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

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


 
 

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

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

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

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

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

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

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

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

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

 PPL CorporationCommon stock, $0.01 par value, 631,700,409630,249,634 shares outstanding at July 31,October 25, 2013.
   
 PPL Energy Supply, LLCPPL Corporation indirectly holds all of the membership interests in PPL Energy Supply, LLC.
   
 PPL Electric Utilities CorporationCommon stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at July 31,October 25, 2013.
   
 LG&E and KU Energy LLCPPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
   
 Louisville Gas and Electric CompanyCommon stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at July 31,October 25, 2013.
   
 Kentucky Utilities CompanyCommon stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at July 31,October 25, 2013.

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

 
 

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

FORM 10-Q
FOR THE QUARTER ENDED JUNESEPTEMBER 30, 2013


Table of Contents

This combined Form 10-Q is separately filed by the following Registrants in their individual registrants:capacity:  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 registrantRegistrant is filed by such registrantRegistrant solely on its own behalf, and no registrantRegistrant makes any representation as to information relating to any other registrant,Registrant, except that information under "Forward-Looking Information" relating to subsidiaries of 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 withinin 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 subsidiaries are consolidated into such RegistrantsRegistrants' financial statements in accordance with GAAP.  This presentation has been applied where identification of particular subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis.
  Page
   
GLOSSARY OF TERMS AND ABBREVIATIONS
i  
FORWARD-LOOKING INFORMATION
1 
PART I.  FINANCIAL INFORMATION  
 Item 1.  Financial Statements  
  PPL Corporation and Subsidiaries  
   
Condensed Consolidated Statements of Income
3 
   
Condensed Consolidated Statements of Comprehensive Income
4 
   
Condensed Consolidated Statements of Cash Flows
5 
   
Condensed Consolidated Balance Sheets
6 
   
Condensed Consolidated Statements of Equity
8 
  PPL Energy Supply, LLC and Subsidiaries  
   
Condensed Consolidated Statements of Income
9 
   
Condensed Consolidated Statements of Comprehensive Income
10 
   
Condensed Consolidated Statements of Cash Flows
11 
   
Condensed Consolidated Balance Sheets
12 
   
Condensed Consolidated Statements of Equity
14 
  PPL Electric Utilities Corporation and Subsidiaries  
   
Condensed Consolidated Statements of Income
16 
   
Condensed Consolidated Statements of Cash Flows
17 
   
Condensed Consolidated Balance Sheets
18 
   
Condensed Consolidated Statements of Shareowners' Equity
20 
  LG&E and KU Energy LLC and Subsidiaries  
   
Condensed Consolidated Statements of Income
22 
   
Condensed Consolidated Statements of Cash Flows
23 
   
Condensed Consolidated Balance Sheets
24 
   
Condensed Consolidated Statements of Equity
26 

 
 
 


  Louisville Gas and Electric Company 
   
Condensed Statements of Income
28
   
Condensed Statements of Cash Flows
29
   
Condensed Balance Sheets
30
   
Condensed Statements of Equity
32
  Kentucky Utilities Company 
   
Condensed Statements of Income
34
   
Condensed Statements of Cash Flows
35
   
Condensed Balance Sheets
36
   
Condensed Statements of Equity
38
 Combined Notes to Condensed Financial Statements (Unaudited) 
  
1.   Interim Financial Statements
39
  
2.   Summary of Significant Accounting Policies
39
  
3.   Segment and Related Information
40
  
4.   Earnings Per Share
41
  
5.   Income Taxes
42
  
6.   Utility Rate Regulation
46
  
7.   Financing Activities
50
  
8.   Acquisitions, Development and Divestitures
5453
  
9.   Defined Benefits
5556
  
10. Commitments and Contingencies
57
  
11. Related Party Transactions
71
  
12. Other Income (Expense) - net
7273
  
13. Fair Value Measurements and Credit Concentration
7374
  
14. Derivative Instruments and Hedging Activities
8182
  
15. Goodwill
9394
  
16. Asset Retirement Obligations
9394
  
17. Available-for-Sale Securities
9395
  
18. Accumulated Other Comprehensive Income (Loss)
9596
  
19. New Accounting Guidance Pending Adoption
9798
 Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 
  
Overview
99
Introduction
99
Business Strategy
101
Financial and Operational Developments
102
 
PPL Corporation and Subsidiaries - Earnings
98102
2013 Outlook
103
Other Financial and Operational Developments
104
Results of Operations
107
PPL Corporation and Subsidiaries - Segment Earnings and Statement of Income Analysis
108
   
PPL Energy Supply, LLC and Subsidiaries - Earnings and Statement of Income Analysis
124120
   
PPL Electric Utilities Corporation and Subsidiaries - Earnings and Statement of Income Analysis
138122
   
LG&E and KU Energy LLC and Subsidiaries - Earnings and Statement of Income Analysis
145124
   
Louisville Gas and Electric Company - Earnings and Statement of Income Analysis
155126
   
Kentucky Utilities Company - Earnings and Statement of Income Analysis
163128
Financial Condition
130
Liquidity and Capital Resources
130
Risk Management
135
Foreign Currency Translation
139
Related Party Transactions
139
Acquisitions, Development and Divestitures
139
Environmental Matters
139
New Accounting Guidance
142
Application of Critical Accounting Policies
142



 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
172143
 
Item 4.  Controls and Procedures
172143
PART II.  OTHER INFORMATION 
 
Item 1.  Legal Proceedings
173144
 
Item 1A.  Risk Factors
173144
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
173144
 
Item 4.  Mine Safety Disclosures
173144
Item 5.  Other Information
144
 
Item 6.  Exhibits
174145
SIGNATURES
176147
COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES
177148
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
 
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
183154
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
 
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
195166


 
 
 





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GLOSSARY OF TERMS AND ABBREVIATIONS

PPL Corporation and its current and former subsidiaries


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

Kentucky Registrants - LKE, LG&E and KU, collectively, SEC Registrants that directly or through subsidiaries own or control operations primarily in Kentucky.

KU - Kentucky Utilities Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky.

LG&E - Louisville Gas and Electric Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas in Kentucky.

LKE - LG&E and KU Energy LLC, a subsidiary of PPL and the parent of LG&E, KU and other subsidiaries.  Within the context of this document, references to LKE also relate to the consolidated entity.

LKS - LG&E and KU Services Company, a subsidiary of LKE that provides services forto LKE and its subsidiaries.

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

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

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

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

PPL Energy Funding - PPL Energy Funding Corporation, a subsidiary of PPL and the parent holding company of PPL Energy Supply, PPL Global and other subsidiaries.

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

PPL Energy Supply - PPL Energy Supply, LLC, a subsidiary of PPL Energy Funding and the parent company of PPL Generation, PPL EnergyPlus and other subsidiaries.

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

PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Funding that primarily, through its subsidiaries, owns and operates WPD, PPL's regulated electricity distribution businesses in the U.K.

PPL Ironwood - PPL Ironwood, LLC, an indirect subsidiary of PPL Generation that owns generating operations in Pennsylvania.

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

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

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

 
i
 


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

PPL Susquehanna - PPL Susquehanna, LLC, the nuclear generatinga subsidiary of PPL Generation.Generation that owns a nuclear-powered generating station.

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

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

Registrant(s) - refers to the Registrants named on the cover of this Report (each a "Registrant" and collectively, the "Registrants").

Subsidiary Registrant(s) - the Registrants that are subsidiaries of PPL.  PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

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

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

WPD Midlands - refers to WPD (East Midlands) and WPD (West Midlands), collectively.

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

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

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

WKE - Western Kentucky Energy Corp., a subsidiary of LKE that leased certain non-utility generating plants in western Kentucky until July 2009.


Other terms and abbreviations

£ - British pound sterling.

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

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

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

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

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

ii


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

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

ii

AEPS - Alternative Energy Portfolio Standard.

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

AOCI - accumulated other comprehensive income or loss.

ARO - asset retirement obligation.

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

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

CAIR - the EPA's Clean Air Interstate Rule.

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

CCR - Coal Combustion Residuals.  CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.

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

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

CSAPR - Cross-State Air Pollution Rule.

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

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

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

DRIP - Dividend Reinvestment and Direct Stock Purchase Plan.

DSIC - a distribution system improvement chargeDistribution System Improvement Charge authorized under Act 11, which is an alternative ratemaking mechanism providing more-timely cost recovery of qualifying distribution system capital expenditures.

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

iii


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

EEI - Electric Energy, Inc., owns and operates a coal-fired plant and a natural gas facility in southern Illinois.  KU's 20% ownership interest in EEI is accounted for as an equity method investment.

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

EPS - earnings per share.

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

ESOP - Employee Stock Ownership Plan.

iii


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

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

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

FTRs - financial transmission rights, which are financial instruments established to manage price risk related to electricity transmission congestion that they entitle the holder to receive compensation or require the holder to remit payment for certain congestion-related transmission charges based on the level of congestion between two pricing locations (source and sink).

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

GBP - British pound sterling.

GHG - greenhouse gas(es).

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

If-Converted Method - A method applicable for calculating diluted EPS whenfor a company haswith convertible debt outstanding.  The method is applied as follows: Interest charges (after tax)(after-tax) applicable to the convertible debt shall beare added back to net income and the convertible debt shall beis assumed to have been converted to equity at the beginning of the period and the resulting common shares shall be included withare treated as outstanding shares.  Both adjustments are made only done for purposes of calculating diluted EPS.  This method was applied to PPL's Equity Units prior to settlement beginning in the first quarter of 2013.

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

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

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

ISO - Independent System Operator.

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

kV - Kilovolt

LIBOR - London Interbank Offered Rate.

LTIIP - Long Term Infrastructure Improvement Plan.

iv
MATS - Mercury and Air Toxics Standards.

MDEQ - Montana Department of Environmental Quality.

MEIC - Montana Environmental Information Center.

MMBtu - One million British Thermal Units.

Montana Power - The Montana Power Company, a Montana-based company that sold its generating assets to PPL Montana in December 1999.  Through a series of transactions consummated during the first quarter of 2002, Montana Power sold its electricity delivery business to NorthWestern.

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

MW - megawatt, one thousand kilowatts.

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

iv


NDT - PPL Susquehanna's nuclear plant decommissioning trust.

NERC - North American Electric Reliability Corporation.

NorthWestern - NorthWestern Corporation, a Delaware corporation, and successor in interest to Montana Power's electricity delivery business, including Montana Power's rights and obligations under contracts with PPL Montana.

NPDES - National Pollutant Discharge Elimination System.

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

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

OCI - other comprehensive income or loss.

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

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

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

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

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

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

PP&E - property, plant and equipment.

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

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

v
RAV - regulatory asset value.  This term, used within the U.K. regulatory environment, is also commonly known as RAB or regulatory asset base.

RECs - renewable energy credits.

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

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

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

RFC - Reliability First Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the reliability of the bulk power systems throughout North America.

v


RMC - Risk Management Committee.

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

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

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

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

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

SERC - SERC Reliability Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the reliability of the bulk power systems throughout North America.

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

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

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

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

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

Spark Spread - a measure of gross margin representing the price of power on a per MWh basis less the equivalent measure of the natural gas cost to produce that power.  This measure is used to describe the gross margin of PPL and its subsidiaries' competitive natural gas-fired generating fleet.  This term is also used to describe a derivative contract in which PPL and its subsidiaries sell power and buy natural gas on a forward basis in the same contract.

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

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

vi


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

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

VIE - variable interest entity.

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

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

 
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viii

FORWARD-LOOKING INFORMATION

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

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

 
1
 


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

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

 
2
 
PART I.  FINANCIAL INFORMATION
ITEM 1. Financial Statements
                
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)            
(Millions of Dollars, except share data)      
                
     Three Months Ended Nine Months Ended
     September 30, September 30,
     2013  2012  2013  2012 
Operating Revenues          
 
Utility
 $ 1,739  $ 1,693  $ 5,344  $ 5,012 
 
Unregulated retail electric and gas
   264    218    758    620 
 Wholesale energy marketing            
  
Realized
   980    1,076    2,767    3,367 
  
Unrealized economic activity (Note 14)
   (49)   (716)   (281)   (322)
 
Net energy trading margins
   12    (11)   1    7 
 
Energy-related businesses
   159    143    423    380 
 
Total Operating Revenues
   3,105    2,403    9,012    9,064 
             
Operating Expenses            
 Operation            
  
Fuel
   494    570    1,464    1,405 
  Energy purchases            
   
Realized
   592    583    1,855    2,253 
   
Unrealized economic activity (Note 14)
   (37)   (569)   (192)   (420)
  
Other operation and maintenance
   669    650    2,043    2,095 
 
Depreciation
   289    278    859    813 
 
Taxes, other than income
   90    90    272    268 
 
Energy-related businesses
   151    137    403    363 
 
Total Operating Expenses
   2,248    1,739    6,704    6,777 
                
Operating Income
   857    664    2,308    2,287 
                
Other Income (Expense) - net
   (116)   (44)   19    (31)
             
Other-Than-Temporary Impairments
   1         1    1 
                
Interest Expense
   246    248    755    714 
                
Income from Continuing Operations Before Income Taxes
   494    372    1,571    1,541 
                
Income Taxes
   84    17    344    364 
                
Income from Continuing Operations After Income Taxes
   410    355    1,227    1,177 
                
Income (Loss) from Discontinued Operations (net of income taxes)
   1         2    (6)
                
Net Income
   411    355    1,229    1,171 
                
Net Income Attributable to Noncontrolling Interests
   1         1    4 
                
Net Income Attributable to PPL Shareowners
 $ 410  $ 355  $ 1,228  $ 1,167 
                
Amounts Attributable to PPL Shareowners:            
 
Income from Continuing Operations After Income Taxes
 $ 409  $ 355  $ 1,226  $ 1,173 
 
Income (Loss) from Discontinued Operations (net of income taxes)
   1         2    (6)
 
Net Income
 $ 410  $ 355  $ 1,228  $ 1,167 
                
Earnings Per Share of Common Stock:            
 Income from Continuing Operations After Income Taxes Available to PPL  
  Common Shareowners:            
  
Basic
 $0.65  $0.61  $ 2.03  $2.01 
  
Diluted
 $0.62  $0.61  $ 1.90  $2.01 
 Net Income Available to PPL Common Shareowners:            
  
Basic
 $0.65  $0.61  $2.03  $2.00 
  
Diluted
 $0.62  $0.61  $1.90  $2.00 
                
Dividends Declared Per Share of Common Stock
 $0.3675  $0.36  $1.1025  $1.08 
                
Weighted-Average Shares of Common Stock Outstanding (in thousands)
            
  
Basic
   631,046    580,585    601,275   579,847 
  
Diluted
   664,343    582,636    662,094   580,930 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

PART I.  FINANCIAL INFORMATION
ITEM 1. Financial Statements
                
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)            
(Millions of Dollars, except share data)      
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2013  2012  2013  2012 
Operating Revenues          
 
Utility
 $ 1,655  $ 1,605  $ 3,605  $ 3,319 
 
Unregulated retail electric and gas
   257    179    494    402 
 Wholesale energy marketing            
  
Realized
   811    1,083    1,787    2,291 
  
Unrealized economic activity (Note 14)
   590    (458)   (232)   394 
 
Net energy trading margins
      10    (11)   18 
 
Energy-related businesses
   137    130    264    237 
 
Total Operating Revenues
   3,450    2,549    5,907    6,661 
             
Operating Expenses            
 Operation            
  
Fuel
   441    411    970    835 
  Energy purchases            
   
Realized
   572    787    1,263    1,670 
   
Unrealized economic activity (Note 14)
   479    (442)   (155)   149 
  
Other operation and maintenance
   698    739    1,374    1,445 
 
Depreciation
   286    271    570    535 
 
Taxes, other than income
   86    87    182    178 
 
Energy-related businesses
   130    124    252    226 
 
Total Operating Expenses
   2,692    1,977    4,456    5,038 
                
Operating Income
   758    572    1,451    1,623 
                
Other Income (Expense) - net
   13    30    135    13 
             
Other-Than-Temporary Impairments
      1       1 
                
Interest Expense
   258    236    509    466 
                
Income from Continuing Operations Before Income Taxes
   513    365    1,077    1,169 
                
Income Taxes
   109    88    260    347 
                
Income from Continuing Operations After Income Taxes
   404    277    817    822 
                
Income (Loss) from Discontinued Operations (net of income taxes)
   1    (6)   1    (6)
                
Net Income
   405    271    818    816 
                
Net Income Attributable to Noncontrolling Interests
            4 
                
Net Income Attributable to PPL Shareowners
 $ 405  $ 271  $ 818  $ 812 
                
Amounts Attributable to PPL Shareowners:            
 
Income from Continuing Operations After Income Taxes
 $ 404  $ 277  $ 817  $ 818 
 
Income (Loss) from Discontinued Operations (net of income taxes)
   1    (6)   1    (6)
 
Net Income
 $ 405  $ 271  $ 818  $ 812 
                
Earnings Per Share of Common Stock:            
 Income from Continuing Operations After Income Taxes Available to PPL  
  Common Shareowners:            
  
Basic
 $0.68  $0.47  $ 1.39  $1.40 
  
Diluted
 $0.63  $0.47  $ 1.28  $1.40 
 Net Income Available to PPL Common Shareowners:            
  
Basic
 $0.68  $0.46  $1.39  $1.39 
  
Diluted
 $0.63  $0.46  $1.28  $1.39 
                
Dividends Declared Per Share of Common Stock
 $0.3675  $0.36  $0.735  $0.72 
                
Weighted-Average Shares of Common Stock Outstanding (in thousands)
            
  
Basic
   589,834    579,881    586,683   579,462 
  
Diluted
   664,615    580,593    661,263   580,062 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
3
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
                
     Three Months Ended Nine Months Ended
     September 30, September 30,
     2013  2012  2013  2012 
                
Net income
 $ 411  $ 355  $ 1,229  $ 1,171 
                
Other comprehensive income (loss):            
Amounts arising during the period - gains (losses), net of tax (expense)            
 benefit:            
  
Foreign currency translation adjustments, net of tax of $8, $1, $1, $1
   87    152    (165)   49 
  
Available-for-sale securities, net of tax of ($15), ($14), ($42), ($32)
   15    13    40    30 
  
Qualifying derivatives, net of tax of $2, $14, ($41), ($29)
   (9)   (41)   77    39 
  Equity investees' other comprehensive income (loss), net of            
   
tax of $0, $0, $0, $2
                  (3)
  Defined benefit plans:            
   
Net actuarial gain (loss), net of tax of $0, $0, $0, $28
                  (85)
Reclassifications from AOCI - (gains) losses, net of tax expense            
 (benefit):            
  
Available-for-sale securities, net of tax of $1, $0, $2, $1
             (2)   (6)
  
Qualifying derivatives, net of tax of $11, $51, $68, $210
   (6)   (61)   (122)   (335)
  Equity investees' other comprehensive (income) loss, net of            
   
tax of $0, $0, $0, $0
  (1)        (1)     
  Defined benefit plans:            
   
Prior service costs, net of tax of ($1), ($1), ($3), ($4)
   2    1    5    6 
   
Net actuarial loss, net of tax of ($12), ($6), ($37), ($17)
   33    17    101    54 
Total other comprehensive income (loss) attributable to PPL            
 
Shareowners
   121    81    (67)   (251)
                
Comprehensive income (loss)
   532    436    1,162    920 
  
Comprehensive income attributable to noncontrolling interests
   1         1    4 
                
Comprehensive income (loss) attributable to PPL Shareowners
 $ 531  $ 436  $ 1,161  $ 916 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2013  2012  2013  2012 
                
Net income
 $ 405  $ 271  $ 818  $ 816 
                
Other comprehensive income (loss):            
Amounts arising during the period - gains (losses), net of tax (expense)            
 benefit:            
  
Foreign currency translation adjustments, net of tax of ($1), ($2), ($7), $0
   (7)   (179)   (252)   (103)
  
Available-for-sale securities, net of tax of ($2), $8, ($27), ($18)
   2    (7)   25    17 
  
Qualifying derivatives, net of tax of ($23), $7, ($43), ($43)
   24    2    86    80 
  Equity investees' other comprehensive income (loss), net of            
   
tax of $0, $0, $0, $2
      1       (3)
  Defined benefit plans:            
   
Net actuarial gain (loss), net of tax of $0, $28, $0, $28
      (85)      (85)
Reclassifications from AOCI - (gains) losses, net of tax expense            
 (benefit):            
  
Available-for-sale securities, net of tax of $0, $1, $1, $1
   (1)   (1)   (2)   (6)
  
Qualifying derivatives, net of tax of $22, $84, $57, $159
   (36)   (140)   (116)   (274)
  Defined benefit plans:            
   
Prior service costs, net of tax of ($1), ($2), ($2), ($3)
   2    2    3    5 
   
Net actuarial loss, net of tax of ($12), ($7), ($25), ($11)
   34    17    68    37 
Total other comprehensive income (loss) attributable to PPL            
 
Shareowners
   18    (390)   (188)   (332)
                
Comprehensive income (loss)
   423    (119)   630    484 
  
Comprehensive income attributable to noncontrolling interests
            4 
                
Comprehensive income (loss) attributable to PPL Shareowners
 $ 423  $ (119) $ 630  $ 480 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
4
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Nine Months Ended September 30,
     2013  2012 
Cash Flows from Operating Activities      
 
Net income
 $ 1,229  $ 1,171 
 Adjustments to reconcile net income to net cash provided by operating activities      
  
Depreciation
   859    813 
  
Amortization
   164    144 
  
Defined benefit plans - expense
   135    123 
  
Deferred income taxes and investment tax credits
   301    298 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   126    21 
  
Other
   92    34 
 Change in current assets and current liabilities      
  
Accounts receivable
   (79)   19 
  
Accounts payable
   (140)   (175)
  
Unbilled revenues
   197    121 
  
Counterparty collateral
   (77)   13 
  
Taxes payable
   76    29 
  
Uncertain tax positions
   (104)   (4)
  
Accrued interest
   8    43 
  
Other
   (111)   8 
 Other operating activities      
  
Defined benefit plans - funding
   (505)   (526)
  
Other assets
   (59)   1 
  
Other liabilities
   111    (39)
   
Net cash provided by operating activities
   2,223    2,094 
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (2,768)   (2,078)
 
Ironwood Acquisition, net of cash acquired
        (84)
 
Purchases of nuclear plant decommissioning trust investments
   (102)   (112)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   92    102 
 
Net (increase) decrease in restricted cash and cash equivalents
   13    62 
 
Other investing activities
   (23)   (6)
   
Net cash provided by (used in) investing activities
   (2,788)   (2,116)
Cash Flows from Financing Activities      
 
Issuance of long-term debt
   862    824 
 
Retirement of long-term debt
   (309)   (105)
 
Repurchase of common stock
   (74)     
 
Issuance of common stock
   1,409    54 
 
Payment of common stock dividends
   (645)   (623)
 
Redemption of preference stock of a subsidiary
        (250)
 
Debt issuance and credit facility costs
   (37)   (10)
 
Contract adjustment payments
   (72)   (71)
 
Net increase (decrease) in short-term debt
   (148)   (51)
 
Other financing activities
   (20)   (8)
   
Net cash provided by (used in) financing activities
   966    (240)
Effect of Exchange Rates on Cash and Cash Equivalents
   (11)   6 
Net Increase (Decrease) in Cash and Cash Equivalents
   390    (256)
Cash and Cash Equivalents at Beginning of Period
   901    1,202 
Cash and Cash Equivalents at End of Period
 $ 1,291  $  946 
          
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Six Months Ended June 30,
     2013  2012 
Cash Flows from Operating Activities      
 
Net income
 $ 818  $ 816 
 Adjustments to reconcile net income to net cash provided by operating activities      
  
Depreciation
   570    535 
  
Amortization
   113    88 
  
Defined benefit plans - expense
   91    84 
  
Deferred income taxes and investment tax credits
   291    364 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   (11)   (209)
  
Other
   50    25 
 Change in current assets and current liabilities      
  
Accounts receivable
   (189)   21 
  
Accounts payable
   (75)   (126)
  
Unbilled revenues
   144    72 
  
Prepayments
   (64)   (97)
  
Counterparty collateral
   (61)   57 
  
Taxes
   128    29 
  
Uncertain tax positions
   (98)   (4)
  
Accrued interest
   (119)   (87)
  
Other
   (113)   (67)
 Other operating activities      
  
Defined benefit plans - funding
   (468)   (493)
  
Other assets
   (64)   (16)
  
Other liabilities
   4    (45)
   
Net cash provided by operating activities
   947    947 
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (1,797)   (1,309)
 
Ironwood Acquisition, net of cash acquired
      (84)
 
Purchases of nuclear plant decommissioning trust investments
   (66)   (85)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   59    79 
 
Net (increase) decrease in restricted cash and cash equivalents
   (17)   54 
 
Other investing activities
   (13)   (8)
   
Net cash provided by (used in) investing activities
   (1,834)   (1,353)
Cash Flows from Financing Activities      
 
Issuance of long-term debt
   450    575 
 
Repurchase of common stock
   (28)   
 
Issuance of common stock
   259    35 
 
Payment of common stock dividends
   (426)   (413)
 
Redemption of preference stock of a subsidiary
      (250)
 
Debt issuance and credit facility costs
   (33)   (9)
 
Contract adjustment payments
   (48)   (48)
 
Net increase (decrease) in short-term debt
   563    311 
 
Other financing activities
   (27)   (10)
   
Net cash provided by (used in) financing activities
   710    191 
Effect of Exchange Rates on Cash and Cash Equivalents
   (13)   (6)
Net Increase (Decrease) in Cash and Cash Equivalents
   (190)   (221)
Cash and Cash Equivalents at Beginning of Period
   901    1,202 
Cash and Cash Equivalents at End of Period
 $ 711  $ 981 
          
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
5
 

CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries(Unaudited)(Millions of Dollars, shares in thousands)
   June 30, December 31,   September 30, December 31,
   2013  2012    2013  2012 
AssetsAssets    Assets      
              
Current AssetsCurrent Assets    Current Assets      
Cash and cash equivalents
 $ 711  $ 901 
Cash and cash equivalents
 $ 1,291  $ 901 
Restricted cash and cash equivalents
  84   54 
Restricted cash and cash equivalents
   52   54 
Accounts receivable (less reserve:  2013, $66; 2012, $64)    Accounts receivable (less reserve:  2013, $65; 2012, $64)     
 
Customer
  879   745  
Customer
   857   745 
 
Other
  129   79  
Other
   117   79 
Unbilled revenues
  701   857 
Unbilled revenues
   652   857 
Fuel, materials and supplies
  642   673 
Fuel, materials and supplies
   686   673 
Prepayments
  198   166 
Prepayments
   173   166 
Price risk management assets
  1,334   1,525 
Price risk management assets
   1,045   1,525 
Regulatory assets
  34   19 
Regulatory assets
   31   19 
Other current assets
   63    49 
Other current assets
   67    49 
Total Current Assets
   4,775    5,068 
Total Current Assets
   4,971    5,068 
             
InvestmentsInvestments    Investments    
Nuclear plant decommissioning trust funds
  771   712 
Nuclear plant decommissioning trust funds
   804   712 
Other investments
   47    47 
Other investments
   47    47 
Total Investments
   818    759 
Total Investments
   851    759 
             
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant
  25,620   25,196 
Regulated utility plant
   26,498   25,196 
Less:  accumulated depreciation - regulated utility plant
   4,424    4,164 
Less:  accumulated depreciation - regulated utility plant
   4,636    4,164 
 
Regulated utility plant, net
   21,196    21,032  
Regulated utility plant, net
   21,862    21,032 
Non-regulated property, plant and equipment    Non-regulated property, plant and equipment    
 
Generation
  11,594   11,295  
Generation
   11,653   11,295 
 
Nuclear fuel
  590   524  
Nuclear fuel
  590   524 
 
Other
  758   726  
Other
   834   726 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,063    5,942 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,173    5,942 
 
Non-regulated property, plant and equipment, net
  6,879   6,603  
Non-regulated property, plant and equipment, net
   6,904   6,603 
Construction work in progress
   2,525    2,397 
Construction work in progress
   2,822    2,397 
Property, Plant and Equipment, net (a)
   30,600    30,032 
Property, Plant and Equipment, net (a)
   31,588    30,032 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  1,443   1,483 
Regulatory assets
   1,423   1,483 
Goodwill
  3,991   4,158 
Goodwill
   4,050   4,158 
Other intangibles
  907   925 
Other intangibles
   932   925 
Price risk management assets
  599   572 
Price risk management assets
   550   572 
Other noncurrent assets
   613    637 
Other noncurrent assets
   623    637 
Total Other Noncurrent Assets
   7,553    7,775 
Total Other Noncurrent Assets
   7,578    7,775 
          
Total Assets
Total Assets
 $ 43,746  $ 43,634 
Total Assets
 $ 44,988  $ 43,634 

(a)At JuneSeptember 30, 2013 and December 31, 2012, includes $416$413 million and $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.

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

 
6
 


CONDENSED CONSOLIDATED BALANCE SHEETSPPL Corporation and Subsidiaries(Unaudited)(Millions of Dollars, shares in thousands)
   June 30, December 31,   September 30, December 31,
   2013  2012    2013  2012 
Liabilities and EquityLiabilities and Equity     Liabilities and Equity     
              
Current LiabilitiesCurrent Liabilities     Current Liabilities     
Short-term debt
 $ 1,206  $ 652 
Short-term debt
 $ 499  $ 652 
Long-term debt due within one year
   751   751 
Long-term debt due within one year
   751   751 
Accounts payable
   1,114   1,252 
Accounts payable
   1,079   1,252 
Taxes
   144   90 
Taxes
   170   90 
Interest
   197   325 
Interest
   325   325 
Dividends
   218   210 
Dividends
   232   210 
Price risk management liabilities
   887   1,065 
Price risk management liabilities
   823   1,065 
Regulatory liabilities
   54   61 
Regulatory liabilities
   68   61 
Other current liabilities
   971    1,219 
Other current liabilities
   1,001    1,219 
Total Current Liabilities
   5,542    5,625 
Total Current Liabilities
   4,948    5,625 
              
Long-term Debt
Long-term Debt
   18,875    18,725 
Long-term Debt
   19,092    18,725 
              
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities     Deferred Credits and Other Noncurrent Liabilities     
Deferred income taxes
   3,704   3,387 
Deferred income taxes
   3,777   3,387 
Investment tax credits
   350   328 
Investment tax credits
   345   328 
Price risk management liabilities
   514   629 
Price risk management liabilities
   538   629 
Accrued pension obligations
   1,551   2,076 
Accrued pension obligations
   1,529   2,076 
Asset retirement obligations
   545   536 
Asset retirement obligations
   678   536 
Regulatory liabilities
   1,052   1,010 
Regulatory liabilities
   1,054   1,010 
Other deferred credits and noncurrent liabilities
   659    820 
Other deferred credits and noncurrent liabilities
   665    820 
Total Deferred Credits and Other Noncurrent Liabilities
   8,375    8,786 
Total Deferred Credits and Other Noncurrent Liabilities
   8,586    8,786 
              
Commitments and Contingent Liabilities (Notes 5, 6 and 10)Commitments and Contingent Liabilities (Notes 5, 6 and 10)     Commitments and Contingent Liabilities (Notes 5, 6 and 10)     
              
EquityEquity     Equity     
PPL Shareowners' Common Equity     PPL Shareowners' Common Equity     
 
Common stock - $0.01 par value (a)
   6   6  
Common stock - $0.01 par value (a)
   6   6 
 
Additional paid-in capital
   7,195   6,936  
Additional paid-in capital
   8,305   6,936 
 
Earnings reinvested
   5,863   5,478  
Earnings reinvested
   6,040   5,478 
 
Accumulated other comprehensive loss
   (2,128)   (1,940) 
Accumulated other comprehensive loss
   (2,007)   (1,940)
 
Total PPL Shareowners' Common Equity
   10,936   10,480  
Total PPL Shareowners' Common Equity
   12,344   10,480 
Noncontrolling Interests
   18    18 
Noncontrolling Interests
   18    18 
Total Equity
   10,954    10,498 
Total Equity
   12,362    10,498 
              
Total Liabilities and Equity
Total Liabilities and Equity
 $ 43,746  $ 43,634 
Total Liabilities and Equity
 $ 44,988  $ 43,634 

(a)780,000 shares authorized; 591,622630,239 and 581,944 shares issued and outstanding at JuneSeptember 30, 2013 and December 31, 2012.

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

 
7
 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries(Unaudited)(Millions of Dollars)
   PPL Shareowners       PPL Shareowners    
   Common               Common            
    stock       Accumulated        stock       Accumulated    
   shares   Additional   other Non-     shares   Additional   other Non-  
   outstanding Common paid-in Earnings comprehensive controlling     outstanding Common paid-in Earnings comprehensive controlling  
   (a)  stock  capital  reinvested  loss  interests  Total   (a)  stock  capital  reinvested  loss  interests  Total
                           
March 31, 2013 (b)
  583,214  $ 6  $ 6,988  $ 5,676  $ (2,146) $ 18  $ 10,542 
June 30, 2013 (b)
June 30, 2013 (b)
  591,622  $ 6  $ 7,195  $ 5,863  $ (2,128) $ 18  $ 10,954 
Common stock issued (c)
Common stock issued (c)
  9,338     245         245 
Common stock issued (c)
  40,117        1,151               1,151 
Common stock repurchased (d)
Common stock repurchased (d)
  (930)    (28)        (28)
Common stock repurchased (d)
  (1,500)       (46)              (46)
Cash settlement of equity forward              
agreements (d)
      (13)        (13)
Stock-based compensation (e)
Stock-based compensation (e)
      3         3 
Stock-based compensation (e)
           5               5 
Net income
Net income
        405       405 
Net income
               410       1   411 
Dividends, dividend equivalents,Dividends, dividend equivalents,              Dividends, dividend equivalents,                 
redemptions and distributions (f)
        (218)      (218)
redemptions and distributions (f)
               (233)      (1)  (234)
Other comprehensiveOther comprehensive              Other comprehensive                 
income (loss)
              18       18 
income (loss)
                      121         121 
June 30, 2013 (b)
  591,622  $ 6  $ 7,195  $ 5,863  $ (2,128) $ 18  $ 10,954 
September 30, 2013 (b)
September 30, 2013 (b)
  630,239  $ 6  $ 8,305  $ 6,040  $ (2,007) $ 18  $ 12,362 
                                 
December 31, 2012 (b)
December 31, 2012 (b)
  581,944  $ 6  $ 6,936  $ 5,478  $ (1,940) $ 18  $ 10,498 
December 31, 2012 (b)
  581,944  $ 6  $ 6,936  $ 5,478  $ (1,940) $ 18  $ 10,498 
Common stock issued (c)
Common stock issued (c)
  10,608     282         282 
Common stock issued (c)
  50,725        1,433               1,433 
Common stock repurchased (d)
Common stock repurchased (d)
  (930)    (28)        (28)
Common stock repurchased (d)
  (2,430)       (74)              (74)
Cash settlement of equity forwardCash settlement of equity forward              Cash settlement of equity forward               
agreements (d)
      (13)        (13)
agreements (d)
           (13)              (13)
Stock-based compensation (e)
Stock-based compensation (e)
      18         18 
Stock-based compensation (e)
           23               23 
Net income
Net income
        818       818 
Net income
               1,228       1   1,229 
Dividends, dividend equivalents,Dividends, dividend equivalents,              Dividends, dividend equivalents,               
redemptions and distributions (f)
        (433)      (433)
redemptions and distributions (f)
               (666)      (1)  (667)
Other comprehensiveOther comprehensive              Other comprehensive               
income (loss)
              (188)      (188)
income (loss)
                      (67)        (67)
June 30, 2013 (b)
  591,622  $ 6  $ 7,195  $ 5,863  $ (2,128) $ 18  $ 10,954 
September 30, 2013 (b)
September 30, 2013 (b)
  630,239  $ 6  $ 8,305  $ 6,040  $ (2,007) $ 18  $ 12,362 
                                
March 31, 2012
  579,520  $ 6  $ 6,862  $ 5,129  $ (730) $ 268  $ 11,535 
June 30, 2012
June 30, 2012
  580,213  $ 6  $ 6,886  $ 5,190  $ (1,120) $ 18  $ 10,980 
Common stock issued (c)
Common stock issued (c)
  693     18         18 
Common stock issued (c)
  757        21               21 
Stock-based compensation (e)
Stock-based compensation (e)
      6         6 
Stock-based compensation (e)
           5               5 
Net income
Net income
        271       271 
Net income
               355           355 
Dividends, dividend equivalentsDividends, dividend equivalents              Dividends, dividend equivalents               
redemptions and distributions (f)
        (210)    (250)  (460)
redemptions and distributions (f)
               (210)          (210)
Other comprehensiveOther comprehensive              Other comprehensive               
income (loss)
              (390)      (390)
income (loss)
                      81         81 
June 30, 2012
  580,213  $ 6  $ 6,886  $ 5,190  $ (1,120) $ 18  $ 10,980 
September 30, 2012
September 30, 2012
  580,970  $ 6  $ 6,912  $ 5,335  $ (1,039) $ 18  $ 11,232 
                                 
December 31, 2011
December 31, 2011
  578,405  $ 6  $ 6,813  $ 4,797  $ (788) $ 268  $ 11,096 
December 31, 2011
  578,405  $ 6  $ 6,813  $ 4,797  $ (788) $ 268  $ 11,096 
Common stock issued (c)
Common stock issued (c)
  1,808     50         50 
Common stock issued (c)
  2,565       71               71 
Stock-based compensation (e)
Stock-based compensation (e)
      23         23 
Stock-based compensation (e)
          28               28 
Net income
Net income
        812     4   816 
Net income
              1,167       4   1,171 
Dividends, dividend equivalentsDividends, dividend equivalents              Dividends, dividend equivalents                
redemptions and distributions (f)
        (419)    (254)  (673)
redemptions and distributions (f)
              (629)      (254)  (883)
Other comprehensiveOther comprehensive              Other comprehensive              
income (loss)
              (332)      (332)
income (loss)
                      (251)        (251)
June 30, 2012
  580,213  $ 6  $ 6,886  $ 5,190  $ (1,120) $ 18  $ 10,980 
September 30, 2012
September 30, 2012
  580,970  $ 6  $ 6,912  $ 5,335  $ (1,039) $ 18  $ 11,232 

(a)Shares in thousands.  Each share entitles the holder to one vote on any question presented at any shareowners' meeting.
(b)See Note 18 for disclosure of balances of each component of AOCI.
(c)Each period includes shares of common stock issued through various stock and incentive compensation plans.  The 2013 periods include the April issuanceand July issuances of shares of common stock.  See Note 7 for additional information.
(d)See Note 7 for additional information.
(e)The three and sixnine months ended JuneSeptember 30, 2013 include $8 million and $36$44 million and the three and sixnine months ended JuneSeptember 30, 2012 include $6$7 million and $35$42 million of stock-based compensation expense related to new and existing unvested equity awards.  The three and sixnine months ended JuneSeptember 30, 2013 include $(5)$(3) million and $(18)$(21) million and the sixthree and nine months ended JuneSeptember 30, 2012 includes $(12)include $(2) million and $(14) million related primarily to the reclassification from "Stock-based compensation" to "Common stock issued" for the issuance of common stock after applicable equity award vesting periods and tax adjustments related to stock-based compensation.
(f)"Earnings reinvested" includes dividends and dividend equivalents on PPL common stock and restricted stock units.  "Noncontrolling interests" includes dividends, redemptions and distributions to noncontrolling interests.  In June 2012, PPL Electric redeemed all of its outstanding preference stock at par value, which was classified as noncontrolling interest.

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

 
8
 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)      
(Millions of Dollars)      
                
     Three Months Ended Nine Months Ended
     September 30, September 30,
     2013  2012  2013  2012 
Operating Revenues            
 Wholesale energy marketing            
  
Realized
 $ 980  $ 1,076  $ 2,767  $ 3,367 
  
Unrealized economic activity (Note 14)
   (49)   (716)   (281)   (322)
 
Wholesale energy marketing to affiliate
   11    23    37    61 
 
Unregulated retail electric and gas
   266    219    761    623 
 
Net energy trading margins
   12    (11)   1    7 
 
Energy-related businesses
   143    128    378    336 
 
Total Operating Revenues
   1,363    719    3,663    4,072 
                
Operating Expenses              
 Operation              
  
Fuel
   258    321    780    728 
  Energy purchases              
   
Realized
   425    421    1,277    1,715 
   
Unrealized economic activity (Note 14)
   (37)   (569)   (192)   (420)
  
Energy purchases from affiliate
   1    1    3    2 
  
Other operation and maintenance
   243    220    748    769 
 
Depreciation
   80    73    237    206 
 
Taxes, other than income
   18    18    51    53 
 
Energy-related businesses
   138    125    366    326 
 
Total Operating Expenses
   1,126    610    3,270    3,379 
                
Operating Income
   237    109    393    693 
                
Other Income (Expense) - net
   2    5    18    16 
                
Other-Than-Temporary Impairments
   1         1    1 
                
Interest Expense
   39    43    131    123 
                
Income Before Income Taxes
   199    71    279    585 
                
Income Taxes
   74    16    106    202 
                
Net Income
   125    55    173    383 
                
Net Income Attributable to Noncontrolling Interests
   1    1    1    1 
                
Net Income Attributable to PPL Energy Supply Member
 $ 124  $ 54  $ 172  $ 382 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)      
(Millions of Dollars)      
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2013  2012  2013  2012 
Operating Revenues            
 Wholesale energy marketing            
  
Realized
 $ 811  $ 1,083  $ 1,787  $ 2,291 
  
Unrealized economic activity (Note 14)
   590    (458)   (232)   394 
 
Wholesale energy marketing to affiliate
   12    17    26    38 
 
Unregulated retail electric and gas
   257    180    495    404 
 
Net energy trading margins
      10    (11)   18 
 
Energy-related businesses
   122    112    235    208 
 
Total Operating Revenues
   1,792    944    2,300    3,353 
                
Operating Expenses            
 Operation            
  
Fuel
   224    196    522    407 
  Energy purchases            
   
Realized
   418    635    852    1,294 
   
Unrealized economic activity (Note 14)
   479    (442)   (155)   149 
  
Energy purchases from affiliate
   1       2    1 
  
Other operation and maintenance
   270    294    505    549 
 
Depreciation
   79    69    157    133 
 
Taxes, other than income
   16    17    33    35 
 
Energy-related businesses
   118    109    228    201 
 
Total Operating Expenses
   1,605    878    2,144    2,769 
                
Operating Income
   187    66    156    584 
                
Other Income (Expense) - net
   12    6    16    11 
                
Other-Than-Temporary Impairments
      1       1 
                
Interest Expense
   46    43    92    80 
                
Income Before Income Taxes
   153    28    80    514 
                
Income Taxes
   67    9    32    186 
                
Net Income Attributable to PPL Energy Supply Member
 $ 86  $ 19  $ 48  $ 328 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
9
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
                
     Three Months Ended Nine Months Ended
     September 30, September 30,
     2013  2012  2013  2012 
                
Net income
 $ 125  $ 55  $ 173  $ 383 
                
Other comprehensive income (loss):            
Amounts arising during the period - gains (losses), net of tax (expense)            
 benefit:            
  
Available-for-sale securities, net of tax of ($15), ($14), ($42), ($32)
   15    13    40    30 
  
Qualifying derivatives, net of tax of $0, ($1), $0, ($41)
        (1)        58 
Reclassifications from AOCI - (gains) losses, net of tax expense            
 (benefit):            
  
Available-for-sale securities, net of tax of $1, $0, $2, $1
             (2)   (6)
  
Qualifying derivatives, net of tax of $19, $62, $63, $218
   (29)   (92)   (96)   (351)
  Defined benefit plans:            
   
Prior service costs, net of tax of ($1), ($1), ($2), ($2)
   1    1    3    4 
   
Net actuarial loss, net of tax of ($2), ($1), ($7), ($1)
   3    2    11    8 
Total other comprehensive income (loss) attributable to            
 
PPL Energy Supply Member
   (10)   (77)   (44)   (257)
                
Comprehensive income (loss)
   115    (22)   129    126 
  
Comprehensive income attributable to noncontrolling interests
   1    1    1    1 
Comprehensive income (loss) attributable to PPL Energy            
 
Supply Member
 $ 114  $ (23) $ 128  $ 125 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2013  2012  2013  2012 
                
Net income
 $ 86  $ 19  $ 48  $ 328 
                
Other comprehensive income (loss):            
Amounts arising during the period - gains (losses), net of tax (expense)            
 benefit:            
  
Available-for-sale securities, net of tax of ($2), $8, ($27), ($18)
   2    (7)   25    17 
  
Qualifying derivatives, net of tax of $0, $5, $0, ($40)
      (9)      59 
Reclassifications from AOCI - (gains) losses, net of tax expense            
 (benefit):            
  
Available-for-sale securities, net of tax of $0, $1, $1, $1
   (1)   (1)   (2)   (6)
  
Qualifying derivatives, net of tax of $23, $75, $44, $156
   (37)   (108)   (67)   (259)
  Defined benefit plans:            
   
Prior service costs, net of tax of $0, $0, ($1), ($1)
   1    2    2    3 
   
Net actuarial loss, net of tax of ($3), ($2), ($5), $0
   4    1    8    6 
Total other comprehensive income (loss) attributable to            
 
PPL Energy Supply Member
   (31)   (122)   (34)   (180)
                
Comprehensive income (loss) attributable to PPL Energy            
 
Supply Member
 $ 55  $ (103) $ 14  $ 148 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
10
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Nine Months Ended September 30,
     2013  2012 
Cash Flows from Operating Activities      
 
Net income
 $ 173  $ 383 
 Adjustments to reconcile net income to net cash provided by operating activities          
  
Depreciation
   237    206 
  
Amortization
   111    93 
  
Defined benefit plans - expense
   39    33 
  
Deferred income taxes and investment tax credits
   112    132 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   98    (37)
  
Other
   32    33 
 Change in current assets and current liabilities      
  
Accounts receivable
   71    (26)
  
Accounts payable
   (131)   (110)
  
Unbilled revenues
   135    78 
  
Fuel, materials and supplies
   (18)   (20)
  
Counterparty collateral
   (77)   12 
  
Other
   (32)   (28)
 Other operating activities      
  
Defined benefit plans - funding
   (107)   (70)
  
Other assets
   (32)   (16)
  
Other liabilities
   (28)   11 
   
Net cash provided by operating activities
   583    674 
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (341)   (460)
 
Ironwood Acquisition, net of cash acquired
        (84)
 
Expenditures for intangible assets
   (33)   (36)
 
Purchases of nuclear plant decommissioning trust investments
   (102)   (112)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   92    102 
 
Net (increase) decrease in notes receivable from affiliates
        198 
 
Net (increase) decrease in restricted cash and cash equivalents
   9    70 
 
Other investing activities
   24    14 
   
Net cash provided by (used in) investing activities
   (351)   (308)
Cash Flows from Financing Activities      
 
Retirement of long-term debt
   (309)   (6)
 
Contributions from member
   980    472 
 
Distributions to member
   (408)   (733)
 
Net increase (decrease) in short-term debt
   (356)   (45)
 
Other financing activities
   (1)   (1)
   
Net cash provided by (used in) financing activities
   (94)   (313)
Net Increase (Decrease) in Cash and Cash Equivalents
   138    53 
 
Cash and Cash Equivalents at Beginning of Period
   413    379 
 
Cash and Cash Equivalents at End of Period
 $ 551  $ 432 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Six Months Ended June 30,
     2013  2012 
Cash Flows from Operating Activities      
 
Net income
 $ 48  $ 328 
 Adjustments to reconcile net income to net cash provided by operating activities      
  
Depreciation
   157    133 
  
Amortization
   71    57 
  
Defined benefit plans - expense
   26    22 
  
Deferred income taxes and investment tax credits
   98    165 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   91    (216)
  
Other
   24    28 
 Change in current assets and current liabilities      
  
Accounts receivable
   6    (2)
  
Accounts payable
   (81)   (57)
  
Unbilled revenues
   96    61 
  
Fuel, materials and supplies
   5    (74)
  
Prepayments
   (67)   (30)
  
Counterparty collateral
   (61)   57 
  
Other
   (22)   (68)
 Other operating activities      
  
Defined benefit plans - funding
   (106)   (69)
  
Other assets
   (38)   (19)
  
Other liabilities
   (20)   (8)
   
Net cash provided by operating activities
   227    308 
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (241)   (316)
 
Ironwood Acquisition, net of cash acquired
      (84)
 
Expenditures for intangible assets
   (23)   (25)
 
Purchases of nuclear plant decommissioning trust investments
   (66)   (85)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   59    79 
 
Net (increase) decrease in notes receivable from affiliates
   (4)   198 
 
Net (increase) decrease in restricted cash and cash equivalents
   (24)   57 
 
Other investing activities
   17    3 
   
Net cash provided by (used in) investing activities
   (282)   (173)
Cash Flows from Financing Activities      
 
Retirement of long-term debt
   (9)   (3)
 
Contributions from member
   105    472 
 
Distributions to member
   (408)   (657)
 
Net increase (decrease) in short-term debt
   219    120 
   
Net cash provided by (used in) financing activities
   (93)   (68)
Net Increase (Decrease) in Cash and Cash Equivalents
   (148)   67 
 
Cash and Cash Equivalents at Beginning of Period
   413    379 
 
Cash and Cash Equivalents at End of Period
 $ 265  $ 446 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
11
 


CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries(Unaudited)(Millions of Dollars)
   June 30, December 31,   September 30, December 31,
   2013  2012    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 265  $ 413 
Restricted cash and cash equivalents
  70   46 
Cash and cash equivalents
 $ 551  $ 413 
Accounts receivable (less reserve:  2013, $20; 2012, $23)    
Restricted cash and cash equivalents
   37   46 
 
Customer
  200   183 Accounts receivable (less reserve:  2013, $20; 2012, $23)     
 
Other
  95   31  
Customer
  203   183 
Accounts receivable from affiliates
  53   125  
Other
  104   31 
Unbilled revenues
  273   369 
Accounts receivable from affiliates
   37   125 
Notes receivable from affiliates
  4   
Unbilled revenues
   234   369 
Fuel, materials and supplies
  322   327 
Fuel, materials and supplies
   345   327 
Prepayments
  63   15 
Prepayments
   22   15 
Price risk management assets
  1,146   1,511 
Price risk management assets
   961   1,511 
Other current assets
   22    10 
Other current assets
   22    10 
Total Current Assets
   2,513    3,030 
Total Current Assets
   2,516    3,030 
           
InvestmentsInvestments    Investments    
Nuclear plant decommissioning trust funds
  771   712 
Nuclear plant decommissioning trust funds
   804   712 
Other investments
   41    41 
Other investments
   41    41 
Total Investments
   812    753 
Total Investments
   845    753 
          
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Non-regulated property, plant and equipment    Non-regulated property, plant and equipment    
 
Generation
  11,604   11,305  
Generation
  11,663   11,305 
 
Nuclear fuel
  590   524  
Nuclear fuel
  590   524 
 
Other
  297   294  
Other
  307   294 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,921    5,817 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,025    5,817 
 
Non-regulated property, plant and equipment, net
  6,570   6,306  
Non-regulated property, plant and equipment, net
   6,535   6,306 
Construction work in progress
   704    987 
Construction work in progress
   739    987 
Property, Plant and Equipment, net (a)
   7,274    7,293 
Property, Plant and Equipment, net (a)
   7,274    7,293 
           
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Goodwill
  86   86 
Goodwill
   86   86 
Other intangibles
  259   252 
Other intangibles
   262   252 
Price risk management assets
  508   557 
Price risk management assets
   519   557 
Other noncurrent assets
   369    404 
Other noncurrent assets
   362    404 
Total Other Noncurrent Assets
   1,222    1,299 
Total Other Noncurrent Assets
   1,229    1,299 
           
Total Assets
Total Assets
 $ 11,821  $ 12,375 
Total Assets
 $ 11,864  $ 12,375 

(a)At JuneSeptember 30, 2013 and December 31, 2012, includes $416$413 million and $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.

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

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


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     September 30, December 31,
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
      $ 356 
 
Long-term debt due within one year
 $ 741    751 
 
Accounts payable
   328    438 
 
Accounts payable to affiliates
   3    31 
 
Taxes
   19    62 
 
Interest
   53    31 
 
Price risk management liabilities
   773    1,010 
 
Deferred income taxes
   45    158 
 
Other current liabilities
   264    319 
 
Total Current Liabilities
   2,226    3,156 
          
Long-term Debt
   2,221    2,521 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,429    1,232 
 
Investment tax credits
   207    186 
 
Price risk management liabilities
   462    556 
 
Accrued pension obligations
   203    293 
 
Asset retirement obligations
   388    365 
 
Other deferred credits and noncurrent liabilities
   180    218 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,869    2,850 
    ��     
Commitments and Contingent Liabilities (Note 10)      
       
Equity      
 
Member's equity
   4,530    3,830 
 
Noncontrolling interests
   18    18 
 
Total Equity
   4,548    3,848 
          
Total Liabilities and Equity
 $ 11,864  $ 12,375 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
13
 


CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries(Unaudited)(Millions of Dollars)
            
   Non-      Non-   
 Member's controlling   Member's controlling   
 equity interests Total equity interests Total
              
March 31, 2013 (a)
 $ 3,476  $ 18  $ 3,494 
June 30, 2013 (a)
 $ 3,541  $ 18  $ 3,559 
Net income
  86     86    124   1   125 
Other comprehensive income (loss)
  (31)    (31)  (10)      (10)
Contributions from member
  105     105   875       875 
Distributions
   (95)      (95)        (1)   (1)
June 30, 2013 (a)
 $ 3,541  $ 18  $ 3,559 
September 30, 2013 (a)
 $ 4,530  $ 18  $ 4,548 
             
December 31, 2012 (a)
 $ 3,830  $ 18  $ 3,848  $ 3,830  $ 18  $ 3,848 
Net income
  48     48    172   1   173 
Other comprehensive income (loss)
  (34)    (34)  (44)      (44)
Contributions from member
  105     105   980       980 
Distributions
   (408)      (408)   (408)   (1)   (409)
June 30, 2013 (a)
 $ 3,541  $ 18  $ 3,559 
September 30, 2013 (a)
 $ 4,530  $ 18  $ 4,548 
             
March 31, 2012
 $ 3,713  $ 18  $ 3,731 
June 30, 2012
 $ 3,982  $ 18  $ 4,000 
Net income
  19     19    54   1   55 
Other comprehensive income (loss)
  (122)    (122)   (77)      (77)
Contributions from member
  472     472 
Distributions
   (100)      (100)   (76)   (1)   (77)
June 30, 2012
 $ 3,982  $ 18  $ 4,000 
September 30, 2012
 $ 3,883  $ 18  $ 3,901 
             
December 31, 2011
 $ 4,019  $ 18  $ 4,037  $ 4,019  $ 18  $ 4,037 
Net income
  328     328    382   1   383 
Other comprehensive income (loss)
  (180)    (180)   (257)      (257)
Contributions from member
  472     472    472       472 
Distributions
   (657)      (657)   (733)   (1)   (734)
June 30, 2012
 $ 3,982  $ 18  $ 4,000 
September 30, 2012
 $ 3,883  $ 18  $ 3,901 

(a)See Note 18 for disclosure of balances of each component of AOCI.

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

 
14
 





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15
 


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
                    
   Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended
   June 30, June 30,   September 30, September 30,
   2013  2012  2013  2012    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues         
Retail electric
 $ 413  $ 403  $ 925  $ 860 
Retail electric
 $ 463  $ 443  $ 1,388  $ 1,303 
Electric revenue from affiliate
   1    1    2    2 
Electric revenue from affiliate
   1    1    3    3 
Total Operating Revenues
   414    404    927    862 
Total Operating Revenues
   464    444    1,391    1,306 
                      
Operating ExpensesOperating Expenses        Operating Expenses             
Operation        Operation              
 
Energy purchases
  120   120   292   273  
Energy purchases
   144    137    436    410 
 
Energy purchases from affiliate
  12   17   26   38  
Energy purchases from affiliate
   11    23    37    61 
 
Other operation and maintenance
  124   143   257   283  
Other operation and maintenance
   134    148    391    431 
Depreciation
  44   39   87   78 
Depreciation
   45    41    132    119 
Taxes, other than income
   22    22    52    48 
Taxes, other than income
   25    24    77    72 
Total Operating Expenses
   322    341    714    720 
Total Operating Expenses
   359    373    1,073    1,093 
                        
Operating Income
Operating Income
  92   63   213   142 
Operating Income
  105    71    318    213 
                        
Other Income (Expense) - net
Other Income (Expense) - net
  2   1   3   3 
Other Income (Expense) - net
   2    3    5    6 
                        
Interest Expense
Interest Expense
   25    24    50    48 
Interest Expense
   30    25    80    73 
                        
Income Before Income Taxes
Income Before Income Taxes
  69   40   166   97 
Income Before Income Taxes
  77    49    243    146 
                        
Income Taxes
Income Taxes
   24    11    57    31 
Income Taxes
   26    16    83    47 
                        
Net Income (a)
Net Income (a)
  45   29   109   66 
Net Income (a)
  51    33    160    99 
                        
Distributions on Preference Stock
Distributions on Preference Stock
            4 
Distributions on Preference Stock
                  4 
                        
Net Income Available to PPL
Net Income Available to PPL
 $ 45  $ 29  $ 109  $ 62 
Net Income Available to PPL
 $ 51  $ 33  $ 160  $ 95 

(a)Net income approximates comprehensive income.

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

 
16
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Nine Months Ended
     September 30,
     2013  2012 
Cash Flows from Operating Activities      
 
Net income
 $ 160  $ 99 
 Adjustments to reconcile net income to net cash provided by operating activities          
  
Depreciation
   132    119 
  
Amortization
   13    13 
  
Defined benefit plans - expense
   16    17 
  
Deferred income taxes and investment tax credits
   103    72 
  
Other
   2    3 
 Change in current assets and current liabilities      
  
Accounts receivable
   (14)   48 
  
Accounts payable
   (51)   (43)
  
Unbilled revenues
   34    18 
  
Taxes payable
   24      
  
Other
   (19)   (4)
 Other operating activities      
  
Defined benefit plans - funding
   (88)   (54)
  
Other assets
   6      
  
Other liabilities
   9    (27)
   
Net cash provided by operating activities
   327    261 
          
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (688)   (407)
 
Net (increase) decrease in notes receivable from affiliates
        (210)
 
Other investing activities
   (9)   3 
   
Net cash provided by (used in) investing activities
   (697)   (614)
          
Cash Flows from Financing Activities      
 
Issuance of long-term debt
   348    249 
 
Contributions from parent
   205    150 
 
Redemption of preference stock
        (250)
 
Payment of common stock dividends to parent
   (94)   (75)
 
Other financing activities
   (4)   (10)
   
Net cash provided by (used in) financing activities
   455    64 
          
Net Increase (Decrease) in Cash and Cash Equivalents
   85    (289)
Cash and Cash Equivalents at Beginning of Period
   140    320 
Cash and Cash Equivalents at End of Period
 $ 225  $ 31 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Six Months Ended
     June 30,
     2013  2012 
Cash Flows from Operating Activities      
 
Net income
 $ 109  $ 66 
 Adjustments to reconcile net income to net cash provided by operating activities      
  
Depreciation
   87    78 
  
Amortization
   10    9 
  
Defined benefit plans - expense
   10    11 
  
Deferred income taxes and investment tax credits
   81    59 
  
Other
   3    5 
 Change in current assets and current liabilities      
  
Accounts receivable
   (56)   19 
  
Accounts payable
   (45)   (37)
  
Unbilled revenues
   36    11 
  
Prepayments
   (18)   (18)
  
Taxes
   18    
  
Other
   (38)   (23)
 Other operating activities      
  
Defined benefit plans - funding
   (88)   (54)
  
Other assets
      2 
  
Other liabilities
   6    (27)
   
Net cash provided by operating activities
   115    101 
          
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (451)   (256)
 
Other investing activities
   (4)   (1)
   
Net cash provided by (used in) investing activities
   (455)   (257)
          
Cash Flows from Financing Activities      
 
Contributions from parent
   205    
 
Redemption of preference stock
      (250)
 
Payment of common stock dividends to parent
   (66)   (56)
 
Net increase (decrease) in short-term debt
   85    195 
 
Other financing activities
      (8)
   
Net cash provided by (used in) financing activities
   224    (119)
          
Net Increase (Decrease) in Cash and Cash Equivalents
   (116)   (275)
Cash and Cash Equivalents at Beginning of Period
   140    320 
Cash and Cash Equivalents at End of Period
 $ 24  $ 45 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
17
 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     September 30, December 31,
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 225  $ 140 
 Accounts receivable (less reserve: 2013, $20; 2012, $18)      
  
Customer
   273    249 
  
Other
   14    5 
 
Accounts receivable from affiliates
   4    29 
 
Unbilled revenues
   76    110 
 
Materials and supplies
   35    39 
 
Prepayments
   67    76 
 
Deferred income taxes
   46    45 
 
Other current assets
   18    4 
 
Total Current Assets
   758    697 
          
Property, Plant and Equipment      
 
Regulated utility plant
   6,771    6,286 
 
Less: accumulated depreciation - regulated utility plant
   2,421    2,316 
  
Regulated utility plant, net
   4,350    3,970 
 
Other, net
   2    2 
 
Construction work in progress
   519    370 
 
Property, Plant and Equipment, net
   4,871    4,342 
          
Other Noncurrent Assets      
 
Regulatory assets
   857    853 
 
Intangibles
   208    171 
 
Other noncurrent assets
   35    55 
 
Total Other Noncurrent Assets
   1,100    1,079 
          
Total Assets
 $ 6,729  $ 6,118 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     June 30, December 31,
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 24  $ 140 
 Accounts receivable (less reserve: 2013, $19; 2012, $18)      
  
Customer
   316    249 
  
Other
   4    5 
 
Accounts receivable from affiliates
   3    29 
 
Unbilled revenues
   74    110 
 
Materials and supplies
   39    39 
 
Prepayments
   94    76 
 
Deferred income taxes
   45    45 
 
Other current assets
   18    4 
 
Total Current Assets
   617    697 
          
Property, Plant and Equipment      
 
Regulated utility plant
   6,627    6,286 
 
Less: accumulated depreciation - regulated utility plant
   2,383    2,316 
  
Regulated utility plant, net
   4,244    3,970 
 
Other, net
   2    2 
 
Construction work in progress
   444    370 
 
Property, Plant and Equipment, net
   4,690    4,342 
          
Other Noncurrent Assets      
 
Regulatory assets
   862    853 
 
Intangibles
   181    171 
 
Other noncurrent assets
   35    55 
 
Total Other Noncurrent Assets
   1,078    1,079 
          
Total Assets
 $ 6,385  $ 6,118 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
18
 


CONDENSED CONSOLIDATED BALANCE SHEETSPPL Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions of Dollars, shares in thousands)
            
   June 30, December 31,   September 30, December 31,
   2013  2012    2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity      
              
Current LiabilitiesCurrent Liabilities    Current Liabilities      
Short-term debt
 $ 85   
Long term debt due within one year
  10   
Long term debt due within one year
 $ 10      
Accounts payable
  242  $ 259 
Accounts payable
  244  $ 259 
Accounts payable to affiliates
  43   63 
Accounts payable to affiliates
  46    63 
Taxes
  20   12 
Taxes
  36    12 
Interest
  26   26 
Interest
  23    26 
Regulatory liabilities
  48   52 
Regulatory liabilities
  51    52 
Other current liabilities
   89    93 
Other current liabilities
   94    93 
Total Current Liabilities
   563    505 
Total Current Liabilities
   504    505 
              
Long-term Debt
Long-term Debt
   1,957    1,967 
Long-term Debt
   2,305    1,967 
              
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities    Deferred Credits and Other Noncurrent Liabilities     
Deferred income taxes
  1,307   1,233 
Deferred income taxes
  1,334    1,233 
Investment tax credits
  3   3 
Investment tax credits
  3    3 
Accrued pension obligations
  154   237 
Accrued pension obligations
  157    237 
Regulatory liabilities
  13   8 
Regulatory liabilities
  14    8 
Other deferred credits and noncurrent liabilities
   78    103 
Other deferred credits and noncurrent liabilities
   79    103 
Total Deferred Credits and Other Noncurrent Liabilities
   1,555    1,584 
Total Deferred Credits and Other Noncurrent Liabilities
   1,587    1,584 
              
Commitments and Contingent Liabilities (Notes 6 and 10)Commitments and Contingent Liabilities (Notes 6 and 10)    Commitments and Contingent Liabilities (Notes 6 and 10)      
              
Stockholder's EquityStockholder's Equity    Stockholder's Equity     
Common stock - no par value (a)
  364   364 
Common stock - no par value (a)
  364    364 
Additional paid-in capital
  1,340   1,135 
Additional paid-in capital
  1,340    1,135 
Earnings reinvested
   606    563 
Earnings reinvested
   629    563 
Total Equity
   2,310    2,062 
Total Equity
   2,333    2,062 
             
Total Liabilities and Equity
Total Liabilities and Equity
 $ 6,385  $ 6,118 
Total Liabilities and Equity
 $ 6,729  $ 6,118 

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

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

 
19
 


CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
PPL Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions of Dollars)
                            
   Common             Common          
   stock             stock          
   shares     Additional       shares     Additional    
   outstanding Preference Common  paid-in Earnings     outstanding Preference Common  paid-in Earnings  
    (a) stock  stock  capital  reinvested Total    (a) stock  stock  capital  reinvested Total
                            
March 31, 2013
  66,368     $ 364  $ 1,195  $ 602  $ 2,161 
June 30, 2013
June 30, 2013
  66,368      $ 364  $ 1,340  $ 606  $ 2,310 
Net income
Net income
          45   45 
Net income
                  51   51 
Capital contributions from PPL
        145     145 
Cash dividends declared on common stock
Cash dividends declared on common stock
              (41)   (41)
Cash dividends declared on common stock
                      (28)   (28)
June 30, 2013
  66,368     $ 364  $ 1,340  $ 606  $ 2,310 
September 30, 2013
September 30, 2013
  66,368       $ 364  $ 1,340  $ 629  $ 2,333 
                            
December 31, 2012
December 31, 2012
  66,368    $ 364  $ 1,135  $ 563  $ 2,062 
December 31, 2012
  66,368      $ 364  $ 1,135  $ 563  $ 2,062 
Net income
Net income
          109   109 
Net income
                  160   160 
Capital contributions from PPL
Capital contributions from PPL
        205     205 
Capital contributions from PPL
              205       205 
Cash dividends declared on common stock
Cash dividends declared on common stock
              (66)   (66)
Cash dividends declared on common stock
                      (94)   (94)
June 30, 2013
  66,368     $ 364  $ 1,340  $ 606  $ 2,310 
September 30, 2013
September 30, 2013
  66,368       $ 364  $ 1,340  $ 629  $ 2,333 
                            
March 31, 2012
  66,368  $ 250  $ 364  $ 979  $ 530  $ 2,123 
June 30, 2012
June 30, 2012
  66,368      $ 364  $ 979  $ 538  $ 1,881 
Net income
Net income
          29   29 
Net income
                  33   33 
Redemption of preference stock (b)
    (250)        (250)
Capital contributions from PPL
Capital contributions from PPL
              150       150 
Cash dividends declared on common stock
Cash dividends declared on common stock
              (21)   (21)
Cash dividends declared on common stock
                      (19)   (19)
June 30, 2012
  66,368  $  $ 364  $ 979  $ 538  $ 1,881 
September 30, 2012
September 30, 2012
  66,368       $ 364  $ 1,129  $ 552  $ 2,045 
                            
December 31, 2011
December 31, 2011
  66,368  $ 250  $ 364  $ 979  $ 532  $ 2,125 
December 31, 2011
  66,368  $ 250  $ 364  $ 979  $ 532  $ 2,125 
Net income
Net income
          66   66 
Net income
                  99   99 
Redemption of preference stock (b)
Redemption of preference stock (b)
    (250)        (250)
Redemption of preference stock (b)
      (250)              (250)
Capital contributions from PPL
Capital contributions from PPL
              150       150 
Cash dividends declared on preference stock
Cash dividends declared on preference stock
          (4)  (4)
Cash dividends declared on preference stock
                  (4)  (4)
Cash dividends declared on common stock
Cash dividends declared on common stock
              (56)   (56)
Cash dividends declared on common stock
                      (75)   (75)
June 30, 2012
  66,368  $  $ 364  $ 979  $ 538  $ 1,881 
September 30, 2012
September 30, 2012
  66,368  $    $ 364  $ 1,129  $ 552  $ 2,045 

(a)Shares in thousands.  All common shares of PPL Electric stock are owned by PPL.
(b)In June 2012, PPL Electric redeemed all of its outstanding preference stock.

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

 
20
 





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21
 


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
                    
   Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended
   June 30, June 30,   September 30, September 30,
   2013  2012   2013   2012    2013  2012   2013   2012 
                   
Operating Revenues
Operating Revenues
 $ 682  $ 658  $ 1,482  $ 1,363 
Operating Revenues
 $ 744  $ 732  $ 2,226  $ 2,095 
                   
Operating ExpensesOperating Expenses        Operating Expenses          
Operation        Operation          
 
Fuel
  216   215   447   428  
Fuel
   237   249    684   677 
 
Energy purchases
  37   34   123   108  
Energy purchases
   23   27    146   135 
 
Other operation and maintenance
  197   197   394   403  
Other operation and maintenance
   188   186    582   589 
Depreciation
  83   86   165   172 
Depreciation
   84   87    249   259 
Taxes, other than income
   12    12    24    23 
Taxes, other than income
   12    11    36    34 
Total Operating Expenses
   545    544    1,153    1,134 
Total Operating Expenses
   544    560    1,697    1,694 
                      
Operating Income
Operating Income
  137   114   329   229 
Operating Income
   200   172    529   401 
                      
Other Income (Expense) - net
Other Income (Expense) - net
    (7)  (2)  (10)
Other Income (Expense) - net
   (4)  (4)   (6)  (14)
                   
Interest Expense
Interest Expense
  36   37   73   75 
Interest Expense
   37   37    110   112 
                      
Interest Expense with Affiliate
Interest Expense with Affiliate
   1       1    
Interest Expense with Affiliate
             1      
                      
Income from Continuing Operations Before Income Taxes
Income from Continuing Operations Before Income Taxes
  100   70   253   144 
Income from Continuing Operations Before Income Taxes
   159   131    412   275 
                      
Income Taxes
Income Taxes
   37    20    94    41 
Income Taxes
   59    48    153    89 
                      
Income from Continuing Operations After Income Taxes
Income from Continuing Operations After Income Taxes
  63   50   159   103 
Income from Continuing Operations After Income Taxes
   100   83    259   186 
                      
Income (Loss) from Discontinued Operations (net of income taxes)
Income (Loss) from Discontinued Operations (net of income taxes)
   1    (6)   1    (6)
Income (Loss) from Discontinued Operations (net of income taxes)
             1    (6)
                      
Net Income (a)
Net Income (a)
 $ 64  $ 44  $ 160  $ 97 
Net Income (a)
 $ 100  $ 83  $ 260  $ 180 

(a)Net income approximates comprehensive income.

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

 
22
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
           
  Nine Months Ended September 30,
     2013   2012 
Cash Flows from Operating Activities       
 
Net income
 $ 260   $ 180 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   249     259 
  
Amortization
   19     20 
  
Defined benefit plans - expense
   38     30 
  
Deferred income taxes and investment tax credits
   99     92 
  
Other
   6     (5)
 Change in current assets and current liabilities       
  
Accounts receivable
   (78)    (25)
  
Accounts payable
   34     4 
  
Accounts payable to affiliates
   1       
  
Unbilled revenues
   19     26 
  
Fuel, materials and supplies
   1     4 
  
Income tax receivable
         3 
  
Taxes payable
   83     51 
  
Accrued interest
   30     29 
  
Other
         19 
 Other operating activities       
  
Defined benefit plans - funding
   (159)    (66)
  
Settlement of interest rate swaps
   98       
  
Other assets
   (1)    (3)
  
Other liabilities
   14     28 
   
Net cash provided by operating activities
   713     646 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (891)    (525)
 
Net (increase) decrease in notes receivable from affiliates
         9 
 
Net (increase) decrease in restricted cash and cash equivalents
   10     (3)
 
Other investing activities
   2       
   
Net cash provided by (used in) investing activities
   (879)    (519)
Cash Flows from Financing Activities       
 
Net increase (decrease) in notes payable with affiliates
   27       
 
Net increase (decrease) in short-term debt
   87       
 
Debt issuance and credit facility costs
         (1)
 
Distributions to member
   (116)    (95)
 
Contributions from member
   146       
   
Net cash provided by (used in) financing activities
   144     (96)
Net Increase (Decrease) in Cash and Cash Equivalents
   (22)    31 
Cash and Cash Equivalents at Beginning of Period
   43     59 
Cash and Cash Equivalents at End of Period
 $ 21   $ 90 
           
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
           
  Six Months Ended June 30,
     2013   2012 
Cash Flows from Operating Activities       
 
Net income
 $ 160   $ 97 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   165     172 
  
Amortization
   14     14 
  
Defined benefit plans - expense
   27     20 
  
Deferred income taxes and investment tax credits
   95     56 
  
Other
   (6)    (2)
 Change in current assets and current liabilities       
  
Accounts receivable
   (62)    (11)
  
Accounts payable
   36     17 
  
Unbilled revenues
   (2)    1 
  
Fuel, materials and supplies
   25     1 
  
Taxes
       33 
  
Other
   2     (6)
 Other operating activities       
  
Defined benefit plans - funding
   (156)    (62)
  
Other assets
   (3)    
  
Other liabilities
   2     24 
   
Net cash provided by operating activities
   297     354 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (579)    (324)
 
Net (increase) decrease in notes receivable from affiliates
       3 
 
Net (increase) decrease in restricted cash and cash equivalents
   10     (2)
 
Other investing activities
   1     
   
Net cash provided by (used in) investing activities
   (568)    (323)
Cash Flows from Financing Activities       
 
Net increase (decrease) in notes payable with affiliates
   47     
 
Net increase (decrease) in short-term debt
   127     
 
Debt issuance and credit facility costs
       (1)
 
Distributions to member
   (69)    (60)
 
Contributions from member
   146     
   
Net cash provided by (used in) financing activities
   251     (61)
Net Increase (Decrease) in Cash and Cash Equivalents
   (20)    (30)
Cash and Cash Equivalents at Beginning of Period
   43     59 
Cash and Cash Equivalents at End of Period
 $ 23   $ 29 
           
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
23
 

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     September 30, December 31,
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 21  $  43 
 Accounts receivable (less reserve: 2013, $22; 2012, $19)      
  
Customer
   216    133 
  
Other
   18    20 
 
Unbilled revenues
   137    156 
 
Accounts receivable from affiliates
        1 
 
Fuel, materials and supplies
   275    276 
 
Prepayments
   24    28 
 
Price risk management assets from affiliates
        14 
 
Deferred income taxes
   20    13 
 
Regulatory assets
   29    19 
 
Other current assets
   6    4 
 
Total Current Assets
   746    707 
          
Property, Plant and Equipment      
 
Regulated utility plant
   8,434    8,073 
 
Less: accumulated depreciation - regulated utility plant
   713    519 
  
Regulated utility plant, net
   7,721    7,554 
 
Other, net
   3    3 
 
Construction work in progress
   1,341    750 
 
Property, Plant and Equipment, net
   9,065    8,307 
          
Other Noncurrent Assets      
 
Regulatory assets
   566    630 
 
Goodwill
   996    996 
 
Other intangibles
   232    271 
 
Other noncurrent assets
   97    108 
 
Total Other Noncurrent Assets
   1,891    2,005 
          
Total Assets
 $ 11,702  $ 11,019 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     June 30, December 31,
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 23  $ 43 
 Accounts receivable (less reserve: 2013, $22; 2012, $19)      
  
Customer
   202    133 
  
Other
   21    20 
 
Unbilled revenues
   158    156 
 
Accounts receivable from affiliates
      1 
 
Fuel, materials and supplies
   251    276 
 
Prepayments
   24    28 
 
Price risk management assets from affiliates
   72    14 
 
Deferred income taxes
   11    13 
 
Regulatory assets
   29    19 
 
Other current assets
   6    4 
 
Total Current Assets
   797    707 
          
Property, Plant and Equipment      
 
Regulated utility plant
   8,232    8,073 
 
Less: accumulated depreciation - regulated utility plant
   647    519 
  
Regulated utility plant, net
   7,585    7,554 
 
Other, net
   3    3 
 
Construction work in progress
   1,113    750 
 
Property, Plant and Equipment, net
   8,701    8,307 
          
Other Noncurrent Assets      
 
Regulatory assets
   581    630 
 
Goodwill
   996    996 
 
Other intangibles
   245    271 
 
Other noncurrent assets
   98    108 
 
Total Other Noncurrent Assets
   1,920    2,005 
          
Total Assets
 $ 11,418  $ 11,019 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
24
 
CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     June 30, December 31,
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 252  $ 125 
 
Notes payable with affiliates
   72    25 
 
Accounts payable
   301    283 
 
Accounts payable to affiliates
   1    1 
 
Customer deposits
   49    48 
 
Taxes
   26    26 
 
Price risk management liabilities
   4    5 
 
Regulatory liabilities
   6    9 
 
Interest
   21    21 
 
Other current liabilities
   104    100 
 
Total Current Liabilities
   836    643 
          
Long-term Debt
   4,075    4,075 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   637    541 
 
Investment tax credits
   137    138 
 
Accrued pension obligations
   266    414 
 
Asset retirement obligations
   127    125 
 
Regulatory liabilities
   1,039    1,002 
 
Price risk management liabilities
   39    53 
 
Other deferred credits and noncurrent liabilities
   240    242 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,485    2,515 
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Member's equity
   4,022    3,786 
          
Total Liabilities and Equity
 $ 11,418  $ 11,019 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     September 30, December 31,
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 212  $ 125 
 
Notes payable with affiliates
   52    25 
 
Accounts payable
   312    283 
 
Accounts payable to affiliates
   2    1 
 
Customer deposits
   49    48 
 
Taxes
   109    26 
 
Price risk management liabilities
   4    5 
 
Price risk management liabilities with affiliates
   14    
 
Regulatory liabilities
   17    9 
 
Interest
   51    21 
 
Other current liabilities
   104    100 
 
Total Current Liabilities
   926    643 
          
Long-term Debt
   4,076    4,075 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   651    541 
 
Investment tax credits
   136    138 
 
Accrued pension obligations
   267    414 
 
Asset retirement obligations
   245    125 
 
Regulatory liabilities
   1,040    1,002 
 
Price risk management liabilities
   37    53 
 
Other deferred credits and noncurrent liabilities
   249    242 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,625    2,515 
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Member's equity
   4,075    3,786 
          
Total Liabilities and Equity
 $ 11,702  $ 11,019 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
25
 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
    
   Member's
   Equity
    
March 31,June 30, 2013
 $ 3,9524,022 
Net income
   64 
Contributions from member
 71100 
Distributions to member
   (65)(47)
JuneSeptember 30, 2013
 $ 4,0224,075 
    
December 31, 2012
 $ 3,786 
Net income
   160260 
Contributions from member
   146 
Distributions to member
   (69)(116)
Other comprehensive income (loss)
   (1)
JuneSeptember 30, 2013
 $ 4,0224,075 
    
March 31,June 30, 2012
 $3,7653,774 
Net income
   4483 
Distributions to member
   (35)
JuneSeptember 30, 2012
 $ 3,7743,822 
    
December 31, 2011
 $3,741 
Net income
   97180 
Distributions to member
   (60)(95)
Other comprehensive income (loss)
   (4)
JuneSeptember 30, 2012
 $ 3,7743,822 

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

 
26
 






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27
 


CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
                    
   Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended
   June 30, June 30,   September 30, September 30,
   2013  2012  2013  2012    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues          
Retail and wholesale
 $ 302  $ 286  $ 671  $ 615 
Retail and wholesale
 $ 332  $ 324  $ 1,003  $ 939 
Electric revenue from affiliate
   14    18    35    42 
Electric revenue from affiliate
   11    9    46    51 
Total Operating Revenues
   316    304    706    657 
Total Operating Revenues
   343    333    1,049    990 
                      
Operating ExpensesOperating Expenses        Operating Expenses          
Operation        Operation          
 
Fuel
  88   92   184   181  
Fuel
   100   100    284   281 
 
Energy purchases
  31   23   111   92  
Energy purchases
   18   18    129   110 
 
Energy purchases from affiliate
  3   2   4   6  
Energy purchases from affiliate
   2   3    6   9 
 
Other operation and maintenance
  94   92   185   190  
Other operation and maintenance
   93   87    278   277 
Depreciation
  37   38   73   76 
Depreciation
   37   38    110   114 
Taxes, other than income
   6    6    12    11 
Taxes, other than income
   6    6    18    17 
Total Operating Expenses
   259    253    569    556 
Total Operating Expenses
   256    252    825    808 
                      
Operating Income
Operating Income
  57   51   137   101 
Operating Income
   87   81    224   182 
                      
Other Income (Expense) - net
Other Income (Expense) - net
  (1)  (1)  (2)  
Other Income (Expense) - net
   (1)  (3)   (3)  (3)
                      
Interest Expense
Interest Expense
   10    10    20    21 
Interest Expense
   10    10    30    31 
                      
Income Before Income Taxes
Income Before Income Taxes
  46   40   115   80 
Income Before Income Taxes
   76   68    191   148 
                      
Income Taxes
Income Taxes
   17    14    42    29 
Income Taxes
   27    25    69    54 
                      
Net Income (a)
Net Income (a)
 $ 29  $ 26  $ 73  $ 51 
Net Income (a)
 $ 49  $ 43  $ 122  $ 94 

(a)Net income equals comprehensive income.

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

 
28
 

CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)
           
  Nine Months Ended September 30,
     2013   2012 
Cash Flows from Operating Activities       
 
Net income
 $ 122   $ 94 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   110     114 
  
Amortization
   9     8 
  
Defined benefit plans - expense
   13     14 
  
Deferred income taxes and investment tax credits
   22     40 
  
Other
   10     (11)
 Change in current assets and current liabilities       
  
Accounts receivable
   (20)    (5)
  
Accounts payable
   18     2 
  
Accounts payable to affiliates
   7       
  
Unbilled revenues
   10     16 
  
Fuel, materials and supplies
   2     (10)
  
Taxes payable
   32     21 
  
Other
   12     13 
 Other operating activities       
  
Defined benefit plans - funding
   (45)    (26)
  
Settlement of interest rate swaps
   49       
  
Other assets
   (1)    (2)
  
Other liabilities
   2     (1)
   
Net cash provided by operating activities
   352     267 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (376)    (193)
 
Net (increase) decrease in restricted cash and cash equivalents
   10     (3)
   
Net cash provided by (used in) investing activities
   (366)    (196)
Cash Flows from Financing Activities       
 
Net increase (decrease) in short-term debt
   17       
 
Debt issuance and credit facility costs
         (1)
 
Payment of common stock dividends to parent
   (67)    (47)
 
Contributions from parent
   54       
   
Net cash provided by (used in) financing activities
   4     (48)
Net Increase (Decrease) in Cash and Cash Equivalents
   (10)    23 
Cash and Cash Equivalents at Beginning of Period
   22     25 
Cash and Cash Equivalents at End of Period
 $ 12   $  48 
           
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)
           
  Six Months Ended June 30,
     2013   2012 
Cash Flows from Operating Activities       
 
Net income
 $ 73   $ 51 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   73     76 
  
Amortization
   6     6 
  
Defined benefit plans - expense
   9     9 
  
Deferred income taxes and investment tax credits
   21     28 
  
Other
       (6)
 Change in current assets and current liabilities       
  
Accounts receivable
   (9)    (7)
  
Accounts payable
   13     11 
  
Accounts payable to affiliates
   (2)    (10)
  
Unbilled revenues
   2     6 
  
Fuel, materials and supplies
   25     6 
  
Taxes
   12     15 
  
Other
   6     
 Other operating activities       
  
Defined benefit plans - funding
   (44)    (25)
  
Other assets
   (1)    (1)
  
Other liabilities
   2     1 
   
Net cash provided by operating activities
   186     160 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (236)    (120)
 
Net (increase) decrease in notes receivable from affiliates
       (6)
 
Net (increase) decrease in restricted cash and cash equivalents
   10     (2)
   
Net cash provided by (used in) investing activities
   (226)    (128)
Cash Flows from Financing Activities       
 
Net increase (decrease) in short-term debt
   25     
 
Debt issuance and credit facility costs
       (1)
 
Payment of common stock dividends to parent
   (48)    (31)
 
Contributions from parent
   54     
   
Net cash provided by (used in) financing activities
   31     (32)
Net Increase (Decrease) in Cash and Cash Equivalents
   (9)    
Cash and Cash Equivalents at Beginning of Period
   22     25 
Cash and Cash Equivalents at End of Period
 $ 13   $ 25 
           
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
29
 

CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     September 30, December 31,
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 12  $ 22 
 Accounts receivable (less reserve: 2013, $2; 2012, $1)      
  
Customer
   93    59 
  
Other
   9    16 
 
Unbilled revenues
   62    72 
 
Accounts receivable from affiliates
   8    14 
 
Fuel, materials and supplies
   140    142 
 
Prepayments
   4    7 
 
Price risk management from affiliates
        7 
 
Deferred income taxes
   3      
 
Regulatory assets
   19    19 
 
Other current assets
   1    1 
 
Total Current Assets
   351    359 
          
Property, Plant and Equipment      
 
Regulated utility plant
   3,340    3,187 
 
Less: accumulated depreciation - regulated utility plant
   309    220 
  
Regulated utility plant, net
   3,031    2,967 
 
Other, net
   1      
 
Construction work in progress
   490    259 
 
Property, Plant and Equipment, net
   3,522    3,226 
          
Other Noncurrent Assets      
 
Regulatory assets
   359    400 
 
Goodwill
   389    389 
 
Other intangibles
   126    144 
 
Other noncurrent assets
   33    44 
 
Total Other Noncurrent Assets
   907    977 
          
Total Assets
 $ 4,780  $ 4,562 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     June 30, December 31,
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 13  $ 22 
 Accounts receivable (less reserve: 2013, $2; 2012, $1)      
  
Customer
   84    59 
  
Other
   9    16 
 
Unbilled revenues
   70    72 
 
Accounts receivable from affiliates
   8    14 
 
Fuel, materials and supplies
   117    142 
 
Prepayments
   7    7 
 
Price risk management from affiliates
   36    7 
 
Regulatory assets
   21    19 
 
Other current assets
   1    1 
 
Total Current Assets
   366    359 
          
Property, Plant and Equipment      
 
Regulated utility plant
   3,279    3,187 
 
Less: accumulated depreciation - regulated utility plant
   282    220 
  
Regulated utility plant, net
   2,997    2,967 
 
Construction work in progress
   407    259 
 
Property, Plant and Equipment, net
   3,404    3,226 
          
Other Noncurrent Assets      
 
Regulatory assets
   369    400 
 
Goodwill
   389    389 
 
Other intangibles
   132    144 
 
Other noncurrent assets
   34    44 
 
Total Other Noncurrent Assets
   924    977 
          
Total Assets
 $ 4,694  $ 4,562 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
30
 


CONDENSED BALANCE SHEETSLouisville Gas and Electric Company(Unaudited)(Millions of Dollars, shares in thousands)
   June 30, December 31,   September 30, December 31,
   2013  2012 ��   2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity     
              
Current LiabilitiesCurrent Liabilities    Current Liabilities     
Short-term debt
 $ 72  $ 55 
Short-term debt
 $ 80  $ 55 
Accounts payable
   147    117 
Accounts payable
  146   117 
Accounts payable to affiliates
   30    23 
Accounts payable to affiliates
  21   23 
Customer deposits
   24    23 
Customer deposits
  24   23 
Taxes
   34    2 
Taxes
  14   2 
Price risk management liabilities
   4    5 
Price risk management liabilities
  4   5 
Price risk management liabilities with affiliates
   7    
Regulatory liabilities
  5   4 
Regulatory liabilities
   11    4 
Interest
  5   5 
Interest
   10    5 
Other current liabilities
   40    34 
Other current liabilities
   34    34 
Total Current Liabilities
   339    268 
Total Current Liabilities
   373    268 
             
Long-term Debt
Long-term Debt
   1,112    1,112 
Long-term Debt
   1,112    1,112 
           
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities    Deferred Credits and Other Noncurrent Liabilities     
Deferred income taxes
  567   544 
Deferred income taxes
  577    544 
Investment tax credits
  39   40 
Investment tax credits
  39    40 
Accrued pension obligations
  57   102 
Accrued pension obligations
  56    102 
Asset retirement obligations
  57   56 
Asset retirement obligations
  69    56 
Regulatory liabilities
  488   471 
Regulatory liabilities
  489    471 
Price risk management liabilities
  39   53 
Price risk management liabilities
  37    53 
Other deferred credits and noncurrent liabilities
   107    106 
Other deferred credits and noncurrent liabilities
   109    106 
Total Deferred Credits and Other Noncurrent Liabilities
   1,354    1,372 
Total Deferred Credits and Other Noncurrent Liabilities
   1,376    1,372 
             
Commitments and Contingent Liabilities (Notes 6 and 10)Commitments and Contingent Liabilities (Notes 6 and 10)    Commitments and Contingent Liabilities (Notes 6 and 10)     
              
Stockholder's EquityStockholder's Equity    Stockholder's Equity      
Common stock - no par value (a)
  424   424 
Common stock - no par value (a)
   424    424 
Additional paid-in capital
  1,332   1,278 
Additional paid-in capital
   1,332    1,278 
Earnings reinvested
   133    108 
Earnings reinvested
   163    108 
Total Equity
   1,889    1,810 
Total Equity
   1,919    1,810 
              
Total Liabilities and Equity
Total Liabilities and Equity
 $ 4,694  $ 4,562 
Total Liabilities and Equity
 $ 4,780  $ 4,562 

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

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

 
31
 


CONDENSED STATEMENTS OF EQUITY
CONDENSED STATEMENTS OF EQUITY
CONDENSED STATEMENTS OF EQUITY
Louisville Gas and Electric CompanyLouisville Gas and Electric Company        Louisville Gas and Electric Company        
(Unaudited)(Unaudited)        (Unaudited)       ��
(Millions of Dollars)(Millions of Dollars)        (Millions of Dollars)        
                
   Common           Common          
   stock           stock          
   shares   Additional       shares    Additional     
   outstanding Common paid-in Earnings     outstanding  Common paid-in Earnings  
   (a) stock capital reinvested Total   (a)  stock capital reinvested Total
                         
March 31, 2013
  21,294  $424  $1,303  $133  $1,860 
June 30, 2013
June 30, 2013
  21,294  $424  $1,332  $133  $1,889 
Net income
Net income
        29   29 
Net income
        49   49 
Capital contributions from LKE
      29     29 
Cash dividends declared on common stock
Cash dividends declared on common stock
           (29)   (29)
Cash dividends declared on common stock
           (19)   (19)
June 30, 2013
 21,294  $ 424  $ 1,332  $ 133  $ 1,889 
September 30, 2013
September 30, 2013
 21,294  $ 424  $ 1,332  $ 163  $ 1,919 
                        
December 31, 2012
December 31, 2012
 21,294  $424  $1,278  $108  $ 1,810 
December 31, 2012
 21,294  $424  $1,278  $108  $ 1,810 
Net income
Net income
        73   73 
Net income
        122   122 
Capital contributions from LKE
Capital contributions from LKE
      54     54 
Capital contributions from LKE
      54     54 
Cash dividends declared on common stock
Cash dividends declared on common stock
           (48)   (48)
Cash dividends declared on common stock
           (67)   (67)
June 30, 2013
 21,294  $ 424  $ 1,332  $ 133  $ 1,889 
September 30, 2013
September 30, 2013
 21,294  $ 424  $ 1,332  $ 163  $ 1,919 
                        
March 31, 2012
 21,294  $424  $1,278  $70  $1,772 
June 30, 2012
June 30, 2012
 21,294  $424  $1,278  $80  $1,782 
Net income
Net income
        26   26 
Net income
        43   43 
Cash dividends declared on common stock
Cash dividends declared on common stock
           (16)   (16)
Cash dividends declared on common stock
           (16)   (16)
June 30, 2012
  21,294  $ 424  $ 1,278  $ 80  $ 1,782 
September 30, 2012
September 30, 2012
  21,294  $ 424  $ 1,278  $ 107  $ 1,809 
                         
December 31, 2011
December 31, 2011
 21,294  $424  $1,278  $60  $1,762 
December 31, 2011
 21,294  $424  $1,278  $60  $1,762 
Net income
Net income
        51   51 
Net income
        94   94 
Cash dividends declared on common stock
Cash dividends declared on common stock
           (31)   (31)
Cash dividends declared on common stock
           (47)   (47)
June 30, 2012
  21,294  $ 424  $ 1,278  $ 80  $ 1,782 
September 30, 2012
September 30, 2012
  21,294  $ 424  $ 1,278  $ 107  $ 1,809 

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

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

 
32
 




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33
 


CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
Kentucky Utilities Company
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
                    
   Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended
   June 30, June 30,   September 30, September 30,
   2013  2012  2013  2012    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues            
Retail and wholesale
 $ 380  $ 372  $ 811  $ 748 
Retail and wholesale
 $ 412  $ 408  $ 1,223  $ 1,156 
Electric revenue from affiliate
   3    2    4    6 
Electric revenue from affiliate
   2    3    6    9 
Total Operating Revenues
   383    374    815    754 
Total Operating Revenues
   414    411    1,229    1,165 
                        
Operating ExpensesOperating Expenses        Operating Expenses            
Operation        Operation            
 
Fuel
  128   123   263   247  
Fuel
   137    149    400    396 
 
Energy purchases
  6   11   12   16  
Energy purchases
   5    9    17    25 
 
Energy purchases from affiliate
  14   18   35   42  
Energy purchases from affiliate
   11    9    46    51 
 
Other operation and maintenance
  98   98   195   193  
Other operation and maintenance
   91    93    286    286 
Depreciation
  46   48   92   96 
Depreciation
   46    49    138    145 
Taxes, other than income
   6    6    12    12 
Taxes, other than income
   6    5    18    17 
Total Operating Expenses
   298    304    609    606 
Total Operating Expenses
   296    314    905    920 
                        
Operating Income
Operating Income
  85   70   206   148 
Operating Income
   118    97    324    245 
                        
Other Income (Expense) - net
Other Income (Expense) - net
  2   (5)  1   (6)
Other Income (Expense) - net
   (2)   1    (1)   (5)
                        
Interest Expense
Interest Expense
   17    17    34    34 
Interest Expense
   17    18    51    52 
                        
Income Before Income Taxes
Income Before Income Taxes
  70   48   173   108 
Income Before Income Taxes
   99    80    272    188 
                        
Income Taxes
Income Taxes
   26    18    65    40 
Income Taxes
   36    30    101    70 
                        
Net Income (a)
Net Income (a)
 $ 44  $ 30  $ 108  $ 68 
Net Income (a)
 $ 63  $ 50  $ 171  $ 118 

(a)Net income approximatesequals comprehensive income.

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

 
34
 

CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)
           
  Nine Months Ended September 30,
     2013   2012 
Cash Flows from Operating Activities       
 
Net income
 $ 171   $ 118 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   138     145 
  
Amortization
   9     9 
  
Defined benefit plans - expense
   16     9 
  
Deferred income taxes and investment tax credits
   73     78 
  
Other
   (3)    1 
 Change in current assets and current liabilities       
  
Accounts receivable
   (46)    (34)
  
Accounts payable
   25     9 
  
Accounts payable to affiliates
   (9)    (4)
  
Unbilled revenues
   9     10 
  
Fuel, materials and supplies
   (1)    16 
  
Taxes payable
   39     26 
  
Accrued interest
   15     14 
  
Other
   (3)    18 
 Other operating activities       
  
Defined benefit plans - funding
   (62)    (20)
  
Settlement of interest rate swaps
   49       
  
Other assets
   (2)    (1)
  
Other liabilities
   1     16 
   
Net cash provided by operating activities
   419     410 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (512)    (331)
 
Other investing activities
   2       
   
Net cash provided by (used in) investing activities
   (510)    (331)
Cash Flows from Financing Activities       
 
Net increase (decrease) in short-term debt
   70       
 
Payment of common stock dividends to parent
   (83)    (68)
 
Contributions from parent
   92       
   
Net cash provided by (used in) financing activities
   79     (68)
Net Increase (Decrease) in Cash and Cash Equivalents
   (12)    11 
Cash and Cash Equivalents at Beginning of Period
   21     31 
Cash and Cash Equivalents at End of Period
 $ 9   $ 42 
           
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)
           
  Six Months Ended June 30,
     2013   2012 
Cash Flows from Operating Activities       
 
Net income
 $ 108   $ 68 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   92     96 
  
Amortization
   7     7 
  
Defined benefit plans - expense
   12     5 
  
Deferred income taxes and investment tax credits
   72     53 
  
Other
   (2)    
 Change in current assets and current liabilities       
  
Accounts receivable
   (39)    (20)
  
Accounts payable
   33     12 
  
Accounts payable to affiliates
   (7)    1 
  
Unbilled revenues
   (4)    (5)
  
Fuel, materials and supplies
       (3)
  
Taxes
   (10)    12 
  
Other
   5     (1)
 Other operating activities       
  
Defined benefit plans - funding
   (61)    (18)
  
Other assets
   (3)    
  
Other liabilities
   (13)    10 
   
Net cash provided by operating activities
   190     217 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (341)    (203)
 
Other investing activities
   1     
   
Net cash provided by (used in) investing activities
   (340)    (203)
Cash Flows from Financing Activities       
 
Net increase (decrease) in notes payable with affiliates
       6 
 
Net increase (decrease) in short-term debt
   102     
 
Payment of common stock dividends to parent
   (55)    (48)
 
Contributions from parent
   92     
   
Net cash provided by (used in) financing activities
   139     (42)
Net Increase (Decrease) in Cash and Cash Equivalents
   (11)    (28)
Cash and Cash Equivalents at Beginning of Period
   21     31 
Cash and Cash Equivalents at End of Period
 $ 10   $ 3 
           
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
35
 

CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     September 30, December 31,
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 9  $  21 
 Accounts receivable (less reserve: 2013, $4; 2012, $2)      
  
Customer
   123    74 
  
Other
   8    13 
 
Unbilled revenues
   75    84 
 
Accounts receivable from affiliates
   10    7 
 
Fuel, materials and supplies
   135    134 
 
Prepayments
   11    10 
 
Price risk management assets from affiliates
        7 
 
Deferred income taxes
   3    3 
 
Regulatory assets
   10      
 
Other current assets
   5    3 
 
Total Current Assets
   389    356 
          
Property, Plant and Equipment      
 
Regulated utility plant
   5,094    4,886 
 
Less: accumulated depreciation - regulated utility plant
   404    299 
  
Regulated utility plant, net
   4,690    4,587 
 
Other, net
   1    1 
 
Construction work in progress
   849    490 
 
Property, Plant and Equipment, net
   5,540    5,078 
          
Other Noncurrent Assets      
 
Regulatory assets
   207    230 
 
Goodwill
   607    607 
 
Other intangibles
   106    127 
 
Other noncurrent assets
   57    57 
 
Total Other Noncurrent Assets
   977    1,021 
          
Total Assets
 $ 6,906  $ 6,455 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     June 30, December 31,
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 10  $ 21 
 Accounts receivable (less reserve: 2013, $5; 2012, $2)      
  
Customer
   118    74 
  
Other
   11    13 
 
Unbilled revenues
   88    84 
 
Accounts receivable from affiliates
   9    7 
 
Fuel, materials and supplies
   134    134 
 
Prepayments
   7    10 
 
Price risk management assets from affiliates
   36    7 
 
Deferred income taxes
   2    3 
 
Regulatory assets
   8    
 
Other current assets
   5    3 
 
Total Current Assets
   428    356 
          
Property, Plant and Equipment      
 
Regulated utility plant
   4,953    4,886 
 
Less: accumulated depreciation - regulated utility plant
   365    299 
  
Regulated utility plant, net
   4,588    4,587 
 
Other, net
   1    1 
 
Construction work in progress
   704    490 
 
Property, Plant and Equipment, net
   5,293    5,078 
          
Other Noncurrent Assets      
 
Regulatory assets
   212    230 
 
Goodwill
   607    607 
 
Other intangibles
   113    127 
 
Other noncurrent assets
   57    57 
 
Total Other Noncurrent Assets
   989    1,021 
          
Total Assets
 $ 6,710  $ 6,455 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
36
 


CONDENSED BALANCE SHEETSKentucky Utilities Company(Unaudited)(Millions of Dollars, shares in thousands)
   June 30, December 31,   September 30, December 31,
   2013  2012    2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity     
              
Current LiabilitiesCurrent Liabilities    Current Liabilities     
Short-term debt
 $ 140  $ 70 
Short-term debt
 $ 172  $ 70 
Accounts payable
   155    147 
Accounts payable
  146   147 
Accounts payable to affiliates
  24    33 
Accounts payable to affiliates
  26   33 
Customer deposits
  25    25 
Customer deposits
  25   25 
Taxes
  65    26 
Taxes
  16   26 
Price risk management liabilities with affiliates
  7    
Regulatory liabilities
  1   5 
Regulatory liabilities
  6    5 
Interest
  10   10 
Interest
  25    10 
Other current liabilities
   37    33 
Other current liabilities
   31    33 
Total Current Liabilities
   433    349 
Total Current Liabilities
   478    349 
             
Long-term Debt
Long-term Debt
   1,842    1,842 
Long-term Debt
   1,843    1,842 
           
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities    Deferred Credits and Other Noncurrent Liabilities     
Deferred income taxes
  657   587 
Deferred income taxes
  660    587 
Investment tax credits
  98   98 
Investment tax credits
  97    98 
Accrued pension obligations
  45   104 
Accrued pension obligations
  45    104 
Asset retirement obligations
  70   69 
Asset retirement obligations
  176    69 
Regulatory liabilities
  551   531 
Regulatory liabilities
  551    531 
Other deferred credits and noncurrent liabilities
   86    92 
Other deferred credits and noncurrent liabilities
   93    92 
Total Deferred Credits and Other Noncurrent Liabilities
   1,507    1,481 
Total Deferred Credits and Other Noncurrent Liabilities
   1,622    1,481 
             
Commitments and Contingent Liabilities (Notes 6 and 10)Commitments and Contingent Liabilities (Notes 6 and 10)    Commitments and Contingent Liabilities (Notes 6 and 10)     
              
Stockholder's EquityStockholder's Equity    Stockholder's Equity      
Common stock - no par value (a)
  308   308 
Common stock - no par value (a)
   308    308 
Additional paid-in capital
  2,440   2,348 
Additional paid-in capital
   2,440    2,348 
Accumulated other comprehensive income (loss)
  1   1 
Accumulated other comprehensive income (loss)
   1    1 
Earnings reinvested
   179    126 
Earnings reinvested
   214    126 
Total Equity
   2,928    2,783 
Total Equity
   2,963    2,783 
              
Total Liabilities and Equity
Total Liabilities and Equity
 $ 6,710  $ 6,455 
Total Liabilities and Equity
 $ 6,906  $ 6,455 

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

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

 
37
 


CONDENSED STATEMENTS OF EQUITY
CONDENSED STATEMENTS OF EQUITY
CONDENSED STATEMENTS OF EQUITY
Kentucky Utilities CompanyKentucky Utilities Company        Kentucky Utilities Company        
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)        (Millions of Dollars)        
                 
 Common       Accumulated   Common        Accumulated  
 stock       other   stock        other  
 shares   Additional   comprehensive   shares    Additional   comprehensive  
 outstanding Common paid-in Earnings income   outstanding Common paid-in Earnings income  
 (a) stock capital reinvested (loss) Total (a) stock capital reinvested (loss) Total
                         
March 31, 2013
  37,818  $308  $2,398  $177  $ 1  $ 2,884 
June 30, 2013
  37,818  $308  $2,440  $179  $ 1  $ 2,928 
Net income
        44     44         63     63 
Capital contributions from LKE
      42       42 
Cash dividends declared on common stock
           (42)      (42)           (28)      (28)
June 30, 2013
 37,818  $ 308  $ 2,440  $ 179  $ 1  $ 2,928 
September 30, 2013
 37,818  $ 308  $ 2,440  $ 214  $ 1  $ 2,963 
                        
December 31, 2012
 37,818  $308  $2,348  $126  $ 1  $2,783  37,818  $308  $2,348  $126  $ 1  $2,783 
Net income
        108     108         171     171 
Capital contributions from LKE
      92       92       92       92 
Cash dividends declared on common stock
           (55)      (55)           (83)      (83)
June 30, 2013
 37,818  $ 308  $ 2,440  $ 179  $ 1  $ 2,928 
September 30, 2013
 37,818  $ 308  $ 2,440  $ 214  $ 1  $ 2,963 
                        
March 31, 2012
 37,818  $308  $2,348  $103  $ (4) $2,755 
June 30, 2012
 37,818  $308  $2,348  $109  $ (4) $2,761 
Net income
        30     30         50     50 
Cash dividends declared on common stock
           (24)      (24)           (20)      (20)
June 30, 2012
 37,818  $ 308  $ 2,348  $ 109  $ (4) $ 2,761 
September 30, 2012
 37,818  $ 308  $ 2,348  $ 139  $ (4) $ 2,791 
                         
December 31, 2011
 37,818  $308  $2,348  $89    $2,745  37,818  $308  $2,348  $89     $2,745 
Net income
        68     68         118     118 
Cash dividends declared on common stock
        (48)    (48)        (68)    (68)
Other comprehensive income (loss)
            $ (4)   (4)            $ (4)   (4)
June 30, 2012
 37,818  $ 308  $ 2,348  $ 109  $ (4) $ 2,761 
September 30, 2012
 37,818  $ 308  $ 2,348  $ 139  $ (4) $ 2,791 

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

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

 
38
 

Combined Notes to Condensed Financial Statements (Unaudited)


1.  Interim Financial Statements

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

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 KUThe specific Registrant to which disclosures are named specifically at each discussion headingapplicable is identified in parenthetical headings in italics above the applicable disclosure or thereinwithin the applicable disclosure for their related activities and disclosures.  Within combined disclosures, amounts are disclosed for any Registrant when significant.

The accompanying unaudited condensed financial statements have been prepared in accordance with 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 GAAP for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation in accordance with 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 sixnine months ended JuneSeptember 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 JuneSeptember 30, 2013 financial statements.

2.  Summary of Significant Accounting Policies

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

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.

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

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 sixnine months ended JuneSeptember 30, 2013, PPL Electric purchased $220$259 million and $479$738 million of accounts receivable from unaffiliated third parties and $70$75 million and $147$222 million from PPL EnergyPlus.  During the three and sixnine months ended JuneSeptember 30, 2012, PPL Electric purchased $184$225 million and $422$647 million of accounts receivable from unaffiliated third parties and $74$81 million and $156$237 million from PPL EnergyPlus.

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

The KPSC approved new lower depreciation rates for LG&E and KU as part of the rate-case settlement agreement reached in
November 2012.  The new rates became effective January 1, 2013 and will result in lower depreciation of approximately $19 million ($9 million for LG&E and $10 million for KU) in 2013, exclusive of net additions to PP&E since the rate case.
 
 
New Accounting Guidance Adopted (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)All Registrants)

Improving Disclosures about Offsetting Balance Sheet Items

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.

 
39
 


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.

Testing Indefinite-Lived Intangible Assets for Impairment

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.

Reporting Amounts Reclassified Out of AOCI

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

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

3.  Segment and Related Information

(PPL)

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

Beginning inIn 2013, PPL anticipates more costs to be included in the Corporate and Other category increased, as anticipated, primarily due to an anticipated increase in financing at PPL Capital Funding not directly attributable to a particular segment.  PPL's growth in rate-regulated businesses provides the organization an enhanced corporate-level financing alternative, through PPL Capital Funding, that further enables PPL to cost-effectively 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.companies.  The financing costs associated primarily with PPL Capital Funding's new securities issuances, with certain exceptions including the remarketing of the debt component of the Equity Units, have not been directly assigned or allocated to any segment and generally have been reflected in Corporate and Other in 2013.

FinancialFor the periods ended September 30, financial data for the segments for the periods ended June 30 are:

      Three Months Nine Months
  2013  2012  2013  2012 
Income Statement Data            
Revenues from external customers            
 U.K. Regulated $ 543  $ 528  $ 1,763  $ 1,647 
 Kentucky Regulated   744    732    2,226    2,095 
 Pennsylvania Regulated   463    443    1,388    1,303 
 Supply (a)   1,352    700    3,626    4,019 
 Corporate and Other   3       9    
Total $ 3,105  $ 2,403  $ 9,012  $ 9,064 
                 
Intersegment electric revenues            
 Pennsylvania Regulated $ 1  $ 1  $ 3  $ 3 
 Supply   11    23    37    61 

 
40
 


   Three Months Six Months
 2013  2012  2013  2012 
Income Statement Data        
Revenues from external customers        
Kentucky Regulated $ 682  $ 658  $ 1,482  $ 1,363 
U.K. Regulated  572   557   1,220   1,119 
Pennsylvania Regulated  413   403   925   860 
Supply (a)  1,780   931   2,274   3,319 
Corporate and Other   3       6    
Total $ 3,450  $ 2,549  $ 5,907  $ 6,661 
          
Intersegment electric revenues        
Pennsylvania Regulated $ 1  $ 1  $ 2  $ 2 
Supply  12   17   26   38    Three Months Nine Months
            2013  2012  2013  2012 
Net Income Attributable to PPL ShareownersNet Income Attributable to PPL Shareowners        Net Income Attributable to PPL Shareowners        
Kentucky Regulated $ 49  $ 34  $ 134  $ 76 U.K. Regulated (a) $ 183  $ 202  $ 741  $ 563 
U.K. Regulated (a)  245   196   558   361 Kentucky Regulated  93   72   227   148 
Pennsylvania Regulated  45   29   109   62 Pennsylvania Regulated  51   33   160   95 
Supply (a)  77   12   31   313 Supply (a)  91   48   122   361 
Corporate and Other   (11)      (14)   Corporate and Other   (8)        (22)     
TotalTotal $ 405  $ 271  $ 818  $ 812 Total $ 410  $ 355  $ 1,228  $ 1,167 

  June 30, December 31,  September 30, December 31,
  2013  2012   2013  2012 
Balance Sheet DataBalance Sheet Data    Balance Sheet Data      
AssetsAssets    Assets     
Kentucky Regulated $ 11,084  $ 10,670 U.K. Regulated $ 14,329  $ 14,073 
U.K. Regulated  13,792   14,073 Kentucky Regulated  11,368    10,670 
Pennsylvania Regulated  6,385   6,023 Pennsylvania Regulated  6,729    6,023 
Supply  12,155   12,868 Supply  12,198    12,868 
Corporate and Other (b)   330    Corporate and Other (b)   364    
Total assetsTotal assets $ 43,746  $ 43,634 Total assets $ 44,988  $ 43,634 

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

4.  Earnings Per Share

(PPL)

Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the applicable period.  Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding, increased by incremental shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares as calculated using the treasury stock method or the If-Converted Method, as applicable.  The If-Converted Method was applied to the Equity Units prior to settlement beginning in the first quarter of 2013.  Incremental non-participating securities that have a dilutive impact are detailed in the table below.

See Note 7 for information on the April and May 2013 settlements of forward sale agreements and the July 2013 issuance of PPL common stock to settle the 2010 Purchase Contracts.

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

     Three Months Nine Months
     2013  2012  2013  2012 
Income (Numerator)            
Income from continuing operations after income taxes attributable to PPL            
 shareowners $ 409  $ 355  $ 1,226  $ 1,173 
Less amounts allocated to participating securities   2    2    6    7 
Income from continuing operations after income taxes available to PPL            
 common shareowners - Basic   407    353    1,220    1,166 
Plus interest charges (net of tax) related to Equity Units   7       37    
Income from continuing operations after income taxes available to PPL            
 common shareowners - Diluted $ 414  $ 353  $ 1,257  $ 1,166 
                
Income (loss) from discontinued operations (net of income taxes) available            
 to PPL common shareowners - Basic and Diluted $ 1  $    $ 2  $ (6)
                
Net income attributable to PPL shareowners $ 410  $ 355  $ 1,228  $ 1,167 
Less amounts allocated to participating securities   2    2    6    7 
Net income available to PPL common shareowners - Basic   408    353    1,222    1,160 
Plus interest charges (net of tax) related to Equity Units   7         37      
Net income available to PPL common shareowners - Diluted $ 415  $ 353  $ 1,259  $ 1,160 

 
41
 

     Three Months Six Months
     2013  2012  2013  2012 
Income (Numerator)            
Income from continuing operations after income taxes attributable to PPL            
 shareowners $ 404  $ 277  $ 817  $ 818 
Less amounts allocated to participating securities   2    2    4    5 
Income from continuing operations after income taxes available to PPL            
 common shareowners - Basic   402    275    813    813 
Plus interest charges (net of tax) related to Equity Units   15       30    
Income from continuing operations after income taxes available to PPL            
 common shareowners - Diluted $ 417  $ 275  $ 843  $ 813 
                
Income (loss) from discontinued operations (net of income taxes) available            
 to PPL common shareowners - Basic and Diluted $ 1  $ (6) $ 1  $ (6)
                
Net income attributable to PPL shareowners $ 405  $ 271  $ 818  $ 812 
Less amounts allocated to participating securities   2    2    4    5 
Net income available to PPL common shareowners - Basic   403    269    814    807 
Plus interest charges (net of tax) related to Equity Units   15       30    
Net income available to PPL common shareowners - Diluted $ 418  $ 269  $ 844  $ 807 
                
Shares of Common Stock (Denominator)            
Weighted-average shares - Basic EPS   589,834    579,881    586,683    579,462 
Add incremental non-participating securities:            
  Share-based payment awards   1,133    444    971    465 
  Equity Units   73,388       72,689    
  Forward sale agreements   260    268    920    135 
Weighted-average shares - Diluted EPS   664,615    580,593    661,263    580,062 
                
Basic EPS            
Available to PPL common shareowners:            
  Income from continuing operations after income taxes $ 0.68  $ 0.47  $ 1.39  $ 1.40 
  Income (loss) from discontinued operations (net of income taxes)      (0.01)      (0.01)
  Net Income $ 0.68  $ 0.46  $ 1.39  $ 1.39 
                
Diluted EPS            
Available to PPL common shareowners:            
  Income from continuing operations after income taxes $ 0.63  $ 0.47  $ 1.28  $ 1.40 
  Income (loss) from discontinued operations (net of income taxes)      (0.01)      (0.01)
  Net Income $ 0.63  $ 0.46  $ 1.28  $ 1.39 
     Three Months Nine Months
     2013  2012  2013  2012 
Shares of Common Stock (Denominator)            
Weighted-average shares - Basic EPS   631,046    580,585    601,275    579,847 
Add incremental non-participating securities:            
  Share-based payment awards   1,163    635    1,035    522 
  Equity Units   32,134    439    59,171    146 
  Forward sale agreements        977    613    415 
Weighted-average shares - Diluted EPS   664,343    582,636    662,094    580,930 
                
Basic EPS            
Available to PPL common shareowners:            
  Income from continuing operations after income taxes $ 0.65  $ 0.61  $ 2.03  $ 2.01 
  Income (loss) from discontinued operations (net of income taxes)                 (0.01)
  Net Income $ 0.65  $ 0.61  $ 2.03  $ 2.00 
                
Diluted EPS            
Available to PPL common shareowners:            
  Income from continuing operations after income taxes $ 0.62  $ 0.61  $ 1.90  $ 2.01 
  Income (loss) from discontinued operations (net of income taxes)                 (0.01)
  Net Income $ 0.62  $ 0.61  $ 1.90  $ 2.00 

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

(Shares in thousands)(Shares in thousands) Three Months Six Months(Shares in thousands) Three Months Nine Months
   2013  2012  2013  2012    2013  2012  2013  2012 
                     
Stock-based compensation plans (a)Stock-based compensation plans (a)  938   76   1,384   353 Stock-based compensation plans (a)  85   159   1,469   512 
ESOPESOP      275   280 ESOP          275   280 
DRIPDRIP    617   549   1,175 DRIP      598   549   1,773 

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

See Note 7 for information on the repurchase of shares of PPL common stock that substantially offset the 2013 issuances for the three months ended June 30, 2013.of common stock under stock-based compensation plans, ESOP and DRIP.

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

 Three Months Six Months Three Months Nine Months
(Shares in thousands) 2013  2012  2013  2012  2013  2012  2013  2012 
                
Stock options  2,192   6,250   5,486   5,966   1,136   4,935   4,793   5,622 
Performance units �� 5   34   108   115   1       73   76 
Restricted stock units      58             39     

5.  Income Taxes

Reconciliations of income taxes for the periods ended JuneSeptember 30 are:

(PPL)
                 
      Three Months Nine Months
      2013  2012  2013  2012 
             
Federal income tax on Income from Continuing Operations Before            
 Income Taxes at statutory tax rate - 35% $ 173  $ 130  $ 550  $ 539 

 
42
 
      Three Months Nine Months
      2013  2012  2013  2012 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   12    6    29    38 
  State valuation allowance adjustments (a)   38    2    38    2 
  Impact of lower U.K. income tax rates (b)   (38)   (30)   (101)   (75)
  U.S. income tax on foreign earnings - net of foreign tax credit (c)   10    1    5    2 
  Federal and state tax reserve adjustments (d)   (1)   (2)   (41)   (7)
  Foreign tax reserve adjustments   (2)        (2)   (5)
  Federal and state income tax return adjustments   (4)         (4)     
  Enactment of the U.K.'s Finance Acts 2013 and 2012 (b)   (93)   (74)   (93)   (74)
  Federal income tax credits   (4)   (5)   (9)   (12)
  Amortization of investment tax credit   (1)   (2)   (6)   (7)
  Depreciation not normalized   (2)   (2)   (6)   (6)
  State deferred tax rate change (e)        (6)        (17)
  Net operating loss carryforward adjustments (f)                  (9)
  Intercompany interest on U.K. financing entities (g)   (2)   (3)   (7)   (8)
  Other   (2)   2    (9)   3 
   Total increase (decrease)   (89)   (113)   (206)   (175)
Total income taxes from continuing operations $ 84  $ 17  $ 344  $ 364 


(PPL)
                 
      Three Months Six Months
      2013  2012  2013  2012 
             
Federal income tax on Income from Continuing Operations Before            
 Income Taxes at statutory tax rate - 35% $ 180  $ 128  $ 377  $ 409 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   14    7    17    32 
  Impact of lower U.K. income tax rates (a)   (25)   (24)   (63)   (45)
  U.S. income tax on foreign earnings - net of foreign tax credit (b)   (7)   (1)   (5)   1 
  Federal and state tax reserve adjustments (c)   (39)   (4)   (40)   (5)
  Foreign tax reserve adjustments (d)      (8)      (5)
  Foreign income tax return adjustments   (4)      (4)   
  Federal income tax credits   (2)   (3)   (5)   (7)
  Amortization of investment tax credit   (2)   (3)   (5)   (5)
  Depreciation not normalized   (1)   (2)   (4)   (4)
  State deferred tax rate change (e)            (11)
  Net operating loss carryforward adjustments (f)      (3)      (9)
  Other   (5)   1    (8)   (4)
   Total increase (decrease)   (71)   (40)   (117)   (62)
Total income taxes from continuing operations $ 109  $ 88  $ 260  $ 347 

(a)During the three and nine months ended September 30, 2013, PPL recorded an increase in state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.
(a)(b)The U.K. Finance Act 2012,2013, enacted in July 2012,2013, reduced the U.K. statutory income tax rate from 25%23% to 24% retroactive to April 1, 2012 and from 24% to 23%21% effective April 1, 2013.2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit in the third quarter of 2013 related to both rate decreases.

The U.K. Finance Act 2011,2012, enacted in July 2011,2012, reduced the U.K. statutory income tax rate from 27%25% to 26%24% retroactive to April 1, 20112012 and from 26%24% to 25%23% effective April 1, 2012.2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit in the third quarter of 2012 related to both rate decreases.
(b)(c)During the three and sixnine months ended JuneSeptember 30, 2013, PPL recorded a $14$10 million and $24 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 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.2013.

During the nine months ended September 30, 2013, PPL recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that was reflected on an amended 2010 U.S. tax return.
(c)(d)In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD.  PPL filed its tax returns for years subsequent to its 1997 and 1998 claims for refund on the basis that the U.K. WPT was creditable.  In September 2010, the U.S. Tax Court (Tax Court) ruled in PPL's favor in a dispute with the IRS, concluding that the U.K. WPT is a creditable tax for U.S. tax purposes.  In January 2011, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit).  In December 2011, the Third Circuit issued its opinion reversing the Tax Court's decision, holding that the U.K. WPT is not a creditable tax.  As a result of the Third Circuit's adverse determination, PPL recorded a $39 million expense in the fourth quarter of 2011.  In June 2012, the U.S. Court of Appeals for the Fifth Circuit issued a contrary opinion in an identical case involving another company.  In July 2012, PPL filed a petition for a writ of certiorari seeking U.S. Supreme Court review of the Third Circuit's opinion.  The Supreme Court granted PPL's petition and oral argument was held in February 2013.  On May 20, 2013, the Supreme Court reversed the Third Circuit's opinion and ruled that the WPT is a creditable tax.  As a result of the Supreme Court ruling, PPL recorded a tax benefit of $44 million during the three and sixnine months ended JuneSeptember 30, 2013, of which $19 million relates to interest.
(d)(e)During the three and sixnine months ended June 30, 2012, PPL recorded a tax benefit following resolution of a U.K. tax issue related to the tax deductibility of interest expense.
(e)During the six months ended JuneSeptember 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.
(f)During the three and sixnine months ended JuneSeptember 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

(g)PPL recorded foreign income tax benefits related to interest expense on intercompany loans for which there was no domestic income tax expense.            
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.

(PPL Energy Supply)(PPL Energy Supply)        (PPL Energy Supply)        
                    
   Three Months Six Months   Three Months Nine Months
   2013  2012  2013  2012    2013  2012  2013  2012 
Federal income tax on Income Before Income Taxes at statutoryFederal income tax on Income Before Income Taxes at statutory        Federal income tax on Income Before Income Taxes at statutory        
tax rate - 35% $ 54  $ 10  $ 28  $ 180 tax rate - 35% $ 70  $ 25  $ 98  $ 205 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
 State income taxes, net of federal income tax benefit  9   1   3   24  State income taxes, net of federal income tax benefit  7   1   10   25 
 Federal and state tax reserve adjustments (a)  7     6    State valuation allowance adjustments  4   2   4   2 
 Federal income tax credits    (2)  (3)  (6) Federal and state tax reserve adjustments (a)          6     
 State deferred tax rate change (b)        (11) Federal income tax credits  (4)  (4)  (7)  (10)
 Other   (3)      (2)   (1) State deferred tax rate change (b)      (6)      (17)
 Total increase (decrease)   13    (1)   4    6  Other   (3)   (2)   (5)   (3)
 Total increase (decrease)   4    (9)   8    (3)
Total income taxesTotal income taxes $ 67  $ 9  $ 32  $ 186 Total income taxes $ 74  $ 16  $ 106  $ 202 

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

 
43
 
(PPL Electric)            
                 
      Three Months Nine Months
      2013  2012  2013  2012 
             
Federal income tax on Income Before Income Taxes at statutory            
 tax rate - 35% $ 27  $ 17  $ 85  $ 51 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   5    2    13    7 
  Federal and state tax reserve adjustments   (2)   (2)   (6)   (5)
  Depreciation not normalized   (2)   (1)   (6)   (5)
  Other   (2)        (3)   (1)
   Total increase (decrease)   (1)   (1)   (2)   (4)
Total income taxes $ 26  $ 16  $ 83  $ 47 



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

(LKE)(LKE)        (LKE)        
                    
   Three Months Six Months   Three Months Nine Months
   2013  2012  2013  2012    2013  2012  2013  2012 
                 
Federal income tax on Income from Continuing Operations BeforeFederal income tax on Income from Continuing Operations Before        Federal income tax on Income from Continuing Operations Before        
Income Taxes at statutory tax rate - 35% $ 35  $ 25  $ 89  $ 50 Income Taxes at statutory tax rate - 35% $ 56  $ 46  $ 144  $ 96 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
 State income taxes, net of federal income tax benefit  3     8   2  State income taxes, net of federal income tax benefit  6   5   14   7 
 Net operating loss carryforward adjustments (a)    (3)    (9) Amortization of investment tax credit  (1)  (1)  (3)  (4)
 Other   (1)   (2)   (3)   (2) Net operating loss carryforward adjustments (a)              (9)
 Total increase (decrease)   2    (5)   5    (9) Other   (2)   (2)   (2)   (1)
 Total increase (decrease)   3    2    9    (7)
Total income taxes from continuing operationsTotal income taxes from continuing operations $ 37  $ 20  $ 94  $ 41 Total income taxes from continuing operations $ 59  $ 48  $ 153  $ 89 

(a)During the three and sixnine months ended JuneSeptember 30, 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.

(LG&E)(LG&E)        (LG&E)        
                    
   Three Months Six Months   Three Months Nine Months
   2013  2012  2013  2012    2013  2012  2013  2012 
                 
Federal income tax on Income Before Income Taxes at statutoryFederal income tax on Income Before Income Taxes at statutory        Federal income tax on Income Before Income Taxes at statutory        
 tax rate - 35% $ 16  $ 14  $ 40  $ 28  tax rate - 35% $ 27  $ 24  $ 67  $ 52 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
 State income taxes, net of federal income tax benefit  1   1   4   3  State income taxes, net of federal income tax benefit  3   2   7   5 
 Other      (1)   (2)   (2) Other   (3)   (1)   (5)   (3)
 Total increase (decrease)   1       2    1  Total increase (decrease)        1    2    2 
Total income taxesTotal income taxes $ 17  $ 14  $ 42  $ 29 Total income taxes $ 27  $ 25  $ 69  $ 54 

(KU)(KU)        (KU)        
                    
   Three Months Six Months   Three Months Nine Months
   2013  2012  2013  2012    2013  2012  2013  2012 
                  
Federal income tax on Income Before Income Taxes at statutoryFederal income tax on Income Before Income Taxes at statutory        Federal income tax on Income Before Income Taxes at statutory        
tax rate - 35% $ 25  $ 17  $ 61  $ 38 tax rate - 35% $ 35  $ 28  $ 95  $ 66 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit  2   2   6   4  State income taxes, net of federal income tax benefit  4   3   10    6 
 Other   (1)   (1)   (2)   (2) Other   (3)   (1)   (4)   (2)
 Total increase (decrease)   1    1    4    2  Total increase (decrease)   1    2    6    4 
Total income taxesTotal income taxes $ 26  $ 18  $ 65  $ 40 Total income taxes $ 36  $ 30  $ 101  $ 70 

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

Changes to unrecognized tax benefits for the periods ended JuneSeptember 30 were as follows.
 
44
 
  Three Months Six Months  Three Months Nine Months
  2013  2012  2013  2012   2013  2012  2013  2012 
PPLPPL        PPL        
Beginning of period $90  $121  $92  $145 Beginning of period $36  $113  $92  $145 
Additions based on tax positions of prior years       4 Additions based on tax positions of prior years     2      6 
Reductions based on tax positions of prior years (25) (4) (26) (31)Reductions based on tax positions of prior years         (26) (31)
Additions based on tax positions related to the current year 3    4  1 Additions based on tax positions related to the current year��         4     
Reductions based on tax positions related to the current year   (2)   (2)Reductions based on tax positions related to the current year     (1)     (2)
Settlements (30)   (30)  Settlements         (30)    
Lapse of applicable statutes of limitations  (2)  (2)  (4)  (4)Lapse of applicable statutes of limitations  (5)  (2)  (9)  (6)
End of period $36  $113  $36  $113 End of period $31  $112  $31  $112 
                  
PPL Energy SupplyPPL Energy Supply        PPL Energy Supply        
Beginning of period $30  $31  $30  $28 Beginning of period $15  $31  $30  $28 
Additions based on tax positions of prior years       4 Additions based on tax positions of prior years             4 
Reductions based on tax positions of prior years  (15)     (15)  (1)Reductions based on tax positions of prior years            (15)  (1)
End of period $15  $31  $15  $31 End of period $15  $31  $15  $31 
                  
PPL ElectricPPL Electric        PPL Electric        
Beginning of period $24  $46  $26  $73 Beginning of period $12  $43  $26  $73 
Reductions based on tax positions of prior years (10) (1) (10) (27)Reductions based on tax positions of prior years     (1) (10) (28)
Additions based on tax positions related to the current year       1 Additions based on tax positions related to the current year             1 
Lapse of applicable statutes of limitations  (2)  (2)  (4)  (4)Lapse of applicable statutes of limitations  (3)  (2)  (7)  (6)
End of period $12  $43  $12  $43 End of period $9  $40  $9  $40 

LKE's, LG&E's and KU's unrecognized tax benefits and changes in those unrecognized tax benefits arewere insignificant for the three and sixnine months ended JuneSeptember 30, 2013 and 2012.

At JuneSeptember 30, 2013, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase or decrease by the following amounts.

   Increase Decrease   Increase Decrease
            
PPLPPL $ 16  $ 35 PPL $ 16  $  30 
PPL Energy SupplyPPL Energy Supply    15 PPL Energy Supply      15 
PPL ElectricPPL Electric  16   11 PPL Electric  16   8 

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

        
 2013  2012  2013  2012 
         
PPL $23  $36  $21  $34 
PPL Energy Supply 14  14  14  14 
PPL Electric 2  5 

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

Other (PPL, PPL Energy Supply and PPL Electric)

PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year for Pennsylvania operations.  PPL made the same change for its Montana operations for the 2009 tax year.  In 2011, the IRS issued guidance on repair expenditures related to network assets providing a safe harbor method of determining whether the repair expenditures can be currently deducted for tax purposes.  On April 30, 2013, the IRS issued Revenue Procedure 2013-24 providing guidance to taxpayers to determine whether expenditures to maintain, replace or improve steam or electric generation property must be capitalized for tax purposes.  The IRS may assert, and ultimately conclude, that PPL's deduction

 
45
 

for generation-related expenditures should be disallowed in whole or in part.less than the amount determined by PPL.  PPL believes that it has established adequate reserves for this contingency.

6.  Utility Rate Regulation

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

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

  PPL PPL Electric  PPL PPL Electric
  June 30, December 31, June 30, December 31,  September 30, December 31, September 30, December 31,
  2013  2012  2013  2012   2013  2012  2013  2012 
                  
Current Regulatory Assets:Current Regulatory Assets:        Current Regulatory Assets:        
Transmission formula rate $ 5    $ 5   
ECR  7       ECR $ 7             
Gas supply clause  14  $ 11     Gas supply clause  13  $ 11         
Fuel adjustment clause  3   6     Fuel adjustment clause      6         
Other   5    2       Other   11    2  $ 2      
Total current regulatory assetsTotal current regulatory assets $ 34  $ 19  $ 5    Total current regulatory assets $ 31  $ 19  $ 2      
                  
Noncurrent Regulatory Assets:Noncurrent Regulatory Assets:        Noncurrent Regulatory Assets:        
Defined benefit plans $ 700  $ 730  $ 351  $ 362 Defined benefit plans $ 683  $ 730  $ 345  $ 362 
Taxes recoverable through future rates  298   293   298   293 Taxes recoverable through future rates  302   293   302   293 
Storm costs  157   168   56   59 Storm costs  152   168   55   59 
Unamortized loss on debt  90   96   60   65 Unamortized loss on debt  88   96   58   65 
Interest rate swaps  51   67     Interest rate swaps  49   67         
Accumulated cost of removal of utility plant  92   71   92   71 Accumulated cost of removal of utility plant  95   71   95   71 
AROs  34   26     AROs  37   26         
Other   21    32    5    3 Other   17    32    2    3 
Total noncurrent regulatory assetsTotal noncurrent regulatory assets $ 1,443  $ 1,483  $ 862  $ 853 Total noncurrent regulatory assets $ 1,423  $ 1,483  $ 857  $ 853 

Current Regulatory Liabilities:Current Regulatory Liabilities:        Current Regulatory Liabilities:        
Generation supply charge $ 21  $ 27  $ 21  $ 27 
ECR      4         
Generation supply charge $ 24  $ 27  $ 24  $ 27 Gas supply clause  2   4         
ECR    4     Transmission service charge  9   6   9   6 
Gas supply clause    4     Transmission formula rate  9       9     
Transmission service charge  11   6   11   6 Universal service rider  11   17   11   17 
Universal service rider  11   17   11   17 Gas line tracker  6             
Other   8    3    2    2 Other   10    3    1    2 
Total current regulatory liabilitiesTotal current regulatory liabilities $ 54  $ 61  $ 48  $ 52 Total current regulatory liabilities $ 68  $ 61  $ 51  $ 52 
                  
Noncurrent Regulatory Liabilities:Noncurrent Regulatory Liabilities:        Noncurrent Regulatory Liabilities:        
Accumulated cost of removal of utility plant $ 689  $ 679     Accumulated cost of removal of utility plant $ 690  $ 679         
Coal contracts (a)  119   141     Coal contracts (a)  108   141         
Power purchase agreement - OVEC (a)  104   108     Power purchase agreement - OVEC (a)  102   108         
Net deferred tax assets  32   34     Net deferred tax assets  32   34         
Act 129 compliance rider  13   8  $ 13  $ 8 Act 129 compliance rider  14   8  $ 14  $ 8 
Defined benefit plans  18   17     Defined benefit plans  18   17         
Interest rate swaps  72   14     Interest rate swaps  84   14         
Other   5    9       Other   6    9           
Total noncurrent regulatory liabilitiesTotal noncurrent regulatory liabilities $ 1,052  $ 1,010  $ 13  $ 8 Total noncurrent regulatory liabilities $ 1,054  $ 1,010  $ 14  $ 8 

   LKE LG&E KU
   September 30, December 31, September 30, December 31, September 30, December 31,
   2013  2012  2013  2012  2013  2012 
                    
Current Regulatory Assets:                  
 ECR $ 7       $ 2       $ 5      
 Gas supply clause   13  $ 11    13  $ 11           
 Fuel adjustment clause        6         6           
 Other   9    2    4    2    5      
Total current regulatory assets $ 29  $ 19  $ 19  $ 19  $ 10      

 
46
 

  LKE LG&E KU  LKE LG&E KU
  June 30, December 31, June 30, December 31, June 30, December 31,  September 30, December 31, September 30, December 31, September 30, December 31,
  2013  2012  2013  2012  2013  2012   2013  2012  2013  2012  2013  2012 
             
Current Regulatory Assets:            
ECR $ 7    $ 2    $ 5   
Gas supply clause  14  $ 11   14  $ 11     
Fuel adjustment clause  3   6   3   6     
Other   5    2    2    2    3    
Total current regulatory assets $ 29  $ 19  $ 21  $ 19  $ 8    
                          
Noncurrent Regulatory Assets:Noncurrent Regulatory Assets:            Noncurrent Regulatory Assets:            
Defined benefit plans $ 349  $ 368  $ 219  $ 232  $ 130  $ 136 Defined benefit plans $ 338  $ 368  $ 212  $ 232  $ 126  $ 136 
Storm costs  101   109   55   59   46   50 Storm costs  97   109   53   59   44   50 
Unamortized loss on debt  30   31   19   20   11   11 Unamortized loss on debt  30   31   19   20   11   11 
Interest rate swaps  51   67   51   67     Interest rate swaps  49   67   49   67         
AROs  34   26   19   15   15   11 AROs  37   26   20   15   17   11 
Other   16    29    6    7    10    22 Other   15    29    6    7    9    22 
Total noncurrent regulatory assetsTotal noncurrent regulatory assets $ 581  $ 630  $ 369  $ 400  $ 212  $ 230 Total noncurrent regulatory assets $ 566  $ 630  $ 359  $ 400  $ 207  $ 230 

Current Regulatory Liabilities:Current Regulatory Liabilities:            Current Regulatory Liabilities:            
 ECR   $ 4        $ 4  ECR     $ 4              $ 4 
 Gas supply clause    4    $ 4      Gas supply clause $ 2   4  $ 2  $ 4         
 Gas line tracker $ 4    $ 4        Gas line tracker  6       6             
 Other   2    1    1     $ 1    1  Other   9    1    3       $ 6    1 
Total current regulatory liabilitiesTotal current regulatory liabilities $ 6  $ 9  $ 5  $ 4  $ 1  $ 5 Total current regulatory liabilities $ 17  $ 9  $ 11  $ 4  $ 6  $ 5 
                            
Noncurrent Regulatory Liabilities:Noncurrent Regulatory Liabilities:            Noncurrent Regulatory Liabilities:            
Accumulated cost of removal            Accumulated cost of removal            
 of utility plant $ 689  $ 679  $ 300  $ 297  $ 389  $ 382  of utility plant $ 690  $ 679  $ 300  $ 297  $ 390  $ 382 
Coal contracts (a)  119   141   52   61   67   80 Coal contracts (a)  108   141   47   61   61   80 
Power purchase agreement - OVEC (a)  104   108   72   75   32   33 Power purchase agreement - OVEC (a)  102   108   71   75   31   33 
Net deferred tax assets  32   34   26   28   6   6 Net deferred tax assets  32   34   26   28   6   6 
Defined benefit plans  18   17       18   17 Defined benefit plans  18   17           18   17 
Interest rate swaps  72   14   36   7   36   7 Interest rate swaps  84   14   42   7   42   7 
Other   5    9    2    3    3    6 Other   6    9    3    3    3    6 
Total noncurrent regulatory liabilitiesTotal noncurrent regulatory liabilities $ 1,039  $ 1,002  $ 488  $ 471  $ 551  $ 531 Total noncurrent regulatory liabilities $ 1,040  $ 1,002  $ 489  $ 471  $ 551  $ 531 

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

Regulatory Matters

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

Rate Case Proceedings

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.  

Pennsylvania Activities (PPL and PPL Electric)

Rate Case Proceeding

In December 2012, the PUC approved a total distribution revenue increase of about $71 million for PPL Electric, using a 10.4%10.40% return on equity.  The approved rates became effective January 1, 2013.

Storm Damage Expense Rider

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


 
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ACTAct 129

Act 129 requires Pennsylvania Electric Distribution Companies (EDCs) to meet specified goals for reduction in customer electricity usage and peak demand by specified dates.  EDCs not meeting the requirements of Act 129 are 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 3.0% by May 2013, reduce overall electricity consumption by 3.0% and reduce peak demand by 4.5%.  Although PPL Electric believes it has metThe overall consumption reduction is measured against PUC-forecasted consumption for the twelve months ended May 2011 requirement, the PUC is not expected to formally determine compliance for any EDC before the first quarter of 2014.31, 2010.  The peak demand reduction must occur for the 100 hours of highest demand, which is determined by actual demand reduction during the June 2012 through September 2012 period.  PPL Electric believes it has met the May 2011 requirement and will determine if it met the May 2013 peak demand reduction and energy reduction targets after it completes the final program evaluation in the fourth quarter of 2013.  PPL Electric does not expect the PUC to formally determine compliance for either the 2011 or 2013 requirements before the first quarter of 2014.
 
 
Act 129 requires the PUC to evaluate the costs and benefits of the EE&C program by November 30, 2013 and adopt additional reductions if the benefits of the program exceed the costs.  In 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 throughtwelve months ended May 31, 2010 baseline year.2010.  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, in March 2013, the PUC approved PPL Electric's Phase II EE&C Plan with minor modifications.  PPL Electric filed a Revised Phase II EE&C Plan on May 13, 2013 pursuant to the PUC's March Order.  On July 11, 2013, the PUC issued an Order approving PPL Electric's Revised Phase II EE&C Plan.  PPL Electric began its Phase II Plan implementation on June 1, 2013.

Act 129 also requires Default Service 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.  A DSP is able to recover the costs associated with its competitivedefault service procurement plan.

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

Smart Meter Rider

Act 129 also requires installation of smart meters for new construction, upon the request of consumers and at their cost, or on a depreciation schedule not exceeding 15 years.  Under Act 129, EDCs are able to recover the costs of providing smart metering technology.  All of PPL Electric's metered customers currently have advanced meters installed at their service locations capable of many of the functions required under Act 129. PPL Electric continues to conduct pilot projects to evaluate additional applications of its current advanced metering technology pursuant to the requirements of Act 129.  PPL Electric recovers the cost of its pilot projects through a cost recovery mechanism, the Smart Meter Rider (SMR).  In August 2012,2013, PPL Electric filed with the PUC an annual report describing the actions it was taking under its Smart Meter Plan during 20122013 and its planned actions for 2013.2014.  PPL Electric also submitted revised SMR charges which became effective January 1,

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2013.  In August 2013, PPL Electricthat 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.


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PUC Investigation of Retail Electricity Market

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

Distribution System Improvement Charge

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

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

Federal Matters

FERC Formula RatesAudit Proceedings (All Registrants except PPL and PPL ElectricEnergy Supply)

PPL Electric must followIn November 2011, 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 FERCcommenced an audit of PPL and its subsidiaries, including an audit of the FERC transmission formula rate mechanisms at PPL Electric, determinedLG&E and KU beginning in April 2012.  The audit identified several matters related to separate aspects of formula rate mechanics at PPL Electric, LG&E and KU.  As previously reported, among the audit matters related to PPL Electric was the determination that it neverPPL Electric had not obtained a waiver of the equity method accounting requirement forwith respect to its wholly owned subsidiary, PPL Receivables Corporation, (PPL Receivables).  PPL Receivables is a wholly owned subsidiary of PPL Electric,which was formed in 2004 to purchase eligible accounts receivable and unbilled revenue offrom PPL Electric to collateralize commercial paper issuances and reduce borrowing costs.  In March 2013,PPL, PPL Electric, filed a request for waiverLKE, LG&E and KU currently believe that the total amount of refunds, if any, that may be required with the FERC that, if approved, would allow itrespect 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 couldand all other issues identified during the course of the audit will not be negatively impacted.  The impact, ifmaterial to any is not known at this time but could range between $0of these Registrants.  PPL, PPL Electric, LKE, LG&E and $40 million, pre-tax.  PPL ElectricKU, however, cannot predict the ultimate outcome of the waiver or audit proceedings, which remain pending before the FERC.these matters.

Transmission rates are regulated by the FERC.  PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism.  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under the FERC's USOA.Uniform System of Accounts.  PPL Electric has initiated separate formula rate Annual Updates for each of the years 2010-2013.  The 2010, 2011, and 2012 updates were subsequently challenged by a group of municipal customers, which challenges PPL Electric has opposed.  In August 2011, the FERC issued an order substantially rejecting the 2010 formal challenge and the municipal customers filed a request for rehearing of that order.  In September 2012, the FERC issued an order setting for evidentiary

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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.  PPL and PPL Electric cannot predict the outcome of the foregoing proceedings, which remain pending before the FERC.


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U. K. Activities (PPL)

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4.  In April 2013, Ofgem stated that their expectation was to issue a decision in the second half of 2013.  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 ofSubsequent to the July 2013 decision paper, WPD has concluded that certain data, which had previously served to reducereceived additional information from Ofgem and as a result revised 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 theestimated potential loss exposure to be in the range of $97$93 million to $251 million.  As$226 million as of September 30, 2013.  On October 21, 2013, Ofgem issued a result, duringfurther consultation paper requesting additional information.  During the three and sixnine months ended JuneSeptember 30, 2013, WPD recorded a $24$21 million increaseand $45 million increases to the liability with a reductionreductions to "Utility" revenue on the Statement of Income, increasingIncome.  At September 30, 2013, the liability to $97was $93 million at June 30, 2013 compared with $94 million at December 31, 2012.  Other changes to this line loss liability included reductions of $16$41 million resulting from the refundrefunds being included in tariffs starting in April 2013 and foreign exchange movementmovements during the sixnine months ended JuneSeptember 30, 2013.  PPL cannot predict the outcome of this matter.

7.  Financing Activities

Credit Arrangements and Short-term Debt

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

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

       June 30, 2013 December 31, 2012
                Letters of      Letters of
                Credit Issued       Credit Issued
                and       and
                Commercial       Commercial
       Expiration    Borrowed Paper Unused Borrowed Paper
        Date Capacity (a) Backup Capacity (a) Backup
PPL                 ��  
 WPD Credit Facilities                    
  PPL WW Syndicated                    
   Credit Facility (b) (c) Dec. 2016 £ 210  £ 112   n/a £ 98  £ 106   n/a
  WPD (South West)                    
   Syndicated Credit Facility Jan. 2017   245      n/a   245      n/a
  WPD (East Midlands)                    
   Syndicated Credit Facility (c) Apr. 2016   300    47       253       
  WPD (West Midlands)                    
   Syndicated Credit Facility (c) Apr. 2016   300    34       266       
  Uncommitted Credit Facilities     84     £ 5    79     £ 4 
   Total WPD Credit Facilities (d)   £ 1,139  £ 193  £ 5  £ 941  £ 106  £ 4 

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  September 30, 2013 December 31, 2012
         Letters of     Letters of
         Credit Issued      Credit Issued
         and      and
         Commercial      Commercial
  Expiration      Paper Unused   Paper
   Date Capacity Borrowed Backup Capacity Borrowed Backup
PPLPPL              
WPD Credit Facilities              
 PPL WW Syndicated              
  Credit Facility (a) (b) Dec. 2016 £ 210  £ 106  n/a £ 104  £ 106  n/a
 WPD (South West)              
  Syndicated Credit Facility Jan. 2017  245    n/a  245    n/a
  June 30, 2013 December 31, 2012 WPD (East Midlands)              
         Letters of     Letters of  Syndicated Credit Facility (b) Apr. 2016  300   44     256      
         Credit Issued     Credit Issued WPD (West Midlands)              
         and     and  Syndicated Credit Facility (b) Apr. 2016  300   34     266     
         Commercial     Commercial Uncommitted Credit Facilities     84     £ 5    79     £ 4 
  Expiration   Borrowed Paper Unused Borrowed Paper Total WPD Credit Facilities (c)   £ 1,139  £ 184  £ 5  £ 950  £ 106  £ 4 
   Date Capacity (a) Backup Capacity (a) Backup                  
PPL Energy SupplyPPL Energy Supply              PPL Energy Supply              
Syndicated Credit Facility Nov. 2017 $ 3,000    $ 637  $ 2,363    $ 499 Syndicated Credit Facility Nov. 2017 $ 3,000    $ 61  $ 2,939     $ 499 
Letter of Credit Facility (e) Mar. 2014  150  n/a  148   2  n/a  132 Letter of Credit Facility (d) Mar. 2014  150  n/a  109   41  n/a   132 
Uncommitted Credit Facilities     200   n/a   80    120   n/a   40 Uncommitted Credit Facilities (e)     175   n/a   51    124   n/a   40 
 Total PPL Energy Supply Credit Facilities $ 3,350     $ 865  $ 2,485     $ 671  Total PPL Energy Supply Credit Facilities $ 3,325     $ 221  $ 3,104     $ 671 
                                  
PPL ElectricPPL Electric              PPL Electric              
Syndicated Credit Facility Oct. 2017 $ 300    $ 86  $ 214    $ 1 Syndicated Credit Facility Oct. 2017 $ 300     $ 1  $ 299     $ 1 
Asset-backed Credit Facility (f) Sept. 2013   100      n/a   100      n/a                
 Total PPL Electric Credit Facilities   $ 400     $ 86  $ 314     $ 1 
                
LG&ELG&E              LG&E              
Syndicated Credit Facility Nov. 2017 $ 500     $ 80  $ 420     $ 55 Syndicated Credit Facility Nov. 2017 $ 500     $ 72  $ 428     $ 55 
                                 
KUKU              KU              
Syndicated Credit Facility Nov. 2017 $ 400    $ 172  $ 228    $ 70 Syndicated Credit Facility Nov. 2017 $ 400    $ 140  $ 260    $ 70 
Letter of Credit Facility (g) May 2016   198       198          198 Letter of Credit Facility (f) May 2016   198       198          198 
 Total KU Credit Facilities   $ 598     $ 370  $ 228     $ 268  Total KU Credit Facilities   $ 598     $ 338  $ 260     $ 268 

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

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(c)(b)PPL WW's amounts borrowed at JuneSeptember 30, 2013 and December 31, 2012 were USD-denominated borrowings of $166 million and $171 million, which equated to £112 million and £106 million at the time of borrowings and bore interest at 1.90%1.89% and 0.85%.  WPD (East Midlands) amount borrowed at JuneSeptember 30, 2013 was a GBP-denominated borrowing of £47£44 million, which equated to $71$68 million and bore interest at 1.30%.  WPD (West Midlands) amount borrowed at JuneSeptember 30, 2013 was a GBP-denominated borrowing of £34 million, which equated to $52$53 million and bore interest at 1.30%.
(d)(c)At JuneSeptember 30, 2013, the USD equivalent of unused capacity under WPD's credit facilities was $1.4$1.5 billion.
(e)(d)In February 2013, PPL Energy Supply extended the expiration date from March 2013 and, effective April 2013, the capacity was reduced from $200 million.
(f)(e)PPL Electric participates in an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary has pledged these assets to secure loansIn August 2013, the capacity was reduced from a commercial paper conduit sponsored by a financial institution.$200 million.

At June 30, 2013 and December 31, 2012, $272 million and $238 million of accounts receivable and $74 million and $106 million of unbilled revenue were pledged by the subsidiary under the credit agreement related to PPL Electric's and the subsidiary's participation in the asset-backed commercial paper program.  Based on the accounts receivable and unbilled revenue pledged at June 30, 2013, the amount available for borrowing under the facility was $100 million.  PPL Electric's sale to its subsidiary of the accounts receivable and unbilled revenue is an absolute sale of assets, and PPL Electric does not retain an interest in these assets.  However, for financial reporting purposes, the subsidiary's financial results are consolidated in PPL Electric's financial statements.  PPL Electric performs certain record-keeping and cash collection functions with respect to the assets in return for a servicing fee from the subsidiary.
(g)(f)In May 2013, KU extended the letter of credit facility from April 2014.

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

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

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

       September 30, 2013 December 31, 2012
       Weighted -    Commercial   Weighted - Commercial
       Average    Paper Unused Average Paper
       Interest Rate Capacity Issuances Capacity Interest Rate Issuances
                   
 PPL Energy Supply   $ 750     $ 750   0.50% $ 356 
 PPL Electric     300       300       
 LG&E (a) 0.28%   350  $ 72    278   0.42%   55 
 KU (a) 0.28%   350    140    210   0.42%   70 
   Total   $ 1,750  $ 212  $ 1,538     $ 481 

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

(PPL and PPL Energy Supply)

PPL Energy Supply maintains a $500 million Facility Agreement expiring June 2017, whereby PPL Energy Supply has the ability to request up to $500 million of committed letter of credit capacity at fees to be agreed upon at the time of each request, based on certain market conditions.  At JuneSeptember 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 JuneSeptember 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 June 30, 2013 and December 31, 2012, PPL Energy Supply had $575 million and

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$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 and PPL Electric)

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.

(PPL, LKE, LG&E and KU)

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%.

(LKE)

See Note 11 for discussion of intercompany borrowings.

Long-term Debt and Equity Securities

(PPL)

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.


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In April 2013, PPL settled the initial forward sale agreements by issuing 8.4 million shares of PPL common stock and cash settling the remaining 1.5 million shares.  PPL received net cash proceeds of $205 million, which was calculated based on an initial forward price of $27.02 per share, reduced during the period the contracts were outstanding as specified in the forward sale agreements.  PPL used the net proceeds to repay short-term debt obligations and for other general corporate purposes.  In May 2013, PPL cash settled the forward sale agreements covering the 591 thousand remaining shares for $4 million.

The forward sale agreements 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 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 5.90% Junior Subordinated Notes due 2073.  PPL Capital Funding received proceeds of $436 million, net of underwriting fees, which was loaned to or invested in affiliates of PPL Capital Funding and used to fund their capital expenditures and for other general corporate purposes.

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

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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.

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

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

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

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

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

(PPL and PPL Energy Supply)

In February 2013, PPL Energy Supply completed an offer to exchange up to all, but not less than a majority, of PPL Ironwood's 8.857% Senior Secured Bonds due 2025, (Ironwood Bonds), for newly issued PPL Energy Supply Senior Notes, Series 4.60% due 2021.  A total of $167 million aggregate principal amount of outstanding Ironwood Bonds was exchanged for $212 million aggregate principal amount of Senior Notes, Series 4.60% due 2021.  This transaction was accounted for as a modification of the existing debt; therefore, the amount of debt on the Balance Sheet remained at $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 Energy Supply repaid the entire $300 million principal amount of its 6.30% Senior Notes upon maturity.

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(PPL and PPL Electric)

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.

Legal Separateness

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

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

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

Distributions and Capital Contributions

(PPL)

In MayAugust 2013, PPL declared its quarterly common stock dividend, payable JulyOctober 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.

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

During the sixnine months ended JuneSeptember 30, 2013, the following distributions and capital contributions occurred:

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   PPL Energy            PPL Energy         
   Supply  PPL Electric LKE LG&E KU   Supply  PPL Electric LKE LG&E KU
                          
Dividends/distributions paid to parent/memberDividends/distributions paid to parent/member $ 408   $ 66  $ 69  $ 48  $ 55 Dividends/distributions paid to parent/member $  408   $  94  $  116  $  67  $  83 
Capital contributions received from parent/memberCapital contributions received from parent/member  105    205   146   54   92 Capital contributions received from parent/member  980    205   146   54   92 

8.  Acquisitions, Development and Divestitures

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

The Registrants 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.

Acquisitions

Ironwood Acquisition (PPL and PPL Energy Supply)

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.

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Development

DevelopmentFuture Capacity Needs(PPL and Kentucky Registrants)

Construction activity continues on the previously announced natural gas combined-cycle generating unit at the Cane Run station, scheduled to be operational in May 2015.  In October 2013, LG&E and KU announced plans to build a second natural gas combined-cycle generating unit at KU's Green River generating site.  Subject to finalizing details, regulatory applications, permitting and construction schedules, the facility is expected to have approximately 700 MW of capacity at an estimated cost of $700 million and is planned to be operational in 2018.  At the same time, LG&E and KU also announced plans for a potential 10 MW solar generation facility to be operational in 2016 at an estimated cost of $25 million.

(PPL and PPL Energy Supply)

Bell Bend COLA

The NRC continues to review the COLA submitted by a PPL Energy Supply subsidiary, PPL Bell Bend, LLC (PPL Bell Bend) for the proposed construction of the Bell Bend nuclear generating unit (Bell Bend) to be built adjacent to PPL's Susquehanna nuclear generating plant.  PPL Bell Bend does not expect to complete the COLA review process with the NRC prior to 2016.  PPL Bell Bend has made no decision to proceed with construction of Bell Bend and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process.  Additionally, PPL Bell Bend 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 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 JuneSeptember 30, 2013 and December 31, 2012, $165$169 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.

Hydroelectric Expansion Project

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

Regional Transmission Line Expansion Plan (PPL and PPL Electric)

Susquehanna-Roseland

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 (PSE&G) as the preferred alternative under the NPS's National Environmental Policy Act review.  OnIn October 15, 2012, a complaint was filed in the U.S. District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation, and on December 6, 2012, the groups filed a petition for injunctive relief seeking to prohibit all construction activities until the court issues a final decision on the complaint.implementation.  PPL Electric hasand PSE&G 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.

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

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

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Construction activities have begunbeen underway on other portions of the 101-mile route in Pennsylvania.Pennsylvania since 2012.  The line is expected to be completed before the peak summer demand period of 2015.  At JuneSeptember 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 future 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.

Northeast/Pocono

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

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

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

Other (PPL and PPL Energy Supply)

Montana Transactions

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

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

Lower Mt. Bethel Plant Transaction

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

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

9.  Defined Benefits

(All Registrants except PPL PPL Energy Supply, LKEElectric and LG&E)KU)

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 JuneSeptember 30:

   Pension Benefits   Pension Benefits
   Three Months Six Months   Three Months Nine Months
   U.S. U.K. U.S. U.K.   U.S. U.K. U.S. U.K.
   2013  2012  2013  2012  2013  2012  2013  2012    2013  2012  2013  2012  2013  2012  2013  2012 
PPLPPL                PPL                 
Service costService cost $ 32  $ 26  $ 16  $ 14  $ 63  $ 52  $ 34  $ 27 Service cost $ 31  $ 25  $ 18  $ 13  $ 94  $ 77  $ 52  $ 40 
Interest costInterest cost  53   54   78   85   107   110   159   169 Interest cost   53   55   79   85   160   165   238   254 
Expected return on plan assetsExpected return on plan assets  (73)  (64)  (113)  (114)  (147)  (130)  (231)  (225)Expected return on plan assets   (73)  (65)  (115)  (115)  (220)  (195)  (346)  (340)
Amortization of:Amortization of:                Amortization of:                 
 Prior service cost  5   6     1   11   12     2  Prior service cost   6   6       1   17   18       3 
 Actuarial (gain) loss   20    11    37    20    40    21    75    40  Actuarial (gain) loss   20    11    37    19    60    32    112    59 
Net periodic defined benefitNet periodic defined benefit                Net periodic defined benefit                   
costs (credits) $ 37  $ 33  $ 18  $ 6  $ 74  $ 65  $ 37  $ 13 costs (credits) $ 37  $ 32  $ 19  $ 3  $ 111  $ 97  $ 56  $ 16 

    Pension Benefits
    Three Months Nine Months
    2013  2012  2013  2012 
PPL Energy Supply            
Service cost $ 1  $ 1  $ 5  $ 4 
Interest cost   2    2    6    6 
Expected return on plan assets   (2)   (2)   (7)   (7)
Amortization of:            
  Actuarial (gain) loss   1    1    2    2 
Net periodic defined benefit costs (credits) $ 2  $ 2  $ 6  $ 5 
               
LKE            
Service cost $ 6  $ 5  $ 19  $ 16 
Interest cost   16    16    47    48 
Expected return on plan assets   (20)   (17)   (61)   (52)
Amortization of:            
  Prior service cost   1    2    3    4 
  Actuarial (gain) loss   8    5    25    16 
Net periodic defined benefit costs (credits) $ 11  $ 11  $ 33  $ 32 
               
LG&E            
Service cost $ 1       $ 2  $ 1 
Interest cost   3  $ 4    10    11 
Expected return on plan assets   (5)   (5)   (15)   (14)
Amortization of:            
  Prior service cost   1    1    2    2 
  Actuarial (gain) loss   3    3    10    8 
Net periodic defined benefit costs (credits) $ 3  $ 3  $ 9  $ 8 

   Other Postretirement Benefits
   Three Months Nine Months
   2013  2012  2013  2012 
PPL            
Service cost $ 4  $ 3  $ 11  $ 9 
Interest cost   7    7    21    23 
Expected return on plan assets   (6)   (6)   (18)   (17)
Amortization of:            
 Transition obligation                  1 
 Prior service cost        1         1 
 Actuarial (gain) loss   1    1    4    3 
Net periodic defined benefit costs (credits) $ 6  $ 6  $ 18  $ 20 
 
5556
 

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

  Other Postretirement Benefits  Other Postretirement Benefits
  Three Months Six Months  Three Months Nine Months
  2013  2012  2013  2012 
         
PPL        
Service cost $ 3  $ 3  $ 7  $ 6 
Interest cost  7   8   14   16 
Expected return on plan assets  (6)  (5)  (12)  (11)
Amortization of:        
Transition obligation        1 
Actuarial (gain) loss   2    1    3    2 
Net periodic defined benefit costs (credits) $ 6  $ 7  $ 12  $ 14 
           2013  2012  2013  2012 
LKELKE        LKE        
Service costService cost $ 1  $ 1  $ 2  $ 2 Service cost $ 2  $ 1  $ 4  $ 3 
Interest costInterest cost  2   2   4   4 Interest cost  2   3   6   7 
Expected return on plan assetsExpected return on plan assets  (1)  (1)  (2)  (2)Expected return on plan assets  (2)  (1)  (4)  (3)
Amortization of:Amortization of:        Amortization of:        
Transition obligation    1     1 Transition obligation           1 
Prior service cost    1   1   2 Prior service cost  1     2   2 
Actuarial (gain) loss      (1)      (1)Actuarial (gain) loss               (1)
Net periodic defined benefit costs (credits)Net periodic defined benefit costs (credits) $ 2  $ 3  $ 5  $ 6 Net periodic defined benefit costs (credits) $ 3  $ 3  $ 8  $ 9 

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

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 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 JuneSeptember 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.

 Three Months Six Months Three Months Nine Months
 2013  2012  2013  2012  2013  2012  2013  2012 
                  
PPL Energy Supply $ 12  $ 9  $ 23  $ 19  $ 11  $ 10  $ 34  $ 29 
PPL Electric  9   7   18   15    9   8    27   23 
LG&E  3   3   6   6   3   3   9   9 
KU  5   5   9   9   4   4   13   13 

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10.  Commitments and Contingencies

Energy Purchase Commitments

(PPL and PPL Energy Supply)

PPL Energy Supply enters into long-term purchase contracts to supply the coal requirements for its coal-fired generating facilities.  These contracts include commitments to purchase coal through 2019.  In 2012, as a result of lower electricity and natural gas prices, coal unit utilization began to decrease.  To mitigate the risk of exceeding available coal storage, PPL Energy Supply incurred pre-tax charges of $17 million and $29 million during the three and nine months ended September 30, 2012 to reduce its 2012 and 2013 contracted coal deliveries.  These charges were recorded to "Fuel" on the Statement of Income.

(PPL and PPL Electric)

In May 2012, PPL Electric filed a plan with the PUC to purchase its electricelectricity supply for default customers for the period June 2013 through May 2015.  The PUC approved the plan in January 2013.  The approved plan proposesprovides 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, oneThrough October 2013, two of four solicitations hashave been completed.

(PPL Electric)

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

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

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.

WKE Indemnification (PPL and LKE)

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.

(PPL and PPL Energy Supply)

Montana Hydroelectric Litigation

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

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

Following an October 2007 trial of this matter on damages, in June 2008, the Montana District Court awarded the State retroactive compensation of approximately $35 million for the 2000-2006 period and approximately $6 million for 2007 compensation.  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

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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.

Sierra Club Litigation

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.  The complaint requests injunctive relief and civil penalties on average of $36,000 per day per violation, including a request that the owners remediate environmental damage and that $100,000 of the civil penalties be used for beneficial mitigation projects.  PPL Montana believes it and the other co-owners have numerous defenses to the allegations set forth in this complaint and will vigorously assert the same.  Trial in this matter as to liability has been scheduled for October 2014.  Trial as to remedies, if there is a finding of liability, is scheduled for August 2015.

On July 27, 2013, the Sierra Club and MEIC filed an additional Notice, identifying additional expansionplant projects that are alleged not to be in compliance with the Clean Air Act.  On September 27, 2013, the plaintiffs filed an amended complaint.  This amended complaint drops all claims regarding pre-2001 plant projects, as well as the plaintiffs' Title V and opacity claims.  It does, however, add claims with respect to a number of post-2000 plant projects, which effectively increased the number of projects subject to the litigation by about 40.  PPL Montana and the other Colstrip Owners filed a motion to dismiss the amended complaint on October 11, 2013.  Although PPL Montana believes it and the other co-owners have numerous defenses to the allegations set forth in this complaint and will vigorously assert the same, PPL Montana cannot predict the ultimate outcome of this matter at this time.

Regulatory Issues

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

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.


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(PPL, PPL Energy Supply and PPL Electric)

New Jersey Capacity Legislation

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

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

In addition, in February 2011, PPL and several other generating companies and utilities filed a complaint in U.S. District Court in New Jersey challenging the Act on the grounds that it violates well-established principles under the Supremacy Clause and the Commerce Clause of the U.S. Constitution and requesting declaratory and injunctive relief barring implementation of the Act by the BPU Commissioners.  In October 2011, the court denied the BPU's motion to dismiss the proceeding and in September 2012 the U.S. District Court denied all summary judgment motions.  Trial of this matter was completed in June 2013.  In October 2013, and is pending decision.  Anythe U.S. District Court in New Jersey issued a decision is expectedfinding the Act unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to beregulate the wholesale sale of electricity in interstate commerce.  The decision has been appealed to the U.S. Court of Appeals for the Third Circuit.Circuit by CPV Power Development, Inc. and is expected to be appealed by the State of New Jersey.  PPL, PPL Energy Supply and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

Maryland Capacity Order

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

In April 2012, PPL and several other generating companies filed a complaint in U.S. District Court in Maryland challenging the MD PSC order on the grounds that it violates well-established principles under the Supremacy and Commerce clauses of the U.S. Constitution and requested declaratory and injunctive relief barring implementation of the order by the Commissioners of the MD PSC.PSC Commissioners.  In August 2012, the court denied the MD PSC and CPV Maryland, LLC motions to dismiss the proceeding.  Trial of this matter was completed in March 2013.  In September 2013, andthe U.S. District Court in Maryland issued a decision is expectedfinding the MD PSC order unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in the third quarter of 2013.  Anyinterstate commerce.  The 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.

Pacific Northwest Markets (PPL and PPL Energy Supply)

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

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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 JuneSeptember 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 havebefore a FERC Administrative Law Judge regarding the City of Seattle's refund claims were completed in October 2013.  A briefing schedule has been scheduled to beginset and an initial decision is expected in August 2013.mid-March 2014.

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.

Electric - Reliability Standards (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)All Registrants)

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

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

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

In October 2012, the FERC issued a Notice of Proposed Rulemaking (NOPR) concerning Reliability Standards for geomagnetic disturbances (GMDs).  The FERC proposed to direct the NERC to submit for approval Reliability Standards that address the impact of GMDs on the reliable operation of the bulk-power system.  In May 2013, the FERC issued its Final Rule, Order No. 779, which directs the NERC to submit GMD Reliability Standards to the FERC for approval in two stages.  In the first stage, the NERC must submit one or more Reliability Standards by January 22, 2014 that require owners and operators of the bulk-power system to develop and implement operational procedures to mitigate the effects of GMDs on the bulk-power system.  In the second stage, the NERC must submit one or more Reliability Standards by January 22, 2015 that require owners and operators of bulk-power system facilities to assess yet to be determined "benchmark GMD events" and develop and implement plans to protect the bulk-power system from such GMD events.  The Registrants are unable to predict the specific requirements that will be contained in the Reliability Standards that the NERC has been directed to submit or the amount of any expenditures that may be required as a result of the approval of any such Reliability Standards.

Environmental Matters - Domestic

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

Due to the environmental issues discussed below or other environmental matters, it may be necessary for the Registrants to modify, curtail, replace or cease 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 applicable to coal combustion wastes and by-products from facilities that generate electricity from coal in accordance with approved compliance plans.  Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before the companies' respective state regulatory authorities, or the FERC, if applicable.  Because PPL Electric does not own any generating plants,

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

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

Air

CSAPR (formerly Clean Air Transport Rule) and CAIR

In July 2011, the EPA adopted the CSAPR.  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 (Circuit(D.C. Circuit Court).  CAIR subsequently was effectively reinstated by the D.C. Circuit Court in December 2008, pending finalization of the CSAPR.  Like CAIR, CSAPR targeted sources in the eastern U.S. and required reductions in sulfur dioxide and nitrogen oxides in two phases (2012 and 2014).

In December 2011, the D.C. Circuit Court stayed implementation of the CSAPR and left CAIR in effect pending a final decision on the validity of the rule.  In August 2012, the D.C. Circuit Court issued a ruling invalidating CSAPR, remanding the rule to the EPA for further action, and leaving CAIR in place during the interim.  OnIn June 24, 2013, the U.S. Supreme Court granted the EPA's petition for review of the D.C. Circuit Court's August 2012 decision.  Oral argument before the U.S. Supreme Court has been scheduled for December 2013.  Prior to a revised rule from the EPA, coal-fired generating plants could face tighter nitrous oxide emission limitations through state action.

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

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

National Ambient Air Quality Standards

PPL'sPPL fossil-fueled generating plants including those in Montana, may face further reductions in 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.  OnIn July 25, 2013, the EPA designated asfinalized non-attainment areasdesignations for parts of the country, including part of Yellowstone County in Montana (Billings area), primarilyincluding the Corette plant and its immediate vicinity, and part of Jefferson County in Kentucky.  These designations will become final 60 days after publication in the Federal Register.  Attainment must be achieved by 2018.  States are working on designations for other areas.

In December 2012, the EPA issued final rules that strengthen the fine particulate standards.  Under the final rule,rules, states and the EPA have until 2015 to identify non-attainment areas, and states have until 2020 to achieve attainment status for those areas.

PPL, PPL Energy Supply, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CAIR, or the MATS, or the Regional Haze requirements (as discussed below), such as upgraded or new sulfur dioxide scrubbers at certain plants and, in the case of LG&E and KU, the previously announced retirement of coal-fired generating units at the Cane Run, Green River and Tyrone plants, will help to achieve compliance with the new one-hour sulfur dioxide standard.  If additional reductions were to be required, the financial impact could be significant.  The short-term impact on the Corette plant from the EPA's final designation of part of Yellowstone County in Montana as non-attainment as noted above is not expected to be significant, as PPL Energy Supply previously announced its intent to place the plant in long-term reserve status beginning in April 2015 (see "MATS" below).  The longer-term impact will depend on what the MDEQ proposes in its State Implementation Plan to bring the area into attainment, which plan is due within 18 months from the date of the EPA's designation (as well as the status of plant operations at that time).time and what the MDEQ requires in its State Implementation Plan for reestablishing attainment, due in January 2015.

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

MATS

In May 2011, the EPA published a proposed regulation requiring stringent reductions of mercury and other hazardous air pollutants from power plants.  In February 2012, the EPA published the final rule, known as the MATS, with an effective date of April 2012.  The rule is being challenged by industry groups and states.states in the D.C. Circuit Court, where oral argument is scheduled for December 2013.  The rule provides for a three-year compliance deadline with the potential for a one-year extension as provided under the statute.  PPL has received two extensions in Kentucky and has requested an extension for one plant in Pennsylvania.  Other extension requests are under consideration.

At the time the MATs rule was proposed, LG&E and KU filed requests with the KPSC for environmental cost recovery based on their expected need to install environmental controls, including chemical additive and fabric-filter baghouses to remove certain hazardous air pollutants.  Recovery of the cost of certain controls was granted by the KPSC in December 2011.  LG&E's and KU's anticipated retirement of certain coal-fired electricelectricity generating units is in response to this and other environmental regulations.  LG&E and KU are continuing to assess whether any revisions of their approved compliance plans will be necessary.

With respect to PPL Energy Supply's Pennsylvania plants, PPL Energy Supply believes that installation of chemical additive systems may be necessary at certain coal-fired plants, the capital cost of which is not expected to be significant.  PPL Energy Supply continues to analyze the potential impact of MATS on operating costs.  With respect to PPL Energy Supply's Montana plants, modifications to the air pollution controls installed on Colstrip may be required, the cost of which is not expected to be significant.  For the Corette plant, PPL Energy Supply announced in September 2012 its intention, beginning in April 2015, to place the plant in long-term reserve status, suspending the plant's operation, due to expected market conditions and the costs to comply with the MATS requirements.  The Corette plant asset group's carrying amount at JuneSeptember 30, 2013 was $68$67 million.  Although the Corette plant asset group was not determined to be impaired at JuneSeptember 30, 2013, it is reasonably possible that an impairment could occur in future periods, as the Company continues to assess its plans for Corette and as higher priced sales contracts settle, adversely impacting projected cash
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flows.  PPL Energy Supply, LG&E and KU are continuing to conduct in-depth reviews of the MATS, including the potential implications to scrubber wastewater discharges.  See the discussion of effluent limitations guidelines and standards below.

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

Regional Haze and Visibility

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

The primary power plant emissions affecting visibility are sulfur dioxide, nitrogen oxide and particulates.  To date, the focus of regional haze activity has been the western U.S. because, until recently, BART requirements for sulfur dioxide and nitrogen oxide reductions in the eastern U.S. were largely addressed through compliance with other regulatory programs, such as CSAPR or CAIR.  More specifically, before CAIR was temporarily invalidated in 2008, the EPA had determined, and the D.C. Circuit Court had affirmed, that a state could accept region-wide reductions under the CAIR trading program to satisfy BART requirements.  After CAIR was temporarily invalidated, the EPA adopted a final rule providing that states subject to CSAPR (which replaced CAIR) may rely on participation in the CSAPR trading program as an alternative to BART.  However, the D.C. Circuit Court's August 2012 decision to vacate and remand CSAPR and to implement CAIR in its place on an interim basis leaves power plants located in the eastern U.S., including PPL's plants in Pennsylvania and Kentucky, exposed to reductions in sulfur dioxide and nitrogen oxides as required by BART, unless the D.C. Circuit Court's decision, now pending before the U.S. Supreme Court, is overturned.

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

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currently installing sorbent injection technology to comply with these reductions, the costs of which are not expected to be significant.

In Montana, the EPA Region 8 developed the regional haze plan as the Montana Department of Environmental QualityMDEQ declined to develop a BART state implementation plan.  In September 2012, the EPA issued its final Federal Implementation Plan (FIP) for the Montana regional haze rule.  The final FIP indicated thatassumed no additional controls were assumed for Corette or Colstrip Units 3 and 4, but proposed tighter limits for Corette and Colstrip Units 1 and 2.  PPL Energy Supply expects to meet these tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" above).  See "Mercury and Other Hazardous Air Pollutants" discussion above.  Under the final FIP, Colstrip Units 1 and 2 may require additional controls, including the possible installation of an SNCR and other technology, to meet more stringent nitrogen oxide and sulfur dioxide limits.  The cost of these potential additional controls, if required, could be significant. In November 2012, PPL filed a petition for review of the Montana Regional Haze FIP with the U.S. Court of Appeals for the Ninth Circuit.  Environmental groups have also filed a petition for review.  The two matters have been consolidated, and litigation is on-going.

New Source Review (NSR)

The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants.  The EPA has asserted that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR requirements under the Clean Air Act.  In April 2009, PPL received EPA information requests for its Montour and Brunner Island plants.  PPL and the EPA have exchanged certain information regarding this matter.  In January 2009, PPL, PPL Energy Supply and other companies that own or operate the Keystone plant in Pennsylvania received a notice of violation from the EPA alleging that certain projects were undertaken without proper NSR compliance.  In May and November 2012, PPL Montana received information requests from the EPA regarding projects undertaken during a Spring 2012 maintenance outage at Colstrip Unit 1.  In September 2012, PPL Montana received an information request from the Montana Department of Environmental Quality regarding Colstrip Unit 1 and other projects.  PPL and PPL Energy Supply cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.

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

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issued an information request on this matter.  In September 2012, the parties reached a tentative settlement addressing the Ghent NSR matter that seeks to resolve a September 2007 notice of violation alleging opacity violations at the plant.  A proposedThe parties subsequently entered into a consent decree which was filed inapproved by the U.S. District Court for the Eastern District of Kentucky in December 2012.  PPL, LKE and KU cannot predict the outcome of this matter until thecourt on September 11, 2013.  The consent decree is entered byrequires the Court, but currently do not expect such outcome to result inincurrence of non-material costs in excess of amountsthat have already accrued, which amounts are not material.been accrued.

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

States and environmental groups also have commenced litigation alleging violations of the NSR regulations by coal-fired generating plants across the nation.  See "Legal Matters" above for information on a lawsuit filed by environmental groups in March 2013 against PPL Montana and other owners of Colstrip.

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

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

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

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

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

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

GHG Regulations and Tort Litigation

As a result of the April 2007 U.S. Supreme Court decision that the EPA has authority under the Clean Air Act to regulate GHG emissions from new motor vehicles, in April 2010, the EPA and the U.S. Department of Transportation issued new light-duty vehicle emissions standards that applied beginning with 2012 model year vehicles.  The EPA also clarified that this standard, beginning in 2011, authorized regulation of GHG emissions from stationary sources under the NSR and Title V operating permit provisions of the Clean Air Act.  As a result, any new sources or major modifications to existing GHG sources causing a net significant emissions increase now require adherence to the BACT permit limits for GHGs.  The rules were challenged, and in June 2012 the D.C. Circuit Court upheld the EPA's regulations.  In December 2012, the D.C. Circuit Court denied petitions for rehearing pertaining to its June 2012 opinion, andopinion.  On October 15, 2013, the U.S. Supreme Court has been petitioned by industry groups and sourcesgranted certiorari for several petitions to heardecide whether the case.

In addition, in April 2012,NSR provisions of the Clean Air Act require the EPA proposed New Source Performance Standards (NSPS) for carbon dioxideto regulate GHG emissions from new coal-fired generating units, combined-cycle natural gas units, and integrated gasification combined-cycle units.  The proposal would require new coal plants to achieve the same stringent limitations on carbon dioxide emissionsstationary sources, such as the best performing new gaspower plants.  There presently is no commercially available technology to allow new coal plants to meet these limitations and, as a result, the EPA's proposal would effectively preclude new construction of coal-fired generation.  Compliance could even be difficult for certain new gas-fired plants.  In December 2012, the Circuit Court dismissed consolidated challenges to the NSPS holding that the proposed rule is not a final agency action.

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

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

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

At the regional level, ten northeastern states signed a Memorandum of Understanding (MOU) agreeing to establish a GHG emission cap-and-trade program, called the Regional Greenhouse Gas Initiative (RGGI).  The program commenced in January 2009 and calls for stabilizing carbon dioxide emissions, at base levels established in 2005, from electric power plants with capacity greater than 25 MW.  The MOU also provides for a 10% reduction, by 2019, in carbon dioxide emissions from base levels.
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Pennsylvania has not stated an intention to join the RGGI, but enacted the Pennsylvania Climate Change Act of 2008 (PCCA).  The PCCA established a Climate Change Advisory Committee to advise the PADEP on the development of a Climate Change Action Plan.  In December 2009, the Advisory Committee finalized its Climate Change Action Report and identified specific actions that could result in reducing GHG emissions by 30% by 2020.  Some of the proposed actions, such as a mandatory 5% efficiency improvement at power plants, could be unachievable.  To date, there have been no regulatory or legislative actions taken to implement the recommendations of the report.

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

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

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

There has been interest in renewable energy legislation at both the state and federal levels.  Federal legislation on renewable energy is not expected to be enacted this year.  In Pennsylvania, bills were recently introduced calling for an increase in AEPS Tier 1 obligations and to create a $25 million permanent funding program for solar generation.  A bill adding new hydropower to Montana's renewable portfolio standard was enacted with an effective date of October 1, 2013.

  An interim legislative committee in Montana is reviewing the state's RPS.  PPL and PPL Energy Supply LKE, LG&E and KUcannot predict at this time whether the committee will recommend any changes to existing laws.

The Registrants believe there are financial, regulatory and logistical uncertainties related to the implementation of renewable energy mandates that will need to be resolved before the impact of such requirements on them can be estimated.  Such uncertainties, among others, include the need to provide back-up supply to augment intermittent renewable generation, potential generation over-supply that could result from such renewable generation and back-up, impacts to PJM's capacity market and the need for substantial changes to transmission and distribution systems to accommodate renewable energy sources.  These uncertainties are not directly addressed by proposed legislation.  PPL and PPL Energy Supply cannot predict at this time the effect on their competitive plants' future competitive position, results of

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operation, cash flows and financial position of renewable energy mandates that may be adopted, although the costs to implement and comply with any such requirements could be significant.

Water/Waste

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

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

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

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

The EPA is continuing to evaluate the unprecedented number of comments it received on its June 2010 proposed regulations.  In October 2011, the EPA issued a Notice of Data Availability (NODA) requesting comments on selected documents it received during the comment period for the proposed regulations, andregulations.  On September 20, 2013, in response to the proposed Effluent Limitation Guidelines, PPL submitted comments on July 29,the proposed CCR regulations.  Also, on September 3, 2013, the EPA releasedPPL commented on a pre-publication version of a second CCR NODA seeking comment on additional information related to itsthe EPA's proposal.  OnIn July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRsissuing final CCR regulations and would set non-hazardous CCR standards under RCRA and sets rules governingauthorize state programs; however, prospects remainpermit programs.  It remains uncertain forwhether similar legislation to pass inwill likely be passed by the U.S. Senate.

A coalition of environmental groups and two CCR recycling companies have filed lawsuits against the EPA for failure to perform nondiscretionary duties under RCRA, which could require a deadline for the EPA to issue strict CCR regulations.  The two CCR recycling companies are asserting that the EPA should regulate CCRs as a non-hazardous waste that would allow for continued recycling of CCRs.recycling.

AAs a result of litigation by environmental groups, final rulemaking is currently expected beforecould be issued as early as the end of 2015.  However, the timing of the final regulations could be accelerated by the outcome of the above litigation, which could require the EPA to issue its regulations sooner.2014.

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

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

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

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

In 2005, approximately 100 million gallons of water containing fly ash was released from a disposal basin at the Martins Creek plant used in connection with the operation of the plant's two 150 MW coal-fired generating units.  This resulted in ash

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being deposited onto adjacent roadways and fields, and into a nearby creek and the Delaware River.  PPL Energy Supply determined that the release was caused by a failure in the disposal basin's discharge structure.  PPL Energy Supply conducted extensive clean-up and completed studies, in conjunction with a group of natural resource trustees and the Delaware River Basin Commission, evaluating the effects of the release on the river's sediment, water quality and ecosystem.

The PADEP filed a complaint in Pennsylvania Commonwealth Court against PPL Martins Creek and PPL Generation, alleging violations of various state laws and regulations and seeking penalties and injunctive relief.  PPL Energy Supply and the PADEP have settled this matter.  The settlement required PPL Energy Supply to submit a report on the completed studies of possible natural resource damages.  PPL Energy Supply subsequently submitted the assessment report to the Pennsylvania and New Jersey regulatory agencies and has continued discussing potential natural resource damages and mitigation options with the agencies.  Subsequently, in August 2011 the PADEP submitted its National Resource Damage (NRD) Assessment report to the court and interveners.  In December 2011, the interveners commented on the PADEP report and in February 2012 the PADEP and PPL Energy Supply filed separate responses with the court.  In March 2012, the court dismissed the interveners' case, and the interveners appealed the dismissal to the Pennsylvania Supreme Court.  In June 2013 the Supreme Court dismissed the appeal.  Following this ruling, PPL Energy Supply is proceeding to finalize the NRD settlement with the PADEP and other NRD trustees.

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

Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky

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

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

In 2007, six plaintiffs filed a lawsuit in the Montana Sixteenth Judicial District Court against the Colstrip plant owners asserting property damage due to seepage from plant wastewater ponds.  A settlement agreement was reached in July 2010 which would have resulted in a payment by PPL Montana, but certain of the plaintiffs later argued the settlement was not final.  The Colstrip plant owners filed a motion to enforce the settlement and in October 2011 the court granted the motion and ordered the settlement to be completed in 60 days.  The plaintiffs appealed the October 2011 order to the Montana Supreme Court, which affirmed the district court's order enforcing the settlement in December 2012 and denied plaintiff's motion for rehearing in February 2013.  The parties are still in negotiations regardingFinal settlement documents were executed and the final settlement documents.was effective on October 28, 2013.  PPL Montana's share of the settlement ispayment was not expected to be significant.

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

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

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

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

(All Registrants except PPL Electric)

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

The EPA published proposed rule 316(b) for existing facilities in April 2011.  The EPA has been evaluating the comments it received to the proposed rule and meeting with industry groups to discuss options.  The proposed rule contains two requirements to reduce impact to aquatic organisms at cooling water intake structures.  The first requires all existing facilities to meet standards for the reduction of mortality of aquatic organisms that become trapped against water intake screens (impingement) regardless of the levels of mortality actually occurring or the cost to achieve the standards.  The second requirement is to determine and install the best technology available to reduce mortality of aquatic organisms pulled through a plant's cooling water system (entrainment).  A form of cost-benefit analysis is allowed for this second requirement involving a site-specific evaluation based on nine factors, including impacts to energy delivery reliability and the remaining useful life of the plant.  The final rule is expected to be issued in November 2013.  Until the final rule is issued, PPL, PPL Energy Supply, LKE, LG&E and KU cannot reasonably estimate a range of reasonably possible costs, if any, that would be required to comply with such a regulation.

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

In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations contain requirements that would affect the inspection and operation of CCR facilities, if finalized.  The EPA has indicated that it will coordinate these regulations with the regulation of CCRs discussed above.  The proposal contains alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL, is workingPPL Energy Supply, LKE, LG&E and KU worked with industry groups to comment on the proposed regulation.regulation on September 20, 2013.  The final regulation is expected to be issued in May 2014.  At the present time, PPL, PPL Energy Supply, LKE, LG&E and KU are currently unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.  Pending finalization of the ELGs, states, including Pennsylvania and Kentucky, are proposing more stringent

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technology-based limits in permit renewals.  Depending on the final limits imposed, the costs of compliance could be significant and costs could be imposed ahead of federal timelines.

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

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

A PPL Energy Supply subsidiary has investigated alternatives to exclude fish from the discharge channel at its Brunner Island plant, but the subsidiary and the PADEP have concluded that a barrier method to exclude fish is not workable.  In June 2012, a Consent Order and Agreement (COA) was signed that allows the subsidiary to study a change in a cooling tower operational method that may keep fish from entering the channel.  Should this approach fail, the COA requires a retrofit of impingement control technology at the intakes to the cooling towers, the cost of which could be significant.

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

In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010, which covers water discharges from the Trimble County plant.  In November 2010, the Cabinet issued a final order upholding the permit.  In December 2010, the environmental groups appealed the order to the Trimble Circuit Court, but the case was subsequently transferred to the Franklin Circuit Court.  In September 2013, the court reversed the Cabinet order upholding the permit and remanded the permit to the agency for further proceedings.  In October 2013, LG&E filed a notice of appeal with the Kentucky Court of Appeals.  PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible losses, if any.

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

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

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

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

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

The EPA is evaluating the risks associated with polycyclic aromatic hydrocarbons and naphthalene, chemical by-products of coal gas manufacturing.  As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil cleanup.  This could require several PPL subsidiaries to take more extensive assessment and remedial actions at former coal gas manufacturing plants.  PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.


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

Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in significant additional costs for the Registrants.

Environmental Matters - WPD (PPL)

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

Other

Nuclear Insurance (PPL and PPL Energy Supply)

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

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

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

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

Guarantees and Other Assurances

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

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

(PPL)

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

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

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


  Exposure at Expiration
  June 30, 2013 (a) Date
PPL      
Indemnifications related to the WPD Midlands acquisition   (b)  
WPD indemnifications for entities in liquidation and sales of assets $ 10 (c) 2018
WPD guarantee of pension and other obligations of unconsolidated entities   87 (d) 2015
       
PPL Energy Supply      
Letters of credit issued on behalf of affiliates   23 (e) 2013 - 2014
Retrospective premiums under nuclear insurance programs   46 (f)  
Nuclear claims assessment under The Price-Anderson Act as amended   235 (g)  
Indemnifications for sales of assets   250 (h) 2025
Indemnification to operators of jointly owned facilities   6 (i)  
Guarantee of a portion of a divested unconsolidated entity's debt   22 (j) 2018
       
PPL Electric      
Guarantee of inventory value   29 (k) 2017
       
LKE      
Indemnification of lease termination and other divestitures   301 (l) 2021 - 2023
       
LG&E and KU      
LG&E and KU guarantee of shortfall related to OVEC   (m)  
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  Exposure at Expiration
  September 30, 2013 (a) Date
PPL      
Indemnifications related to the WPD Midlands acquisition      (b)  
WPD indemnifications for entities in liquidation and sales of assets  $ 11 (c) 2018
WPD guarantee of pension and other obligations of unconsolidated entities    125 (d) 2015
       
PPL Energy Supply      
Letters of credit issued on behalf of affiliates    23 (e) 2013 - 2014
Retrospective premiums under nuclear insurance programs    46 (f)  
Nuclear claims assessment under The Price-Anderson Act as amended    235 (g)  
Indemnifications for sales of assets    250 (h) 2025
Indemnification to operators of jointly owned facilities    6 (i)  
Guarantee of a portion of a divested unconsolidated entity's debt    22 (j) 2018
       
PPL Electric      
Guarantee of inventory value    32 (k) 2017
       
LKE      
Indemnification of lease termination and other divestitures    301 (l) 2021 - 2023
       
LG&E and KU      
LG&E and KU guarantee of shortfall related to OVEC      (m)  

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

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

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

A subsidiary of PPL Energy Supply has agreed to provide indemnification to the purchaser of the Long Island generation business for damages arising out of any breach of the representations, warranties and covenants under the related transaction agreement and for damages arising out of certain other matters, including liabilities relating to certain renewable energy facilities which were previously owned by one of the PPL subsidiaries sold in the transaction but which were unrelated to the Long Island generation business.  The indemnification provisions for most representations and warranties expired in the third quarter of 2011.
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A subsidiary of PPL Energy Supply has agreed to provide indemnification to the purchasers of the Maine hydroelectric facilities for damages arising out of any breach of the representations, warranties and covenants under the respective transaction agreements and for damages arising out of certain other matters, including liabilities of the PPL Energy Supply subsidiary relating to the pre-closing ownership or operation of those hydroelectric facilities.  The indemnification provisions for most representations and warranties expired in the fourth quarter of 2012.

Subsidiaries of PPL Energy Supply have agreed to provide indemnification to the purchasers of certain non-core generation facilities sold in March 2011 for damages arising out of any breach of the representations, warranties and covenants under the related transaction agreements and for damages arising out of certain other matters relating to the facilities that were the subject of the transaction, including certain reduced capacity payments (if any) at one of the facilities in the event specified PJM rule changes are proposed and become effective.  The indemnification provisions for most representations and warranties expired in the first quarter of 2012.
(i)In December 2007, a subsidiary of PPL Energy Supply executed revised owners agreements for two jointly owned facilities, the Keystone and Conemaugh generating plants.  The agreements require that in the event of any default by an owner, the other owners fund contributions for the operation of the generating plants, based upon their ownership percentages.  The non-defaulting owners, who make up the defaulting owner's obligations, are entitled to the generation entitlement of the defaulting owner, based upon their ownership percentage.  The exposure shown reflects the PPL Energy Supply subsidiary's share of the maximum obligation.  The agreements do not have an expiration date.
(j)A PPL Energy Supply subsidiary owned a one-third equity interest in Safe Harbor Water Power Corporation (Safe Harbor) that was sold in March 2011.  Beginning in 2008, PPL Energy Supply guaranteed one-third of any amounts payable with respect to certain senior notes issued by Safe Harbor.  Under the terms of the sale agreement, PPL Energy Supply continues to guarantee the portion of Safe Harbor's debt, but received a cross-indemnity from the purchaser, secured by a lien on the purchaser's stock of Safe Harbor, in the event PPL Energy Supply is required to make a payment under the guarantee.  The exposure noted reflects principal only.
(k)PPL Electric entered into contracts with a third party logistics firm that provides inventory procurement and fulfillment services.  Under the contracts, the logistics firm has title to the inventory purchased for PPL Electric's use.  Upon termination of the contracts, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold by the logistics firm at the weighted-average cost at which the logistics firm purchased the inventory.
(l)LKE provides certain indemnifications, the most significant of which relate to the termination of the WKE lease in July 2009.  These guarantees cover the due and punctual payment, performance and discharge by each party of its respective present and future obligations.  The most comprehensive of these guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under the WKE Transaction Termination Agreement.  This guarantee has a term of 12 years ending July 2021, and a cumulative maximum exposure of $200 million.  Certain items such as government fines and penalties fall outside the cumulative cap.  LKE has contested the applicability of the indemnification requirement relating to one matter presented by a counterparty under this guarantee.  Another guarantee with a maximum exposure of $100 million covering other indemnifications expires in 2023.  In May 2012, LKE's indemnitee received an arbitration panel's decision affecting this matter, which granted LKE's indemnitee certain rights of first refusal to purchase excess power at a market-based price rather than at an absolute fixed price.  In January 2013, LKE's indemnitee commenced a proceeding in the Kentucky Court of Appeals appealing the December 2012 order of the Henderson Circuit Court, confirming the arbitration award.  A decision in the appellate matter may occur during late 2013 or early 2014.  LKE believes its indemnification obligations in this matter remain subject to various uncertainties, including potential for additional legal challenges regarding the arbitration decision as well as future prices, availability and demand for the subject excess power.  LKE continues to evaluate various legal and commercial options with respect to this indemnification matter.  The ultimate outcomes of the WKE termination-related indemnifications cannot be predicted at this time.  Additionally, LKE has indemnified various third parties

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related to historical obligations for other divested subsidiaries and affiliates.  The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; however, LKE is not aware of formal claims under such indemnities made by any party at this time.  LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party.  In the second quarter of 2012, LKE adjusted its estimated liability for certain of these indemnifications by $9 million ($5 million after-tax), which is reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income.  The adjustment was recorded in the Kentucky Regulated segment for PPL.  LKE cannot predict the ultimate outcomes of such indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.
(m)Pursuant to the OVEC power purchase contract, expiring in June 2040, LG&E and KU are obligated to pay a demand charge which includes, among other charges, debt service and amortization toward principal retirement, decommissioning costs, post-retirement and post-employment benefits costs (other than pensions), and reimbursement of plant operating, maintenance and other expenses.  The demand charge is expected to cover LG&E's and KU's shares of the cost of the listed items over the term of the contract.  However, in the event there is a shortfall in covering these costs, LG&E and KU are obligated to pay their share of the excess debt service, post-retirement and decommissioning costs.  The maximum exposure and the expiration date of these potential obligations are not presently determinable.

The Registrants provide other miscellaneous guarantees through contracts entered into in the normal course of business.  These guarantees are primarily in the form of indemnification or warranties related to services or equipment and vary in duration.  The amounts of these guarantees often are not explicitly stated, and the overall maximum amount of the obligation under such guarantees cannot be reasonably estimated.  Historically, no significant payments have been made with respect to these types of guarantees and the probability of payment/performance under these guarantees is remote.

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

11.  Related Party Transactions

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

PPL Electric holds competitive solicitations for PLR generation supply.  PPL EnergyPlus has been awarded a portion of the PLR generation supply through these competitive solicitations.  The sales and purchases between PPL EnergyPlus and PPL Electric are included in the Statements of Income as "Wholesale energy marketing to affiliate" by PPL Energy Supply and as "Energy purchases from affiliate" by PPL Electric.

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Under the standard Default Service Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits.  PPL EnergyPlus is required to post collateral with PPL Electric:  (a) when the market price of electricity to be delivered by PPL EnergyPlus exceeds the contract price for the forecasted quantity of electricity to be delivered; and (b) this market price exposure exceeds a contractual credit limit.  Based on the current credit rating of PPL Energy Supply, as guarantor, PPL EnergyPlus' credit limit was $35 million at JuneSeptember 30, 2013.  In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.

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

At JuneSeptember 30, 2013, PPL Energy Supply had a net credit exposure of $26$25 million from PPL Electric from its commitment as a PLR supplier and from the sale of its accounts receivable to PPL Electric.

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

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

 Three Months Six Months Three Months Nine Months
 2013  2012  2013  2012  2013  2012  2013  2012 
                 
PPL Energy Supply $ 52  $ 53  $ 109  $ 110  $ 52  $ 49  $ 161  $ 159 
PPL Electric  34   39   72   81   37   35   109   116 
LKE  4   3   8   8   3   3   11   11 

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Intercompany Billings by LKS (LG&E and KU)

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

 Three Months Six Months Three Months Nine Months
 2013  2012  2013  2012  2013  2012  2013  2012 
                
LG&E $67  $40  $106  $81  $53  $51  $159  $132 
KU 44  35  110  81  36  33  146  114 

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

Intercompany Borrowings (LKE)

LKE maintains a $300 million revolving demand note with a PPL Energy Funding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates.  The interest rates on borrowings are equal to one-month LIBOR plus a spread.  At JuneSeptember 30, 2013 and December 31, 2012, $72$52 million and $25 million waswere outstanding and waswere reflected in "Notes payable with affiliates" on the Balance Sheet.  The interest rate on the outstanding borrowing at JuneSeptember 30, 2013 was 1.69%1.68%.  Interest on the demand note was not significant for the three and sixnine months ended JuneSeptember 30, 2013 and 2012.  In October 2013, the capacity of the revolving demand note was reduced by $75 million.
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Intercompany Derivatives (LKE, LG&E and KU)Kentucky Registrants)

Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL.  These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties.  See Note 14 for additional information on intercompany derivatives.

Intercompany Insurance (PPL Electric)

In May 2013, PPL Electric received $18.25 million from the settlement of its 2012 storm insurance claims with PPL Power Insurance Ltd. (PPL Power Insurance), a subsidiary of PPL that provides certain insurance coverage to PPL and its subsidiaries.

Effective January 1, 2013, PPL Electric no longer has storm insurance coverage with PPL Power Insurance.Insurance Ltd.  See Note 6 for discussion regarding the proposed Storm Damage Expense Rider filed with the PUC by PPL Electric.

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

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

12.  Other Income (Expense) - net

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

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

    Three Months Nine Months
    2013  2012  2013  2012 
PPL            
Other Income            
 Earnings on securities in NDT funds $ 4  $ 5  $ 14  $ 17 
 Interest income   1    1    2    4 
 AFUDC - equity component   3    2    8    7 
 Earnings (losses) from equity method investments        (1)        (7)
 Miscellaneous - Domestic        3    9    8 
 Miscellaneous - U.K.        (1)   1    1 
 Total Other Income   8    9    34    30 
Other Expense            
 Economic foreign currency exchange contracts (Note 14)   117    47    (6)   40 
 Charitable contributions   5    1    13    7 
 Miscellaneous - Domestic   2    4    7    12 
 Miscellaneous - U.K.        1    1    2 
 Total Other Expense   124    53      15    61 
Other Income (Expense) - net $ (116) $ (44) $ 19  $ (31)
 
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   Three Months Six Months
   2013  2012  2013  2012 
PPL        
Other Income        
Earnings on securities in NDT funds $ 5  $ 4  $ 10  $ 12 
Interest income    2   1   3 
AFUDC - equity component  2   3   5   5 
Earnings (losses) from equity method investments    (4)    (6)
Miscellaneous - Domestic  7   3   9   5 
Miscellaneous - U.K.      2    1    2 
Total Other Income   14    10    26    21 
Other Expense        
Economic foreign currency exchange contracts (Note 14)  (4)  (25)  (123)  (7)
Charitable contributions  4   2   8   6 
Miscellaneous - Domestic  1   4   5   8 
Miscellaneous - U.K.      (1)   1    1 
Total Other Expense   1    (20)   (109)   8 
Other Income (Expense) - net $ 13  $ 30  $ 135  $ 13 
          
PPL Energy SupplyPPL Energy Supply        PPL Energy Supply            
Other IncomeOther Income        Other Income        
Earnings on securities in NDT funds $ 5  $ 4  $ 10  $ 12 Earnings on securities in NDT funds $ 4  $ 5  $ 14  $ 17 
Interest income  2   1   2   1 Interest income  1       3   1 
Miscellaneous   6    2    7    3 Miscellaneous        2    7    5 
Total Other Income   13    7    19    16 Total Other Income   5    7    24    23 
Other ExpenseOther Expense        Other Expense        
Charitable contributions  1     2   1 Charitable contributions  1   1   3   2 
Miscellaneous      1    1    4 Miscellaneous   2    1    3    5 
Total Other Expense   1    1    3    5 Total Other Expense   3    2      6    7 
Other Income (Expense) - netOther Income (Expense) - net $ 12  $ 6  $ 16  $ 11 Other Income (Expense) - net $ 2  $ 5  $ 18  $ 16 

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


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13.  Fair Value Measurements and Credit Concentration

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

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

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

     September 30, 2013 December 31, 2012
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL                        
Assets                        
 Cash and cash equivalents $ 1,291  $ 1,291            $ 901  $ 901           
 Restricted cash and cash equivalents (a)   120    120              135    135           
 Price risk management assets:                        
  Energy commodities   1,480    7  $ 1,421  $ 52    2,068    2  $ 2,037  $ 29 
  Interest rate swaps   86         86         15         15      
  Foreign currency contracts   1         1                          
  Cross-currency swaps   28         28         14         13    1 
 Total price risk management assets   1,595    7    1,536    52    2,097    2    2,065    30 
 NDT funds:                        
  Cash and cash equivalents   14    14              11    11           
  Equity securities                                        
   U.S. large-cap   494    369    125         412    308    104      
   U.S. mid/small-cap   74    30    44         60    25    35      
  Debt securities                                        
   U.S. Treasury   96    96              95    95           
   U.S. government sponsored agency   6         6         9         9      
   Municipality   75         75         82         82      
   Investment-grade corporate   40         40         40         40      
   Other   3         3         3         3      
  Receivables (payables), net   2         2              (2)   2      
 Total NDT funds   804    509    295         712    437    275      
 Auction rate securities (b)   19              19    19         3    16 
Total assets $ 3,829  $ 1,927  $ 1,831  $ 71  $ 3,864  $ 1,475  $ 2,343  $ 46 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,235  $ 4  $ 1,226  $ 5  $ 1,566  $ 2  $ 1,557  $ 7 
  Interest rate swaps   58         58         80         80      
  Foreign currency contracts   67         67         44         44      
  Cross-currency swaps   1         1         4         4      
 Total price risk management liabilities $ 1,361  $ 4  $ 1,352  $ 5  $ 1,694  $ 2  $ 1,685  $ 7 
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     June 30, 2013 December 31, 2012
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL                        
Assets                        
 Cash and cash equivalents $ 711  $ 711        $ 901  $ 901       
 Restricted cash and cash equivalents (a)   151    151          135    135       
 Price risk management assets:                        
  Energy commodities   1,654    1  $ 1,600  $ 53    2,068    2  $ 2,037  $ 29 
  Interest rate swaps   132       132       15       15    
  Foreign currency contracts   85       85                
  Cross-currency swaps   62       59    3    14       13    1 
 Total price risk management assets   1,933    1    1,876    56    2,097    2    2,065    30 
 NDT funds:                        
  Cash and cash equivalents   12    12          11    11       
  Equity securities                        
   U.S. large-cap   468    349    119       412    308    104    
   U.S. mid/small-cap   68    28    40       60    25    35    
  Debt securities                        
   U.S. Treasury   95    95          95    95       
   U.S. government sponsored agency   6       6       9       9    
   Municipality   77       77       82       82    
   Investment-grade corporate   39       39       40       40    
   Other   3       3       3       3    
  Receivables (payables), net   3       3          (2)   2    
 Total NDT funds   771    484    287       712    437    275    
 Auction rate securities (b)   19          19    19       3    16 
Total assets $ 3,585  $ 1,347  $ 2,163  $ 75  $ 3,864  $ 1,475  $ 2,343  $ 46 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,351  $ 1  $ 1,337  $ 13  $ 1,566  $ 2  $ 1,557  $ 7 
  Interest rate swaps   46       46       80       80    
  Foreign currency contracts   3       3       44       44    
  Cross-currency swaps   1       1       4       4    
 Total price risk management liabilities $ 1,401  $ 1  $ 1,387  $ 13  $ 1,694  $ 2  $ 1,685  $ 7 
                            
PPL Energy Supply                        
Assets                        
 Cash and cash equivalents $ 265  $ 265        $ 413  $ 413       
 Restricted cash and cash equivalents (a)   87    87          63    63       
 Price risk management assets:                        
  Energy commodities   1,654    1  $ 1,600  $ 53    2,068    2  $ 2,037  $ 29 
 Total price risk management assets   1,654    1    1,600    53    2,068    2    2,037    29 
 NDT funds:                        
  Cash and cash equivalents   12    12          11    11       
  Equity securities                        
   U.S. large-cap   468    349    119       412    308    104    
   U.S. mid/small-cap   68    28    40       60    25    35    
  Debt securities                        
   U.S. Treasury   95    95          95    95       
   U.S. government sponsored agency   6       6       9       9    
   Municipality   77       77       82       82    
   Investment-grade corporate   39       39       40       40    
   Other   3       3       3       3    
  Receivables (payables), net   3       3          (2)   2    
 Total NDT funds   771    484    287       712    437    275    
 Auction rate securities (b)   16          16    16       3    13 
Total assets $ 2,793  $ 837  $ 1,887  $ 69  $ 3,272  $ 915  $ 2,315  $ 42 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,351  $ 1  $ 1,337  $ 13  $ 1,566  $ 2  $ 1,557  $ 7 
 Total price risk management liabilities $ 1,351  $ 1  $ 1,337  $ 13  $ 1,566  $ 2  $ 1,557  $ 7 
                            
PPL Electric                        
Assets                        
 Cash and cash equivalents $ 24  $ 24        $ 140  $ 140       
 Restricted cash and cash equivalents (c)   12    12          13    13       
Total assets $ 36  $ 36        $ 153  $ 153       

 
74
 
     September 30, 2013 December 31, 2012
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL Energy Supply                        
Assets                        
 Cash and cash equivalents $ 551  $ 551            $ 413  $ 413           
 Restricted cash and cash equivalents (a)   54    54              63    63           
 Price risk management assets:                        
  Energy commodities   1,480    7  $ 1,421  $ 52    2,068    2  $ 2,037  $ 29 
 Total price risk management assets   1,480    7    1,421    52    2,068    2    2,037    29 
 NDT funds:                        
  Cash and cash equivalents   14    14              11    11           
  Equity securities                                        
   U.S. large-cap   494    369    125         412    308    104      
   U.S. mid/small-cap   74    30    44         60    25    35      
  Debt securities                                        
   U.S. Treasury   96    96              95    95           
   U.S. government sponsored agency   6         6         9         9      
   Municipality   75         75         82         82      
   Investment-grade corporate   40         40         40         40      
   Other   3         3         3         3      
  Receivables (payables), net   2         2              (2)   2      
 Total NDT funds   804    509    295         712    437    275      
 Auction rate securities (b)   16              16    16         3    13 
Total assets $ 2,905  $ 1,121  $ 1,716  $ 68  $ 3,272  $ 915  $ 2,315  $ 42 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,235  $ 4  $ 1,226  $ 5  $ 1,566  $ 2  $ 1,557  $ 7 
 Total price risk management liabilities $ 1,235  $ 4  $ 1,226  $ 5  $ 1,566  $ 2  $ 1,557  $ 7 
                            
PPL Electric                        
Assets                        
 Cash and cash equivalents $ 225  $ 225            $ 140  $ 140           
 Restricted cash and cash equivalents (c)   12    12              13    13           
Total assets $ 237  $ 237            $ 153  $ 153           

   June 30, 2013 December 31, 2012
   Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
LKELKE                LKE                 
AssetsAssets                Assets                 
Cash and cash equivalents $ 23  $ 23      $ 43  $ 43     Cash and cash equivalents $ 21  $ 21          $ 43  $ 43         
Restricted cash and cash equivalents (d)  22   22       32   32     Restricted cash and cash equivalents (d)   22   22           32   32         
Price risk management assets:                Price risk management assets:                 
 Interest rate swaps   72     $ 72       14     $ 14     Interest rate swaps                       14       $ 14      
Total price risk management assets   72       72       14       14    Total price risk management assets                       14         14      
Total assetsTotal assets $ 117  $ 45  $ 72     $ 89  $ 75  $ 14    Total assets $ 43  $ 43            $ 89  $ 75  $ 14      
                                     
LiabilitiesLiabilities                Liabilities                 
Price risk management liabilities:                Price risk management liabilities:                 
 Interest rate swaps $ 43     $ 43     $ 58     $ 58     Interest rate swaps $ 55       $ 55       $ 58       $ 58      
Total price risk management liabilitiesTotal price risk management liabilities $ 43     $ 43     $ 58     $ 58    Total price risk management liabilities $ 55       $ 55       $ 58       $ 58      
                                    
LG&ELG&E                LG&E                 
AssetsAssets                Assets                 
Cash and cash equivalents $ 13  $ 13      $ 22  $ 22     Cash and cash equivalents $ 12  $ 12          $ 22  $ 22         
Restricted cash and cash equivalents (d)  22   22       32   32     Restricted cash and cash equivalents (d)   22   22           32   32         
Price risk management assets:                Price risk management assets:                 
 Interest rate swaps   36     $ 36       7     $ 7     Interest rate swaps                       7       $ 7      
Total price risk management assets   36       36       7       7    Total price risk management assets                       7         7      
Total assetsTotal assets $ 71  $ 35  $ 36     $ 61  $ 54  $ 7    Total assets $ 34  $ 34            $ 61  $ 54  $ 7      
                                     
LiabilitiesLiabilities                Liabilities                 
Price risk management liabilities:                Price risk management liabilities:                 
 Interest rate swaps $ 43     $ 43     $ 58     $ 58     Interest rate swaps $ 48       $ 48       $ 58       $ 58      
Total price risk management liabilitiesTotal price risk management liabilities $ 43     $ 43     $ 58     $ 58    Total price risk management liabilities $ 48       $ 48       $ 58       $ 58      
                  
KU                
Assets                
Cash and cash equivalents $ 10  $ 10      $ 21  $ 21     
Price risk management assets:                
 Interest rate swaps   36     $ 36       7     $ 7    
Total price risk management assets   36       36       7       7    
Total assets $ 46  $ 10  $ 36     $ 28  $ 21  $ 7    

75
     September 30, 2013 December 31, 2012
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
KU                        
Assets                        
 Cash and cash equivalents $ 9  $ 9            $ 21  $ 21           
 Price risk management assets:                        
   Interest rate swaps                       7       $ 7      
 Total price risk management assets                       7         7      
Total assets $ 9  $ 9            $ 28  $ 21  $ 7      
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps $ 7     $ 7                          
Total price risk management liabilities $ 7       $ 7                          

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

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

75

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended September 30, 2013 is as follows:A reconciliation of net assets and liabilities classified as Level 3 for the periods ended September 30, 2013 is as follows:
   Fair Value Measurements Using Significant Unobservable Inputs (Level 3)                  
   Three Months Six Months   Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
   Energy Auction Cross-   Energy Auction Cross-     Three Months Nine Months
   Commodities, Rate Currency   Commodities,  Rate Currency     Energy Auction Cross-   Energy Auction Cross-   
   Commodities, Rate Currency   Commodities,  Rate Currency   
    net Securities Swaps Total  net Securities Swaps Total
PPLPPL                 
Balance at beginning ofBalance at beginning of                
period $ 40  $ 19  $ 3  $ 62  $ 22  $ 16  $ 1  $ 39 
 Total realized/unrealized                 
 gains (losses)                 
 Included in earnings   18           18   23           23 
 Included in OCI (a)           (2)  (2)          1   1 
 Sales                   (2)          (2)
 Settlements   (2)          (2)  1           1 
 Transfers into Level 3   (7)           (7)  1   3   3   7 
 Transfers out of Level 3   (2)        (1)   (3)   2         (5)   (3)
Balance at end of periodBalance at end of period $ 47  $ 19  $    $ 66  $ 47  $ 19  $    $66 
    net Securities Swaps Total  net Securities Swaps Total                   
PPL Energy SupplyPPL Energy Supply                PPL Energy Supply                 
Balance at beginning ofBalance at beginning of                Balance at beginning of                 
period $ 14  $ 13    $ 27  $ 22  $ 13    $ 35 period $ 40  $ 16    $ 56  $ 22  $ 13    $ 35 
 Total realized/unrealized                 Total realized/unrealized                 
 gains (losses)                 gains (losses)                 
 Included in earnings  14       14   6       6  Included in earnings   18         18   23         23 
 Sales  (2)      (2)  (2)      (2) Sales                 (2)        (2)
 Settlements  4       4   3       3  Settlements   (2)        (2)  1         1 
 Transfers into Level 3  6   3     9   7   3     10  Transfers into Level 3   (7)        (7)  1   3     4 
 Transfers out of Level 3   4          4    4          4  Transfers out of Level 3   (2)           (2)   2            2 
Balance at end of periodBalance at end of period $ 40  $ 16     $ 56  $ 40  $ 16     $ 56 Balance at end of period $ 47  $ 16       $ 63  $ 47  $ 16       $ 63 

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

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

76
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Three Months Nine Months
      Energy Auction Cross-    Energy Auction Cross-   
      Commodities, Rate Currency    Commodities,  Rate Currency   
       net Securities Swaps Total  net Securities Swaps Total
PPL                        
Balance at beginning of                        
 period $ 34  $ 15  $ 10  $ 59  $ 13  $ 24  $ 4  $ 41 
  Total realized/unrealized                        
   gains (losses)                        
    Included in earnings   (17)             (17)   (1)        (1)   (2)
    Included in OCI (a)        1    (8)   (7)   1         2    3 
  Sales                          (5)        (5)
  Settlements   2              2    (9)             (9)
  Transfers into Level 3   (2)             (2)   12              12 
  Transfers out of Level 3   8              8    9    (3)   (3)   3 
Balance at end of period $ 25  $ 16  $ 2  $ 43  $ 25  $ 16  $ 2  $ 43 
PPL Energy Supply                        
Balance at beginning of                        
 period $ 34  $ 12     $ 46  $ 13  $ 19     $ 32 
  Total realized/unrealized                        
   gains (losses)                        
    Included in earnings   (17)           (17)   (1)           (1)
    Included in OCI (a)        1       1    1            1 
  Sales                          (3)      (3)
  Settlements   2            2    (9)           (9)
  Transfers into Level 3   (2)           (2)   12            12 
  Transfers out of Level 3   8            8    9    (3)      6 
Balance at end of period $ 25  $ 13       $ 38  $ 25  $ 13       $ 38 

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

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:
76

    JuneSeptember 30, 2013
    Fair Value, net     Range
    Asset Valuation Unobservable (Weighted
    (Liability) Technique Input(s) Average) (a)
PPL            
Energy commodities       
 Retail natural gas sales contracts (b) $ 3635  Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 17%13% - 100% (82%)
Power sales contracts (c) (5)Discounted cash flowProprietary model used to calculate forward basis prices11% - 100% (39%(80%)
   Heat rate call optionoptions (d)   9  Discounted cash flow Proprietary model used to calculate forward pricesImplied correlation, implied volatility, and market implied heat rate 33% - 60% (58%)
FTR purchase contracts (g)  18% (18% 3 Discounted cash flow Historical settled prices used to model forward prices  100% (100%)
           
Auction rate securities (e)   19  Discounted cash flow Modeled from SIFMA Index 11%12% - 78% (63%80% (64%)
Cross-currency swaps (f) 3 Discounted cash flowCredit valuation adjustment 11% (11%)
PPL Energy Supply            
Energy commodities            
 Retail natural gas sales contracts (b) $ 3635  Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 17%13% - 100% (82%)
Power sales contracts (c) (5)Discounted cash flowProprietary model used to calculate forward basis prices11% - 100% (39%(80%)
   Heat rate call optionoptions (d)   9  Discounted cash flow Proprietary modelImplied correlation, implied volatility, and market implied heat rate 33% - 60% (58%)
FTR purchase contracts (g) 3 Discounted cash flow Historical settled prices used to calculatemodel forward prices 18% (18%100% (100%)
           
Auction rate securities (e)   16  Discounted cash flow Modeled from SIFMA Index 11%12% - 78% (62%80% (63%)


77
    December 31, 2012
    Fair Value, net     Range
    Asset Valuation Unobservable (Weighted
    (Liability) Technique Input(s) Average) (a)
PPL            
Energy commodities       
 Retail natural gas sales contracts (b) $ 24  Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 21% - 100% (75%)
   Power sales contracts (c)   (4) Discounted cash flow Proprietary model used to calculate forward basis prices  24% (24%)
 FTR purchase contracts (g)   2  Discounted cash flow Historical settled prices used to model forward prices  100% (100%)
           
Auction rate securities (e)   16  Discounted cash flow Modeled from SIFMA Index 54% - 74% (64%)
           
Cross-currency swaps (f)   1  Discounted cash flow Credit valuation adjustment  22% (22%)
PPL Energy Supply            
Energy commodities            
 Retail natural gas sales contracts (b) $ 24  Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 21% - 100% (75%)
   Power sales contracts (c)   (4) Discounted cash flow Proprietary model used to calculate forward basis prices  24% (24%)
 FTR purchase contracts (g)   2  Discounted cash flow Historical settled prices used to model forward prices 100% (100%)
           
Auction rate securities (e)   13  Discounted cash flow Modeled from SIFMA Index 57% - 74% (65%)

(a)For energy commodities and auction rate securities, the range and weighted average represent the percentage of fair value derived from the unobservable inputs.  For cross-currency swaps, the range and weighted average represent the percentage decrease in fair value due to the unobservable inputs used in the model to calculate the credit valuation adjustment.
(b)At JuneSeptember 30, 2013, retail natural gas sales contracts extend through 2018,2019, and $16$14 million of the fair value is scheduled to deliver within the next 12 months.  As the forward price of natural gas increases/(decreases), the fair value of the contracts (decreases)/increases.
(c)At June 30, 2013, power sales contracts extend into 2018, and $(5) million of the fair value is scheduled to deliver within the next 12 months.  As the forward price of basis increases/(decreases), the fair value of the contracts (decreases)/increases.
(d)At JuneSeptember 30, 2013, the heat rate call option extendsoptions extend through 2014,2020, and $6$1 million of the fair value is scheduled to deliver within the next 12 months.  As the implied correlation in heat rate call options increases/(decreases), the fair value of the heat rate call options  (decreases)/increases, as all implied volatilities in heat rate call options increase/(decrease), the fair value of the heat rate call options increases/(decreases), and as the market implied heat rate increases/(decreases), the fair value of the contractsheat rate call options increases/(decreases).
(e)At JuneSeptember 30, 2013, auction rate securities have a weighted average contractual maturity of 2322 years.  The model used to calculate fair value incorporates an assumption that the auctions will continue to fail.  As the modeled forward rates of the SIFMA Index increase/(decrease), the fair value of the securities increases/(decreases).
(f)At June 30, 2013, cross-currency swaps extend into 2021.  The credit valuation adjustment incorporates projected probabilities of default and estimated recovery rates.  As the credit valuation adjustment increases/(decreases), the fair value of the swaps (decreases)/increases.

77

(g)At September 30, 2013, FTR purchase contracts extend through 2015, and $1 million of the fair value is scheduled to deliver within the next 12 months.  As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases).

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

  Three Months  Three Months
                  Cross-Currency                      
  Energy Commodities, net Swaps  Energy Commodities, net
                      
  Unregulated Retail Wholesale Energy Net Energy Energy    Unregulated Wholesale      
  Electric and Gas Marketing Trading Margins Purchases Interest Expense  Retail Energy Net Energy   Energy
  2013  2012  2013  2012  2013  2012  2013  2012  2013  2012   Electric and Gas Marketing Trading Margins Fuel Purchases
PPL                
  2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
PPL and PPL Energy SupplyPPL and PPL Energy Supply                
                    
Total gains (losses) included in earningsTotal gains (losses) included in earnings $ 22  $ 2  $ (5) $ (6) $ (2) $ 1  $ (1) $ 1    $ (1)Total gains (losses) included in earnings $ 3  $ (3) $ (8) $ (4) $ 11  $ (8) $ 3       $ 9  $ (2)
Change in unrealized gains (losses) relatingChange in unrealized gains (losses) relating                    Change in unrealized gains (losses) relating                         
to positions still held at the reporting date  22   49     (12)  (7)  1   1   1     to positions still held at the reporting date  3    (2)       (1)  17    2                   
                     
PPL Energy Supply                    
Total gains (losses) included in earnings $ 22  $ 2  $ (5) $ (6) $ (2) $ 1  $ (1) $ 1     
Change in unrealized gains (losses) relating                    
to positions still held at the reporting date  22   49     (12)  (7)  1   1   1     


78
   Six Months
                           Cross-Currency
   Energy Commodities, net Swaps
               
   Unregulated Retail Wholesale Energy Net Energy Energy  
   Electric and Gas Marketing Trading Margins Purchases Interest Expense
   2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
PPL                           
Total gains (losses) included in earnings $ 15  $ 18  $ (7) $ (2) $ (2)             $ (1)
Change in unrealized gains (losses) relating                              
 to positions still held at the reporting date   17    39    (2)   (13)   (7) $ 1  $ 2  $ 1       
                                
PPL Energy Supply                              
Total gains (losses) included in earnings $ 15  $ 18  $ (7) $ (2) $ (2)               
Change in unrealized gains (losses) relating                              
 to positions still held at the reporting date   17    39    (2)   (13)   (7) $ 1  $ 2  $ 1       
                                
   Nine Months
                                 Cross-Currency
   Energy Commodities, net Swaps
              
   Unregulated Wholesale                        
   Retail Energy Net Energy   Energy  
   Electric and Gas Marketing Trading Margins Fuel Purchases Interest Expense
   2013  2012  2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
PPL                                 
Total gains (losses) included                                    
 in earnings $ 18  $ 16  $ (15) $ (7) $ 8  $ (9) $ 3       $ 9  $ (1)      $ (1)
Change in unrealized gains                                    
 (losses) relating to positions                                    
 still held at the reporting date   18    29    (1)        8    2              5    1           
                                      
PPL Energy Supply                                    
Total gains (losses) included                                    
 in earnings $ 18  $ 16  $ (15) $ (7) $ 8  $ (9) $ 3       $ 9  $ (1)      
Change in unrealized gains                                    
 (losses) relating to positions                                    
 still held at the reporting date   18    29    (1)        8    2              5    1       
                                      

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

Energy commodity contracts for electricity, gas, oil and/or emission allowances are generally valued using the income approach, except for exchange-traded derivative gas and oil contracts, which are valued using the market approach and are classified as Level 1.  When 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.available, implied volatilities, implied correlations, and market implied heat rates.  Forward transactions, including forward transactions classified as Level 3, are analyzed by PPL's Risk Management department, which reports to the Chief Financial Officer (CFO).  Accounting personnel, who also report to the CFO, interpret the analysis quarterly to appropriately classify the forward transactions in the fair value hierarchy.  Valuation techniques are evaluated periodically.  Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on PPL's own creditworthiness (for net liabilities) and its counterparties' creditworthiness (for net assets).  PPL's credit department assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment.

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In certain instances, energy commodity contracts are transferred between Level 2 and Level 3.  The primary reasons for the transfers during 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.

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

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)

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GBP), 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 FinanceTreasury department, which reports to the CFO.  Accounting personnel, who also report to the CFO, interpret analysis quarterly to appropriately classify the contracts in the fair value hierarchy.  Valuation techniques are evaluated periodically.

(PPL and PPL Energy Supply)

NDT Funds

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

·The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets and are comprised of securities that are representative of the Wilshire 5000 Total Market Index.

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

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

The debt securities held in the NDT funds at JuneSeptember 30, 2013 have a weighted-average coupon of 3.99%3.94% and a weighted-average maturity of 7.8 years.

Auction Rate Securities

Auction rate securities include Federal Family Education Loan Program guaranteed student loan revenue bonds, as well as various municipal bond issues.  The exposure to realizeprobability of realizing 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.

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

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

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.


   June 30, 2013 December 31, 2012
   Carrying    Carrying   
   Amount Fair Value Amount Fair Value
PPL            
 Contract adjustment payments (a) $ 56  $ 57  $ 105  $ 106 
 Long-term debt   19,626    21,413    19,476    21,671 
PPL Energy Supply            
 Long-term debt   3,263    3,462    3,272    3,556 
PPL Electric            
 Long-term debt   1,967    2,168    1,967    2,333 
LKE            
 Long-term debt   4,075    4,231    4,075    4,423 
LG&E            
 Long-term debt   1,112    1,136    1,112    1,178 
KU            
 Long-term debt   1,842    1,938    1,842    2,056 
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   September 30, 2013 December 31, 2012
   Carrying    Carrying   
   Amount Fair Value Amount Fair Value
PPL            
 Contract adjustment payments (a) $ 32  $ 32  $ 105  $ 106 
 Long-term debt   19,843    21,537    19,476    21,671 
PPL Energy Supply            
 Long-term debt   2,962    3,127    3,272    3,556 
PPL Electric            
 Long-term debt   2,315    2,505    1,967    2,333 
LKE            
 Long-term debt   4,076    4,222    4,075    4,423 
LG&E            
 Long-term debt   1,112    1,137    1,112    1,178 
KU            
 Long-term debt   1,843    1,940    1,842    2,056 

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

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

Credit Concentration Associated with Financial Instruments

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

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

(PPL)

At JuneSeptember 30, 2013, PPL had credit exposure of $1.3$1.1 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 $669$541 million.  The top ten counterparties including their affiliates accounted for $339$292 million, or 51%54%, of this exposure and allexposure.  Nine of these counterparties had an investment grade credit ratingsrating from S&P or Moody's.Moody's and accounted for 95% of the top ten exposure.  The remaining counterparty has not been rated by S&P or Moody's, but is current on its obligations.

(PPL Energy Supply)

At JuneSeptember 30, 2013, PPL Energy Supply had credit exposure of $1.3$1.1 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 $667$540 million.  The top ten counterparties including their affiliates accounted for $339$292 million, or 51%54%, of this exposure and allexposure.   Nine of these counterparties had an investment grade credit ratingsrating from S&P or Moody's.Moody's and accounted for 95% of the top ten exposure.  The remaining counterparty has not been rated by S&P or Moody's, but is current on its obligations.  See Note 11 for information regarding the related party credit exposure.

(PPL Electric)

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.

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(LKE, LG&E and KU)Kentucky Registrants)

At JuneSeptember 30, 2013, LKE's, LG&E's and KU's credit exposure was not significant.


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14.  Derivative Instruments and Hedging Activities

Risk Management Objectives

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

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

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.Subsidiary Registrants.

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

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

Commodity price and volumetric risks

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

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

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

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


 
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Interest rate risk

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

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

Equity securities price risk

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

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

Foreign currency risk

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

Credit Risk

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

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 PPL.  LKE and LG&E are also exposed to credit risk from interest rate derivatives with third-party financial institutions.

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

Master Netting Arrangements

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


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PPL's and PPL Energy Supply's obligation to return counterparty cash collateral under master netting arrangements was $31$14 million and $112 million at JuneSeptember 30, 2013 and December 31, 2012.

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

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

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

(PPL and PPL Energy Supply)

Commodity Price Risk (Non-trading)

Commodity price risk, including basis and volumetric risk, is among PPL's and PPL Energy Supply's most significant risks due to the level of investment that PPL and PPL Energy Supply maintain in their competitive generation assets, as well as the extent of their marketing 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.

Cash Flow Hedges

Certain derivative contracts have qualified for hedge accounting so that the effective portion of a derivative's gain or loss is deferred in AOCI and reclassified into earnings when the forecasted transaction occurs.  Certain cash flow hedge positions were dedesignated during the sixnine months ended JuneSeptember 30, 2013 and 2012 and the unamortized portion remained in AOCI because the original forecasted transaction is still expected to occur.  There were no active cash flow hedges at JuneSeptember 30, 2013.  At JuneSeptember 30, 2013, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $71$47 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 sixnine months ended JuneSeptember 30, 2013 and 2012, such reclassifications were insignificant.

For the three and sixnine months ended JuneSeptember 30, 2013 and 2012, hedge ineffectiveness associated with energy derivatives was insignificant.

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Economic Activity

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

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hedge accounting was not elected.  These derivatives hedge a portion of the economic value of PPL Energy Supply's competitive generation assets and unregulated full-requirement and retail contracts, which are subject to changes in fair value due to market price volatility and volume expectations.  Additionally, economic activity 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 JuneSeptember 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 which the generating unit would be dispatched and therefore does not expose PPL Energy Supply to uncovered market price risk.

Commodity Price Risk (Trading)

PPL Energy Supply 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 shown in "Net energy trading margins" on the Statements of Income is not a significant part of PPL Energy Supply's business.

Commodity Volumes

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

   Volume (a)   Volume (a)
Commodity Unit of Measure 2013 (b) 2014  2015  Thereafter Unit of Measure 2013 (b) 2014  2015  Thereafter
                    
Power MWh  (20,132,552)  (28,846,530)  (4,693,573)  1,575,123  MWh  (9,950,950)  (28,280,182)  (4,110,530)  10,991,752 
Capacity MW-Month  (10,339)  (9,075)  (1,453)  490  MW-Month  (5,114)  (14,418)  (309)  1,990 
Gas MMBtu  27,768,152   (2,395,839)  (4,919,285)  (8,210,551) MMBtu  12,653,279   18,794,545   (3,852,725)  5,320,453 
Coal Tons      (30,000)    
FTRs MW-Month  8,807   8,519   1,465    MW-Month  5,056   8,724   1,465   
Oil Barrels  (148,614)  300,000   392,331   378,315  Barrels  (15,335)  300,000   384,334   371,466 

(a)Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.
(b)Represents balance of the current year.

Interest Rate Risk

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

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.

Cash Flow Hedges

(PPL)

Interest rate risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financings.  Financial interest rate swap contracts that qualify as cash flow hedges may be entered into to hedge floating interest rate risk associated with both existing and anticipated debt issuances.  At JuneSeptember 30, 2013, outstanding interest rate swap contracts range in maturity through 2024 for WPD and through 2044 for PPL's domestic interest rate swaps.  These swaps had an aggregate notional value of $1.9$2.3 billion at JuneSeptember 30, 2013 of which £300 million (approximately $455
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(approximately $464 million based on spot rates) was related to WPD.  Also included in this total are forward-starting interest rate swaps entered into by PPL on behalf of LG&E and KU.  Realized gains and losses from these swaps are probable of recovery through regulated rates; as such, the fair value of these derivatives have been reclassified from AOCI to regulatory assets or liabilities.  The gains and losses will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt when the hedged transaction occurs.

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At JuneSeptember 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2013 and 2012.

At JuneSeptember 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 $(12)$(11) million.  Amounts are reclassified as the hedged interest payments are made.

(LKE, LG&E and KU)Kentucky Registrants)

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 instrumentsIn September 2013, these hedges were terminated and LG&E and KU entered into new forward-starting interest rate swaps with PPL, effectively extending the start date of the prior hedges from September 2013 to December 2013.  Both the terminated swaps and the swaps entered into in September have terms identical to forward-starting swaps entered into by PPL with third parties.  A cash settlement of $98 million (LG&E and KU each received $49 million) was received on the terminated swaps, which is included in "Cash Flows from Operating Activities" on the Statements of Cash Flows.  Realized gains and losses from theon all of these swaps are probable of recovery through regulated rates; as such, the September settlements and the fair value of thesethe new derivatives were reclassified from AOCI to regulatory assets or liabilities.  The gainsliabilities and losses willare expected to 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 sixnine months ended JuneSeptember 30, 2013, there was no hedge ineffectiveness associated withrecorded for the interest rate derivatives.  At JuneSeptember 30, 2013, LGthe total notional amount outstanding was $500 million (LG&E and KU each held contracts with aggregate notional amounts of $250 millionmillion) that rangematures in maturity through 2043.

Economic Activity (PPL, LKE and LG&E)

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

Foreign Currency Risk (PPL)

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including 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.

Net Investment Hedges

PPL enters into foreign currency contracts on behalf of a subsidiary to protect the value of a portion of its net investment in WPD.  The contracts outstanding at JuneSeptember 30, 2013 had a notional amount of £166£320 million (approximately $263$505 million based on contracted rates).  The settlement dates of these contracts range from November 2013 through June 2014.2015.
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Additionally, a PPL Global subsidiary that has a U.S. dollar functional currency entered into GBP intercompany loans payable with PPL WEM subsidiaries that have GBP functional currency.  The loans qualify as a net investment hedge for the PPL Global subsidiary.  As such, the foreign currency gains and losses on the intercompany loans for the PPL Global subsidiary are recorded to the foreign currency translation adjustment component of OCI.  At JuneSeptember 30, 2013, the outstanding balances of the intercompany loans were £94£77 million (approximately $142$119 million based on spot rates).  For the three and sixnine months ended JuneSeptember 30, 2013, PPL recognized after-tax net investment hedge gains (losses) on the intercompany loans of $2$(9) million and $6$(3) million in the foreign currency translation adjustment component of OCI.  Such amounts for the three and sixnine months ended JuneSeptember 30, 2012 were not significant.

At JuneSeptember 30, 2013, PPL had $29$5 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.

85


Economic Activity

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings.  At JuneSeptember 30, 2013, the total exposure hedged by PPL was approximately £1.2£1.3 billion (approximately $1.9$2.1 billion based on contracted rates).  These contracts had termination dates ranging from JulyOctober 2013 through JuneOctober 2015.

Accounting and Reporting

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

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 JuneSeptember 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.

(PPL)

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

     June 30, 2013 December 31, 2012     September 30, 2013 December 31, 2012
     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
     hedging instruments as hedging instruments (a) hedging instruments as hedging instruments (a)     hedging instruments as hedging instruments (a) hedging instruments as hedging instruments (a)
     Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities     Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:Current:                Current:                    
Price Risk Management                Price Risk Management                   
 Assets/Liabilities (b):                 Assets/Liabilities (b):                   
 Interest rate swaps (c) $ 130  $ 3    $ 4  $ 14  $ 22    $ 5  Interest rate swaps (c) $ 83  $ 16      $ 4  $ 14  $ 22      $ 5 
 Cross-currency swaps  1   1         3      Cross-currency swaps  1   1              3        
 Foreign currency                 Foreign currency                           
  contracts  11    $ 46       2     23   contracts     5  $    24       2       23 
 Commodity contracts         1,146    879    59     $ 1,452    1,010  Commodity contracts           961    773    59      $ 1,452    1,010 
   Total current   142    4    1,192    883    73    27    1,452    1,038    Total current   84    22    961    801    73    27    1,452    1,038 
Noncurrent:Noncurrent:                Noncurrent:                   
Price Risk Management                Price Risk Management                   
 Assets/Liabilities (b):                 Assets/Liabilities (b):                   
 Interest rate swaps (c)  2       39   1       53  Interest rate swaps (c)  3   1       37    1          53 
 Cross-currency swaps  61         14   1      Cross-currency swaps  27              14   1        
 Foreign currency                 Foreign currency                           
  contracts      28   3         19   contracts     6    1   32              19 
 Commodity contracts         508    472    27       530    556  Commodity contracts           519    462    27        530    556 
   Total noncurrent   63       536    514    42    1    530    628    Total noncurrent   30    7    520    531    42    1    530    628 
Total derivativesTotal derivatives $ 205  $ 4  $ 1,728  $ 1,397  $ 115  $ 28  $ 1,982  $ 1,666 Total derivatives $ 114  $ 29  $ 1,481  $ 1,332  $ 115  $ 28  $ 1,982  $ 1,666 

(a)$264216 million and $300 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at JuneSeptember 30, 2013 and December 31, 2012.

87
(b)Represents the location on the Balance Sheets.
(c)Excludes accrued interest, if applicable.

86
The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $102$87 million and $132 million at JuneSeptember 30, 2013 and December 31, 2012.  The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $333$231 million and $527 million at JuneSeptember 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 periods ended JuneSeptember 30, 2013.

         Three Months Six Months         Three Months Nine Months
           Gain (Loss)   Gain (Loss)           Gain (Loss)    Gain (Loss)
           Recognized   Recognized           Recognized   Recognized
           in Income   in Income           in Income    in Income
         on Derivative Gain (Loss) on Derivative         on Derivative Gain (Loss) on Derivative
       Gain (Loss) (Ineffective Reclassified (Ineffective       Gain (Loss) (Ineffective Reclassified (Ineffective
     Location of Reclassified Portion and from AOCI Portion and     Location of Reclassified Portion and from AOCI Portion and
   Derivative Gain Gain (Loss) from AOCI Amount into Amount   Derivative Gain Gain (Loss) from AOCI Amount into Amount
   (Loss) Recognized in Recognized into Income Excluded from Income Excluded from   (Loss) Recognized in Recognized into Income Excluded from Income Excluded from
DerivativeDerivative  OCI (Effective Portion) in Income (Effective Effectiveness (Effective EffectivenessDerivative  OCI (Effective Portion)  in Income (Effective Effectiveness (Effective Effectiveness
RelationshipsRelationships Three Months Six Months on Derivative Portion) Testing) Portion) Testing)Relationships Three Months Nine Months on Derivative Portion) Testing) Portion) Testing)
Cash Flow Hedges:Cash Flow Hedges:              Cash Flow Hedges:                 
Interest rate swaps $ 68  $ 77  Interest expense $ (4)   $ (9)  Interest rate swaps $ 25  $ 102  Interest expense $ (5)     $ (14)    
Cross-currency swaps  (21)  52  Interest expense  1     1   Cross-currency swaps   (36)   16  Interest expense   (1)            
        Other income                Other income         
       (expense) - net  1     70            (expense) - net   (25)      45     
Commodity contracts     Wholesale energy        Commodity contracts           Wholesale energy         
       marketing  73     140  $ 1        marketing   58       198  $ 1 
       Depreciation  1     1            Depreciation   1       2     
         Energy purchases   (14)     (30)            Energy purchases   (11)        (41)     
TotalTotal $ 47  $ 129    $ 58     $ 173  $ 1 Total $ (11) $ 118    $ 17       $ 190  $ 1 
                                    
Net Investment Hedges:Net Investment Hedges:              Net Investment Hedges:                 
 Foreign currency contracts $ 1  $ 17            Foreign currency contracts $ (22) $ (5)           

Derivatives Not Designated as Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Hedging Instruments  Income on Derivative Three Months Six Months  Income on Derivative Three Months Nine Months
              
Foreign currency contracts Other income (expense) - net $ 4  $ 123  Other income (expense) - net $ (117) $ 6 
Interest rate swaps Interest expense  (2)  (4) Interest expense   (2)   (6)
Commodity contracts Unregulated retail electric and gas  22   15  Unregulated retail electric and gas  3   18 
 Wholesale energy marketing  739   40  Wholesale energy marketing   104    144 
 Net energy trading margins (a)  1   (6) Net energy trading margins (a)   14    8 
 Fuel  (3)  (2) Fuel   4    2 
 Energy purchases   (599)   (13) Energy purchases   (86)   (99)
 Total $ 162  $ 153  Total $ (80) $ 73 
      
Derivatives Not Designated as Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Six Months
      
Interest rate swaps Regulatory assets - noncurrent $ 11  $ 15 
      
Derivatives Designated as Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Six Months
      
Interest rate swaps Regulatory liabilities - noncurrent $ 48  $ 58 
Derivatives Not Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments Regulatory Liabilities/Assets Three Months Nine Months
         
Interest rate swaps Regulatory assets - noncurrent $ 2  $ 18 
         
Derivatives Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments Regulatory Liabilities/Assets Three Months Nine Months
         
Interest rate swaps Regulatory liabilities - noncurrent $ 12  $ 70 

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

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

Derivatives in Hedged Items in  Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized
Fair Value Hedging Fair Value Hedging  (Loss) Recognized in in Income on Derivative in Income on Related Item
Relationships Relationships  Income on Derivative Three Months Nine Months Three Months Nine Months
                  
Interest rate swaps Fixed rate debt Interest expense $ (1)      $ 1  $ 3 
 
8788
 
Derivatives in Hedged Items in  Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized
Fair Value Hedging Fair Value Hedging  (Loss) Recognized in in Income on Derivative in Income on Related Item
Relationships Relationships  Income on Derivative Three Months Six Months Three Months Six Months
                  
Interest rate swaps Fixed rate debt Interest expense $ 1  $ 1  $ 1  $ 2 
              Three Months Nine Months
                 Gain (Loss)    Gain (Loss)
                 Recognized    Recognized
                 in Income    in Income
              on Derivative Gain (Loss) on Derivative
           Gain (Loss) (Ineffective Reclassified (Ineffective
        Location of Reclassified Portion and from AOCI Portion and
     Derivative Gain Gain (Loss) from AOCI Amount into Amount
     (Loss) Recognized in Recognized into Income Excluded from Income Excluded from
Derivative  OCI (Effective Portion)  in Income (Effective Effectiveness (Effective Effectiveness
Relationships Three Months Nine Months on Derivative Portion) Testing) Portion) Testing)
Cash Flow Hedges:                    
 Interest rate swaps $ (6) $ (28) Interest expense $ (4)      $ (13)     
           Other income              
            (expense) - net   1         1      
 Cross-currency swaps   (49)   (3) Interest expense             (1)     
           Other income            
            (expense) - net   (40)        (12)     
 Commodity contracts        99  Wholesale energy            
            marketing   174         673  $ (1)
           Depreciation   1         2      
           Energy purchases   (20) $ 1    (105)   (2)
Total $ (55) $ 68     $ 112  $ 1  $ 545  $ (3)
                         
Net Investment Hedges:                     
  Foreign currency contracts $ (4) $ (5)               


Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments  Income on Derivative Three Months Nine Months
         
Foreign currency contracts Other income (expense) - net $ (47) $ (40)
Interest rate swaps Interest expense   (2)   (4)
Commodity contracts Unregulated retail electric and gas   (3)   20 
  Wholesale energy marketing   (476)   900 
  Net energy trading margins (a)   (10)   12 
  Fuel   6      
  Energy purchases   364    (717)
  Total $ (168) $ 171 

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

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

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

(PPL Energy Supply)

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

     June 30, 2013 December 31, 2012     September 30, 2013 December 31, 2012
     Derivatives not designated Derivatives designated as Derivatives not designated     Derivatives not designated Derivatives designated as Derivatives not designated
     as hedging instruments (a) hedging instruments as hedging instruments (a)     as hedging instruments (a) hedging instruments as hedging instruments (a)
     Assets Liabilities Assets Liabilities Assets Liabilities     Assets Liabilities Assets Liabilities Assets Liabilities
Current:Current:            Current:               
Price Risk Management            Price Risk Management               
 Assets/Liabilities (b):             Assets/Liabilities (b):               
 Commodity contracts $ 1,146  $ 879  $ 59     $ 1,452  $ 1,010  Commodity contracts $ 961  $ 773  $ 59       $ 1,452  $ 1,010 
   Total current   1,146    879    59       1,452    1,010    Total current   961    773    59         1,452    1,010 
Noncurrent:Noncurrent:            Noncurrent:               
Price Risk Management            Price Risk Management               
 Assets/Liabilities (b):             Assets/Liabilities (b):               
 Commodity contracts   508    472    27       530    556  Commodity contracts   519    462    27         530    556 
   Total noncurrent   508    472    27       530    556    Total noncurrent   519    462    27         530    556 
Total derivativesTotal derivatives $ 1,654  $ 1,351  $ 86     $ 1,982  $ 1,566 Total derivatives $ 1,480  $ 1,235  $ 86       $ 1,982  $ 1,566 

(a)$264216 million and $300 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at JuneSeptember 30, 2013 and December 31, 2012.
(b)Represents the location on the Balance Sheets.

 
8889
 

The after-tax balances of accumulated net gains (losses) in AOCI were $144$115 million and $211 million at JuneSeptember 30, 2013 and December 31, 2012.  The after-tax balances of accumulated net gains (losses) in AOCI were $405$312 million and $605 million at JuneSeptember 30, 2012 and December 31, 2011.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended JuneSeptember 30, 2013.

         Three Months Six Months         Three Months Nine Months
           Gain (Loss)   Gain (Loss)           Gain (Loss)   Gain (Loss)
           Recognized   Recognized           Recognized   Recognized
           in Income   in Income            in Income    in Income
           on Derivative   on Derivative            on Derivative    on Derivative
       Gain (Loss) (Ineffective Gain (Loss) (Ineffective        Gain (Loss) (Ineffective Gain (Loss) (Ineffective
     Location of Reclassified Portion and Reclassified Portion and      Location of Reclassified Portion and Reclassified Portion and
   Derivative Gain Gains (Losses) from AOCI Amount from AOCI Amount   Derivative Gain Gains (Losses) from AOCI Amount from AOCI Amount
   (Loss) Recognized in Recognized into Income Excluded from into Income Excluded from   (Loss) Recognized in Recognized into Income Excluded from into Income Excluded from
DerivativeDerivative OCI (Effective Portion) in Income(Effective Effectiveness (Effective EffectivenessDerivative OCI (Effective Portion)  in Income(Effective Effectiveness (Effective Effectiveness
RelationshipsRelationships Three Months Six Months on Derivative  Portion)  Testing) Portion) Testing)Relationships Three Months Nine Months on Derivative  Portion)  Testing) Portion) Testing)
Cash Flow Hedges:Cash Flow Hedges:              Cash Flow Hedges:                 
Commodity contracts      Wholesale energy        Commodity contracts       Wholesale energy         
        marketing $ 73    $ 140  $ 1              marketing $ 58      $ 198  $ 1 
       Depreciation  1     1            Depreciation   1       2     
         Energy purchases   (14)      (30)            Energy purchases   (11)        (41)     
TotalTotal         $ 60     $ 111  $ 1 Total             $ 48       $ 159  $ 1 
                                    

Derivatives Not Designated as Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Hedging Instrument  Income on Derivative Three Months Six Months  Income on Derivative Three Months Nine Months
              
Commodity contracts Unregulated retail electric and gas $ 22  $ 15  Unregulated retail electric and gas $ 3  $ 18 
 Wholesale energy marketing  739   40  Wholesale energy marketing   104    144 
 Net energy trading margins (a)  1   (6) Net energy trading margins (a)   14    8 
 Fuel  (3)  (2) Fuel   4    2 
 Energy purchases   (599)   (13) Energy purchases   (86)   (99)
 Total $ 160  $ 34  Total $ 39  $ 73 

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

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

         Three Months Six Months         Three Months Nine Months
           Gain (Loss)   Gain (Loss)           Gain (Loss)   Gain (Loss)
           Recognized   Recognized           Recognized   Recognized
           in Income   in Income            in Income    in Income
           on Derivative   on Derivative            on Derivative    on Derivative
       Gain (Loss) (Ineffective Gain (Loss) (Ineffective        Gain (Loss) (Ineffective Gain (Loss) (Ineffective
     Location of Reclassified Portion and Reclassified Portion and      Location of Reclassified Portion and Reclassified Portion and
   Derivative Gain Gains (Losses) from AOCI Amount from AOCI Amount   Derivative Gain Gains (Losses) from AOCI Amount from AOCI Amount
   (Loss) Recognized in Recognized into Income Excluded from into Income Excluded from   (Loss) Recognized in Recognized into Income Excluded from into Income Excluded from
DerivativeDerivative OCI (Effective Portion) in Income(Effective Effectiveness (Effective EffectivenessDerivative OCI (Effective Portion)  in Income(Effective Effectiveness (Effective Effectiveness
RelationshipsRelationships Three Months Six Months on Derivative  Portion)  Testing) Portion) Testing)Relationships Three Months Nine Months on Derivative  Portion)  Testing) Portion) Testing)
Cash Flow Hedges:Cash Flow Hedges:              Cash Flow Hedges:                 
        Wholesale energy                 Wholesale energy         
 Commodity contracts $ (14) $ 99  marketing $ 227  $ (5) $ 499  $ (1) Commodity contracts      $ 99  marketing $ 174      $ 673  $ (1)
       Depreciation  1      1            Depreciation           1     
         Energy purchases   (45)   1    (85)   (3)         Energy purchases   (20) $ 1    (105)   (2)
TotalTotal $ (14) $ 99    $ 183  $ (4) $ 415  $ (4)Total      $ 99    $ 154  $ 1  $ 569  $ (3)

Derivatives Not Designated as Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Hedging Instruments  Income on Derivative Three Months Six Months  Income on Derivative Three Months Nine Months
              
Commodity contracts Unregulated retail electric and gas $ 1  $ 23  Unregulated retail electric and gas $ (3) $ 20 
 Wholesale energy marketing  33   1,376  Wholesale energy marketing   (476)   900 
 Net energy trading margins (a)  13   22  Net energy trading margins (a)   (10)   12 
 Fuel  (12)  (6) Fuel   6      
 Energy purchases   (11)   (1,081) Energy purchases   364    (717)
 Total $ 24  $ 334  Total $ (119) $ 215 


 
8990
 


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

(LKE)

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

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

(a)Represents the location on the Balance Sheets.

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

Derivative Instruments Location of Gain (Loss) Three Months Six Months Location of Gain (Loss) Three Months Nine Months
             
Interest rate swaps Regulatory liabilities - noncurrent $ 48  $ 58  Regulatory liabilities - noncurrent $ 12  $ 70 

(LG&E)

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

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

(a)Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended JuneSeptember 30, 2013.
Derivative Instruments Location of Gain (Loss) Three Months Six Months Location of Gain (Loss) Three Months Nine Months
             
Interest rate swaps Regulatory liabilities - noncurrent $ 24  $ 29  Regulatory liabilities - noncurrent $ 6  $ 35 

(KU)

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

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

(a)Represents the location on the Balance Sheets.

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

 
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Derivative Instruments Location of Gain (Loss) Three Months Six Months Location of Gain (Loss) Three Months Nine Months
             
Interest rate swaps Regulatory liabilities - noncurrent $ 24  $ 29  Regulatory liabilities - noncurrent $ 6  $ 35 

(LKE and LG&E)

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

     June 30, 2013 December 31, 2012      September 30, 2013 December 31, 2012 
     Assets Liabilities Assets Liabilities      Assets Liabilities  Assets Liabilities 
Current:Current:         Current:           
Price Risk Management         Price Risk Management          
 Assets/Liabilities (a):          Assets/Liabilities (a):          
 Interest rate swaps    $ 4     $ 5   Interest rate swaps     $ 4      $ 5  
   Total current      4       5     Total current       4        5  
Noncurrent:Noncurrent:         Noncurrent:          
Price Risk Management         Price Risk Management          
 Assets/Liabilities (a):          Assets/Liabilities (a):          
 Interest rate swaps    39     53   Interest rate swaps     37       53  
   Total noncurrent      39       53     Total noncurrent       37        53  
Total derivativesTotal derivatives    $ 43     $ 58  Total derivatives     $ 41      $ 58  

(a)Represents the location on the Balance Sheets.

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

 Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Six Months Income on Derivatives Three Months Nine Months
             
Interest rate swaps Interest expense $ (2) $ (4) Interest expense $ (2) $ (6)
      
 Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Six Months
      
Interest rate swaps Regulatory assets - noncurrent $ 11  $ 15 
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Nine Months
         
Interest rate swaps Regulatory assets - noncurrent (a) $ 2  $ 18 

(a)Includes both realized and unrealized gains (losses).

The following tables present the pre-tax effect of derivatives not designated as hedging instruments recognized in income or regulatory assets for the periods ended JuneSeptember 30, 2012.

 Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Six Months Income on Derivatives Three Months Nine Months
               
Interest rate swaps Interest expense $ (2) $ (4) Interest expense $ (2) $ (6)
       
 Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Six Months
       
Interest rate swaps Regulatory assets - noncurrent $ (9) $ (3)
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Nine Months
         
Interest rate swaps Regulatory assets - noncurrent (a) $ 1  $ (2)

(a)Includes both realized and unrealized gains (losses).

(All Registrants except PPL Electric)

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

PPL, PPL Energy Supply, LKE, LG&E and 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 registrantsPPL, PPL Energy Supply, LKE, LG&E and KU and their subsidiaries also enter into agreements pursuant to which they trade certain
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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.

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

   Assets Liabilities   Assets Liabilities
     Eligible for Offset     Eligible for Offset       Eligible for Offset      Eligible for Offset  
       Cash       Cash         Cash        Cash  
      Derivative Collateral       Derivative Collateral         Derivative Collateral      Derivative Collateral  
   Gross Instruments Received Net Gross Instruments Pledged Net   Gross Instruments Received Net Gross Instruments Pledged Net
June 30, 2013                
September 30, 2013September 30, 2013                 
PPLPPL                PPL                 
Energy Commodities $ 1,654  $ 1,221  $ 29  $ 404  $ 1,351  $ 1,221  $ 12  $ 118 Energy Commodities $ 1,480  $ 1,122  $ 14  $ 344  $ 1,235  $ 1,122      $ 113 
Treasury Derivatives  279   4     275   50   4   22   24 Treasury Derivatives   115    47         68    126    47  $ 22    57 
TotalTotal $ 1,933  $ 1,225  $ 29  $ 679  $ 1,401  $ 1,225  $ 34  $ 142 Total $ 1,595  $ 1,169  $ 14  $ 412  $ 1,361  $ 1,169  $ 22  $ 170 
                                     
PPL Energy SupplyPPL Energy Supply                PPL Energy Supply                 
Energy Commodities $ 1,654  $ 1,221  $ 29  $ 404  $ 1,351  $ 1,221  $ 12  $ 118 Energy Commodities $ 1,480  $ 1,122  $ 14  $ 344  $ 1,235  $ 1,122       $ 113 

LKELKE                LKE                 
Treasury Derivatives $ 72        $ 72  $ 43     $ 22  $ 21 Treasury Derivatives                   $ 55       $ 22  $ 33 
                                     
LG&ELG&E                LG&E                 
Treasury Derivatives $ 36        $ 36  $ 43     $ 22  $ 21 Treasury Derivatives                   $ 48       $ 22  $ 26 
                                     
KUKU                KU                 
Treasury Derivatives $ 36        $ 36             Treasury Derivatives                   $ 7          $ 7 

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

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

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

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 and 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
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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.

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At JuneSeptember 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:

     PPL          PPL    
   PPL Energy Supply LKE LG&E   PPL Energy Supply LKE LG&E
                    
Aggregate fair value of derivative instruments in a net liabilityAggregate fair value of derivative instruments in a net liability        Aggregate fair value of derivative instruments in a net liability        
position with credit risk-related contingent features $ 148  $ 118  $ 30  $ 30 position with credit risk-related contingent features $ 178  $  115  $  29  $  29 
Aggregate fair value of collateral posted on these derivative instrumentsAggregate fair value of collateral posted on these derivative instruments  22     22   22 Aggregate fair value of collateral posted on these derivative instruments  39   17   22   22 
Aggregate fair value of additional collateral requirements in the event ofAggregate fair value of additional collateral requirements in the event of        Aggregate fair value of additional collateral requirements in the event of            
a credit downgrade below investment grade (a)  144  136   8  8 a credit downgrade below investment grade (a)  167  127   7  7 

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

15.  Goodwill

(PPL)

The change in the carrying amount of goodwill for the sixnine months ended JuneSeptember 30, 2013 was due to the effect of foreign currency exchange rates on the U.K. Regulated segment.

16. Asset Retirement Obligations
16. Asset Retirement Obligations
          
16. Asset Retirement Obligations
          
                        
(PPL, PPL Energy Supply, LKE, LG&E and KU)         
(All Registrants except PPL Electric)(All Registrants except PPL Electric)         
                        
The changes in the carrying amounts of AROs were as follows.The changes in the carrying amounts of AROs were as follows.      The changes in the carrying amounts of AROs were as follows.      
                        
     PPL           PPL      
   PPL Energy Supply LKE LG&E KU   PPL Energy Supply LKE LG&E KU
                          
Balance at December 31, 2012Balance at December 31, 2012 $ 552  $ 375  $ 131  $ 62  $ 69 Balance at December 31, 2012 $ 552  $ 375  $ 131  $ 62  $ 69 
Accretion expense  18   14   3   1   2 Accretion expense  27   22    4    2    2 
Changes in estimated cash flow or settlement date    (1)  1   1   Obligations incurred  6   6                
Effect of foreign currency exchange rates  (3)        Changes in estimated cash flow or settlement date  123   1    122    17    105 
Obligations settled   (6)   (3)   (3)   (3)   Effect of foreign currency exchange rates  (2)                   
Balance at June 30, 2013 $ 561  $ 385  $ 132  $ 61  $ 71 
Obligations settled   (12)   (6)   (6)   (6)     
Balance at September 30, 2013Balance at September 30, 2013 $ 694  $ 398  $ 251  $ 75  $ 176 

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

(PPL, LKE, LG&E and KU)

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

(PPL and PPL Energy Supply)

The most significant ARO recorded by PPL and PPL Energy Supply relates to the decommissioning of the Susquehanna nuclear plant.  The accrued nuclear decommissioning obligation was $329$335 million and $316 million at JuneSeptember 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 $771$804 million and $712 million at JuneSeptember 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.

(PPL and Kentucky Registrants)

Accretion and depreciation expense recorded by LG&E and KU is reversed on the income statement and recorded as a regulatory asset, such that there is no net earnings impact.  AROs were revalued primarily due to updates in the estimated cash flows for ash ponds and CCR surface impoundments based on updated cost estimates.

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17.  Available-for-Sale Securities

(PPL and PPL Energy Supply)

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.

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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.

     June 30, 2013 December 31, 2012     September 30, 2013 December 31, 2012
       Gross Gross     Gross Gross          Gross Gross      Gross Gross  
     Amortized  Unrealized  Unrealized   Amortized  Unrealized  Unrealized       Amortized  Unrealized  Unrealized   Amortized  Unrealized  Unrealized  
     Cost Gains Losses Fair Value  Cost  Gains Losses Fair Value     Cost Gains Losses Fair Value  Cost  Gains Losses Fair Value
PPLPPL                PPL                 
NDT funds:                NDT funds:                
 Cash and cash equivalents $ 12      $ 12  $ 11      $ 11  Cash and cash equivalents $ 14        $ 14  $ 11        $ 11 
 Equity securities:                 Equity securities:                
  U.S. large-cap  227  $ 241     468   222  $ 190     412   U.S. large-cap  230  $ 264      494   222  $ 190      412 
  U.S. mid/small-cap  31   37     68   30   30     60   U.S. mid/small-cap  31   43      74   30   30      60 
 Debt securities:                 Debt securities:                
  U.S. Treasury  89   6     95   86   9     95   U.S. Treasury  90   6      96   86   9      95 
  U.S. government sponsored                  U.S. government sponsored                
   agency  5   1     6   8   1     9    agency  5   1      6   8   1      9 
  Municipality  77   2  $ 2   77   78   5  $ 1   82   Municipality  74   2  $ 1   75   78   5  $ 1   82 
  Investment-grade corporate  37   2     39   36   4     40   Investment-grade corporate  39   2   1   40   36   4      40 
  Other  3       3   3       3   Other  3         3   3         3 
 Receivables/payables, net   3          3              Receivables/payables, net   2            2                 
 Total NDT funds   484    289    2    771    474    239    1    712  Total NDT funds   488    318    2    804    474    239    1    712 
Auction rate securities   20       1    19    20       1    19 Auction rate securities   20        1    19    20        1    19 
Total $ 504  $ 289  $ 3  $ 790  $ 494  $ 239  $ 2  $ 731 Total $ 508  $ 318  $ 3  $ 823  $ 494  $ 239  $ 2  $ 731 
                                         
PPL Energy SupplyPPL Energy Supply                PPL Energy Supply                       
NDT funds:                NDT funds:                
 Cash and cash equivalents $ 12      $ 12  $ 11      $ 11  Cash and cash equivalents $ 14        $ 14  $ 11        $ 11 
 Equity securities:                 Equity securities:                
  U.S. large-cap  227  $ 241     468   222  $ 190     412   U.S. large-cap  230  $ 264      494   222  $ 190      412 
  U.S. mid/small-cap  31   37     68   30   30     60   U.S. mid/small-cap  31   43      74   30   30      60 
 Debt securities:                 Debt securities:                  
  U.S. Treasury  89   6     95   86   9     95   U.S. Treasury  90   6      96    86    9      95 
  U.S. government sponsored                  U.S. government sponsored                
   agency  5   1     6   8   1     9    agency  5   1      6   8   1      9 
  Municipality  77   2  $ 2   77   78   5  $ 1   82   Municipality  74   2  $ 1   75    78    5  $ 1   82 
  Investment-grade corporate  37   2     39   36   4     40   Investment-grade corporate  39   2   1   40    36    4      40 
  Other  3       3   3       3   Other  3         3    3          3 
 Receivables/payables, net   3          3              Receivables/payables, net   2            2                 
 Total NDT funds   484    289    2    771    474    239    1    712  Total NDT funds   488    318    2    804    474    239    1    712 
Auction rate securities   17       1    16    17       1    16 Auction rate securities   17        1    16    17        1    16 
Total $ 501  $ 289  $ 3  $ 787  $ 491  $ 239  $ 2  $ 728 Total $ 505  $ 318  $ 3  $ 820  $ 491  $ 239  $ 2  $ 728 

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

The following table shows the scheduled maturity dates of debt securities held at JuneSeptember 30, 2013.

  Maturity Maturity Maturity Maturity     Maturity Maturity Maturity Maturity   
   Less Than1-56-10in Excess    Less Than1-56-10in Excess  
  1 YearYearsYearsof 10 YearsTotal  1 YearYearsYearsof 10 YearsTotal
PPLPPL          PPL            
Amortized costAmortized cost $ 12  $ 81  $ 61  $ 77  $ 231 Amortized cost $ 6  $ 92  $ 56  $ 77  $ 231 
Fair valueFair value  12   84   63   80   239 Fair value  6    96    58   79   239 
                       
PPL Energy SupplyPPL Energy Supply          PPL Energy Supply           
Amortized costAmortized cost $ 12  $ 81  $ 61  $ 74  $ 228 Amortized cost $ 6  $ 92  $ 56  $ 74  $ 228 
Fair valueFair value  12   84   63   77   236 Fair value  6    96    58   76   236 


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

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  Three Months Six Months  Three Months Nine Months
  2013  2012  2013  2012   2013  2012  2013  2012 
PPLPPL        PPL         
Proceeds from sales of NDT securities (a)Proceeds from sales of NDT securities (a) $ 35  $ 45  $ 59  $ 79 Proceeds from sales of NDT securities (a) $ 33  $ 23  $  92  $  102 
Other proceeds from salesOther proceeds from sales    5     5 Other proceeds from sales              5 
Gross realized gains (b)Gross realized gains (b)  3   8   7   13 Gross realized gains (b)  3   2   10   15 
Gross realized losses (b)Gross realized losses (b)  2   5   4   6 Gross realized losses (b)  2   2   6   8 
                  
PPL Energy SupplyPPL Energy Supply        PPL Energy Supply         
Proceeds from sales of NDT securities (a)Proceeds from sales of NDT securities (a) $ 35  $ 45  $ 59  $ 79 Proceeds from sales of NDT securities (a) $ 33  $ 23  $  92  $  102 
Other proceeds from salesOther proceeds from sales    3     3 Other proceeds from sales              3 
Gross realized gains (b)Gross realized gains (b)  3   8   7   13 Gross realized gains (b)  3   2   10   15 
Gross realized losses (b)Gross realized losses (b)  2   5   4   6 Gross realized losses (b)  2   2   6   8 

(a)These proceeds are used to pay income taxes and fees related to managing the trust.  Remaining proceeds are reinvested in the trust.
(b)Excludes the impact of other-than-temporary impairment charges recognized on the Statements of Income.         

18.  Accumulated Other Comprehensive Income (Loss)

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

The after-tax changes in AOCI by component for the three and sixnine months ended JuneSeptember 30, 2013 were as follows.

 Foreign Unrealized gains (losses)   Defined benefit plans   Foreign  Unrealized gains (losses)     Defined benefit plans   
 currency Available-   Equity Prior Actuarial Transition   currency  Available-     Equity  Prior  Actuarial  Transition   
 translation for-sale Qualifying investees' service gain asset   translation  for-sale  Qualifying  investees'  service  gain  asset   
 adjustments securities derivatives AOCI costs (loss) (obligation) Total adjustments  securities  derivatives  AOCI  costs  (loss)  (obligation)  Total 
PPLPPL                PPL                
March 31, 2013$ (394) $ 134  $ 114  $ 1  $ (13) $ (1,989) $ 1  $ (2,146)
June 30, 2013June 30, 2013$  (401) $  135  $  102  $  1  $  (11) $  (1,955) $  1  $  (2,128)
Amounts arising during the periodAmounts arising during the period  (7)  2   24           19 Amounts arising during the period  87   15   (9)                  93 
Reclassifications from AOCIReclassifications from AOCI     (1)   (36)      2    34       (1)Reclassifications from AOCI            (6)   (1)   2    33         28 
Net OCI during the periodNet OCI during the period  (7)   1    (12)      2    34       18 Net OCI during the period  87    15    (15)   (1)   2    33         121 
June 30, 2013$ (401) $ 135  $ 102  $ 1  $ (11) $ (1,955) $ 1  $ (2,128)
September 30, 2013September 30, 2013$  (314) $  150  $  87  $     $  (9) $  (1,922) $  1  $  (2,007)
                                  
December 31, 2012December 31, 2012$ (149) $ 112  $ 132  $ 1  $ (14) $ (2,023) $ 1  $ (1,940)December 31, 2012$  (149) $  112  $  132  $  1  $  (14) $  (2,023) $  1  $  (1,940)
Amounts arising during the periodAmounts arising during the period  (252)  25   86           (141)Amounts arising during the period  (165)  40   77                   (48)
Reclassifications from AOCIReclassifications from AOCI     (2)   (116)      3    68       (47)Reclassifications from AOCI       (2)   (122)   (1)   5    101         (19)
Net OCI during the periodNet OCI during the period  (252)   23    (30)      3    68       (188)Net OCI during the period  (165)   38    (45)   (1)   5    101         (67)
June 30, 2013$ (401) $ 135  $ 102  $ 1  $ (11) $ (1,955) $ 1  $ (2,128)
                 
PPL Energy Supply                
March 31, 2013   $ 134  $ 181    $ (9) $ (261)    $ 45 
Amounts arising during the period    2             2 
Reclassifications from AOCI     (1)   (37)     1    4       (33)
Net OCI during the period     1    (37)     1    4       (31)
June 30, 2013   $ 135  $ 144    $ (8) $ (257)    $ 14 
                 
December 31, 2012   $ 112  $ 211    $ (10) $ (265)    $ 48 
Amounts arising during the period    25             25 
Reclassifications from AOCI     (2)   (67)     2    8       (59)
Net OCI during the period     23    (67)     2    8       (34)
June 30, 2013   $ 135  $ 144     $ (8) $ (257)    $ 14 
September 30, 2013September 30, 2013$  (314) $  150  $  87  $     $  (9) $  (1,922) $  1  $  (2,007)
PPL Energy Supply                       
June 30, 2013     $  135  $  144     $  (8) $  (257)      $  14 
Amounts arising during the period       15                           15 
Reclassifications from AOCI            (29)      1    3         (25)
Net OCI during the period       15    (29)      1    3         (10)
September 30, 2013     $  150  $  115     $  (7) $  (254)      $  4 
                         
December 31, 2012   $  112  $  211     $  (10) $  (265)      $  48 
Amounts arising during the period     40                             40 
Reclassifications from AOCI     (2)   (96)        3    11         (84)
Net OCI during the period     38    (96)        3    11         (44)
September 30, 2013   $  150  $  115        $  (7) $  (254)      $  4 

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

 
9596
 


  Three Months  Three Months
  Affected Line Item on the Statements of Income  Affected Line Item on the Statements of Income
        Other                Other        
  Wholesale     Income          Wholesale      Income        
  energy Energy   (Expense), Interest Total Income Total  energy Energy   (Expense), Interest Total Income Total
Details about AOCIDetails about AOCI marketing purchases Depreciation net Expense Pre-tax Taxes After-taxDetails about AOCI marketing purchases Depreciation net Expense Pre-tax Taxes After-tax
PPLPPL                PPL                
Available-for-sale securitiesAvailable-for-sale securities          $ 1     $ 1     $ 1 Available-for-sale securities          $  1     $  1  $  (1)     
Qualifying derivativesQualifying derivatives                Qualifying derivatives                
Interest rate swaps         $ (4)  (4) $ 2   (2)Interest rate swaps         $  (5)  (5)  2  $  (3)
Cross-currency swaps        1   1   2     2 Cross-currency swaps        (25)  (1)  (26)  7   (19)
Energy commodities $ 73  $ (14) $ 1          60    (24)   36 Energy commodities $  58  $  (11) $  1          48    (20)   28 
Total $ 73  $ (14) $ 1  $ 1  $ (3)   58    (22)   36 Total $  58  $  (11) $  1  $  (25) $  (6)   17    (11)   6 
Equity investees' AOCIEquity investees' AOCI          $  1       1         1 
Defined benefit plansDefined benefit plans                Defined benefit plans                
Prior service costs            (3)  1   (2)Prior service costs            (3)  1   (2)
Net actuarial loss             (46)   12    (34)Net actuarial loss             (45)   12    (33)
Total           $ (49) $ 13    (36)Total           $  (48) $  13    (35)
                                  
Total reclassificationsTotal reclassifications               Total reclassifications               
during the period               $ 1 during the period               $ (28)
                                  
PPL Energy SupplyPPL Energy Supply                PPL Energy Supply                
Available-for-sale securitiesAvailable-for-sale securities          $ 1     $ 1     $ 1 Available-for-sale securities          $  1     $  1  $  (1)     
Qualifying derivativesQualifying derivatives                Qualifying derivatives                
Energy commodities $ 73  $ (14) $ 1          60  $ (23)   37 
Total $ 73  $ (14) $ 1          60    (23)   37 Energy commodities $  58  $  (11) $  1          48    (19) $  29 
Defined benefit plansDefined benefit plans                Defined benefit plans                
Prior service costs            (1)    (1)Prior service costs            (2)  1   (1)
Net actuarial loss             (7)   3    (4)Net actuarial loss             (5)   2    (3)
Total           $ (8) $ 3    (5)Total           $  (7) $  3    (4)
                                  
Total reclassificationsTotal reclassifications               Total reclassifications               
during the period               $ 33 during the period               $ 25 
                                  
  Six Months  Nine Months
  Affected Line Item on the Statements of Income  Affected Line Item on the Statements of Income
        Other                Other        
  Wholesale     Income          Wholesale      Income        
  energy Energy   (Expense), Interest Total Income Total  energy Energy   (Expense), Interest Total Income Total
Details about AOCIDetails about AOCI marketing purchases Depreciation net Expense Pre-tax Taxes After-taxDetails about AOCI marketing purchases Depreciation net Expense Pre-tax Taxes After-tax
PPLPPL                PPL                
Available-for-sale securitiesAvailable-for-sale securities          $ 3     $ 3  $ (1) $ 2 Available-for-sale securities          $  4     $  4  $  (2) $  2 
Qualifying derivativesQualifying derivatives                Qualifying derivatives                
Interest rate swaps         $ (9)  (9)  4   (5)Interest rate swaps         $  (14)  (14)  6   (8)
Cross-currency swaps        70   1   71   (17)  54 Cross-currency swaps        45       45   (10)  35 
Energy commodities $ 140  $ (30) $ 1          111    (44)   67 Energy commodities $  198  $  (41) $  2          159    (64)   95 
Total $ 140  $ (30) $ 1  $ 70  $ (8)   173    (57)   116 Total $  198  $  (41) $  2  $  45  $  (14)   190    (68)   122 
Equity investees' AOCIEquity investees' AOCI          $  1       1       1 
Defined benefit plansDefined benefit plans                Defined benefit plans                
Prior service costs            (5)  2   (3)Prior service costs            (8)  3   (5)
Net actuarial loss             (93)   25    (68)Net actuarial loss             (138)   37    (101)
Total           $ (98) $ 27    (71)Total           $  (146) $  40    (106)
                                  
Total reclassificationsTotal reclassifications               Total reclassifications               
during the period               $ 47 during the period               $ 19 
                                  
PPL Energy SupplyPPL Energy Supply                PPL Energy Supply                
Available-for-sale securitiesAvailable-for-sale securities          $ 3     $ 3  $ (1) $ 2 Available-for-sale securities          $  4     $  4  $  (2) $  2 
Qualifying derivativesQualifying derivatives                Qualifying derivatives                
Energy commodities $ 140  $ (30) $ 1          111    (44)   67 Energy commodities $  198  $  (41) $  2          159    (63)   96 
Total $ 140  $ (30) $ 1          111    (44)   67 
Defined benefit plansDefined benefit plans                Defined benefit plans                
Prior service costs            (3)  1   (2)Prior service costs            (5)  2   (3)
Net actuarial loss             (13)   5    (8)Net actuarial loss             (18)   7    (11)
Total           $ (16) $ 6    (10)Total           $  (23) $  9    (14)
                                  
Total reclassificationsTotal reclassifications               Total reclassifications               
during the period               $ 59 during the period               $ 84 
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(LKE and KU)

For the three and sixnine months ended JuneSeptember 30, 2013, the changes in AOCI and the effect of reclassifications from AOCI on the statement of income for LKE and KU were insignificant.

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19.  New Accounting Guidance Pending Adoption

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

Accounting for Obligations Resulting from Joint and Several Liability Arrangements

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 is not expected to be material.

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

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

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

Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes

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.

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

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

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

 
9798
 

PPL CORPORATION AND SUBSIDIARIES

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


(All Registrants)

This combined Item 2.  "Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL Corporation and its Subsidiary Registrants: 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.  The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures.  Within combined disclosures, amounts are disclosed for any Registrant when significant.

The following should be read in conjunction with PPL'sthe Registrants' Condensed Consolidated Financial Statements and the accompanying Notes and with PPL'sthe Registrants' 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:

·  "Overview" provides a description of PPLeach Registrant and its business strategy, selected information on PPL's segment earnings, a summarydescription of Net Income Attributablekey factors expected to PPL Shareownersimpact future earnings and a discussion of certain events related to PPL's results of operationsimportant financial and financial condition.operational developments.

·  "Results of Operations" provides a summary of PPL's earnings a review of results by reportable segment and a description of key factors by segment expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of non-GAAP financial measures and significant changes in principal line items on PPL'sthe Statements of Income, comparing the three and sixnine months ended JuneSeptember 30, 2013 with the same periods in 2012.

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

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

Overview

Introduction

(PPL)

PPL, headquartered in Allentown, Pennsylvania, is an energy and utility holding company with headquarters in Allentown, Pennsylvania.  Throughthat 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 the U.K., Pennsylvania, Kentucky, Virginia Tennessee and the U.K.Tennessee and delivers natural gas to customers in Kentucky.

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

         PPL Corporation*        
                            
                  PPL Capital Funding      
    
                         
                        
   
LKE*
PPL Global
● Engages in the regulated distribution of electricity in the U.K.
LKE*
 
PPL Electric*
● Engages in the regulated transmission and distribution of electricity in Pennsylvania
  
PPL Energy Supply*
 
  
                            
                            
LG&E*
● Engages in the regulated generation, transmission, distribution and sale of electricity in Kentucky, and distribution and sale of natural gas in Kentucky
  
KU*
● Engages in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky
  
PPL EnergyPlus
● Performs energy marketing and trading activities
● Purchases fuel
  
PPL Generation
● Engages in the competitive generation of electricity, primarily in Pennsylvania and Montana
                        
   
KentuckyU.K. Regulated
Segment
 
U.K.Kentucky Regulated
Segment
 
Pennsylvania Regulated Segment
 
Supply
Segment
  


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

(PPL Energy Supply)

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

(PPL Electric)

PPL Electric, headquartered in Allentown, Pennsylvania, is an electricity transmission and distribution service provider in eastern and central Pennsylvania.  PPL Electric is subject to regulation as a public utility by the PUC, and certain of its transmission activities are subject to the jurisdiction of FERC under the Federal Power Act.  PPL Electric delivers electricity in its Pennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.

(LKE)

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

(LG&E)

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

 
98100
 
(KU)

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

(All Registrants except PPL Electric)

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

Ownership or
Lease Interest
Primary Fuelin MW (a)
Regulated
Coal (c)
 5,940 
Natural Gas/Oil (b)
 2,098 
Hydro
 78 
Total Regulated
 8,116 
Competitive
Coal (b) (c)
 4,146 
Natural Gas/Oil
 3,316 
Nuclear (c)
 2,275 
Hydro
 807 
Other (d)
 70 
Total Competitive
 10,614 
Total
 18,730 
   Ownership or Lease Interest in MW (a)
     PPL Energy      
Primary Fuel PPL Supply LKE LG&E KU
            
Regulated          
 Coal (c) 5,940    5,940  2,656  3,284 
 Natural Gas/Oil (b) 2,098    2,098  644  1,454 
 Hydro 78    78  54  24 
            
Total Regulated 8,116    8,116  3,354  4,762 
            
Competitive          
 Coal (b) (c) 4,146  4,146       
 Natural Gas/Oil 3,316  3,316       
 Nuclear (c) 2,275  2,275       
 Hydro (d) 807  807       
 Other (e) 70  70       
            
Total Competitive 10,614  10,614       
            
Total 18,730  10,614  8,116  3,354  4,762 

(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'sthe 2012 Form 10-K for additional information on ownership percentages.
(b)Includes leasehold interests.  See Note 11 to the Financial Statements in PPL'sthe 2012 Form 10-K for additional information.
(c)Includes units that are jointly owned or subject to a power purchase agreement.  Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs.  See Notes 14 and 15 to the Financial Statements in PPL'sthe 2012 Form 10-K for additional information.
(d)In September 2013, PPL Montana executed a definitive agreement to sell its 11 hydroelectric facilities, which have a combined generating capacity of 633 MW, to NorthWestern for $900 million in cash, subject to certain adjustments.  The sale is not expected to close before the second half of 2014 and is subject to closing conditions, including receipt of regulatory approvals by the FERC and Montana Public Service Commission and certain third party consents.  See Note 8 to the Financial Statements for additional information.
(e)Includes facilities owned, controlled or for which PPL Energy Supply has the rights to the output.

Business Strategy

PPL's(PPL and PPL Energy Supply)

The 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 businessPPL Energy Supply is to achieve disciplined optimization of energy supply margins while mitigating near-term volatility in both cash flows and earnings.  More specifically, PPL'sthe 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 managingmaintaining 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.below for additional information.

(All Registrants except PPL Energy Supply)

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

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

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

(All Registrants)

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

Financial and Operational Developments

Net Income Attributable to PPL ShareownersEarnings (PPL)

Net Income Attributable to PPL ShareownersEarnings by component of PPL's reportable segments for the periods ended JuneSeptember 30 by segment, and reconciled to PPL's consolidated results, was:were as follows.

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   Three Months Six Months
   2013  2012  2013  2012 
              
Kentucky Regulated $ 49  $ 34  $ 134  $ 76 
U.K. Regulated   245    196    558    361 
Pennsylvania Regulated   45    29    109    62 
Supply   77    12    31    313 
Corporate and Other (a)   (11)      (14)   
Net Income Attributable to PPL Shareowners $ 405  $ 271  $ 818  $ 812 
              
EPS - basic $ 0.68  $ 0.46  $ 1.39  $ 1.39 
EPS - diluted (b) $ 0.63  $ 0.46  $ 1.28  $ 1.39 
   Three Months Nine Months
   2013  2012  % Change 2013  2012  % Change
                   
 U.K. Regulated $ 183  $ 202    (9) $ 741  $ 563    32 
 Kentucky Regulated   93    72    29    227    148    53 
 Pennsylvania Regulated   51    33    55    160    95    68 
 Supply   91    48    90    122    361    (66)
 Corporate and Other (a)   (8)     n/a    (22)     n/a 
Net Income Attributable to                  
 PPL Shareowners $ 410  $ 355    15  $ 1,228  $ 1,167    5 
                    
EPS - basic $ 0.65  $ 0.61    7  $ 2.03  $ 2.00    2 
EPS - diluted (b) $ 0.62  $ 0.61    2  $ 1.90  $ 2.00    (5)

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

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

   Three Months Nine Months
   2013  2012  Change 2013  2012  Change
                   
U.K. Regulated $ (16) $ 41  $ (57) $ 78  $ 39  $ 39 
Kentucky Regulated                  2    (1)   3 
Supply   (6)   (105)   99    (49)   3    (52)
Total PPL $ (22) $ (64) $  42  $ 31  $  41  $ (10)

The changes in PPL's reportable segments results for the three and six months ended June 30, 2013 increased 49%nine-month periods, excluding the impact of special items, were due to the following factors (on an after-tax basis):

·Increase at the U.K. Regulated segment for the three-month period primarily due to higher electricity delivery prices and lower U.K. income taxes, partially offset by an accrual for over-recovery of current-year revenues, lower sales volume due to weather and higher operation and maintenance expense.  Increase at the U.K. Regulated segment for the nine-month period primarily due to higher electricity delivery prices, increased sales volume due to weather, and lower U.K.
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income taxes, partially offset by an accrual for over-recovery of current-year revenues, higher operation and 1% compared with the same periods in 2012.  maintenance expense and higher depreciation.
·Increases at the Kentucky Regulated segment for both periods primarily due to higher base rates that became effective January 1, 2013 and returns from additional environmental capital investments.  The three-month period was also partially offset by lower sales volume due to weather.
·Increases at the Pennsylvania Regulated segment for both periods primarily due to higher electricity base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments.  The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.
·Decrease at the Supply segment for the three-month period primarily due to lower baseload energy prices, lower baseload generation, higher operation and maintenance expense and higher income taxes.  The decline in segment earnings was partially offset by higher capacity prices.  Decrease at the Supply segment for the nine-month period primarily due to lower baseload energy prices, higher fuel costs, higher income taxes and higher depreciation.  The decline in segment earnings was partially offset by higher capacity prices, higher intermediate and peaking margins and higher baseload generation.  The higher income taxes for both periods resulted primarily from a non-cash adjustment of deferred tax assets.

See "Results of Operations" below for further discussion of PPL's businessreportable segments details of special items and analysis of the consolidated results of operations.

2013 Outlook

(PPL)

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

(PPL's U.K. Regulated Segment)

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

(PPL's Kentucky Regulated Segment and Kentucky Registrants)

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

(PPL's Pennsylvania Regulated Segment and PPL Electric)

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

(PPL's Supply Segment and PPL Energy Supply)

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

(All Registrants)

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

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Other Financial and Operational Developments

Economic and Market Conditions

(PPL and PPL Energy Supply)

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

(All Registrants except PPL Electric)

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

(PPL and PPL Energy Supply)

In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS.  PPL Energy Supply continues to monitor its Corette plant for potential impairment.  The Corette plant asset group's carrying value at JuneSeptember 30, 2013 was $68$67 million.  See "Environmental Matters - Domestic - Air - MATS" in Note 10 to the Financial Statements for additional information.

PPL Energy Supply believes its remaining competitive coal-fired generation assets are well positioned to meet the additional environmental requirements described above based on prior and planned investmentsinvestments.  Management continues to monitor energy and does not currently anticipate the need to temporarily PJM capacity prices.  A further decline in energy and/or permanently shut down additionalcapacity prices could negatively impact PPL Energy Supply's operations and potentially result in future asset impairment charges for coal-fired plants.plants or goodwill.

(PPL and Kentucky Registrants)

The additional environmental requirements discussed above have also resulted in LKE's projected $2.1$2.2 billion ($1.1 billion each at LG&E and KU) in capital investment over the next five years and the anticipated retirement by 2015 of five coal-fired units (three at LG&E and two at KU) with a combined summer capacity rating of 726 MW.MW (563 MW at LG&E and 163 MW at KU).  KU retired the 71 MW unit at the Tyrone plant in February 2013.  The retirement of the fivethese coal-fired units is not expected to have a material impact on the financial condition or results of operations of PPL.PPL, LKE, LG&E and KU.  See Note 8 to the Financial Statements in PPL'sthe 2012 Form 10-K for PPL, LKE, LG&E and KU for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky.

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

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

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Susquehanna Turbine Blade Inspection

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

Rate Case Proceedings

Pennsylvania

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

Kentucky

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

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4.  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 received from Ofgem in the decision paper has increased the level of uncertainty regarding the ultimate settlement of this liability.

2013, WPD currently estimates the potential loss exposure for this matter to be in the range of $97$93 million to $251 million.  As a result, during$226 million as of September 30, 2013.  During the three and sixnine months ended JuneSeptember 30, 2013, WPD increasedrecorded $21 million and $45 million of increases to the liability by $24 million,with reductions to a total"Utility" revenue on the Statement of $97 million.Income.  PPL cannot predict the outcome of this matter.  See Note 6 to the Financial Statements for additional information.

RIIO-ED1Pennsylvania Regulated Segment
Supply
Segment

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

(PPL Energy Supply)

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

(PPL Electric)

PPL Electric, headquartered in Allentown, Pennsylvania, is an electricity transmission and distribution service provider in eastern and central Pennsylvania.  PPL Electric is subject to regulation as a public utility by the PUC, and certain of its transmission activities are subject to the jurisdiction of FERC under the Federal Power Act.  PPL Electric delivers electricity in its Pennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.

(LKE)

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

(LG&E)

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

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(KU)

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

(All Registrants except PPL Electric)

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

   Ownership or Lease Interest in MW (a)
     PPL Energy      
Primary Fuel PPL Supply LKE LG&E KU
            
Regulated          
 Coal (c) 5,940    5,940  2,656  3,284 
 Natural Gas/Oil (b) 2,098    2,098  644  1,454 
 Hydro 78    78  54  24 
            
Total Regulated 8,116    8,116  3,354  4,762 
            
Competitive          
 Coal (b) (c) 4,146  4,146       
 Natural Gas/Oil 3,316  3,316       
 Nuclear (c) 2,275  2,275       
 Hydro (d) 807  807       
 Other (e) 70  70       
            
Total Competitive 10,614  10,614       
            
Total 18,730  10,614  8,116  3,354  4,762 

In October 2010, Ofgem announced changes to
(a)The capacity of generation units is based on a number of factors, including 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 componentsoperating experience and physical conditions of the RIIO-ED1 are: an extension of the price review periodunits, and may be revised periodically 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.reflect changed circumstances.  See "Item 1. Business - Background - U.K. Regulated Segment - Revenue and Regulation"2. Properties" in the 2012 Form 10-K for additional information.information on ownership percentages.

(b)Includes leasehold interests.  See Note 11 to the Financial Statements in the 2012 Form 10-K for additional information.
Distribution System Improvement Charge
(c)Includes units that are jointly owned or subject to a power purchase agreement.  Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs.  See Notes 14 and 15 to the Financial Statements in the 2012 Form 10-K for additional information.

Act
(d)In September 2013, PPL Montana executed a definitive agreement to sell its 11 authorizes the PUChydroelectric facilities, which have a combined generating capacity of 633 MW, to approve two specific ratemaking mechanisms - the use of a fully projected future test yearNorthWestern for $900 million in base rate proceedings and,cash, subject to certain adjustments.  The sale is not expected to close before the second half of 2014 and is subject to closing conditions, including receipt of regulatory approvals by the use of a DSIC.  Such alternative ratemaking proceduresFERC and Montana Public Service Commission and certain third party consents.  See Note 8 to the Financial Statements for additional information.
(e)Includes facilities owned, controlled or for which PPL Energy Supply has the rights to the output.

Business Strategy

(PPL and PPL Energy Supply)

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

(All Registrants except PPL Energy Supply)

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

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

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

(All Registrants)

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

Financial and Operational Developments

Earnings (PPL)

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

   Three Months Nine Months
   2013  2012  % Change 2013  2012  % Change
                   
 U.K. Regulated $ 183  $ 202    (9) $ 741  $ 563    32 
 Kentucky Regulated   93    72    29    227    148    53 
 Pennsylvania Regulated   51    33    55    160    95    68 
 Supply   91    48    90    122    361    (66)
 Corporate and Other (a)   (8)     n/a    (22)     n/a 
Net Income Attributable to                  
 PPL Shareowners $ 410  $ 355    15  $ 1,228  $ 1,167    5 
                    
EPS - basic $ 0.65  $ 0.61    7  $ 2.03  $ 2.00    2 
EPS - diluted (b) $ 0.62  $ 0.61    2  $ 1.90  $ 2.00    (5)

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

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

   Three Months Nine Months
   2013  2012  Change 2013  2012  Change
                   
U.K. Regulated $ (16) $ 41  $ (57) $ 78  $ 39  $ 39 
Kentucky Regulated                  2    (1)   3 
Supply   (6)   (105)   99    (49)   3    (52)
Total PPL $ (22) $ (64) $  42  $ 31  $  41  $ (10)

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

mechanisms provide opportunity
·Increase at the U.K. Regulated segment for accelerated cost-recovery.  In May 2013, the PUC approved PPL Electric's proposed DSIC, withthree-month period primarily due to higher electricity delivery prices and lower U.K. income taxes, partially offset by an initial rateaccrual for over-recovery of current-year revenues, lower sales volume due to weather and higher operation and maintenance expense.  Increase at the U.K. Regulated segment for the nine-month period primarily due to higher electricity delivery prices, increased sales volume due to weather, and lower U.K.
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income taxes, partially offset by an accrual for over-recovery of current-year revenues, higher operation and maintenance expense and higher depreciation.
·Increases at the Kentucky Regulated segment for both periods primarily due to higher base rates that became effective JulyJanuary 1, 2013 subjectand returns from additional environmental capital investments.  The three-month period was also partially offset by lower sales volume due to refund after hearings.weather.
·Increases at the Pennsylvania Regulated segment for both periods primarily due to higher electricity base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments.  The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.
·Decrease at the Supply segment for the three-month period primarily due to lower baseload energy prices, lower baseload generation, higher operation and maintenance expense and higher income taxes.  The decline in segment earnings was partially offset by higher capacity prices.  Decrease at the Supply segment for the nine-month period primarily due to lower baseload energy prices, higher fuel costs, higher income taxes and higher depreciation.  The decline in segment earnings was partially offset by higher capacity prices, higher intermediate and peaking margins and higher baseload generation.  The higher income taxes for both periods resulted primarily from a non-cash adjustment of deferred tax assets.

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

2013 Outlook

(PPL)

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

(PPL's U.K. Regulated Segment)

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

(PPL's Kentucky Regulated Segment and Kentucky Registrants)

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

(PPL's Pennsylvania Regulated Segment and PPL Electric)

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

(PPL's Supply Segment and PPL Energy Supply)

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

(All Registrants)

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

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Other Financial and Operational Developments

Economic and Market Conditions

(PPL and PPL Energy Supply)

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

(All Registrants except PPL Electric)

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

(PPL and PPL Energy Supply)

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

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

(PPL and Kentucky Registrants)

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

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

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

(PPL)

Ofgem Review of Line Loss Calculation

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

FERC Formula Rates

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

Equity Forward Agreements

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

Equity Units

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

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

Tax Litigation

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

U.K. Tax Rate Change

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

Results of Operations

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

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

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

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

Segment Results

Kentucky Regulated Segment

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

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

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

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

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

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

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

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

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

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

   Income Statement Three Months Six Months
   Line Item 2013  2012  2013  2012 
                
LKE acquisition-related adjustments:             
 Income Taxes and Other            
 Net operating loss carryforward and other tax-related adjustmentsOperation and Maintenance          $ 4 
Other:             
 LKE discontinued operations, net of tax of ($1), $4, ($1), $4 (a)Discontinued Operations $ 1  $ (5) $ 1    (5)
 EEI adjustments, net of tax of $0, $0, $0, $0Other Income (Expense)-net         1    
Total  $ 1  $ (5) $ 2  $ (1)

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

2013 Outlook

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

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

U.K. Regulated Segment

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

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

   Three Months Six Months
   2013  2012  % Change 2013  2012  % Change
                  
Utility revenues $ 559  $ 543   3  $ 1,197  $ 1,095   9 
Energy-related businesses   13    14   (7)   23    24   (4)
 Total operating revenues   572    557   3    1,220    1,119   9 
Other operation and maintenance   112    112      229    225   2 
Depreciation   72    70   3    146    137   7 
Taxes, other than income   36    36      73    72   1 
Energy-related businesses   7    11   (36)   14    16   (13)
 Total operating expenses   227    229   (1)   462    450   3 
Other Income (Expense) - net   4    31   (87)   124    11   1,027 
Interest Expense   104    105   (1)   211    208   1 
Income Taxes      58   (100)   113    111   2 
Net Income Attributable to PPL Shareowners $ 245  $ 196   25  $ 558  $ 361   55 
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The changes in the components of the U.K. Regulated segment's results between these periods were due to the following factors, which reflect reclassifications for certain items that management considers special.  See additional detail of these special items in the table below.

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

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

U.K.

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

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

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

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

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

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

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

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

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

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

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

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

2013 Outlook

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

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

Pennsylvania Regulated Segment
Supply
Segment

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

(PPL Energy Supply)

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

(PPL Electric)

PPL Electric, headquartered in Allentown, Pennsylvania, is an electricity transmission and distribution service provider in eastern and central Pennsylvania.  PPL Electric is subject to regulation as a public utility by the PUC, and certain of its transmission activities are subject to the jurisdiction of FERC under the Federal Power Act.  PPL Electric delivers electricity in its Pennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.

(LKE)

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

(LG&E)

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

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(KU)

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

(All Registrants except PPL Electric)

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

   Ownership or Lease Interest in MW (a)
     PPL Energy      
Primary Fuel PPL Supply LKE LG&E KU
            
Regulated          
 Coal (c) 5,940    5,940  2,656  3,284 
 Natural Gas/Oil (b) 2,098    2,098  644  1,454 
 Hydro 78    78  54  24 
            
Total Regulated 8,116    8,116  3,354  4,762 
            
Competitive          
 Coal (b) (c) 4,146  4,146       
 Natural Gas/Oil 3,316  3,316       
 Nuclear (c) 2,275  2,275       
 Hydro (d) 807  807       
 Other (e) 70  70       
            
Total Competitive 10,614  10,614       
            
Total 18,730  10,614  8,116  3,354  4,762 

(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 the 2012 Form 10-K for additional information on ownership percentages.
(b)Includes leasehold interests.  See Note 11 to the Financial Statements in the 2012 Form 10-K for additional information.
(c)Includes units that are jointly owned or subject to a power purchase agreement.  Each owner is entitled to its proportionate share of the 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 the 2012 Form 10-K for additional information.
(d)In September 2013, PPL Montana executed a definitive agreement to sell its 11 hydroelectric facilities, which have a combined generating capacity of 633 MW, to NorthWestern for $900 million in cash, subject to certain adjustments.  The sale is not expected to close before the second half of 2014 and is subject to closing conditions, including receipt of regulatory approvals by the FERC and Montana Public Service Commission and certain third party consents.  See Note 8 to the Financial Statements for additional information.
(e)Includes facilities owned, controlled or for which PPL Energy Supply has the rights to the output.

Business Strategy

(PPL and PPL Energy Supply)

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

(All Registrants except PPL Energy Supply)

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

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

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

(All Registrants)

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

Financial and Operational Developments

Earnings (PPL)

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

   Three Months Nine Months
   2013  2012  % Change 2013  2012  % Change
                   
 U.K. Regulated $ 183  $ 202    (9) $ 741  $ 563    32 
 Kentucky Regulated   93    72    29    227    148    53 
 Pennsylvania Regulated   51    33    55    160    95    68 
 Supply   91    48    90    122    361    (66)
 Corporate and Other (a)   (8)     n/a    (22)     n/a 
Net Income Attributable to                  
 PPL Shareowners $ 410  $ 355    15  $ 1,228  $ 1,167    5 
                    
EPS - basic $ 0.65  $ 0.61    7  $ 2.03  $ 2.00    2 
EPS - diluted (b) $ 0.62  $ 0.61    2  $ 1.90  $ 2.00    (5)

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

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

   Three Months Nine Months
   2013  2012  Change 2013  2012  Change
                   
U.K. Regulated $ (16) $ 41  $ (57) $ 78  $ 39  $ 39 
Kentucky Regulated                  2    (1)   3 
Supply   (6)   (105)   99    (49)   3    (52)
Total PPL $ (22) $ (64) $  42  $ 31  $  41  $ (10)

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

·Increase at the U.K. Regulated segment includes PPL Electric's regulatedfor the three-month period primarily due to higher electricity transmissiondelivery prices and distribution operations.  In addition,lower U.K. income taxes, partially offset by an accrual for over-recovery of current-year revenues, lower sales volume due to weather and higher operation and maintenance expense.  Increase at the U.K. Regulated segment for the nine-month period primarily due to higher electricity delivery prices, increased sales volume due to weather, and lower U.K.
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income taxes, partially offset by an accrual for over-recovery of current-year revenues, higher operation and maintenance expense and higher depreciation.
·Increases at the Kentucky Regulated segment for both periods primarily due to higher base rates that became effective January 1, 2013 and returns from additional environmental capital investments.  The three-month period was also partially offset by lower sales volume due to weather.
·Increases at the Pennsylvania Regulated segment for both periods primarily due to higher electricity base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments.  The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.
·Decrease at the Supply segment for the three-month period primarily due to lower baseload energy prices, lower baseload generation, higher operation and maintenance expense and higher income taxes.  The decline in segment earnings was partially offset by higher capacity prices.  Decrease at the Supply segment for the nine-month period primarily due to lower baseload energy prices, higher fuel costs, higher income taxes and higher depreciation.  The decline in segment earnings was partially offset by higher capacity prices, higher intermediate and peaking margins and higher baseload generation.  The higher income taxes for both periods resulted primarily from a non-cash adjustment of deferred tax assets.

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

2013 Outlook

(PPL)

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

(PPL's U.K. Regulated Segment)

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

(PPL's Kentucky Regulated Segment and Kentucky Registrants)

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

(PPL's Pennsylvania Regulated Segment and PPL Electric)

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

(PPL's Supply Segment and PPL Energy Supply)

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

(All Registrants)

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

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Other Financial and Operational Developments

Economic and Market Conditions

(PPL and PPL Energy Supply)

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

(All Registrants except PPL Electric)

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

(PPL and PPL Energy Supply)

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

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

(PPL and Kentucky Registrants)

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

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

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

(PPL)

Ofgem Review of Line Loss Calculation

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

RIIO-ED1

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

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

Equity Forward Agreements

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

Equity Units

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

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

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

Tax Litigation

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

U.K. Tax Rate Change

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

Pennsylvania Net Operating Loss Valuation Allowance

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

FERC Audit Proceedings (All Registrants except PPL Energy Supply)

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

(PPL and PPL Energy Supply)

Montana Transactions

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

Susquehanna Turbine Blade Inspection

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

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

Colstrip Unit 4 Outage (PPL Energy Supply)

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

(PPL and PPL Electric)

Distribution System Improvement Charge

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

Rate Case Proceedings

(PPL and PPL Electric)

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

(PPL and Kentucky Registrants)

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

(KU)

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

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

Results of Operations

(PPL)

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


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

(Subsidiary Registrants)

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

(All Registrants)

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

PPL:  Segment Earnings and Statement of Income Analysis

Segment Earnings

U.K. Regulated Segment

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

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

   Three Months Nine Months
   2013  2012  % Change 2013  2012  % Change
                  
Utility revenues $ 534  $ 518   3  $ 1,731  $ 1,613   7 
Energy-related businesses   9    10   (10)   32    34   (6)
 Total operating revenues   543    528   3    1,763    1,647   7 
Other operation and maintenance   111    101   10    340    326   4 
Depreciation   73    69   6    219    206   6 
Taxes, other than income   36    36        109    108   1 
Energy-related businesses   7    8   (13)   21    24   (13)
 Total operating expenses   227    214   6    689    664   4 
Other Income (Expense) - net   (117)   (50)  134    7    (39)  (118)
Interest Expense   102    106   (4)   313    314     
Income Taxes   (86)   (44)  95    27    67   (60)
Net Income Attributable to PPL Shareowners $ 183  $ 202   (9) $ 741  $ 563   32 

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

   Three Months Nine Months
        
U.K.      
 Utility revenues $ 44  $  187 
 Other operation and maintenance   (9)   (19)
 Depreciation   (6)   (17)
 Interest expense   3    (4)
 Other   2    2 
 Income taxes   8    (13)
U.S.      
 Interest expense and other        1 
 Income taxes   (5)   4 
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   Three Months Nine Months
        
Foreign currency exchange rates, after-tax (a)   1    (2)
Special items, after-tax   (57)   39 
Total $ (19) $ 178 

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

U.K.

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

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

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

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

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

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

U.S.

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

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

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

   Income Statement Three Months Nine Months
   Line Item 2013  2012  2013  2012 
                
 Other Income              
Foreign currency-related economic hedges, net of tax of $44, $18, $5, $17 (a) (Expense)-net  $ (82) $ (30) $ (8) $ (28)
WPD Midlands acquisition-related adjustments:             
   Other Operation             
 Separation benefits, net of tax of $1, $1, $1, $3and Maintenance    (2)   (1)   (4)   (9)
   Other Operation             
 Other acquisition-related adjustments, net of tax of $0, $0, $0, ($1)and Maintenance         (2)   (2)   2 
Other:             
 Windfall Profits Tax litigation (b)Income Taxes            43    
 Change in WPD line loss accrual, net of tax of $5, $0, $10, $0 (c)Utility    (16)      (35)   
 Change in U.K. tax rate (d)Income Taxes    84    74    84    74 
Total  $ (16) $ 41  $ 78  $ 39 

(a)Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.
(b)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling, by the U.S. Court of Appeals for the Third Circuit, on the creditability for income tax purposes of the Pennsylvania Regulated segment's results between these periods were dueU.K. Windfall Profits Tax.  As a result of the U.S. Supreme Court ruling, PPL recorded an income tax benefit during the nine-month 2013 period.  See Note 5 to the following factors, which reflect reclassificationsFinancial Statements for items includedadditional information.

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(c)WPD Midlands recorded adjustments to its line loss accrual based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4, a price control period that ended prior to PPL's acquisition of WPD Midlands.  See Note 6 to the Financial Statements for additional information.
(d)The U.K. Finance Act of 2013, enacted in Pennsylvania Gross Delivery Margins.July 2013, reduced the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015.  The U.K. Finance Act of 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liability and recognized a deferred tax benefit in the three and nine-month periods of 2013 and 2012.

Kentucky Regulated Segment

The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations.  This segment also includes LKE's regulated distribution and sale of natural gas.  In addition, certain financing costs are allocated to the Kentucky Regulated segment.  The Kentucky Regulated segment represents 19% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 2013 and 25% of PPL's assets at September 30, 2013.

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

   Three Months Nine Months
   2013  2012  % Change 2013  2012  % Change
                 
Utility revenues $ 744  $  732   2  $ 2,226  $ 2,095   6 
Fuel   237    249   (5)   684    677   1 
Energy purchases   23    27   (15)   146    135   8 
Other operation and maintenance   188    186   1    582    589   (1)
Depreciation   84    87   (3)   249    259   (4)
Taxes, other than income   12    11   9    36    34   6 
 Total operating expenses   544    560   (3)   1,697    1,694     
Other Income (Expense) - net   (4)   (4)       (6)   (14)  (57)
Interest Expense   49    54   (9)   165    163   1 
Income Taxes   54    42   29    132    70   89 
Income (Loss) from Discontinued Operations           n/a    1    (6)  (117)
Net Income Attributable to PPL Shareowners $ 93  $ 72   29  $ 227  $ 148   53 

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

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

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

·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania
·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Kentucky 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-monthnine-month period primarily due to $18 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages.  This decrease was partially offset by $8 million of higher administrative and general expenses and $4 million of adjustments to regulatory assets and liabilities.

·Higher depreciation for the three and nine-month periods primarily due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates, which added $13 million and $39 million to depreciation that is excluded from Kentucky Gross Margins.  This increase was partially offset by lower depreciation of $5 and $16 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 nine-month period primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.
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·Higher income taxes for the three and nine-month periods primarily due to the change in pre-tax income at current period tax rates.

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

   Income Statement Three Months Nine Months
   Line Item 2013  2012  2013  2012 
                
LKE acquisition-related adjustments:             
 Income Taxes and Other            
 Net operating loss carryforward and other tax-related adjustmentsOperation and Maintenance          $ 4 
Other:             
 LKE discontinued operations (a) Discontinued Operations            $ 1    (5)
 EEI adjustments, net of tax of $0, $0, $0, $0 (b) Other Income (Expense)-net            1    
Total            $ 2  $ (1)

(a)2012 period includes an adjustment to an indemnification liability.
(b)Impact recorded at KU.

Pennsylvania Regulated Segment

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

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

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

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

·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania Gross Delivery Margins.
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·Lower other operation and maintenance for the three-month period primarily due to lower storm costs of $8 million, lower corporate service costs of $11$3 million and lower rent expense of $3 million, partially offset by higher vegetation management expense of $3$6 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-monthLower other operation and maintenance for the nine-month period primarily due to lower storm costs of $9 million, lower corporate service costs of $13 million and lower rent expense of $4 million.

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

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

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

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

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 September 30 includes the following results:Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results:
                          
  Three Months Six Months  Three Months Nine Months
  2013  2012  % Change 2013  2012  % Change  2013  2012  % Change 2013  2012  % Change
Energy revenuesEnergy revenues            Energy revenues            
External (a) $ 1,658  $ 816   103  $ 2,039  $ 3,106   (34)External (a) $ 1,209  $ 567   113  $ 3,248  $ 3,673   (12)
Intersegment  12   17   (29)  26   38   (32)Intersegment  11   23   (52)  37   61   (39)
Energy-related businessesEnergy-related businesses   122    115   6    235    213   10 Energy-related businesses   143    133   8    378    346   9 
Total operating revenues   1,792    948   89    2,300    3,357   (31)Total operating revenues   1,363    723   89    3,663    4,080   (10)
Fuel (a)Fuel (a)  224   196   14   522   407   28 Fuel (a)  258   321   (20)  780   728   7 
Energy purchasesEnergy purchases            Energy purchases            
External (a)  897   191   370   697   1,438   (52)External (a)  388   (150)  (359)  1,085   1,288   (16)
Intersegment  1    n/a  2   1   100 Intersegment  1   1       3   2   50 
Other operation and maintenanceOther operation and maintenance  270   293   (8)  505   548   (8)Other operation and maintenance  243   221   10   748   769   (3)
DepreciationDepreciation  79   70   13   157   135   16 Depreciation  80   75   7   237   210   13 
Taxes, other than incomeTaxes, other than income  16   17   (6)  33   35   (6)Taxes, other than income  18   19   (5)  51   54   (6)
Energy-related businessesEnergy-related businesses   118    113   4    228    210   9 Energy-related businesses   138    129   7    366    339   8 
Total operating expenses   1,605    880   82    2,144    2,774   (23)Total operating expenses   1,126    616   83    3,270    3,390   (4)
Other Income (Expense) - netOther Income (Expense) - net  12   4   200   16   9   78 Other Income (Expense) - net  2   6   (67)  18   15   20 
Other-Than-Temporary ImpairmentsOther-Than-Temporary Impairments    1   (100)    1   (100)Other-Than-Temporary Impairments  1      n/a   1   1     
Interest ExpenseInterest Expense  60   53   13   120   101   19 Interest Expense  54   62   (13)  174   163   7 
Income TaxesIncome Taxes   62    6   933    21    177   (88)Income Taxes  92   3   2,967   113   180   (37)
Net Income Attributable to Noncontrolling InterestsNet Income Attributable to Noncontrolling Interests   1       n/a    1       n/a 
Net Income Attributable to PPL ShareownersNet Income Attributable to PPL Shareowners $ 77  $ 12   542  $ 31  $ 313   (90)Net Income Attributable to PPL Shareowners $ 91  $ 48   90  $ 122  $ 361   (66)

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.

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

 Three Months Six Months Three Months Nine Months
         
Unregulated Gross Energy Margins $ (88) $ (195) $ (9) $ (204)
Other operation and maintenance  16   29   (18)  11 
Depreciation  (9)  (22)  (5)  (27)
Taxes, other than income  3   4   (1)  3 
Other Income (Expense) - net  9   10   (4)  6 
Interest expense  (7)  (19)  8   (11)
Other  2   2   (4)  (2)
Income Taxes  27   60   (23)  37 
Special items, after-tax   112    (151)   99    (52)
Total $ 65  $ (282) $ 43  $ (239)

112
·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Unregulated Gross Energy Margins.

·LowerHigher other operation and maintenance for the three-month period primarily due to $11 million of lower 2013 project and refueling outage costs at PPL Susquehanna and $4 million of Brunner Island Unit 3Montour outage costs in 20122013 with no comparable outage in 2013.2012.

Lower other operation and maintenance for the six-monthnine-month period primarily due to $19$23 million of outage costs at Brunner Island Unit 3 outage costs in 2012 with no comparable outage in 2013mainly due to timing and $17$9 million ofdue to lower 2013 project and refueling outage costs at PPL Susquehanna, partially offset by $5$13 million of Conemaugh Unit 2Montour outage costs in 2013 with no comparable outage in 2012 and $6 million of Ironwood outage costs in 2013 with no comparable outage in 2012.

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

·Higher other income (expense) - netinterest expense for the three and six-month periods partiallynine-month period primarily due to the impact of a worker's compensation adjustment of $4 million.lower capitalized interest in 2013.

·Higher interest expense for the six-month period due to $7 million from PPL Capital Funding's June 2012 $400 million debt issuance, $6 million due to lower capitalized interest in 2013 and $4 million due to financing associated with PPL Ironwood.  Interest expense associated with certain PPL Capital Funding debt issuances is allocated to the Supply segment.

·Lower income taxes for the threethree-month period primarily due to $26 million of higher adjustments to valuation allowances in 2013 on Pennsylvania net operating loss carryforwards and six-month periods due toa $6 million benefit from a state tax rate change recorded in 2012, partially offset by lower pre-tax income in 2013, which reduced income taxes by $30 million and $77 million, partially offset for the six-month period by an $11$10 million.

Lower income taxes for the nine-month period primarily due to lower pre-tax income in 2013, which reduced income taxes by $87 million, partially offset by $26 million of higher adjustments to valuation allowances in 2013 on Pennsylvania net operating loss carryforwards and a $17 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 JuneSeptember 30.

  Income Statement Three Months Six Months  Income Statement Three Months Nine Months
  Line Item 2013  2012  2013  2012   Line Item 2013  2012  2013  2012 
                        
Adjusted energy-related economic activity, net, net of tax of ($51), $23, $28, ($79)(a) $ 76  $ (32) $ (41) $ 118 
Adjusted energy-related economic activity - net, net of tax of $4, $63, $32, ($16)Adjusted energy-related economic activity - net, net of tax of $4, $63, $32, ($16)(a) $ (6) $ (95) $ (47) $ 23 
Impairments:Impairments:         Impairments:          
Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1), $0, ($2)Other Income-net        1 Adjustments - nuclear decommissioning trust investments, net of tax of $0, $0, $0, ($2)Other Income-net              1 
Other:Other:         Other:          
Change in tax accounting method related to repairsIncome Taxes  (3)    (3)  Change in tax accounting method related to repairsIncome Taxes         (3)   
 Other Operation         Other Operation          
Counterparty bankruptcy, net of tax of ($1), $0, ($1), $5 (b)and Maintenance  1     1   (6)Counterparty bankruptcy, net of tax of $0, $0, ($1), $5 (b)and Maintenance         1    (6)
Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0(c)    1     1 Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0(c)            1 
  Other Operation          Other Operation          
Ash basin leak remediation adjustment, net of tax of $0, $0, $0, ($1)and Maintenance        1 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)Coal contract modification payments, net of tax of $0, $7, $0, $12 (d)Fuel       (10)      (17)
TotalTotal  $ 74  $ (38) $ (43) $ 108 Total  $ (6) $ (105) $ (49) $ 3 

(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 JuneSeptember 30, to the special item identified as "Adjusted energy-related economic activity - net."

    Three Months Six Months
    2013  2012  2013  2012 
Operating Revenues            
  Unregulated retail electric and gas $ 20  $ (12) $ 12  $ (2)
  Wholesale energy marketing   590    (458)   (232)   394 
Operating Expenses            
  Fuel   (4)   (16)   (5)   (14)
  Energy Purchases   (479)   442    155    (149)
Energy-related economic activity (a)   127    (44)   (70)   229 
Option premiums      1    1    1 
Adjusted energy-related economic activity   127    (43)   (69)   230 
Less:  Economic activity realized, associated with the monetization of            
 certain full-requirement sales contracts in 2010      12       33 
Adjusted energy-related economic activity, net, pre-tax $ 127  $ (55) $ (69) $ 197 
               
Adjusted energy-related economic activity, net, after-tax $ 76  $ (32) $ (41) $ 118 
    Three Months Nine Months
    2013  2012  2013  2012 
Operating Revenues            
  Unregulated retail electric and gas $ (2) $ (13) $ 10  $ (15)
  Wholesale energy marketing   (49)   (716)   (281)   (322)
Operating Expenses            
  Fuel   3    3    (2)   (11)
  Energy Purchases   37    569    192    420 
Energy-related economic activity (a)   (11)   (157)   (81)   72 
113
    Three Months Nine Months
    2013  2012  2013  2012 
Option premiums   1         2    1 
Adjusted energy-related economic activity   (10)   (157)   (79)   73 
Less:  Economic activity realized, associated with the monetization of            
 certain full-requirement sales contracts in 2010        1         34 
Adjusted energy-related economic activity - net, pre-tax $ (10) $ (158) $ (79) $ 39 
               
Adjusted energy-related economic activity - net, after-tax $ (6) $ (95) $ (47) $ 23 

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

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

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL'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

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

PPL's three non-GAAP financial measures include:as indicators of performance for its businesses.
109

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

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

·"Unregulated Gross Energy Margins" is a single financial performance measure of the Supply segment'sPPL Energy Supply's competitive energy non-trading and trading activities.  Non-trading activities are managed on a geographic basis that is aligned with the generation fleet.  In calculating this measure, the Supply segment's energy revenues are offset by the cost of fuel, energy purchases and certain other operation and maintenance expenses, primarily ancillary charges and gross receipts tax, which is recorded in "Taxes, other than income".income."  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 reconciliation table below.below (in "Wholesale energy marketing to affiliate" in PPL excludes fromEnergy Supply's reconciliation table).  "Unregulated Gross Energy Margins" the Supply segment'sexcludes 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'sthe 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 adjustedAdjusted energy-related economic activity isalso includes the premium amortization associated with options and for 2012 the ineffective portion of qualifying cash flow hedges and realized economic activity associated with the monetization of certain full-requirement sales contracts in 2010.  This economic activity was deferred, with the exception of the full-requirement sales contracts that were monetized, and included in Unregulated"Unregulated Gross Energy MarginsMargins" over the delivery period that was hedged or upon realization.
114

These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  Management believes that these measures provide additional criteria to make investment decisions.  These performance measures are used, in conjunction with other information, internally by senior management and PPL's Board of Directors to manage the operations, analyze actual results compared with budget and, in certain cases, to measure certain corporate financial goals used in determining variable compensation.

Reconciliation of Non-GAAP Financial Measures

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

      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 
      2013 Three Months 2012 Three Months
          Unregulated          Unregulated      
      Kentucky 
PA Gross
 Gross    
Operating
 Kentucky PA Gross Gross    
Operating
      Gross Delivery Energy    Income Gross Delivery Energy     Income
      Margins Margins Margins Other (a) (b) Margins Margins Margins Other (a) (b)
Operating Revenues                                
 Utility $ 744  $ 463     $ 532 (c)  $ 1,739  $ 732  $ 443     $ 518 (c)  $ 1,693 
 PLR intersegment utility                                
  revenue (expense) (d)      (11) $ 11                (23) $ 23          
 Unregulated retail                                    
  electric and gas         267    (3)(f)    264          232    (14)(f)    218 
 Wholesale energy marketing                                    
   Realized         981    (1)    980          1,074    2 (e)    1,076 
   Unrealized economic                                    
    activity            (49)(f)    (49)            (716)(f)    (716)
 Net energy trading margins         12          12          (11)         (11)
 Energy-related businesses            159     159               143     143 
   Total Operating Revenues   744    452    1,271    638     3,105    732    420    1,318    (67)    2,403 
                                     
Operating Expenses                                
 Fuel   237       256    1     494    249         310    11 (g)    570 
 Energy purchases                                    
   Realized   23    144    427    (2)    592    27    137    418    1 (e)    583 
   Unrealized economic                                    
    activity            (37)(f)    (37)            (569)(f)    (569)
 Other operation and                                    
  maintenance   26    19    5    619     669    28    25    1    596     650 
 Depreciation   1            288     289    13          265     278 
 Taxes, other than income        23    9    58     90         23    11    56     90 
 Energy-related businesses         5    146     151               137     137 
 Intercompany eliminations      (1)   1                (1)   1          
   Total Operating Expenses   287    185    703    1,073     2,248    317    184    741    497     1,739 
Total $ 457  $ 267  $ 568  $ (435)  $ 857  $ 415  $ 236  $ 577  $ (564)  $ 664 

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

 
110115
 
      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    2013 Nine Months 2012 Nine Months
Net energy trading margins      (11)     (11)      18      18        Unregulated          Unregulated      
Energy-related businesses            264     264             237     237    Kentucky PA Gross Gross    
Operating
 Kentucky PA Gross Gross    
Operating
 Total Operating Revenues   1,482    899    2,287    1,239     5,907    1,363    822    2,741    1,735     6,661    Gross Delivery Energy    Income Gross Delivery Energy    Income
                           Margins Margins Margins Other (a) (b) Margins Margins Margins Other (a) (b)
Operating ExpensesOperating Expenses                      Operating Expenses                       
Fuel  447     522   1    970   428     385   22 (g)  835 Fuel  684     778   2    1,464   677     695   33 (g)   1,405 
Energy purchases                      Energy purchases                          
 Realized  123   292   855   (7)   1,263   108   273   1,251   38 (e)  1,670  Realized  146   436   1,282   (9)   1,855   135   410   1,669   39 (e)   2,253 
 Unrealized economic                       Unrealized economic                          
 activity        (155)(f)  (155)        149 (f)  149  activity        (192)(f)   (192)        (420)(f)   (420)
Other operation and                      Other operation and                          
 maintenance  48   43   8   1,275    1,374   46   49   11   1,339    1,445  maintenance  74   62   13   1,894    2,043   76   74   12   1,933    2,095 
Depreciation  2       568    570   26       509    535 Depreciation  3         856    859   39           774    813 
Taxes, other than income    47   18   117    182     44   16   118    178 Taxes, other than income      70   27   175    272       67   27   174    268 
Energy-related businesses        252    252         226    226 Energy-related businesses      5   398    403           363    363 
Intercompany eliminations      (2)   2              (2)   1    1     Intercompany eliminations      (3)   3                (3)   2    1     
 Total Operating Expenses   620    380    1,405    2,051     4,456    608    364    1,664    2,402     5,038  Total Operating Expenses   907    565    2,108    3,124     6,704    927    548    2,405    2,897     6,777 
TotalTotal $ 862  $ 519  $ 882  $ (812)  $ 1,451  $ 755  $ 458  $ 1,077  $ (667)  $ 1,623 Total $ 1,319  $ 786  $ 1,450  $ (1,247)  $ 2,308  $ 1,168  $ 694  $ 1,654  $ (1,229)  $ 2,287 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(c)Primarily represents WPD's utility revenue.
(d)Primarily related to PLR supply sold by PPL EnergyPlus to PPL Electric.
(e)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 sixnine months ended JuneSeptember 30, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $12$1 million and $33$34 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 sixnine months ended JuneSeptember 30, 2012 include a pre-tax loss of $12$17 million and $29 million related to coal contract modification payments.

Changes in Non-GAAP Financial Measures

The following table shows PPL's threethe non-GAAP financial measures by PPL's reportable segment and by component, as applicable, for the periods ended JuneSeptember 30 as well as the change between periods.  The factors that gave rise to the changes are described below the table.

111
  Three Months Six Months   Three Months Nine Months
  2013  2012  Change 2013  2012  Change   2013  2012  Change 2013  2012  Change
                             
Kentucky RegulatedKentucky Regulated             
Kentucky Gross MarginsKentucky Gross Margins $ 404  $ 372  $ 32  $ 862  $ 755  $ 107 Kentucky Gross Margins             
PA Gross Delivery Margins by Component            
LKE $ 457  $ 415  $  42  $ 1,319  $ 1,168  $  151 
 LG&E   210   198   12   595   552   43 
 KU   247   216   31   724   616   108 
                   
Pennsylvania RegulatedPennsylvania Regulated                  
PA Gross Delivery MarginsPA Gross Delivery Margins            
Distribution $ 183  $ 170  $ 13  $ 407  $ 359  $ 48  Distribution $ 201  $ 185  $ 16  $ 607  $ 544  $ 63 
Transmission   59    51    8    112    99    13  Transmission   66    51    15    179    150    29 
TotalTotal $ 242  $ 221  $ 21  $ 519  $ 458  $ 61 Total $ 267  $ 236  $ 31  $ 786  $ 694  $ 92 
                             
Unregulated Gross Energy Margins by Region            
SupplySupply              
Unregulated Gross Energy MarginsUnregulated Gross Energy Margins                  
Non-tradingNon-trading            Non-trading                  
Eastern U.S. $ 349  $ 407  $ (58) $ 779  $ 896  $ (117) Eastern U.S. $ 504  $ 521  $ (17) $ 1,283  $ 1,417  $ (134)
Western U.S.  56   76   (20)  114   163   (49) Western U.S.  52   67   (15)  166   230   (64)
Net energy tradingNet energy trading      10    (10)   (11)   18    (29)Net energy trading   12    (11)   23    1    7    (6)
TotalTotal $ 405  $ 493  $ (88) $ 882  $ 1,077  $ (195)Total $ 568  $ 577  $ (9) $ 1,450  $ 1,654  $ (204)

Kentucky Gross Margins

Kentucky Gross Margins increased $42 million for the three months ended JuneSeptember 30, 2013 compared with 2012, primarily due to higher base rates of $25$23 million ($10 million at LG&E and $13 million at KU), environmental cost recoveries added to base rates of $14$13 million and increased(at KU), returns from additional environmental capital investments of $8 million ($3 million at LG&E and $5 million at KU) and higher fuel recoveries of $6 million ($3 million at LG&E and $3 million at KU), partially offset by lower volumes of $9 million.$13 million ($7 million at LG&E and $6 million at KU).  The change in volumes was partiallyprimarily attributable to weather, as cooling degree days decreased 14%16% compared to the same period in 2012.

116
Kentucky Gross Margins increased $151 million for the sixnine months ended JuneSeptember 30, 2013 compared with 2012, primarily due to higher base rates of $56$72 million ($31 million at LG&E and $41 million at KU), environmental cost recoveries added to base rates of $32$45 million increased($3 million at LG&E and $42 million at KU), returns from additional environmental capital investments of $10$18 million ($9 million at LG&E and $9 million at KU) and higher volumesfuel recoveries 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.$11 million ($3 million at LG&E and $8 million at KU).

The increase in base rates was the result of new KPSC rates effective January 1, 2013.2013 at LG&E and KU.  The environmental cost recoveries added to base rates were due to the eliminationtransfer of the 2005 and 2006 ECR plans into base rates as a result of the 2012 Kentucky rate cases.cases for LG&E and KU.  This eliminationtransfer results in depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Kentucky Gross Margins in 2013, while the recovery of such costs remain in Kentucky Gross Margins through base rates.

Pennsylvania Gross Delivery Margins

Distribution

MarginsDistribution margins increased for the three months ended JuneSeptember 30, 2013 compared with 2012, primarily due to an $11$18 million favorable effect of price as a result of higher base rates, effective January 1, 2013.2013, partially offset by unfavorable weather of $4 million.

MarginsDistribution margins increased for the sixnine months ended JuneSeptember 30, 2013 compared with 2012 primarily due to a $13 million adverse effect of mild weather in 2012 and a $32$50 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, a favorable weather effect of $9 million and higher volumes of $4 million.

Transmission

MarginsTransmission margins increased for the three and sixnine months ended JuneSeptember 30, 2013 compared with 2012, primarily due to increased investment in plantcapital investments and the recovery of additional costs through the FERC formula-based rates.

Unregulated Gross Energy Margins

The increase (decrease) in unregulated gross energy margins for the periods ended September 30, 2013 compared with 2012 was due to:
   Three Months Nine Months
Eastern U.S.      
 Baseload energy prices $ (64) $ (310)
 Coal prices   (5)   (14)
 Nuclear fuel prices   (4)   (14)
 Retail electric   (10)   (10)
 Nuclear generation volume   (12)   (3)
 Full-requirement sales contracts   (6)   4 
 Gas optimization and storage   5    16 
 Ironwood acquisition which eliminated tolling expense      17 
 Intermediate and peaking Spark Spreads and availability   11    18 
 Net economic availability of coal and hydroelectric plants   (10)   29 
 Capacity prices   77    124 
 Other   1    9 
 Total $ (17) $ (134)
        
Western U.S.      
 Wholesale energy prices $ (10) $ (67)
 Net economic availability of coal and hydroelectric plants   (8)   (1)
 Other   3    4 
 Total $ (15) $ (64)
        
Net Energy Trading Margins      
 Gas positions $ (3) $ (17)
 Power positions   15    5 
 FTRs   9    7 
 Other   2    (1)
 Total $ 23  $ (6)

 
112117
 
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 RevenuesUtility Revenues  Utility Revenues  
            
The increase (decrease) in utility revenues for the periods ended June 30, 2013 compared with 2012 was due to:  
The increase (decrease) in utility revenues for the periods ended September 30, 2013 compared with 2012 was due to:The increase (decrease) in utility revenues for the periods ended September 30, 2013 compared with 2012 was due to:
            
   Three Months Six Months   Three Months Nine Months
Domestic:Domestic:    Domestic:    
PPL Electric (a) $ 10  $ 65 PPL Electric (a) $ 20  $ 85 
LKE (b)   24    119 LKE (b)   12    131 
Total Domestic   34    184 Total Domestic   32    216 
              
U.K.:U.K.:    U.K.:     
Price (c)  50   113 Price (c)  74    187 
Volume (d)  23   28 Volume (d)  (10)   18 
DPCR4 accrual adjustments (e)  (24)  (24)DPCR4 accrual adjustments (e)  (21)   (45)
Foreign currency exchange rates  (26)  (16)Recovery of allowed revenues (f)  (22)   (22)
Other (f)   (7)   1 Foreign currency exchange rates  (9)   (25)
Total U.K.   16    102 Other   2    3 
Total U.K.   14    116 
TotalTotal $ 50  $ 286 Total $ 46  $ 332 

(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-monthnine-month periods is primarily due towere impacted by a price increasesincrease effective April 1, 2013 and2013.  The nine-month period was also impacted by a price increase effective April 1, 2012.
(d)The increase for the three and six-month periods isnine-month period was primarily due to the favorable effect of weather.
(e)The decrease for the three and six-monthnine-month periods iswas 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 monthand nine-month period was due to an accrual for over-recovered revenues as a result of price and weather related volume effects that is primarily relatednot expected to reverse within the regulatory year ending March 31, 2014.  Therefore, a $6 million reductionliability was recorded and utility revenue was reduced for the amount of the over-recovery in third-party engineering revenue, which is partially offset by a reduction in costs in "Other operation and maintenance" onSeptember 2013.  These amounts are expected to be refunded within the Statements of Income.regulatory year beginning April 1, 2014.

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



Other Operation and MaintenanceOther Operation and Maintenance    
      
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
      
      
  Three Months Six Months  Three Months Nine Months
Domestic:Domestic:    Domestic:     
Brunner Island outage timing$ (4) $ (23)
Uncollectible accounts (a)       (23)
LKE coal plant outages (b)  (1)  (18)
Uncollectible accounts (a)$ (4) $ (20)Montour outage in 2013  15   13 
LKE coal plant outages (b)  (4)  (17)Act 129 costs (c)  (7)  (13)
Brunner Island Unit 3 outage in 2012  (4)  (19)PUC-reportable storm costs, net of insurance recovery  (8)  (9)
PPL Susquehanna projects  (6)  (9)PPL Susquehanna projects    (9)
PPL Susquehanna refueling outage  (5)  (8)PPL Susquehanna outages  1   (6)
Act 129 (c)  (7)  (7)Ironwood outage in 2013  3   6 
Conemaugh Unit 2 outage in 2013  3  5 LKE adjustments to regulatory assets and liabilities      4 
Other generation plant costs  (7)  (1)Other generation plants  4   4 
Other  (7)  1 Other  8   9 
U.K.:U.K.:    U.K.:    
Third-party engineering (d)  (3)  2 Third-party engineering (d)  3   5 
Network maintenance (e)  6   13 Network maintenance (e)  10   23 
Insurance claim provision release  6   6 Insurance claim provision release      6 
Severance compensation (f)  (4)  (8)Severance compensation (f)    (8)
Pension  (2)  (4)Employee related expenses  (1)  (6)
Foreign currency exchange rates  (5)  (3)Foreign currency exchange rates  (2)  (4)
Other  2    (2)Other  (2)   (3)
TotalTotal$ (41) $ (71)Total$ 19  $ (52)

(a)The decrease for the six-monthnine-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 sixnine month periods is due to the timing and scope of scheduled outages.
(c)The decrease for the three and sixnine 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 sixnine month periods is primarily due to higher vegetation management costs.
(f)The decrease for the three and sixnine month periodsperiod 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 
118
Depreciation  
        
The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:
        
   Three Months Nine Months
        
Additions to PP&E $ 20  $ 64 
LKE lower depreciation rates effective January 1, 2013   (5)   (16)
Ironwood Acquisition        6 
Other   (4)   (8)
Total $ 11  $ 46 

Other Income (Expense) - net

The $17$72 million decrease in other income (expense) - net for the three months ended JuneSeptember 30, 2013 compared with 2012 was primarily due to a decrease of $21$70 million from realized and unrealized gains on foreign currency contracts.contracts to economically hedge GBP denominated earnings from WPD.

The $122$50 million increase in other income (expense) - net for the sixnine months ended JuneSeptember 30, 2013 compared with 2012 was primarily due to an increase of $116$46 million from realized and unrealized gains on foreign currency contracts.contracts to economically hedge GBP denominated earnings from WPD.

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 September 30, 2013 compared with 2012 was due to:
     
  ��Three Months Nine Months
        
Long-term debt interest expense (a) $ 5  $ 32 
Loss on extinguishment of debt (b)       10 
Net amortization of debt discounts, premiums and issuance costs   (4)   (4)
Other   (3)   3 
Total $ (2) $ 41 
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 periodthree and nine-month periods was primarily due to debt issuances by PPL Capital Funding's debt issuancesFunding in March 2013 Juneand October 2012, and October 2012.  See Note 7 toby PPL Electric in July 2013 and August 2012, partially offset by the Financial Statements in this Form 10-Q and in PPL's 2012 Form 10-K for additional information.impact of lower interest rates resulting from the remarketing of the 2010 Equity Units.

 The increase for the six-monthnine-month period was primarilyalso increased due to debt issuances by PPL Capital Funding's debt issuances as discussed aboveFunding in June 2012 and by WPD (East Midlands) in April 2012, as well as higher accretion expense on WPD index linked notes and three additional months of interest on WPD (East Midlands') April 2012 issuancedebt assumed as part of £100 million, 5.25% Senior Notes due 2023.the Ironwood Acquisition.  Partially offsetting these increases was PPL Energy Supply's debt maturity in July 2013.

114
(b)In May 2013, PPL Capital Funding remarketed and exchanged junior subordinatedsubordinate 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)
See Note 7 to the Financial Statements in this Form 10-Q for information on 2013 long-term debt activity and PPL's 2012 Form 10-K for information on 2012 activity.

Income Taxes  
        
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
    
   Three Months Nine Months
        
Change in pre-tax income at current period tax rates $ 36  $ (31)
State valuation allowance adjustments (a)   36    36 
Federal and state tax reserve adjustments (b)   1    (34)
Federal and state tax return adjustments   (4)   (4)
U.S. income tax on foreign earnings net of foreign tax credit (c)   9    3 
U.K. Finance Act adjustments (d)   (19)   (19)
Foreign tax reserve adjustments   (2)   3 
Net operating loss carryforward adjustments (e)        9 
Intercompany Interest on WPD Financing Entities   2    2 
State deferred tax rate change (f)   6    17 
Other   2    (2)
Total $ 67  $ (20)
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(a)During the three and nine months ended September 30, 2013, PPL recorded a $38 million increase in state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.
(b)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during the three and sixnine months ended JuneSeptember 30, 2013.  See Note 5 to the Financial Statements for additional information.
(b)(c)During the three and sixnine months ended JuneSeptember 30, 2013, PPL recorded a $14$10 million and $24 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013.

During the nine months ended September 30, 2013, andPPL 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)(d)DuringThe U.K.'s Finance Act 2013, enacted in July 2013, reduced the threeU.K. statutory income tax rate from 23% to 21%, effective April 1, 2014 and six months ended June 30, 2012,from 21% to 20% effective April 1, 2015.  As a result, PPL recordedreduced its net deferred tax liabilities and recognized a $93 million deferred tax benefit following resolutionin the third quarter of a U.K. tax issue2013 related to both rate decreases.

The U.K.'s Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax deductibilityrate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a $74 million deferred tax benefit in the third quarter of interest expense.2012 related to both rate decreases.
(d)(e)During the three and sixnine months ended JuneSeptember 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(e)(f)During the sixthree and nine months ended JuneSeptember 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 

PPL Energy Supply:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income Attributable to PPL Energy Supply Member $ 124  $ 54  $ 172  $ 382 
Special items, after-tax   (6)   (105)   (49)   3 

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

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

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

Statement of Income Analysis --

Unregulated Gross Energy Margins

"Unregulated Gross Energy Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.
120

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

     2013 Three Months 2012 Three Months
     Unregulated       Unregulated      
     Gross Energy    Operating Gross Energy     Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                   
 Wholesale energy marketing                   
    Realized$ 981  $  (1)  $  980  $ 1,074  $  2 (c)  $  1,076 
    Unrealized economic activity     (49)(d)    (49)        (716)(d)    (716)
 Wholesale energy marketing                     
  to affiliate  11          11    23          23 
 Unregulated retail electric and gas  267    (1)(d)    266    232    (13)(d)    219 
 Net energy trading margins  12          12    (11)         (11)
 Energy-related businesses       143     143         128     128 
   Total Operating Revenues  1,271    92     1,363    1,318    (599)    719 
                        
Operating Expenses                   
 Fuel  256    2     258    310    11 (e)    321 
 Energy purchases                         
    Realized  427    (2)    425    418    3 (c)    421 
    Unrealized economic activity       (37)(d)    (37)        (569)(d)    (569)
 Energy purchases from affiliate  1          1    1        1 
 Other operation and maintenance  5    238     243    1    219     220 
 Depreciation     80     80         73     73 
 Taxes, other than income  9    9     18    11    7     18 
 Energy-related businesses  5    133     138         125     125 
   Total Operating Expenses  703    423     1,126    741    (131)    610 
Total$ 568  $ (331)  $ 237  $ 577  $ (468)  $ 109 

      2013 Nine Months 2012 Nine Months
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                    
 Wholesale energy marketing                        
    Realized $ 2,770  $  (3)  $  2,767  $ 3,353  $  14 (c)  $  3,367 
    Unrealized economic activity      (281)(d)    (281)        (322)(d)    (322)
 Wholesale energy marketing                        
  to affiliate   37          37    61          61 
 Unregulated retail electric and gas   750    11 (d)    761    638    (15)(d)    623 
 Net energy trading margins   1          1    7          7 
 Energy-related businesses      378     378         336     336 
   Total Operating Revenues   3,558    105     3,663    4,059    13     4,072 
                         
Operating Expenses                    
 Fuel   778    2     780    695    33 (e)    728 
 Energy purchases                        
    Realized   1,282    (5)    1,277    1,669    46 (c)    1,715 
    Unrealized economic activity      (192)(d)    (192)        (420)(d)    (420)
 Energy purchases from affiliate   3          3    2          2 
 Other operation and maintenance   13    735     748    12    757     769 
 Depreciation      237     237         206     206 
 Taxes, other than income   27    24     51    27    26     53 
 Energy-related businesses   5    361     366         326     326 
   Total Operating Expenses   2,108    1,162     3,270    2,405    974     3,379 
Total $ 1,450  $ (1,057)  $ 393  $ 1,654  $ (961)  $ 693 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(c)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.   For the three and nine months ended September 30, 2012 "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $1 million and $34 million related to the monetization of certain full-requirement sales contracts.
(d)Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.
(e)Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and nine months ended September 30, 2012 include pre-tax losses of $17 million and $29 million related to coal contract modification payments.

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Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
  Three Months Nine Months
       
Brunner Island outage timing$ (4) $ (23)
Uncollectible accounts (a)     (15)
PPL Susquehanna projects       (9)
PPL Susquehanna outages  1    (6)
Ironwood outage in 2013  3    6 
Montour outage in 2013  15    13 
Other generation plants  4    4 
Other  4    9 
Total$ 23  $ (21)

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

Depreciation

Depreciation increased by $7 million and $31 million for the three and nine months ended September 30, 2013 compared with 2012, primarily due to $8 million and $28 million related to PP&E additions, and $6 million attributable to the Ironwood Acquisition for the nine-month period.

Interest Expense

For the nine months ended September 30, 2013 compared with 2012, interest expense increased by $8 million, primarily due to $6 million of lower capitalized interest related to the Rainbow hydroelectric redevelopment project.

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
    
  Three Months Nine Months
       
Change in pre-tax income at current period tax rates $ 50  $ (122)
State valuation allowance adjustments   2    2 
Federal and state tax reserve adjustments (a)        6 
Federal and state tax return adjustments   (1)   (1)
State deferred tax rate change (b)   6    17 
Other   1    2 
Total $ 58  $ (96)

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

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


PPL Electric:  Earnings and Statement of Income Analysis

Earnings            
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income Available to PPL $ 51  $ 33  $ 160  $ 95 

The increase in earnings for both periods was primarily due to higher electricity base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments, partially offset by higher income taxes.  The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.
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The table below quantifies the changes in the components of Net Income Available to PPL between these periods, which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

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

Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

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

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

     2013 Three Months 2012 Three Months
     PA Gross      PA Gross     
     Delivery   Operating Delivery    Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                 
 Retail electric$ 463       $ 463  $ 443       $ 443 
 Electric revenue from affiliate  1         1    1         1 
   Total Operating Revenues  464         464    444         444 
                      
Operating Expenses                 
 Energy purchases  144         144    137         137 
 Energy purchases from affiliate  11       11    23       23 
 Other operation and maintenance  19  $ 115    134    25  $ 123    148 
 Depreciation       45    45       41    41 
 Taxes, other than income  23    2    25    23    1    24 
   Total Operating Expenses  197    162    359    208    165    373 
Total$ 267  $ (162) $ 105  $ 236  $ (165) $ 71 

      2013 Nine Months 2012 Nine Months
      PA Gross      PA Gross     
      Delivery   Operating Delivery    Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                  
 Retail electric $ 1,388       $ 1,388  $ 1,303       $ 1,303 
 Electric revenue from affiliate   3         3    3         3 
   Total Operating Revenues   1,391         1,391    1,306         1,306 
                       
Operating Expenses                  
 Energy purchases   436         436    410         410 
 Energy purchases from affiliate   37       37    61       61 
 Other operation and maintenance   62  $ 329    391    74  $ 357    431 
 Depreciation      132    132       119    119 
 Taxes, other than income   70    7    77    67    5    72 
   Total Operating Expenses   605    468    1,073    612    481    1,093 
Total $ 786  $ (468) $ 318  $ 694  $ (481) $ 213 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

123
Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
      
Vegetation management$ 6  $ 3 
PUC-reportable storm costs, net of insurance recovery  (8)   (9)
Act 129 costs (a)  (7)   (13)
Uncollectible accounts       (3)
Corporate service (b)  (2)   (13)
Rent  (3)   (4)
Other       (1)
Total$ (14) $ (40)

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

Depreciation

Depreciation increased by $4 million and $13 million for the three and nine months ended September 30, 2013 compared with 2012, primarily due to PP&E additions as part of ongoing investments to enhance system reliability.

Taxes, Other Than Income

Taxes, other than income increased by $5 million for the nine months ended September 30, 2013 compared with 2012, primarily due to higher Pennsylvania gross receipts tax expense due to higher retail electricity revenue.  This tax is included in "Pennsylvania Gross Delivery Margins."

Financing Costs      
       
The increase (decrease) in financing costs for the periods ended September 30, 2013 compared with 2012 was due to:
       
  Three Months Nine Months
       
Long-term debt interest expense (a) $ 5  $ 8 
Distributions on Preference Stock (b)        (4)
Other        (1)
Total $ 5  $ 3 

(a)The increase was due to debt issuances in August 2012 and July 2013.
(b)The decrease was due to the June 2012 redemption of all 2.5 million shares of preference stock.

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
       
  Three Months Nine Months
       
Change in pre-tax income at current period tax rates $ 12  $ 39 
Other   (2)   (3)
Total $ 10  $ 36 

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

LKE:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 100  $ 83  $ 260  $ 180 
Special items, after-tax             2    (1)
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Excluding special items, the increases in earnings for both periods were primarily due to higher electricity and gas base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery, partially offset by higher depreciation (due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates and excluded from Margins) and higher income taxes.  The increase for the three-month period was partially offset by lower sales volumes.

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

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

Statement of Income Analysis --

Margins

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

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

      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 744     $  744   $ 732     $  732 
Operating Expenses                   
 Fuel   237       237     249       249 
 Energy purchases   23       23     27       27 
 Other operation and maintenance   26  $  162    188     28  $  158    186 
 Depreciation   1    83    84     13    74    87 
 Taxes, other than income        12    12          11    11 
   Total Operating Expenses   287    257    544     317    243    560 
Total $ 457  $ (257) $ 200   $ 415  $ (243) $ 172 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 2,226     $  2,226   $ 2,095     $  2,095 
Operating Expenses                   
 Fuel   684       684     677       677 
 Energy purchases   146       146     135       135 
 Other operation and maintenance   74  $  508    582     76  $  513    589 
 Depreciation   3    246    249     39    220    259 
 Taxes, other than income  ��     36    36          34    34 
   Total Operating Expenses   907    790    1,697     927    767    1,694 
Total $ 1,319  $ (790) $ 529   $ 1,168  $ (767) $ 401 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

125
Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
 Three Months  Nine Months
       
Coal plant outages (a)$ (1) $ (18)
Administrative and general (b)  3    8 
Adjustments to regulatory assets and liabilities     4 
Coal plant operations     3 
Other     (4)
Total$ 2  $ (7)

(a)Decrease is due to the timing and scope of scheduled outages.
(b)Increase for the nine-month period is primarily due to an increase in outside services of $8 million.

Depreciation

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

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

Other Income (Expense) - net

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

Income Taxes

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

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

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

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


LG&E:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 49  $ 43  $ 122  $ 94 

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

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

126
  Three Months Nine Months
       
Margins $ 12  $ 43 
Other operation and maintenance   (6)   (3)
Depreciation        3 
Taxes, other than income        (1)
Other Income (Expense) - net   2      
Interest Expense        1 
Income Taxes   (2)   (15)
Total $ 6  $ 28 

Statement of Income Analysis --

Margins

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

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

      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 343     $  343   $ 333     $  333 
Operating Expenses                   
 Fuel   100       100     100       100 
 Energy purchases   20       20     21       21 
 Other operation and maintenance   13  $  80    93     13  $  74    87 
 Depreciation        37    37     1    37    38 
 Taxes, other than income        6    6          6    6 
   Total Operating Expenses   133    123    256     135    117    252 
Total $ 210  $ (123) $ 87   $ 198  $ (117) $ 81 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                    
Operating Revenues $ 1,049     $  1,049   $ 990     $  990 
Operating Expenses                   
 Fuel   284       284     281       281 
 Energy purchases   135       135     119       119 
 Other operation and maintenance   34  $ 244    278     36  $  241    277 
 Depreciation   1    109    110     2    112    114 
 Taxes, other than income        18    18          17    17 
   Total Operating Expenses   454    371    825     438   370    808 
Total $ 595  $ (371) $ 224   $ 552  $ (370) $ 182 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
Coal plant outages (a)$ 1  $ (6)
Administrative and general (b)  1    6 
Distribution maintenance  2    2 
Other  2    (1)
Total$ 6  $ 1 

(a)Increase (decrease) is due to the timing and scope of scheduled outages.
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(b)Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

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

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

Income Taxes

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

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


KU:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 63  $ 50  $ 171  $ 118 

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

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

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

Statement of Income Analysis --

Margins

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

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

128
      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 414     $  414   $ 411     $  411 
Operating Expenses                   
 Fuel   137       137     149       149 
 Energy purchases   16       16     18       18 
 Other operation and maintenance   13  $  78    91     16  $  77    93 
 Depreciation   1    45    46     12    37    49 
 Taxes, other than income        6    6          5    5 
   Total Operating Expenses   167    129    296     195    119    314 
Total $ 247  $ (129) $ 118   $ 216  $ (119) $ 97 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 1,229     $  1,229   $ 1,165     $  1,165 
Operating Expenses                   
 Fuel   400       400     396       396 
 Energy purchases   63       63     76       76 
 Other operation and maintenance   40  $  246    286     41  $  245    286 
 Depreciation   2    136    138     36    109    145 
 Taxes, other than income        18    18          17    17 
   Total Operating Expenses   505    400    905     549    371    920 
Total $ 724  $ (400) $ 324   $ 616  $ (371) $ 245 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
Coal plant outages (a)$ (2) $ (12)
Administrative and general (b)  2    6 
Coal plant operations       4 
Adjustments to regulatory assets and liabilities     4 
Other  (2)   (2)
Total$ (2) $   

(a)Decrease is due to the timing and scope of scheduled outages.
(b)Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

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

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

Other Income (Expense) - net

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

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

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

Financial Condition
                   
Financial Condition and the remainder of this Item 2 are presented on a combined basis, providing information, as
applicable, for all Registrants.
                   
Liquidity and Capital Resources
                   
(All Registrants)
                   
The Registrants had the following at:
     PPL            
  PPL Energy Supply PPL Electric LKE LG&E KU
September 30, 2013                  
Cash and cash equivalents $ 1,291  $ 551  $ 225  $ 21  $ 12  $ 9 
Short-term debt   499              212    72    140 
Notes payable with affiliates            52           
                   
December 31, 2012                  
Cash and cash equivalents $ 901  $ 413  $ 140  $ 43  $ 22  $ 21 
Short-term debt   652    356         125    55    70 
Notes payable with affiliates            25           

At JuneSeptember 30, 2013, $178 million ofPPL's cash and cash equivalents wereincluded $231 million denominated in GBP.  If these amounts would be remitted as dividends, PPL may be subject to additional U.S. income taxes, net of allowable foreign income tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

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

     PPL Energy            
  PPL Supply PPL Electric LKE LG&E KU
2013                   
Operating activities $ 2,223  $ 583  $ 327  $ 713  $ 352  $ 419 
Investing activities   (2,788)   (351)   (697)   (879)   (366)   (510)
Financing activities   966    (94)   455    144    4    79 
                   
2012                   
Operating activities $ 2,094  $ 674  $ 261  $ 646  $ 267  $ 410 
Investing activities   (2,116)   (308)   (614)   (519)   (196)   (331)
Financing activities   (240)   (313)   64    (96)   (48)   (68)
                   
Change  - Cash Provided (Used)                  
Operating activities $ 129  $ (91) $ 66  $ 67  $ 85  $ 9 
Investing activities   (672)   (43)   (83)   (360)   (170)   (179)
Financing activities   1,206    219    391    240    52    147 

Operating Activities

The components of the change in cash provided by (used in) operating activities had no net change for the sixnine months ended JuneSeptember 30, 2013 compared with 2012. The result was the net effect of:2012 were as follows.

·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).

 
115130
 
        PPL Energy            
     PPL Supply PPL Electric LKE LG&E KU
                      
Change - Cash Provided (Used)                  
  Net income $ 58  $ (210) $ 61  $ 80  $ 28  $ 53 
  Non-cash components   244    169    42    15    (1)   (9)
  Net income, adjusted for non-cash                  
   components   302    (41)   103    95    27    44 
  Working capital   (284)   42    (45)   (21)   24    (26)
  Defined benefit funding   21    (37)   (34)   (93)   (19)   (42)
  Other operating activities   90    (55)   42    86    53    33 
 Total $ 129  $ (91) $ 66  $ 67  $ 85  $ 9 
Capital
For PPL, non-cash components of net income primarily consisted of $105 million related to non-cash hedging activities, $46 million related to increased depreciation and $45 million related to 2013 charges to adjust WPD's line loss accrual.  The decrease in cash from changes in components of working capital was primarily due to increases in accounts receivable (primarily due to extended payment terms at LG&E and KU and base rate increases effective in 2013 at PPL Electric, LG&E and KU), returns of counterparty collateral and changes to certain tax-related accounts.  The increase in cash from other operating activities was primarily due to $98 million in proceeds from the settlement of forward-starting interest rate swaps.

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

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

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

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

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

Investing Activities

The primary use of cash within investing activities is expenditures increased by $488 millionfor PP&E.  The change in these expenditures for the sixnine months ended JuneSeptember 30, 2013 compared with 2012 was as follows.

     PPL Energy            
  PPL Supply PPL Electric LKE LG&E KU
                   
(Increase) Decrease $ (690) $ 119  $ (281) $ (366) $ (183) $ (181)

The increase in expenditures for PP&E was primarily due to PPL Electric's Susquehanna-Roseland transmission project and projects to enhance system reliability at WPD and LKE'sPPL Electric, the Susquehanna-Roseland transmission project at PPL Electric, environmental projects at LG&E's Mill Creek and KU's Ghent plants and construction of Cane Run Unit 7.7 for LG&E and KU.
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Expenditures for PP&E decreased at PPL Energy Supply primarily related to the Rainbow hydroelectric redevelopment and Holtwood expansion projects and timing of nuclear fuel purchases.

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

Financing Activities

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

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

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

Credit Facilities
Unregulated Gross Energy Margins

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:
The increase (decrease) in unregulated gross energy margins for the periods ended September 30, 2013 compared with 2012 was due to:
   Three Months Nine Months
Eastern U.S.      
 Baseload energy prices $ (64) $ (310)
 Coal prices   (5)   (14)
 Nuclear fuel prices   (4)   (14)
 Retail electric   (10)   (10)
 Nuclear generation volume   (12)   (3)
 Full-requirement sales contracts   (6)   4 
 Gas optimization and storage   5    16 
 Ironwood acquisition which eliminated tolling expense      17 
 Intermediate and peaking Spark Spreads and availability   11    18 
 Net economic availability of coal and hydroelectric plants   (10)   29 
 Capacity prices   77    124 
 Other   1    9 
 Total $ (17) $ (134)
        
Western U.S.      
 Wholesale energy prices $ (10) $ (67)
 Net economic availability of coal and hydroelectric plants   (8)   (1)
 Other   3    4 
 Total $ (15) $ (64)
        
Net Energy Trading Margins      
 Gas positions $ (3) $ (17)
 Power positions   15    5 
 FTRs   9    7 
 Other   2    (1)
 Total $ 23  $ (6)

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Utility Revenues  
          
The increase (decrease) in utility revenues for the periods ended September 30, 2013 compared with 2012 was due to:
          
     Three Months Nine Months
Domestic:      
 PPL Electric (a) $ 20  $ 85 
 LKE (b)   12    131 
 Total Domestic   32    216 
          
U.K.:      
 Price (c)   74    187 
 Volume (d)   (10)   18 
 DPCR4 accrual adjustments (e)   (21)   (45)
 Recovery of allowed revenues (f)   (22)   (22)
 Foreign currency exchange rates   (9)   (25)
 Other   2    3 
 Total U.K.   14    116 
Total $ 46  $ 332 

         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)See "Pennsylvania Gross Delivery Margins" for further information.
(b)See "Kentucky Gross Margins" for further information.
(c)The three and nine-month periods were impacted by a price increase effective April 1, 2013.  The nine-month period was also impacted by a price increase effective April 1, 2012.
(d)The increase for the nine-month period was primarily due to the favorable effect of weather.
(e)The decrease for the three and nine-month periods was due to a reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4.  See Note 6 to the Financial Statements for additional information.
(f)The decrease for the three and nine-month period was due to an accrual for over-recovered revenues as a result of price and weather related volume effects that is not expected to reverse within the regulatory year ending March 31, 2014.  Therefore, a liability was recorded and utility revenue was reduced for the amount of the over-recovery in September 2013.  These amounts are expected to be refunded within the regulatory year beginning April 1, 2014.

Other Operation and Maintenance     
        
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
        
        
   Three Months Nine Months
Domestic:     
 Brunner Island outage timing$ (4) $ (23)
 Uncollectible accounts (a)       (23)
 LKE coal plant outages (b)  (1)   (18)
 Montour outage in 2013  15    13 
 Act 129 costs (c)  (7)   (13)
 PUC-reportable storm costs, net of insurance recovery  (8)   (9)
 PPL Susquehanna projects     (9)
 PPL Susquehanna outages  1    (6)
 Ironwood outage in 2013  3    6 
 LKE adjustments to regulatory assets and liabilities       4 
 Other generation plants  4    4 
 Other  8    9 
U.K.:     
 Third-party engineering (d)  3    5 
 Network maintenance (e)  10    23 
 Insurance claim provision release       6 
 Severance compensation (f)     (8)
 Employee related expenses  (1)   (6)
 Foreign currency exchange rates  (2)   (4)
 Other  (2)   (3)
Total$ 19  $ (52)

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

118
Depreciation  
        
The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:
        
   Three Months Nine Months
        
Additions to PP&E $ 20  $ 64 
LKE lower depreciation rates effective January 1, 2013   (5)   (16)
Ironwood Acquisition        6 
Other   (4)   (8)
Total $ 11  $ 46 

Other Income (Expense) - net

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

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

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

Interest Expense   
        
The increase (decrease) in interest expense for the periods ended September 30, 2013 compared with 2012 was due to:
     
  ��Three Months Nine Months
        
Long-term debt interest expense (a) $ 5  $ 32 
Loss on extinguishment of debt (b)       10 
Net amortization of debt discounts, premiums and issuance costs   (4)   (4)
Other   (3)   3 
Total $ (2) $ 41 

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

The nine-month period also increased due to debt issuances by PPL Capital Funding in June 2012 and by WPD (East Midlands) in April 2012, as well as higher accretion expense on WPD index linked notes and three additional months of interest on debt assumed as part of the Ironwood Acquisition.  Partially offsetting these increases was PPL Energy Supply's debt maturity in July 2013.
(b)In May 2013, PPL Capital Funding remarketed and exchanged junior subordinate notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.

See Note 7 to the Financial Statements 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" abovethis Form 10-Q for information regarding equity forward agreementson 2013 long-term debt activity and the 2010 Equity Units.  PPL has no plans to issue new shares of common stock for the remainder of 2013.

In March 2013, PPL Capital Funding issued $450 million of its 5.90% Junior Subordinated Notes due 2073.  PPL Capital Funding received proceeds of $436 million, net of underwriting fees, which was loaned to or invested in affiliates of PPL Capital Funding and used to fund their capital expenditures and other general corporate purposes.
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In July 2013, PPL Electric issued $350 million of 4.75% First Mortgage Bonds due 2043.  PPL Electric received proceeds of $345 million, net of a discount and underwriting fees, which will be used for capital expenditures, to fund pension obligations and for other general corporate purposes.

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

Common Stock Dividends

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

Rating Agency Actions

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

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

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

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

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

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

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

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

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

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

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

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

Ratings Triggers

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

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

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

Risk Management
Income Taxes  
        
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
    
   Three Months Nine Months
        
Change in pre-tax income at current period tax rates $ 36  $ (31)
State valuation allowance adjustments (a)   36    36 
Federal and state tax reserve adjustments (b)   1    (34)
Federal and state tax return adjustments   (4)   (4)
U.S. income tax on foreign earnings net of foreign tax credit (c)   9    3 
U.K. Finance Act adjustments (d)   (19)   (19)
Foreign tax reserve adjustments   (2)   3 
Net operating loss carryforward adjustments (e)        9 
Intercompany Interest on WPD Financing Entities   2    2 
State deferred tax rate change (f)   6    17 
Other   2    (2)
Total $ 67  $ (20)

Market Risk

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

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

Commodity Price Risk (Non-trading)

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

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

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

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

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

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

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


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

Commodity Price Risk (Trading)

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

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

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

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

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

VaR Models

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

      Non-Trading
   Trading VaR VaR
95% Confidence Level, Five-Day Holding Period      
 Period End $ 2  $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.

 
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Interest Rate Risk

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

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

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

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

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

(a)Includes accrued interest, if applicable.During the three and nine months ended September 30, 2013, PPL recorded a $38 million increase in state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.
(b)EffectsIn May 2013, the U.S. Supreme Court reversed the December 2011 ruling of adverse movements decrease assets or increase liabilities, as applicable, which couldthe U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result in an asset becomingof this decision, PPL recorded 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 totax benefit of $44 million during the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through rates.  The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings.  The positions outstanding at Junenine months ended September 30, 2013 mature through 2044.
(d)PPL utilizes cross-currency swaps to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.  While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.  The positions outstanding at June 30, 2013 mature through 2028.
(e)PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  The positions outstanding at June 30, 2013 mature through 2033.

Foreign Currency Risk

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's domestic operations may make purchases of equipment in currencies other than U.S. dollars.

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

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

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

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(a)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(b)To protect the value of a portion of its net investment in WPD, PPL executes forward contracts to sell GBP.  The positions outstanding at June 30, 2013 mature through 2014.  Excludes the amount of intercompany loans classified as net investment hedges.2013.  See Note 145 to the Financial Statements for additional information.
(c)To economically hedgeDuring the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwardsthree and average rate options to sell GBP.  The forwards and options outstanding at Junenine months ended September 30, 2013, mature through 2015.PPL recorded a $10 million and $24 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013.

NDT Funds - Securities Price Risk
During the nine months ended September 30, 2013, PPL recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.
(d)The U.K.'s Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a $93 million deferred tax benefit in the third quarter of 2013 related to both rate decreases.

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At June 30, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At June 30, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $57 million reduction in the fair value of the trust assets.  
The U.K.'s Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a $74 million deferred tax benefit in the third quarter of 2012 related to both rate decreases.
(e)During the nine months ended September 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(f)During the three and nine months ended September 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.

See Notes 13 and 17Note 5 to the Financial Statements for additional information regarding the NDT funds.on income taxes.

Credit Risk

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

Foreign Currency Translation

The value of the British pound sterling fluctuates in relation to the U.S. dollar.  Changes in this exchange rate resulted in a foreign currency translation loss of $269 million for the six months ended June 30, 2013, which primarily reflected a $714 million reduction to PP&E and goodwill offset by a reduction of $445 million to net liabilities.  Changes in this exchange rate resulted in a foreign currency translation loss of $104 million for the six months ended June 30, 2012, which primarily reflected a $259 million reduction to PP&E and goodwill offset by a reduction of $155 million to net liabilities.  The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions

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

Acquisitions, Development and Divestitures

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

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of PPL's business.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs for their products or their demand for PPL's services.
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Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL has hydroelectric generating facilities or where river water is used to cool its fossil and nuclear powered generators.  PPL cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

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

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL will work with industry groups to comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, PPL is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

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

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

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  PPL is generally well-positioned to comply with MATS, primarily due to recent investments in environmental

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controls and approved ECR plans to install additional controls at some of its Kentucky plants.  Additionally, PPL is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions.  In September 2012, PPL announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.  The anticipated retirements of certain coal-fired electric generating units are in response to this and other environmental regulations.

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

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

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

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

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


New Accounting Guidance

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

Application of Critical Accounting Policies

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

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PPL ENERGY SUPPLY, LLC AND SUBSIDIARIESEnergy Supply:  Earnings and Statement of Income Analysis

Item 2.  Management's Discussion
Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income Attributable to PPL Energy Supply Member $ 124  $ 54  $ 172  $ 382 
Special items, after-tax   (6)   (105)   (49)   3 

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

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

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

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

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

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

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

Overview

Introduction

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

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

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

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

Business Strategy

PPL Energy Supply's strategy is to achieve disciplined optimization of energy supply margins while mitigating near-term volatility in both cash flows and earnings.  More specifically, PPL Energy Supply's strategy is to optimize the value from its competitive generation and marketing portfolios.  PPL Energy Supply endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL Energy

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

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

Financial and Operational Developments

Net Income Attributable to PPL Energy Supply Member

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

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

Economic and Market Conditions

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

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

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

Susquehanna Turbine Blade Inspection

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

Colstrip Unit 4 Outage

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

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

Results of Operations

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

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

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

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

 Three Months Six Months Three Months Nine Months
         
Unregulated Gross Energy Margins $ (88) $ (195) $ (9) $ (204)
Other operation and maintenance  17   30   (19)  11 
Depreciation  (10)  (24)  (7)  (31)
Taxes, other than income  3   4   (2)  2 
Other Income (Expense) - net  7   8   (3)  5 
Interest Expense  (3)  (12)  4   (8)
Other  4   2   (1)  1 
Income Taxes  25   58   8   66 
Special items, after-tax   112    (151)   99    (52)
Total $ 67  $ (280) $ 70  $ (210)

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

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

Lower other operation"Unregulated Gross Energy Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and maintenance for explanations of the six-month period primarily due to $19 millionunderlying drivers 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.the changes between periods.

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

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

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

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

 
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The following after-tax gains (losses), which management considers special items, also impactedtables contain the results duringcomponents from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended JuneSeptember 30.

   Income Statement Three Months Six Months
   Line Item 2013  2012  2013  2012 
                
Adjusted energy-related economic activity, net, net of tax of ($51), $23, $28, ($79)(a) $ 76  $ (32) $ (41) $ 118 
Impairments:             
 Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1), $0, ($2)Other Income-net            1 
Other:             
 Change in tax accounting method related to repairsIncome Taxes   (3)      (3)   
  Other Operation            
 Counterparty bankruptcy, net of tax of ($1), $0, ($1), $5 (b)and Maintenance   1       1    (6)
 Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0(c)      1       1 
   Other Operation            
 Ash basin leak remediation adjustment, net of tax of $0, $0, $0, ($1)and Maintenance            1 
 Coal contract modification payments, net of tax of $0, $5, $0, $5 (d)Fuel      (7)      (7)
Total  $ 74  $ (38) $ (43) $ 108 
     2013 Three Months 2012 Three Months
     Unregulated       Unregulated      
     Gross Energy    Operating Gross Energy     Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                   
 Wholesale energy marketing                   
    Realized$ 981  $  (1)  $  980  $ 1,074  $  2 (c)  $  1,076 
    Unrealized economic activity     (49)(d)    (49)        (716)(d)    (716)
 Wholesale energy marketing                     
  to affiliate  11          11    23          23 
 Unregulated retail electric and gas  267    (1)(d)    266    232    (13)(d)    219 
 Net energy trading margins  12          12    (11)         (11)
 Energy-related businesses       143     143         128     128 
   Total Operating Revenues  1,271    92     1,363    1,318    (599)    719 
                        
Operating Expenses                   
 Fuel  256    2     258    310    11 (e)    321 
 Energy purchases                         
    Realized  427    (2)    425    418    3 (c)    421 
    Unrealized economic activity       (37)(d)    (37)        (569)(d)    (569)
 Energy purchases from affiliate  1          1    1        1 
 Other operation and maintenance  5    238     243    1    219     220 
 Depreciation     80     80         73     73 
 Taxes, other than income  9    9     18    11    7     18 
 Energy-related businesses  5    133     138         125     125 
   Total Operating Expenses  703    423     1,126    741    (131)    610 
Total$ 568  $ (331)  $ 237  $ 577  $ (468)  $ 109 

      2013 Nine Months 2012 Nine Months
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                    
 Wholesale energy marketing                        
    Realized $ 2,770  $  (3)  $  2,767  $ 3,353  $  14 (c)  $  3,367 
    Unrealized economic activity      (281)(d)    (281)        (322)(d)    (322)
 Wholesale energy marketing                        
  to affiliate   37          37    61          61 
 Unregulated retail electric and gas   750    11 (d)    761    638    (15)(d)    623 
 Net energy trading margins   1          1    7          7 
 Energy-related businesses      378     378         336     336 
   Total Operating Revenues   3,558    105     3,663    4,059    13     4,072 
                         
Operating Expenses                    
 Fuel   778    2     780    695    33 (e)    728 
 Energy purchases                        
    Realized   1,282    (5)    1,277    1,669    46 (c)    1,715 
    Unrealized economic activity      (192)(d)    (192)        (420)(d)    (420)
 Energy purchases from affiliate   3          3    2          2 
 Other operation and maintenance   13    735     748    12    757     769 
 Depreciation      237     237         206     206 
 Taxes, other than income   27    24     51    27    26     53 
 Energy-related businesses   5    361     366         326     326 
   Total Operating Expenses   2,108    1,162     3,270    2,405    974     3,379 
Total $ 1,450  $ (1,057)  $ 393  $ 1,654  $ (961)  $ 693 

(a)See "Reconciliation of Economic Activity" below.Represents amounts excluded from Margins.
(b)In October 2011, a wholesale customer,As reported on the Statements of Income.
(c)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.   For the three and nine months ended September 30, 2012 "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $1 million and $34 million related to the monetization of certain full-requirement sales contracts.
(d)Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.
(e)Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and nine months ended September 30, 2012 include pre-tax losses of $17 million and $29 million related to coal contract modification payments.

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Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
  Three Months Nine Months
       
Brunner Island outage timing$ (4) $ (23)
Uncollectible accounts (a)     (15)
PPL Susquehanna projects       (9)
PPL Susquehanna outages  1    (6)
Ironwood outage in 2013  3    6 
Montour outage in 2013  15    13 
Other generation plants  4    4 
Other  4    9 
Total$ 23  $ (21)

(a)The decrease for the nine-month period is primarily due to SMGT filedfiling 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 DistrictCode in 2011.  $11 million of Montana approved the requestdamages billed to terminate the contract, effective April 1,SMGT were fully reserved in 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 ActivityDepreciation

The following table reconciles unrealized pre-tax gains (losses)Depreciation increased by $7 million and $31 million for the periodsthree and nine months ended JuneSeptember 30, 2013 compared with 2012, primarily due to $8 million and $28 million related to PP&E additions, and $6 million attributable to the special item identified as "Adjusted energy-related economic activity, net."Ironwood Acquisition for the nine-month period.

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

For the nine months ended September 30, 2013 compared with 2012, interest expense increased by $8 million, primarily due to $6 million of lower capitalized interest related to the Rainbow hydroelectric redevelopment project.

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
    
  Three Months Nine Months
       
Change in pre-tax income at current period tax rates $ 50  $ (122)
State valuation allowance adjustments   2    2 
Federal and state tax reserve adjustments (a)        6 
Federal and state tax return adjustments   (1)   (1)
State deferred tax rate change (b)   6    17 
Other   1    2 
Total $ 58  $ (96)

(a)See Note 14During the nine months ended September 30, 2013, PPL Energy Supply reversed $3 million in tax benefits related to a 2008 change in method of accounting for certain expenditures for tax purposes and recorded $4 million in federal tax reserves related to differences in over (under) payment interest rates applied to audit claims as a result of the U.S. Supreme Court decision related to the Financial Statements for additional information.Windfall Profits tax.
(b)During the three and nine months ended September 30, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.

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


PPL Electric:  Earnings and Statement of Income Analysis

Earnings            
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income Available to PPL $ 51  $ 33  $ 160  $ 95 

The increase in earnings for both periods was primarily due to higher electricity base rates that became effective January 1, 2013 Outlookand higher transmission margins from additional capital investments, partially offset by higher income taxes.  The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.
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The table below quantifies the changes in the components of Net Income Available to PPL between these periods, which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

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

Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

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

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

     2013 Three Months 2012 Three Months
     PA Gross      PA Gross     
     Delivery   Operating Delivery    Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                 
 Retail electric$ 463       $ 463  $ 443       $ 443 
 Electric revenue from affiliate  1         1    1         1 
   Total Operating Revenues  464         464    444         444 
                      
Operating Expenses                 
 Energy purchases  144         144    137         137 
 Energy purchases from affiliate  11       11    23       23 
 Other operation and maintenance  19  $ 115    134    25  $ 123    148 
 Depreciation       45    45       41    41 
 Taxes, other than income  23    2    25    23    1    24 
   Total Operating Expenses  197    162    359    208    165    373 
Total$ 267  $ (162) $ 105  $ 236  $ (165) $ 71 

      2013 Nine Months 2012 Nine Months
      PA Gross      PA Gross     
      Delivery   Operating Delivery    Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                  
 Retail electric $ 1,388       $ 1,388  $ 1,303       $ 1,303 
 Electric revenue from affiliate   3         3    3         3 
   Total Operating Revenues   1,391         1,391    1,306         1,306 
                       
Operating Expenses                  
 Energy purchases   436         436    410         410 
 Energy purchases from affiliate   37       37    61       61 
 Other operation and maintenance   62  $ 329    391    74  $ 357    431 
 Depreciation      132    132       119    119 
 Taxes, other than income   70    7    77    67    5    72 
   Total Operating Expenses   605    468    1,073    612    481    1,093 
Total $ 786  $ (468) $ 318  $ 694  $ (481) $ 213 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

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Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
      
Vegetation management$ 6  $ 3 
PUC-reportable storm costs, net of insurance recovery  (8)   (9)
Act 129 costs (a)  (7)   (13)
Uncollectible accounts       (3)
Corporate service (b)  (2)   (13)
Rent  (3)   (4)
Other       (1)
Total$ (14) $ (40)

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

Depreciation

Depreciation increased by $4 million and $13 million for the three and nine months ended September 30, 2013 compared with 2012, primarily due to PP&E additions as part of ongoing investments to enhance system reliability.

Taxes, Other Than Income

Taxes, other than income increased by $5 million for the nine months ended September 30, 2013 compared with 2012, primarily due to higher Pennsylvania gross receipts tax expense due to higher retail electricity revenue.  This tax is included in "Pennsylvania Gross Delivery Margins."

Financing Costs      
       
The increase (decrease) in financing costs for the periods ended September 30, 2013 compared with 2012 was due to:
       
  Three Months Nine Months
       
Long-term debt interest expense (a) $ 5  $ 8 
Distributions on Preference Stock (b)        (4)
Other        (1)
Total $ 5  $ 3 

(a)The increase was due to debt issuances in August 2012 and July 2013.
(b)The decrease was due to the June 2012 redemption of all 2.5 million shares of preference stock.

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
       
  Three Months Nine Months
       
Change in pre-tax income at current period tax rates $ 12  $ 39 
Other   (2)   (3)
Total $ 10  $ 36 

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

LKE:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 100  $ 83  $ 260  $ 180 
Special items, after-tax             2    (1)
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Excluding special items, the increases in earnings for both periods were primarily due to higher electricity and gas base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery, partially offset by higher depreciation (due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates and excluded from Margins) and higher income taxes.  The increase for the three-month period was partially offset by lower sales volumes.

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

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

Statement of Income Analysis --

Margins

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

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

      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 744     $  744   $ 732     $  732 
Operating Expenses                   
 Fuel   237       237     249       249 
 Energy purchases   23       23     27       27 
 Other operation and maintenance   26  $  162    188     28  $  158    186 
 Depreciation   1    83    84     13    74    87 
 Taxes, other than income        12    12          11    11 
   Total Operating Expenses   287    257    544     317    243    560 
Total $ 457  $ (257) $ 200   $ 415  $ (243) $ 172 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 2,226     $  2,226   $ 2,095     $  2,095 
Operating Expenses                   
 Fuel   684       684     677       677 
 Energy purchases   146       146     135       135 
 Other operation and maintenance   74  $  508    582     76  $  513    589 
 Depreciation   3    246    249     39    220    259 
 Taxes, other than income  ��     36    36          34    34 
   Total Operating Expenses   907    790    1,697     927    767    1,694 
Total $ 1,319  $ (790) $ 529   $ 1,168  $ (767) $ 401 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

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Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
 Three Months  Nine Months
       
Coal plant outages (a)$ (1) $ (18)
Administrative and general (b)  3    8 
Adjustments to regulatory assets and liabilities     4 
Coal plant operations     3 
Other     (4)
Total$ 2  $ (7)

(a)Decrease is due to the timing and scope of scheduled outages.
(b)Increase for the nine-month period is primarily due to an increase in outside services of $8 million.

Depreciation

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

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

Other Income (Expense) - net

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

Income Taxes

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

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

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

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


LG&E:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 49  $ 43  $ 122  $ 94 

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

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

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

Statement of Income Analysis --

Margins

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

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

      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 343     $  343   $ 333     $  333 
Operating Expenses                   
 Fuel   100       100     100       100 
 Energy purchases   20       20     21       21 
 Other operation and maintenance   13  $  80    93     13  $  74    87 
 Depreciation        37    37     1    37    38 
 Taxes, other than income        6    6          6    6 
   Total Operating Expenses   133    123    256     135    117    252 
Total $ 210  $ (123) $ 87   $ 198  $ (117) $ 81 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                    
Operating Revenues $ 1,049     $  1,049   $ 990     $  990 
Operating Expenses                   
 Fuel   284       284     281       281 
 Energy purchases   135       135     119       119 
 Other operation and maintenance   34  $ 244    278     36  $  241    277 
 Depreciation   1    109    110     2    112    114 
 Taxes, other than income        18    18          17    17 
   Total Operating Expenses   454    371    825     438   370    808 
Total $ 595  $ (371) $ 224   $ 552  $ (370) $ 182 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
Coal plant outages (a)$ 1  $ (6)
Administrative and general (b)  1    6 
Distribution maintenance  2    2 
Other  2    (1)
Total$ 6  $ 1 

(a)Increase (decrease) is due to the timing and scope of scheduled outages.
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(b)Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

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

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

Income Taxes

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

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


KU:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 63  $ 50  $ 171  $ 118 

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

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

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

Statement of Income Analysis --

Margins

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

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

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      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 414     $  414   $ 411     $  411 
Operating Expenses                   
 Fuel   137       137     149       149 
 Energy purchases   16       16     18       18 
 Other operation and maintenance   13  $  78    91     16  $  77    93 
 Depreciation   1    45    46     12    37    49 
 Taxes, other than income        6    6          5    5 
   Total Operating Expenses   167    129    296     195    119    314 
Total $ 247  $ (129) $ 118   $ 216  $ (119) $ 97 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 1,229     $  1,229   $ 1,165     $  1,165 
Operating Expenses                   
 Fuel   400       400     396       396 
 Energy purchases   63       63     76       76 
 Other operation and maintenance   40  $  246    286     41  $  245    286 
 Depreciation   2    136    138     36    109    145 
 Taxes, other than income        18    18          17    17 
   Total Operating Expenses   505    400    905     549    371    920 
Total $ 724  $ (400) $ 324   $ 616  $ (371) $ 245 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
Coal plant outages (a)$ (2) $ (12)
Administrative and general (b)  2    6 
Coal plant operations       4 
Adjustments to regulatory assets and liabilities     4 
Other  (2)   (2)
Total$ (2) $   

(a)Decrease is due to the timing and scope of scheduled outages.
(b)Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

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

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

Other Income (Expense) - net

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

Income taxes increased by lower energy prices, higher fuel costs, higher$6 million and $31 million for the three and nine months ended September 30, 2013 compared with 2012 primarily due to the change in pre-tax income at current period tax rates.

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

Financial Condition
                   
Financial Condition and the remainder of this Item 2 are presented on a combined basis, providing information, as
applicable, for all Registrants.
                   
Liquidity and Capital Resources
                   
(All Registrants)
                   
The Registrants had the following at:
     PPL            
  PPL Energy Supply PPL Electric LKE LG&E KU
September 30, 2013                  
Cash and cash equivalents $ 1,291  $ 551  $ 225  $ 21  $ 12  $ 9 
Short-term debt   499              212    72    140 
Notes payable with affiliates            52           
                   
December 31, 2012                  
Cash and cash equivalents $ 901  $ 413  $ 140  $ 43  $ 22  $ 21 
Short-term debt   652    356         125    55    70 
Notes payable with affiliates            25           

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

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

     PPL Energy            
  PPL Supply PPL Electric LKE LG&E KU
2013                   
Operating activities $ 2,223  $ 583  $ 327  $ 713  $ 352  $ 419 
Investing activities   (2,788)   (351)   (697)   (879)   (366)   (510)
Financing activities   966    (94)   455    144    4    79 
                   
2012                   
Operating activities $ 2,094  $ 674  $ 261  $ 646  $ 267  $ 410 
Investing activities   (2,116)   (308)   (614)   (519)   (196)   (331)
Financing activities   (240)   (313)   64    (96)   (48)   (68)
                   
Change  - Cash Provided (Used)                  
Operating activities $ 129  $ (91) $ 66  $ 67  $ 85  $ 9 
Investing activities   (672)   (43)   (83)   (360)   (170)   (179)
Financing activities   1,206    219    391    240    52    147 

Operating Activities

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

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

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

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

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

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

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

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

Investing Activities

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

     PPL Energy            
  PPL Supply PPL Electric LKE LG&E KU
                   
(Increase) Decrease $ (690) $ 119  $ (281) $ (366) $ (183) $ (181)

The increase in expenditures for PP&E was primarily due to projects to enhance system reliability at WPD and PPL Electric, the Susquehanna-Roseland transmission project at PPL Electric, environmental projects at LG&E's Mill Creek and KU's Ghent plants and construction of Cane Run Unit 7 for LG&E and KU.
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Expenditures for PP&E decreased at PPL Energy Supply primarily related to the Rainbow hydroelectric redevelopment and Holtwood expansion projects and timing of nuclear fuel purchases.

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

Financing Activities

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

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

See "Forward-Looking Information," the rest of this Item 2, and Note 107 to the Financial Statements in this Form 10-Q for information on 2013 short and "Item 1. Business"long-term debt activity, equity transactions and "Item 1A. Risk Factors" in PPL Energy Supply'sdividends.  See the Registrant's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.information on 2012 activity.

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Statement of Income Analysis --

UnregulatedPennsylvania Gross EnergyDelivery Margins

Non-GAAP Financial MeasureDistribution

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

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Unregulated Gross Energy Margins" as defined by PPL Energy Supply to "Operating Income" for the periods ended June 30.

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

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

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

Changes in Non-GAAP Financial Measures

Unregulated Gross Energy Margins are generated through PPL Energy Supply's competitive non-trading and trading activities.  PPL Energy Supply's non-trading energy business is managed on a geographic basis that is aligned with its generation fleet.  The following table shows PPL Energy Supply's non-GAAP financial measure, Unregulated Gross Energy Margins, for the periods ended June 30, as well as the change between periods.  The factors that gave rise to the changes are described below the table.

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

Unregulated Gross Energy Margins

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

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

Western U.S.

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

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

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

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

Depreciation

Depreciation increased by $10 million and $24 million for the three and six months ended JuneSeptember 30, 2013 compared with 2012, primarily due to $10an $18 million and $20 million related to PP&E additions, and $6 million attributable to the Ironwood Acquisitionfavorable effect of price as a result of higher base rates, effective January 1, 2013, partially offset by unfavorable weather of $4 million.

Distribution margins increased for the six-month period.

Other Income (Expense) - net

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

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

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

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

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

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

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

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

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

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

PPL Energy Supply's cash provided by operating activities decreased by $81 million for the six months ended June 30, 2013, compared with 2012.  This was partially due to a $37$50 million increase in defined benefit plans funding and an $11 million increase in cash used by componentsfavorable effect of working capital (primarily due to changes in counterparty collateralprice, largely comprised of $118 million, partially offset by changes in fuel, materials and supplieshigher base rates, effective January 1, 2013, a favorable weather effect of $79 million).  In addition, a change of $31 million in other operating activities contributed to the decrease, partially due to changes in certain tax-related accounts.

Credit Facilities

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

         Letters of   
         Credit Issued   
       and  
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
              
PPL Energy Supply Credit Facilities (a) $ 3,150     $ 785  $ 2,365 

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

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

Commercial Paper

PPL Energy Supply maintains a commercial paper program for up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility.  At June 30, 2013 and December 31, 2012, PPL Energy Supply had $575$9 million and $356 millionhigher volumes of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.29% and 0.50%.

Rating Agency Actions

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

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

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

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

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

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

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

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

Ratings Triggers

PPL Energy Supply has various contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate instruments, which contain provisions that require PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract, if PPL Energy Supply's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2013.

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

Market Risk

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

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

Commodity Price Risk (Non-trading)

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

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

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

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

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

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

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

PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets.  If PPL Energy Supply were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages.  These damages would be based on the difference between the market price and the contract price of the commodity.  Depending on price changes in the wholesale energy markets, such damages could be significant.  Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL Energy Supply attempts to mitigate these risks, there can

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be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.

Commodity Price Risk (Trading)

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

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

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

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

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

VaR Models

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

      Non-Trading
   Trading VaR VaR
95% Confidence Level, Five-Day Holding Period      
 Period End $ 2  $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.

Interest Rate Risk

PPL Energy Supply and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk.  PPL and PPL Energy Supply utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in PPL Energy Supply's debt portfolio, adjust the duration of its debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate.  Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of PPL Energy Supply's debt portfolio due to changes in the absolute level of interest rates.  PPL Energy Supply had no interest rate hedges outstanding at June 30, 2013.

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

PPL Energy Supply is also exposed to changes in the fair value of its debt portfolio.  PPL Energy Supply estimated that a 10% decrease in interest rates at June 30, 2013 would increase the fair value of its debt portfolio by $50$4 million.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At June 30, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At June 30, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $57 million reduction in the fair value of the trust assets.  See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 11, 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL Energy Supply's 2012 Form 10-K for additional information.

Related Party Transactions

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

Acquisitions, Development and Divestitures

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

Environmental Matters

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

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

The following is a discussion of the more significant environmental matters.
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Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact PPL Energy Supply's coal-fired plants.  PPL Energy Supply will work with industry groups to comment on the proposed regulation.  A final regulation is expected in May 2014.  At the present time, PPL Energy Supply is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

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

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

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

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

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

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

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

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Energy Supply's 2012 Form 10-K for additional information on environmental matters.

New Accounting Guidance

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

Application of Critical Accounting Policies

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

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PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES

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


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

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

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

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

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

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

Overview

Introduction

PPL Electric is an electricity transmission and distribution service provider in eastern and central Pennsylvania with headquarters in Allentown, Pennsylvania.  PPL Electric is subject to regulation as a public utility by the PUC, and certain of its transmission activities are subject to the jurisdiction of FERC under the Federal Power Act.  PPL Electric delivers electricity in its Pennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.

Business Strategy

PPL Electric's strategy for its regulated electricity delivery business is to provide safe, reliable service to its customers and achieve stable, long-term growth in earnings and rate base.  Rate base is expected to grow as a result of significant capital expenditure programs aimed at maintaining existing assets and improving system reliability.  PPL Electric is focused on timely recovery of costs, efficient operations, strong customer service and constructive regulatory relationships.

To manage financing costs and access to credit markets and to fund capital expenditure programs, a key objective for PPL Electric is to maintain a strong credit profile and strong liquidity position.

Timely recovery of costs to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets, is required in order to maintain strong cash flows and a strong credit profile.  Traditionally, such cost recovery would be pursued through periodic base rate case proceedings with the PUC.  As such costs continue to increase, more frequent rate case proceedings may be required in order to achieve more timely recovery.  The recently approved DSIC mechanism will help reduce regulatory lag on distribution reliability-related capital investment.  See "Financial and Operational Developments - Distribution System Improvement Charge" below for information on Pennsylvania's new alternative rate-making mechanism.Transmission

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

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Financial and Operational Developments

Net Income Available to PPL

Net Income Available to PPL for the three and sixnine months ended JuneSeptember 30, 2013 was $45 million and $109 million compared to $29 million and $62 million for the same periods in 2012, representing a 55% and 76% increase over the same periods in 2012.

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

Rate Case Proceeding

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

Distribution System Improvement Charge

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

FERC Formula Rates

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

Results of Operations

The following discussion provides a summary of PPL Electric's earnings and a description of key factors that are expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Pennsylvania Gross Delivery Margins by component and principal line items on PPL Electric's Statements of Income, comparing the three and six months ended June 30, 2013 with the same periods in 2012.

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

Earnings            
              
Net Income Available to PPL for the periods ended June 30 was:
              
   Three Months Six Months
   2013  2012  2013  2012 
              
Net Income Available to PPL $ 45  $ 29  $ 109  $ 62 

The changes in the components of Net Income Available to PPL between these periods were due to the following factors which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

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

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

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

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

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

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

2013 Outlook

Excluding special items, PPL Electric projects higher earnings in 2013 compared with 2012, primarily driven by higher distribution revenues from a distribution base rate increasedue to increased capital investments and higher transmission margins, partially offset by higher depreciation and higher operation and maintenance expense.the recovery of additional costs through the FERC formula-based rates.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL Electric's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

Non-GAAP Financial MeasureDistribution

The following discussion includes financial information prepared in accordanceDistribution margins increased for the three months ended September 30, 2013 compared with GAAP, as well2012, primarily due to an $18 million favorable effect of price as a non-GAAP financial measure, "Pennsylvania Gross Delivery Margins."  "Pennsylvania Gross Delivery Margins" is a single financial performance measureresult of PPL Electric's Pennsylvania regulated electric delivery operations, which includes transmission and distribution activities.  In calculating this measure, utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, arehigher base rates, effective January 1, 2013, partially offset with minimal impact on earnings.  Costs associated with these mechanisms are recorded in "Energy purchases," "Energy purchases from affiliate," "Other operation and maintenance," which is primarily Act 129 costs, and "Taxes, other than income" which is primarily gross receipts tax.  As a result, this measure represents the net revenues from PPL Electric's Pennsylvania regulated electric delivery operations.  This measure is not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicatorby unfavorable weather of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  PPL Electric believes that "Pennsylvania Gross Delivery Margins" provides another criterion to make investment decisions.  This performance measure is used, in conjunction with other information, internally by senior management to manage PPL Electric's operations and analyze actual results to budget.$4 million.

ReconciliationDistribution margins increased for the nine months ended September 30, 2013 compared with 2012 due to a $50 million favorable effect of Non-GAAP Financial Measuresprice, largely comprised of higher base rates, effective January 1, 2013, a favorable weather effect of $9 million and higher volumes of $4 million.

The following tables reconcile "Pennsylvania Gross Delivery Margins" to "Operating Income" as defined by PPL ElectricTransmission

Transmission margins increased for the periodsthree and nine months ended June 30.September 30, 2013 compared with 2012, primarily due to increased capital investments and the recovery of additional costs through the FERC formula-based rates.

Unregulated Gross Energy Margins

The increase (decrease) in unregulated gross energy margins for the periods ended September 30, 2013 compared with 2012 was due to:
   Three Months Nine Months
Eastern U.S.      
 Baseload energy prices $ (64) $ (310)
 Coal prices   (5)   (14)
 Nuclear fuel prices   (4)   (14)
 Retail electric   (10)   (10)
 Nuclear generation volume   (12)   (3)
 Full-requirement sales contracts   (6)   4 
 Gas optimization and storage   5    16 
 Ironwood acquisition which eliminated tolling expense      17 
 Intermediate and peaking Spark Spreads and availability   11    18 
 Net economic availability of coal and hydroelectric plants   (10)   29 
 Capacity prices   77    124 
 Other   1    9 
 Total $ (17) $ (134)
        
Western U.S.      
 Wholesale energy prices $ (10) $ (67)
 Net economic availability of coal and hydroelectric plants   (8)   (1)
 Other   3    4 
 Total $ (15) $ (64)
        
Net Energy Trading Margins      
 Gas positions $ (3) $ (17)
 Power positions   15    5 
 FTRs   9    7 
 Other   2    (1)
 Total $ 23  $ (6)

 
140117
 
     2013 Three Months 2012 Three Months
     PA Gross      PA Gross     
     Delivery   Operating Delivery    Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
                
Operating Revenues                 
 Retail electric$ 413     $ 413  $ 403     $ 403 
 Electric revenue from affiliate  1       1    1       1 
   Total Operating Revenues  414       414    404       404 
                      
Operating Expenses                 
 Energy purchases  120       120    120       120 
 Energy purchases from affiliate  12       12    17       17 
 Other operation and maintenance  21  $ 103    124    26  $ 117    143 
 Depreciation     44    44       39    39 
 Taxes, other than income  19    3    22    20    2    22 
   Total Operating Expenses  172    150    322    183    158    341 
Total$ 242  $ (150) $ 92  $ 221  $ (158) $ 63 
Utility Revenues  
          
The increase (decrease) in utility revenues for the periods ended September 30, 2013 compared with 2012 was due to:
          
     Three Months Nine Months
Domestic:      
 PPL Electric (a) $ 20  $ 85 
 LKE (b)   12    131 
 Total Domestic   32    216 
          
U.K.:      
 Price (c)   74    187 
 Volume (d)   (10)   18 
 DPCR4 accrual adjustments (e)   (21)   (45)
 Recovery of allowed revenues (f)   (22)   (22)
 Foreign currency exchange rates   (9)   (25)
 Other   2    3 
 Total U.K.   14    116 
Total $ 46  $ 332 

      2013 Six Months 2012 Six Months
      PA Gross      PA Gross     
      Delivery   Operating Delivery    Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
                 
Operating Revenues                  
 Retail electric $ 925     $ 925  $ 860     $ 860 
 Electric revenue from affiliate   2       2    2       2 
   Total Operating Revenues   927       927    862       862 
                       
Operating Expenses                  
 Energy purchases   292       292    273       273 
 Energy purchases from affiliate   26       26    38       38 
 Other operation and maintenance   43  $ 214    257    49  $ 234    283 
 Depreciation      87    87       78    78 
 Taxes, other than income   47    5    52    44    4    48 
   Total Operating Expenses   408    306    714    404    316    720 
Total $ 519  $ (306) $ 213  $ 458  $ (316) $ 142 
(a)See "Pennsylvania Gross Delivery Margins" for further information.
(b)See "Kentucky Gross Margins" for further information.
(c)The three and nine-month periods were impacted by a price increase effective April 1, 2013.  The nine-month period was also impacted by a price increase effective April 1, 2012.
(d)The increase for the nine-month period was primarily due to the favorable effect of weather.
(e)The decrease for the three and nine-month periods was due to a reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4.  See Note 6 to the Financial Statements for additional information.
(f)The decrease for the three and nine-month period was due to an accrual for over-recovered revenues as a result of price and weather related volume effects that is not expected to reverse within the regulatory year ending March 31, 2014.  Therefore, a liability was recorded and utility revenue was reduced for the amount of the over-recovery in September 2013.  These amounts are expected to be refunded within the regulatory year beginning April 1, 2014.

Other Operation and Maintenance     
        
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
        
        
   Three Months Nine Months
Domestic:     
 Brunner Island outage timing$ (4) $ (23)
 Uncollectible accounts (a)       (23)
 LKE coal plant outages (b)  (1)   (18)
 Montour outage in 2013  15    13 
 Act 129 costs (c)  (7)   (13)
 PUC-reportable storm costs, net of insurance recovery  (8)   (9)
 PPL Susquehanna projects     (9)
 PPL Susquehanna outages  1    (6)
 Ironwood outage in 2013  3    6 
 LKE adjustments to regulatory assets and liabilities       4 
 Other generation plants  4    4 
 Other  8    9 
U.K.:     
 Third-party engineering (d)  3    5 
 Network maintenance (e)  10    23 
 Insurance claim provision release       6 
 Severance compensation (f)     (8)
 Employee related expenses  (1)   (6)
 Foreign currency exchange rates  (2)   (4)
 Other  (2)   (3)
Total$ 19  $ (52)

(a)The decrease for the nine-month period is primarily due to SMGT filing for protection under Chapter 11 of the U.S. Bankruptcy Code in 2011.  $11 million of damages billed to SMGT were fully reserved in 2012.
(b)The decrease for the three and nine month periods is due to the timing and scope of scheduled outages.
(c)The decrease for the three and nine month periods is due to a reduction in Act 129 energy efficiency and conservation plan costs for Phase 1 programs.  Phase 1 ended May 31, 2013.
(d)These costs are offset by revenues reflected in "Utility" on the Statement of Income.
(e)The increase for the three and nine month periods is primarily due to higher vegetation management costs.
(f)The decrease for the nine month period is primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.

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Depreciation  
        
The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:
        
   Three Months Nine Months
        
Additions to PP&E $ 20  $ 64 
LKE lower depreciation rates effective January 1, 2013   (5)   (16)
Ironwood Acquisition        6 
Other   (4)   (8)
Total $ 11  $ 46 

Other Income (Expense) - net

The $72 million decrease in other income (expense) - net for the three months ended September 30, 2013 compared with 2012 was primarily due to a decrease of $70 million from realized and unrealized gains on foreign currency contracts to economically hedge GBP denominated earnings from WPD.

The $50 million increase in other income (expense) - net for the nine months ended September 30, 2013 compared with 2012 was primarily due to an increase of $46 million from realized and unrealized gains on foreign currency contracts to economically hedge GBP denominated earnings from WPD.

See Note 12 to the Financial Statements for additional information on other income (expense) - net.

Interest Expense   
        
The increase (decrease) in interest expense for the periods ended September 30, 2013 compared with 2012 was due to:
     
  ��Three Months Nine Months
        
Long-term debt interest expense (a) $ 5  $ 32 
Loss on extinguishment of debt (b)       10 
Net amortization of debt discounts, premiums and issuance costs   (4)   (4)
Other   (3)   3 
Total $ (2) $ 41 

(a)The increase for the three and nine-month periods was due to debt issuances by PPL Capital Funding in March 2013 and October 2012, and by PPL Electric in July 2013 and August 2012, partially offset by the impact of lower interest rates resulting from the remarketing of the 2010 Equity Units.

The nine-month period also increased due to debt issuances by PPL Capital Funding in June 2012 and by WPD (East Midlands) in April 2012, as well as higher accretion expense on WPD index linked notes and three additional months of interest on debt assumed as part of the Ironwood Acquisition.  Partially offsetting these increases was PPL Energy Supply's debt maturity in July 2013.
(b)In May 2013, PPL Capital Funding remarketed and exchanged junior subordinate notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.

See Note 7 to the Financial Statements in this Form 10-Q for information on 2013 long-term debt activity and PPL's 2012 Form 10-K for information on 2012 activity.

Income Taxes  
        
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
    
   Three Months Nine Months
        
Change in pre-tax income at current period tax rates $ 36  $ (31)
State valuation allowance adjustments (a)   36    36 
Federal and state tax reserve adjustments (b)   1    (34)
Federal and state tax return adjustments   (4)   (4)
U.S. income tax on foreign earnings net of foreign tax credit (c)   9    3 
U.K. Finance Act adjustments (d)   (19)   (19)
Foreign tax reserve adjustments   (2)   3 
Net operating loss carryforward adjustments (e)        9 
Intercompany Interest on WPD Financing Entities   2    2 
State deferred tax rate change (f)   6    17 
Other   2    (2)
Total $ 67  $ (20)
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(a)During the three and nine months ended September 30, 2013, PPL recorded a $38 million increase in state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.
(b)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during the nine months ended September 30, 2013.  See Note 5 to the Financial Statements for additional information.
(c)During the three and nine months ended September 30, 2013, PPL recorded a $10 million and $24 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013.

During the nine months ended September 30, 2013, PPL recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.
(d)The U.K.'s Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a $93 million deferred tax benefit in the third quarter of 2013 related to both rate decreases.

The U.K.'s Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a $74 million deferred tax benefit in the third quarter of 2012 related to both rate decreases.
(e)During the nine months ended September 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(f)During the three and nine months ended September 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.

See Note 5 to the Financial Statements for additional information on income taxes.


PPL Energy Supply:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income Attributable to PPL Energy Supply Member $ 124  $ 54  $ 172  $ 382 
Special items, after-tax   (6)   (105)   (49)   3 

Excluding special items, the decrease in earnings for the three-month period was primarily due to lower baseload energy prices, lower baseload generation and higher operation and maintenance expense, partially offset by higher capacity prices.  The decrease for the nine-month period was primarily due to lower baseload energy prices, higher fuel costs and higher depreciation, partially offset by higher capacity prices, higher intermediate and peaking margins, higher baseload generation and lower income taxes.

The table below quantifies the changes in the components of Net Income Attributable to PPL Energy Supply Member between these periods, which reflect reclassifications for items included in Unregulated Gross Energy Margins and certain items that management considers special.  See PPL's "Results of Operations - Segment Earnings - Supply Segment" for the details of special items.

  Three Months Nine Months
       
Unregulated Gross Energy Margins $ (9) $ (204)
Other operation and maintenance   (19)   11 
Depreciation   (7)   (31)
Taxes, other than income   (2)   2 
Other Income (Expense) - net   (3)   5 
Interest Expense   4    (8)
Other   (1)   1 
Income Taxes   8    66 
Special items, after-tax   99    (52)
Total $ 70  $ (210)

Statement of Income Analysis --

Unregulated Gross Energy Margins

"Unregulated Gross Energy Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.
120

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

     2013 Three Months 2012 Three Months
     Unregulated       Unregulated      
     Gross Energy    Operating Gross Energy     Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                   
 Wholesale energy marketing                   
    Realized$ 981  $  (1)  $  980  $ 1,074  $  2 (c)  $  1,076 
    Unrealized economic activity     (49)(d)    (49)        (716)(d)    (716)
 Wholesale energy marketing                     
  to affiliate  11          11    23          23 
 Unregulated retail electric and gas  267    (1)(d)    266    232    (13)(d)    219 
 Net energy trading margins  12          12    (11)         (11)
 Energy-related businesses       143     143         128     128 
   Total Operating Revenues  1,271    92     1,363    1,318    (599)    719 
                        
Operating Expenses                   
 Fuel  256    2     258    310    11 (e)    321 
 Energy purchases                         
    Realized  427    (2)    425    418    3 (c)    421 
    Unrealized economic activity       (37)(d)    (37)        (569)(d)    (569)
 Energy purchases from affiliate  1          1    1        1 
 Other operation and maintenance  5    238     243    1    219     220 
 Depreciation     80     80         73     73 
 Taxes, other than income  9    9     18    11    7     18 
 Energy-related businesses  5    133     138         125     125 
   Total Operating Expenses  703    423     1,126    741    (131)    610 
Total$ 568  $ (331)  $ 237  $ 577  $ (468)  $ 109 

      2013 Nine Months 2012 Nine Months
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                    
 Wholesale energy marketing                        
    Realized $ 2,770  $  (3)  $  2,767  $ 3,353  $  14 (c)  $  3,367 
    Unrealized economic activity      (281)(d)    (281)        (322)(d)    (322)
 Wholesale energy marketing                        
  to affiliate   37          37    61          61 
 Unregulated retail electric and gas   750    11 (d)    761    638    (15)(d)    623 
 Net energy trading margins   1          1    7          7 
 Energy-related businesses      378     378         336     336 
   Total Operating Revenues   3,558    105     3,663    4,059    13     4,072 
                         
Operating Expenses                    
 Fuel   778    2     780    695    33 (e)    728 
 Energy purchases                        
    Realized   1,282    (5)    1,277    1,669    46 (c)    1,715 
    Unrealized economic activity      (192)(d)    (192)        (420)(d)    (420)
 Energy purchases from affiliate   3          3    2          2 
 Other operation and maintenance   13    735     748    12    757     769 
 Depreciation      237     237         206     206 
 Taxes, other than income   27    24     51    27    26     53 
 Energy-related businesses   5    361     366         326     326 
   Total Operating Expenses   2,108    1,162     3,270    2,405    974     3,379 
Total $ 1,450  $ (1,057)  $ 393  $ 1,654  $ (961)  $ 693 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

(c)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.   For the three and nine months ended September 30, 2012 "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $1 million and $34 million related to the monetization of certain full-requirement sales contracts.
Changes in Non-GAAP Financial Measures
(d)Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.
(e)Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and nine months ended September 30, 2012 include pre-tax losses of $17 million and $29 million related to coal contract modification payments.

121
Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
  Three Months Nine Months
       
Brunner Island outage timing$ (4) $ (23)
Uncollectible accounts (a)     (15)
PPL Susquehanna projects       (9)
PPL Susquehanna outages  1    (6)
Ironwood outage in 2013  3    6 
Montour outage in 2013  15    13 
Other generation plants  4    4 
Other  4    9 
Total$ 23  $ (21)

The following table shows PPL Electric's non-GAAP financial measure, "Pennsylvania Gross Delivery Margins" for the periods ended June 30, as well as the change between periods.  The factors that gave rise to the change are described below the table.
   Three Months Six Months
   2013  2012  Change 2013  2012  Change
                    
PA Gross Delivery Margins by Component                  
 Distribution $ 183  $ 170  $ 13  $ 407  $ 359  $ 48 
 Transmission   59    51    8    112    99    13 
 Total $ 242  $ 221  $ 21  $ 519  $ 458  $ 61 
(a)The decrease for the nine-month period is primarily due to SMGT filing for protection under Chapter 11 of the U.S. Bankruptcy Code in 2011.  $11 million of damages billed to SMGT were fully reserved in 2012.

DistributionDepreciation

MarginsDepreciation increased by $7 million and $31 million for the three and nine months ended JuneSeptember 30, 2013 compared with 2012, primarily due to an $11$8 million favorable effect of price as a result of higher base rates, effective January 1, 2013.and $28 million related to PP&E additions, and $6 million attributable to the Ironwood Acquisition for the nine-month period.

Margins increased forInterest Expense

For the sixnine months ended JuneSeptember 30, 2013 compared with 2012, interest expense increased by $8 million, primarily due to a $13$6 million adverse effect of mild weatherlower capitalized interest related to the Rainbow hydroelectric redevelopment project.

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
    
  Three Months Nine Months
       
Change in pre-tax income at current period tax rates $ 50  $ (122)
State valuation allowance adjustments   2    2 
Federal and state tax reserve adjustments (a)        6 
Federal and state tax return adjustments   (1)   (1)
State deferred tax rate change (b)   6    17 
Other   1    2 
Total $ 58  $ (96)

(a)During the nine months ended September 30, 2013, PPL Energy Supply reversed $3 million in tax benefits related to a 2008 change in method of accounting for certain expenditures for tax purposes and recorded $4 million in federal tax reserves related to differences in over (under) payment interest rates applied to audit claims as a result of the U.S. Supreme Court decision related to the Windfall Profits tax.
(b)During the three and nine months ended September 30, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.

See Note 5 to the Financial Statements for additional information on income taxes.


PPL Electric:  Earnings and Statement of Income Analysis

Earnings            
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income Available to PPL $ 51  $ 33  $ 160  $ 95 

The increase in 2012 and a $32 million favorable effect of price, largely comprised ofearnings for both periods was primarily due to higher electricity base rates that became effective January 1, 2013 and higher volumes of $4 million.
transmission margins from additional capital investments, partially offset by higher income taxes.  The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.
 
141122
 

TransmissionThe table below quantifies the changes in the components of Net Income Available to PPL between these periods, which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

  Three Months Nine Months
       
Pennsylvania Gross Delivery Margins��$ 31  $ 92 
Other operation and maintenance   8    28 
Depreciation   (4)   (13)
Interest Expense   (5)   (7)
Other   (2)   (3)
Income Taxes   (10)   (36)
Distributions on preference stock        4 
Total $ 18  $ 65 

Statement of Income Analysis --

Pennsylvania Gross Delivery Margins increased

"Pennsylvania Gross Delivery Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the three and six monthsperiods ended June 30, 2013 compared with 2012, primarily due to increased investment in plant and the recovery of additional costs through the FERC formula-based rates.September 30.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance for the periods ended June 30, 2013 compared with 2012 was due to:
   
  Three Months Six Months
       
      
Vegetation management$ (2) $ (3)
Act 129 costs (a)  (7)   (7)
Uncollectible accounts  (1)   (3)
Corporate service costs (b)  (6)   (11)
Other  (3)   (2)
Total$ (19) $ (26)
     2013 Three Months 2012 Three Months
     PA Gross      PA Gross     
     Delivery   Operating Delivery    Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                 
 Retail electric$ 463       $ 463  $ 443       $ 443 
 Electric revenue from affiliate  1         1    1         1 
   Total Operating Revenues  464         464    444         444 
                      
Operating Expenses                 
 Energy purchases  144         144    137         137 
 Energy purchases from affiliate  11       11    23       23 
 Other operation and maintenance  19  $ 115    134    25  $ 123    148 
 Depreciation       45    45       41    41 
 Taxes, other than income  23    2    25    23    1    24 
   Total Operating Expenses  197    162    359    208    165    373 
Total$ 267  $ (162) $ 105  $ 236  $ (165) $ 71 

      2013 Nine Months 2012 Nine Months
      PA Gross      PA Gross     
      Delivery   Operating Delivery    Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues                  
 Retail electric $ 1,388       $ 1,388  $ 1,303       $ 1,303 
 Electric revenue from affiliate   3         3    3         3 
   Total Operating Revenues   1,391         1,391    1,306         1,306 
                       
Operating Expenses                  
 Energy purchases   436         436    410         410 
 Energy purchases from affiliate   37       37    61       61 
 Other operation and maintenance   62  $ 329    391    74  $ 357    431 
 Depreciation      132    132       119    119 
 Taxes, other than income   70    7    77    67    5    72 
   Total Operating Expenses   605    468    1,073    612    481    1,093 
Total $ 786  $ (468) $ 318  $ 694  $ (481) $ 213 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

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Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
      
Vegetation management$ 6  $ 3 
PUC-reportable storm costs, net of insurance recovery  (8)   (9)
Act 129 costs (a)  (7)   (13)
Uncollectible accounts       (3)
Corporate service (b)  (2)   (13)
Rent  (3)   (4)
Other       (1)
Total$ (14) $ (40)

(a)The decrease iswas due to a reduction in Act 129 energy efficiency and conservation plan costs for Phase 1 programs.  Phase 1 ended May 31, 2013.
(b)The decrease iswas partially due to storm insurance policy premiums for coverage that was in place in 2012 but was not renewed in 2013.

Depreciation

Depreciation increased by $5$4 million and $9$13 million for the three and sixnine months ended JuneSeptember 30, 2013 compared with 2012, primarily due to PP&E additions as part of ongoing investments to enhance system reliability.

Taxes, Other Than Income

Taxes, other than income increased by $4$5 million for the sixnine months ended JuneSeptember 30, 2013 compared with 2012, primarily due to higher Pennsylvania gross receipts tax expense due to higher retail electricity revenue.  This tax is included in "Pennsylvania Gross Delivery Margins."

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended June 30, 2013 compared with 2012 was due to:
       
    
  Three Months Six Months
       
Higher (lower) pre-tax income $ 11  $ 27 
Depreciation not normalized   2    
Other      (1)
Total $ 13  $ 26 
Financing Costs      
       
The increase (decrease) in financing costs for the periods ended September 30, 2013 compared with 2012 was due to:
       
  Three Months Nine Months
       
Long-term debt interest expense (a) $ 5  $ 8 
Distributions on Preference Stock (b)        (4)
Other        (1)
Total $ 5  $ 3 

(a)The increase was due to debt issuances in August 2012 and July 2013.
(b)The decrease was due to the June 2012 redemption of all 2.5 million shares of preference stock.

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
       
  Three Months Nine Months
       
Change in pre-tax income at current period tax rates $ 12  $ 39 
Other   (2)   (3)
Total $ 10  $ 36 

See Note 5 to the Financial Statements for additional information on income taxes.

LKE:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 100  $ 83  $ 260  $ 180 
Special items, after-tax             2    (1)
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Excluding special items, the increases in earnings for both periods were primarily due to higher electricity and gas base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery, partially offset by higher depreciation (due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates and excluded from Margins) and higher income taxes.  The increase for the three-month period was partially offset by lower sales volumes.

The table below quantifies the components of Net Income between these periods, which reflect reclassifications for items included in Margins and certain items that management considers special.  See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated Segment" for details of special items.

  Three Months Nine Months
       
Margins $ 42  $ 151 
Other operation and maintenance   (4)   4 
Depreciation   (9)   (26)
Taxes, other than income   (1)   (2)
Other Income (Expense) - net        7 
Interest Expense        1 
Income Taxes   (11)   (58)
Special items, after-tax        3 
Total $ 17  $ 80 

Statement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods.  Within PPL's discussion, LKE's Margins are referred to as "Kentucky Gross Margins."

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 744     $  744   $ 732     $  732 
Operating Expenses                   
 Fuel   237       237     249       249 
 Energy purchases   23       23     27       27 
 Other operation and maintenance   26  $  162    188     28  $  158    186 
 Depreciation   1    83    84     13    74    87 
 Taxes, other than income        12    12          11    11 
   Total Operating Expenses   287    257    544     317    243    560 
Total $ 457  $ (257) $ 200   $ 415  $ (243) $ 172 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 2,226     $  2,226   $ 2,095     $  2,095 
Operating Expenses                   
 Fuel   684       684     677       677 
 Energy purchases   146       146     135       135 
 Other operation and maintenance   74  $  508    582     76  $  513    589 
 Depreciation   3    246    249     39    220    259 
 Taxes, other than income  ��     36    36          34    34 
   Total Operating Expenses   907    790    1,697     927    767    1,694 
Total $ 1,319  $ (790) $ 529   $ 1,168  $ (767) $ 401 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

125
Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
 Three Months  Nine Months
       
Coal plant outages (a)$ (1) $ (18)
Administrative and general (b)  3    8 
Adjustments to regulatory assets and liabilities     4 
Coal plant operations     3 
Other     (4)
Total$ 2  $ (7)

(a)Decrease is due to the timing and scope of scheduled outages.
(b)Increase for the nine-month period is primarily due to an increase in outside services of $8 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

  Three Months Nine Months
      
Lower depreciation rates effective January 1, 2013$ (5) $ (16)
Additions to PP&E  2    6 
Total$ (3) $ (10)

Other Income (Expense) - net

Other income (expense) - net increased by $8 million for the nine months ended September 30, 2013 compared with 2012 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

Income Taxes

Income taxes increased by $11 million and $64 million for the three and nine months ended September 30, 2013 compared with 2012 primarily due to the change in pre-tax income at current period tax rates.

See Note 5 to the Financial Statements for additional information on income taxes.

Financial Condition
       
Liquidity and Capital Resources
       
PPL Electric had the following at:
       
  June 30, 2013 December 31, 2012
       
Cash and cash equivalents $ 24  $ 140 
Short-term debt $ 85  $ 
Income (Loss) from Discontinued Operations (net of income taxes)

The $116 million decrease in PPL Electric's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $451 million;
·the payment of $66 million of common stock dividends to parent;
·contributions from parent of $205 million;
·net cash provided by operating activities of $115 million; and
·a net increase in short-term debt of $85 million.
142
PPL Electric's cash provided by operating activitiesIncome (loss) from discontinued operations increased by $14$7 million for the sixnine months ended JuneSeptember 30, 2013 compared with 2012.  The increase was primarily related to an adjustment to the netestimated liability for indemnifications related to the 2009 termination of the WKE lease recorded in 2012.


LG&E:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 49  $ 43  $ 122  $ 94 

The increases in earnings for both periods were primarily due to higher electricity and gas base rates that went into effect of a $72 millionJanuary 1, 2013, returns from additional environmental capital investments and higher fuel recovery.  The increase in net income when adjusted for non-cash components,the three-month period was partially offset by anlower sales volumes.  The increase of $55 millionfor the nine-month period was partially offset by higher income taxes.

The table below quantifies the changes in cash used bythe components of working capital.Net Income between these periods, which reflect reclassifications for items included in Margins.

126
  Three Months Nine Months
       
Margins $ 12  $ 43 
Other operation and maintenance   (6)   (3)
Depreciation        3 
Taxes, other than income        (1)
Other Income (Expense) - net   2      
Interest Expense        1 
Income Taxes   (2)   (15)
Total $ 6  $ 28 

Capital expendituresStatement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods.  Within PPL's discussion, LG&E's Margins are included in "Kentucky Gross Margins."

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 343     $  343   $ 333     $  333 
Operating Expenses                   
 Fuel   100       100     100       100 
 Energy purchases   20       20     21       21 
 Other operation and maintenance   13  $  80    93     13  $  74    87 
 Depreciation        37    37     1    37    38 
 Taxes, other than income        6    6          6    6 
   Total Operating Expenses   133    123    256     135    117    252 
Total $ 210  $ (123) $ 87   $ 198  $ (117) $ 81 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                    
Operating Revenues $ 1,049     $  1,049   $ 990     $  990 
Operating Expenses                   
 Fuel   284       284     281       281 
 Energy purchases   135       135     119       119 
 Other operation and maintenance   34  $ 244    278     36  $  241    277 
 Depreciation   1    109    110     2    112    114 
 Taxes, other than income        18    18          17    17 
   Total Operating Expenses   454    371    825     438   370    808 
Total $ 595  $ (371) $ 224   $ 552  $ (370) $ 182 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
Coal plant outages (a)$ 1  $ (6)
Administrative and general (b)  1    6 
Distribution maintenance  2    2 
Other  2    (1)
Total$ 6  $ 1 

(a)Increase (decrease) is due to the timing and scope of scheduled outages.
127

(b)Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

  Three Months Nine Months
       
Lower depreciation rates effective January 1, 2013$ (2) $ (6)
Additions to PP&E  1    2 
Total$ (1) $ (4)

Income Taxes

Income taxes increased by $195$15 million for the sixnine months ended JuneSeptember 30, 2013 compared with 2012 primarily due to the Susquehanna-Roseland transmission projectchange in pre-tax income at current period tax rates.

See Note 5 to the Financial Statements for additional information on income taxes.


KU:  Earnings and Statement of Income Analysis

Earnings
   Three Months Ended Nine Months Ended
   September 30, September 30,
   2013  2012  2013  2012 
              
Net Income $ 63  $ 50  $ 171  $ 118 

Excluding special items, the increases in earnings for both periods were primarily due to higher electricity base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery, partially offset by higher depreciation (due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates and excluded from Margins) and higher income taxes.  The increase for the three-month period was partially offset by lower sales volumes.

The table below quantifies the changes in the components of Net Income between these periods, which reflect reclassifications for items included in Margins and an item that management considers special.

  Three Months Nine Months
       
Margins $ 31  $ 108 
Other operation and maintenance   (1)   (1)
Depreciation   (8)   (27)
Taxes, other than income   (1)   (1)
Other Income (Expense) - net   (3)   3 
Interest Expense   1    1 
Income Taxes   (6)   (31)
Special item - EEI adjustments, after-tax        1 
Total $ 13  $ 53 

Statement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods.  Within PPL's discussion, KU's Margins are included in "Kentucky Gross Margins."

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

128
      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 414     $  414   $ 411     $  411 
Operating Expenses                   
 Fuel   137       137     149       149 
 Energy purchases   16       16     18       18 
 Other operation and maintenance   13  $  78    91     16  $  77    93 
 Depreciation   1    45    46     12    37    49 
 Taxes, other than income        6    6          5    5 
   Total Operating Expenses   167    129    296     195    119    314 
Total $ 247  $ (129) $ 118   $ 216  $ (119) $ 97 

      2013 Nine Months  2012 Nine Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 1,229     $  1,229   $ 1,165     $  1,165 
Operating Expenses                   
 Fuel   400       400     396       396 
 Energy purchases   63       63     76       76 
 Other operation and maintenance   40  $  246    286     41  $  245    286 
 Depreciation   2    136    138     36    109    145 
 Taxes, other than income        18    18          17    17 
   Total Operating Expenses   505    400    905     549    371    920 
Total $ 724  $ (400) $ 324   $ 616  $ (371) $ 245 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
   
  Three Months Nine Months
       
Coal plant outages (a)$ (2) $ (12)
Administrative and general (b)  2    6 
Coal plant operations       4 
Adjustments to regulatory assets and liabilities     4 
Other  (2)   (2)
Total$ (2) $   

(a)Decrease is due to the timing and scope of scheduled outages.
(b)Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

  Three Months Nine Months
       
Lower depreciation rates effective January 1, 2013$ (4) $ (10)
Additions to PP&E  1    4 
Other       (1)
Total$ (3) $ (7)

Other Income (Expense) - net

Other income (expense) - net increased by $4 million for the nine months ended September 30, 2013 compared with 2012 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.
129

Income Taxes

Income taxes increased by $6 million and $31 million for the three and nine months ended September 30, 2013 compared with 2012 primarily due to the change in pre-tax income at current period tax rates.

See Note 5 to the Financial Statements for additional information on income taxes.

Financial Condition
                   
Financial Condition and the remainder of this Item 2 are presented on a combined basis, providing information, as
applicable, for all Registrants.
                   
Liquidity and Capital Resources
                   
(All Registrants)
                   
The Registrants had the following at:
     PPL            
  PPL Energy Supply PPL Electric LKE LG&E KU
September 30, 2013                  
Cash and cash equivalents $ 1,291  $ 551  $ 225  $ 21  $ 12  $ 9 
Short-term debt   499              212    72    140 
Notes payable with affiliates            52           
                   
December 31, 2012                  
Cash and cash equivalents $ 901  $ 413  $ 140  $ 43  $ 22  $ 21 
Short-term debt   652    356         125    55    70 
Notes payable with affiliates            25           

At September 30, 2013, PPL's cash and cash equivalents included $231 million denominated in GBP.  If these amounts would be remitted as dividends, PPL may be subject to additional U.S. income taxes, net of allowable foreign income tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

Net cash provided by (used in) operating, investing and financing activities for the nine-month periods ended September 30, and the changes between periods were as follows.

     PPL Energy            
  PPL Supply PPL Electric LKE LG&E KU
2013                   
Operating activities $ 2,223  $ 583  $ 327  $ 713  $ 352  $ 419 
Investing activities   (2,788)   (351)   (697)   (879)   (366)   (510)
Financing activities   966    (94)   455    144    4    79 
                   
2012                   
Operating activities $ 2,094  $ 674  $ 261  $ 646  $ 267  $ 410 
Investing activities   (2,116)   (308)   (614)   (519)   (196)   (331)
Financing activities   (240)   (313)   64    (96)   (48)   (68)
                   
Change  - Cash Provided (Used)                  
Operating activities $ 129  $ (91) $ 66  $ 67  $ 85  $ 9 
Investing activities   (672)   (43)   (83)   (360)   (170)   (179)
Financing activities   1,206    219    391    240    52    147 

Operating Activities

The components of the change in cash provided by (used in) operating activities for the nine months ended September 30, 2013 compared with 2012 were as follows.

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        PPL Energy            
     PPL Supply PPL Electric LKE LG&E KU
                      
Change - Cash Provided (Used)                  
  Net income $ 58  $ (210) $ 61  $ 80  $ 28  $ 53 
  Non-cash components   244    169    42    15    (1)   (9)
  Net income, adjusted for non-cash                  
   components   302    (41)   103    95    27    44 
  Working capital   (284)   42    (45)   (21)   24    (26)
  Defined benefit funding   21    (37)   (34)   (93)   (19)   (42)
  Other operating activities   90    (55)   42    86    53    33 
 Total $ 129  $ (91) $ 66  $ 67  $ 85  $ 9 

For PPL, non-cash components of net income primarily consisted of $105 million related to non-cash hedging activities, $46 million related to increased depreciation and $45 million related to 2013 charges to adjust WPD's line loss accrual.  The decrease in cash from changes in components of working capital was primarily due to increases in accounts receivable (primarily due to extended payment terms at LG&E and KU and base rate increases effective in 2013 at PPL Electric, LG&E and KU), returns of counterparty collateral and changes to certain tax-related accounts.  The increase in cash from other operating activities was primarily due to $98 million in proceeds from the settlement of forward-starting interest rate swaps.

For PPL Energy Supply, non-cash components of net income primarily consisted of $135 million related to non-cash hedging activities and $31 million related to increased depreciation.  The increase in cash from changes in components of working capital was primarily due to decreases in accounts receivable (primarily affiliate receivables), and lower unbilled revenue (primarily due to decreases in power swap sales), partially offset by returns of counterparty collateral.  The decrease in cash from other operating activities was partially due to changes to certain tax-related accounts.

For PPL Electric, non-cash components of net income primarily consisted of $31 million related to an increase in deferred tax expense and $13 million related to increased depreciation.  The decrease in cash from changes in components of working capital was primarily due to increases in accounts receivable (primarily due to the base rate increase effective January 1, 2013, partially offset by a decrease in affiliate receivables).  The increase in cash from other operating activities was partially due to changes to certain tax-related accounts.

LKE's decrease in working capital was driven primarily by increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates, offset by an increase in accounts payable due to timing of fuel purchase commitments and payments.  The increase in cash from LKE's other operating activities was driven primarily by $98 million in proceeds from the settlement of interest rate swaps.

LG&E's increase in working capital was driven primarily by lower fuel inventory purchases in 2013 and an increase in accounts payable due to timing of fuel purchase commitments and payments, offset by increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates.  The increase in cash from LG&E's other operating activities was driven primarily by $49 million in proceeds from the settlement of interest rate swaps.

KU's decrease in working capital was driven primarily by higher fuel inventory purchases in 2013 and increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates, offset by an increase in accounts payable due to timing of fuel purchase commitments and payments.  The increase in cash from KU's other operating activities was driven primarily by $49 million in proceeds from the settlement of interest rate swaps.

Investing Activities

The primary use of cash within investing activities is expenditures for PP&E.  The change in these expenditures for the nine months ended September 30, 2013 compared with 2012 was as follows.

     PPL Energy            
  PPL Supply PPL Electric LKE LG&E KU
                   
(Increase) Decrease $ (690) $ 119  $ (281) $ (366) $ (183) $ (181)

The increase in expenditures for PP&E was primarily due to projects to enhance system reliability.reliability at WPD and PPL Electric, the Susquehanna-Roseland transmission project at PPL Electric, environmental projects at LG&E's Mill Creek and KU's Ghent plants and construction of Cane Run Unit 7 for LG&E and KU.
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Expenditures for PP&E decreased at PPL Energy Supply primarily related to the Rainbow hydroelectric redevelopment and Holtwood expansion projects and timing of nuclear fuel purchases.

For PPL Energy Supply and PPL Electric, the change in cash provided by (used in) investing activities was also impacted primarily by the change in notes receivable from affiliates of ($198) million and $210 million.

Financing Activities

The components of the change in cash provided by (used in) financing activities for the nine months ended September 30, 2013 compared with 2012 was as follows.

      PPL Energy            
   PPL Supply PPL Electric LKE LG&E KU
                    
Change - Cash Provided (Used)                  
 Debt issuances/retirements, net $ (166) $ (303) $ 99                
 Stock issuances/redemptions, net   1,531       250          
 Dividends   (22)      (19)    $ (20) $ (15)
 Capital contributions/distributions, net        833    55  $ 125    54    92 
 Change in short-term debt, net   (97)   (311)        87    17    70 
 Other financing activities   (40)        6    28    1      
 Total $ 1,206  $ 219  $ 391  $ 240  $ 52  $ 147 

See Note 7 to the Financial Statements in this Form 10-Q for information on 2013 short and long-term debt activity, equity transactions and dividends.  See the Registrant's 2012 Form 10-K for information on 2012 activity.

Credit Facilities

PPL Electric maintainsThe Registrants maintain credit facilities to provide liquidity and to backstop commercial paper issuances.  At June 30, 2013, PPL Electric'sThe total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:the borrowings under these facilities at September 30, 2013 was as follows.

         Letters of   
         Credit Issued   
       and  
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
PPL Electric Credit Facilities (a) $ 400     $ 86  $ 314 
External (All Registrants)

         Letters of   
         Credit Issued   
         and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
PPL Energy Supply Credit Facilities (a) $ 3,150       $ 170  $ 2,980 
PPL Electric Credit Facilities (a)   300         1    299 
              
LG&E Syndicated Credit Facility (a)   500         72    428 
KU Credit Facilities (a)   598         338    260 
Total LKE (a) (b)   1,098         410    688 
 Total PPL Domestic Credit Facilities (a) $ 4,548       $ 581  $ 3,967 
              
Total WPD Credit Facilities (c) £ 1,055  £ 184       £ 871 

(a)The commitments under the $300 million syndicated credit facilityfacilities are provided by a diverse bank group with no one bank and its affiliates providing an aggregate commitment of more than 5%the following percentages of the total committed capacity:  8% for PPL's domestic credit facilities, 9% for PPL Energy Supply, 5% for PPL Electric, 13% for LKE, 6% for LG&E and 22% for KU.
(b)In October 2013, LKE entered into a $75 million syndicated credit facility that expires in October 2018.
(c)At September 30, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion.  The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

In September 2013, PPL Electric terminated its asset-backed commercial paper program sponsored by a financial institution.  See Note 7 in PPL's and PPL Electric's 2012 Form 10-K for more information regarding the asset-backed commercial paper program.

See Note 7 to the Financial Statements for further discussion of the Registrants' credit facilities.
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Intercompany (All Registrants except PPL)
  Committed    Unused
  Capacity Borrowed Capacity
          
PPL Energy Supply Credit Facility $200     $200 
PPL Electric Credit Facility  100      100 
LKE Credit Facility (a)  300  $52   248 
LG&E Money Pool (b)  500      500 
KU Money Pool (b)  500      500 
(a)  In October 2013, LKE reduced the size of the intercompany credit facility by $75 million.
(b)  LG&E and KU participate in an intercompany money pool agreement whereby LKE, LG&E and/or KU make available funds up to $500 million at an interest rate based on a market index of commercial paper issues.

See Note 11 to the Financial Statements for further discussion of intercompany credit facilities.

Commercial Paper(All Registrants)

PPL Energy Supply, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by the respective Registrant's Syndicated Credit Facility.

When outstanding, the amounts are reflected in "Short-term debt" on the Balance Sheets.  The following amounts were outstanding at:

  September 30, 2013 December 31, 2012
      Commercial   Commercial
      Paper Unused Paper
   Capacity Issuances Capacity Issuances
              
PPL Energy Supply $ 750     $ 750  $ 356 
PPL Electric   300       300    
              
LG&E (a)   350  $ 72    278    55 
KU (a)   350    140    210    70 
Total LKE   700    212    488    125 
 Total PPL $ 1,750  $ 212  $ 1,538  $ 481 

(a)In April 2013, the capacity was increased from $250 million.

Long-term Debt and Equity Securities

(PPL and Kentucky Registrants)

During 2012, LG&E and KU received KPSC and other state approvals to issue up to $350 million for LG&E and $300 million for KU of first mortgage bond indebtedness in 2013.  The proceeds will be used to fund capital expenditures and for other general corporate purposes.

(PPL, PPL Energy Supply and PPL Electric)
            
The long-term debt and equity securities activity through September 30, 2013 was:
            
    Debt Net Stock
    Issuances (a) Retirements Issuances (b)
Cash Flow Impact:         
 PPL $862  $ (309) $ 1,335 
 PPL Energy Supply        (309)   
 PPL Electric  348         
            
Non-cash Transactions:         
 PPL (c) $ 1,317       

(a)Issuances are net of pricing discounts, where applicable and exclude the impact of debt issuance costs.
(b)Net stock issuances include activity related to various stock and incentive compensation plans and other equity transactions.  See Overview - "Financial and Operational Developments" for 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.  The activity is net of the 2013 repurchase of PPL common stock.
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(c)The debt issuances primarily include $1.150 billion relating to the remarketing of Junior Subordinated Notes that were issued as a component of PPL's 2010 Equity Units and simultaneously exchanged into Senior Notes.

See Note 7 to the Financial Statements for further discussion of PPL Electric's credit facilities.Long-term Debt and Equity Securities.

Commercial Paper

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.

Long-term DebtCommon Stock Dividends(PPL)

In JulyAugust 2013, PPL Electric issued $350 milliondeclared its quarterly common stock dividend, payable October 1, 2013, at 36.75 cents per share (equivalent to $1.47 per annum).  Future dividends, declared at the discretion of 4.75% First Mortgage Bonds due 2043.  PPL Electric received proceedsthe Board of $345 million, net of a discount and underwriting fees, whichDirectors, will be used for capital expenditures, to fund pension obligationsdependent upon future earnings, cash flows, financial and forlegal requirements and other general corporate purposes.factors.

Rating Agency Actions

(All Registrants)

Fitch, Moody's and S&P periodically review the credit ratings on the debt securities of PPL Electric.the Registrants and their subsidiaries.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of PPL Electricthe Registrants and their subsidiaries are based on information provided by PPL Electricthe Registrants 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 Electric.the Registrants or their 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 Electric'sthe Registrants' or their subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.  PPL Electric does notThe Registrants and their 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 the Registrants and their subsidiaries during 2013:

(PPL)

In March 2013, Fitch, Moody's and S&P assigned ratings of BB+, Ba1 and BB+ to PPL Electric in 2013:Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

In May 2013, Fitch, Moody's and S&P assigned ratings of BBB, Baa3 and BBB- to PPL Capital Funding's $250 million 1.90% Senior Notes due 2018, $600 million 3.40% Senior Notes due 2023 and $300 million 4.70% Senior Notes due 2043.  Fitch also assigned a stable outlook to these notes.

In September 2013, Fitch affirmed the BBB-, issuer default rating, BBB, senior unsecured rating and stable outlook at PPL WW.

In September 2013, Fitch affirmed the BBB+, issuer default rating, A-, senior unsecured rating, F2 short-term issuer default rating and stable outlook at WPD (South Wales) WPD (South West).

In September 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (East Midlands') £65 million 1.676% Index-Linked Senior Notes due 2052.

In October 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (West Midlands') £400 million 3.875% Senior Notes due 2024.

(PPL and PPL Energy Supply)

In February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised the outlook from under review to stable for PPL Ironwood.

In April 2013, Fitch affirmed the BBB- rating and stable outlook on PPL Montana's pass-through trust certificates due 2020.

In July 2013, Moody's withdrew its rating and outlook for PPL Ironwood.
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In July 2013, S&P lowered its rating, from BBB- to BB+ and retained the negative outlook for PPL Montana's pass-through trust certificates due 2020.

In August 2013, Moody's affirmed the Baa3 rating and revised the outlook from stable to negative for PPL Montana's pass through trust certificates due 2020.

In September 2013, S&P affirmed the BB+ rating and revised the outlook from negative to stable for PPL Montana's pass through trust certificates due 2020.

(PPL and PPL Electric)

In July 2013, Fitch, Moody's and S&P assigned ratings of A-, A3 and A- to PPL Electric's $350 million 4.75% First Mortgage Bonds due 2043.  Fitch also assigned a stable outlook to these notes and S&P assigned a recovery rating of 1+.

For additional information on (PPL, Electric's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Electric's 2012 Form 10-K.

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Risk Management

Market Risk and Credit Risk

PPL Electric issues debt to finance its operations, which exposes it to interest rate risk.  At June 30, 2013, PPL Electric's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL Electric is also exposed to changes in the fair value of its debt portfolio.  PPL Electric estimated that a 10% decrease in interest rates at June 30, 2013 would increase the fair value of its debt portfolio by $95 million.

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management" in PPL Electric's 2012 Form 10-K for additional information on market and credit risk.

Related Party Transactions

PPL Electric is not aware of any material ownership interests or operating responsibility by senior management of PPL Electric in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with PPL Electric.  See Note 11 to the Financial Statements for additional information on related party transactions.

Environmental Matters

Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL Electric's electricity transmission and distribution systems, as well as impacts on customers.  PPL Electric cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

The following is a discussion of the more significant environmental matters.

GHG Regulations
In June 2013, President Obama released his Climate Action Plan which, among other things, calls for actions to be taken to prepare the U.S. for the impacts of climate change.  PPL Electric and others in the industry could be affected by resulting guidelines and standards which may require transmission system modifications to improve the ability of critical infrastructure to withstand major storms.

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Electric's 2012 Form 10-K for additional information on environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: defined benefits, loss accruals, income taxes, regulatory assets and liabilities and revenue recognition - unbilled revenue.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL Electric's 2012 Form 10-K for a discussion of each critical accounting policy.

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LG&E AND KU ENERGY LLC AND SUBSIDIARIES

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations


The following should be read in conjunction with LKE's Condensed Consolidated Financial Statements and the accompanying Notes and with LKE's 2012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:

·"Overview" provides a description of LKE and its business strategy, a summary of Net Income and a discussion of certain events related to LKE's results of operations and financial condition.

·"Results of Operations" provides a summary of LKE's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on LKE's Statements of Income, comparing the three and six months ended June 30, 2013 with 2012.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of LKE's liquidity position and credit profile.  This section also includes a discussion of rating agency actions.

·"Financial Condition - Risk Management" provides an explanation of LKE's risk management programs relating to market and credit risk.

Overview

Introduction

LKE, headquartered in Louisville, Kentucky, is a holding company and a wholly owned subsidiary of PPL.  LKE has regulated utility operations through its subsidiaries, LG&E and KU, which constitute substantially all of LKE's assets.  LG&E and KU are engaged in the generation, transmission, distribution and sale of electric energy.  LG&E also engages in the distribution and sale of natural gas.  LG&E and KU maintain their separate identities and serve customers in Kentucky under their respective names.  KU also serves customers in Virginia under the Old Dominion Power name and in Tennessee under the KU name.

Business Strategy

LKE's overall strategy is to provide reliable, safe, competitively priced energy to its customers and reasonable returns on regulated investments to its member.  Rate base is expected to grow as a result of significant capital expenditure programs to maintain reliable service and comply with federal and state regulations.  LKE is focused on efficient operations, strong customer service, timely recovery of costs and constructive regulatory relationships. 

A key objective for LKE is to maintain a strong credit profile through managing financing costs and access to credit markets.  LKE continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income
Net Income for the three and six months ended June 30, 2013 was $64 million and $160 million compared to $44 million and $97 million for the same periods in 2012 representing increases of 45% and 65% over 2012. 

See "Results of Operations" for a discussion and analysis of LKE's earnings.

Economic and Market Conditions

The KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, a fuel adjustment clause, a gas supply clause and recovery on certain construction work-in-progress) that provide for recovery of prudently incurred costs.  The utility

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businesses are impacted by changes in customer usage levels which can be driven by a number of factors including weather conditions and economic factors that impact the load utilized by industrial and commercial customers.   

LKE's businesses are subject to extensive federal, state and local environmental laws, rules and regulations.  Certain regulated generation assets at LG&E and KU will require substantial capital investment.  LG&E and KU project $2.1 billion of capital investment over the next five years to satisfy certain of these requirements.  See Note 10 to the Financial Statements for additional information on these requirements.  These requirements have resulted in LKE's anticipated retirement by 2015 of five coal-fired units with 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 LKE.  See Note 8 to the Financial Statements in LKE'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.

LKE cannot predict the future impact that these economic and market conditions and changes in regulatory requirements may have on its financial condition or results of operations.

Rate Case Proceedings

In 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.

Results of Operations

The following discussion provides a summary of LKE's earnings and a description of key factors expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Margins and principal line items on LKE's Statements of Income, comparing the three and six months ended June 30, 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 for future periods.

Earnings
              
Net Income for the periods ended June 30 was:            
              
   Three Months Six Months
   2013  2012  2013  2012 
              
Net Income $ 64  $ 44  $ 160  $ 97 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in Margins and certain items that management considers special.  See additional detail of these special items in the table below.

  Three Months Six Months
       
Margins $ 32  $ 107 
Other operation and maintenance      10 
Depreciation   (8)   (17)
Taxes, other than income      (1)
Other Income (Expense) - net   7    7 
Interest Expense      1 
Income Taxes   (17)   (47)
Special items, after-tax   6    3 
Total $ 20  $ 63 

·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Margins.

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·Lower other operation and maintenance for the six-month period primarily due to $17 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages.  This decrease was partially offset by $4 million of adjustments to regulatory assets and liabilities and increased coal plant operation costs of $3 million.

·Higher depreciation for the three and six-month periods primarily due to environmental costs related to the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $13 million and $26 million to depreciation that is excluded from Margins. This increase was partially offset by lower depreciation of $6 million and $11 million due to revised rates that were effective January 1, 2013.  Both events are the result of the 2012 rate case proceedings.

·Higher other income (expense) - net for the three and six-month periods primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

·Higher income taxes for the three and six-month periods primarily due to higher pre-tax income.

The following after-tax gains (losses), which management considers special items, also impacted earnings during the periods ended June 30.

  Income Statement Three Months Six Months
  Line Item 2013  2012  2013  2012 
               
EEI adjustmentsOther Income (Expense) - net       $ 1    
  Income Taxes and Other            
Net operating loss carryforward and other tax-related adjustmentsOperation and Maintenance          $ 4 
Discontinued Operations, net of tax of ($1), $4, ($1), $4Discontinued Operations $ 1  $ (5)   1    (5)
Total  $ 1  $ (5) $ 2  $ (1)

2013 Outlook

LKE projects higher 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, Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in LKE's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins." Margins is not intended to replace "Operating Income," which is determined in accordance with GAAP as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  Margins is a single financial performance measure of LKE'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 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 LKE's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage operations and analyze actual results compared with budget.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Margins" to "Operating Income" as defined by LKE for the periods ended June 30.

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      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 682     $ 682   $ 658     $ 658 
Operating Expenses                   
 Fuel   216       216     215       215 
 Energy purchases   37       37     34       34 
 Other operation and maintenance   23  $ 174    197     24  $ 173    197 
 Depreciation   2    81    83     13    73    86 
 Taxes, other than income      12    12        12    12 
   Total Operating Expenses   278    267    545     286    258    544 
Total $ 404  $ (267) $ 137   $ 372  $ (258) $ 114 

      2013 Six Months  2012 Six Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 1,482     $ 1,482   $ 1,363     $ 1,363 
Operating Expenses                   
 Fuel   447       447     428       428 
 Energy purchases   123       123     108       108 
 Other operation and maintenance   48  $ 346    394     46  $ 357    403 
 Depreciation   2    163    165     26    146    172 
 Taxes, other than income      24    24        23    23 
   Total Operating Expenses   620    533    1,153     608    526    1,134 
Total $ 862  $ (533) $ 329   $ 755  $ (526) $ 229 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Changes in Non-GAAP Financial Measures

Margins increased by $32 million for the three-month period primarily due to higher base rates of $25 million, environmental cost recoveries added to base rates of $14 million and increased environmental investments of $3 million, partially offset by lower volumes of $9 million.  The change in volumes was partially attributable to weather, as cooling degree days decreased 14% compared to the same period in 2012.

Margins increased by $107 million for the six-month period 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 effective January 1, 2013.  The environmental cost recoveries added to base rates were due to the elimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate cases.  This elimination results in depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013, while the recovery of such costs remain in Margins through base rates.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2013 compared with 2012 was due to:
   
 Three Months Six Months
       
Coal plant outages (a)$ (4) $ (17)
Adjustments to regulatory assets and liabilities     4 
Coal plant operations     3 
Other  4    1 
Total$  $ (9)

(a)Decrease is due to the timing and scope of scheduled outages.

Depreciation

The increase (decrease) in depreciation for the periods ended June 30, 2013 compared with 2012 was due to:

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  Three Months Six Months
      
Lower depreciation rates effective January 1, 2013$ (6) $ (11)
Additions to PP&E  2    4 
Other  1    
Total$ (3) $ (7)

Other Income (Expense) - net

Other income (expense) - net increased by $7 million and $8 million for the three and six months ended June 30, 2013 compared with 2012 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

Income Taxes

Income taxes increased by $17 million and $53 million for the three and six months ended June 30, 2013 compared with 2012 primarily due to higher pre-tax income.

See Note 5 to the Financial Statements for additional information on income taxes.

Income (Loss) from Discontinued Operations (net of income taxes)

Income (loss) from discontinued operations increased by $7 million for the three and six months ended June 30, 2013 compared with 2012.  The increase was primarily related to an adjustment to the estimated liability for indemnifications related to the 2009 termination of the WKE lease recorded in 2012.

Financial Condition
       
Liquidity and Capital Resources
       
LKE had the following at:
       
  June 30, 2013 December 31, 2012
       
Cash and cash equivalents $ 23  $ 43 
       
Short-term debt (a) $ 252  $ 125 
       
Notes payable with affiliates $ 72  $ 25 

(a)Represents borrowings under LG&E's and KU's commercial paper programs.  See Note 7 to the Financial Statements for additional information.

The $20 million decrease in LKE's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $579 million; and
·distributions to member of $69 million; partially offset by
·cash provided by operating activities of $297 million;
·capital contributions from member of $146 million;
·an increase in short term debt of $127 million; and
·an increase in notes payable with affiliates of $47 million.

LKE's cash provided by operating activities decreased by $57 million for the six months ended June 30, 2013, compared with 2012, primarily due to:

·an increase in cash outflows from other operating activities of $119 million driven by a $94 million increase in discretionary defined benefit plan contributions; and
·a decline in working capital cash flow changes of $36 million driven primarily by increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates and a lower federal income tax accrual in 2013 as a result of a federal settlement payment, offset by an increase in accounts payable primarily due to timing of fuel purchase commitments and payments, and lower inventory levels in 2013 compared with 2012 driven by increased generation at the plants and higher gas consumption from storage; partially offset by

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·an increase in net income adjusted for non-cash items of $98 million (deferred income taxes and investment tax credits of $39 million, defined benefit plans - expense of $7 million, partially offset by depreciation of $7 million and other non-cash items of $4 million).

Capital expenditures increased by $255 million during the six months ended June 30, 2013 compared with 2012 primarily due to environmental air projects at the Mill Creek and Ghent plants, coal consumption residual projects at the Ghent plant and construction of Cane Run Unit 7.

Credit Facilities

At June 30, 2013, LKE'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
          
LKE Credit Facility with a subsidiary of PPL Energy Funding Corporation $ 300  $ 72     $ 228 
LG&E Credit Facility (a)   500     $ 80    420 
KU Credit Facilities (a) (b)   598       370    228 
Total LG&E and KU Credit Facilities (c) $ 1,398  $ 72  $ 450  $ 876 

(a)Each company pays customary fees under their respective syndicated credit facilities, as well as KU's letter of credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.
(b)In May 2013, KU extended its $198 million letter of credit facility to May 2016.
(c)The $1.098 billion of commitments under LG&E's and KU's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 13% of the total committed capacity; however, the PPL affiliate provided a commitment of approximately 21% of the total facilities listed above. The syndicated credit facilities, as well as KU's letter of credit facility, each contain a financial covenant requiring debt to total capitalization not to exceed 70% for LG&E or KU, as calculated in accordance with the facility, and other customary covenants.

See Note 7 to the Financial Statements for further discussion of LKE's credit facilities.

Long-term Debt Securities

During 2012, LG&E and KU received KPSC and other state approvals to issue, up to $350 million for LG&E and $300 million for KU, of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Rating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt securities of LKE and its subsidiaries.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of LKE and its subsidiaries are based on information provided by LKE and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of LKE or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  The credit ratings of LKE and its subsidiaries affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.

The rating agencies took the following action related to LKE and its subsidiaries during 2013:KU)

In July 2013, S&P confirmed the long-term 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-termshort term rating on these Bonds.

Ratings Triggers

LKE and its subsidiaries have various(All Registrants except PPL Electric)

Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements (for PPL and PPL Energy Supply) and interest rate and foreign currency (for PPL) instruments, which contain provisions requiring

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LKE and its subsidiaries to postthat require the posting of additional collateral or permittingpermit the counterparty to terminate the contract, if PPL's, PPL Energy Supply's, LKE's, LG&E's or itsKU's or their subsidiaries' credit ratingsrating, as applicable, were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at JuneSeptember 30, 2013.

(All Registrants)

For additional information on the Registrants' liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Registrants' 2012 Form 10-K.

Risk Management

Market Risk

(All Registrants)

See Notes 13 and 14 to the Financial Statements for information about LKE'sthe Registrants' 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 and PPL Energy Supply)

PPL Energy Supply segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL Energy Supply's competitive generation assets and full-requirement sales and retail contracts.  This economic activity is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power).
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Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity.  See Note 14 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL Energy Supply's energy-related assets, liabilities and other contractual arrangements, PPL Energy Supply both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL Energy Supply's non-trading commodity derivative contracts range in maturity through 2019.

The following table sets forth the changes in the net fair value of non-trading commodity derivative contracts for the periods ended September 30.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Nine Months
  2013  2012  2013  2012 
             
Fair value of contracts outstanding at the beginning of the period $ 285  $ 961  $ 473  $ 1,082 
Contracts realized or otherwise settled during the period   (95)   (224)   (332)   (764)
Fair value of new contracts entered into during the period (a)   2    (11)   48    1 
Other changes in fair value   25    (101)   28    306 
Fair value of contracts outstanding at the end of the period $ 217  $ 625  $ 217  $ 625 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at September 30, 2013, based on the observability of the information used to determine the fair value.

   Net Asset (Liability)
   Maturity       Maturity   
   Less Than Maturity Maturity in Excess Total Fair
   1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant observable inputs (Level 2) $ 166  $ 11  $ (2) $ 5  $ 180 
Prices based on significant unobservable inputs (Level 3)   12    21    4         37 
Fair value of contracts outstanding at the end of the period $ 178  $ 32  $ 2  $ 5  $ 217 

PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets.  If PPL Energy Supply were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages.  These damages would be based on the difference between the market price and the contract price of the commodity.  Depending on price changes in the wholesale energy markets, such damages could be significant.  Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL Energy Supply attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.

(PPL and Kentucky Registrants)

LG&E's and KU's rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, LG&E and KU are subject to commodity price risk for only a small portion of on-going business operations.  LKE sellsLG&E and KU sell excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers.  See Note 14 to the Financial Statements for additional disclosures.

(PPL and PPL Energy Supply)

Commodity Price Risk (Trading)

PPL Energy Supply's trading commodity derivative contracts range in maturity through 2020.  The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended September 30.  See Notes 13 and 14 to the Financial Statements for additional information.

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  Gains (Losses)
  Three Months Nine Months
  2013  2012  2013  2012 
             
Fair value of contracts outstanding at the beginning of the period $ 18  $ 17  $ 29  $ (4)
Contracts realized or otherwise settled during the period   (3)   17    (5)   16 
Fair value of new contracts entered into during the period (a)   12    13    (4)   18 
Other changes in fair value   1    (15)   8    2 
Fair value of contracts outstanding at the end of the period $ 28  $ 32  $��28  $ 32 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of trading commodity derivative contracts at September 30, 2013, based on the observability of the information used to determine the fair value.

  Net Asset (Liability)
  Maturity      Maturity  
  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices quoted in active markets for identical instruments (Level 1) $ 3                 $ 3 
Prices based on significant observable inputs (Level 2)   5  $ 8  $ 2         15 
Prices based on significant unobservable inputs (Level 3)   2    4    1  $ 3    10 
Fair value of contracts outstanding at the end of the period $ 10  $ 12  $ 3  $ 3  $ 28 

VaR Models

A VaR model is utilized to measure commodity price risk in unregulated gross energy margins for the non-trading and trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's disciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term.  The VaR for portfolios using end-of-month results for the nine months ended September 30, 2013 was as follows.

      Non-Trading
   Trading VaR VaR
95% Confidence Level, Five-Day Holding Period      
 Period End $ 6  $6 
 Average for the Period   4   8 
 High   7   10 
 Low   2   5 

The trading portfolio includes all proprietary trading positions, regardless of the delivery period.  All positions not considered proprietary trading are considered non-trading.  The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months.  Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets.  The fair value of the non-trading and trading FTR positions was insignificant at September 30, 2013.

Interest Rate Risk (All Registrants)

LKEThe Registrants and itstheir subsidiaries issue debt to finance their operations, which exposes them to interest rate risk.  LKE utilizesThe Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in itstheir debt portfolioportfolios, adjust the duration of their debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate.  Risk limits under LKE'sthe risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of LKE'sthe debt portfolio due to changes in the absolute level of interest rates.

At June 30, 2013, LKE's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.
The following interest rate hedges were outstanding at September 30, 2013.


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LKE is also exposed to changes in the fair value of its debt portfolio.  LKE estimated that a 10% decrease in interest rates at June 30, 2013, would increase the fair value of its debt portfolio by $112 million.

At June 30, 2013, LKE had the following interest rate hedges outstanding:
             Effect of a  
      Effect of a    Fair Value, 10% Adverse Maturities
      10% Adverse   Exposure Net - Asset Movement Ranging
    Fair Value, Movement  Hedged (Liability) (a) in Rates (b) Through
PPLPPL          
Cash flow hedgesCash flow hedges        
   Exposure Net - Asset In InterestInterest rate swaps (c) $ 2,264  $ 68  $ (92) 2044 
  Hedged (Liability) (a) RatesCross-currency swaps (d)  1,262    26    (171) 2028 
Economic activityEconomic activity      Economic activity        
Interest rate swaps  (b) $ 179  $ (44) $ (4)Interest rate swaps (e)  179   (41)  (3) 2033 
LKELKE           
Cash flow hedgesCash flow hedges      Cash flow hedges        
Interest rate swaps (b)  500   72   (32)Interest rate swaps (c)  500   (14)  (36) 2043 
Economic activityEconomic activity          
Interest rate swaps (e)  179    (41)   (3) 2033 
LG&ELG&E          
Cash flow hedgesCash flow hedges          
Interest rate swaps (c)  250    (7)   (18) 2043 
Economic activityEconomic activity          
Interest rate swaps (e)  179    (41)   (3) 2033 
KUKU          
Cash flow hedgesCash flow hedges          
Interest rate swaps (c)  250    (7)   (18) 2043 

(a)Includes accrued interest.interest, if applicable.
(b)LKE utilizes various risk management instruments to reduce its exposure toEffects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.
(c)Changes in the expected futurefair value of such cash flow variabilityhedges are recorded in equity or as regulatory assets or liabilities, if recoverable through rates.  The changes in fair value of its debt instruments.  These risks include exposurethese instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings.
(d)Cross-currency swaps are utilized to adversehedge the interest rate movements for outstanding variable rate debtpayments and for future anticipated financing.  While LKE is exposed to changesprincipal of WPD's U.S. dollar-denominated senior notes.  Changes in the fair value of these instruments any realizedare recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.
(e)Realized changes in the fair value of such economic and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  The positions outstanding at June 30, 2013 mature through 2043.

The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios.  The estimated impact of a 10% adverse movement in interest rates at September 30, 2013 is shown below.

      PPL Energy  PPL         
   PPL Supply  Electric LKE LG&E KU
                    
Increase to interest expense of 10% Not  Not  Not   Not   Not   Not 
 increase in interest rates Significant  Significant  Significant  Significant  Significant  Significant 
Increase in fair value of 10% decrease                  
 in interest rates $ 682  $ 50  $ 120  $ 111  $ 26  $ 67 

Foreign Currency Risk (PPL)

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's domestic operations may make purchases of equipment in currencies other than U.S. dollars.

PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactions and net investments.  In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected earnings.

The following foreign currency hedges were outstanding at September 30, 2013.

       Effect of a  
       10%  
       Adverse  
       Movement  
       in Foreign  
     Fair Value, Currency Maturities
   Exposure Net - Asset Exchange Ranging
   Hedged (Liability) Rates (a) Through
             
Net investment hedges (b) £ 320  $ (11) $ (51) 2015 
Economic activity (c)   1,350    (55)   (208) 2015 

(a)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.

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(b)To protect the value of a portion of its net investment in WPD, PPL executes forward contracts to sell GBP.  The positions outstanding exclude the amount of intercompany loans classified as net investment hedges.  See Note 14 to the Financial Statements for additional information.
(c)To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP.

NDT Funds - Securities Price Risk (PPL and PPL Energy Supply)

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At September 30, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At September 30, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $60 million reduction in the fair value of the trust assets.  See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk(All Registrants)

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's  2012 Form 10-K and "Risk Management" in PPL Electric's 2012 Form 10-K for additional information.

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Foreign Currency Translation (PPL)

The value of the British pound sterling fluctuates in relation to the U.S. dollar.  Changes in this exchange rate resulted in a foreign currency translation loss of $159 million for the nine months ended September 30, 2013, which primarily reflected a $454 million reduction to PP&E and goodwill offset by a reduction of $295 million to net liabilities.  Changes in this exchange rate resulted in a foreign currency translation gain of $53 million for the nine months ended September 30, 2012, which primarily reflected a $123 million increase to PP&E and goodwill offset by an increase of $70 million to net liabilities.  The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions(All Registrants)

LKE isThe Registrants are not aware of any material ownership interestinterests or operating responsibility by senior management of LKE, LG&E or KUthe Registrants in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with LKE.  the Registrants.

See Note 11 to the Financial Statements for additional information on related party transactions.transactions for PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

Acquisitions, Development and Divestitures(All Registrants)

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.  See Note 8 to the Financial Statements for information on the more significant activities.

Environmental Matters

(All Registrants)

Extensive federal, state and local environmental laws and regulations are applicable to PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of LKE's business.the Registrants' businesses.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed 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 costcosts for their products or their demand for LG&E's and KU'sthe Registrants' services.

Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to LG&E's and KU's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where LG&E and KU have hydroelectric generating facilities or where river water is used to cool its fossil-powered generators.  LKE cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential costs of their related consequences.
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The following is a discussion of the more significant environmental matters.

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact LG&E's and KU's coal-fired plants.  LG&E and KU will comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, LKE is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment); and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November 2013.  The proposed regulation would apply to nearly all LG&E and KU-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

GHG Regulations
In June 2013, President Obama released his Climate Action Plan, which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum, the EPA was directed to issue a new proposal for new power plants by

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September 20, 2013, with a final rule to be issued in a timely fashion thereafter, and to issue proposed standards for existing power plants by June 1, 2014 with a final rule by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.  The Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may lead to more costly regulatory requirements.  Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect LKE and others in the industry as transmission system modifications to improve the ability to withstand major storms may be needed in order to meet those requirements.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  LG&E and KU are generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of their Kentucky plants.  In connection with a unanimous settlement agreement filed with the KPSC in November 2011, KU agreed to defer the requested approval for certain environmental upgrades to Units 1 and 2 at its E.W. Brown generating plant which represented approximately $200 million in capital costs.  LG&E and KU are evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants.  These measures, combined with the completion of recent feasibility studies conducted based on current market conditions, provide alternative compliance options for KU on Units 1 and 2 at the E.W. Brown station.  The anticipated retirements of certain coal-fired electric generating units is in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the Circuit Court stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Circuit Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place in the interim, and on June 24, 2013, the U.S. Supreme Court granted the EPA's petition for review of the Circuit Court's decision.

LG&E and KU plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

National Ambient Air Quality Standards
During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively.  In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide.  Final designations of non-attainment areas may occur in 2013 and 2014, respectively.  Existing environmental plans for LG&E's and KU's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements.   However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in LKE'sthe Registrants' 2012 Form 10-K for additional information on environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.


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Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, defined benefits, asset impairment, loss accruals, AROs, income taxes, and regulatory assets and liabilities.  See "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations" in LKE's 2012 Form 10-K for a discussion of each critical accounting policy.

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LOUISVILLE GAS AND ELECTRIC COMPANY

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations


The following should be read in conjunction with LG&E's Condensed Financial Statements and the accompanying Notes and with LG&E's 2012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:

·"Overview" provides a description of LG&E and its business strategy, a summary of Net Income and a discussion of certain events related to LG&E's results of operations and financial condition.

·"Results of Operations" provides a summary of LG&E's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on LG&E's Statements of Income, comparing the three and six months ended June 30, 2013 with 2012.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of LG&E's liquidity position and credit profile.  This section also includes a discussion of rating agency actions.

·"Financial Condition - Risk Management" provides an explanation of LG&E's risk management programs relating to market and credit risk.

Overview

Introduction

LG&E, headquartered in Louisville, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electric energy and distribution and sale of natural gas in Kentucky.  LG&E and its affiliate, KU, are wholly owned subsidiaries of LKE.  LKE is an intermediary holding company in PPL's group of companies.

Business Strategy

LG&E's overall strategy is to provide reliable, safe, competitively priced energy to its customers and reasonable returns on regulated investments to its shareowner.  Rate base is expected to grow as a result of significant capital expenditure programs to maintain reliable service and comply with federal and state regulations.  LG&E is focused on efficient operations, strong customer service, timely recovery of costs and constructive regulatory relationships.

A key objective for LG&E is to maintain a strong credit profile through managing financing costs and access to credit markets.  LG&E continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income
Net Income for the three and six months ended June 30, 2013 was $29 million and $73 million compared to $26 million and $51 million for the same periods in 2012 representing increases of 12% and 43% over 2012. 

See "Results of Operations" for a discussion and analysis of LG&E's earnings.

Economic and Market Conditions

The KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, a fuel adjustment clause, a gas supply clause and recovery on certain construction work-in-progress) that provide for recovery of prudently incurred costs.  LG&E is impacted by changes in customer usage levels which can be driven by a number of factors including weather conditions and economic factors that impact the load utilized by industrial and commercial customers.   

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LG&E is subject to extensive federal, state and local environmental laws, rules and regulations.  Certain regulated generation assets will require substantial capital investment.  LG&E projects $1.1 billion of capital investment over the next five years to satisfy certain of these requirements.  See Note 10 to the Financial Statements for additional information on these requirements.  These requirements have resulted in LG&E's anticipated retirement by 2015 of three coal-fired units with a combined summer capacity rating of 563 MW.  The retirement of the three coal-fired units is not expected to have a material impact on the financial condition or results of operations of LG&E.  See Note 8 to the Financial Statements in LG&E's 2012 Form 10-K for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky. 

LG&E cannot predict the future impact that these economic and market conditions and changes in regulatory requirements may have on its financial condition or results of operations.

Rate Case Proceedings

In December 2012, the KPSC approved a rate case settlement agreement providing for increases in annual base electricity rates of $34 million and an increase in annual base gas rates of $15 million using a 10.25% return on equity.  The approved rates became effective January 1, 2013.

Results of Operations

The following discussion provides a summary of LG&E's earnings and a description of key factors expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Margins and principal line items on LG&E's Statements of Income, comparing the three and six months ended June 30, 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 for future periods.

Earnings
              
Net Income for the periods ended June 30 was:
              
   Three Months Six Months
   2013  2012  2013  2012 
              
Net Income $ 29  $ 26  $ 73  $ 51 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in Margins.

  Three Months Six Months
       
Margins $ 8  $ 29 
Other operation and maintenance   (3)   5 
Depreciation   1    3 
Taxes, other than income      (1)
Other Income (Expense) - net      (2)
Interest Expense      1 
Income Taxes   (3)   (13)
Total $ 3  $ 22 

·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Margins.

·Lower other operation and maintenance for the six-month period primarily due to the timing and scope of scheduled coal plant maintenance outages.

·Higher income taxes for the six-month period primarily due to higher pre-tax income.

2013 Outlook

LG&E projects higher earnings in 2013 compared with 2012, primarily driven by electric and gas base rate increases, returns

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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, Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in LG&E's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins."  Margins is not intended to replace "Operating Income," which is determined in accordance with GAAP as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  Margins is a single financial performance measure of LG&E'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 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 LG&E's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage operations and analyze actual results compared with budget.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Margins" to "Operating Income" as defined by LG&E for the periods ended June 30.

      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 316     $ 316   $ 304     $ 304 
Operating Expenses                   
 Fuel   88       88     92       92 
 Energy purchases   34       34     25       25 
 Other operation and maintenance   10  $ 84    94     11  $ 81    92 
 Depreciation   1    36    37     1    37    38 
 Taxes, other than income      6    6        6    6 
   Total Operating Expenses   133    126    259     129    124    253 
Total $ 183  $ (126) $ 57   $ 175  $ (124) $ 51 

      2013 Six Months  2012 Six Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
                    
Operating Revenues $ 706     $ 706   $ 657     $ 657 
Operating Expenses                   
 Fuel   184       184     181       181 
 Energy purchases   115       115     98       98 
 Other operation and maintenance   21  $ 164    185     21  $ 169    190 
 Depreciation   1    72    73     1    75    76 
 Taxes, other than income      12    12        11    11 
   Total Operating Expenses   321    248    569     301   255    556 
Total $ 385  $ (248) $ 137   $ 356  $ (255) $ 101 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Changes in Non-GAAP Financial Measures

Margins increased by $8 million for the three-month period primarily due to higher base rates of $10 million and increased environmental investments of $3 million, partially offset by lower volumes of $5 million.  The change in volumes was partially attributable to weather, as cooling degree days decreased 25% compared to the same period in 2012.

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Margins increased by $29 million for the six-month period due to higher base rates of $22 million and increased environmental investments of $5 million.

The increase in base rates was the result of new KPSC rates effective January 1, 2013.

Other Operation and Maintenance

Other operation and maintenance decreased by $5 million for the six months ended June 30, 2013 compared with 2012 primarily due to $7 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages.

Income Taxes

Income taxes increased by $13 million for the six months ended June 30, 2013 compared with 2012 primarily due to higher pre-tax income.

See Note 5 to the Financial Statements for additional information on income taxes.

Financial Condition
       
Liquidity and Capital Resources
       
LG&E had the following at:
       
  June 30, 2013 December 31, 2012
       
Cash and cash equivalents $ 13  $ 22 
       
Short-term debt (a) $ 80  $ 55 

(a)Represents borrowings under LG&E's commercial paper program.  See Note 7 to the Financial Statements for additional information.

The $9 million decrease in LG&E's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $236 million; and
·the payment of common stock dividends to parent of $48 million; partially offset by
·cash provided by operating activities of $186 million,
·capital contributions from parent of $54 million; and
·an increase in short term debt of $25 million.

LG&E's cash provided by operating activities increased by $26 million for the six months ended June 30, 2013, compared with 2012, primarily due to:

·an increase in working capital cash flow changes of $26 million driven primarily by lower fuel levels in 2013 compared with 2012 due to increased generation at the plants and higher gas consumption from storage compared to 2012 due to the unseasonably milder weather in December 2011; and
·an increase in net income adjusted for non-cash items of $18 million (other non-cash items of $6 million; partially offset by deferred income taxes and investment tax credits of $7 million and depreciation of $3 million); partially offset by
·an increase in cash outflows from other operating activities of $18 million driven by a $19 million increase in discretionary defined benefit plan contributions.

Capital expenditures increased by $116 million during the six months ended June 30, 2013 compared with 2012 primarily due to environmental air projects at Mill Creek plant and construction of Cane Run Unit 7.

Credit Facilities,

At June 30, 2013, LG&E's committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

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         Letters of   
         Credit Issued   
         and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
Syndicated Credit Facility (a) (b) $ 500     $ 80  $ 420 

(a)The commitments under LG&E's Syndicated Credit Facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 6% of the total committed capacity available to LG&E.
(b)LG&E pays customary fees under its syndicated credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

LG&E participates in an intercompany money pool agreement whereby LKE and/or KU make available to LG&E funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At June 30, 2013 and December 31, 2012, there was no balance outstanding.

See Note 7 to the Financial Statements for further discussion of LG&E's credit facilities.

Long-term Debt Securities

During 2012, LG&E received KPSC and other state approvals to issue, up to $350 million of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Rating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt securities of LG&E.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of LG&E are based on information provided by LG&E and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of LG&E.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  The credit ratings of LG&E affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.

The rating agencies did not take any actions related to LG&E during the second quarter of 2013.

Ratings Triggers

LG&E has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, commodity transportation and storage and interest rate instruments, which contain provisions requiring LG&E to post additional collateral, or permitting the counterparty to terminate the contract, if LG&E's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2013.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about LG&E's risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

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Commodity Price Risk (Non-trading)

LG&E's rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, LG&E is subject to commodity price risk for only a small portion of on-going business operations.  LG&E sells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers.  See Note 14 to the Financial Statements for additional disclosures.

Interest Rate Risk

LG&E issues debt to finance its operations, which exposes it to interest rate risk.  LG&E utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate.  Risk limits under LG&E's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of LG&E's debt portfolio due to changes in the absolute level of interest rates.

At June 30, 2013, LG&E's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

LG&E is also exposed to changes in the fair value of its debt portfolio.  LG&E estimated that a 10% decrease in interest rates at June 30, 2013, would increase the fair value of its debt portfolio by $27 million.

At June 30, 2013, LG&E had the following interest rate hedges outstanding:
           
       Effect of a
        10% Adverse
      Fair Value, Movement
    Exposure Net - Asset in Interest
   Hedged (Liability) (a)  Rates
Economic activity         
 Interest rate swaps  (b) $ 179  $ (44) $ (4)
Cash flow hedges         
 Interest rate swaps (b)   250    36    (16)

(a)Includes accrued interest.
(b)LG&E utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While LG&E is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  The positions outstanding at June 30, 2013 mature through 2043.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in LG&E's 2012 Form 10-K for additional information.

Related Party Transactions

LG&E is not aware of any material ownership interest or operating responsibility by senior management of LG&E in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with LG&E.  See Note 11 to the Financial Statements for additional information on related party transactions.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to LG&E's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of LG&E's business.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed 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 cost for their products or their demand for LG&E's services.

Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to LG&E's generation assets, electricity transmission and
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distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where LG&E has hydroelectric generating facilities or where river water is used to cool its fossil-powered generators.  LG&E cannot currently predict whether its business will experience these potential climate change-related risks or estimate the potential costs of their related consequences.

The following is a discussion of the more significant environmental matters.

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact LG&E's coal-fired plants.  LG&E will comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, LG&E is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment); and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November 2013.  The proposed regulation would apply to nearly all LG&E-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

GHG Regulations
In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum the EPA was directed to issue a new proposal for new power plants by September 20, 2013, with a final rule to be issued in a timely fashion thereafter, and to issue proposed standards for existing power plants by June 1, 2014 with a final rule by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.

The EPA's re-proposal for new power plants was released on September 20, 2013.  The EPA's dependence on carbon capture and sequestration, a technology which is not presently commercially viable, effectively precludes the construction of new coal plants.  The proposal is further problematic as the proposed standards for new gas plants may not be achievable at all times.  PPL will comment on the rule to this effect.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.  The

Additionally, the Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may lead to more costly regulatory requirements.  Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect PPL, PPL Electric, LKE, LG&E and KU and others in the industry as transmission system modifications to improve the ability to withstand major storms may be needed in order to meet those requirements.

Climate Change
Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage, as applicable, to the Registrants' generation assets, electricity transmission and distribution systems, as well as impacts on the Registrants' customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL, PPL Energy Supply, LKE, LG&E and KU have hydroelectric generating facilities or where river water is used to cool their fossil and nuclear (as applicable) powered generators.  The Registrants cannot currently predict whether their businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

(All Registrants except PPL Electric)

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations.  A final rulemaking is currently expected by the end of 2014, as a result of litigation by environmental groups.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial and operational impact is expected to be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

In July 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from issuing final CCR regulations and would set non-hazardous CCR standards under RCRA and authorize state permit programs.  It remains uncertain whether similar legislation will likely be passed by the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's coal-fired plants.  PPL, PPL Energy Supply, LKE, LG&E and KU worked with industry groups to comment on the proposed regulation on September 20, 2013.  The final regulation is expected in May 2014.  At the present time, PPL, PPL Energy Supply, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.
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316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November 2013.  The proposed regulation would apply to nearly all PPL-owned steam electric generation plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  PPL, PPL Energy Supply, LKE, LG&E isand KU are generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls at PPL Energy Supply and approved ECR plans to install additional controls at some of itsLG&E's and KU's Kentucky plants.  Additionally, PPL Energy Supply is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions.  In September 2012, PPL Energy Supply announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.  Also, PPL has received approval for two compliance extensions in Kentucky, and has requested an extension for one of its plants in Pennsylvania.  Other extension requests are under consideration.

In connection with a unanimous settlement agreement filed with the KPSC in November 2011, KU agreed to defer the requested approval for certain environmental upgrades to Units 1 and 2 at its E.W. Brown generating plant which represented approximately $200 million in capital costs.  LG&E isand KU are evaluating, among other measures, chemical additive systems for mercury control at Trimble County plant.  and Brown plants.  These measures, combined with the completion of recent feasibility studies conducted based on current market conditions, provide alternative compliance options for KU on Units 1 and 2 at the E.W. Brown station.

The anticipated retirements of certain coal-fired electricelectricity generating units isare in response to this and other environmental regulations.

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CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit CourtCourt) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the D.C. Circuit Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place in the interim, and onin June 24, 2013 the U.S. Supreme Court granted the EPA's petition for review of the D.C. Circuit Court's decision.  Oral argument before the U.S. Supreme Court has been scheduled for December 2013.  Prior to a revised rule from the EPA, coal-fired generating plants could face tighter nitrous oxide emission limitations through state action.

The PPL, PPL Energy Supply, LKE, LG&E and KU plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The D.C. Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

Regional Haze
Under the EPA's regional haze programs (developed to eliminate man-made visibility degradation by 2064), states are required to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.  For the eastern U.S., the EPA had determined that region-wide reductions under the CAIR or CSAPR trading program could be utilized by state programs to satisfy BART requirements.  However, the August 2012 decision by the D.C. Circuit Court to vacate and remand CSAPR exposes power plants located in the eastern U.S., including PPL Energy Supply's plants in Pennsylvania and PPL's plants in Kentucky, to reductions in sulfur dioxide and nitrogen oxides as required by BART.
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The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for PPL Energy Supply's Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for PPL Energy Supply's Corette plant (which are not based on additional controls).  The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant.  PPL Energy Supply expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).  PPL is participating in litigation regarding this matter before the U.S. Court of Appeals for the Ninth Circuit.

National Ambient Air Quality Standards(Kentucky Registrants)
During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively.  In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide.  Final designations of non-attainment areas may occur in 2013 and 2014, respectively.  Existing environmental plans for LG&E's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements.   However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in LG&E's 2012 Form 10-K for additional information on environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, defined benefits, asset impairment, loss accruals, AROs, income taxes, and regulatory assets and liabilities.  See "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations" in LG&E's 2012 Form 10-K for a discussion of each critical accounting policy.

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KENTUCKY UTILITIES COMPANY

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations


The following should be read in conjunction with KU's Condensed Financial Statements and the accompanying Notes and with KU's 2012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:

·"Overview" provides a description of KU and its business strategy, a summary of Net Income and a discussion of certain events related to KU's results of operations and financial condition.

·"Results of Operations" provides a summary of KU's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on KU's Statements of Income, comparing the three and six months ended June 30, 2013 with 2012.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of KU's liquidity position and credit profile.  This section also includes a discussion of rating agency actions.

·"Financial Condition - Risk Management" provides an explanation of KU's risk management programs relating to market and credit risk.

Overview

Introduction

KU, headquartered in Lexington, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electric energy in Kentucky, Virginia and Tennessee.  KU and its affiliate, LG&E, are wholly owned subsidiaries of LKE.  LKE is an intermediary holding company in PPL's group of companies.

Business Strategy

KU's overall strategy is to provide reliable, safe, competitively priced energy to its customers and reasonable returns on regulated investments to its shareowner.  Rate base is expected to grow as a result of significant capital expenditure programs to maintain reliable service and comply with federal and state regulations.  KU is focused on efficient operations, strong customer service, timely recovery of costs and constructive regulatory relationships.

A key objective for KU is to maintain a strong credit profile through managing financing costs and access to credit markets.  KU continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income
Net Income for the three and six months ended June 30, 2013 was $44 million and $108 million compared to $30 million and $68 million for the same periods in 2012 representing increases of 47% and 59% over 2012. 

See "Results of Operations" for a discussion and analysis of KU's earnings.

Economic and Market Conditions

The KPSC has adopted a series of regulatory mechanisms (ECR, DSM, a fuel adjustment clause and recovery on certain construction work-in-progress) that provide for recovery of prudently incurred costs.  KU is impacted by changes in customer usage levels which can be driven by a number of factors including weather conditions and economic factors that impact the load utilized by industrial and commercial customers.   

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KU is subject to extensive federal, state and local environmental laws, rules and regulations.  Certain regulated generation assets will require substantial capital investment.  KU projects $1 billion of capital investment over the next five years to satisfy certain of these requirements.  See Note 10 to the Financial Statements for additional information on these requirements.  These requirements have resulted in KU's anticipated retirement by 2015 of two coal-fired units with a combined summer capacity rating of 163 MW.  KU retired the 71 MW unit at the Tyrone plant in February 2013.  The retirement of the two coal-fired units is not expected to have a material impact on the financial condition or results of operations of KU.  See Note 8 to the Financial Statements in KU's 2012 Form 10-K for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky. 

KU cannot predict the future impact that these economic and market conditions and changes in regulatory requirements may have on its financial condition or results of operations.

Rate Case Proceedings

Virginia

During April 2013, KU filed an application with the VSCC to increase annual Virginia base electric revenue by approximately $7 million, representing an increase of 9.6%.  KU proposed an authorized 10.8% return on equity.  Subject to regulatory approval, new rates would become effective January 1, 2014.

Kentucky

In December 2012, the KPSC approved a rate case settlement agreement providing for increases in annual base electricity rates of $51 million using a 10.25% return on equity.  The approved rates became effective January 1, 2013.

Results of Operations

The following discussion provides a summary of KU's earnings and a description of key factors expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Margins and principal line items on KU's Statements of Income, comparing the three and six months ended June 30, 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 for future periods.

Earnings
              
Net Income for the periods ended June 30 was:
              
   Three Months Six Months
   2013  2012  2013  2012 
              
Net Income $ 44  $ 30  $ 108  $ 68 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in Margins.

  Three Months Six Months
       
Margins $ 23  $ 77 
Other operation and maintenance   1    
Depreciation   (9)   (19)
Other Income (Expense) - net   7    6 
Income Taxes   (8)   (25)
Special item - EEI adjustments, after-tax      1 
Total $ 14  $ 40 

·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Margins.

·Higher depreciation for the three and six-month periods primarily due to environmental costs related to the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $12 million and $24 million to depreciation

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that is excluded from Margins.  This increase was partially offset by lower depreciation of $3 million and $7 million due to revised rates that were effective January 1, 2013.  Both events are the result of the 2012 rate case proceedings.

·Higher other income (expense) - net for the three and six-month periods primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

·Higher income taxes for the three and six-month periods primarily due to higher pre-tax income.

2013 Outlook

KU projects higher earnings in 2013 compared with 2012, primarily driven by electric 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, Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in KU's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins." Margins is not intended to replace "Operating Income," which is determined in accordance with GAAP as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  Margins is a single financial performance measure of KU's electricity generation, transmission and distribution operations.  In calculating this measure, fuel and energy purchases are deducted from revenues.  In addition, utility revenues and expenses associated with approved cost recovery mechanisms are offset.  These mechanisms allow for recovery of certain expenses, returns on capital investments and performance incentives.  Certain costs associated with these mechanisms, primarily ECR and DSM, are recorded as "Other operation and maintenance" and "Depreciation."  As a result, this measure represents the net revenues from KU's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage operations and analyze actual results compared with budget.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Margins" to "Operating Income" as defined by KU for the periods ended June 30.

      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 383     $ 383   $ 374     $ 374 
Operating Expenses                   
 Fuel   128       128     123       123 
 Energy purchases   20       20     29       29 
 Other operation and maintenance   13  $ 85    98     12  $ 86    98 
 Depreciation   1    45    46     12    36    48 
 Taxes, other than income      6    6        6    6 
   Total Operating Expenses   162    136    298     176    128    304 
Total $ 221  $ (136) $ 85   $ 198  $ (128) $ 70 

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      2013 Six Months  2012 Six Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 815     $ 815   $ 754     $ 754 
Operating Expenses                   
 Fuel   263       263     247       247 
 Energy purchases   47       47     58       58 
 Other operation and maintenance   27  $ 168    195     25  $ 168    193 
 Depreciation   1    91    92     24    72    96 
 Taxes, other than income      12    12        12    12 
   Total Operating Expenses   338    271    609     354    252    606 
Total $ 477  $ (271) $ 206   $ 400  $ (252) $ 148 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Changes in Non-GAAP Financial Measures

Margins increased by $23 million for the three-month period primarily due to higher base rates of $15 million and environmental cost recoveries added to base rates of $13 million, partially offset by lower volumes of $4 million.

Margins increased by $77 million for the six-month period due to higher base rates of $33 million, environmental cost recoveries added to base rates of $30 million, higher volumes of $9 million and increased environmental investments of $5 million.  The change in volumes was attributable to weather, as heating degree days increased 31% compared to the same period in 2012.

The increase in base rates was the result of new KPSC rates effective January 1, 2013.  The environmental cost recoveries added to base rates were due to the elimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate case.  This elimination results in depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013, while the recovery of such costs remain in Margins through base rates.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2013 compared with 2012 was due to:
   
  Three Months Six Months
       
Coal plant outages (a)$ (5) $ (10)
Coal plant operations  2    4 
Adjustments to regulatory assets and liabilities     4 
Other  3    4 
Total$  $ 2 

(a)Decrease is due to the timing and scope of scheduled outages.

Depreciation

The increase (decrease) in depreciation for the periods ended June 30, 2013 compared with 2012 was due to:

  Three Months Six Months
       
Lower depreciation rates effective January 1, 2013$ (3) $ (7)
Additions to PP&E  1    3 
Total$ (2) $ (4)

Other Income (Expense) - net

Other income (expense) - net increased by $7 million for the three and six months ended June 30, 2013 compared with 2012 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.
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Income Taxes

Income taxes increased by $8 million and $25 million for the three and six months ended June 30, 2013 compared with 2012 primarily due to higher pre-tax income.

See Note 5 to the Financial Statements for additional information on income taxes.

Financial Condition
       
Liquidity and Capital Resources
       
KU had the following at:
       
  June 30, 2013 December 31, 2012
       
Cash and cash equivalents $ 10  $ 21 
       
Short-term debt (a) $ 172  $ 70 

(a)Represents borrowings made under KU's commercial paper program.  See Note 7 to the Financial Statements for additional information.

The $11 million decrease in KU's cash and cash equivalents position was the net result of:

·capital expenditures of $341 million; and
·the payment of common stock dividends to parent of $55 million; partially offset by
·cash provided by operating activities of $190 million;
·an increase in short term debt of $102 million; and
·capital contributions from parent of $92 million.

KU's cash provided by operating activities decreased by $27 million for the six months ended June 30, 2013, compared with 2012, primarily due to:

·an increase in cash outflows from other operating activities of $69 million driven by a $43 million increase in discretionary defined benefit plan contributions; and
·a decline in working capital cash flow of $18 million driven primarily by increases in accounts receivable due to higher sales volumes, higher rates and extended payment terms and a lower tax accrual due to timing of settlements, partially offset by an increase in accounts payable primarily due to timing of fuel purchase commitments and payments; partially offset by
·an increase in net income adjusted for non-cash items of $60 million (deferred income taxes and investment tax credits of $19 million and defined benefit plans - expense of $7 million, partially offset by depreciation of $4 million and other non-cash items of $2 million).

Capital expenditures increased by $138 million during the six months ended June 30, 2013 compared with 2012 primarily due to environmental air projects and coal consumption residual projects at the Ghent plant and construction of Cane Run Unit 7.

Credit Facilities

At June 30, 2013, KU's 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
          
Total KU Credit Facilities (a) (b) $ 598     $ 370  $ 228 

(a)The commitments under KU's credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 22% of the total committed capacity available to KU.
(b)KU pays customary fees under its syndicated credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

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KU participates in an intercompany money pool agreement whereby LKE and/or LG&E make available to KU funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At June 30, 2013 and December 31, 2012, there was no balance outstanding.

See Notes 7 to the Financial Statements for further discussion of KU's credit facilities.

Long-term Debt Securities

During 2012, KU received KPSC and other state approvals to issue, up to $300 million of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Rating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt securities of KU.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of KU are based on information provided by KU and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of KU.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  The credit ratings of KU affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.

The rating agencies took the following action related to KU during 2013:

In July 2013, S&P confirmed the long-term 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.

Ratings Triggers

KU has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, and commodity transportation and storage, which contain provisions requiring KU to post additional collateral, or permitting the counterparty to terminate the contract, if KU's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2013.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about KU's risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

KU's rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, KU is subject to commodity price risk for only a small portion of on-going business operations.  KU sells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers.  See Note 14 to the Financial Statements for additional disclosures.
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Interest Rate Risk

KU issues debt to finance its operations, which exposes it to interest rate risk. KU utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate. Risk limits under KU's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of KU's debt portfolio due to changes in the absolute level of interest rates.

At June 30, 2013, KU's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

KU is also exposed to changes in the fair value of its debt portfolio.  KU estimated that a 10% decrease in interest rates at June 30, 2013, would increase the fair value of its debt portfolio by $68 million.

At June 30, 2013, KU had the following interest rate hedges outstanding:
           
       Effect of a
        10% Adverse
      Fair Value, Movement
    Exposure Net - Asset in Interest
   Hedged (Liability) Rates
Cash flow hedges         
 Interest rate swaps (a) $ 250  $ 36  $ (16)

(a)KU utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While KU is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  The positions outstanding at June 30, 2013 mature through 2043.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in KU's 2012 Form 10-K for additional information.

Related Party Transactions

KU is not aware of any material ownership interest or operating responsibility by senior management of KU in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with KU.  See Note 11 to the Financial Statements for additional information on related party transactions.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to KU's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of KU's business.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed 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 cost for their products or their demand for KU's services.

Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to KU's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where KU has hydroelectric generating facilities or where river water is used to cool its fossil-powered generators.  KU cannot currently predict whether its business will experience these potential climate change-related risks or estimate the potential costs of their related consequences.

The following is a discussion of the more significant environmental matters.

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations.  A final rulemaking is currently expected before the end of

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2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact KU's coal-fired plants.  KU will comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, KU is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment); and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November of 2013.  The proposed regulation would apply to nearly all KU-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

GHG Regulations
In June 2013, President Obama released his Climate Action Plan, which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum, the EPA was directed to issue a new proposal for new power plants by September 20, 2013, with a final rule to be issued in a timely fashion thereafter, and to issue proposed standards for existing power plants by June 1, 2014 with a final rule by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.  The Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may lead to more costly regulatory requirements.  Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect KU and others in the industry as transmission system modifications to improve the ability to withstand major storms may be needed in order to meet those requirements.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  KU is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants.  In connection with a unanimous settlement agreement filed with the KPSC in November 2011, KU agreed to defer the requested approval for certain environmental upgrades to Units 1 and 2 at its E.W. Brown generating plant which represented approximately $200 million in capital costs.  KU is evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants.  These measures, combined with the completion of recent feasibility studies conducted based on current market conditions, provide alternative compliance options for KU on Units 1 and 2 at the E.W. Brown station.  The anticipated retirements of certain coal-fired electric generating units is in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the Circuit Court stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Circuit Court vacated and remanded CSAPR back to the EPA for further
170
rulemaking, again leaving CAIR in place in the interim, and on June 24, 2013, the U.S. Supreme Court granted the EPA's petition for review of the Circuit Court's decision.

KU plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

National Ambient Air Quality Standards
During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively.  In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide.  Final designations of non-attainment areas may occur in 2013 and 2014, respectively.  Existing environmental plans for KU's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements.  However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in KU's 2012 Form 10-K for additional information on environmental matters.

New Accounting Guidance (All Registrants)

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(All Registrants)

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following table summarizes the accounting policies by Registrant that are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, defined benefits, asset impairment, loss accruals, AROs, income taxes, and regulatory assets and liabilities.uncertain.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in KU'seach Registrant's 2012 Form 10-K for a discussion of each critical accounting policy.

PPLPPL
PPLEnergy SupplyElectricLKELG&EKU
Defined BenefitsXXXXXX
Loss AccrualsXXXXXX
Income TaxesXXXXXX
Asset Impairments (Excluding Investments)XXXXX
AROsXXXXX
Price Risk ManagementXX
Regulatory Assets and LiabilitiesXXXXX
Revenue Recognition - unbilled revenueXXXX

 
171142
 

PPL Corporation
PPL Energy Supply, LLC
PPL Electric Utilities Corporation
LG&E and KU Energy LLC
Louisville Gas and Electric Company
Kentucky Utilities Company

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Reference is made to "Risk Management" in each Registrant's "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 4.  Controls and Procedures

(a)           Evaluation of disclosure controls and procedures.

PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company, and Kentucky Utilities Company

The registrants'Registrants' principal executive officers and principal financial officers, based on their evaluation of the registrants'Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of JuneSeptember 30, 2013, the registrants'Registrants' disclosure controls and procedures are effective to ensure that material information relating to the registrantsRegistrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared.  The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.

(b)           Change in internal controls over financial reporting.

PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company, and Kentucky Utilities Company

TheAs reported in the June 30, 2013 Form 10-Q, the principal executive officers and principal financial officers of the above listed registrants haveRegistrants concluded that the implementation of a financial consolidation and reporting system for PPL and its primary U.S. subsidiaries during the quarter ended June 30, 2013 resulted in a material change to the registrants'Registrants' internal control over financial reporting.  The new system enhances the consolidation of subsidiary accounts, provides reporting tools for analysis and automates certain aspects of financial statement preparation for each of the registrants.Registrants.  Processes and controls over the consolidation and reporting processes that were previously considered to be effective were replaced with new or modified controls that were also determined to be effective.

The new consolidation and reporting system was subject to extensive testing and data reconciliation during implementation.  Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes.

The Registrants' principal executive officers and principal financial officers have concluded that there were no other changes in the Registrants' internal control over financial reporting during the Registrants' third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrants' internal control over financial reporting.


PPL Corporation

As reported in the June 30, 2013 Form 10-Q, PPL's principal executive officer and principal financial officer have concluded that the implementation of a new general ledger system and a financial reporting system at WPD during the quarter ended June 30, 2013 resulted in a material change to its internal control over financial reporting.  The general ledger system that was implemented at WPD replaced the existing mainframe system and resulted in more automation and enhanced controls over

143

general ledger processing and consolidation.  The reporting system that was implemented at WPD improves and automates controls over data transfer included in PPL's consolidation process and improves controls over GAAP and foreign currency adjustments.  In each of the WPD system implementations, controls that were previously determined to be effective were replaced with new or modified controls that were also determined to be effective.

172

The general ledger and reporting systems were subject to extensive testing and data reconciliation during their implementation.  Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes remain effective.  Risks related to the system implementations at WPD were also partially mitigated by PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD results and their incorporation into PPL's consolidated financial statements.

PART II.  OTHER INFORMATIONThe Registrant's principal executive officer and principal financial officer have concluded that there were no other changes in the Registrant's internal control over financial reporting during the Registrant's third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

For additional information regarding pending administrative and judicial proceedings involving regulatory, environmental and other matters, which information is incorporated by reference into this Part II, see:

 · "Item 3. Legal Proceedings" in each Registrant's 2012 Form 10-K; and
 · Notes 5, 6 and 10 to the Financial Statements.

Item 1A.  Risk Factors

There have been no material changes in the Registrant'sRegistrants' risk factors from those disclosed in "Item 1A. Risk Factors" of the 2012 Form 10-K.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
              
 Issuer Purchase of Equity Securities during the Third Quarter of 2013:   
              
    (a)(b)(c)(d)
              
             Maximum Number (or
             Approximate Dollar
          Total Number ofValue) of Shares
          Shares (or Units)(or Units) that May
    Total Number ofAverage PricePurchased as Part ofYet Be Purchased
    Shares (or Units)Paid per SharePublicly AnnouncedUnder the Plans
Period  Purchased (1)(or Unit)Plans of Programsor Programs
July 1 to July 31, 2013       
August 1 to August 31, 2013   750,000 $30.81   
September 1 to September 30, 2013   750,000 $31.00   
Total   1,500,000 $30.91     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
              
 Issuer Purchase of Equity Securities during the Second Quarter of 2013:   
              
    (a)(b)(c)(d)
              
             Maximum Number (or
             Approximate Dollar
          Total Number ofValue) of Shares
          Shares (or Units)(or Units) that May
    Total Number ofAverage PricePurchased as Part ofYet Be Purchased
    Shares (or Units)Paid per SharePublicly AnnouncedUnder the Plans
Period  Purchased (1)(or Unit)Plans of Programsor Programs
April 1 to April 30, 2013      
May 1 to May 31, 2013      
June 1 to June 30, 2013   930,000 $29.92  
Total   930,000 $29.92  

(1) Represents shares of common stock repurchased in the open market to offset a portion of shares issued under stock based compensation plans.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

PPL Electric Utilities Corporation

Effective October 31, 2013, PPL Electric amended and restated its Articles of Incorporation and Bylaws, copies of which are filed as exhibits 3(a) and 3(b), respectively, to this report.

 
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Item 6. Exhibits

The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith.  The balance of the Exhibits have heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference.  Exhibits indicated by a [_] are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

3(a)
1(a)
-
Amended and Restated Articles
Final Terms of Incorporation of PPL Corporation, effective as of May 15, 2013the WPD West Midlands £400 million 3.875% Senior Unsecured Notes due October 17, 2024 (Exhibit 3(i)1.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 20,October 18, 2013)
3(b)
1(b)
-
Amended and Restated Bylaws
Final Terms of PPL Corporation, effective as of May 15, 2013WPD East Midlands £40 million 1.676% Notes due 2052 (Exhibit 3(ii)1.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 20,October 18, 2013)
4(a)
1(c)
-
Supplemental Indenture No. 10, dated as
Final Terms of May 24, 2013, among PPL Capital Funding, Inc., PPL Corporation and The Bank of New York Mellon (formerly known as The Bank of New York), as TrusteeWPD East Midlands £25 million 1.676% Notes due 2052 (Exhibit 4.21.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 24,October 18, 2013)
4(b)
2(a)
-
Supplemental Indenture No. 11,
Purchase and Sale Agreement by and between PPL Montana, LLC and NorthWestern Corporation, dated as of May 24,September 26, 2013 among PPL Capital Funding, Inc., PPL Corporation and The Bank of New York Mellon (formerly known as The Bank of New York), as Trustee (Exhibit 4.32.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 24,September 27, 2013)
4(c)
2(b)
-
Supplemental Indenture No. 12,
Lease Termination Agreement by and between PPL Montana, LLC, Montana OL3 LLC and Montana OP3 LLC, dated as of May 24,September 26, 2013 among PPL Capital Funding, Inc., PPL Corporation and The Bank of New York Mellon (formerly known as The Bank of New York), as Trustee (Exhibit 4.42.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 24,September 27, 2013)
4(d)
2(c)
-
Supplemental Indenture No. 15,
Lease Termination Agreement by and between PPL Montana, LLC, Montana OL4 LLC and Montana OP4 LLC, dated as of July 1,September 26, 2013 of PPL Electric Utilities Corporation to The Bank of New York Mellon, as Trustee (Exhibit 4(a)2.3 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905)1-11459) dated July 11,September 27, 2013)
2(d)
-
Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.4 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(e)
-
Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.5 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
*3(a)
-
Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation, effective as of October 31, 2013
*3(b)
-
Amended and Restated Bylaws of PPL Electric Utilities Corporation, effective as of October 31, 2013
*4(a)
-
Amendment No. 10 to Employee Stock Ownership Plan, dated September 16, 2013
4(b)
-
Amended and Restated Trust Deed, dated September 10, 2013, by and among Western Power Distribution (East Midlands) plc, Western Power Distribution (West Midlands) plc, Western Power Distribution (South West) plc and Western Power Distribution (South Wales) plc as Issuers, and HSBC Corporate Trustee Company (UK) Limited as Note Trustee (Exhibit 4.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
*12(a)
-
PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(b)
-
PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
*12(c)
-
PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(d)
-
LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
*12(e)
-
Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
*12(f)
-
Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
   
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended JuneSeptember 30, 2013, filed by the following officers for the following companies:
   
*31(a)
-
PPL Corporation's principal executive officer
*31(b)
-
PPL Corporation's principal financial officer
*31(c)
-
PPL Energy Supply, LLC's principal executive officer
145
*31(d)
-
PPL Energy Supply, LLC's principal financial officer
*31(e)
-
PPL Electric Utilities Corporation's principal executive officer
*31(f)
-
PPL Electric Utilities Corporation's principal financial officer
*31(g)
-
LG&E and KU Energy LLC's principal executive officer
*31(h)
-
LG&E and KU Energy LLC's principal financial officer
*31(i)
-
Louisville Gas and Electric Company's principal executive officer
*31(j)
-
Louisville Gas and Electric Company's principal financial officer
*31(k)
-
Kentucky Utilities Company's principal executive officer
*31(l)
-
Kentucky Utilities Company's principal financial officer
 

174


Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended JuneSeptember 30, 2013, furnished by the following officers for the following companies:
   
*32(a)
-
PPL Corporation's principal executive officer and principal financial officer
*32(b)
-
PPL Energy Supply, LLC's principal executive officer and principal financial officer
*32(c)
-
PPL Electric Utilities Corporation's principal executive officer and principal financial officer
*32(d)
-
LG&E and KU Energy LLC's principal executive officer and principal financial officer
*32(e)
-
Louisville Gas and Electric Company's principal executive officer and principal financial officer
*32(f)
-
Kentucky Utilities Company's principal executive officer and principal financial officer
   
101.INS
-
XBRL Instance Document for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.SCH
-
XBRL Taxonomy Extension Schema for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.CAL
-
XBRL Taxonomy Extension Calculation Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.DEF
-
XBRL Taxonomy Extension Definition Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.LAB
-
XBRL Taxonomy Extension Label Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.PRE
-
XBRL Taxonomy Extension Presentation Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.  The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.

 PPL Corporation
 (Registrant) 
   
 PPL Energy Supply, LLC
 (Registrant) 
   
   
   
Date:  August 2,November 1, 2013/s/  Vincent Sorgi 
 Vincent Sorgi 
 Vice President and Controller 
 (Principal Accounting Officer) 
   
   
   
 PPL Electric Utilities Corporation
 (Registrant) 
   
   
   
Date:  August 2,November 1, 2013/s/  Dennis A. Urban, Jr. 
 Dennis A. Urban, Jr. 
 Controller 
 (Principal Financial Officer and Principal Accounting Officer) 


 LG&E and KU Energy LLC
 (Registrant) 
   
 Louisville Gas and Electric Company
 (Registrant) 
   
 Kentucky Utilities Company
 (Registrant) 
   
   
   
Date:  August 2,November 1, 2013/s/  Kent W. Blake 
 
Kent W. Blake
Chief Financial Officer
 
 (Principal Financial Officer and Principal Accounting Officer) 
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176