UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |
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FORM 10-Q |
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[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 20132014 |
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. |
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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 |
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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 |
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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 |
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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 |
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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 |
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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 Corporation | Common stock, $0.01 par value, 630,249,634665,072,010 shares outstanding at October 25, 2013.31, 2014. |
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| PPL Energy Supply, LLC | PPL Corporation indirectly holds all of the membership interests in PPL Energy Supply, LLC. |
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| PPL Electric Utilities Corporation | Common stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at October 25, 2013.31, 2014. |
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| LG&E and KU Energy LLC | PPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC. |
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| Louisville Gas and Electric Company | Common stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at October 25, 2013.31, 2014. |
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| Kentucky Utilities Company | Common stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at October 25, 2013.31, 2014. |
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 SEPTEMBER 30, 20132014
Table of Contents
This combined Form 10-Q is separately filed by the following Registrants in their individual 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 Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant, except that information under "Forward-Looking Information" relating to subsidiaries of PPL Corporation 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 in 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 Registrants' financial statementsRegistrants 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.
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PART I. FINANCIAL INFORMATION | | |
| Item 1. Financial Statements | | |
| | PPL Corporation and Subsidiaries | | |
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| | PPL Energy Supply, LLC and Subsidiaries | | |
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| | PPL Electric Utilities Corporation and Subsidiaries | | |
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| | LG&E and KU Energy LLC and Subsidiaries | | |
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| | Louisville Gas and Electric Company | |
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| | Kentucky Utilities Company | |
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| Combined Notes to Condensed Financial Statements (Unaudited) | |
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| | | 4644 |
| | | 5049 |
| | | 5351 |
| | | 5653 |
| | | 5755 |
| | | 7169 |
| | | 7371 |
| | | 7471 |
| | | 8278 |
| | | 9492 |
| | | 9492 |
| | | 9593 |
| | | 9694 |
| | | 9896 |
| Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| | | 9998 |
| | | | 9998 |
| | | | 101100 |
| | | | 102101 |
| | | | | 102101 |
| | | | | 103102 |
| | | | | 104103 |
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| | | | 108 |
| | | | 120119 |
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| | | | 135137 |
| | | | 139140 |
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PART II. OTHER INFORMATION | |
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| | 144145 |
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| 147149 |
| 148150 |
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GLOSSARY OF TERMS AND ABBREVIATIONS
PPL Corporation and its 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.
LKS - LG&E and KU Services Company, a subsidiary of LKE that provides services to 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. Debt issued by PPL Capital Funding is guaranteed as to payment by PPL.
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 electricelectricity 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 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.
PPL Services - PPL Services Corporation, a subsidiary of PPL that provides services to PPL and its subsidiaries.
PPL Susquehanna - PPL Susquehanna, LLC, a subsidiary of PPL Generation that owns a nuclear-powered generating station.
PPL WEM - PPL WEM Holdings plc (formerly WPD Investment Holdings Limited),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 direct or indirect wholly owned subsidiaries of PPL.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 requiring 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 requiring holders to purchase shares of PPL common stock on or prior to May 1, 2014.
20122013 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2012.2013.
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 changes to the existing Alternative Energy Portfolio Standard.AEPS.
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 combined-cycle unit under construction in Kentucky, jointly owned by LG&E and KU, which is expected to provide additional electric generating capacity of 141640 MW (141 MW and 499 MW to LG&E and KU byKU) in 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.
COLACOBRA - Consolidated Omnibus Budget Reconciliation Act, which provides individuals the option to temporarily continue employer group health insurance coverage after termination of employment.
CPCN - license applicationCertificate of Public Convenience and Necessity. Authority granted by the KPSC pursuant to Kentucky Revised Statute 278.020 to provide utility service to or for a combinedthe public or the construction permit and operating license fromof certain plant, equipment, property or facility for the NRC for a nuclear plant.furnishing of utility service to the public.
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.
DNO - Distribution Network Operator.
DOJ - U.S. Department of Justice.
DPCR4 - Distribution Price Control Review 4, the U.K. 5-yearfive-year rate review period applicable to WPD that commenced April 1, 2005.
DPCR5 - Distribution Price Control Review 5, the U.K. five-year rate review period applicable to WPD that commenced April 1, 2010.
DRIP - Dividend Reinvestment and Direct Stock Purchase Plan.
DSIC - the Distribution System Improvement Charge authorized under Act 11, which is an alternative ratemaking mechanism providing more-timely cost recovery of qualifying distribution system capital expenditures.
DSM - Demand Side Management. Pursuant to Kentucky Revised Statute 278.285, the KPSC may determine the reasonableness of DSM plans proposed by any utility under its jurisdiction. Proposed DSM mechanisms may seek full recovery of DSM programscosts and revenues lost by implementing thoseDSM programs and/or incentives designed to provide financial rewards to the utility for implementing cost-effective DSM programs. The cost of such programs shall be assigned only to the class or classes of customers which benefit from the programs.
ECR - Environmental Cost Recovery. Pursuant to Kentucky Revised Statute 278.183, 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 whichthat apply to coal combustion wastes 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.
ERCOT - the Electric Reliability Council of Texas, operator of the electricity transmission network and electricity energy market in most of Texas.
ESOP - Employee Stock Ownership Plan.
FERC - Federal Energy Regulatory Commission, the U.S. 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 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, (sourceknown as source and sink).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.
IBEW - International Brotherhood of Electrical Workers.
If-Converted Method - A method applicable for calculatingapplied to calculate diluted EPS for a company with outstanding convertible debt outstanding.debt. The method is applied as follows: Interest charges (after-tax)(after tax) applicable to the convertible debt are added back to net income and the convertible debt is assumed to have been converted to equity at the beginning of the period, and the resulting common shares are treated as outstanding shares. Both adjustments are made only for purposes of calculating diluted EPS. This method was applied in 2013 and 2014 to PPL's Equity Units prior to settlement beginning in the first quarter of 2013.settlement.
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, 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.
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.
MPSC - Montana Public Service Commission.
MW - megawatt, one thousand kilowatts.
MWh - megawatt-hour, one thousand kilowatt-hours.
NDT - PPL Susquehanna's nuclear plant decommissioning trust.
NERC - North American Electric Reliability Corporation.
NGCC - Natural gas-fired combined-cycle generating plant.
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.
NPNS - the normal purchases and normal sales exception as permitted by derivative accounting rules. Derivatives that qualify for this exception may 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 of 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 nameplatesummer rating capacities of 2,3902,120 MW.
PADEP - the Pennsylvania Department of Environmental Protection, a state government agency.
PJM - PJM Interconnection, L.L.C., operator of the electricelectricity transmission network and electricelectricity 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 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, (whichwhich are components of the 2010 and 2011 Equity Units.)
RAV - regulatory asset value. This term, used within the U.K. regulatory environment, is also commonly known as RAB or regulatory asset base. RAV is based on historical investment costs at time of privatization, plus subsequent allowed additions less annual regulatory depreciation, and represents the value on which DNOs earn a return in accordance with the regulatory cost of capital. RAV is indexed to Retail Price Index in order to allow for the effects of inflation. Since the beginning of DPCR5 in April 2010, RAV additions have been based on a percentage of annual total expenditures.
RCRA - Resource Conservation and Recovery Act of 1976.
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 needednecessary 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.Board.
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 - ReliabilityFirst 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.
RIIO-ED1 - RIIO represents "Revenues = Incentive + Innovation + Outputs - Electricity Distribution." RIIO-ED1 refers to the initial eight-year rate review period applicable to WPD commencing April 1, 2015.
Riverstone - Riverstone Holdings LLC, a Delaware limited liability company and ultimate parent company of the entities that own the competitive power generation business to be contributed to Talen Energy other than the competitive power generation business to be contributed by virtue of the spinoff of a newly formed parent of PPL Energy Supply.
RJS Power - RJS Power Holdings LLC, a Delaware limited liability company controlled by Riverstone, that owns the competitive power generation business to be contributed, directly or indirectly, by its owners to Talen Energy other than the competitive power generation business to be contributed by virtue of the spinoff of a newly formed parent of PPL Energy Supply.
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 andreporting. It also requires an independent auditor to make its own assessment.
SCR - selective catalytic reduction, a pollution control process for the removal of nitrogen oxide from exhaust gases.
Scrubber - an air pollution control device that can remove particulates and/or gases (primarily sulfur dioxide) from exhaust gases.
SEC - the U.S. Securities and Exchange Commission, a U.S. government agency primarily 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 legislationstatute that addresses remediation of contaminated sites; states also have similar statutes.
Talen Energy - Talen Energy Corporation, the Delaware corporation formed to be the publicly traded company and owner of the competitive generation assets of PPL Energy Supply and certain affiliates of Riverstone.
TC2 - Trimble County Unit 2, a coal-fired plant located in Kentucky with a net summer capacity of 732 MW. LKE indirectly owns a 75% interest (consists of LG&E's 14.25% and KU's 60.75% interests) in TC2 or 549 MW of the capacity.
Tolling agreement - agreement whereby the owner of an electricelectricity generating facility agrees to use that facility to convert fuel provided by a third party into electricity for delivery back to the third party.
TRA - Tennessee Regulatory Authority, the state agency that has jurisdiction over the regulation of rates and service of utilities in Tennessee.
Treasury Stock Method - A method applied to calculate diluted EPS that assumes any proceeds that could be obtained upon exercise of options and warrants (and their equivalents) would be used to purchase common stock at the average market price during the relevant period.
USWA – United Steelworkers of America.
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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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 whichthat 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 20122013 Form 10-K and Form 10-Q for the period ended June 30, 2014 and in "Item 2. Combined 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 or revenue 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, including the PPL Energy Supply spinoff transaction with Riverstone and the anticipated formation of Talen Energy and our ability to successfully operate acquired businesses and realize expected benefits from such business acquisitions.transactions. |
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.
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 | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2014 | | 2013 | | 2014 | | 2013 |
Operating Revenues | | | | | | | | | | |
| Utility | | $ | 1,860 | | $ | 1,739 | | $ | 5,852 | | $ | 5,344 |
| Unregulated wholesale energy | | | 1,109 | | | 913 | | | 203 | | | 2,380 |
| Unregulated retail energy | | | 282 | | | 263 | | | 909 | | | 755 |
| Energy-related businesses | | | 198 | | | 159 | | | 512 | | | 423 |
| Total Operating Revenues | | | 3,449 | | | 3,074 | | | 7,476 | | | 8,902 |
| | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Fuel | | | 452 | | | 494 | | | 1,701 | | | 1,464 |
| | Energy purchases | | | 859 | | | 555 | | | (284) | | | 1,663 |
| | Other operation and maintenance | | | 684 | | | 658 | | | 2,082 | | | 2,009 |
| Depreciation | | | 307 | | | 284 | | | 913 | | | 845 |
| Taxes, other than income | | | 92 | | | 86 | | | 283 | | | 261 |
| Energy-related businesses | | | 186 | | | 151 | | | 492 | | | 403 |
| Total Operating Expenses | | | 2,580 | | | 2,228 | | | 5,187 | | | 6,645 |
| | | | | | | | | | | | | | | |
Operating Income | | | 869 | | | 846 | | | 2,289 | | | 2,257 |
| | | | | | | | | | | | | | | |
Other Income (Expense) - net | | | 144 | | | (117) | | | 38 | | | 18 |
| | | | | | | | | | | | | | | |
Interest Expense | | | 258 | | | 244 | | | 775 | | | 747 |
| | | | | | | | | | | | | | | |
Income from Continuing Operations Before Income Taxes | | | 755 | | | 485 | | | 1,552 | | | 1,528 |
| | | | | | | | | | | | | | | |
Income Taxes | | | 265 | | | 81 | | | 520 | | | 329 |
| | | | | | | | | | | | | | | |
Income from Continuing Operations After Income Taxes | | | 490 | | | 404 | | | 1,032 | | | 1,199 |
| | | | | | | | | | | | | | | |
Income (Loss) from Discontinued Operations (net of income taxes) | | | 7 | | | 7 | | | 10 | | | 30 |
| | | | | | | | | | | | | | | |
Net Income | | | 497 | | | 411 | | | 1,042 | | | 1,229 |
| | | | | | | | | | | | | | | |
Net Income Attributable to Noncontrolling Interests | | | | | | 1 | | | | | | 1 |
| | | | | | | | | | | | | | | |
Net Income Attributable to PPL Shareowners | | $ | 497 | | $ | 410 | | $ | 1,042 | | $ | 1,228 |
| | | | | | | | | | | | | | | |
Amounts Attributable to PPL Shareowners: | | | | | | | | | | | | |
| Income from Continuing Operations After Income Taxes | | $ | 490 | | $ | 403 | | $ | 1,032 | | $ | 1,198 |
| Income (Loss) from Discontinued Operations (net of income taxes) | | | 7 | | | 7 | | | 10 | | | 30 |
| Net Income | | $ | 497 | | $ | 410 | | $ | 1,042 | | $ | 1,228 |
| | | | | | | | | | | | | | | |
Earnings Per Share of Common Stock: | | | | | | | | | | | | |
| Income from Continuing Operations After Income Taxes Available to PPL | | |
| Common Shareowners: | | | | | | | | | | | | |
| | Basic | | $ | 0.73 | | $ | 0.64 | | $ | 1.58 | | $ | 1.98 |
| | Diluted | | $ | 0.73 | | $ | 0.61 | | $ | 1.56 | | $ | 1.86 |
| Net Income Available to PPL Common Shareowners: | | | | | | | | | | | | |
| | Basic | | $ | 0.74 | | $ | 0.65 | | $ | 1.60 | | $ | 2.03 |
| | Diluted | | $ | 0.74 | | $ | 0.62 | | $ | 1.57 | | $ | 1.90 |
| | | | | | | | | | | | | | | |
Dividends Declared Per Share of Common Stock | | $ | 0.3725 | | $ | 0.3675 | | $ | 1.1175 | | $ | 1.1025 |
| | | | | | | | | | | | | | | |
Weighted-Average Shares of Common Stock Outstanding (in thousands) | | | | | | | | | | | | |
| | Basic | | | 664,432 | | | 631,046 | | | 649,561 | | | 601,275 |
| | Diluted | | | 666,402 | | | 664,343 | | | 665,501 | | | 662,094 |
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 | | 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 | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | |
Net income | | $ | 497 | | $ | 411 | | $ | 1,042 | | $ | 1,229 |
| | | | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Amounts arising during the period - gains (losses), net of tax (expense) | | | | | | | | | | | | |
| benefit: | | | | | | | | | | | | |
| | Foreign currency translation adjustments, net of tax of ($9), $8, ($3), $1 | | | (48) | | | 87 | | | 80 | | | (165) |
| | Available-for-sale securities, net of tax of $1, ($15), ($20), ($42) | | | (1) | | | 15 | | | 18 | | | 40 |
| | Qualifying derivatives, net of tax of $2, $2, $31, ($41) | | | (5) | | | (9) | | | (52) | | | 77 |
| | Defined benefit plans: | | | | | | | | | | | | |
| | | Net actuarial gain (loss), net of tax of ($1), $0, $1, $0 | | | (1) | | | | | | (3) | | | |
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): | | | | | | | | | | | | |
| | Available-for-sale securities, net of tax of $4, $1, $6, $2 | | | (3) | | | | | | (5) | | | (2) |
| | Qualifying derivatives, net of tax of $3, $11, $4, $68 | | | (12) | | | (6) | | | 2 | | | (122) |
| | 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), ($3) | | | 1 | | | 2 | | | 3 | | | 5 |
| | | Net actuarial loss, net of tax of ($9), ($12), ($26), ($37) | | | 29 | | | 33 | | | 84 | | | 101 |
Total other comprehensive income (loss) attributable to PPL | | | | | | | | | | | | |
| Shareowners | | | (40) | | | 121 | | | 127 | | | (67) |
| | | | | | | | | | | | | | | |
Comprehensive income (loss) | | | 457 | | | 532 | | | 1,169 | | | 1,162 |
| | Comprehensive income attributable to noncontrolling interests | | | | | | 1 | | | | | | 1 |
Comprehensive income (loss) attributable to PPL Shareowners | | $ | 457 | | $ | 531 | | $ | 1,169 | | $ | 1,161 |
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) |
| | | | | | | | | |
| | | | | 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) |
| | | | | | | | | |
| | | | | Nine Months Ended September 30, |
| | | | | 2014 | | 2013 |
Cash Flows from Operating Activities | | | | | | |
| Net income | | $ | 1,042 | | $ | 1,229 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | |
| | Depreciation | | | 930 | | | 859 |
| | Amortization | | | 168 | | | 164 |
| | Defined benefit plans - expense | | | 71 | | | 135 |
| | Deferred income taxes and investment tax credits | | | 266 | | | 301 |
| | Unrealized (gains) losses on derivatives, and other hedging activities | | | 117 | | | 126 |
| | Adjustment to WPD line loss accrual | | | 65 | | | 45 |
| | Stock compensation expense | | | 52 | | | 45 |
| | Other | | | 38 | | | 2 |
| Change in current assets and current liabilities | | | | | | |
| | Accounts receivable | | | (29) | | | (79) |
| | Accounts payable | | | (126) | | | (140) |
| | Unbilled revenues | | | 163 | | | 197 |
| | Fuel, materials and supplies | | | (60) | | | (14) |
| | Counterparty collateral | | | (18) | | | (77) |
| | Taxes payable | | | 208 | | | 76 |
| | Uncertain tax positions | | | 1 | | | (104) |
| | Other | | | (5) | | | (89) |
| Other operating activities | | | | | | |
| | Defined benefit plans - funding | | | (322) | | | (505) |
| | Other assets | | | 8 | | | (59) |
| | Other liabilities | | | 59 | | | 111 |
| | | Net cash provided by operating activities | | | 2,628 | | | 2,223 |
Cash Flows from Investing Activities | | | | | | |
| Expenditures for property, plant and equipment | | | (2,878) | | | (2,768) |
| Expenditures for intangible assets | | | (74) | | | (61) |
| Purchases of nuclear plant decommissioning trust investments | | | (124) | | | (102) |
| Proceeds from the sale of nuclear plant decommissioning trust investments | | | 112 | | | 92 |
| Proceeds from the receipt of grants | | | 164 | | | 5 |
| Net (increase) decrease in restricted cash and cash equivalents | | | (187) | | | 13 |
| Other investing activities | | | 13 | | | 33 |
| | | Net cash provided by (used in) investing activities | | | (2,974) | | | (2,788) |
Cash Flows from Financing Activities | | | | | | |
| Issuance of long-term debt | | | 296 | | | 862 |
| Retirement of long-term debt | | | (545) | | | (309) |
| Repurchase of common stock | | | | | | (74) |
| Issuance of common stock | | | 1,037 | | | 1,409 |
| Payment of common stock dividends | | | (718) | | | (645) |
| Debt issuance and credit facility costs | | | (21) | | | (37) |
| Contract adjustment payments | | | (21) | | | (72) |
| Net increase (decrease) in short-term debt | | | 398 | | | (148) |
| Other financing activities | | | (7) | | | (20) |
| | | Net cash provided by (used in) financing activities | | | 419 | | | 966 |
Effect of Exchange Rates on Cash and Cash Equivalents | | | 13 | | | (11) |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 86 | | | 390 |
Cash and Cash Equivalents at Beginning of Period | | | 1,102 | | | 901 |
Cash and Cash Equivalents at End of Period | | $ | 1,188 | | $ | 1,291 |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS |
PPL Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars, shares in thousands) |
| | | | | September 30, | | December 31, |
| | | | | 2013 | | 2012 |
Assets | | | | | | |
| | | | | | | | | |
Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 1,291 | | $ | 901 |
| Restricted cash and cash equivalents | | | 52 | | | 54 |
| Accounts receivable (less reserve: 2013, $65; 2012, $64) | | | | | | |
| | Customer | | | 857 | | | 745 |
| | Other | | | 117 | | | 79 |
| Unbilled revenues | | | 652 | | | 857 |
| Fuel, materials and supplies | | | 686 | | | 673 |
| Prepayments | | | 173 | | | 166 |
| Price risk management assets | | | 1,045 | | | 1,525 |
| Regulatory assets | | | 31 | | | 19 |
| Other current assets | | | 67 | | | 49 |
| Total Current Assets | | | 4,971 | | | 5,068 |
| | | | | | | | | |
Investments | | | | | | |
| Nuclear plant decommissioning trust funds | | | 804 | | | 712 |
| Other investments | | | 47 | | | 47 |
| Total Investments | | | 851 | | | 759 |
| | | | | | | | | |
Property, Plant and Equipment | | | | | | |
| Regulated utility plant | | | 26,498 | | | 25,196 |
| Less: accumulated depreciation - regulated utility plant | | | 4,636 | | | 4,164 |
| | Regulated utility plant, net | | | 21,862 | | | 21,032 |
| Non-regulated property, plant and equipment | | | | | | |
| | Generation | | | 11,653 | | | 11,295 |
| | Nuclear fuel | | | 590 | | | 524 |
| | Other | | | 834 | | | 726 |
| Less: accumulated depreciation - non-regulated property, plant and equipment | | | 6,173 | | | 5,942 |
| | Non-regulated property, plant and equipment, net | | | 6,904 | | | 6,603 |
| Construction work in progress | | | 2,822 | | | 2,397 |
| Property, Plant and Equipment, net (a) | | | 31,588 | | | 30,032 |
| | | | | | | | | |
Other Noncurrent Assets | | | | | | |
| Regulatory assets | | | 1,423 | | | 1,483 |
| Goodwill | | | 4,050 | | | 4,158 |
| Other intangibles | | | 932 | | | 925 |
| Price risk management assets | | | 550 | | | 572 |
| Other noncurrent assets | | | 623 | | | 637 |
| Total Other Noncurrent Assets | | | 7,578 | | | 7,775 |
| | | | | | |
Total Assets | | $ | 44,988 | | $ | 43,634 |
(a) | At September 30, 2013 and December 31, 2012, includes $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. |
CONDENSED CONSOLIDATED BALANCE SHEETS |
PPL Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars, shares in thousands) |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Assets | | | | | | |
| | | | | | | | | |
Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 1,188 | | $ | 1,102 |
| Restricted cash and cash equivalents | | | 274 | | | 83 |
| Accounts receivable (less reserve: 2014, $48; 2013, $64) | | | | | | |
| | Customer | | | 911 | | | 923 |
| | Other | | | 139 | | | 97 |
| Unbilled revenues | | | 676 | | | 835 |
| Fuel, materials and supplies | | | 763 | | | 702 |
| Prepayments | | | 117 | | | 153 |
| Deferred income taxes | | | 242 | | | 246 |
| Price risk management assets | | | 732 | | | 942 |
| Assets of discontinued operations | | | 647 | | | |
| Regulatory assets | | | 28 | | | 33 |
| Other current assets | | | 43 | | | 37 |
| Total Current Assets | | | 5,760 | | | 5,153 |
| | | | | | | | | |
Investments | | | | | | |
| Nuclear plant decommissioning trust funds | | | 911 | | | 864 |
| Other investments | | | 36 | | | 43 |
| Total Investments | | | 947 | | | 907 |
| | | | | | | | | |
Property, Plant and Equipment | | | | | | |
| Regulated utility plant | | | 30,169 | | | 27,755 |
| Less: accumulated depreciation - regulated utility plant | | | 5,315 | | | 4,873 |
| | Regulated utility plant, net | | | 24,854 | | | 22,882 |
| Non-regulated property, plant and equipment | | | | | | |
| | Generation | | | 11,179 | | | 11,881 |
| | Nuclear fuel | | | 624 | | | 591 |
| | Other | | | 869 | | | 834 |
| Less: accumulated depreciation - non-regulated property, plant and equipment | | | 6,323 | | | 6,172 |
| | Non-regulated property, plant and equipment, net | | | 6,349 | | | 7,134 |
| Construction work in progress | | | 3,194 | | | 3,071 |
| Property, Plant and Equipment, net | | | 34,397 | | | 33,087 |
| | | | | | | | | |
Other Noncurrent Assets | | | | | | |
| Regulatory assets | | | 1,253 | | | 1,246 |
| Goodwill | | | 4,187 | | | 4,225 |
| Other intangibles | | | 936 | | | 947 |
| Price risk management assets | | | 366 | | | 337 |
| Other noncurrent assets | | | 343 | | | 357 |
| Total Other Noncurrent Assets | | | 7,085 | | | 7,112 |
| | | | | | | | | |
Total Assets | | $ | 48,189 | | $ | 46,259 |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS |
PPL Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars, shares in thousands) |
| | | | | September 30, | | December 31, |
| | | | | 2013 | | 2012 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | $ | 499 | | $ | 652 |
| Long-term debt due within one year | | | 751 | | | 751 |
| Accounts payable | | | 1,079 | | | 1,252 |
| Taxes | | | 170 | | | 90 |
| Interest | | | 325 | | | 325 |
| Dividends | | | 232 | | | 210 |
| Price risk management liabilities | | | 823 | | | 1,065 |
| Regulatory liabilities | | | 68 | | | 61 |
| Other current liabilities | | | 1,001 | | | 1,219 |
| Total Current Liabilities | | | 4,948 | | | 5,625 |
| | | | | | | | | |
Long-term Debt | | | 19,092 | | | 18,725 |
| | | | | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 3,777 | | | 3,387 |
| Investment tax credits | | | 345 | | | 328 |
| Price risk management liabilities | | | 538 | | | 629 |
| Accrued pension obligations | | | 1,529 | | | 2,076 |
| Asset retirement obligations | | | 678 | | | 536 |
| Regulatory liabilities | | | 1,054 | | | 1,010 |
| Other deferred credits and noncurrent liabilities | | | 665 | | | 820 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 8,586 | | | 8,786 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 5, 6 and 10) | | | | | | |
| | | | | | | | | |
Equity | | | | | | |
| PPL Shareowners' Common Equity | | | | | | |
| | Common stock - $0.01 par value (a) | | | 6 | | | 6 |
| | Additional paid-in capital | | | 8,305 | | | 6,936 |
| | Earnings reinvested | | | 6,040 | | | 5,478 |
| | Accumulated other comprehensive loss | | | (2,007) | | | (1,940) |
| | Total PPL Shareowners' Common Equity | | | 12,344 | | | 10,480 |
| Noncontrolling Interests | | | 18 | | | 18 |
| Total Equity | | | 12,362 | | | 10,498 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 44,988 | | $ | 43,634 |
CONDENSED CONSOLIDATED BALANCE SHEETS |
PPL Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars, shares in thousands) |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | $ | 1,099 | | $ | 701 |
| Long-term debt due within one year | | | 235 | | | 315 |
| Accounts payable | | | 1,208 | | | 1,308 |
| Taxes | | | 281 | | | 114 |
| Interest | | | 354 | | | 325 |
| Dividends | | | 248 | | | 232 |
| Price risk management liabilities | | | 897 | | | 829 |
| Regulatory liabilities | | | 92 | | | 90 |
| Other current liabilities | | | 998 | | | 998 |
| Total Current Liabilities | | | 5,412 | | | 4,912 |
| | | | | | | | | |
Long-term Debt | | | 20,522 | | | 20,592 |
| | | | | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 4,423 | | | 3,928 |
| Investment tax credits | | | 161 | | | 342 |
| Price risk management liabilities | | | 377 | | | 415 |
| Accrued pension obligations | | | 952 | | | 1,286 |
| Asset retirement obligations | | | 739 | | | 687 |
| Regulatory liabilities | | | 1,028 | | | 1,048 |
| Other deferred credits and noncurrent liabilities | | | 601 | | | 583 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 8,281 | | | 8,289 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 6 and 10) | | | | | | |
| | | | | | | | | |
Equity | | | | | | |
| | Common stock - $0.01 par value (a) | | | 7 | | | 6 |
| | Additional paid-in capital | | | 9,388 | | | 8,316 |
| | Earnings reinvested | | | 6,017 | | | 5,709 |
| | Accumulated other comprehensive loss | | | (1,438) | | | (1,565) |
| Total Equity | | | 13,974 | | | 12,466 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 48,189 | | $ | 46,259 |
(a) | 780,000 shares authorized; 630,239664,653 and 581,944630,321 shares issued and outstanding at September 30, 20132014 and December 31, 2012.2013. |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY |
PPL Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | PPL Shareowners | | | | | | |
| | | | Common | | | | | | | | | | | | | | | | | | |
| | | | stock | | | | | | | | | | | | Accumulated | | | | | | |
| | | | shares | | | | | | Additional | | | | | | other | | | Non- | | | |
| | | | outstanding | | | Common | | | paid-in | | | Earnings | | | comprehensive | | | controlling | | | |
| | | | (a) | | | stock | | | capital | | | reinvested | | | loss | | | interests | | | Total |
| | | | | | | | | | | | | | | | | | | |
June 30, 2013 (b) | | 591,622 | | $ | 6 | | $ | 7,195 | | $ | 5,863 | | $ | (2,128) | | $ | 18 | | $ | 10,954 |
Common stock issued (c) | | 40,117 | | | | | | 1,151 | | | | | | | | | | | | 1,151 |
Common stock repurchased (d) | | (1,500) | | | | | | (46) | | | | | | | | | | | | (46) |
Stock-based compensation (e) | | | | | | | | 5 | | | | | | | | | | | | 5 |
Net income | | | | | | | | | | | 410 | | | | | | 1 | | | 411 |
Dividends, dividend equivalents, | | | | | | | | | | | | | | | | | | | | |
| redemptions and distributions (f) | | | | | | | | | | | (233) | | | | | | (1) | | | (234) |
Other comprehensive | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | | | | | | | | | | | | 121 | | | | | | 121 |
September 30, 2013 (b) | | 630,239 | | $ | 6 | | $ | 8,305 | | $ | 6,040 | | $ | (2,007) | | $ | 18 | | $ | 12,362 |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2012 (b) | | 581,944 | | $ | 6 | | $ | 6,936 | | $ | 5,478 | | $ | (1,940) | | $ | 18 | | $ | 10,498 |
Common stock issued (c) | | 50,725 | | | | | | 1,433 | | | | | | | | | | | | 1,433 |
Common stock repurchased (d) | | (2,430) | | | | | | (74) | | | | | | | | | | | | (74) |
Cash settlement of equity forward | | | | | | | | | | | | | | | | | | | | |
| agreements (d) | | | | | | | | (13) | | | | | | | | | | | | (13) |
Stock-based compensation (e) | | | | | | | | 23 | | | | | | | | | | | | 23 |
Net income | | | | | | | | | | | 1,228 | | | | | | 1 | | | 1,229 |
Dividends, dividend equivalents, | | | | | | | | | | | | | | | | | | | | |
| redemptions and distributions (f) | | | | | | | | | | | (666) | | | | | | (1) | | | (667) |
Other comprehensive | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | | | | | | | | | | | | (67) | | | | | | (67) |
September 30, 2013 (b) | | 630,239 | | $ | 6 | | $ | 8,305 | | $ | 6,040 | | $ | (2,007) | | $ | 18 | | $ | 12,362 |
| | | | | | | | | | | | | | | | | | | | | | |
June 30, 2012 | | 580,213 | | $ | 6 | | $ | 6,886 | | $ | 5,190 | | $ | (1,120) | | $ | 18 | | $ | 10,980 |
Common stock issued (c) | | 757 | | | | | | 21 | | | | | | | | | | | | 21 |
Stock-based compensation (e) | | | | | | | | 5 | | | | | | | | | | | | 5 |
Net income | | | | | | | | | | | 355 | | | | | | | | | 355 |
Dividends, dividend equivalents | | | | | | | | | | | | | | | | | | | | |
| redemptions and distributions (f) | | | | | | | | | | | (210) | | | | | | | | | (210) |
Other comprehensive | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | | | | | | | | | | | | 81 | | | | | | 81 |
September 30, 2012 | | 580,970 | | $ | 6 | | $ | 6,912 | | $ | 5,335 | | $ | (1,039) | | $ | 18 | | $ | 11,232 |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2011 | | 578,405 | | $ | 6 | | $ | 6,813 | | $ | 4,797 | | $ | (788) | | $ | 268 | | $ | 11,096 |
Common stock issued (c) | | 2,565 | | | | | | 71 | | | | | | | | | | | | 71 |
Stock-based compensation (e) | | | | | | | | 28 | | | | | | | | | | | | 28 |
Net income | | | | | | | | | | | 1,167 | | | | | | 4 | | | 1,171 |
Dividends, dividend equivalents | | | | | | | | | | | | | | | | | | | | |
| redemptions and distributions (f) | | | | | | | | | | | (629) | | | | | | (254) | | | (883) |
Other comprehensive | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | | | | | | | | | | | | (251) | | | | | | (251) |
September 30, 2012 | | 580,970 | | $ | 6 | | $ | 6,912 | | $ | 5,335 | | $ | (1,039) | | $ | 18 | | $ | 11,232 |
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY |
PPL Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | PPL Shareowners | | | | | | |
| | | | Common | | | | | | | | | | | | | | | | | | |
| | | | stock | | | | | | | | | | | | Accumulated | | | | | | |
| | | | shares | | | | | | Additional | | | | | | other | | | Non- | | | |
| | | | outstanding | | | Common | | | paid-in | | | Earnings | | | comprehensive | | | controlling | | | |
| | | | (a) | | | stock | | | capital | | | reinvested | | | loss | | | interests | | | Total |
| | | | | | | | | | | | | | | | | | | | | | |
June 30, 2014 | | 664,018 | | $ | 7 | | $ | 9,358 | | $ | 5,768 | | $ | (1,398) | | | | | $ | 13,735 |
Common stock issued | | 635 | | | | | | 21 | | | | | | | | | | | | 21 |
Stock-based compensation | | | | | | | | 9 | | | | | | | | | | | | 9 |
Net income | | | | | | | | | | | 497 | | | | | | | | | 497 |
Dividends and dividend | | | | | | | | | | | | | | | | | | | | |
| equivalents | | | | | | | | | | | (248) | | | | | | | | | (248) |
Other comprehensive | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | | | | | | | | | | | | (40) | | | | | | (40) |
September 30, 2014 | | 664,653 | | $ | 7 | | $ | 9,388 | | $ | 6,017 | | $ | (1,438) | | | | | $ | 13,974 |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2013 | | 630,321 | | $ | 6 | | $ | 8,316 | | $ | 5,709 | | $ | (1,565) | | | | | $ | 12,466 |
Common stock issued | | 34,332 | | | 1 | | | 1,048 | | | | | | | | | | | | 1,049 |
Stock-based compensation | | | | | | | | 24 | | | | | | | | | | | | 24 |
Net income | | | | | | | | | | | 1,042 | | | | | | | | | 1,042 |
Dividends and dividend | | | | | | | | | | | | | | | | | | | | |
| equivalents | | | | | | | | | | | (734) | | | | | | | | | (734) |
Other comprehensive | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | | | | | | | | | | | | 127 | | | | | | 127 |
September 30, 2014 | | 664,653 | | $ | 7 | | $ | 9,388 | | $ | 6,017 | | $ | (1,438) | | | | | $ | 13,974 |
| | | | | | | | | | | | | | | | | | | | | | |
June 30, 2013 | | 591,622 | | $ | 6 | | $ | 7,195 | | $ | 5,863 | | $ | (2,128) | | $ | 18 | | $ | 10,954 |
Common stock issued | | 40,117 | | | | | | 1,151 | | | | | | | | | | | | 1,151 |
Common stock repurchased | | (1,500) | | | | | | (46) | | | | | | | | | | | | (46) |
Stock-based compensation | | | | | | | | 5 | | | | | | | | | | | | 5 |
Net income | | | | | | | | | | | 410 | | | | | | 1 | | | 411 |
Dividends and dividend | | | | | | | | | | | | | | | | | | | | |
| equivalents | | | | | | | | | | | (233) | | | | | | (1) | | | (234) |
Other comprehensive | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | | | | | | | | | | | | 121 | | | | | | 121 |
September 30, 2013 | | 630,239 | | $ | 6 | | $ | 8,305 | | $ | 6,040 | | $ | (2,007) | | $ | 18 | | $ | 12,362 |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2012 | | 581,944 | | $ | 6 | | $ | 6,936 | | $ | 5,478 | | $ | (1,940) | | $ | 18 | | $ | 10,498 |
Common stock issued | | 50,725 | | | | | | 1,433 | | | | | | | | | | | | 1,433 |
Common stock repurchased | | (2,430) | | | | | | (74) | | | | | | | | | | | | (74) |
Cash settlement of equity forward | | | | | | | | | | | | | | | | | | | | |
| agreements | | | | | | | | (13) | | | | | | | | | | | | (13) |
Stock-based compensation | | | | | | | | 23 | | | | | | | | | | | | 23 |
Net income | | | | | | | | | | | 1,228 | | | | | | 1 | | | 1,229 |
Dividends and dividend | | | | | | | | | | | | | | | | | | | | |
| equivalents | | | | | | | | | | | (666) | | | | | | (1) | | | (667) |
Other comprehensive | | | | | | | | | | | | | | | | | | | | |
| income (loss) | | | | | | | | | | | | | | (67) | | | | | | (67) |
September 30, 2013 | | 630,239 | | $ | 6 | | $ | 8,305 | | $ | 6,040 | | $ | (2,007) | | $ | 18 | | $ | 12,362 |
(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 and July issuances of shares of common stock. See Note 7 for additional information. |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
(d) | See Note 7 for additional information. |
(e) | The three and nine months ended September 30, 2013 include $8 million and $44 million and the three and nine months ended September 30, 2012 include $7 million and $42 million of stock-based compensation expense related to new and existing unvested equity awards. The three and nine months ended September 30, 2013 include $(3) million and $(21) million and the three and nine months ended September 30, 2012 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. |
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, |
| | | | | 2014 | | 2013 | | 2014 | | 2013 |
Operating Revenues | | | | | | | | | | | | |
| Unregulated wholesale energy | | $ | 1,109 | | $ | 913 | | $ | 203 | | $ | 2,380 |
| Unregulated wholesale energy to affiliate | | | 20 | | | 11 | | | 68 | | | 37 |
| Unregulated retail energy | | | 283 | | | 265 | | | 913 | | | 758 |
| Energy-related businesses | | | 189 | | | 143 | | | 469 | | | 378 |
| Total Operating Revenues | | | 1,601 | | | 1,332 | | | 1,653 | | | 3,553 |
| | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Fuel | | | 212 | | | 258 | | | 953 | | | 780 |
| | Energy purchases | | | 708 | | | 389 | | | (893) | | | 1,088 |
| | Other operation and maintenance | | | 232 | | | 232 | | | 746 | | | 714 |
| Depreciation | | | 74 | | | 75 | | | 225 | | | 223 |
| Taxes, other than income | | | 14 | | | 14 | | | 45 | | | 40 |
| Energy-related businesses | | | 172 | | | 138 | | | 451 | | | 366 |
| Total Operating Expenses | | | 1,412 | | | 1,106 | | | 1,527 | | | 3,211 |
| | | | | | | | | | | | | | | |
Operating Income | | | 189 | | | 226 | | | 126 | | | 342 |
| | | | | | | | | | | | | | | |
Other Income (Expense) - net | | | 10 | | | 1 | | | 23 | | | 17 |
| | | | | | | | | | | | | | | |
Interest Expense | | | 31 | | | 37 | | | 95 | | | 123 |
| | | | | | | | | | | | | | | |
Income from Continuing Operations Before Income Taxes | | | 168 | | | 190 | | | 54 | | | 236 |
| | | | | | | | | | | | | | | |
Income Taxes | | | 74 | | | 71 | | | 16 | | | 91 |
| | | | | | | | | | | | | | | |
Income from Continuing Operations After Income Taxes | | | 94 | | | 119 | | | 38 | | | 145 |
| | | | | | | | | | | | | | | |
Income (Loss) from Discontinued Operations (net of income taxes) | | | 7 | | | 6 | | | 10 | | | 28 |
| | | | | | | | | | | | | | | |
Net Income | | | 101 | | | 125 | | | 48 | | | 173 |
| | | | | | | | | | | | | | | |
Net Income Attributable to Noncontrolling Interests | | | | | | 1 | | | | | | 1 |
| | | | | | | | | | | | | | | |
Net Income Attributable to PPL Energy Supply Member | | $ | 101 | | $ | 124 | | $ | 48 | | $ | 172 |
| | | | | | | | | | | | | | | |
Amounts Attributable to PPL Energy Supply Member: | | | | | | | | | | | | |
| Income from Continuing Operations After Income Taxes | | $ | 94 | | $ | 118 | | $ | 38 | | $ | 144 |
| Income (Loss) from Discontinued Operations (net of income taxes) | | | 7 | | | 6 | | | 10 | | | 28 |
| Net Income | | $ | 101 | | $ | 124 | | $ | 48 | | $ | 172 |
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 | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | |
Net income | | $ | 101 | | $ | 125 | | $ | 48 | | $ | 173 |
| | | | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Amounts arising during the period - gains (losses), net of tax (expense) | | | | | | | | | | | | |
| benefit: | | | | | | | | | | | | |
| | Available-for-sale securities, net of tax of $1, ($15), ($20), ($42) | | | (1) | | | 15 | | | 18 | | | 40 |
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): | | | | | | | | | | | | |
| | Available-for-sale securities, net of tax of $4, $1, $6, $2 | | | (3) | | | | | | (5) | | | (2) |
| | Qualifying derivatives, net of tax of $2, $19, $11, $63 | | | (5) | | | (29) | | | (18) | | | (96) |
| | Defined benefit plans: | | | | | | | | | | | | |
| | | Prior service costs, net of tax of ($1), ($1), ($2), ($2) | | | 1 | | | 1 | | | 2 | | | 3 |
| | | Net actuarial loss, net of tax of $0, ($2), ($2), ($7) | | | 1 | | | 3 | | | 4 | | | 11 |
Total other comprehensive income (loss) attributable to | | | | | | | | | | | | |
| PPL Energy Supply Member | | | (7) | | | (10) | | | 1 | | | (44) |
| | | | | | | | | | | | | | | |
Comprehensive income (loss) | | | 94 | | | 115 | | | 49 | | | 129 |
| | Comprehensive income attributable to noncontrolling interests | | | | | | 1 | | | | | | 1 |
Comprehensive income (loss) attributable to PPL Energy | | | | | | | | | | | | |
| Supply Member | | $ | 94 | | $ | 114 | | $ | 49 | | $ | 128 |
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) |
| | | | | | | | | |
| | | | | Nine Months Ended September 30, |
| | | | | 2014 | | 2013 |
Cash Flows from Operating Activities | | | | | | |
| Net income | | $ | 48 | | $ | 173 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | |
| | Depreciation | | | 242 | | | 237 |
| | Amortization | | | 117 | | | 111 |
| | Defined benefit plans - expense | | | 34 | | | 39 |
| | Deferred income taxes and investment tax credits | | | (150) | | | 112 |
| | Impairment of assets | | | 20 | | | |
| | Unrealized (gains) losses on derivatives, and other hedging activities | | | 216 | | | 98 |
| | Other | | | 19 | | | 9 |
| Change in current assets and current liabilities | | | | | | |
| | Accounts receivable | | | (1) | | | 71 |
| | Accounts payable | | | (45) | | | (108) |
| | Unbilled revenues | | | 41 | | | 135 |
| | Fuel, materials and supplies | | | (67) | | | (18) |
| | Taxes payable | | | 70 | | | (43) |
| | Counterparty collateral | | | (18) | | | (77) |
| | Price risk management assets and liabilities | | | (34) | | | 1 |
| | Other | | | (9) | | | 10 |
| Other operating activities | | | | | | |
| | Defined benefit plans - funding | | | (32) | | | (107) |
| | Other assets | | | (2) | | | (32) |
| | Other liabilities | | | 16 | | | (28) |
| | | Net cash provided by operating activities | | | 465 | | | 583 |
Cash Flows from Investing Activities | | | | | | |
| Expenditures for property, plant and equipment | | | (276) | | | (341) |
| Expenditures for intangible assets | | | (38) | | | (33) |
| Purchases of nuclear plant decommissioning trust investments | | | (124) | | | (102) |
| Proceeds from the sale of nuclear plant decommissioning trust investments | | | 112 | | | 92 |
| Proceeds from the receipt of grants | | | 164 | | | 4 |
| Net (increase) decrease in restricted cash and cash equivalents | | | (199) | | | 9 |
| Other investing activities | | | 17 | | | 20 |
| | | Net cash provided by (used in) investing activities | | | (344) | | | (351) |
Cash Flows from Financing Activities | | | | | | |
| Retirement of long-term debt | | | (308) | | | (309) |
| Contributions from member | | | 730 | | | 980 |
| Distributions to member | | | (1,178) | | | (408) |
| Net increase (decrease) in short-term debt | | | 590 | | | (356) |
| Other financing activities | | | | | | (1) |
| | | Net cash provided by (used in) financing activities | | | (166) | | | (94) |
Net Increase (Decrease) in Cash and Cash Equivalents | | | (45) | | | 138 |
| Cash and Cash Equivalents at Beginning of Period | | | 239 | | | 413 |
| Cash and Cash Equivalents at End of Period | | $ | 194 | | $ | 551 |
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, |
| | | | | 2014 | | 2013 |
Assets | | | | | | |
| | | | | | | | | |
Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 194 | | $ | 239 |
| Restricted cash and cash equivalents | | | 267 | | | 68 |
| Accounts receivable (less reserve: 2014, $2; 2013, $21) | | | | | | |
| | Customer | | | 203 | | | 233 |
| | Other | | | 96 | | | 97 |
| Accounts receivable from affiliates | | | 44 | | | 45 |
| Unbilled revenues | | | 245 | | | 286 |
| Fuel, materials and supplies | | | 425 | | | 358 |
| Prepayments | | | 10 | | | 20 |
| Deferred income taxes | | | 35 | | | |
| Price risk management assets | | | 713 | | | 860 |
| Assets of discontinued operations | | | 578 | | | |
| Other current assets | | | 30 | | | 27 |
| Total Current Assets | | | 2,840 | | | 2,233 |
| | | | | | | | | |
Investments | | | | | | |
| Nuclear plant decommissioning trust funds | | | 911 | | | 864 |
| Other investments | | | 32 | | | 37 |
| Total Investments | | | 943 | | | 901 |
| | | | | | | | | |
Property, Plant and Equipment | | | | | | |
| Non-regulated property, plant and equipment | | | | | | |
| | Generation | | | 11,188 | | | 11,891 |
| | Nuclear fuel | | | 624 | | | 591 |
| | Other | | | 296 | | | 288 |
| Less: accumulated depreciation - non-regulated property, plant and equipment | | | 6,157 | | | 6,046 |
| | Non-regulated property, plant and equipment, net | | | 5,951 | | | 6,724 |
| Construction work in progress | | | 408 | | | 450 |
| Property, Plant and Equipment, net | | | 6,359 | | | 7,174 |
| | | | | | | | | |
Other Noncurrent Assets | | | | | | |
| Goodwill | | | 72 | | | 86 |
| Other intangibles | | | 254 | | | 266 |
| Price risk management assets | | | 328 | | | 328 |
| Other noncurrent assets | | | 77 | | | 86 |
| Total Other Noncurrent Assets | | | 731 | | | 766 |
| | | | | | | | | |
Total Assets | | $ | 10,873 | | $ | 11,074 |
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 | | 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 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 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 BALANCE SHEETS |
PPL Energy Supply, LLC and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | | September 30, | | December 31, |
| | | | | 2013 | | 2012 |
Assets | | | | | | |
| | | | | | | | | |
Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 551 | | $ | 413 |
| Restricted cash and cash equivalents | | | 37 | | | 46 |
| Accounts receivable (less reserve: 2013, $20; 2012, $23) | | | | | | |
| | Customer | | | 203 | | | 183 |
| | Other | | | 104 | | | 31 |
| Accounts receivable from affiliates | | | 37 | | | 125 |
| Unbilled revenues | | | 234 | | | 369 |
| Fuel, materials and supplies | | | 345 | | | 327 |
| Prepayments | | | 22 | | | 15 |
| Price risk management assets | | | 961 | | | 1,511 |
| Other current assets | | | 22 | | | 10 |
| Total Current Assets | | | 2,516 | | | 3,030 |
| | | | | | | |
Investments | | | | | | |
| Nuclear plant decommissioning trust funds | | | 804 | | | 712 |
| Other investments | | | 41 | | | 41 |
| Total Investments | | | 845 | | | 753 |
| | | | | | | |
Property, Plant and Equipment | | | | | | |
| Non-regulated property, plant and equipment | | | | | | |
| | Generation | | | 11,663 | | | 11,305 |
| | Nuclear fuel | | | 590 | | | 524 |
| | Other | | | 307 | | | 294 |
| Less: accumulated depreciation - non-regulated property, plant and equipment | | | 6,025 | | | 5,817 |
| | Non-regulated property, plant and equipment, net | | | 6,535 | | | 6,306 |
| Construction work in progress | | | 739 | | | 987 |
| Property, Plant and Equipment, net (a) | | | 7,274 | | | 7,293 |
| | | | | | | |
Other Noncurrent Assets | | | | | | |
| Goodwill | | | 86 | | | 86 |
| Other intangibles | | | 262 | | | 252 |
| Price risk management assets | | | 519 | | | 557 |
| Other noncurrent assets | | | 362 | | | 404 |
| Total Other Noncurrent Assets | | | 1,229 | | | 1,299 |
| | | | | | | |
Total Assets | | $ | 11,864 | | $ | 12,375 |
(a) | At September 30, 2013 and December 31, 2012, includes $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. |
CONDENSED CONSOLIDATED BALANCE SHEETS |
PPL Energy Supply, LLC and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | $ | 590 | | | |
| Long-term debt due within one year | | | 235 | | $ | 304 |
| Accounts payable | | | 272 | | | 393 |
| Accounts payable to affiliates | | | 42 | | | 4 |
| Taxes | | | 101 | | | 31 |
| Interest | | | 42 | | | 22 |
| Price risk management liabilities | | | 850 | | | 750 |
| Other current liabilities | | | 243 | | | 278 |
| Total Current Liabilities | | | 2,375 | | | 1,782 |
| | | | | | | | | |
Long-term Debt | | | 1,983 | | | 2,221 |
| | | | | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 1,185 | | | 1,114 |
| Investment tax credits | | | 27 | | | 205 |
| Price risk management liabilities | | | 287 | | | 320 |
| Accrued pension obligations | | | 103 | | | 111 |
| Asset retirement obligations | | | 413 | | | 393 |
| Other deferred credits and noncurrent liabilities | | | 135 | | | 130 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 2,150 | | | 2,273 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Note 10) | | | | | | |
| | | | | | | | | |
Member's Equity | | | 4,365 | | | 4,798 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 10,873 | | $ | 11,074 |
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. |
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY |
PPL Energy Supply, LLC and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | | | | | | |
| | | | | Non- | | | |
| | Member's | | controlling | | | |
| | equity | | interests | | Total |
| | | | | | | | | |
June 30, 2013 (a) | | $ | 3,541 | | $ | 18 | | $ | 3,559 |
Net income | | | 124 | | | 1 | | | 125 |
Other comprehensive income (loss) | | | (10) | | | | | | (10) |
Contributions from member | | | 875 | | | | | | 875 |
Distributions | | | | | | (1) | | | (1) |
September 30, 2013 (a) | | $ | 4,530 | | $ | 18 | | $ | 4,548 |
| | | | | | | | | |
December 31, 2012 (a) | | $ | 3,830 | | $ | 18 | | $ | 3,848 |
Net income | | | 172 | | | 1 | | | 173 |
Other comprehensive income (loss) | | | (44) | | | | | | (44) |
Contributions from member | | | 980 | | | | | | 980 |
Distributions | | | (408) | | | (1) | | | (409) |
September 30, 2013 (a) | | $ | 4,530 | | $ | 18 | | $ | 4,548 |
| | | | | | | | | |
June 30, 2012 | | $ | 3,982 | | $ | 18 | | $ | 4,000 |
Net income | | | 54 | | | 1 | | | 55 |
Other comprehensive income (loss) | | | (77) | | | | | | (77) |
Distributions | | | (76) | | | (1) | | | (77) |
September 30, 2012 | | $ | 3,883 | | $ | 18 | | $ | 3,901 |
| | | | | | | | | |
December 31, 2011 | | $ | 4,019 | | $ | 18 | | $ | 4,037 |
Net income | | | 382 | | | 1 | | | 383 |
Other comprehensive income (loss) | | | (257) | | | | | | (257) |
Contributions from member | | | 472 | | | | | | 472 |
Distributions | | | (733) | | | (1) | | | (734) |
September 30, 2012 | | $ | 3,883 | | $ | 18 | | $ | 3,901 |
(a) | See Note 18 for disclosure of balances of each component of AOCI. |
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY |
PPL Energy Supply, LLC and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | | | | | | |
| | | | | Non- | | | |
| | Member's | | controlling | | | |
| | equity | | interests | | Total |
| | | | | | | | | |
June 30, 2014 | | $ | 4,569 | | | | | $ | 4,569 |
Net income | | | 101 | | | | | | 101 |
Other comprehensive income (loss) | | | (7) | | | | | | (7) |
Distributions | | | (298) | | | | | | (298) |
September 30, 2014 | | $ | 4,365 | | | | | $ | 4,365 |
| | | | | | | | | |
December 31, 2013 | | $ | 4,798 | | | | | $ | 4,798 |
Net income | | | 48 | | | | | | 48 |
Other comprehensive income (loss) | | | 1 | | | | | | 1 |
Contributions from member | | | 730 | | | | | | 730 |
Distributions | | | (1,212) | | | | | | (1,212) |
September 30, 2014 | | $ | 4,365 | | | | | $ | 4,365 |
| | | | | | | | | |
June 30, 2013 | | $ | 3,541 | | $ | 18 | | $ | 3,559 |
Net income | | | 124 | | | 1 | | | 125 |
Other comprehensive income (loss) | | | (10) | | | | | | (10) |
Contributions from member | | | 875 | | | | | | 875 |
Distributions | | | | | | (1) | | | (1) |
September 30, 2013 | | $ | 4,530 | | $ | 18 | | $ | 4,548 |
| | | | | | | | | |
December 31, 2012 | | $ | 3,830 | | $ | 18 | | $ | 3,848 |
Net income | | | 172 | | | 1 | | | 173 |
Other comprehensive income (loss) | | | (44) | | | | | | (44) |
Contributions from member | | | 980 | | | | | | 980 |
Distributions | | | (408) | | | (1) | | | (409) |
September 30, 2013 | | $ | 4,530 | | $ | 18 | | $ | 4,548 |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
(THIS PAGE LEFT BLANK INTENTIONALLY.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
PPL Electric Utilities Corporation and Subsidiaries |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | |
| | | | | | | | | | | | | | |
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| | | | 2013 | | 2012 | | 2013 | | 2012 |
Operating Revenues | | | | | | | | | | | | |
| Retail electric | | $ | 463 | | $ | 443 | | $ | 1,388 | | $ | 1,303 |
| Electric revenue from affiliate | | | 1 | | | 1 | | | 3 | | | 3 |
| Total Operating Revenues | | | 464 | | | 444 | | | 1,391 | | | 1,306 |
| | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Energy purchases | | | 144 | | | 137 | | | 436 | | | 410 |
| | Energy purchases from affiliate | | | 11 | | | 23 | | | 37 | | | 61 |
| | Other operation and maintenance | | | 134 | | | 148 | | | 391 | | | 431 |
| Depreciation | | | 45 | | | 41 | | | 132 | | | 119 |
| Taxes, other than income | | | 25 | | | 24 | | | 77 | | | 72 |
| Total Operating Expenses | | | 359 | | | 373 | | | 1,073 | | | 1,093 |
| | | | | | | | | | | | | | |
Operating Income | | | 105 | | | 71 | | | 318 | | | 213 |
| | | | | | | | | | | | | | |
Other Income (Expense) - net | | | 2 | | | 3 | | | 5 | | | 6 |
| | | | | | | | | | | | | | |
Interest Expense | | | 30 | | | 25 | | | 80 | | | 73 |
| | | | | | | | | | | | | | |
Income Before Income Taxes | | | 77 | | | 49 | | | 243 | | | 146 |
| | | | | | | | | | | | | | |
Income Taxes | | | 26 | | | 16 | | | 83 | | | 47 |
| | | | | | | | | | | | | | |
Net Income (a) | | | 51 | | | 33 | | | 160 | | | 99 |
| | | | | | | | | | | | | | |
Distributions on Preference Stock | | | | | | | | | | | | 4 |
| | | | | | | | | | | | | | |
Net Income Available to PPL | | $ | 51 | | $ | 33 | | $ | 160 | | $ | 95 |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
PPL Electric Utilities Corporation and Subsidiaries |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | |
| | | | | | | | | | | | | | |
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | |
Operating Revenues | | $ | 477 | | $ | 464 | | $ | 1,518 | | $ | 1,391 |
| | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Energy purchases | | | 128 | | | 144 | | | 431 | | | 436 |
| | Energy purchases from affiliate | | | 20 | | | 11 | | | 68 | | | 37 |
| | Other operation and maintenance | | | 133 | | | 134 | | | 402 | | | 391 |
| Depreciation | | | 47 | | | 45 | | | 137 | | | 132 |
| Taxes, other than income | | | 25 | | | 25 | | | 80 | | | 77 |
| Total Operating Expenses | | | 353 | | | 359 | | | 1,118 | | | 1,073 |
| | | | | | | | | | | | | | |
Operating Income | | | 124 | | | 105 | | | 400 | | | 318 |
| | | | | | | | | | | | | | |
Other Income (Expense) - net | | | 3 | | | 2 | | | 6 | | | 5 |
| | | | | | | | | | | | | | |
Interest Expense | | | 33 | | | 30 | | | 91 | | | 80 |
| | | | | | | | | | | | | | |
Income Before Income Taxes | | | 94 | | | 77 | | | 315 | | | 243 |
| | | | | | | | | | | | | | |
Income Taxes | | | 37 | | | 26 | | | 121 | | | 83 |
| | | | | | | | | | | | | | |
Net Income (a) | | $ | 57 | | $ | 51 | | $ | 194 | | $ | 160 |
(a) | Net income approximates comprehensive income. |
| 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) |
| | | | | | | | | |
| | | | | 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 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) |
| | | | | | | | | |
| | | | | September 30, | | December 31, |
| | | | | 2013 | | 2012 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Long term debt due within one year | | $ | 10 | | | |
| Accounts payable | | | 244 | | $ | 259 |
| Accounts payable to affiliates | | | 46 | | | 63 |
| Taxes | | | 36 | | | 12 |
| Interest | | | 23 | | | 26 |
| Regulatory liabilities | | | 51 | | | 52 |
| Other current liabilities | | | 94 | | | 93 |
| Total Current Liabilities | | | 504 | | | 505 |
| | | | | | | | | |
Long-term Debt | | | 2,305 | | | 1,967 |
| | | | | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 1,334 | | | 1,233 |
| Investment tax credits | | | 3 | | | 3 |
| Accrued pension obligations | | | 157 | | | 237 |
| Regulatory liabilities | | | 14 | | | 8 |
| Other deferred credits and noncurrent liabilities | | | 79 | | | 103 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 1,587 | | | 1,584 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 6 and 10) | | | | | | |
| | | | | | | | | |
Stockholder's Equity | | | | | | |
| Common stock - no par value (a) | | | 364 | | | 364 |
| Additional paid-in capital | | | 1,340 | | | 1,135 |
| Earnings reinvested | | | 629 | | | 563 |
| Total Equity | | | 2,333 | | | 2,062 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 6,729 | | $ | 6,118 |
(a) | 170,000 shares authorized; 66,368 shares issued and outstanding at September 30, 2013 and December 31, 2012. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
PPL Electric Utilities Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | | | | | | |
| | | | | Nine Months Ended |
| | | | | September 30, |
| | | | | 2014 | | 2013 |
Cash Flows from Operating Activities | | | | | | |
| Net income | | $ | 194 | | $ | 160 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | |
| | Depreciation | | | 137 | | | 132 |
| | Amortization | | | 13 | | | 13 |
| | Defined benefit plans - expense | | | 10 | | | 16 |
| | Deferred income taxes and investment tax credits | | | 65 | | | 103 |
| | Other | | | (20) | | | (7) |
| Change in current assets and current liabilities | | | | | | |
| | Accounts receivable | | | (45) | | | (14) |
| | Accounts payable | | | (25) | | | (42) |
| | Unbilled revenues | | | 40 | | | 34 |
| | Taxes payable | | | 45 | | | 24 |
| | Other | | | 4 | | | (19) |
| Other operating activities | | | | | | |
| | Defined benefit plans - funding | | | (20) | | | (88) |
| | Other assets | | | 8 | | | 6 |
| | Other liabilities | | | 6 | | | 9 |
| | | Net cash provided by operating activities | | | 412 | | | 327 |
| | | | | | | | | |
Cash Flows from Investing Activities | | | | | | |
| Expenditures for property, plant and equipment | | | (700) | | | (688) |
| Expenditures for intangible assets | | | (25) | | | (20) |
| Net (increase) decrease in notes receivable from affiliates | | | 150 | | | |
| Other investing activities | | | 13 | | | 11 |
| | | Net cash provided by (used in) investing activities | | | (562) | | | (697) |
| | | | | | | | | |
Cash Flows from Financing Activities | | | | | | |
| Issuance of long-term debt | | | 296 | | | 348 |
| Retirement of long-term debt | | | (10) | | | |
| Contributions from parent | | | 95 | | | 205 |
| Payment of common stock dividends to parent | | | (121) | | | (94) |
| Net increase (decrease) in short-term debt | | | (20) | | | |
| Other financing activities | | | (4) | | | (4) |
| | | Net cash provided by (used in) financing activities | | | 236 | | | 455 |
| | | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 86 | | | 85 |
Cash and Cash Equivalents at Beginning of Period | | | 25 | | | 140 |
Cash and Cash Equivalents at End of Period | | $ | 111 | | $ | 225 |
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) |
| | | | | | | | | |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Assets | | | | | | |
| | | | | | | | | |
Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 111 | | $ | 25 |
| Accounts receivable (less reserve: 2014, $18; 2013, $18) | | | | | | |
| | Customer | | | 309 | | | 284 |
| | Other | | | 27 | | | 5 |
| Accounts receivable from affiliates | | | 2 | | | 4 |
| Notes receivable from affiliate | | | | | | 150 |
| Unbilled revenues | | | 76 | | | 116 |
| Materials and supplies | | | 35 | | | 35 |
| Prepayments | | | 28 | | | 40 |
| Deferred income taxes | | | 89 | | | 85 |
| Other current assets | | | 13 | | | 22 |
| Total Current Assets | | | 690 | | | 766 |
| | | | | | | | | |
Property, Plant and Equipment | | | | | | |
| Regulated utility plant | | | 7,430 | | | 6,886 |
| Less: accumulated depreciation - regulated utility plant | | | 2,523 | | | 2,417 |
| | Regulated utility plant, net | | | 4,907 | | | 4,469 |
| Other, net | | | 2 | | | 2 |
| Construction work in progress | | | 713 | | | 591 |
| Property, Plant and Equipment, net | | | 5,622 | | | 5,062 |
| | | | | | | | | |
Other Noncurrent Assets | | | | | | |
| Regulatory assets | | | 772 | | | 772 |
| Intangibles | | | 234 | | | 211 |
| Other noncurrent assets | | | 37 | | | 35 |
| Total Other Noncurrent Assets | | | 1,043 | | | 1,018 |
| | | | | | | | | |
Total Assets | | $ | 7,355 | | $ | 6,846 |
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) |
| | | | | | | | | |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | | | | $ | 20 |
| Long term debt due within one year | | | | | | 10 |
| Accounts payable | | $ | 280 | | | 295 |
| Accounts payable to affiliates | | | 53 | | | 57 |
| Taxes | | | 52 | | | 51 |
| Interest | | | 27 | | | 34 |
| Regulatory liabilities | | | 81 | | | 76 |
| Other current liabilities | | | 92 | | | 82 |
| Total Current Liabilities | | | 585 | | | 625 |
| | | | | | | | | |
Long-term Debt | | | 2,602 | | | 2,305 |
| | | | | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 1,490 | | | 1,399 |
| Accrued pension obligations | | | 84 | | | 96 |
| Regulatory liabilities | | | 18 | | | 15 |
| Other deferred credits and noncurrent liabilities | | | 59 | | | 57 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 1,651 | | | 1,567 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 6 and 10) | | | | | | |
| | | | | | | | | |
Stockholder's Equity | | | | | | |
| Common stock - no par value (a) | | | 364 | | | 364 |
| Additional paid-in capital | | | 1,435 | | | 1,340 |
| Earnings reinvested | | | 718 | | | 645 |
| Total Equity | | | 2,517 | | | 2,349 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 7,355 | | $ | 6,846 |
(a) | 170,000 shares authorized; 66,368 shares issued and outstanding at September 30, 2014 and December 31, 2013. |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY |
PPL Electric Utilities Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | | | | | | | | | | | |
| | | | Common | | | | | | | | | | |
| | | | stock | | | | | | | | | | |
| | | | shares | | | | | | Additional | | | | |
| | | | outstanding | | Preference | | Common | | paid-in | | Earnings | | |
| | | | (a) | | stock | | stock | | capital | | reinvested | | Total |
| | | | | | | | | | | | | | | | | | | |
June 30, 2013 | | 66,368 | | | | | $ | 364 | | $ | 1,340 | | $ | 606 | | $ | 2,310 |
Net income | | | | | | | | | | | | | | 51 | | | 51 |
Cash dividends declared on common stock | | | | | | | | | | | | | | (28) | | | (28) |
September 30, 2013 | | 66,368 | | | | | $ | 364 | | $ | 1,340 | | $ | 629 | | $ | 2,333 |
| | | | | | | | | | | | | | | | | | | |
December 31, 2012 | | 66,368 | | | | | $ | 364 | | $ | 1,135 | | $ | 563 | | $ | 2,062 |
Net income | | | | | | | | | | | | | | 160 | | | 160 |
Capital contributions from PPL | | | | | | | | | | | 205 | | | | | | 205 |
Cash dividends declared on common stock | | | | | | | | | | | | | | (94) | | | (94) |
September 30, 2013 | | 66,368 | | | | | $ | 364 | | $ | 1,340 | | $ | 629 | | $ | 2,333 |
| | | | | | | | | | | | | | | | | | | |
June 30, 2012 | | 66,368 | | | | | $ | 364 | | $ | 979 | | $ | 538 | | $ | 1,881 |
Net income | | | | | | | | | | | | | | 33 | | | 33 |
Capital contributions from PPL | | | | | | | | | | | 150 | | | | | | 150 |
Cash dividends declared on common stock | | | | | | | | | | | | | | (19) | | | (19) |
September 30, 2012 | | 66,368 | | | | | $ | 364 | | $ | 1,129 | | $ | 552 | | $ | 2,045 |
| | | | | | | | | | | | | | | | | | | |
December 31, 2011 | | 66,368 | | $ | 250 | | $ | 364 | | $ | 979 | | $ | 532 | | $ | 2,125 |
Net income | | | | | | | | | | | | | | 99 | | | 99 |
Redemption of preference stock (b) | | | | | (250) | | | | | | | | | | | | (250) |
Capital contributions from PPL | | | | | | | | | | | 150 | | | | | | 150 |
Cash dividends declared on preference stock | | | | | | | | | | | | | | (4) | | | (4) |
Cash dividends declared on common stock | | | | | | | | | | | | | | (75) | | | (75) |
September 30, 2012 | | 66,368 | | $ | | | $ | 364 | | $ | 1,129 | | $ | 552 | | $ | 2,045 |
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY |
PPL Electric Utilities Corporation and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | | | | | | | | | |
| | | | Common | | | | | | | | |
| | | | stock | | | | | | | | |
| | | | shares | | | | Additional | | | | |
| | | | outstanding | | Common | | paid-in | | Earnings | | |
| | | | (a) | | stock | | capital | | reinvested | | Total |
| | | | | | | | | | | | | | | | |
June 30, 2014 | | 66,368 | | $ | 364 | | $ | 1,435 | | $ | 695 | | $ | 2,494 |
Net income | | | | | | | | | | | 57 | | | 57 |
Cash dividends declared on common stock | | | | | | | | | | | (34) | | | (34) |
September 30, 2014 | | 66,368 | | $ | 364 | | $ | 1,435 | | $ | 718 | | $ | 2,517 |
| | | | | | | | | | | | | | | | |
December 31, 2013 | | 66,368 | | $ | 364 | | $ | 1,340 | | $ | 645 | | $ | 2,349 |
Net income | | | | | | | | | | | 194 | | | 194 |
Capital contributions from PPL | | | | | | | | 95 | | | | | | 95 |
Cash dividends declared on common stock | | | | | | | | | | | (121) | | | (121) |
September 30, 2014 | | 66,368 | | $ | 364 | | $ | 1,435 | | $ | 718 | | $ | 2,517 |
| | | | | | | | | | | | | | | | |
June 30, 2013 | | 66,368 | | $ | 364 | | $ | 1,340 | | $ | 606 | | $ | 2,310 |
Net income | | | | | | | | | | | 51 | | | 51 |
Cash dividends declared on common stock | | | | | | | | | | | (28) | | | (28) |
September 30, 2013 | | 66,368 | | $ | 364 | | $ | 1,340 | | $ | 629 | | $ | 2,333 |
| | | | | | | | | | | | | | | | |
December 31, 2012 | | 66,368 | | $ | 364 | | $ | 1,135 | | $ | 563 | | $ | 2,062 |
Net income | | | | | | | | | | | 160 | | | 160 |
Capital contributions from PPL | | | | | | | | 205 | | | | | | 205 |
Cash dividends declared on common stock | | | | | | | | | | | (94) | | | (94) |
September 30, 2013 | | 66,368 | | $ | 364 | | $ | 1,340 | | $ | 629 | | $ | 2,333 |
(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. |
(THIS PAGE LEFT BLANK INTENTIONALLY.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
LG&E and KU Energy LLC and Subsidiaries |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2013 | | 2012 | | | 2013 | | | 2012 |
| | | | | | | | | | | | |
Operating Revenues | | $ | 744 | | $ | 732 | | $ | 2,226 | | $ | 2,095 |
| | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Fuel | | | 237 | | | 249 | | | 684 | | | 677 |
| | Energy purchases | | | 23 | | | 27 | | | 146 | | | 135 |
| | Other operation and maintenance | | | 188 | | | 186 | | | 582 | | | 589 |
| Depreciation | | | 84 | | | 87 | | | 249 | | | 259 |
| Taxes, other than income | | | 12 | | | 11 | | | 36 | | | 34 |
| Total Operating Expenses | | | 544 | | | 560 | | | 1,697 | | | 1,694 |
| | | | | | | | | | | | | | | |
Operating Income | | | 200 | | | 172 | | | 529 | | | 401 |
| | | | | | | | | | | | | | | |
Other Income (Expense) - net | | | (4) | | | (4) | | | (6) | | | (14) |
| | | | | | | | | | | | |
Interest Expense | | | 37 | | | 37 | | | 110 | | | 112 |
| | | | | | | | | | | | | | | |
Interest Expense with Affiliate | | | | | | | | | 1 | | | |
| | | | | | | | | | | | | | | |
Income from Continuing Operations Before Income Taxes | | | 159 | | | 131 | | | 412 | | | 275 |
| | | | | | | | | | | | | | | |
Income Taxes | | | 59 | | | 48 | | | 153 | | | 89 |
| | | | | | | | | | | | | | | |
Income from Continuing Operations After Income Taxes | | | 100 | | | 83 | | | 259 | | | 186 |
| | | | | | | | | | | | | | | |
Income (Loss) from Discontinued Operations (net of income taxes) | | | | | | | | | 1 | | | (6) |
| | | | | | | | | | | | | | | |
Net Income (a) | | $ | 100 | | $ | 83 | | $ | 260 | | $ | 180 |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
LG&E and KU Energy LLC and Subsidiaries |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2014 | | 2013 | | | 2014 | | | 2013 |
| | | | | | | | | | | | |
Operating Revenues | | $ | 753 | | $ | 744 | | $ | 2,409 | | $ | 2,226 |
| | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Fuel | | | 240 | | | 237 | | | 748 | | | 684 |
| | Energy purchases | | | 24 | | | 23 | | | 184 | | | 146 |
| | Other operation and maintenance | | | 197 | | | 188 | | | 609 | | | 582 |
| Depreciation | | | 89 | | | 84 | | | 262 | | | 249 |
| Taxes, other than income | | | 13 | | | 12 | | | 39 | | | 36 |
| Total Operating Expenses | | | 563 | | | 544 | | | 1,842 | | | 1,697 |
| | | | | | | | | | | | | | | |
Operating Income | | | 190 | | | 200 | | | 567 | | | 529 |
| | | | | | | | | | | | | | | |
Other Income (Expense) - net | | | (2) | | | (4) | | | (6) | | | (6) |
| | | | | | | | | | | | |
Interest Expense | | | 42 | | | 37 | | | 125 | | | 110 |
| | | | | | | | | | | | | | | |
Interest Expense with Affiliate | | | | | | | | | | | | 1 |
| | | | | | | | | | | | | | | |
Income from Continuing Operations Before Income Taxes | | | 146 | | | 159 | | | 436 | | | 412 |
| | | | | | | | | | | | | | | |
Income Taxes | | | 55 | | | 59 | | | 165 | | | 153 |
| | | | | | | | | | | | | | | |
Income from Continuing Operations After Income Taxes | | | 91 | | | 100 | | | 271 | | | 259 |
| | | | | | | | | | | | | | | |
Income (Loss) from Discontinued Operations (net of income taxes) | | | | | | | | | | | | 1 |
| | | | | | | | | | | | | | | |
Net Income (a) | | $ | 91 | | $ | 100 | | $ | 271 | | $ | 260 |
(a) | Net income approximates comprehensive income. |
| 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) |
| | | | | | | | | | |
| | 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) |
| | | | | | | | | | |
| | | | | Nine Months Ended September 30, |
| | | | | 2014 | | | 2013 |
Cash Flows from Operating Activities | | | | | | | |
| Net income | | $ | 271 | | | $ | 260 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | |
| | Depreciation | | | 262 | | | | 249 |
| | Amortization | | | 18 | | | | 19 |
| | Defined benefit plans - expense | | | 18 | | | | 38 |
| | Deferred income taxes and investment tax credits | | | 251 | | | | 99 |
| | Other | | | 11 | | | | 6 |
| Change in current assets and current liabilities | | | | | | | |
| | Accounts receivable | | | (31) | | | | (78) |
| | Accounts payable | | | 7 | | | | 34 |
| | Accounts payable to affiliates | | | (2) | | | | 1 |
| | Unbilled revenues | | | 49 | | | | 19 |
| | Fuel, materials and supplies | | | 4 | | | | 1 |
| | Taxes payable | | | 5 | | | | 83 |
| | Accrued interest | | | 36 | | | | 30 |
| | Other | | | (10) | | | | |
| Other operating activities | | | | | | | |
| | Defined benefit plans - funding | | | (43) | | | | (159) |
| | Settlement of interest rate swaps | | | | | | | 98 |
| | Other assets | | | | | | | 9 |
| | Other liabilities | | | 5 | | | | 14 |
| | | Net cash provided by operating activities | | | 851 | | | | 723 |
Cash Flows from Investing Activities | | | | | | | |
| Expenditures for property, plant and equipment | | | (843) | | | | (891) |
| Net (increase) decrease in notes receivable from affiliates | | | 70 | | | | |
| Other investing activities | | | | | | | 2 |
| | | Net cash provided by (used in) investing activities | | | (773) | | | | (889) |
Cash Flows from Financing Activities | | | | | | | |
| Net increase (decrease) in notes payable with affiliates | | | 22 | | | | 27 |
| Net increase (decrease) in short-term debt | | | 103 | | | | 87 |
| Debt issuance and credit facility costs | | | (3) | | | | |
| Distributions to member | | | (327) | | | | (116) |
| Contributions from member | | | 139 | | | | 146 |
| | | Net cash provided by (used in) financing activities | | | (66) | | | | 144 |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 12 | | | | (22) |
Cash and Cash Equivalents at Beginning of Period | | | 35 | | | | 43 |
Cash and Cash Equivalents at End of Period | | $ | 47 | | | $ | 21 |
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 |
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) |
| | | | | | | | | |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Assets | | | | | | |
| | | | | | | | | |
Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 47 | | $ | 35 |
| Accounts receivable (less reserve: 2014, $25; 2013, $22) | | | | | | |
| | Customer | | | 219 | | | 224 |
| | Other | | | 44 | | | 20 |
| Unbilled revenues | | | 131 | | | 180 |
| Fuel, materials and supplies | | | 274 | | | 278 |
| Prepayments | | | 28 | | | 21 |
| Notes receivable from affiliates | | | | | | 70 |
| Deferred income taxes | | | 69 | | | 159 |
| Regulatory assets | | | 25 | | | 27 |
| Other current assets | | | 4 | | | 3 |
| Total Current Assets | | | 841 | | | 1,017 |
| | | | | | | | | |
Property, Plant and Equipment | | | | | | |
| Regulated utility plant | | | 9,399 | | | 8,526 |
| Less: accumulated depreciation - regulated utility plant | | | 996 | | | 778 |
| | Regulated utility plant, net | | | 8,403 | | | 7,748 |
| Other, net | | | 4 | | | 3 |
| Construction work in progress | | | 1,812 | | | 1,793 |
| Property, Plant and Equipment, net | | | 10,219 | | | 9,544 |
| | | | | | | | | |
Other Noncurrent Assets | | | | | | |
| Regulatory assets | | | 481 | | | 474 |
| Goodwill | | | 996 | | | 996 |
| Other intangibles | | | 185 | | | 221 |
| Price risk management assets from affiliates | | | 6 | | | |
| Other noncurrent assets | | | 99 | | | 98 |
| Total Other Noncurrent Assets | | | 1,767 | | | 1,789 |
| | | | | | | | | |
Total Assets | | $ | 12,827 | | $ | 12,350 |
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. |
CONDENSED CONSOLIDATED BALANCE SHEETS |
LG&E and KU Energy LLC and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | $ | 348 | | $ | 245 |
| Notes payable with affiliates | | | 22 | | | |
| Accounts payable | | | 429 | | | 346 |
| Accounts payable to affiliates | | | 1 | | | 3 |
| Customer deposits | | | 51 | | | 50 |
| Taxes | | | 44 | | | 39 |
| Price risk management liabilities | | | 4 | | | 4 |
| Regulatory liabilities | | | 11 | | | 14 |
| Interest | | | 59 | | | 23 |
| Other current liabilities | | | 113 | | | 111 |
| Total Current Liabilities | | | 1,082 | | | 835 |
| | | | | | | | | |
Long-term Debt | | | 4,566 | | | 4,565 |
| | | | | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 1,131 | | | 965 |
| Investment tax credits | | | 132 | | | 135 |
| Accrued pension obligations | | | 116 | | | 152 |
| Asset retirement obligations | | | 275 | | | 245 |
| Regulatory liabilities | | | 1,010 | | | 1,033 |
| Price risk management liabilities | | | 38 | | | 32 |
| Price risk management liabilities with affiliates | | | 4 | | | |
| Other deferred credits and noncurrent liabilities | | | 243 | | | 238 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 2,949 | | | 2,800 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 6 and 10) | | | | | | |
| | | | | | | | | |
Member's equity | | | 4,230 | | | 4,150 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 12,827 | | $ | 12,350 |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY |
LG&E and KU Energy LLC and Subsidiaries |
(Unaudited) |
(Millions of Dollars) |
| | | |
| | | Member's |
| | | Equity |
| | | |
June 30, 2014 | | $ | 4,225 |
Net income | | | 91 |
Contributions from member | | | 20 |
Distributions to member | | | (106) |
September 30, 2014 | | $ | 4,230 |
| | | |
December 31, 2013 | | $ | 4,150 |
Net income | | | 271 |
Contributions from member | | | 139 |
Distributions to member | | | (327) |
Other comprehensive income (loss) | | | (3) |
September 30, 2014 | | $ | 4,230 |
| | | |
June 30, 2013 | | $ | 4,022 |
Net income | | | 100 |
Distributions to member | | | (47) |
September 30, 2013 | | $ | 4,075 |
| | | |
December 31, 2012 | | $ | 3,786 |
Net income | | | 260 |
Contributions from member | | | 146 |
Distributions to member | | | (116) |
Other comprehensive income (loss) | | | (1) |
September 30, 2013 | | $ | 4,075 |
| | | |
June 30, 2012
| | $ | 3,774 |
Net income
| | | 83 |
Distributions to member
| | | (35) |
September 30, 2012
| | $ | 3,822 |
| | | |
December 31, 2011
| | $ | 3,741 |
Net income
| | | 180 |
Distributions to member
| | | (95) |
Other comprehensive income (loss)
| | | (4) |
September 30, 2012
| | $ | 3,822 |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
(THIS PAGE LEFT BLANK INTENTIONALLY.)
CONDENSED STATEMENTS OF INCOME |
Louisville Gas and Electric Company |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2013 | | 2012 | | 2013 | | 2012 |
Operating Revenues | | | | | | | | | | | | |
| Retail and wholesale | | $ | 332 | | $ | 324 | | $ | 1,003 | | $ | 939 |
| Electric revenue from affiliate | | | 11 | | | 9 | | | 46 | | | 51 |
| Total Operating Revenues | | | 343 | | | 333 | | | 1,049 | | | 990 |
| | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Fuel | | | 100 | | | 100 | | | 284 | | | 281 |
| | Energy purchases | | | 18 | | | 18 | | | 129 | | | 110 |
| | Energy purchases from affiliate | | | 2 | | | 3 | | | 6 | | | 9 |
| | Other operation and maintenance | | | 93 | | | 87 | | | 278 | | | 277 |
| Depreciation | | | 37 | | | 38 | | | 110 | | | 114 |
| Taxes, other than income | | | 6 | | | 6 | | | 18 | | | 17 |
| Total Operating Expenses | | | 256 | | | 252 | | | 825 | | | 808 |
| | | | | | | | | | | | | | | |
Operating Income | | | 87 | | | 81 | | | 224 | | | 182 |
| | | | | | | | | | | | | | | |
Other Income (Expense) - net | | | (1) | | | (3) | | | (3) | | | (3) |
| | | | | | | | | | | | | | | |
Interest Expense | | | 10 | | | 10 | | | 30 | | | 31 |
| | | | | | | | | | | | | | | |
Income Before Income Taxes | | | 76 | | | 68 | | | 191 | | | 148 |
| | | | | | | | | | | | | | | |
Income Taxes | | | 27 | | | 25 | | | 69 | | | 54 |
| | | | | | | | | | | | | | | |
Net Income (a) | | $ | 49 | | $ | 43 | | $ | 122 | | $ | 94 |
CONDENSED STATEMENTS OF INCOME |
Louisville Gas and Electric Company |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2014 | | 2013 | | 2014 | | 2013 |
Operating Revenues | | | | | | | | | | | | |
| Retail and wholesale | | $ | 334 | | $ | 332 | | $ | 1,096 | | $ | 1,003 |
| Electric revenue from affiliate | | | 13 | | | 11 | | | 74 | | | 46 |
| Total Operating Revenues | | | 347 | | | 343 | | | 1,170 | | | 1,049 |
| | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Fuel | | | 99 | | | 100 | | | 320 | | | 284 |
| | Energy purchases | | | 20 | | | 18 | | | 167 | | | 129 |
| | Energy purchases from affiliate | | | 3 | | | 2 | | | 11 | | | 6 |
| | Other operation and maintenance | | | 94 | | | 93 | | | 286 | | | 278 |
| Depreciation | | | 39 | | | 37 | | | 116 | | | 110 |
| Taxes, other than income | | | 6 | | | 6 | | | 19 | | | 18 |
| Total Operating Expenses | | | 261 | | | 256 | | | 919 | | | 825 |
| | | | | | | | | | | | | | | |
Operating Income | | | 86 | | | 87 | | | 251 | | | 224 |
| | | | | | | | | | | | | | | |
Other Income (Expense) - net | | | | | | (1) | | | (3) | | | (3) |
| | | | | | | | | | | | | | | |
Interest Expense | | | 13 | | | 10 | | | 37 | | | 30 |
| | | | | | | | | | | | | | | |
Income Before Income Taxes | | | 73 | | | 76 | | | 211 | | | 191 |
| | | | | | | | | | | | | | | |
Income Taxes | | | 27 | | | 27 | | | 78 | | | 69 |
| | | | | | | | | | | | | | | |
Net Income (a) | | $ | 46 | | $ | 49 | | $ | 133 | | $ | 122 |
(a) | Net income equals comprehensive income. |
| 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) |
| | | | | | | | | | |
| | 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. |
|
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) |
| | | | | September 30, | | December 31, |
| �� | | | | 2013 | | 2012 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | $ | 72 | | $ | 55 |
| Accounts payable | | | 147 | | | 117 |
| Accounts payable to affiliates | | | 30 | | | 23 |
| Customer deposits | | | 24 | | | 23 |
| Taxes | | | 34 | | | 2 |
| Price risk management liabilities | | | 4 | | | 5 |
| Price risk management liabilities with affiliates | | | 7 | | | |
| Regulatory liabilities | | | 11 | | | 4 |
| Interest | | | 10 | | | 5 |
| Other current liabilities | | | 34 | | | 34 |
| Total Current Liabilities | | | 373 | | | 268 |
| | | | | | | | | |
Long-term Debt | | | 1,112 | | | 1,112 |
| | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 577 | | | 544 |
| Investment tax credits | | | 39 | | | 40 |
| Accrued pension obligations | | | 56 | | | 102 |
| Asset retirement obligations | | | 69 | | | 56 |
| Regulatory liabilities | | | 489 | | | 471 |
| Price risk management liabilities | | | 37 | | | 53 |
| Other deferred credits and noncurrent liabilities | | | 109 | | | 106 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 1,376 | | | 1,372 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 6 and 10) | | | | | | |
| | | | | | | | | |
Stockholder's Equity | | | | | | |
| Common stock - no par value (a) | | | 424 | | | 424 |
| Additional paid-in capital | | | 1,332 | | | 1,278 |
| Earnings reinvested | | | 163 | | | 108 |
| Total Equity | | | 1,919 | | | 1,810 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 4,780 | | $ | 4,562 |
(a) | 75,000 shares authorized; 21,294 shares issued and outstanding at September 30, 2013 and December 31, 2012. |
|
Louisville Gas and Electric Company |
(Unaudited) |
(Millions of Dollars) |
| | | | | | | | | | |
| | | | | Nine Months Ended September 30, |
| | | | | 2014 | | | 2013 |
Cash Flows from Operating Activities | | | | | | | |
| Net income | | $ | 133 | | | $ | 122 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | |
| | Depreciation | | | 116 | | | | 110 |
| | Amortization | | | 9 | | | | 9 |
| | Defined benefit plans - expense | | | 7 | | | | 13 |
| | Deferred income taxes and investment tax credits | | | 31 | | | | 22 |
| | Other | | | (2) | | | | 10 |
| Change in current assets and current liabilities | | | | | | | |
| | Accounts receivable | | | (8) | | | | (20) |
| | Accounts payable | | | 8 | | | | 18 |
| | Accounts payable to affiliates | | | (4) | | | | 7 |
| | Unbilled revenues | | | 27 | | | | 10 |
| | Fuel, materials and supplies | | | 5 | | | | 2 |
| | Taxes payable | | | 10 | | | | 32 |
| | Accrued Interest | | | 9 | | | | 3 |
| | Other | | | 1 | | | | 9 |
| Other operating activities | | | | | | | |
| | Defined benefit plans - funding | | | (12) | | | | (45) |
| | Settlement of interest rate swaps | | | | | | | 49 |
| | Other assets | | | 1 | | | | 9 |
| | Other liabilities | | | (4) | | | | 2 |
| | | Net cash provided by operating activities | | | 327 | | | | 362 |
Cash Flows from Investing Activities | | | | | | | |
| Expenditures for property, plant and equipment | | | (422) | | | | (376) |
| | | Net cash provided by (used in) investing activities | | | (422) | | | | (376) |
Cash Flows from Financing Activities | | | | | | | |
| Net increase (decrease) in short-term debt | | | 123 | | | | 17 |
| Debt issuance and credit facility costs | | | (1) | | | | |
| Payment of common stock dividends to parent | | | (83) | | | | (67) |
| Contributions from parent | | | 73 | | | | 54 |
| | | Net cash provided by (used in) financing activities | | | 112 | | | | 4 |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 17 | | | | (10) |
Cash and Cash Equivalents at Beginning of Period | | | 8 | | | | 22 |
Cash and Cash Equivalents at End of Period | | $ | 25 | | | $ | 12 |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
|
Louisville Gas and Electric Company |
(Unaudited) |
(Millions of Dollars, shares in thousands) |
| | | | | | | | | |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Assets | | | | | | |
| | | | | | | | | |
Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 25 | | $ | 8 |
| Accounts receivable (less reserve: 2014, $2; 2013, $2) | | | | | | |
| | Customer | | | 93 | | | 102 |
| | Other | | | 12 | | | 9 |
| Unbilled revenues | | | 58 | | | 85 |
| Accounts receivable from affiliates | | | 10 | | | |
| Fuel, materials and supplies | | | 149 | | | 154 |
| Prepayments | | | 5 | | | 7 |
| Regulatory assets | | | 23 | | | 17 |
| Other current assets | | | 2 | | | 3 |
| Total Current Assets | | | 377 | | | 385 |
| | | | | | | | | |
Property, Plant and Equipment | | | | | | |
| Regulated utility plant | | | 3,606 | | | 3,383 |
| Less: accumulated depreciation - regulated utility plant | | | 429 | | | 332 |
| | Regulated utility plant, net | | | 3,177 | | | 3,051 |
| Construction work in progress | | | 912 | | | 651 |
| Property, Plant and Equipment, net | | | 4,089 | | | 3,702 |
| | | | | | | | | |
Other Noncurrent Assets | | | | | | |
| Regulatory assets | | | 305 | | | 303 |
| Goodwill | | | 389 | | | 389 |
| Other intangibles | | | 102 | | | 120 |
| Price risk management assets from affiliates | | | 3 | | | |
| Other noncurrent assets | | | 34 | | | 35 |
| Total Other Noncurrent Assets | | | 833 | | | 847 |
| | | | | | | | | |
Total Assets | | $ | 5,299 | | $ | 4,934 |
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) |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | $ | 143 | | $ | 20 |
| Accounts payable | | | 250 | | | 166 |
| Accounts payable to affiliates | | | 20 | | | 24 |
| Customer deposits | | | 24 | | | 24 |
| Taxes | | | 21 | | | 11 |
| Price risk management liabilities | | | 4 | | | 4 |
| Regulatory liabilities | | | 9 | | | 9 |
| Interest | | | 15 | | | 6 |
| Other current liabilities | | | 33 | | | 32 |
| Total Current Liabilities | | | 519 | | | 296 |
| | | | | | | | | |
Long-term Debt | | | 1,353 | | | 1,353 |
| | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 613 | | | 582 |
| Investment tax credits | | | 37 | | | 38 |
| Accrued pension obligations | | | 9 | | | 19 |
| Asset retirement obligations | | | 69 | | | 68 |
| Regulatory liabilities | | | 471 | | | 482 |
| Price risk management liabilities | | | 38 | | | 32 |
| Price risk management liabilities with affiliates | | | 2 | | | |
| Other deferred credits and noncurrent liabilities | | | 105 | | | 104 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 1,344 | | | 1,325 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 6 and 10) | | | | | | |
| | | | | | | | | |
Stockholder's Equity | | | | | | |
| Common stock - no par value (a) | | | 424 | | | 424 |
| Additional paid-in capital | | | 1,437 | | | 1,364 |
| Earnings reinvested | | | 222 | | | 172 |
| Total Equity | | | 2,083 | | | 1,960 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 5,299 | | $ | 4,934 |
(a) | 75,000 shares authorized; 21,294 shares issued and outstanding at September 30, 2014 and December 31, 2013. |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
CONDENSED STATEMENTS OF EQUITY |
Louisville Gas and Electric Company | | | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | | �� |
(Millions of Dollars) | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | Common | | | | | | | | | | | | |
| | | | stock | | | | | | | | | | | | |
| | | | shares | | | | | | Additional | | | | | | |
| | | | outstanding | | | Common | | | paid-in | | | Earnings | | | |
| | | | (a) | | | stock | | | capital | | | reinvested | | | Total |
| | | | | | | | | | | | | | | | |
June 30, 2013 | | 21,294 | | $ | 424 | | $ | 1,332 | | $ | 133 | | $ | 1,889 |
Net income | | | | | | | | | | | 49 | | | 49 |
Cash dividends declared on common stock | | | | | | | | | | | (19) | | | (19) |
September 30, 2013 | | 21,294 | | $ | 424 | | $ | 1,332 | | $ | 163 | | $ | 1,919 |
| | | | | | | | | | | | | | | | |
December 31, 2012 | | 21,294 | | $ | 424 | | $ | 1,278 | | $ | 108 | | $ | 1,810 |
Net income | | | | | | | | | | | 122 | | | 122 |
Capital contributions from LKE | | | | | | | | 54 | | | | | | 54 |
Cash dividends declared on common stock | | | | | | | | | | | (67) | | | (67) |
September 30, 2013 | | 21,294 | | $ | 424 | | $ | 1,332 | | $ | 163 | | $ | 1,919 |
| | | | | | | | | | | | | | | | |
June 30, 2012 | | 21,294 | | $ | 424 | | $ | 1,278 | | $ | 80 | | $ | 1,782 |
Net income | | | | | | | | | | | 43 | | | 43 |
Cash dividends declared on common stock | | | | | | | | | | | (16) | | | (16) |
September 30, 2012 | | 21,294 | | $ | 424 | | $ | 1,278 | | $ | 107 | | $ | 1,809 |
| | | | | | | | | | | | | | | | |
December 31, 2011 | | 21,294 | | $ | 424 | | $ | 1,278 | | $ | 60 | | $ | 1,762 |
Net income | | | | | | | | | | | 94 | | | 94 |
Cash dividends declared on common stock | | | | | | | | | | | (47) | | | (47) |
September 30, 2012 | | 21,294 | | $ | 424 | | $ | 1,278 | | $ | 107 | | $ | 1,809 |
CONDENSED STATEMENTS OF EQUITY |
Louisville Gas and Electric Company | | | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | Common | | | | | | | | | | | | |
| | | | stock | | | | | | | | | | | | |
| | | | shares | | | | | | Additional | | | | | | |
| | | | outstanding | | | Common | | | paid-in | | | Earnings | | | |
| | | | (a) | | | stock | | | capital | | | reinvested | | | Total |
| | | | | | | | | | | | | | | | |
June 30, 2014 | | 21,294 | | $ | 424 | | $ | 1,417 | | $ | 199 | | $ | 2,040 |
Net income | | | | | | | | | | | 46 | | | 46 |
Capital contributions from LKE | | | | | | | | 20 | | | | | | 20 |
Cash dividends declared on common stock | | | | | | | | | | | (23) | | | (23) |
September 30, 2014 | | 21,294 | | $ | 424 | | $ | 1,437 | | $ | 222 | | $ | 2,083 |
| | | | | | | | | | | | | | | | |
December 31, 2013 | | 21,294 | | $ | 424 | | $ | 1,364 | | $ | 172 | | $ | 1,960 |
Net income | | | | | | | | | | | 133 | | | 133 |
Capital contributions from LKE | | | | | | | | 73 | | | | | | 73 |
Cash dividends declared on common stock | | | | | | | | | | | (83) | | | (83) |
September 30, 2014 | | 21,294 | | $ | 424 | | $ | 1,437 | | $ | 222 | | $ | 2,083 |
| | | | | | | | | | | | | | | | |
June 30, 2013 | | 21,294 | | $ | 424 | | $ | 1,332 | | $ | 133 | | $ | 1,889 |
Net income | | | | | | | | | | | 49 | | | 49 |
Cash dividends declared on common stock | | | | | | | | | | | (19) | | | (19) |
September 30, 2013 | | 21,294 | | $ | 424 | | $ | 1,332 | | $ | 163 | | $ | 1,919 |
| | | | | | | | | | | | | | | | |
December 31, 2012 | | 21,294 | | $ | 424 | | $ | 1,278 | | $ | 108 | | $ | 1,810 |
Net income | | | | | | | | | | | 122 | | | 122 |
Capital contributions from LKE | | | | | | | | 54 | | | | | | 54 |
Cash dividends declared on common stock | | | | | | | | | | | (67) | | | (67) |
September 30, 2013 | | 21,294 | | $ | 424 | | $ | 1,332 | | $ | 163 | | $ | 1,919 |
(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.
(THIS PAGE LEFT BLANK INTENTIONALLY.)
CONDENSED STATEMENTS OF INCOME |
Kentucky Utilities Company |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2013 | | 2012 | | 2013 | | 2012 |
Operating Revenues | | | | | | | | | | | | |
| Retail and wholesale | | $ | 412 | | $ | 408 | | $ | 1,223 | | $ | 1,156 |
| Electric revenue from affiliate | | | 2 | | | 3 | | | 6 | | | 9 |
| Total Operating Revenues | | | 414 | | | 411 | | | 1,229 | | | 1,165 |
| | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Fuel | | | 137 | | | 149 | | | 400 | | | 396 |
| | Energy purchases | | | 5 | | | 9 | | | 17 | | | 25 |
| | Energy purchases from affiliate | | | 11 | | | 9 | | | 46 | | | 51 |
| | Other operation and maintenance | | | 91 | | | 93 | | | 286 | | | 286 |
| Depreciation | | | 46 | | | 49 | | | 138 | | | 145 |
| Taxes, other than income | | | 6 | | | 5 | | | 18 | | | 17 |
| Total Operating Expenses | | | 296 | | | 314 | | | 905 | | | 920 |
| | | | | | | | | | | | | | | |
Operating Income | | | 118 | | | 97 | | | 324 | | | 245 |
| | | | | | | | | | | | | | | |
Other Income (Expense) - net | | | (2) | | | 1 | | | (1) | | | (5) |
| | | | | | | | | | | | | | | |
Interest Expense | | | 17 | | | 18 | | | 51 | | | 52 |
| | | | | | | | | | | | | | | |
Income Before Income Taxes | | | 99 | | | 80 | | | 272 | | | 188 |
| | | | | | | | | | | | | | | |
Income Taxes | | | 36 | | | 30 | | | 101 | | | 70 |
| | | | | | | | | | | | | | | |
Net Income (a) | | $ | 63 | | $ | 50 | | $ | 171 | | $ | 118 |
CONDENSED STATEMENTS OF INCOME |
Kentucky Utilities Company |
(Unaudited) |
(Millions of Dollars) |
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| | | | | 2014 | | 2013 | | 2014 | | 2013 |
Operating Revenues | | | | | | | | | | | | |
| Retail and wholesale | | $ | 419 | | $ | 412 | | $ | 1,313 | | $ | 1,223 |
| Electric revenue from affiliate | | | 3 | | | 2 | | | 11 | | | 6 |
| Total Operating Revenues | | | 422 | | | 414 | | | 1,324 | | | 1,229 |
| | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | |
| Operation | | | | | | | | | | | | |
| | Fuel | | | 141 | | | 137 | | | 428 | | | 400 |
| | Energy purchases | | | 4 | | | 5 | | | 17 | | | 17 |
| | Energy purchases from affiliate | | | 13 | | | 11 | | | 74 | | | 46 |
| | Other operation and maintenance | | | 97 | | | 91 | | | 302 | | | 286 |
| Depreciation | | | 50 | | | 46 | | | 145 | | | 138 |
| Taxes, other than income | | | 7 | | | 6 | | | 20 | | | 18 |
| Total Operating Expenses | | | 312 | | | 296 | | | 986 | | | 905 |
| | | | | | | | | | | | | | | |
Operating Income | | | 110 | | | 118 | | | 338 | | | 324 |
| | | | | | | | | | | | | | | |
Other Income (Expense) - net | | | (1) | | | (2) | | | (1) | | | (1) |
| | | | | | | | | | | | | | | |
Interest Expense | | | 19 | | | 17 | | | 58 | | | 51 |
| | | | | | | | | | | | | | | |
Income Before Income Taxes | | | 90 | | | 99 | | | 279 | | | 272 |
| | | | | | | | | | | | | | | |
Income Taxes | | | 34 | | | 36 | | | 106 | | | 101 |
| | | | | | | | | | | | | | | |
Net Income (a) | | $ | 56 | | $ | 63 | | $ | 173 | | $ | 171 |
(a) | Net income equalsapproximates comprehensive income. |
| 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) |
| | | | | | | | | | |
| | 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. |
|
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) |
| | | | | September 30, | | December 31, |
| | | | | 2013 | | 2012 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | $ | 140 | | $ | 70 |
| Accounts payable | | | 155 | | | 147 |
| Accounts payable to affiliates | | | 24 | | | 33 |
| Customer deposits | | | 25 | | | 25 |
| Taxes | | | 65 | | | 26 |
| Price risk management liabilities with affiliates | | | 7 | | | |
| Regulatory liabilities | | | 6 | | | 5 |
| Interest | | | 25 | | | 10 |
| Other current liabilities | | | 31 | | | 33 |
| Total Current Liabilities | | | 478 | | | 349 |
| | | | | | | | | |
Long-term Debt | | | 1,843 | | | 1,842 |
| | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 660 | | | 587 |
| Investment tax credits | | | 97 | | | 98 |
| Accrued pension obligations | | | 45 | | | 104 |
| Asset retirement obligations | | | 176 | | | 69 |
| Regulatory liabilities | | | 551 | | | 531 |
| Other deferred credits and noncurrent liabilities | | | 93 | | | 92 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 1,622 | | | 1,481 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 6 and 10) | | | | | | |
| | | | | | | | | |
Stockholder's Equity | | | | | | |
| Common stock - no par value (a) | | | 308 | | | 308 |
| Additional paid-in capital | | | 2,440 | | | 2,348 |
| Accumulated other comprehensive income (loss) | | | 1 | | | 1 |
| Earnings reinvested | | | 214 | | | 126 |
| Total Equity | | | 2,963 | | | 2,783 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 6,906 | | $ | 6,455 |
(a) | 80,000 shares authorized; 37,818 shares issued and outstanding at September 30, 2013 and December 31, 2012. |
CONDENSED STATEMENTS OF CASH FLOWS |
Kentucky Utilities Company |
(Unaudited) |
(Millions of Dollars) |
| | | | | | | | | | |
| | | | | Nine Months Ended September 30, |
| | | | | 2014 | | | 2013 |
Cash Flows from Operating Activities | | | | | | | |
| Net income | | $ | 173 | | | $ | 171 |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | |
| | Depreciation | | | 145 | | | | 138 |
| | Amortization | | | 8 | | | | 9 |
| | Defined benefit plans - expense | | | 4 | | | | 16 |
| | Deferred income taxes and investment tax credits | | | 129 | | | | 73 |
| | Other | | | 11 | | | | (3) |
| Change in current assets and current liabilities | | | | | | | |
| | Accounts receivable | | | (11) | | | | (46) |
| | Accounts payable | | | 6 | | | | 25 |
| | Accounts payable to affiliates | | | 4 | | | | (9) |
| | Unbilled revenues | | | 22 | | | | 9 |
| | Fuel, materials and supplies | | | (1) | | | | (1) |
| | Taxes payable | | | (12) | | | | 39 |
| | Accrued interest | | | 18 | | | | 15 |
| | Other | | | (8) | | | | (3) |
| Other operating activities | | | | | | | |
| | Defined benefit plans - funding | | | (4) | | | | (62) |
| | Settlement of interest rate swaps | | | | | | | 49 |
| | Other assets | | | (2) | | | | (2) |
| | Other liabilities | | | 4 | | | | 1 |
| | | Net cash provided by operating activities | | | 486 | | | | 419 |
Cash Flows from Investing Activities | | | | | | | |
| Expenditures for property, plant and equipment | | | (418) | | | | (512) |
| Other investing activities | | | | | | | 2 |
| | | Net cash provided by (used in) investing activities | | | (418) | | | | (510) |
Cash Flows from Financing Activities | | | | | | | |
| Net increase (decrease) in short-term debt | | | (20) | | | | 70 |
| Debt issuance and credit facility costs | | | (1) | | | | |
| Payment of common stock dividends to parent | | | (112) | | | | (83) |
| Contributions from parent | | | 66 | | | | 92 |
| | | Net cash provided by (used in) financing activities | | | (67) | | | | 79 |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 1 | | | | (12) |
Cash and Cash Equivalents at Beginning of Period | | | 21 | | | | 21 |
Cash and Cash Equivalents at End of Period | | $ | 22 | | | $ | 9 |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
|
Kentucky Utilities Company |
(Unaudited) |
(Millions of Dollars, shares in thousands) |
| | | | | | | | | |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Assets | | | | | | |
| | | | | | | | | |
Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 22 | | $ | 21 |
| Accounts receivable (less reserve: 2014, $3; 2013, $4) | | | | | | |
| | Customer | | | 126 | | | 122 |
| | Other | | | 8 | | | 9 |
| Unbilled revenues | | | 73 | | | 95 |
| Fuel, materials and supplies | | | 125 | | | 124 |
| Prepayments | | | 11 | | | 4 |
| Regulatory assets | | | 2 | | | 10 |
| Other current assets | | | 3 | | | 6 |
| Total Current Assets | | | 370 | | | 391 |
| | | | | | | | | |
Property, Plant and Equipment | | | | | | |
| Regulated utility plant | | | 5,793 | | | 5,143 |
| Less: accumulated depreciation - regulated utility plant | | | 567 | | | 446 |
| | Regulated utility plant, net | | | 5,226 | | | 4,697 |
| Other, net | | | 1 | | | 1 |
| Construction work in progress | | | 897 | | | 1,139 |
| Property, Plant and Equipment, net | | | 6,124 | | | 5,837 |
| | | | | | | | | |
Other Noncurrent Assets | | | | | | |
| Regulatory assets | | | 176 | | | 171 |
| Goodwill | | | 607 | | | 607 |
| Other intangibles | | | 83 | | | 101 |
| Price risk management assets from affiliates | | | 3 | | | |
| Other noncurrent assets | | | 59 | | | 56 |
| Total Other Noncurrent Assets | | | 928 | | | 935 |
| | | | | | | | | |
Total Assets | | $ | 7,422 | | $ | 7,163 |
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) |
| | | | | September 30, | | December 31, |
| | | | | 2014 | | 2013 |
Liabilities and Equity | | | | | | |
| | | | | | | | | |
Current Liabilities | | | | | | |
| Short-term debt | | $ | 130 | | $ | 150 |
| Accounts payable | | | 166 | | | 159 |
| Accounts payable to affiliates | | | 29 | | | 25 |
| Customer deposits | | | 27 | | | 26 |
| Taxes | | | 21 | | | 33 |
| Regulatory liabilities | | | 2 | | | 5 |
| Interest | | | 29 | | | 11 |
| Other current liabilities | | | 38 | | | 36 |
| Total Current Liabilities | | | 442 | | | 445 |
| | | | | | | | | |
Long-term Debt | | | 2,091 | | | 2,091 |
| | | | | | | | | |
Deferred Credits and Other Noncurrent Liabilities | | | | | | |
| Deferred income taxes | | | 786 | | | 658 |
| Investment tax credits | | | 95 | | | 97 |
| Accrued pension obligations | | | 2 | | | 11 |
| Asset retirement obligations | | | 206 | | | 177 |
| Regulatory liabilities | | | 539 | | | 551 |
| Price risk management liabilities with affiliates | | | 2 | | | |
| Other deferred credits and noncurrent liabilities | | | 89 | | | 89 |
| Total Deferred Credits and Other Noncurrent Liabilities | | | 1,719 | | | 1,583 |
| | | | | | | | | |
Commitments and Contingent Liabilities (Notes 6 and 10) | | | | | | |
| | | | | | | | | |
Stockholder's Equity | | | | | | |
| Common stock - no par value (a) | | | 308 | | | 308 |
| Additional paid-in capital | | | 2,571 | | | 2,505 |
| Accumulated other comprehensive income (loss) | | | | | | 1 |
| Earnings reinvested | | | 291 | | | 230 |
| Total Equity | | | 3,170 | | | 3,044 |
| | | | | | | | | |
Total Liabilities and Equity | | $ | 7,422 | | $ | 7,163 |
(a) | 80,000 shares authorized; 37,818 shares issued and outstanding at September 30, 2014 and December 31, 2013. |
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
CONDENSED STATEMENTS OF EQUITY |
Kentucky Utilities Company | | | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Common | | | | | | | | | | | Accumulated | | | |
| | stock | | | | | | | | | | | other | | | |
| | shares | | | | | Additional | | | | | comprehensive | | | |
| | outstanding | | Common | | paid-in | | Earnings | | income | | | |
| | (a) | | stock | | capital | | reinvested | | (loss) | | Total |
| | | | | | | | | | | | | | | | | |
June 30, 2013 | | 37,818 | | $ | 308 | | $ | 2,440 | | $ | 179 | | $ | 1 | | $ | 2,928 |
Net income | | | | | | | | | | | 63 | | | | | | 63 |
Cash dividends declared on common stock | | | | | | | | | | | (28) | | | | | | (28) |
September 30, 2013 | | 37,818 | | $ | 308 | | $ | 2,440 | | $ | 214 | | $ | 1 | | $ | 2,963 |
| | | | | | | | | | | | | | | | | |
December 31, 2012 | | 37,818 | | $ | 308 | | $ | 2,348 | | $ | 126 | | $ | 1 | | $ | 2,783 |
Net income | | | | | | | | | | | 171 | | | | | | 171 |
Capital contributions from LKE | | | | | | | | 92 | | | | | | | | | 92 |
Cash dividends declared on common stock | | | | | | | | | | | (83) | | | | | | (83) |
September 30, 2013 | | 37,818 | | $ | 308 | | $ | 2,440 | | $ | 214 | | $ | 1 | | $ | 2,963 |
| | | | | | | | | | | | | | | | | |
June 30, 2012 | | 37,818 | | $ | 308 | | $ | 2,348 | | $ | 109 | | $ | (4) | | $ | 2,761 |
Net income | | | | | | | | | | | 50 | | | | | | 50 |
Cash dividends declared on common stock | | | | | | | | | | | (20) | | | | | | (20) |
September 30, 2012 | | 37,818 | | $ | 308 | | $ | 2,348 | | $ | 139 | | $ | (4) | | $ | 2,791 |
| | | | | | | | | | | | | | | | | |
December 31, 2011 | | 37,818 | | $ | 308 | | $ | 2,348 | | $ | 89 | | | | | $ | 2,745 |
Net income | | | | | | | | | | | 118 | | | | | | 118 |
Cash dividends declared on common stock | | | | | | | | | | | (68) | | | | | | (68) |
Other comprehensive income (loss) | | | | | | | | | | | | | $ | (4) | | | (4) |
September 30, 2012 | | 37,818 | | $ | 308 | | $ | 2,348 | | $ | 139 | | $ | (4) | | $ | 2,791 |
CONDENSED STATEMENTS OF EQUITY |
Kentucky Utilities Company | | | | | | | | | | | | |
(Unaudited) | | | | | | | | | | | | |
(Millions of Dollars) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Common | | | | | | | | | | | Accumulated | | | |
| | stock | | | | | | | | | | | other | | | |
| | shares | | | | | Additional | | | | | comprehensive | | | |
| | outstanding | | Common | | paid-in | | Earnings | | income | | | |
| | (a) | | stock | | capital | | reinvested | | (loss) | | Total |
| | | | | | | | | | | | | | | | | |
June 30, 2014 | | 37,818 | | $ | 308 | | $ | 2,571 | | $ | 261 | | | | | $ | 3,140 |
Net income | | | | | | | | | | | 56 | | | | | | 56 |
Cash dividends declared on common stock | | | | | | | | | | | (26) | | | | | | (26) |
September 30, 2014 | | 37,818 | | $ | 308 | | $ | 2,571 | | $ | 291 | | | | | $ | 3,170 |
| | | | | | | | | | | | | | | | | |
December 31, 2013 | | 37,818 | | $ | 308 | | $ | 2,505 | | $ | 230 | | $ | 1 | | $ | 3,044 |
Net income | | | | | | | | | | | 173 | | | | | | 173 |
Capital contributions from LKE | | | | | | | | 66 | | | | | | | | | 66 |
Cash dividends declared on common stock | | | | | | | | | | | (112) | | | | | | (112) |
Other comprehensive income (loss) | | | | | | | | | | | | | | (1) | | | (1) |
September 30, 2014 | | 37,818 | | $ | 308 | | $ | 2,571 | | $ | 291 | | $ | | | $ | 3,170 |
| | | | | | | | | | | | | | | | | |
June 30, 2013 | | 37,818 | | $ | 308 | | $ | 2,440 | | $ | 179 | | $ | 1 | | $ | 2,928 |
Net income | | | | | | | | | | | 63 | | | | | | 63 |
Cash dividends declared on common stock | | | | | | | | | | | (28) | | | | | | (28) |
September 30, 2013 | | 37,818 | | $ | 308 | | $ | 2,440 | | $ | 214 | | $ | 1 | | $ | 2,963 |
| | | | | | | | | | | | | | | | | |
December 31, 2012 | | 37,818 | | $ | 308 | | $ | 2,348 | | $ | 126 | | $ | 1 | | $ | 2,783 |
Net income | | | | | | | | | | | 171 | | | | | | 171 |
Capital contributions from LKE | | | | | | | | 92 | | | | | | | | | 92 |
Cash dividends declared on common stock | | | | | | | | | | | (83) | | | | | | (83) |
September 30, 2013 | | 37,818 | | $ | 308 | | $ | 2,440 | | $ | 214 | | $ | 1 | | $ | 2,963 |
(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.
Combined Notes to Condensed Financial Statements (Unaudited)
1.1. Interim Financial Statements
(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. 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 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, 20122013 is derived from that Registrant's 20122013 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 20122013 Form 10-K. The results of operations for the three and nine months ended September 30, 2013,2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013,2014 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 September 30, 20132014 financial statements.
(PPL and PPL Energy Supply)
"Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income includes the activities of PPL Montana's hydroelectric generating facilities expected to be sold in the fourth quarter of 2014. "Assets of discontinued operations" on the Balance Sheet at September 30, 2014, includes the related assets. Corresponding amounts at December 31, 2013, have not been reclassified on the Balance Sheet as of that date. See Note 8 for additional information. The Statements of Cash Flows do not separately report the cash flows of the Discontinued Operations.
During the three and nine months ended September 30, 2014, PPL Energy Supply recorded $14 million ($9 million after-tax) and $17 million ($11 million after-tax) increases to "Energy-related businesses" revenues on the 2014 Statement of Income related to prior periods and the timing of revenue recognition for a mechanical contracting and engineering subsidiary. The impact of the errors is not material to the previously-issued financial statements and is not expected to be material to the full year results for 2014.
2. Summary of Significant Accounting Policies
The following accounting policy disclosures represent updates to Note 1 in each Registrant's 20122013 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 designed to facilitate competitive markets for electricity in Pennsylvania, PPL Electric purchases certain accounts receivable from alternative electricity suppliers (including PPL EnergyPlus) at a discount, which reflects a provision for uncollectible accounts. The alternative electricity 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 nine months ended September 30, 2014, PPL Electric purchased $260 million and $874 million of accounts receivable from unaffiliated third parties and $77 million and $261 million from
PPL EnergyPlus. During the three and nine months ended September 30, 2013, PPL Electric purchased $259 million and $738 million of accounts receivable from unaffiliated third parties and $75 million and $222 million from PPL EnergyPlus. During the three and nine months ended September 30, 2012, PPL Electric purchased $225 million and $647 million of accounts receivable from unaffiliated third parties and $81 million and $237 million from PPL EnergyPlus.
Depreciation (PPL and Kentucky Registrants)
The KPSC approved new lower depreciation rates for LG&E and KU as part of the rate-case settlement agreement reached in
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 (All Registrants)
Improving Disclosures about Offsetting Balance Sheet ItemsAccounting for Obligations Resulting from Joint and Several Liability Arrangements
Effective January 1, 2013,2014, the Registrants retrospectively adopted accounting guidance issuedfor the recognition, measurement and disclosure of certain obligations resulting from joint and several liability arrangements when the amount of the obligation is fixed at the reporting date. If the obligation is determined to enhance disclosures about derivative instruments that either (1) offset onbe in the balance sheet or (2) are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet.
The adoptionscope of this guidance, resulted in enhanced disclosures but did not have a significant impactit will be measured as the sum of the amount the reporting entity agreed to pay on the Registrants. See Note 14basis 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 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.these obligations.
The adoption of this guidance did not have a significant impact on the Registrants.
Reporting Amounts Reclassified OutAccounting for the Cumulative Translation Adjustment upon Derecognition of AOCICertain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity
Effective January 1, 2013, the Registrants2014, PPL 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 requiredthat 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 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.previously held investment.
The initial adoption of this guidance resulted in enhanced disclosures but did not have a significant impact on PPL; however, the Registrants. See Note 18impact in future periods could be material.
Presentation of Unrecognized Tax Benefits When Net Operating Loss Carryforwards, Similar Tax Losses, or Tax Credit Carryforwards Exist
Effective January 1, 2014, the Registrants prospectively adopted 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 new disclosures.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 did not have a significant impacton the Registrants.
3. Segment and Related Information
(PPL)
See Note 2 in PPL's 20122013 Form 10-K for a discussion of reportable segments. "Corporatesegments and Other"related information.
In June 2014, PPL and PPL Energy Supply, which primarily includes financing and certain other costs incurred atrepresents PPL's Supply segment, executed definitive agreements with affiliates of Riverstone to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy. The transaction is expected to close in the corporate level thatfirst or second quarter of 2015. Upon completion of this transaction, PPL will no longer have not been allocated or assigned toa Supply segment. See Note 8 for additional information.
Financial data for the segments as well as certain unallocated assets, which is presented to reconcile segment informationand reconciliation to PPL's consolidated results. For 2012, there were no significant costs or assets in this category.
In 2013, costs included in the Corporate and Other category increased, as anticipated, primarily due to an 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 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. 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.
Forresults for the periods ended September 30 financial data for the segments 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 |
| | | | | | Three Months | | Nine Months |
| | 2013 | | 2012 | | 2013 | | 2012 |
Net Income Attributable to PPL Shareowners | | | | | | | | | | | | |
| U.K. Regulated (a) | | $ | 183 | | $ | 202 | | $ | 741 | | $ | 563 |
| Kentucky Regulated | | | 93 | | | 72 | | | 227 | | | 148 |
| Pennsylvania Regulated | | | 51 | | | 33 | | | 160 | | | 95 |
| Supply (a) | | | 91 | | | 48 | | | 122 | | | 361 |
| Corporate and Other | | | (8) | | | | | | (22) | | | |
Total | | $ | 410 | | $ | 355 | | $ | 1,228 | | $ | 1,167 |
| | | September 30, | | December 31, |
| | | 2013 | | 2012 |
Balance Sheet Data | | | | | | |
Assets | | | | | | |
| U.K. Regulated | | $ | 14,329 | | $ | 14,073 |
| Kentucky Regulated | | | 11,368 | | | 10,670 |
| Pennsylvania Regulated | | | 6,729 | | | 6,023 |
| Supply | | | 12,198 | | | 12,868 |
| Corporate and Other (b) | | | 364 | | | |
Total assets | | $ | 44,988 | | $ | 43,634 |
| | | | | | Three Months | | Nine Months |
| | 2014 | | 2013 | | 2014 | | 2013 |
Income Statement Data | | | | | | | | | | | | |
Revenues from external customers | | | | | | | | | | | | |
| U.K. Regulated | | $ | 644 | | $ | 543 | | $ | 1,964 | | $ | 1,763 |
| Kentucky Regulated | | | 753 | | | 744 | | | 2,409 | | | 2,226 |
| Pennsylvania Regulated | | | 477 | | | 463 | | | 1,516 | | | 1,388 |
| Supply (a) | | | 1,571 | | | 1,321 | | | 1,575 | | | 3,516 |
| Corporate and Other | | | 4 | | | 3 | | | 12 | | | 9 |
Total | | $ | 3,449 | | $ | 3,074 | | $ | 7,476 | | $ | 8,902 |
| | | | | | | | | | | | | | | | |
Intersegment electric revenues | | | | | | | | | | | | |
| Supply | | $ | 20 | | $ | 11 | | $ | 68 | | $ | 37 |
| | | | | | | | | | | | | | | | |
Net Income Attributable to PPL Shareowners | | | | | | | | | | | | |
| U.K. Regulated (a) | | $ | 295 | | $ | 183 | | $ | 688 | | $ | 741 |
| Kentucky Regulated | | | 82 | | | 93 | | | 247 | | | 227 |
| Pennsylvania Regulated | | | 57 | | | 51 | | | 194 | | | 160 |
| Supply (a) | | | 86 | | | 91 | | | 16 | | | 122 |
| Corporate and Other (b) | | | (23) | | | (8) | | | (103) | | | (22) |
Total | | $ | 497 | | $ | 410 | | $ | 1,042 | | $ | 1,228 |
| | | September 30, | | December 31, |
| | | 2014 | | 2013 |
Balance Sheet Data | | | | | | |
Assets | | | | | | |
| U.K. Regulated | | $ | 16,543 | | $ | 15,895 |
| Kentucky Regulated | | | 12,493 | | | 12,016 |
| Pennsylvania Regulated | | | 7,355 | | | 6,846 |
| Supply | | | 11,210 | | | 11,408 |
| Corporate and Other (c) | | | 588 | | | 94 |
Total assets | | $ | 48,189 | | $ | 46,259 |
| Includes unrealized gains and losses from economic activity. See Note 14 for additional information. |
(b) | 2014 includes certain costs related to the anticipated spinoff of PPL Energy Supply, including deferred income tax expense, third party transaction costs, and separation benefits. See Note 8 for additional information. |
(c) | Primarily consists of unallocated assets,items, including cash, PP&E and the elimination of inter-segment transactions. |
(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 stockTreasury 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 September 30 used in the EPS calculation are:
| | | | | Three Months | | Nine Months | | | | | Three Months | | Nine Months |
| | | | | 2013 | | 2012 | | 2013 | | 2012 | | | | | 2014 | | 2013 | | 2014 | | 2013 |
Income (Numerator) | Income (Numerator) | | | | | | | | | | Income (Numerator) | | | | | | | | |
Income from continuing operations after income taxes attributable to PPL | Income from continuing operations after income taxes attributable to PPL | | | | | | | | | | Income from continuing operations after income taxes attributable to PPL | | | | | | | | |
| shareowners | | $ | 409 | | $ | 355 | | $ | 1,226 | | $ | 1,173 | shareowners | | $ | 490 | | $ | 403 | | $ | 1,032 | | $ | 1,198 |
Less amounts allocated to participating securities | Less amounts allocated to participating securities | | | 2 | | | 2 | | | 6 | | | 7 | Less amounts allocated to participating securities | | | 2 | | | 2 | | | 5 | | | 6 |
Income from continuing operations after income taxes available to PPL | Income from continuing operations after income taxes available to PPL | | | | | | | | | | Income from continuing operations after income taxes available to PPL | | | | | | | | |
| common shareowners - Basic | | 407 | | 353 | | | 1,220 | | 1,166 | common shareowners - Basic | | 488 | | 401 | | 1,027 | | 1,192 |
Plus interest charges (net of tax) related to Equity Units | | | 7 | | | | | | 37 | | | | |
Plus interest charges (net of tax) related to Equity Units (a) | | Plus interest charges (net of tax) related to Equity Units (a) | | | | | | 7 | | | 9 | | | 37 |
Income from continuing operations after income taxes available to PPL | Income from continuing operations after income taxes available to PPL | | | | | | | | | | Income from continuing operations after income taxes available to PPL | | | | | | | | |
| common shareowners - Diluted | | $ | 414 | | $ | 353 | | $ | 1,257 | | $ | 1,166 | common shareowners - Diluted | | $ | 488 | | $ | 408 | | $ | 1,036 | | $ | 1,229 |
| | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from discontinued operations (net of income taxes) available | Income (loss) from discontinued operations (net of income taxes) available | | | | | | | | | | Income (loss) from discontinued operations (net of income taxes) available | | | | | | | | |
| to PPL common shareowners - Basic and Diluted | | $ | 1 | | $ | | | $ | 2 | | $ | (6) | to PPL common shareowners - Basic and Diluted | | $ | 7 | | $ | 7 | | $ | 10 | | $ | 30 |
| | | | | | | | | | | | | |
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 | |
| | | | | 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 |
| | | | | Three Months | | Nine Months |
| | | | | 2014 | | 2013 | | 2014 | | 2013 |
Net income attributable to PPL shareowners | | $ | 497 | | $ | 410 | | $ | 1,042 | | $ | 1,228 |
Less amounts allocated to participating securities | | | 2 | | | 2 | | | 5 | | | 6 |
Net income available to PPL common shareowners - Basic | | | 495 | | | 408 | | | 1,037 | | | 1,222 |
Plus interest charges (net of tax) related to Equity Units (a) | | | | | | 7 | | | 9 | | | 37 |
Net income available to PPL common shareowners - Diluted | | $ | 495 | | $ | 415 | | $ | 1,046 | | $ | 1,259 |
| | | | | | | | | | | | | | | |
Shares of Common Stock (Denominator) | | | | | | | | | | | | |
Weighted-average shares - Basic EPS | | | 664,432 | | | 631,046 | | | 649,561 | | | 601,275 |
Add incremental non-participating securities: | | | | | | | | | | | | |
| | Share-based payment awards | | | 1,970 | | | 1,163 | | | 1,860 | | | 1,035 |
| | Equity Units (a) | | | | | | 32,134 | | | 14,080 | | | 59,171 |
| | Forward sale agreements | | | | | | | | | | | | 613 |
Weighted-average shares - Diluted EPS | | | 666,402 | | | 664,343 | | | 665,501 | | | 662,094 |
| | | | | | | | | | | | | | | |
Basic EPS | | | | | | | | | | | | |
Available to PPL common shareowners: | | | | | | | | | | | | |
| | Income from continuing operations after income taxes | | $ | 0.73 | | $ | 0.64 | | $ | 1.58 | | $ | 1.98 |
| | Income (loss) from discontinued operations (net of income taxes) | | | 0.01 | | | 0.01 | | | 0.02 | | | 0.05 |
| | Net Income Available to PPL common shareowners | | $ | 0.74 | | $ | 0.65 | | $ | 1.60 | | $ | 2.03 |
| | | | | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | |
Available to PPL common shareowners: | | | | | | | | | | | | |
| | Income from continuing operations after income taxes | | $ | 0.73 | | $ | 0.61 | | $ | 1.56 | | $ | 1.86 |
| | Income (loss) from discontinued operations (net of income taxes) | | | 0.01 | | | 0.01 | | | 0.01 | | | 0.04 |
| | Net Income Available to PPL common shareowners | | $ | 0.74 | | $ | 0.62 | | $ | 1.57 | | $ | 1.90 |
| The If-Converted Method was applied to the Equity Units prior to settlement. See Note 7 for additional information on the 2011 Equity Units, including the issuance of PPL common stock on May 1, 2014 to settle the 2011 Purchase Contracts. |
For the periods ended September 30, PPL issued common stock related to stock-based compensation plans, ESOP and DRIP as follows:follows (in thousands):
(Shares in thousands) | | Three Months | | Nine Months | |
| | | | Three Months | | Nine Months |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation plans (a) | Stock-based compensation plans (a) | | 85 | | 159 | | 1,469 | | 512 | Stock-based compensation plans (a) | | 210 | | 85 | | 2,228 | | 1,469 |
ESOP | ESOP | | | | | | 275 | | 280 | ESOP | | | | | | | | 275 |
DRIP | DRIP | | | | 598 | | 549 | | 1,773 | DRIP | | 425 | | | | 425 | | 549 |
| 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 offset the 2013 issuances of common stock under stock-based compensation plans, ESOP and DRIP.
For the periods ended September 30, the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would have been antidilutive.
| | Three Months | | Nine Months | | Three Months | | Nine Months |
(Shares in thousands) | | 2013 | | 2012 | | 2013 | | 2012 | |
| | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | |
Stock options | | 1,136 | | 4,935 | | 4,793 | | 5,622 | | 527 | | 1,136 | | 1,901 | | 4,793 |
Performance units | | 1 | | | | 73 | | 76 | | | | 1 | | | | 73 |
Restricted stock units | | | | | | 39 | | | | | | | | 41 | | 39 |
Reconciliations of income taxes for the periods ended September 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 |
| | | | | | 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 | | Nine Months |
| | | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | |
Federal income tax on Income from Continuing Operations Before | | | | | | | | | | | | |
| Income Taxes at statutory tax rate - 35% | | $ | 264 | | $ | 170 | | $ | 543 | | $ | 535 |
Increase (decrease) due to: | | | | | | | | | | | | |
| | State income taxes, net of federal income tax benefit | | | 27 | | | 11 | | | 21 | | | 27 |
| | State valuation allowance adjustments (a) | | | 3 | | | 38 | | | 49 | | | 38 |
| | Impact of lower U.K. income tax rates (b) | | | (50) | | | (38) | | | (126) | | | (101) |
| | U.S. income tax on foreign earnings - net of foreign tax credit (c) | | | 26 | | | 10 | | | 47 | | | 5 |
| | Federal and state tax reserve adjustments (d) | | | (1) | | | (1) | | | | | | (41) |
| | Federal and state income tax return adjustments | | | 2 | | | (4) | | | 2 | | | (4) |
| | Impact of the U.K. Finance Acts on deferred tax balances (b) | | | | | | (93) | | | | | | (93) |
| | Federal income tax credits | | | | | | (3) | | | (3) | | | (8) |
| | Amortization of investment tax credit | | | (1) | | | | | | (5) | | | (5) |
| | Depreciation not normalized | | | (3) | | | (2) | | | (7) | | | (6) |
| | Intercompany interest on U.K. financing entities | | | (2) | | | (2) | | | (6) | | | (7) |
| | Other | | | | | | (5) | | | 5 | | | (11) |
| | | Total increase (decrease) | | | 1 | | | (89) | | | (23) | | | (206) |
Total income taxes | | $ | 265 | | $ | 81 | | $ | 520 | | $ | 329 |
| As a result of the PPL Energy Supply spinoff announcement, PPL recorded deferred income tax expense during the three and nine months ended September 30, 2014 to adjust valuation allowances on deferred tax assets primarily for state net operating loss carryforwards that were previously supported by the future earnings of PPL Energy Supply. See Note 8 for additional information on the anticipated spinoff. |
| 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. |
(b) | The U.K.'s Finance Act of 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 deferred tax benefit in the third quarter of 2013 related to both rate decreases. |
(c) | For the three and nine months ended September 30, 2014, PPL recorded $19 million and $40 million increases to income tax expense primarily attributable to the expected taxable amount of cash repatriation in 2014. |
The U.K. 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 deferred tax benefit in the third quarter of 2012 related to both rate decreases.
(c) | During the three and nine months ended September 30, 2013, PPL recorded a $10 million and $24 million increaseincreases 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 was reflected on an amended 2010 U.S. tax return. |
(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. OnIn 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 nine months ended September 30, 2013, of which $19 million relates to interest. |
(e) | During the three and nine months ended September 30, 2012, PPL recorded adjustments related to state deferred tax liabilities. |
(f) | 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. |
(g) | PPL recorded foreign income tax benefits related to interest expense on intercompany loans for which there was no domestic income tax expense. |
(PPL Energy Supply) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | Three Months | | Nine Months |
| | | | | | 2013 | | 2012 | | 2013 | | 2012 |
Federal income tax on Income Before Income Taxes at statutory | | | | | | | | | | | | |
| tax rate - 35% | | $ | 70 | | $ | 25 | | $ | 98 | | $ | 205 |
Increase (decrease) due to: | | | | | | | | | | | | |
| | State income taxes, net of federal income tax benefit | | | 7 | | | 1 | | | 10 | | | 25 |
| | State valuation allowance adjustments | | | 4 | | | 2 | | | 4 | | | 2 |
| | Federal and state tax reserve adjustments (a) | | | | | | | | | 6 | | | |
| | Federal income tax credits | | | (4) | | | (4) | | | (7) | | | (10) |
| | State deferred tax rate change (b) | | | | | | (6) | | | | | | (17) |
| | Other | | | (3) | | | (2) | | | (5) | | | (3) |
| | | Total increase (decrease) | | | 4 | | | (9) | | | 8 | | | (3) |
Total income taxes | | $ | 74 | | $ | 16 | | $ | 106 | | $ | 202 |
(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 Windfall Profits Tax. |
(PPL Energy Supply) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | Three Months | | Nine Months |
| | | | | | 2014 | | 2013 | | 2014 | | 2013 |
Federal income tax on Income from Continuing Operations Before | | | | | | | | | | | | |
| Income Taxes at statutory tax rate - 35% | | $ | 59 | | $ | 67 | | $ | 19 | | $ | 83 |
Increase (decrease) due to: | | | | | | | | | | | | |
| | State income taxes, net of federal income tax benefit | | | 16 | | | 6 | | | (3) | | | 8 |
| | State valuation allowance adjustments | | | | | | 4 | | | | | | 4 |
| | Federal and state tax reserve adjustments | | | (1) | | | | | | | | | 6 |
| | Federal income tax credits | | | (3) | | | (3) | | | (5) | | | (6) |
| | State deferred tax rate change | | | | | | | | | 3 | | | |
| | Other | | | 3 | | | (3) | | | 2 | | | (4) |
| | | Total increase (decrease) | | | 15 | | | 4 | | | (3) | | | 8 |
Total income taxes | | $ | 74 | | $ | 71 | | $ | 16 | | $ | 91 |
(b) | During the three and nine months ended September 30, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities. |
(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 |
(LKE) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | Three Months | | Nine Months |
| | | | | | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | | | | |
Federal income tax on Income from Continuing Operations Before | | | | | | | | | | | | |
| Income Taxes at statutory tax rate - 35% | | $ | 56 | | $ | 46 | | $ | 144 | | $ | 96 |
Increase (decrease) due to: | | | | | | | | | | | | |
| | State income taxes, net of federal income tax benefit | | | 6 | | | 5 | | | 14 | | | 7 |
| | Amortization of investment tax credit | | | (1) | | | (1) | | | (3) | | | (4) |
| | Net operating loss carryforward adjustments (a) | | | | | | | | | | | | (9) |
| | Other | | | (2) | | | (2) | | | (2) | | | (1) |
| | | Total increase (decrease) | | | 3 | | | 2 | | | 9 | | | (7) |
Total income taxes from continuing operations | | $ | 59 | | $ | 48 | | $ | 153 | | $ | 89 |
(a) | During the nine months ended September 30, 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments. |
(PPL Electric) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | Three Months | | Nine Months |
| | | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | |
Federal income tax on Income Before Income Taxes at statutory | | | | | | | | | | | | |
| tax rate - 35% | | $ | 33 | | $ | 27 | | $ | 110 | | $ | 85 |
Increase (decrease) due to: | | | | | | | | | | | | |
| | State income taxes, net of federal income tax benefit | | | 5 | | | 5 | | | 17 | | | 13 |
| | Federal and state tax reserve adjustments | | | | | | (2) | | | (1) | | | (6) |
| | Depreciation not normalized | | | (2) | | | (2) | | | (5) | | | (6) |
| | Other | | | 1 | | | (2) | | | | | | (3) |
| | | Total increase (decrease) | | | 4 | | | (1) | | | 11 | | | (2) |
Total income taxes | | $ | 37 | | $ | 26 | | $ | 121 | | $ | 83 |
(LG&E) | | | | | | | | | |
(LKE) | | (LKE) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | Three Months | | Nine Months | | | | Three Months | | Nine Months |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | |
Federal income tax on Income Before Income Taxes at statutory | | | | | | | | | |
Federal income tax on Income from Continuing Operations Before | | Federal income tax on Income from Continuing Operations Before | | | | | | | | |
| tax rate - 35% | | $ | 27 | | $ | 24 | | $ | 67 | | $ | 52 | Income Taxes at statutory tax rate - 35% | | $ | 51 | | $ | 56 | | $ | 153 | | $ | 144 |
Increase (decrease) due to: | Increase (decrease) due to: | | | | | | | | | Increase (decrease) due to: | | | | | | | | |
| | State income taxes, net of federal income tax benefit | | 3 | | 2 | | 7 | | 5 | | State income taxes, net of federal income tax benefit | | 6 | | 6 | | 16 | | 14 |
| | Other | | | (3) | | | (1) | | | (5) | | | (3) | | Amortization of investment tax credit | | (1) | | (1) | | (3) | | (3) |
| | Total increase (decrease) | | | | | | 1 | | | 2 | | | 2 | | Other | | | (1) | | | (2) | | | (1) | | | (2) |
| | | Total increase (decrease) | | | 4 | | | 3 | | | 12 | | | 9 |
Total income taxes | Total income taxes | | $ | 27 | | $ | 25 | | $ | 69 | | $ | 54 | Total income taxes | | $ | 55 | | $ | 59 | | $ | 165 | | $ | 153 |
(KU) | | | | | | | | | |
(LG&E) | | (LG&E) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | Three Months | | Nine Months | | | | Three Months | | Nine Months |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | |
Federal income tax on Income Before Income Taxes at statutory | Federal income tax on Income Before Income Taxes at statutory | | | | | | | | | Federal income tax on Income Before Income Taxes at statutory | | | | | | | | |
| tax rate - 35% | | $ | 35 | | $ | 28 | | $ | 95 | | $ | 66 | tax rate - 35% | | $ | 26 | | $ | 27 | | $ | 74 | | $ | 67 |
Increase (decrease) due to: | Increase (decrease) due to: | | | | | | | | | | Increase (decrease) due to: | | | | | | | | |
| | State income taxes, net of federal income tax benefit | | 4 | | 3 | | 10 | | | 6 | | State income taxes, net of federal income tax benefit | | 3 | | 3 | | 8 | | 7 |
| | Other | | | (3) | | | (1) | | | (4) | | | (2) | | Other | | | (2) | | | (3) | | | (4) | | | (5) |
| | Total increase (decrease) | | | 1 | | | 2 | | | 6 | | | 4 | | Total increase (decrease) | | | 1 | | | | | | 4 | | | 2 |
Total income taxes | Total income taxes | | $ | 36 | | $ | 30 | | $ | 101 | | $ | 70 | Total income taxes | | $ | 27 | | $ | 27 | | $ | 78 | | $ | 69 |
Unrecognized Tax Benefits(All Registrants)(KU) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | Three Months | | Nine Months |
| | | | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | |
Federal income tax on Income Before Income Taxes at statutory | | | | | | | | | | | | |
| tax rate - 35% | | $ | 32 | | $ | 35 | | $ | 98 | | $ | 95 |
Increase (decrease) due to: | | | | | | | | | | | | |
| | State income taxes, net of federal income tax benefit | | | 3 | | | 4 | | | 10 | | | 10 |
| | Other | | | (1) | | | (3) | | | (2) | | | (4) |
| | | Total increase (decrease) | | | 2 | | | 1 | | | 8 | | | 6 |
Total income taxes | | $ | 34 | | $ | 36 | | $ | 106 | | $ | 101 |
Changes to unrecognized tax benefits for the periods ended September 30 were as follows.
| | | Three Months | | Nine Months |
| | | 2013 | | 2012 | | 2013 | | 2012 |
PPL | | | | | | | | | | | | |
| Beginning of period | | $ | 36 | | $ | 113 | | $ | 92 | | $ | 145 |
| Additions based on tax positions of prior years | | | | | | 2 | | | | | | 6 |
| Reductions based on tax positions of prior years | | | | | | | | | (26) | | | (31) |
| Additions based on tax positions related to the current year | �� | | | | | | | | 4 | | | |
| Reductions based on tax positions related to the current year | | | | | | (1) | | | | | | (2) |
| Settlements | | | | | | | | | (30) | | | |
| Lapse of applicable statutes of limitations | | | (5) | | | (2) | | | (9) | | | (6) |
| End of period | | $ | 31 | | $ | 112 | | $ | 31 | | $ | 112 |
| | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | |
| Beginning of period | | $ | 15 | | $ | 31 | | $ | 30 | | $ | 28 |
| Additions based on tax positions of prior years | | | | | | | | | | | | 4 |
| Reductions based on tax positions of prior years | | | | | | | | | (15) | | | (1) |
| End of period | | $ | 15 | | $ | 31 | | $ | 15 | | $ | 31 |
| | | | | | | | | | | | | |
PPL Electric | | | | | | | | | | | | |
| Beginning of period | | $ | 12 | | $ | 43 | | $ | 26 | | $ | 73 |
| Reductions based on tax positions of prior years | | | | | | (1) | | | (10) | | | (28) |
| Additions based on tax positions related to the current year | | | | | | | | | | | | 1 |
| Lapse of applicable statutes of limitations | | | (3) | | | (2) | | | (7) | | | (6) |
| 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 were insignificant for the three and nine months ended September 30, 2013 and 2012.
At September 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 |
| | | | | | | | |
PPL | | $ | 16 | | $ | 30 |
PPL Energy Supply | | | | | | 15 |
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 September 30, the total unrecognized tax benefits and related indirect effects that, if recognized, would decrease the effective income tax rate were as follows.
| | | | | | |
| | 2013 | | 2012 |
| | | | | | |
PPL | | $ | 21 | | $ | 34 |
PPL Energy Supply | | | 14 | | | 14 |
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
for generation-related expenditures should be 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 Energy Supply)
The following table provides information about the regulatory assets and liabilities of cost-based rate-regulated utility operations.
| | | PPL | | PPL Electric |
| | | September 30, | | December 31, | | September 30, | | December 31, |
| | | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | | | | | |
Current Regulatory Assets: | | | | | | | | | | | | |
| ECR | | $ | 7 | | | | | | | | | |
| Gas supply clause | | | 13 | | $ | 11 | | | | | | |
| Fuel adjustment clause | | | | | | 6 | | | | | | |
| Other | | | 11 | | | 2 | | $ | 2 | | | |
Total current regulatory assets | | $ | 31 | | $ | 19 | | $ | 2 | | | |
| | | | | | | | | | | | | |
Noncurrent Regulatory Assets: | | | | | | | | | | | | |
| Defined benefit plans | | $ | 683 | | $ | 730 | | $ | 345 | | $ | 362 |
| Taxes recoverable through future rates | | | 302 | | | 293 | | | 302 | | | 293 |
| Storm costs | | | 152 | | | 168 | | | 55 | | | 59 |
| Unamortized loss on debt | | | 88 | | | 96 | | | 58 | | | 65 |
| Interest rate swaps | | | 49 | | | 67 | | | | | | |
| Accumulated cost of removal of utility plant | | | 95 | | | 71 | | | 95 | | | 71 |
| AROs | | | 37 | | | 26 | | | | | | |
| Other | | | 17 | | | 32 | | | 2 | | | 3 |
Total noncurrent regulatory assets | | $ | 1,423 | | $ | 1,483 | | $ | 857 | | $ | 853 |
Current Regulatory Liabilities: | | | | | | | | | | | | |
| Generation supply charge | | $ | 21 | | $ | 27 | | $ | 21 | | $ | 27 |
| ECR | | | | | | 4 | | | | | | |
| Gas supply clause | | | 2 | | | 4 | | | | | | |
| Transmission service charge | | | 9 | | | 6 | | | 9 | | | 6 |
| Transmission formula rate | | | 9 | | | | | | 9 | | | |
| Universal service rider | | | 11 | | | 17 | | | 11 | | | 17 |
| Gas line tracker | | | 6 | | | | | | | | | |
| Other | | | 10 | | | 3 | | | 1 | | | 2 |
Total current regulatory liabilities | | $ | 68 | | $ | 61 | | $ | 51 | | $ | 52 |
| | | | | | | | | | | | | |
Noncurrent Regulatory Liabilities: | | | | | | | | | | | | |
| Accumulated cost of removal of utility plant | | $ | 690 | | $ | 679 | | | | | | |
| Coal contracts (a) | | | 108 | | | 141 | | | | | | |
| Power purchase agreement - OVEC (a) | | | 102 | | | 108 | | | | | | |
| Net deferred tax assets | | | 32 | | | 34 | | | | | | |
| Act 129 compliance rider | | | 14 | | | 8 | | $ | 14 | | $ | 8 |
| Defined benefit plans | | | 18 | | | 17 | | | | | | |
| Interest rate swaps | | | 84 | | | 14 | | | | | | |
| Other | | | 6 | | | 9 | | | | | | |
Total noncurrent regulatory liabilities | | $ | 1,054 | | $ | 1,010 | | $ | 14 | | $ | 8 |
| | | 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 | | | |
| | | LKE | | LG&E | | KU |
| | | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | | December 31, |
| | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | | | | | | | | | | |
Noncurrent Regulatory Assets: | | | | | | | | | | | | | | | | | | |
| Defined benefit plans | | $ | 338 | | $ | 368 | | $ | 212 | | $ | 232 | | $ | 126 | | $ | 136 |
| Storm costs | | | 97 | | | 109 | | | 53 | | | 59 | | | 44 | | | 50 |
| Unamortized loss on debt | | | 30 | | | 31 | | | 19 | | | 20 | | | 11 | | | 11 |
| Interest rate swaps | | | 49 | | | 67 | | | 49 | | | 67 | | | | | | |
| AROs | | | 37 | | | 26 | | | 20 | | | 15 | | | 17 | | | 11 |
| Other | | | 15 | | | 29 | | | 6 | | | 7 | | | 9 | | | 22 |
Total noncurrent regulatory assets | | $ | 566 | | $ | 630 | | $ | 359 | | $ | 400 | | $ | 207 | | $ | 230 |
Current Regulatory Liabilities: | | | | | | | | | | | | | | | | | | |
| | ECR | | | | | $ | 4 | | | | | | | | | | | $ | 4 |
| | Gas supply clause | | $ | 2 | | | 4 | | $ | 2 | | $ | 4 | | | | | | |
| | Gas line tracker | | | 6 | | | | | | 6 | | | | | | | | | |
| | Other | | | 9 | | | 1 | | | 3 | | | | | $ | 6 | | | 1 |
Total current regulatory liabilities | | $ | 17 | | $ | 9 | | $ | 11 | | $ | 4 | | $ | 6 | | $ | 5 |
| | | | | | | | | | | | | | | | | | | | |
Noncurrent Regulatory Liabilities: | | | | | | | | | | | | | | | | | | |
| Accumulated cost of removal | | | | | | | | | | | | | | | | | | |
| | of utility plant | | $ | 690 | | $ | 679 | | $ | 300 | | $ | 297 | | $ | 390 | | $ | 382 |
| Coal contracts (a) | | | 108 | | | 141 | | | 47 | | | 61 | | | 61 | | | 80 |
| Power purchase agreement - OVEC (a) | | | 102 | | | 108 | | | 71 | | | 75 | | | 31 | | | 33 |
| Net deferred tax assets | | | 32 | | | 34 | | | 26 | | | 28 | | | 6 | | | 6 |
| Defined benefit plans | | | 18 | | | 17 | | | | | | | | | 18 | | | 17 |
| Interest rate swaps | | | 84 | | | 14 | | | 42 | | | 7 | | | 42 | | | 7 |
| Other | | | 6 | | | 9 | | | 3 | | | 3 | | | 3 | | | 6 |
Total noncurrent regulatory liabilities | | $ | 1,040 | | $ | 1,002 | | $ | 489 | | $ | 471 | | $ | 551 | | $ | 531 |
| | | PPL | | PPL Electric |
| | | September 30, | | December 31, | | September 30, | | December 31, |
| | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | |
Current Regulatory Assets: | | | | | | | | | | | | |
| Environmental cost recovery | | $ | 3 | | $ | 7 | | | | | | |
| Gas supply clause | | | 20 | | | 10 | | | | | | |
| Fuel adjustment clause | | | | | | 2 | | | | | | |
| Demand side management | | | | | | 8 | | | | | | |
| Other | | | 5 | | | 6 | | $ | 3 | | $ | 6 |
Total current regulatory assets | | $ | 28 | | $ | 33 | | $ | 3 | | $ | 6 |
| | | | | | | | | | | | | |
Noncurrent Regulatory Assets: | | | | | | | | | | | | |
| Defined benefit plans | | $ | 486 | | $ | 509 | | $ | 250 | | $ | 257 |
| Taxes recoverable through future rates | | | 313 | | | 306 | | | 313 | | | 306 |
| Storm costs | | | 130 | | | 147 | | | 47 | | | 53 |
| Unamortized loss on debt | | | 79 | | | 85 | | | 51 | | | 57 |
| Interest rate swaps | | | 54 | | | 44 | | | | | | |
| Accumulated cost of removal of utility plant | | | 111 | | | 98 | | | 111 | | | 98 |
| AROs | | | 72 | | | 44 | | | | | | |
| Other | | | 8 | | | 13 | | | | | | 1 |
Total noncurrent regulatory assets | | $ | 1,253 | | $ | 1,246 | | $ | 772 | | $ | 772 |
Current Regulatory Liabilities: | | | | | | | | | | | | |
| Generation supply charge | | $ | 33 | | $ | 23 | | $ | 33 | | $ | 23 |
| Gas supply clause | | | 4 | | | 3 | | | | | | |
| Transmission service charge | | | 2 | | | 8 | | | 2 | | | 8 |
| Fuel adjustment clause | | | 1 | | | 4 | | | | | | |
| Transmission formula rate | | | 42 | | | 20 | | | 42 | | | 20 |
| Universal service rider | | | | | | 10 | | | | | | 10 |
| Storm damage expense | | | 1 | | | 14 | | | 1 | | | 14 |
| Gas line tracker | | | 5 | | | 6 | | | | | | |
| Other | | | 4 | | | 2 | | | 3 | | | 1 |
Total current regulatory liabilities | | $ | 92 | | $ | 90 | | $ | 81 | | $ | 76 |
| | | | | | | | | | | | | |
Noncurrent Regulatory Liabilities: | | | | | | | | | | | | |
| Accumulated cost of removal of utility plant | | $ | 697 | | $ | 688 | | | | | | |
| Coal contracts (a) | | | 69 | | | 98 | | | | | | |
| Power purchase agreement - OVEC (a) | | | 94 | | | 100 | | | | | | |
| Net deferred tax assets | | | 27 | | | 30 | | | | | | |
| Act 129 compliance rider | | | 18 | | | 15 | | $ | 18 | | $ | 15 |
| Defined benefit plans | | | 29 | | | 26 | | | | | | |
| Interest rate swaps | | | 90 | | | 86 | | | | | | |
| Other | | | 4 | | | 5 | | | | | | |
Total noncurrent regulatory liabilities | | $ | 1,028 | | $ | 1,048 | | $ | 18 | | $ | 15 |
| | | LKE | | LG&E | | KU |
| | | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | | December 31, |
| | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | |
Current Regulatory Assets: | | | | | | | | | | | | | | | | | | |
| Environmental cost recovery | | $ | 3 | | $ | 7 | | $ | 3 | | $ | 2 | | | | | $ | 5 |
| Gas supply clause | | | 20 | | | 10 | | | 20 | | | 10 | | | | | | |
| Fuel adjustment clause | | | | | | 2 | | | | | | 2 | | | | | | |
| Demand side management | | | | | | 8 | | | | | | 3 | | | | | | 5 |
| Other | | | 2 | | | | | | | | | | | $ | 2 | | | |
Total current regulatory assets | | $ | 25 | | $ | 27 | | $ | 23 | | $ | 17 | | $ | 2 | | $ | 10 |
| | | | | | | | | | | | | | | | | | | |
Noncurrent Regulatory Assets: | | | | | | | | | | | | | | | | | | |
| Defined benefit plans | | $ | 236 | | $ | 252 | | $ | 159 | | $ | 164 | | $ | 77 | | $ | 88 |
| Storm costs | | | 83 | | | 94 | | | 45 | | | 51 | | | 38 | | | 43 |
| Unamortized loss on debt | | | 28 | | | 28 | | | 18 | | | 18 | | | 10 | | | 10 |
| Interest rate swaps | | | 54 | | | 44 | | | 52 | | | 44 | | | 2 | | | |
| AROs | | | 72 | | | 44 | | | 27 | | | 21 | | | 45 | | | 23 |
| Other | | | 8 | | | 12 | | | 4 | | | 5 | | | 4 | | | 7 |
Total noncurrent regulatory assets | | $ | 481 | | $ | 474 | | $ | 305 | | $ | 303 | | $ | 176 | | $ | 171 |
Current Regulatory Liabilities: | | | | | | | | | | | | | | | | | | |
| | Gas supply clause | | $ | 4 | | $ | 3 | | $ | 4 | | $ | 3 | | | | | | |
| | Fuel adjustment clause | | | 1 | | | 4 | | | | | | | | $ | 1 | | $ | 4 |
| | Gas line tracker | | | 5 | | | 6 | | | 5 | | | 6 | | | | | | |
| | Other | | | 1 | | | 1 | | | | | | | | | 1 | | | 1 |
Total current regulatory liabilities | | $ | 11 | | $ | 14 | | $ | 9 | | $ | 9 | | $ | 2 | | $ | 5 |
| | LKE | | LG&E | | KU |
| | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | | December 31, |
| | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
Noncurrent Regulatory Liabilities: | | | | | | | | | | | | | | | | | | |
| Accumulated cost of removal | | | | | | | | | | | | | | | | | | |
| | of utility plant | | $ | 697 | | $ | 688 | | $ | 305 | | $ | 299 | | $ | 392 | | $ | 389 |
| Coal contracts (a) | | | 69 | | | 98 | | | 30 | | | 43 | | | 39 | | | 55 |
| Power purchase agreement - OVEC (a) | | | 94 | | | 100 | | | 65 | | | 69 | | | 29 | | | 31 |
| Net deferred tax assets | | | 27 | | | 30 | | | 24 | | | 26 | | | 3 | | | 4 |
| Defined benefit plans | | | 29 | | | 26 | | | | | | | | | 29 | | | 26 |
| Interest rate swaps | | | 90 | | | 86 | | | 45 | | | 43 | | | 45 | | | 43 |
| Other | | | 4 | | | 5 | | | 2 | | | 2 | | | 2 | | | 3 |
Total noncurrent regulatory liabilities | | $ | 1,010 | | $ | 1,033 | | $ | 471 | | $ | 482 | | $ | 539 | | $ | 551 |
| These liabilities were recorded as offsets to certain intangible assets that were recorded at fair value upon the acquisition of LKE by PPL. |
U. K. Activities(PPL)
Ofgem Review of Line Loss Calculation
In March 2014, Ofgem issued its final decision on the DPCR4 line loss incentives and penalties mechanism. As a result, during the first quarter of 2014 WPD increased its existing liability by $65 million for over-recovery of line losses with a reduction to "Utility" revenues on the Statement of Income. The total recorded liability at September 30, 2014 was $105 million, all of which will be refunded to customers from April 1, 2015 through March 31, 2019. The recorded liability at December 31, 2013 was $74 million. Other activity impacting the liability included reductions in the liability that have been included in tariffs and foreign exchange movements. In June 2014, WPD applied for judicial review of certain of Ofgem's decisions related to closing out the DPCR4 line loss mechanism. The court has set a hearing for November 20, 2014 to hear WPD's application for permission to seek judicial review. The primary relief sought is for Ofgem to reconsider the overall proportionality of penalties imposed on WPD. The entire process could last through the second quarter of 2015. PPL cannot predict the outcome of this matter.
Kentucky Activities (PPL, LKE, LG&E and Kentucky Registrants)KU)
CPCN Filings
In January 2014, LG&E and KU filed an application for a CPCN with the KPSC requesting approval to build an NGCC generating unit, Green River Unit 5, at KU's Green River generating site and a solar generating facility at the E. W. Brown generating site. In April 2014, LG&E and KU filed a motion to hold further proceedings in abeyance to allow the companies to assess the potential impact of certain events on their future capacity needs, including the receipt of termination notices to be generally effective in 2019 from certain KU municipal wholesale customers. In August 2014, LG&E and KU submitted a motion to withdraw their request to construct the Green River NGCC and the KPSC issued an order granting that request. LG&E's and KU's CPCN application continues to request approval to construct the E. W. Brown solar generating facility. LG&E and KU entered into a stipulation in this proceeding agreeing to certain matters with some interveners. A hearing is scheduled to be held in November 2014, and a final order is anticipated before the end of the year. See "Federal Matters - FERC Wholesale Formula Rates" below for additional information relating to the municipal wholesale customers.
In December 2012,On November 4, 2014, LG&E and KU announced that on November 26, 2014, they anticipate filing requests with the KPSC approved a rate case settlement agreement providing for increases in annual base electricity rates of $34approximately $30 million forat LG&E and $51approximately $153 million forat KU and an increase in annual base gas rates of $15approximately $14 million forat LG&E. The proposed base rate increases would result in electricity rate increases of 2.7% at LG&E usingand 9.6% at KU and a 10.25% returngas rate increase of 4.2% at LG&E and would become effective in July 2015. LG&E's and KU's applications each include a request for authorized returns-on-equity of 10.50%. The applications are based on equity. The approved rates became effective Januarya forecasted test year of July 1, 2013.2015 through June 30, 2016. LG&E and KU cannot predict the outcome of these proceedings.
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 10.40% return on equity. The approved rates became effective January 1, 2013.
Storm Damage Expense Rider
In its December 28, 2012 final rate case order, the PUC directed PPL Electric to file a proposed Storm Damage Expense Rider (SDER). In March 2013, PPL Electric filed its proposed SDER on March 28, 2013, includingwith the PUC and, as part of that filing, requested recovery of the 2012 qualifying storm costs related to Hurricane Sandy, which the PUC previously approved for deferral.Sandy. PPL Electric proposed that the SDER become effective January 1, 2013 forat a zero rate with qualifying 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 opposingAs of December 31, 2013, PPL Electric had a $14 million regulatory liability balance for amounts expected to be refunded to customers for revenues collected to cover storm costs in excess of actual storm costs incurred during 2013. In April 2014, the PUC issued a final order approving the SDER. The SDER will be effective January 1, 2015 and initially include actual storm costs compared to collections from December 2013 through November 2014. As a result of the order, PPL Electric and several other partiesreduced its regulatory liability by $12 million. Also, as part of the order, PPL Electric can recover Hurricane Sandy storm damage costs through the SDER over a three-year period beginning January 2015. On June 20, 2014, the Office of Consumer Advocate filed reply comments in May 2013. a petition for review of the April 2014 order with the Commonwealth Court of Pennsylvania. The case remains pending. See "Storm Costs" below for additional information on Hurricane Sandy costs.
Storm Costs
In OctoberFebruary 2013, PPL Electric received an order from the PUC adopted an Order requesting submissiongranting permission to defer qualifying costs in excess of additional commentsinsurance recoveries associated with Hurricane Sandy. At September 30, 2014 and reply commentsDecember 31, 2013, $29 million was included on PPL Electric's proposal. This matter remains pending before the PUC.Balance Sheets as a regulatory asset.
Act 129
Act 129 requires Pennsylvania Electric Distribution Companies (EDCs) to meet specified goals for reduction in customer electricity usage and peak demand by specified dates. EDCs not meeting the requirements of Act 129 are 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, and reduce peak demand by 4.5%. The overall consumption reduction is measured against PUC-forecasted consumption for the twelve months ended May 31, 2010. The peak demand reduction must occur for the 100 hours of highest demand, which is determined by actual demand reduction during the June 2012 through September 2012 period. PPL Electric believes it has met the May 2011 requirement 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 twelve months ended May 31, 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 electricelectricity 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 default service procurement plan.
TheIn January 2013, 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 January 2013, 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,April 2014, PPL Electric filed a revised Default Service Supply Master Agreement and a revised Request for Proposals Process and Rules whichnew DSP procurement plan with the PUC approved. PPL Electricfor the period June 1, 2015 through May 31, 2017. In September 2014, the parties filed revised retail competition initiatives and a revised plan consistent with the PUC's January order, andpresiding Administrative Law Judge a partial settlement resolving all but two issues in May 2013,the proceeding related to the structure of the DSP, without direct financial impact on PPL Electric. The parties filed briefs on those two issues. In October 2014, a Recommended Decision was issued approving the partial settlement. This proceeding remains pending before the PUC approvedbut is not expected to have a material impact on PPL Electric's most recent filing with minor changes. PPL Electric began implementing its revised plan on June 1, 2013. See Note 10 for additional information.Electric.
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 conductconducted pilot projects to evaluate additional applicationsand technical evaluations of its current advanced metering technology pursuant toand concluded that the requirementscurrent technology does not meet all of the Act 129.129 requirements. PPL Electric recoversrecovered the cost of its pilot projectsevaluations through a cost recovery mechanism, the Smart Meter Rider (SMR). In August 2013, PPL Electric filed with the PUC an annual report describing the actions it was taking under its Smart Meter Plan during 2013 and its planned actions for 2014. PPL Electric also submitted revised SMR charges that will becomebecame effective January 1, 2014. On June 30, 2014, PPL Electric will submitfiled its final Smart Meter Plan with the PUC. In that plan, PPL Electric proposes to replace all of its current meters with advanced meters that meet the Act 129 requirements. Full deployment of the new meters is expected to be complete by June 30, 2014.the end of 2019. The total cost of the project is estimated to be approximately $450 million. PPL Electric proposes to recover these costs through the SMR which the PUC previously has approved for recovery of such costs. The PUC assigned PPL Electric's plan to an Administrative Law Judge for hearings and preparation of a recommended decision. PPL Electric cannot predict the outcome of this proceeding.
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, 2013DSIC 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. Inin 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 specifictechnical recovery calculation issues to the Office of Administrative Law Judge for hearing and preparation of a recommended decision. The Judge'sIn August 2014, the presiding Administrative Law Judge issued a recommended decision is expected in early 2014. The casewhich would not have a significant impact on PPL Electric. This matter remains pending before the PUC.
Federal Matters
FERC Audit Proceedings (Formula RatesAll Registrants except (PPL and PPL Energy SupplyElectric))
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.
Transmission rates are regulated by the FERC. PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism. The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1 filed under the FERC's Uniform System of Accounts.
PPL Electric has initiated separateits formula rate Annual Updates for each of the years 2010-2013. The 2010,2012, 2011 and 2012 updates were2010 Annual Updates. Each update was subsequently challenged by a group of municipal customers, whichwhose challenges were opposed by PPL Electric has opposed. In AugustElectric. Between 2011 and 2013, numerous hearings before 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 hearings and settlement judge procedures a number of issues raisedconferences were convened in an attempt to resolve these matters. Beginning in the 2010 and 2011 formal challenges. Settlement conferences were held in late 2012 and early 2013. In Februarysecond half of 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 proposalsproposals. In September 2014, the parties filed a Joint Offer of Settlement with the FERC resolving all issues in the pending challenges, and PPL Electric anticipatesincluding refunds of certain insignificant amounts to the municipalities. The settlement judge certified the uncontested settlement to the FERC with a recommendation that thereit be approved.
FERC Wholesale Formula Rates (LKE and 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 charge cost-based rates with a subsequent true-up to actual costs, replacing the current formula which does not include a true-up. KU's application proposed an authorized return on equity of 10.7%. Certain elements, including the new formula rate, became effective April 23, 2014, subject to refund. In April 2014, nine municipalities submitted notices of termination, under the original notice period provisions, to cease taking power under the wholesale requirements contracts. Such terminations are to be effective in 2019, except in the case of one municipality with a 2017 effective date. In July 2014, KU agreed on settlement terms with the two municipal customers that did not provide termination notices and filed the settlement proposal with the FERC for its approval. In August 2014, the FERC issued an order on the interim settlement agreement allowing the proposed rates to become effective pending a final order. If approved, the settlement agreement will be additionalresolve the rate case with respect to these two municipalities, including an authorized return on equity of 10% or the return on equity awarded to other parties in this case, whichever is lower. Also in July 2014, KU made a contractually required filing with the FERC that addressed certain rate recovery matters affecting the nine terminating municipalities during the remaining term of their contracts. KU and the terminating municipalities continue settlement conferences helddiscussions in 2013. PPL and PPL Electricthis proceeding. KU cannot currently predict the outcome of its FERC applications regarding its wholesale power agreements with the foregoing proceedings, which remain pending before the FERC.municipalities.
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. On July 12, 2013, Ofgem issued a decision paper on the process to follow for closing out the line loss incentive/penalty. Subsequent to the July 2013 decision paper, WPD received additional information from Ofgem and as a result revised the estimated potential loss exposure to be in the range of $93 million to $226 million as of September 30, 2013. On October 21, 2013, Ofgem issued a further consultation paper requesting additional information. During the three and nine months ended September 30, 2013, WPD recorded $21 million and $45 million increases to the liability with reductions to "Utility" revenue on the Statement of Income. At September 30, 2013, the liability was $93 million compared with $94 million at December 31, 2012. Other changes to this line loss liability included reductions of $41 million resulting from refunds being included in tariffs and foreign exchange movements during the nine months ended September 30, 2013. PPL cannot predict the outcome of this matter.
Credit Arrangements and Short-term Debt
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, LKE, LG&E and KU also apply to PPL and the credit facilities and commercial paper programs of LG&E and KU also apply to LKE. The amounts borrowed below are recorded as "Short-term debt" on the Balance Sheets. The following credit facilities were in place at:
| | | | | | | September 30, 2013 | | December 31, 2012 |
| | | | | | | | | | | | | | | | Letters of | | | | | | | Letters of |
| | | | | | | | | | | | | | | | Credit Issued | | | | | | | | Credit Issued |
| | | | | | | | | | | | | | | | and | | | | | | | | and |
| | | | | | | | | | | | | | | | Commercial | | | | | | | | Commercial |
| | | | | | | Expiration | | | | | | | Paper | | Unused | | | | Paper |
| | | | | | | Date | | Capacity | | Borrowed | | Backup | | Capacity | | Borrowed | | Backup |
PPL | | | | | | | | | | | | | | | | | | | | |
| WPD Credit Facilities | | | | | | | | | | | | | | | | | | | | |
| | PPL WW Syndicated | | | | | | | | | | | | | | | | | | | | |
| | | Credit Facility (a) (b) | | Dec. 2016 | | £ | 210 | | £ | 106 | | | n/a | | £ | 104 | | £ | 106 | | | n/a |
| | WPD (South West) | | | | | | | | | | | | | | | | | | | | |
| | | Syndicated Credit Facility | | Jan. 2017 | | | 245 | | | | | | n/a | | | 245 | | | | | | n/a |
| | WPD (East Midlands) | | | | | | | | | | | | | | | | | | | | |
| | | Syndicated Credit Facility (b) | | Apr. 2016 | | | 300 | | | 44 | | | | | | 256 | | | | | | |
| | WPD (West Midlands) | | | | | | | | | | | | | | | | | | | | |
| | | Syndicated Credit Facility (b) | | Apr. 2016 | | | 300 | | | 34 | | | | | | 266 | | | | | | |
| | Uncommitted Credit Facilities | | | | | 84 | | | | | £ | 5 | | | 79 | | | | | £ | 4 |
| | | Total WPD Credit Facilities (c) | | | | £ | 1,139 | | £ | 184 | | £ | 5 | | £ | 950 | | £ | 106 | | £ | 4 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility | | Nov. 2017 | | $ | 3,000 | | | | | $ | 61 | | $ | 2,939 | | | | | $ | 499 |
| Letter of Credit Facility (d) | | Mar. 2014 | | | 150 | | | n/a | | | 109 | | | 41 | | | n/a | | | 132 |
| Uncommitted Credit Facilities (e) | | | | | 175 | | | n/a | | | 51 | | | 124 | | | n/a | | | 40 |
| | | Total PPL Energy Supply Credit Facilities | | $ | 3,325 | | | | | $ | 221 | | $ | 3,104 | | | | | $ | 671 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Electric | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility | | Oct. 2017 | | $ | 300 | | | | | $ | 1 | | $ | 299 | | | | | $ | 1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
LG&E | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility | | Nov. 2017 | | $ | 500 | | | | | $ | 72 | | $ | 428 | | | | | $ | 55 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
KU | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility | | Nov. 2017 | | $ | 400 | | | | | $ | 140 | | $ | 260 | | | | | $ | 70 |
| Letter of Credit Facility (f) | | May 2016 | | | 198 | | | | | | 198 | | | | | | | | | 198 |
| | | Total KU Credit Facilities | | | | $ | 598 | | | | | $ | 338 | | $ | 260 | | | | | $ | 268 |
(a) | 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. |
| | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | | | | | | | | | | | Letters of | | | | | | | Letters of |
| | | | | | | | | | | | | | | | Credit Issued | | | | | | | | Credit Issued |
| | | | | | | | | | | | | | | | and | | | | | | | | and |
| | | | | | | | | | | | | | | | Commercial | | | | | | | | Commercial |
| | | | | | | Expiration | | | | | | | Paper | | Unused | | | | Paper |
| | | | | | | Date | | Capacity | | Borrowed | | Issued | | Capacity | | Borrowed | | Issued |
PPL | | | | | | | | | | | | | | | | | | | | |
U.K. | | | | | | | | | | | | | | | | | | | | |
| | PPL WW Syndicated | | | | | | | | | | | | | | | | | | | | |
| | | Credit Facility | | Dec. 2016 | | £ | 210 | | £ | 97 | | | | | £ | 113 | | £ | 103 | | | |
| | WPD (South West) | | | | | | | | | | | | | | | | | | | | |
| | | Syndicated Credit Facility | | July 2019 | | | 245 | | | | | | | | | 245 | | | | | | |
| | WPD (East Midlands) | | | | | | | | | | | | | | | | | | | | |
| | | Syndicated Credit Facility | | July 2019 | | | 300 | | | | | | | | | 300 | | | | | | |
| | WPD (West Midlands) | | | | | | | | | | | | | | | | | | | | |
| | | Syndicated Credit Facility | | July 2019 | | | 300 | | | | | | | | | 300 | | | | | | |
| | Uncommitted Credit Facilities | | | | | 105 | | | | | £ | 5 | | | 100 | | | | | £ | 5 |
| | | Total U.K. Credit Facilities (a) | | | | £ | 1,160 | | £ | 97 | | £ | 5 | | £ | 1,058 | | £ | 103 | | £ | 5 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. | | | | | | | | | | | | | | | | | | | | |
| PPL Capital Funding | | | | | | | | | | | | | | | | | | | | |
| | Syndicated Credit Facility | | July 2019 | | $ | 300 | | | | | | | | $ | 300 | | | | | | |
| | Syndicated Credit Facility (b) | | Nov. 2018 | | | 300 | | | | | | | | | 300 | | $ | 270 | | | |
| | Bilateral Credit Facility | | Mar. 2015 | | | 150 | | | | | | | | | 150 | | | | | | |
| | Uncommitted Credit Facility | | | | | 65 | | | | | | | | | 65 | | | | | | |
| | | Total PPL Capital Funding Credit Facilities | | $ | 815 | | | | | | | | $ | 815 | | $ | 270 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility (b) | | Nov. 2017 | | $ | 3,000 | | $ | 590 | | $ | 82 | | $ | 2,328 | | | | | $ | 29 |
| Letter of Credit Facility | | Mar. 2015 | | | 150 | | | | | | 113 | | | 37 | | | | | | 138 |
| Uncommitted Credit Facilities | | | | | 175 | | | | | | 74 | | | 101 | | | | | | 77 |
| | | Total PPL Energy Supply Credit Facilities | | | $ | 3,325 | | $ | 590 | | $ | 269 | | $ | 2,466 | | | | | $ | 244 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Electric | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility | | July 2019 | | $ | 300 | | | | | $ | 1 | | $ | 299 | | | | | $ | 21 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
LKE | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility (b) | | Oct. 2018 | | $ | 75 | | $ | 75 | | | | | | | | $ | 75 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
LG&E | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility | | July 2019 | | $ | 500 | | | | | $ | 143 | | $ | 357 | | | | | $ | 20 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
KU | | | | | | | | | | | | | | | | | | | | |
| Syndicated Credit Facility | | July 2019 | | $ | 400 | | | | | $ | 130 | | $ | 270 | | | | | $ | 150 |
| Letter of Credit Facility (c) | | May 2016 | | | 198 | | | | | | 198 | | | | | | | | | 198 |
| | | Total KU Credit Facilities | | | | $ | 598 | | | | | $ | 328 | | $ | 270 | | | | | $ | 348 |
(b) | PPL WW's amounts borrowed at September 30, 20132014 and December 31, 20122013 were USD-denominated borrowings of $161 million and $166 million, and $171 million, which equated to £106 million at the time of borrowings and bore interest at 1.89%1.86% and 0.85%1.87%. WPD (East Midlands) amount borrowed atAt September 30, 20132014, the unused capacity under the U.K. credit facilities was a GBP-denominated borrowing of £44 million, which equated to $68 million and bore interest at 1.30%. WPD (West Midlands) amount borrowed at$1.8 billion. |
(b) | At September 30, 2014, interest rates on outstanding borrowings were 2.04% for PPL Energy Supply and 1.66% for LKE. At December 31, 2013, was a GBP-denominated borrowing of £34 million, which equated to $53 millioninterest rates on outstanding borrowings were 1.79% for PPL Capital Funding and bore interest at 1.30%.1.67% for LKE. |
(c) | At September 30, 2013,In October 2014, the USD equivalent of unused capacity under WPD's credit facilities was $1.5 billion. |
(d) | In February 2013, PPL Energy Supply extended the expiration date from March 2013 and, effective April 2013, the capacity was reduced from $200 million. |
(e) | In August 2013, the capacity was reduced from $200 million. |
(f) | In May 2013, KU extended the letter of credit facility from April 2014.was terminated and replaced with a new letter of credit facility with the same capacity expiring October 2017. |
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 whenas 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 |
| | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | | Weighted - | | | | | Commercial | | | | Weighted - | | Commercial |
| | | | | | | Average | | | | | Paper | | Unused | | Average | | Paper |
| | | | | | | Interest Rate | | Capacity | | Issuances | | Capacity | | Interest Rate | | Issuances |
| | | | | | | | | | | | | | | | | | | | | | | |
| PPL Electric | | | | $ | 300 | | | | | $ | 300 | | | 0.23% | | $ | 20 |
| LG&E | | 0.29% | | | 350 | | $ | 143 | | | 207 | | | 0.29% | | | 20 |
| KU | | 0.29% | | | 350 | | | 130 | | | 220 | | | 0.32% | | | 150 |
| | | Total | | | | $ | 1,000 | | $ | 273 | | $ | 727 | | | | | $ | 190 |
(a) | In April 2013, the capacity was increased from $250 million. |
In August 2014, PPL Energy Supply terminated its commercial paper program.
(PPL and PPL Energy Supply)
PPL Energy Supply maintains a $500 million Facility Agreement expiring June 2017, wherebywhich provides PPL Energy Supply has the ability to request up to $500 million of committed letter of credit capacity at fees to be agreed upon at the time of each request, based on certain market conditions. At September 30, 2013,2014, 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 2017,2018, but is subject to automatic one-year renewals under certain conditions. There were no$59 million of secured obligations outstanding under this facility at September 30, 2013.2014.
(LKE)(PPL Electric and 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.
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 2013,2014, PPL Capital Funding issued $450remarketed $978 million of 5.90%4.32% 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 20182019 that were originally issued in June 2010April 2011 as a component of PPL's 20102011 Equity Units. In connection with the remarketing, PPL Capital Funding issued $300retired $228 million of 2.04%the 4.32% Junior Subordinated Notes due 20162019 and $850issued $350 million of 2.77%2.189% 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 $2502017 and $400 million of 1.90%3.184% Junior Subordinated Notes due 2019. Simultaneously, the newly issued Junior Subordinated Notes were exchanged for $350 million of 3.95% Senior Notes due 2018, $6002024 and $400 million of 3.40%5.00% Senior Notes due 2023 and $300 million of 4.70% Senior Notes due 2043.2044. The transaction was accounted for as a debt extinguishment, resulting in a $10$(9) million lossgain (loss) on extinguishment of the Junior Subordinated Notes, which was recorded to "Interest Expense" on the Statement of Income. The transactionExcept for the $228 million retirement of the 4.32% Junior Subordinated Notes and fees related to the transactions, the activity was considered non-cash activity thatand was excluded from the 2013 Statement of Cash Flows.
Flows for the nine months ended September 30, 2014. In July 2013,May 2014, PPL issued 4031.7 million shares of common stock at $28.73$30.86 per share to settle the 20102011 Purchase Contracts. PPL received net cash proceeds of $1.150 billion,$978 million, which will bewere 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 as 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,August 2014, PPL Energy Supply repaid the entire $300 million principal amount of its 6.30%5.40% Senior Notes upon maturity.
(PPL and PPL Electric)
In July 2013,June 2014, PPL Electric issued $350$300 million of 4.75%4.125% First Mortgage Bonds due 2043.2044. PPL Electric received proceeds of $345$294 million, net of a discount and underwriting fees, which will bewere used for capital expenditures, to fund pension obligationsrepay short-term debt and for other general corporate purposes.
Legal Separateness
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 August 2013,2014, PPL declared its quarterly common stock dividend, payable October 1, 2013,2014, at 36.7537.25 cents per share (equivalent to $1.47$1.49 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.
(All Registrants except PPL)
During the nine months ended September 30, 2013, the following distributions and capital contributions occurred:
| | | | PPL Energy | | | | | | | | | | | | | |
| | | | Supply | | | PPL Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | |
Dividends/distributions paid to parent/member | | $ | 408 | | | $ | 94 | | $ | 116 | | $ | 67 | | $ | 83 |
Capital contributions received from parent/member | | | 980 | | | | 205 | | | 146 | | | 54 | | | 92 |
8. Acquisitions, Development and Divestitures
(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. See Note 8 in the 2013 Form 10-K for additional information.
Anticipated Spinoff of PPL Energy Supply
(PPL and PPL Energy Supply)
In June 2014, PPL and PPL Energy Supply executed definitive agreements with affiliates of Riverstone to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy. Under the terms of the agreements, at closing, PPL will spin off to PPL shareowners the parent of PPL Energy Supply, recently formed for purposes of this transaction, which by merging with a special purpose subsidiary of Talen Energy, will immediately thereafter become a subsidiary of Talen Energy. Substantially contemporaneous with the spinoff and merger, RJS Power will be contributed, directly or indirectly, by its owners to become a subsidiary of Talen Energy. Following completion of these transactions, PPL shareowners will own 65% of Talen Energy and affiliates of Riverstone will own 35%. PPL will have no continuing ownership interest in, control of, or affiliation with Talen Energy and PPL's shareowners will receive a number of Talen Energy shares at closing based on the number of PPL shares owned as of the spinoff record date. The spinoff will have no effect on the number of PPL common shares owned by PPL shareowners or the number of shares of PPL common stock outstanding. The transaction is intended to be tax-free to PPL and its shareowners for U.S. federal income tax purposes and is subject to customary closing conditions, including receipt of certain regulatory approvals by the NRC, FERC, DOJ and PUC. In addition, there must be available, subject to certain conditions, at least $1 billion of undrawn capacity after excluding any letters of credit or other credit support measures posted in connection with energy marketing and trading transactions then outstanding, under a Talen Energy (or its subsidiaries) revolving credit or similar facility. The transaction is expected to close in the first or second quarter of 2015.
(PPL, PPL Energy Supply and PPL Electric)
Following the announcement of the transaction to form Talen Energy, efforts were initiated to identify the appropriate staffing for Talen Energy and for PPL and its subsidiaries following completion of the spinoff. Organizational plans were substantially completed in the third quarter of 2014 and staffing selections are in progress and expected to be completed by the end of 2014.
The new organizational plans identify the need to resize and restructure the organizations of both PPL and PPL Energy Supply. As a result, during the third quarter of 2014, estimated charges for employee separation benefits were recorded in "Other operation and maintenance" on the Statement of Income and in "Other current liabilities" on the Balance Sheet as follows.
| | | | | PPL Energy | | PPL |
| | PPL | | Supply | | Electric |
| | | | | | | | | |
Separation benefits | | $ | 30 | | $ | 12 | | $ | 1 |
Number of positions | | | 265 | | | 100 | | | 10 |
The separation benefits incurred include cash severance compensation, lump sum COBRA reimbursement payments and outplacement services. As staffing selections are completed, revisions to the estimated costs will be recognized primarily in the fourth quarter of 2014.
Additional costs to be incurred include accelerated stock based compensation and pro-rated performance based cash incentive and stock based compensation awards primarily for PPL Energy Supply employees and for PPL employees who will become PPL Energy Supply employees in connection with the transaction. These costs will be recognized at the spinoff closing date. PPL and PPL Energy Supply estimate these additional costs will be in the range of $30 million to $40 million.
(PPL)
As a result of the spinoff announcement, PPL recorded $3 million and $49 million of deferred income tax expense during the three and nine months ended September 30, 2014, to adjust valuation allowances on deferred tax assets primarily for state net operating loss carryforwards that were previously supported by the future earnings of PPL Energy Supply.
In addition, PPL recorded $5 million and $21 million of third-party costs during the three and nine months ended September 30, 2014 related to this transaction primarily in "Other Income (Expense) - net" on the Statement of Income, for investment bank advisory, legal, consulting and accounting fees. PPL currently estimates a range of total third-party costs that will ultimately be incurred of between $60 million and $70 million.
The assets and liabilities of PPL Energy Supply will continue to be classified as "held and used" on PPL's Balance Sheet until the closing of the transaction. The spinoff announcement was evaluated and determined not to be an event or a change in circumstance that required a recoverability test or a goodwill impairment assessment. However, an impairment loss could be recognized by PPL at the spinoff date if the aggregate carrying amount of PPL Energy Supply's assets and liabilities exceeds its aggregate fair value at that date. PPL cannot currently predict whether an impairment loss will be recorded at the spinoff date.
Ironwood Acquisition(PPL Energy Supply)
PPL Energy Supply will treat the combination with RJS Power as an acquisition, as PPL Energy Supply will be considered the accounting acquirer in accordance with business combination accounting guidance.
Montana Hydro Sale Agreement (PPL and PPL Energy Supply)
See Note 10In September 2013, PPL Montana executed a definitive agreement to sell to NorthWestern 633 MW of hydroelectric generating facilities located in PPL'sMontana for $900 million in cash, subject to certain adjustments. Total net cash proceeds of the sale are currently estimated to be $880 million. The sale includes 11 hydroelectric power facilities and related assets, included in the Supply segment.
In September 2014, the MPSC approved the transaction. As a result, these hydroelectric generating facilities met the "held for sale" criteria in the third quarter of 2014. The sale is expected to close in the fourth quarter of 2014.
Following are the components of Discontinued Operations in the Statements of Income for the periods ended September 30.
| | | Three Months | | Nine Months |
| | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | |
Operating revenues | | $ | 33 | | $ | 31 | | $ | 103 | | $ | 110 |
Operating expenses | | | 20 | | | 20 | | | 77 | | | 59 |
Operating income (loss) | | | 13 | | | 11 | | | 26 | | | 51 |
Interest expense (a) | | | 2 | | | 2 | | | 6 | | | 8 |
Income (loss) before income taxes | | | 11 | | | 9 | | | 20 | | | 43 |
Income tax expense (benefit) | | | 4 | | | 3 | | | 10 | | | 15 |
Income (Loss) from Discontinued Operations | | $ | 7 | | $ | 6 | | $ | 10 | | $ | 28 |
| Represents allocated interest expense based upon debt attributable to the generation facilities being sold. |
The major classes of "Assets of discontinued operations" on the Balance Sheet at September 30, 2014, were $544 million of PP&E, net and $82 million of Goodwill for PPL ($14 million for PPL Energy Supply). Corresponding amounts at December 31, 2013 were $614 million of PP&E, net, and similar amounts for Goodwill, which have not been reclassified on the Balance Sheet as of that date.
Development
Hydroelectric Expansion Projects (PPL and PPL Energy Supply's 2012 Form 10-KSupply)
In January 2014, the U.S. Department of Treasury awarded $56 million for information onSpecified Energy Property in Lieu of Tax Credits for the April 13, 2012 Ironwood Acquisition. See Note 7Rainbow hydroelectric redevelopment project in Great Falls, Montana. PPL Energy Supply accepted and accounted for information on the February 2013 exchangereceipt of a portionthe grant in the first quarter of long-term debt assumed through consolidation2014. PPL Energy Supply was required to recapture $60 million of investment tax credits previously recorded related to the Rainbow project as a result of the acquisition.
grant receipt. The impact on the financial statements for the grant receipt and recapture of investment tax credits was included in "Income (Loss) from Discontinued Operations (net of income taxes)" and was not significant for the three and nine months ended September 30, 2014, and will not be significant in future periods. DevelopmentIn July 2014, the U.S. Department of Treasury awarded $108 million for Specified Energy Property in Lieu of Tax Credits for the Holtwood hydroelectric project in Holtwood, Pennsylvania. PPL Energy Supply accepted and accounted for the receipt of the grant in the third quarter of 2014. PPL Energy Supply was required to recapture $117 million of investment tax credits previously recorded related to the Holtwood project as a result of the grant receipt. The impact on the financial statements for the grant receipt and recapture of investment tax credits was not significant for the three and nine months ended September 30, 2014, and will not be significant in future periods.
Future Capacity Needs (PPL, LKE, LG&E and Kentucky Registrants)KU)
Construction activity continues on the previously announced natural gas combined-cycle generatingNGCC unit, at the Cane Run station,Unit 7, scheduled to be operational in May 2015. In October 2013, LG&E and KU announced plans to build a second natural gas combined-cycle generatingNGCC unit, Green River Unit 5, at KU's Green River generating site. Subject to finalizing details, regulatory applications, permitting and construction schedules, the facility is expectedwas to have approximately 700 MW of capacity at an estimateda cost of $700 million and iswas originally 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 estimateda cost of $25approximately $36 million.
(PPL In August 2014, LG&E and PPL Energy Supply)
Bell Bend COLA
The NRCKU submitted a motion to withdraw their request to construct the Green River NGCC and the KPSC issued an order granting that request. LG&E's and KU's CPCN application continues to reviewrequest approval to construct the COLA submitted by a PPL Energy Supply subsidiary, PPL Bell Bend, LLC (PPL Bell Bend) for the proposed construction of the Bell Bend nuclearE. W. Brown solar generating unit (Bell Bend) 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 thefacility. A final Order is 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 September 30, 2013 and December 31, 2012, $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
Induring 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. In October 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. PPL Electric and PSE&G intervened in the lawsuit. In December 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.
Construction activities have been underway on other portions of the 101-mile route in Pennsylvania since 2012. The line is expected to be completed before the peak summer demand period of 2015. At September 30, 2013, PPL Electric's estimated share of the project cost was $630 million.
PPL and PPL Electric cannot predict any future legal challenges to the project or what additional actions, if any, PJM might take in the event of a further delay to the scheduled in-service date for the new line.
Northeast/Pocono
In October 2012, the FERC issued an order in response to PPL Electric's December 2011 request for ratemaking incentives for the Northeast/Pocono Reliability project (a new 58-mile 230 kV transmission line that includes three new substations and upgrades to adjacent facilities). The FERC granted the incentive for inclusion in rate base of all prudently incurred construction work in progress (CWIP) costs but denied the incentive for a 100 basis point adder to the return on equity. The order required a follow-up compliance filing from PPL Electric to ensure proper accounting treatment of AFUDC and CWIP for the project, which PPL Electric submitted to the FERC in March 2013 and the FERC subsequently approved in April 2013.
In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project. A number of parties have protested the application, which has been assigned to an Administrative Law Judge (ALJ). Evidentiary hearings were held in July 2013. In October 2013, the ALJ concluded that PPL met its burden on all issues, and recommended that the PUC approve the siting application, two zoning petitions, and the remaining eminent domain applications. A final PUC order is expected in the first quarter of 2014. PPL Electric expects the project to be completed in 2017. At September 30, 2013, PPL Electric's estimated cost of the project was $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
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.
(PPL, PPL Energy Supply and PPL Electric)
Effective July 1, 2014, PPL's primary defined benefit pension plan and postretirement medical plan were closed to newly hired IBEW Local 1600 employees. All of PPL's defined benefit pension plans are now closed to newly hired employees.
(All Registrants except PPL Electric and 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 September 30:
| | | | Pension Benefits | | | | Pension Benefits |
| | | | Three Months | | Nine Months | | | | Three Months | | Nine Months |
| | | | U.S. | | U.K. | | U.S. | | U.K. | | | | U.S. | | U.K. | | U.S. | | U.K. |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
PPL | PPL | | | | | | | | | | | | | | | | | | PPL | | | | | | | | | | | | | | | | |
Service cost | Service cost | | $ | 31 | | $ | 25 | | $ | 18 | | $ | 13 | | $ | 94 | | $ | 77 | | $ | 52 | | $ | 40 | Service cost | | $ | 26 | | $ | 31 | | $ | 18 | | $ | 18 | | $ | 77 | | $ | 94 | | $ | 54 | | $ | 52 |
Interest cost | Interest cost | | | 53 | | 55 | | 79 | | 85 | | 160 | | 165 | | 238 | | 254 | Interest cost | | 58 | | 53 | | 90 | | 79 | | 175 | | 160 | | 268 | | 238 |
Expected return on plan assets | Expected return on plan assets | | | (73) | | (65) | | (115) | | (115) | | (220) | | (195) | | (346) | | (340) | Expected return on plan assets | | (75) | | (73) | | (133) | | (115) | | (224) | | (220) | | (395) | | (346) |
Amortization of: | Amortization of: | | | | | | | | | | | | | | | | | | Amortization of: | | | | | | | | | | | | | | | | |
| | Prior service cost | | | 6 | | 6 | | | | 1 | | 17 | | 18 | | | | 3 | | Prior service cost | | 5 | | 6 | | | | | | 15 | | 17 | | | | |
| | Actuarial (gain) loss | | | 20 | | | 11 | | | 37 | | | 19 | | | 60 | | | 32 | | | 112 | | | 59 | | Actuarial (gain) loss | | | 8 | | | 20 | | | 34 | | | 37 | | | 23 | | | 60 | | | 100 | | | 112 |
Net periodic defined benefit | Net periodic defined benefit | | | | | | | | | | | | | | | | | | Net periodic defined benefit | | | | | | | | | | | | | | | | |
| costs (credits) | | $ | 37 | | $ | 32 | | $ | 19 | | $ | 3 | | $ | 111 | | $ | 97 | | $ | 56 | | $ | 16 | costs (credits) prior to | | | | | | | | | | | | | | | | |
| | termination benefits | | 22 | | 37 | | 9 | | 19 | | 66 | | 111 | | 27 | | 56 |
Termination benefits (a) | | Termination benefits (a) | | | (7) | | | | | | | | | | | | 13 | | | | | | | | | |
Net periodic defined benefit | | Net periodic defined benefit | | | | | | | | | | | | | | | | |
| | costs (credits) | | $ | 15 | | $ | 37 | | $ | 9 | | $ | 19 | | $ | 79 | | $ | 111 | | $ | 27 | | $ | 56 |
| | | | 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 |
| | | Other Postretirement Benefits |
| | | Three Months | | Nine Months |
| | | 2013 | | 2012 | | 2013 | | 2012 |
LKE | | | | | | | | | | | | |
Service cost | | $ | 2 | | $ | 1 | | $ | 4 | | $ | 3 |
Interest cost | | | 2 | | | 3 | | | 6 | | | 7 |
Expected return on plan assets | | | (2) | | | (1) | | | (4) | | | (3) |
Amortization of: | | | | | | | | | | | | |
| Transition obligation | | | | | | | | | | | | 1 |
| Prior service cost | | | 1 | | | | | | 2 | | | 2 |
| Actuarial (gain) loss | | | | | | | | | | | | (1) |
Net periodic defined benefit costs (credits) | | $ | 3 | | $ | 3 | | $ | 8 | | $ | 9 |
| See Note 10 for details of a one-time voluntary retirement window offered to certain bargaining unit employees. |
| | | | Pension Benefits |
| | | | Three Months | | Nine Months |
| | | | 2014 | | 2013 | | 2014 | | 2013 |
PPL Energy Supply | | | | | | | | | | | | |
Service cost | | $ | 1 | | $ | 1 | | $ | 4 | | $ | 5 |
Interest cost | | | 3 | | | 2 | | | 7 | | | 6 |
Expected return on plan assets | | | (3) | | | (2) | | | (8) | | | (7) |
Amortization of: | | | | | | | | | | | | |
| | Actuarial (gain) loss | | | | | | 1 | | | 1 | | | 2 |
Net periodic defined benefit costs (credits) | | $ | 1 | | $ | 2 | | $ | 4 | | $ | 6 |
| | | | | | | | | | | | | | |
LKE | | | | | | | | | | | | |
Service cost | | $ | 5 | | $ | 6 | | $ | 16 | | $ | 19 |
Interest cost | | | 17 | | | 16 | | | 50 | | | 47 |
Expected return on plan assets | | | (21) | | | (20) | | | (62) | | | (61) |
Amortization of: | | | | | | | | | | | | |
| | Prior service cost | | | 1 | | | 1 | | | 3 | | | 3 |
| | Actuarial (gain) loss | | | 4 | | | 8 | | | 10 | | | 25 |
Net periodic defined benefit costs (credits) | | $ | 6 | | $ | 11 | | $ | 17 | | $ | 33 |
| | | | | | | | | | | | | | |
LG&E | | | | | | | | | | | | |
Service cost | | | | | $ | 1 | | $ | 1 | | $ | 2 |
Interest cost | | $ | 4 | | | 3 | | | 11 | | | 10 |
Expected return on plan assets | | | (4) | | | (5) | | | (14) | | | (15) |
Amortization of: | | | | | | | | | | | | |
| | Prior service cost | | | 1 | | | 1 | | | 2 | | | 2 |
| | Actuarial (gain) loss | | | 1 | | | 3 | | | 4 | | | 10 |
Net periodic defined benefit costs (credits) | | $ | 2 | | $ | 3 | | $ | 4 | | $ | 9 |
| | | Other Postretirement Benefits |
| | | Three Months | | Nine Months |
| | | 2014 | | 2013 | | 2014 | | 2013 |
PPL | | | | | | | | | | | | |
Service cost | | $ | 3 | | $ | 4 | | $ | 9 | | $ | 11 |
Interest cost | | | 8 | | | 7 | | | 24 | | | 21 |
Expected return on plan assets | | | (6) | | | (6) | | | (19) | | | (18) |
Amortization of: | | | | | | | | | | | | |
| Actuarial (gain) loss | | | | | | 1 | | | | | | 4 |
Net periodic defined benefit costs (credits) | | $ | 5 | | $ | 6 | | $ | 14 | | $ | 18 |
| | | | | | | | | | | | | |
LKE | | | | | | | | | | | | |
Service cost | | $ | 1 | | $ | 2 | | $ | 3 | | $ | 4 |
Interest cost | | | 2 | | | 2 | | | 7 | | | 6 |
Expected return on plan assets | | | (1) | | | (2) | | | (4) | | | (4) |
Amortization of: | | | | | | | | | | | | |
| Prior service cost | | | 1 | | | 1 | | | 2 | | | 2 |
Net periodic defined benefit costs (credits) | | $ | 3 | | $ | 3 | | $ | 8 | | $ | 8 |
(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 independentlydirectly 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 September 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 | | Nine Months |
| | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | |
PPL Energy Supply (a) | | $ | 2 | | $ | 11 | | $ | 32 | | $ | 34 |
PPL Electric (a) | | | 3 | | | 9 | | | 18 | | | 27 |
LG&E | | | 2 | | | 3 | | | 6 | | | 9 |
KU | | | 2 | | | 4 | | | 6 | | | 13 |
| | Three Months | | Nine Months |
| | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | | | | |
PPL Energy Supply | | $ | 11 | | $ | 10 | | $ | 34 | | $ | 29 |
PPL Electric | | | 9 | | | 8 | | | 27 | | | 23 |
LG&E | | | 3 | | | 3 | | | 9 | | | 9 |
KU | | | 4 | | | 4 | | | 13 | | | 13 |
| For PPL Energy Supply and PPL Electric, the three months ended September 30, 2014 include $(5) million and $(2) million and the nine months ended September 30, 2014 include $11 million and $2 million of termination benefits related to a one-time voluntary retirement window offered to certain bargaining unit employees. See Note 10 for additional information. |
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 electricity supply for default customers for the period June 2013 through May 2015. The PUC approved the plan in January 2013. The approved plan provides 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. Through October 2013, two of four solicitations have been completed.
(PPL Electric)
See Note 11 for information on the power supply agreements between PPL EnergyPlus and PPL Electric.
Legal Matters
(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)(h) 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)
Sierra Club Litigation
In July 2012,On March 6, 2013, the Sierra Club and the MEIC filed a complaint in the U.S. District Court, District of Montana, Billings Division against PPL Montana received a Notice of Intent to Sue (Notice) for violations ofand the Clean Air Act atother 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 EnergyNorthWestern and PacificCorp.PacifiCorp. PPL Montana operates Colstrip on behalf of the co-owners. The Notices allegesuit alleges certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements.
On March 6, 2013, the Sierra Clubrequirements 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 listslisted 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. 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.
OnIn July 27, 2013, the Sierra Club and MEIC filed an additional Notice, identifying additional plant projects that are alleged not to be in compliance with the Clean Air Act. OnAct and, in September 27, 2013, the plaintiffs filed an amended complaint. ThisThe amended complaint dropsdropped all claims regarding pre-2001 plant projects, as well as the plaintiffs' Title V and opacity claims. It does,did, 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 Ownersowners filed a motion to dismiss the amended complaint in October 2013. In May 2014, the court dismissed the plaintiffs' independent Best Available Control Technology claims and their Prevention of Significant Deterioration (PSD) claims for three projects, but denied the owners' motion to dismiss the plaintiffs' other PSD claims on statute of limitation grounds. In October 11,2014, trial as to liability in this matter was re-scheduled to August 2015. A trial date with respect to remedies, if there is a finding of liability, has not been scheduled. On August 27, 2014, the Sierra Club and MEIC filed a second amended complaint. This complaint includes the same causes of action articulated in the first amended complaint, but alleges those claims in regard to only eight projects at the plant between 2001 and 2013. AlthoughOn September 26, 2014, the Colstrip owners filed an answer to the second amended complaint. Discovery is ongoing. 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,same. PPL Montana cannot predict the ultimate outcome of this matter at this time.
Notice of Intent to File Suit
On October 20, 2014, PPL Energy Supply received a notice letter from the Chesapeake Bay Foundation (CBF) alleging violations of the Clean Water Act and Pennsylvania Clean Streams Law at the Brunner Island generation plant. The letter was sent to PPL Brunner Island and the PADEP and is intended to provide notice of the alleged violations and CBF's intent to file suit in Federal court after expiration of the 60 day statutory notice period. Among other things, the letter alleges that PPL Brunner Island failed to comply with the terms of its National Pollutant Discharge Elimination System permit and associated
regulations related to the application of nutrient credits to the facility's discharges of nitrogen to the Susquehanna River. The letter also alleges that PADEP has failed to ensure that credits generated from nonpoint source pollution reduction activities that PPL Brunner Island applies to its discharges meet the eligibility and certification requirements under PADEP's nutrient trading program regulations. If a court-approved settlement cannot be reached, CBF plans to seek injunctive relief, monetary penalties, fees and costs of litigation. PPL and PPL Energy Supply cannot predict the outcome of this matter.
(PPL, LKE and LG&E)
Cane Run Environmental Claims
On December 16, 2013, six residents, on behalf of themselves and others similarly situated, filed a class action complaint against LG&E and PPL in the U.S. District Court for the Western District of Kentucky alleging violations of the Clean Air Act and RCRA. In addition, these plaintiffs assert common law claims of nuisance, trespass and negligence. These plaintiffs seek injunctive relief and civil penalties, plus costs and attorney fees, for the alleged statutory violations. Under the common law claims, these plaintiffs seek monetary compensation and punitive damages for property damage and diminished property values for a class consisting of residents within four miles of the plant. In their individual capacities, these plaintiffs seek compensation for alleged adverse health effects. In response to a motion to dismiss filed by PPL and LG&E, on July 17, 2014 the court dismissed the plaintiffs' RCRA claims and all but one of its Clean Air Act claims, but declined to dismiss their common law tort claims. Upon motion of LG&E and PPL, the district court certified for appellate review the issue of whether the common law claims are preempted by statute, but the U.S. Court of Appeals for the Sixth Circuit has yet to accept the case for review. PPL, LKE and LG&E cannot predict the outcome of this matter or the potential impact on operations of the Cane Run plant. LG&E has previously announced that it anticipates retiring the coal-fired units at Cane Run before the end of 2015.
Mill Creek Environmental Claims
In May 2014, the Sierra Club filed a citizen suit against LG&E in the U.S. District Court for the Western District of Kentucky for alleged violations of the Clean Water Act. The Sierra Club alleges that various discharges at the Mill Creek plant constitute violations of the plant's water discharge permit. The Sierra Club seeks civil penalties, injunctive relief, plus costs and attorney's fees. PPL, LKE and LG&E cannot predict the outcome of this matter or the potential impact on the operations of the Mill Creek plant but believe the plant is operating in compliance with the permits.
Regulatory Issues
(All Registrants)Registrants except PPL Energy Supply)
See Note 6 for information on regulatory matters related to utility rate regulation. See Note 15 to the Registrants' 2012 Form 10-K for a discussion of Enactment of Financial Reform Legislation.
(PPL, PPL Energy Supply 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)FERC (the Act). To create incentives for the development of new, in-state electricelectricity generation facilities, the Act implementsimplemented a "long-termlong-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 incentencourage necessary generation investment throughout PJM. In February 2011, the PJM Power Providers Group (P3), an organization in which PPL is a member, filed a complaint before the FERC seeking changes in PJM's capacity market rules designed to ensure that subsidized generation, such as the generation that may result from the implementation of the LCAPP, will not be able to set capacity prices artificially low as a result of their exercise of buyer market power. In April 2011, the FERC issued an order granting in part and denying in part P3's complaint and ordering changes in PJM's capacity rules consistent with a significant portion of P3's requested changes. Several parties have filed appeals of the FERC's order. PPL, PPL Energy Supply and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.
In 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 Clauseclauses 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, the U.S. District Court in New Jersey issued a decision finding the Act 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 interstate commerce. The decision has beenwas appealed to the U.S. Court of Appeals for the Third Circuit (Third Circuit) by CPV Power Development, Inc., Hess Newark, LLC and is expected to be appealed by the State of New Jersey. PPL, PPL Energy Supply and PPL Electric cannot predict In September 2014, the outcome of this proceeding orThird Circuit affirmed the economic impact on their businesses or operations, or the markets in which they transact business.District Court's decision.
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 electricelectricity 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 (District Court) 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 MD 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, the U.S. District Court in Maryland issued a decision finding 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 interstate commerce. The decision is expected to bewas appealed to the U.S. Court of Appeals for the Fourth Circuit. PPL, PPL Energy Supply,Circuit (Fourth Circuit) by CPV Power Development, Inc. and PPL Electric cannot predict the outcomeState of this proceeding orMaryland. In June 2014, the economic impact on their businesses or operations, orFourth Circuit affirmed the markets in which they transact business.District Court's opinion and subsequently denied the appellants' motion for rehearing.
Pacific Northwest Markets (PPL and PPL Energy Supply)
Through its subsidiaries, PPL Energy Supply made spot market bilateral sales of power in the Pacific Northwest during the period from December 2000 through June 2001. Several parties subsequently claimed refunds at FERC as a result of these sales. In June 2003, the FERC terminated proceedings to consider whether to order refunds for spot market bilateral sales made in the Pacific Northwest, including sales made by PPL Montana, during the period December 2000 through June 2001. In August 2007, the U.S. Court of Appeals for the Ninth Circuit reversed the FERC's decision and ordered the FERC to
consider additional evidence. In October 2011, the 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 September 30, 20132014 by the City of Seattle for approximately $50 million. In April 2013, the FERC issued an order on reconsideration allowing the parties to seek refunds for the period January 2000 through December 2000. As a result, the City of Seattle may be able to seek refunds from PPL Montana for such period. Hearings before a FERC Administrative Law Judge (ALJ) regarding the City of Seattle's refund claims were completed in October 2013. A2013 and briefing schedule has been set andwas completed in January 2014. In March 2014, the ALJ issued an initial decision denying the City of Seattle's complaint against PPL Montana. The initial decision is expected in mid-March 2014.pending review by the FERC.
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.
(All Registrants)
FERC Market-Based Rate Authority
In 1998, the FERC authorized LG&E, KU and PPL EnergyPlus to make wholesale sales of electricity and related products at market-based rates. In those orders, the FERC directed LG&E, KU and PPL EnergyPlus, respectively, to file an updated market analysis within three years after the order, and every three years thereafter. Since then, periodic market-based rate filings with the FERC have been made by LG&E, KU, PPL EnergyPlus, PPL Electric, PPL Montana and most of PPL Generation's subsidiaries. In December 2013, PPL and these subsidiaries filed market-based rate updates for the Eastern and Western regions. In June 2014, the FERC accepted PPL's and its subsidiaries' updated market power analysis finding that they qualify for continued market-based rate authority in the Western region, which acceptance became final in July 2014. The filings for the Eastern region remain pending before the FERC. The Registrants cannot predict the ultimate outcome of the update filings for the Eastern region at this time.
Electricity - Reliability Standards(All Registrants)
The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system. The FERC oversees this process and independently enforces the Reliability Standards.
The Reliability Standards have the force and effect of law and apply to certain users of the bulk power electricity system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.
LG&E, KU, PPL Electric and certain subsidiaries of PPL Energy Supply monitor their compliance with the Reliability Standards and continue to self-report potential violations of certain applicable reliability requirements and submit accompanying mitigation plans, as required. The resolution of a number of potential violations is pending. Any Regional Reliability Entity (including RFC or SERC) 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.any.
InAs previously reported, in October 2012, the FERC issued a Noticeinitiated its consideration of Proposed Rulemaking (NOPR) concerningproposed changes to Reliability Standards forto address the impacts of 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. Insystem, which might, among other things, lead to a requirement to install equipment that blocks geomagnetically induced currents on implicated transformers. On May 16, 2013, the FERC issued its Final Rule, Order No. 779, which directs therequiring NERC to submit GMDtwo types of Reliability Standards to the FERC for approval in two stages. In theFERC's approval. The first stage, the NERC must submit one or more Reliability Standards by January 22, 2014 thattype would require certain owners and operators of the bulk-power systemnation's electricity infrastructure, such as the Registrants, to develop and implement operational procedures to mitigate the effects of GMDsgeomagnetic disturbances on the bulk-power system. In theThis NERC-proposed standard was filed by NERC with FERC for approval in January 2014 and was approved on June 19, 2014. The second stage, the NERC must submit one or more Reliability Standards by January 22, 2015 thattype is to require owners and operators of the bulk-power system facilities to assess yet to be determined "benchmark GMD events"certain geomagnetic disturbance events and develop and implement plans to protect the bulk-power system from such GMD events.those events and must be filed by NERC with FERC for approval by January 22, 2015. The Registrants may be required to make significant expenditures in new equipment or modifications to their facilities to comply with the new requirements. 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 approvaladoption of any such Reliability Standards.Standards for geomagnetic disturbances.
Environmental Matters - Domestic
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 which are applicable to coal combustion wastes and by-products from facilities that generate electricity from coal in accordance with approved compliance plans. Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before the companies' respective state regulatory authorities, or the FERC, if applicable. Because PPL Electric does not own any generating plants,
its exposure to related environmental compliance costs is reduced. As PPL Energy Supply is not a rate regulatedrate-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 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 (D.C. Circuit Court). The CAIR subsequently was effectively reinstated by the D.C. Circuit Court in December 2008, pending finalization of the CSAPR. Like the CAIR, the CSAPR targeted sources in the eastern U.S. and would have 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 the 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 the CSAPR, remanding the rule to the EPA for further action, and leaving the CAIR in place during the interim. In June 2013,April 2014, the U.S. Supreme Court granted the EPA's petition for review ofreversed and remanded the D.C. Circuit Court's August 2012 decision. Oral argument beforedecision, and on October 23, 2014, the U.S. SupremeD.C. Circuit Court has been scheduledlifted the stay of CSAPR, granting EPA's request.
PPL, PPL Energy Supply, LKE, LG&E and KU are preparing for December 2013. Prior to a revised rule from the EPA, coal-fired generating plants could face tighter nitrousPhase 1 annual trading programs for nitrogen oxide emission limitations through state action.
The Kentucky fossil-fueled generating plants can meet the CAIRand sulfur dioxide emission requirements by utilizing sulfur dioxide allowances (including banked allowancesto commence on January 1, 2015. Phase 1 ozone season trading will begin on May 1, 2015. Phase 2 reductions impacting the annual and optimizing existing controls). To meet nitrogen oxide standards underozone season trading programs would take effect in 2017 and continue into the CAIR, the Kentucky companies will needfuture. Based on analyses conducted in 2011 to buy allowances and/or make operational changes.prepare for CSAPR compliance, PPL, PPL Energy Supply, LKE, LG&E and KU do not currently anticipate that thesignificant compliance costs, of meetinghowever these reinstated CAIR requirements or standardsanalyses will be significant.reviewed under current market and operating conditions to make further assessments on compliance impacts.
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 fossil-fueled generating plants may face furtherIn 2008, the EPA revised the National Ambient Air Quality Standard for ozone. As a result, states in the ozone transport region (OTR), including Pennsylvania, are required by the Clean Air Act to impose additional reductions in nitrogen oxide emissions based upon reasonably available control technologies. The PADEP has issued a draft rule requiring reasonable reduction; however, the proposal is being questioned as a result oftoo lenient by the EPA, other OTR states and environmental groups. The PADEP may impose more stringent national ambient air quality standards foremission limits than those set forth in the proposed rule which could have a significant impact on PPL Energy Supply's Pennsylvania coal plants. The EPA is expected to further tighten the ozone standard in the near term, which may require further nitrogen oxide sulfur dioxide and/orreductions, particularly within the OTR.
In December 2012, the EPA issued final rules that tighten the National Ambient Air Quality Standard for fine particulates. The rules were challenged by industry groups, and on May 9, 2014 the D.C. Circuit Court upheld them. Under the final rules, states and the EPA have until 2015 to identify non-attainment areas, and states have until 2020 to achieve attainment for those areas.
In 2010, the EPA finalized a new one-hour standardNational Ambient Air Quality Standard for sulfur dioxide and required states are required to identify areas that meet those standards and areas that are in non-attainment. In July 2013, the EPA finalized non-attainment designations for parts of the country, including part of Yellowstone County in Montana (Billings area), including the Corette plant and its immediate vicinity, and part of Jefferson County in Kentucky. Attainment must be achieved by 2018. States are working on designations for other areas.
In December 2012,April 2014, the EPA issued final rules that strengthen the fine particulate standards. Under the final rules, states and the EPA have until 2015 to identify non-attainment areas, and states have until 2020 to achieve attainment statusproposed timeframes for those areas.
completing these designations. PPL, PPL Energy Supply, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CAIR or the CSAPR (as discussed above), 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(as noted aboveabove) is not expected to be significant, as PPL Energy Supply previously announced its intent to place the plant in long-term reserve status beginning in April 2015 (see "MATS" below). The longer-term impact will depend on the status of plant operations at that time and what the MDEQ requires in its State Implementation Plan for reestablishing attainment, due in January 2015.
Until particulate matterfinal rules are promulgated, non-attainment designations are finalized and sulfur dioxide maintenance andstate 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 impactultimate outcome of the new standards.National Ambient Air Quality standards for ozone, sulfur dioxide and particulate matter.
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 16, 2012. The rule, is beingwhich was challenged by industry groups and states, inwas upheld by the D.C. Circuit Court where oral argument is scheduled for December 2013.in April 2014. On July 14, 2014, a coalition of 23 states filed a petition seeking Supreme Court review of this decision. The rule provides for a three-year compliance deadline with the potential for a one-year extension as provided under the statute. LG&E, KU and PPL Energy Supply have received compliance extensions for certain plants and PPL Energy Supply has received two extensions in Kentucky and has requested an extensiona pending request, which was submitted on September 15, 2014, for one plant in Pennsylvania. Other extension requests are under consideration.its Colstrip plant.
At the time the MATsMATS 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 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 electricity generating units located at Cane Run and Green River is in response to thisMATS 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 and other controls 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 September 30, 2013 was $67 million. Although the Corette plant asset group was not determined to be impaired at September 30,in December 2013. See Note 18 in PPL's and PPL Energy Supply's 2013 it is reasonably possible that an impairment could occur in future periods, as the Company continues to assess its plansForm 10-K for Corette and as higher priced sales contracts settle, adversely impacting projected cash flows. additional information.
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, includingthrough the application, among other things, 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 oxideoxides and particulates. To date, the focus of regional haze activity has been the western U.S. because until recently,the EPA had determined that the regional trading program in the eastern U.S. under the CSAPR satisfies BART requirements forto reduce 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, andoxides. Although the D.C. Circuit Court had affirmed, thatrecently lifted the CSAPR stay in response to a state could accept region-wide reductions under the CAIR trading program to satisfy BART requirements. After CAIR was temporarily invalidated,U.S. Supreme Court action in April 2014, (see "CSAPR/CAIR" discussion above), decisions by the EPA adopted a final rule providing that states subject to CSAPR (which replaced CAIR) may rely on participation inand 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 leavescourts will determine whether power plants located in the eastern U.S., including PPL's plants in Pennsylvania and Kentucky, exposedwill be subject to additional 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.
BART. In addition, to this exposure stemming from the remand of CSAPR, LG&E's Mill Creek Units 3 and 4 are required to reduce sulfuric acid mist emissions because they were determined to have a significant regional haze impact. These reductions are required in the Kentucky Division of Air Quality's regional haze state implementation plan that wasthe Kentucky Division for Air Quality submitted to the EPA. LG&E is
currently installing sorbent injection technology to comply with these reductions, the costs of which are not expected to be significant.
In Montana, the EPA Region 8 developed the regional haze plan as the MDEQ declined to develop a BART state implementation plan. In September 2012,do so. The EPA finalized the EPA issued its final Federal Implementation Plan (FIP) for the Montana regional haze rule.in September 2012. The final FIP assumed no additional controls 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" 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 oxideoxides and sulfur dioxide limits. The cost of these potential additional controls, if required, could be significant. In November 2012,Both PPL filed a petition for review ofand environmental groups have appealed the Montana Regional Hazefinal FIP withto 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,Circuit and litigation is on-going.ongoing.
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 andplants, but they have received no further communications from the EPA have exchanged certain information regarding this matter.since providing their responses. 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. The EPA request remains an open matter. In September 2012, PPL Montana received an information request from the Montana Department of Environmental QualityMDEQ regarding Colstrip Unit 1 and other projects. MDEQ formally suspended this request on June 6, 2014, in consideration of pending litigation (see "Legal Matters - Sierra Club Litigation" above). 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 issued an information request on this matter. In September 2012, the parties reached a tentative settlement addressing the Ghent NSR matter that seeks to resolve a September 2007 notice of violation alleging opacity violations at the plant. The parties subsequently entered into a consent decree which was approved by the court on September 11, 2013. The consent decree requires the incurrence of non-material costs that have already been accrued.
In August 2007, LG&E received information requests for the Mill Creek and Trimble County plants, and KU received requests for the Ghent plant, but they have received no further communications from the EPA since providing their responses. PPL, LKE, LG&E and KU cannot predict the outcome of these matters, and cannot estimate a range of reasonably
possible losses, if any.
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 by significantly increasing pollutants through a major plant modification, PPL, PPL Energy Supply, LKE, LG&E and KU would, among other things, be required to meet stringent permit limits reflecting Best Available Control Technology (BACT) for pollutants meeting the emissions of any pollutant found to have significantly increased due to a major plant modification.National Ambient Air Quality Standards (NAAQS) in the area and reflecting Lowest Achievable Emission Rates for pollutants not meeting the NAAQS in the area. The costs to meet such limits, including installation of technology at certain units, could be significant.material.
TC2 Air Permit (PPL, LKE, LG&E and Kentucky Registrants)KU)
The Sierra Club and other environmental groups petitioned the Kentucky Environmental and Public Protection Cabinet to overturn the air permit issued for the TC2 baseload coal-fired 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.Kentucky Division for Air Quality. 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 theplant operations, including increased capital costs, of this project, if any.
Cane Run Environmental Claims(PPL, LKE and LG&E)
On September 6, 2013, PPL, LKE and LG&E received a letter on behalf of two residents adjacent to the Cane Run plant notifying various federal, state, and local agencies of their intent to file a citizen suit for alleged violations of the Clean Air Act and Resource Conservation and Recovery Act. The claimants allege various environmental harms including an imminent and substantial endangerment to health or the environment and state that they will seek civil penalties, injunctive relief and attorneys' fees. PPL, LKE and LG&E cannot predict the outcome of this matter or the potential impact on operations of the Cane Run plant. In the 2011 to 2013 time period, the Louisville Metro Air Pollution Control District issued several notices of violation alleging violations of local air quality rules at the Cane Run plant. The agency is seeking civil penalties and remedial measures which are not expected to result in the incurrence of material costs. LG&E is currently in settlement negotiations with the agency. LG&E has previously announced that it anticipates retiring the coal-fired units at Cane Run before the end of 2015.Climate Change
(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. The EPA's rules were challenged in court and on June 23, 2014 the U.S. Supreme Court ruled that the EPA has the authority to regulate GHG emissions under these provisions of the Clean Air Act but only for stationary sources that would otherwise have been subject to these provisions due to significant increases in emissions of other pollutants. As a result, any new sources or major modifications to an existing GHG sourcessource causing a net significant increase in GHG emissions increase now require adherence to themust comply with BACT permit limits for GHGs. The rules were challenged, andGHGs if it would otherwise be subject to BACT or lowest achievable emissions rate limits due to significant increases 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. On October 15, 2013, the U.S. Supreme Court granted certiorari for several petitions to decide whether the NSR provisions of the Clean Air Act require the EPA to regulate GHG emissions from stationary sources, such as power plants.other pollutants.
In June 2013, President Obama released his Climate Action Plan whichthat 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 newrevised proposal for new power plants (a prior proposal was issued in 2012) 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 30, 2016. Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and the state implementation plans. The Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may also lead to more costly regulatory requirements. Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect PPLthe Registrants and others in the industry as transmission system modifications to electricity delivery systems to improve the ability to withstand major storms may be needed in order to meet those requirements.
The EPA issued itsEPA's revised proposal (re-proposal) forto regulate new sources under Section 111(b) of the Clean Air Act was published in the Federal Register on September 20, 2013 as directed by the White House.January 8, 2014. Unlike the EPA's April 2012 Carbon Dioxide (CO2) New Source Performance Standards (NSPS) for new plants,prior proposal, the re-proposalEPA's revised 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 therethis technology is nonot presently commercially viable CO2 reduction technology available, presently to allow new coal plants to meet the proposed standards, thisrevised proposal effectively precludes the construction of new coal plants. The standard for NGCC power plants is the same as 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.2012 and is not continuously achievable.
At the regional level, ten northeastern states signed a Memorandum of Understanding (MOU) agreeing to establish aThe EPA's proposed regulation addressing 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 electricexisting power plants with capacity greater than 25 MW.under Section 111(d) of the Clean Air Act was published in the Federal Register on June 18, 2014. The MOU also providesproposal contains state-specific rate-based reduction goals and guidelines for a 10% reduction, by 2019, in carbon dioxide emissions from base levels.the development, submission, and implementation of state plans to achieve the state goals. State-specific
Pennsylvania has not stated an intention
goals were calculated from 2012 data by applying EPA's very broad interpretation and definition of the Best System of Emission Reduction resulting in very stringent targets to join the RGGI, but enacted the Pennsylvania Climate Change Act of 2008 (PCCA)be met in two phases (2020-2029 and 2030 and beyond). The PCCA establishedEPA believes it has offered some flexibility to the states as to how state compliance plans can be crafted, including the option to demonstrate compliance on a Climate Change Advisory Committee to advise the PADEPmass basis and through multi-state collaborations. The EPA is also proposing potential state plan extensions based on the developmentplan filed (single or multi-state). On October 30, 2014, the EPA issued a Notice of Data Availability seeking comments on several issues including providing additional flexibility in meeting compliance deadlines, addressing disparities in state-specific targets, and incorporating a Climate Change Action Plan. In December 2009,regionalized approach to demonstrating compliance. The Registrants are analyzing the Advisory Committee finalizedproposal and its Climate Change Action Report and identified specific actions that could result in reducingpotential impacts. The regulation of GHG emissions by 30% by 2020. Some of the proposed actions, such as a mandatory 5% efficiency improvement atfrom existing power plants could be unachievable. To date,have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.
The EPA has also proposed a regulation under Section 111(b) of the Clean Air Act addressing GHG emissions from existing power plants that are modified or reconstructed; however, the Registrants do not expect a significant impact from this rulemaking as there have beenare no plans to modify or reconstruct their existing plants in a manner that would trigger the standards under 111(b).
(PPL and PPL Energy Supply)
Based on the stringent reduction requirements in the EPA's proposed rule under Section 111(d), and based on information gained from public input, the PADEP is no longer expecting to achieve reductions required under the EPA's proposed rule by solely increasing efficiency at existing fossil-fuel plants and/or reducing their generation as set forth in the PADEP's April 10, 2014 white paper. On October 23, 2014, the Governor of Pennsylvania signed into law, Act 175 of 2014 requiring the PADEP to obtain General Assembly approval of any state plan addressing GHG emissions under the EPA's 111(d) rules for existing plants. The law includes provisions to minimize the exposure to a federal implementation plan due to legislative delay.
The MDEQ, at the request of the Governor of Montana, has issued a white paper outlining possible regulatory or legislative actions takenscenarios to implement the recommendationsEPA's proposed Section 111(d) rule, including a combination of increasing energy efficiency at coal-fired plants, adding more low- and zero-carbon generation, and carbon sequestration at Colstrip. The white paper was made public in September 2014 and the report.MDEQ has held public meetings to present the white paper and gather comments.
(PPL, LKE, LG&E and KU)
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,In November 2011, the state has notCouncil issued a final plan.report to the Secretary of Kentucky's Energy and Environment Cabinet for consideration. The final report acknowledged that the recommendations would require additional review and analysis prior to implementation, and that many of the recommendations would likely require, in part, further legislative or regulatory actions. The impact of any such plan is not now determinable, but the costs to comply with the plan could be significant. In April 2014, the Kentucky General Assembly passed legislation which limits the measures which the Energy and Environment Cabinet may consider in setting performance standards to comply with the EPA's regulations governing GHG emissions from existing sources. The legislation provides that such state GHG performance standards shall be based on emission reductions, efficiency measures, and other improvements available at each power plant, rather than renewable energy, end-use energy efficiency, fuel switching and re-dispatch. These statutory restrictions will make it more difficult for Kentucky to achieve the GHG reduction levels which the EPA has proposed for Kentucky.
(All Registrants except PPL Electric)
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 KUThe Registrants cannot predict the outcome of these lawsuits or estimate a range of reasonably possible losses, if any.
Renewable Energy Legislation
(All Registrants)
There has been interest in renewable energy legislation at both the state and federal levels. Federallevels; however, no legislation on renewable energy is not expected to be enacted this year. become law in 2014 at either the federal level or in the states in which PPL operates.
(PPL, PPL Energy Supply and PPL Electric)
In Pennsylvania, bills were recently introduced calling for an increase in AEPSAlternative Energy Portfolio Standard (AEPS) Tier 1 obligations and to create a $25 million permanent funding program for solar generation. ABills (SB 1171 and HB 100) were also introduced to add natural gas as a qualified AEPS resource, and another bill adding new hydropower(HB 1912) would repeal the AEPS Act entirely. All these bills remain in committee and are unlikely to Montana's renewable portfolio standard was enacted with an effective date of October 1, 2013. advance.
(PPL and PPL Energy Supply)
An interim legislative committee in Montana is reviewing the state's RPS.Renewable Portfolio Standard (RPS) and recommended that the law continue without change. In New Jersey, a bill (S-1475) has been introduced to increase the current RPS standard to 30% from Class I sources by 2020. The chairman of the Senate Environmental Committee convened a workgroup to look at further changes to New Jersey's RPS law to enable New Jersey to meet emissions goals established in the state's Global Warming Response Act. A bill (S-2444) was subsequently introduced to mandate that 80% of New Jersey's electricity be generated from renewable resources by 2050. PPL and PPL Energy Supply cannotare unable to predict the outcome of this legislation at this time whether the committee will recommend any changes to existing laws.time.
(All Registrants)
The Registrants believe there are financial, regulatory and logisticaloperational 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 and downward pressure on energy prices that could result from such renewable generation and back-up, impacts to PJM's capacity market and the need for substantial changes to transmission and distribution systems to accommodate renewable energy sources. These uncertainties are not directly addressed by proposed legislation. PPL and PPL Energy Supply cannot predict at this time the effect on their competitive plants' future competitive position, results of operation, cash flows and financial position of renewable energy mandates that may be adopted, although the costs to implement and comply with any such requirements could be significant.
Water/Waste
Coal Combustion Residuals (CCRs) (All Registrants except PPL 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).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
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. On September 20, 2013, in response
A coalition of environmental groups and two CCR recycling companies filed lawsuits against the EPA seeking a deadline for final rulemaking. In settlement of that litigation, the EPA has agreed to the proposed Effluent Limitation Guidelines, PPL submitted commentsissue its final rulemaking on the proposed CCR regulations. Also, on September 3, 2013, PPL commented on a second CCR NODA seeking comment on additional information related to the EPA's proposal. Subtitle D option described above by December 19, 2014.
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.
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.
As a result of litigation by environmental groups, final rulemaking could be issued as early as the end of 2014.
PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict at this time the final requirements of the EPA's CCR regulations or potential changes to the RCRA and what impact they would have on their facilities, but the financial and operational impact is 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 Kentucky Registrants)KU)
In May 2011, LG&E submitted an application for a special waste landfill permit to handle coal combustion residuals generated at the Trimble County plant. After extensive review of the permit application 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 areAfter assessing additional options for managing coal combustion residuals, including constructionin January 2014, LG&E submitted to the Kentucky Division of Waste Management a landfill atpermit application for an alternate site adjacent to the plant. SubmittalLG&E has also applied for other necessary regulatory approvals including a dredge and fill permit from the U.S. Army Corps 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.Engineers. PPL, LKE, LG&E and KU are unable to determine the precisepotential impact of this matter until they select an alternate management optionall permits are issued and complete a detailed engineering design.any resulting legal challenges are concluded.
Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky
(All Registrants except PPL 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 respond to notices of violations and implement assessment or abatement measures, where required.required or applicable. A range of reasonably possible losses cannot currently be estimated.
(PPL and PPL Energy Supply)
In 2007, six plaintiffs filed a lawsuit in the Montana Sixteenth Judicial District Court against the Colstrip plant owners asserting property damage due to seepage from plant wastewater ponds. A settlement agreement was reached in July 2010 which would have resulted in a payment by PPL Montana, but certain of the plaintiffs later argued the settlement was not final. The Colstrip plant owners filed a motion to enforce the settlement and in October 2011 the court granted the motion and ordered the settlement to be completed in 60 days. The plaintiffs appealed the October 2011 order to the Montana Supreme Court, which affirmed the district court's order enforcing the settlement in December 2012 and denied plaintiff's motion for rehearing in February 2013. Final settlement documents were executed and the settlement was effective on October 28, 2013. PPL Montana's share of the settlement payment was not 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).Federation. 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.
This matter was stayed in December 2012. In late October 2012,April 2014, Earthjustice filed a second complaint againstmotion for leave to amend the petition for review and to lift the stay which was granted by the court in May 2014. PPL Montana and the MDEQ responded to the amended petition and PPL Montanafiled partial motions to dismiss in state district court in Lewis and Clark County on behalf ofJuly 2014, which were both recently denied by the Sierra Club, the MEIC and the NWF. This complaint alleges that the defendants have failed to take action under the MFSA and the Montana Water Quality Act to effectively monitor and correct issues of coal ash disposal and wastewater ponds at the Colstrip plant. The complaint seeks a declaration that the operations of the impoundments violate the statutes 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.court.
(All Registrants except PPL Electric)
Clean Water Act Act/316(b)
The EPA published proposedEPA's final 316(b) rule 316(b) for existing facilities, in April 2011. The EPA has been evaluating the comments it received to the proposed rulebecame effective on October 14, 2014, and meeting with industry groups to discuss options. The proposed rule contains two requirements to reduce impact to aquatic organisms atregulates cooling water intake structures.structures and their impact on aquatic organisms. The firstrule allows states considerable authority to interpret the rule. The rule requires all existing facilities to meet standards forchoose between several options to reduce the reduction of mortality ofimpact to 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 isand to determine and install the best technology available to reduce mortality ofintake structure's impact on 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 impactsPlants already equipped with closed-cycle cooling, an acceptable option, would likely not incur additional costs. Once-through systems would likely require additional technology to energy delivery reliability andcomply with the remaining useful life of the plant. The final rule is expected to be issued in November 2013. Until the final rule is issued,rule. PPL, PPL Energy Supply, LKE, LG&E and KU cannot reasonably estimate a range of reasonably possibleare evaluating compliance strategies but do not presently expect the compliance costs if any, that wouldto be required to comply with such a regulation.material.
Effluent Limitations Guidelines (ELGs) and Standards
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, PPL Energy Supply, LKE, LG&E and KU worked with industry groupsThe EPA has agreed to comment ona new deadline for the proposed regulation onfinal rule of September 20, 2013. The30, 2015 which is contingent upon the EPA meeting its deadline of December 19, 2014 for issuing its final regulation is expected to be issued in May 2014.CCR regulations. 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, certain states including(including Pennsylvania and Kentucky,Kentucky) and environmental groups are proposing more stringent
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.
(All Registrants)
Waters of the United States (WOTUS)
On April 21, 2014, the EPA and the U.S. Army Corps of Engineers (Army Corps) published the proposed rule defining Waters of the United States (WOTUS) that could significantly expand the federal government's interpretation of what constitutes WOTUS subject to regulation under the Clean Water Act. If the definition is expanded as proposed by the EPA and the Army Corps, permits and other regulatory requirements may be imposed for many matters presently not covered (including vegetation management for transmission lines and activities affecting storm water conveyances and wetlands), the implications of which could be significant. The U.S. House and Senate are considering legislation to block these regulations.
The EPA is reassessing its polychlorinated biphenyls (PCB) (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 or some PCB-containing equipment. The EPA is planning to propose the revised regulations in 2014.2015. 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.
(PPL and PPL Energy Supply)
A subsidiary of PPL Energy Supply 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.plant. In June 2012, a Consent Order and Agreement (COA) with the PADEP was signed, that allowsallowing the subsidiary to study a change in a cooling tower operational method that may keep fish from entering the channel. Should this approach fail, theThe COA requiresrequired a retrofit of impingement control technology at the intakes to the cooling towers, at a cost that would have been significant. Based on the costresults of whichthe first year of study, the PADEP has suggested closing the COA and writing a new COA to resolve the issue. PPL is in negotiations with the agency at this time. PPL and PPL Energy Supply cannot predict at this time the outcome of the proposed new COA and what impact, if any, it would have on their facilities, but the costs could be significant.
In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010, which covers water discharges from the Trimble County plant. In November 2010, the Cabinet issued a final order upholding the permit. In December 2010, the environmental groups appealed the order to the Trimble Circuit Court, but the case was subsequently transferred to the Franklin Circuit Court. In September 2013, the court reversed the Cabinet order upholding the permit and remanded the permit to the agency for further proceedings. In October 2013, LG&E filed a notice of appeal with the Kentucky Court of Appeals. PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible losses, if any.
The EPA and the Army Corps of Engineers are working on a guidance document that will expand the federal government's interpretation of what constitutes "waters of the 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 (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.
From time to time, PPL Energy Supply, PPL Electric, LG&E and KU undertake remedial action in response to notices of violations, 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 theirthese Registrants' 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.
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.
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 thisa United States Federal law which governs liability-related issues and ensures the availability of funds for public liability claims arising from an incident at any of the U.S. licensed nuclear facilities. It also seeks to limit the liability of nuclear reactor owners for such claims from any single incident. Effective September 10, 2013, the liability limit per incident is $13.6 billion for such claims which is funded by a combination of commercial insurance coverage from American Nuclear Insurers and an industry assessment program.
InUnder the 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$255 million per incident, payable at $35$38 million per year.
Additionally, PPL Susquehanna purchases property insurance programs from NEIL, an industry mutual insurance company of which PPL Susquehanna is a member. Effective April 1, 2014, facilities at the Susquehanna plant are insured against property damage losses up to $2.0 billion. PPL Susquehanna also purchases an insurance program that provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions.
Under the NEIL property and replacement power insurance programs, PPL Susquehanna could be assessed retrospective premiums in the event of the insurers' adverse loss experience. This maximum assessment is $46 million.
Pennsylvania Coal Plants(PPL and PPL Energy Supply)
In the fourth quarter of 2013, management tested the Brunner Island and Montour plants for impairment and concluded neither was impaired as of December 31, 2013. There were no events or changes in circumstances that indicated a recoverability test was required to be performed in 2014. The carrying value of the Pennsylvania coal-fired generation assets was $2.5 billion as of September 30, 2014 ($1.3 billion for Brunner Island and $1.2 billion for Montour).
Labor Union Agreements
(PPL, PPL Energy Supply and PPL Electric)
In May 2014, PPL's, PPL Energy Supply's and PPL Electric's bargaining agreement with its largest IBEW local expired. PPL, PPL Energy Supply and PPL Electric finalized a new three-year labor agreement with IBEW local 1600 in May 2014 and the agreement was ratified in early June 2014.
As part of efforts to reduce operations and maintenance expenses, the new agreement offered a one-time voluntary retirement window to certain bargaining unit employees. The benefits offered under this provision are consistent with the standard separation program benefits for bargaining unit employees. As a result, in the second quarter of 2014, estimated separation benefits of $29 million were recorded ($23 million for PPL Energy Supply and $6 million for PPL Electric). During the three months ended September 30, 2014, based on final employee acceptances of the offer, PPL reduced the previously recorded estimated amounts by $9 million ($6 million for PPL Energy Supply and $3 million for PPL Electric). As a result, for the nine months ended September 30, 2014, the following total separation benefits have been recorded:
| | | | | PPL Energy | | PPL |
| | PPL | | Supply | | Electric |
| | | | | | | | | |
Pension Benefits | | $ | 13 | | $ | 11 | | $ | 2 |
Severance Compensation | | | 7 | | | 6 | | | 1 |
Total Separation Benefits | | $ | 20 | | $ | 17 | | $ | 3 |
| | | | | | | | | |
Number of Employees | | | 121 | | | 105 | | | 15 |
The separation benefits are included in "Other operation and maintenance" on the Statement of Income. The liability for pension benefits is included in "Accrued pension obligations" on the Balance Sheet at September 30, 2014. All of the severance compensation was paid in the third quarter of 2014. The remaining terms of the new labor agreement are not expected to have a significant impact on the financial results of PPL, PPL Energy Supply or PPL Electric.
(LKE, LG&E and KU)
In August 2014, KU and the USWA ratified a three-year labor agreement through August 2017 containing 2.5% wage increases for each year. The agreement covers approximately 74 employees.
In November 2014, LG&E and the IBEW ratified a three-year labor agreement through November 2017 containing 2.5% wage increases for each year. The agreement covers approximately 700 employees.
Guarantees and Other Assurances
(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.
(All Registrants)
The table below details guarantees provided atas of September 30, 2013. The total recorded liability at September 30, 2013 and December 31, 2012, was $23 million and $24 million for PPL and $20 million for both periods for LKE.2014. "Exposure" represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee. 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." The total recorded liability at September 30, 2014 and December 31, 2013, was $25 million and $26 million for PPL and $19 million for both periods for LKE. For reporting purposes, on a consolidated basis, all guarantees of PPL Energy Supply (other than the letters of credit), PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE. | | Exposure at | | Expiration |
| | September 30, 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. |
| | Exposure at | | Expiration |
| | September 30, 2014 | | Date |
PPL | | | | | | |
Indemnifications related to the WPD Midlands acquisition | | | | (a) | | |
WPD indemnifications for entities in liquidation and sales of assets | | $ | 12 | (b) | | 2017 - 2018 |
WPD guarantee of pension and other obligations of unconsolidated entities | | | 125 | (c) | | |
| | | | | | |
PPL Energy Supply | | | | | | |
Letters of credit issued on behalf of affiliates | | | 27 | (d) | | 2014 - 2015 |
Indemnifications for sales of assets | | | 250 | (e) | | 2025 |
Guarantee of a portion of a divested unconsolidated entity's debt | | | 22 | (f) | | 2018 |
| | | | | | |
PPL Electric | | | | | | |
Guarantee of inventory value | | | 33 | (g) | | 2017 |
| | | | | | |
LKE | | | | | | |
Indemnification of lease termination and other divestitures | | | 301 | (h) | | 2021 - 2023 |
| | | | | | |
LG&E and KU | | | | | | |
LG&E and KU guarantee of shortfall related to OVEC | | | | (i) | | |
(b) | PriorIndemnifications related 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, including a specific unresolved tax issue and those relating to properties and assets owned by affiliates of E.ON AGthe seller that were transferred to WPD Midlands in connection with the acquisition. A cross indemnity has been received from the seller on the tax issue. The maximum exposure and expiration of these indemnifications cannot be estimated because the maximum potential liability is not capped and the expiration date is not specified in the transaction documents. |
(c)(b) | In connection with the liquidation of wholly owned subsidiaries that have been deconsolidated upon turning the entities overIndemnification to the liquidators and certain affiliates of PPL Global have agreed to indemnify the liquidators, directors and/or the entities themselvesothers for anyexisting liabilities or expenses or liabilities arising during the liquidation process, including liabilities and expenses of the entities placed into liquidation. In some cases, theprocess. 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 isliquidation or are 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 whichwhere the agreements provide for specific limits. |
| 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 or have agreed to continue their obligations under existing third-party guarantees, either for a specific limit onset period of time following the amount oftransactions or upon the indemnification, andcondition that the expiration date was based on an estimate of the dissolution date of the entities.purchasers |
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 resultmake 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. |
(c) | Relates to certain obligations 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 beenmodified electric associations that were guaranteed at the time of privatization 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, costsand can be reallocated to and are guaranteed by the remaining members.if an existing member becomes insolvent. At September 30, 2013,2014, 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 haveagreements, and as a result, the exposure has been estimated based on the types of obligations.estimated. |
(e)(d) | 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)(e) | 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 isIndemnifications are governed by the maximum amount PPL Susquehanna could be assessed for each incident at anyspecific sales agreement and include breach of the nuclear reactors covered by this Act. See "Nuclear Insurance" aboverepresentations, warranties and covenants, and liabilities for additional information. |
(h) | certain other matters. 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 datesdate noted are only foris based on those cases in which the agreements provide for specific limits. The indemnification provisions described below are in each case subject to certain customary limitations, including thresholds for allowable claims, caps on aggregate liability, and time limitations for claims arising out of breaches of most representations and warranties. |
A subsidiary of PPL Energy Supply has agreed to provide indemnification to the purchaser of the Long Island generation business for damages arising out of any breach of the representations, warranties and covenants under the related transaction agreement and for damages arising out of certain other matters, including liabilities relating to certain renewable energy facilities which were previously owned by one of the PPL subsidiaries sold in the transaction but which were unrelated to the Long Island generation business. The indemnification provisions for most representations and warranties expired in the third quarter of 2011.
A subsidiary of PPL Energy Supply has agreed to provide indemnification to the purchasers of the Maine hydroelectric facilities for damages arising out of any breach of the representations, warranties and covenants under the respective transaction agreements and for damages arising out of certain other matters, including liabilities of the PPL Energy Supply subsidiary relating to the pre-closing ownership or operation of those hydroelectric facilities. The indemnification provisions for 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)(f) | A PPL Energy Supply subsidiary ownedRelates to 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 guaranteedguarantee of 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 receiveddivested entity's debt. The purchaser provided 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.divested entity. The exposure noted reflects principal only. |
(k)(g) | PPL Electric entered into contracts with aA third party logistics firm that provides inventory procurement and fulfillment services. Under the contracts, theThe logistics firm has title to the inventory, purchased for PPL Electric's use. Uponhowever, 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.sold. |
(l)(h) | 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. AOn May 30, 2014, the Court of Appeals issued an opinion affirming the lower court decision, inand subsequently denied a Petition for Rehearing. LKE's indemnitee filed a Motion for Discretionary Review with the appellate matter may occur during late 2013 or earlyKentucky Supreme Court on October 2, 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 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)(i) | Pursuant to the OVEC power purchase contract, expiring in June 2040, LG&E and KU are obligated to pay for their share of OVEC's excess debt service, post-retirement and decommissioning costs, as well as any shortfall from amounts currently included within a demand charge which includes, among other charges, debt servicedesigned 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 iscurrently expected to cover LG&E's and KU's shares of the cost of the listed itemsthese costs 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. See "Energy Purchase Commitments" and "Guarantees and Other Assurances" in Note 15 in PPL's, LKE's, LG&E's and KU's 2013 Form 10-K for additional information on the OVEC power purchase contract. |
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 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"Unregulated wholesale energy marketing to affiliate" by PPL Energy Supply and as "Energy purchases from affiliate" by PPL Electric.
Under the standard Default Service Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits. PPL EnergyPlus is required to post collateral with PPL Electric:Electric when: (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 onDuring the currentsecond quarter of 2014, PPL Energy Supply experienced a downgrade in its corporate credit ratingratings to below investment grade. As a result of the downgrade of PPL Energy Supply, as guarantor, PPL EnergyPlus'EnergyPlus no longer has an
established credit limit was $35 million atlimit. At September 30, 2013.2014, PPL EnergyPlus was not required to post collateral. In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.
PPL Electric's customers may choose an alternative supplier for their generation supply. See Note 2 for additional information regarding PPL Electric's purchases of accounts receivable from alternative suppliers, including PPL EnergyPlus.
At September 30, 2013,2014, PPL Energy Supply had a net credit exposure of $25$27 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 ServicesSupport Costs (PPL Energy Supply, PPL Electric and LKE)All Registrants except PPL)
Both PPL Services provides corporate functions such as financial, legal, human resources and information technology services. PPL Services chargesLKS provide the respective PPL and LKE subsidiaries forwith administrative, management and support services. Where applicable, the costcosts of suchthese services when they can be specifically identified. The cost of the services that is not directlyare charged to the respective subsidiaries as direct support costs. General costs that cannot be directly attributed to a specific subsidiary are allocated and charged to the respective subsidiaries as indirect support costs. PPL subsidiaries is allocated to applicable subsidiaries based on an average ofServices uses a three-factor methodology that includes the subsidiaries' relative invested capital, operation and maintenance expenses and number of employees. employees to allocate indirect costs. LKS bases its indirect allocations on the subsidiaries' number of employees, total assets, revenues, number of customers and/or other statistical information. PPL Services and LKS charged the following amounts for the periods ended September 30, which PPL management believesand believe these amounts are reasonable, including amounts applied to accounts that are further distributed between capital and expense:expense.
| | Three Months | | Nine Months |
| | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | | | | |
PPL Energy Supply | | $ | 52 | | $ | 49 | | $ | 161 | | $ | 159 |
PPL Electric | | | 37 | | | 35 | | | 109 | | | 116 |
LKE | | | 3 | | | 3 | | | 11 | | | 11 |
| | Three Months | | Nine Months |
| | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | |
PPL Energy Supply from PPL Services | | $ | 49 | | $ | 52 | | $ | 161 | | $ | 161 |
PPL Electric from PPL Services | | | 34 | | | 37 | | | 113 | | | 109 |
LKE from PPL Services | | | 3 | | | 3 | | | 11 | | | 11 |
LG&E from LKS | | | 49 | | | 53 | | | 154 | | | 159 |
KU from LKS | | | 55 | | | 36 | | | 167 | | | 146 |
Intercompany Billings by LKS (LG&E and KU)
LKS provides LG&E and KU
with a variety of centralized administrative, management and support services. The cost of these services is directly charged to the company or, for general costs that cannot be directly attributed, charged based on predetermined allocation factors, including the following measures: number of customers, total assets, revenues, number of employees and/or other statistical information. LKS charged the amounts in the table below for the periods ended September 30, which LKE management believes are reasonable, including amounts that are further distributed between capital and expense:
| | Three Months | | Nine Months |
| | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | | | | |
LG&E | | $ | 53 | | $ | 51 | | $ | 159 | | $ | 132 |
KU | | | 36 | | | 33 | | | 146 | | | 114 |
In addition, LG&E and KUalso 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)(PPL Electric and LKE)
A PPL Electric subsidiary periodically holds revolving demand notes from certain affiliates. At September 30, 2014, there was no balance outstanding. At December 31, 2013, $150 million was outstanding and was reflected in "Notes receivable from affiliate" on the Balance Sheet. The interest rates on borrowings are equal to one-month LIBOR plus a spread. The interest rate on the outstanding borrowing at December 31, 2013, was 1.92%. Interest earned on these revolving facilities was not significant for the three and nine months ended September 30, 2014 and 2013.
LKE maintains a $300$225 million revolving demand noteline of credit with a PPL Energy Funding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates. The interest ratesrate on borrowings areis equal to one-month LIBOR plus a spread. At September 30, 2013 and December 31, 2012, $522014, $22 million and $25 million werewas outstanding and werewas reflected in "Notes payable with affiliates" on the Balance Sheet. The interest rate on the outstanding borrowing at September 30, 20132014 was 1.68%1.66%. There was no balance outstanding at December 31, 2013. Interest on the demandrevolving line of credit was not significant for the three and nine months ended September 30, 2014 and 2013.
LKE maintains an agreement with a PPL affiliate that has a $300 million borrowing limit whereby LKE can loan funds on a short-term basis at market-based rates. The interest on the loan is based on the PPL affiliate's credit rating and is currently equal to one-month LIBOR plus a spread. There was no balance outstanding at September 30, 2014. At December 31, 2013, $70 million was outstanding and was reflected in "Notes receivable from affiliates" on the Balance Sheet. The interest rate on the outstanding borrowing at December 31, 2013 was 2.17%. Interest income on this note was not significant for the three and nine months ended September 30, 20132014 and 2012. In October 2013, the capacity of the revolving demand note was reduced by $75 million.2013.
Intercompany Derivatives (Kentucky Registrants)LKE, LG&E and KU)
Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL. These hedging instruments have terms identical to forward-starting swaps entered into by PPL 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., 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 Ltd. See Note 6 for discussion regarding the proposed Storm Damage Expense Rider filed with the PUC by PPL Electric.
Other (All Registrants except PPL)PPL and LKE)
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
(All Registrants)
The breakdowncomponents of "Other Income (Expense) - net" for the periods ended September 30 was:were:
| | | | Three Months | | Nine Months | | | | Three Months | | Nine Months |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | | | 2014 | | 2013 | | 2014 | | 2013 |
PPL | PPL | | | | | | | | | | | | | PPL | | | | | | | | |
Other Income | Other Income | | | | | | | | | 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 on securities in NDT funds | | $ | 11 | | $ | 4 | | $ | 23 | | $ | 14 |
| Earnings (losses) from equity method investments | | | | (1) | | | | (7) | Interest income | | | | 1 | | 4 | | 2 |
| Miscellaneous - Domestic | | | | 3 | | 9 | | 8 | AFUDC - equity component | | 3 | | 3 | | 8 | | 8 |
| Miscellaneous - U.K. | | | | | | (1) | | | 1 | | | 1 | Miscellaneous | | | 4 | | | | | | 8 | | | 10 |
| Total Other Income | | | 8 | | | 9 | | | 34 | | | 30 | Total Other Income | | | 18 | | | 8 | | | 43 | | | 34 |
Other Expense | Other Expense | | | | | | | | | Other Expense | | | | | | | | |
| Economic foreign currency exchange contracts (Note 14) | | 117 | | 47 | | (6) | | 40 | Economic foreign currency exchange contracts (Note 14) | | (134) | | 117 | | (38) | | (6) |
| Charitable contributions | | 5 | | 1 | | 13 | | 7 | Charitable contributions | | 3 | | 5 | | 12 | | 13 |
| Miscellaneous - Domestic | | 2 | | 4 | | 7 | | 12 | Transaction costs related to spinoff of PPL Energy Supply (Note 8) | | 2 | | | | 18 | | |
| Miscellaneous - U.K. | | | | | | 1 | | | 1 | | | 2 | Miscellaneous | | | 3 | | | 3 | | | 13 | | | 9 |
| Total Other Expense | | | 124 | | | 53 | | | 15 | | | 61 | Total Other Expense | | | (126) | | | 125 | | | 5 | | | 16 |
Other Income (Expense) - net | Other Income (Expense) - net | | $ | (116) | | $ | (44) | | $ | 19 | | $ | (31) | Other Income (Expense) - net | | $ | 144 | | $ | (117) | | $ | 38 | | $ | 18 |
PPL Energy Supply | | | | | | | | | | | | |
Other Income | | | | | | | | | | | | |
| Earnings on securities in NDT funds | | $ | 4 | | $ | 5 | | $ | 14 | | $ | 17 |
| Interest income | | | 1 | | | | | | 3 | | | 1 |
| Miscellaneous | | | | | | 2 | | | 7 | | | 5 |
| Total Other Income | | | 5 | | | 7 | | | 24 | | | 23 |
Other Expense | | | | | | | | | | | | |
| Charitable contributions | | | 1 | | | 1 | | | 3 | | | 2 |
| Miscellaneous | | | 2 | | | 1 | | | 3 | | | 5 |
| Total Other Expense | | | 3 | | | 2 | | | 6 | | | 7 |
Other Income (Expense) - net | | $ | 2 | | $ | 5 | | $ | 18 | | $ | 16 |
"Other Income (Expense) - net" for the three and nine months ended September 30, 20132014 and 20122013 for PPL Electric isEnergy Supply was primarily the equity component of AFUDC.earnings on securities in NDT funds. The components of "Other Income (Expense) - net" for the three and nine months ended September 30, 2014 and 2013 for PPL Electric, LKE, LG&E and KU arewere not significant. The components of "Other Income (Expense) - net" for the three months ended September 30, 2012 for LKE, LG&E and KU are not significant. "Other Income (Expense) - net" for the nine months ended September 30, 2012 for LKE and KU is primarily losses from an equity method investment. The components of "Other Income (Expense) - net" for the nine months ended September 30, 2012 for LG&E are not significant. 13. Fair Value Measurements and Credit Concentration
(All Registrants)
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of financial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values. During the three and nine months ended September 30, 20132014 and 2012,2013, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 20122013 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 | | | | September 30, 2014 | | December 31, 2013 |
| | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
PPL | PPL | | | | | | | | | | | | | | | | | | PPL | | | | | | | | | | | | | | | | |
Assets | Assets | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 1,291 | | $ | 1,291 | | | | | | | | $ | 901 | | $ | 901 | | | | | | | Cash and cash equivalents | | $ | 1,188 | | $ | 1,188 | | | | | | | | $ | 1,102 | | $ | 1,102 | | | | | | |
| Restricted cash and cash equivalents (a) | | | 120 | | | 120 | | | | | | | | | 135 | | | 135 | | | | | | | Restricted cash and cash equivalents (a) | | | 324 | | | 324 | | | | | | | | | 134 | | | 134 | | | | | | |
| Price risk management assets: | | | | | | | | | | | | | | | | | | Price risk management assets: | | | | | | | | | | | | | | | | |
| | Energy commodities | | | 1,480 | | 7 | | $ | 1,421 | | $ | 52 | | 2,068 | | 2 | | $ | 2,037 | | $ | 29 | | Energy commodities | | 1,041 | | 4 | | $ | 945 | | $ | 92 | | 1,188 | | 3 | | $ | 1,123 | | $ | 62 |
| | Interest rate swaps | | | 86 | | | | 86 | | | | 15 | | | | 15 | | | | Interest rate swaps | | 6 | | | | 6 | | | | 91 | | | | 91 | | |
| | Foreign currency contracts | | | 1 | | | | 1 | | | | | | | | | | | | Foreign currency contracts | | | 51 | | | | | | 51 | | | | | | | | | | | | | | | |
| | Cross-currency swaps | | | 28 | | | | | | 28 | | | | | | 14 | | | | | | 13 | | | 1 | Total price risk management assets | | | 1,098 | | | 4 | | | 1,002 | | | 92 | | | 1,279 | | | 3 | | | 1,214 | | | 62 |
| 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 | |
| | | | | September 30, 2014 | | December 31, 2013 |
| | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| | NDT funds: | | | | | | | | | | | | | | | | |
| | | Cash and cash equivalents | | 17 | | 17 | | | | | | 14 | | 14 | | | | |
| | | Equity securities | | | | | | | | | | | | | | | | |
| | | U.S. large-cap | | 582 | | 432 | | 150 | | | | 547 | | 409 | | 138 | | |
| | | U.S. mid/small-cap | | 83 | | 35 | | 48 | | | | 81 | | 33 | | 48 | | |
| | | Debt securities | | | | | | | | | | | | | | | | |
| | | U.S. Treasury | | 98 | | 98 | | | | | | 95 | | 95 | | | | |
| | | U.S. government sponsored agency | | 6 | | | | 6 | | | | 6 | | | | 6 | | |
| | | Municipality | | 77 | | | | 77 | | | | 77 | | | | 77 | | |
| | | Investment-grade corporate | | 40 | | | | 40 | | | | 38 | | | | 38 | | |
| | | Other | | 6 | | | | 6 | | | | 5 | | | | 5 | | |
| | | Receivables (payables), net | | | 2 | | | | | | 2 | | | | | | 1 | | | (1) | | | 2 | | | |
| | Total NDT funds | | | 911 | | | 582 | | | 329 | | | | | | 864 | | | 550 | | | 314 | | | |
| | Auction rate securities (b) | | | 13 | | | | | | | | | 13 | | | 19 | | | | | | | | | 19 |
Total assets | | Total assets | | $ | 3,534 | | $ | 2,098 | | $ | 1,331 | | $ | 105 | | $ | 3,398 | | $ | 1,789 | | $ | 1,528 | | $ | 81 |
| | | | | | | | | | | | | | | | | | | |
Liabilities | | Liabilities | | | | | | | | | | | | | | | | |
| | Price risk management liabilities: | | | | | | | | | | | | | | | | |
| | | Energy commodities | | $ | 1,137 | | $ | 2 | | $ | 1,063 | | $ | 72 | | $ | 1,070 | | $ | 4 | | $ | 1,028 | | $ | 38 |
| | | Interest rate swaps | | 64 | | | | 64 | | | | 36 | | | | 36 | | |
| | | Foreign currency contracts | | 26 | | | | 26 | | | | 106 | | | | 106 | | |
| | | Cross-currency swaps | | | 47 | | | | | | 47 | | | | | | 32 | | | | | | 32 | | | |
| | | | September 30, 2013 | | December 31, 2012 | Total price risk management liabilities | | $ | 1,274 | | $ | 2 | | $ | 1,200 | | $ | 72 | | $ | 1,244 | | $ | 4 | | $ | 1,202 | | $ | 38 |
| | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | PPL Energy Supply | | | | | | | | | | | | | | | | | | PPL Energy Supply | | | | | | | | | | | | | | | | |
Assets | Assets | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 551 | | $ | 551 | | | | | | | | $ | 413 | | $ | 413 | | | | | | | Cash and cash equivalents | | $ | 194 | | $ | 194 | | | | | | | | $ | 239 | | $ | 239 | | | | | | |
| Restricted cash and cash equivalents (a) | | | 54 | | | 54 | | | | | | | | | 63 | | | 63 | | | | | | | Restricted cash and cash equivalents (a) | | | 284 | | | 284 | | | | | | | | | 85 | | | 85 | | | | | | |
| Price risk management assets: | | | | | | | | | | | | | | | | | | Price risk management assets: | | | | | | | | | | | | | | | | |
| | Energy commodities | | | 1,480 | | | 7 | | $ | 1,421 | | $ | 52 | | | 2,068 | | | 2 | | $ | 2,037 | | $ | 29 | | Energy commodities | | | 1,041 | | | 4 | | $ | 945 | | $ | 92 | | | 1,188 | | | 3 | | $ | 1,123 | | $ | 62 |
| Total price risk management assets | | | 1,480 | | | 7 | | | 1,421 | | | 52 | | | 2,068 | | | 2 | | | 2,037 | | | 29 | Total price risk management assets | | | 1,041 | | | 4 | | | 945 | | | 92 | | | 1,188 | | | 3 | | | 1,123 | | | 62 |
| NDT funds: | | | | | | | | | | | | | | | | | | NDT funds: | | | | | | | | | | | | | | | | |
| | Cash and cash equivalents | | | 14 | | 14 | | | | | | 11 | | 11 | | | | | | Cash and cash equivalents | | 17 | | 17 | | | | | | 14 | | 14 | | | | |
| | Equity securities | | | | | | | | | | | | | | | | | | | Equity securities | | | | | | | | | | | | | | | | |
| | U.S. large-cap | | | 494 | | 369 | | 125 | | | | 412 | | 308 | | 104 | | | | U.S. large-cap | | 582 | | 432 | | 150 | | | | 547 | | 409 | | 138 | | |
| | U.S. mid/small-cap | | | 74 | | 30 | | 44 | | | | 60 | | 25 | | 35 | | | | U.S. mid/small-cap | | 83 | | 35 | | 48 | | | | 81 | | 33 | | 48 | | |
| | Debt securities | | | | | | | | | | | | | | | | | | | Debt securities | | | | | | | | | | | | | | | | |
| | U.S. Treasury | | | 96 | | 96 | | | | | | 95 | | 95 | | | | | | U.S. Treasury | | 98 | | 98 | | | | | | 95 | | 95 | | | | |
| | U.S. government sponsored agency | | | 6 | | | | 6 | | | | 9 | | | | 9 | | | | U.S. government sponsored agency | | 6 | | | | 6 | | | | 6 | | | | 6 | | |
| | Municipality | | | 75 | | | | 75 | | | | 82 | | | | 82 | | | | Municipality | | 77 | | | | 77 | | | | 77 | | | | 77 | | |
| | Investment-grade corporate | | | 40 | | | | 40 | | | | 40 | | | | 40 | | | | Investment-grade corporate | | 40 | | | | 40 | | | | 38 | | | | 38 | | |
| | Other | | | 3 | | | | 3 | | | | 3 | | | | 3 | | | | Other | | 6 | | | | 6 | | | | 5 | | | | 5 | | |
| | Receivables (payables), net | | | 2 | | | | | | 2 | | | | | | | | | (2) | | | 2 | | | | | Receivables (payables), net | | | 2 | | | | | | 2 | | | | | | 1 | | | (1) | | | 2 | | | |
| Total NDT funds | | | 804 | | | 509 | | | 295 | | | | | | 712 | | | 437 | | | 275 | | | | Total NDT funds | | | 911 | | | 582 | | | 329 | | | | | | 864 | | | 550 | | | 314 | | | |
| Auction rate securities (b) | | | 16 | | | | | | | | | 16 | | | 16 | | | | | | 3 | | | 13 | Auction rate securities (b) | | | 10 | | | | | | | | | 10 | | | 16 | | | | | | | | | 16 |
Total assets | Total assets | | $ | 2,905 | | $ | 1,121 | | $ | 1,716 | | $ | 68 | | $ | 3,272 | | $ | 915 | | $ | 2,315 | | $ | 42 | Total assets | | $ | 2,440 | | $ | 1,064 | | $ | 1,274 | | $ | 102 | | $ | 2,392 | | $ | 877 | | $ | 1,437 | | $ | 78 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | Liabilities | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | |
| Price risk management liabilities: | | | | | | | | | | | | | | | | | | Price risk management liabilities: | | | | | | | | | | | | | | | | |
| | Energy commodities | | $ | 1,235 | | $ | 4 | | $ | 1,226 | | $ | 5 | | $ | 1,566 | | $ | 2 | | $ | 1,557 | | $ | 7 | | Energy commodities | | $ | 1,137 | | $ | 2 | | $ | 1,063 | | $ | 72 | | $ | 1,070 | | $ | 4 | | $ | 1,028 | | $ | 38 |
| Total price risk management liabilities | | $ | 1,235 | | $ | 4 | | $ | 1,226 | | $ | 5 | | $ | 1,566 | | $ | 2 | | $ | 1,557 | | $ | 7 | Total price risk management liabilities | | $ | 1,137 | | $ | 2 | | $ | 1,063 | | $ | 72 | | $ | 1,070 | | $ | 4 | | $ | 1,028 | | $ | 38 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Electric | PPL Electric | | | | | | | | | | | | | | | | | | PPL Electric | | | | | | | | | | | | | | | | |
Assets | Assets | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 225 | | $ | 225 | | | | | | $ | 140 | | $ | 140 | | | | | Cash and cash equivalents | | $ | 111 | | $ | 111 | | | | | | $ | 25 | | $ | 25 | | | | |
| Restricted cash and cash equivalents (c) | | | 12 | | | 12 | | | | | | | | | 13 | | | 13 | | | | | | | Restricted cash and cash equivalents (c) | | | 3 | | | 3 | | | | | | | | | 12 | | | 12 | | | | | | |
Total assets | Total assets | | $ | 237 | | $ | 237 | | | | | | | | $ | 153 | | $ | 153 | | | | | | | Total assets | | $ | 114 | | $ | 114 | | | | | | | | $ | 37 | | $ | 37 | | | | | | |
LKE | LKE | | | | | | | | | | | | | | | | | | LKE | | | | | | | | | | | | | | | | |
Assets | Assets | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 21 | | $ | 21 | | | | | | $ | 43 | | $ | 43 | | | | | |
| Restricted cash and cash equivalents (d) | | | 22 | | 22 | | | | | | 32 | | 32 | | | | | Cash and cash equivalents | | $ | 47 | | $ | 47 | | | | | | $ | 35 | | $ | 35 | | | | |
| Price risk management assets: | | | | | | | | | | | | | | | | | | Price risk management assets: | | | | | | | | | | | | | | | | |
| | Interest rate swaps | | | | | | | | | | | | | | | 14 | | | | | $ | 14 | | | | | Interest rate swaps | | 6 | | | | $ | 6 | | | | | | | | | | |
| Total price risk management assets | | | | | | | | | | | | | | | 14 | | | | | | 14 | | | | Cash collateral posted to counterparties (d) | | | 20 | | | 20 | | | | | | | | | 22 | | | 22 | | | | | | |
Total assets | Total assets | | $ | 43 | | $ | 43 | | | | | | | | $ | 89 | | $ | 75 | | $ | 14 | | | | Total assets | | $ | 73 | | $ | 67 | | $ | 6 | | | | | $ | 57 | | $ | 57 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | Liabilities | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | |
| Price risk management liabilities: | | | | | | | | | | | | | | | | | | Price risk management liabilities: | | | | | | | | | | | | | | | | |
| | Interest rate swaps | | $ | 55 | | | | | $ | 55 | | | | | $ | 58 | | | | | $ | 58 | | | | | Interest rate swaps | | $ | 46 | | | | | $ | 46 | | | | | $ | 36 | | | | | $ | 36 | | | |
Total price risk management liabilities | Total price risk management liabilities | | $ | 55 | | | | | $ | 55 | | | | | $ | 58 | | | | | $ | 58 | | | | Total price risk management liabilities | | $ | 46 | | | | | $ | 46 | | | | | $ | 36 | | | | | $ | 36 | | | |
| | | | | | | | | | | | | | | | | | | |
LG&E | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 12 | | $ | 12 | | | | | | $ | 22 | | $ | 22 | | | | | |
| Restricted cash and cash equivalents (d) | | | 22 | | 22 | | | | | | 32 | | 32 | | | | | |
| Price risk management assets: | | | | | | | | | | | | | | | | | | |
| | Interest rate swaps | | | | | | | | | | | | | | | 7 | | | | | $ | 7 | | | | |
| Total price risk management assets | | | | | | | | | | | | | | | 7 | | | | | | 7 | | | | |
Total assets | | $ | 34 | | $ | 34 | | | | | | | | $ | 61 | | $ | 54 | | $ | 7 | | | | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
| Price risk management liabilities: | | | | | | | | | | | | | | | | | | |
| | Interest rate swaps | | $ | 48 | | | | | $ | 48 | | | | | $ | 58 | | | | | $ | 58 | | | | |
Total price risk management liabilities | | $ | 48 | | | | | $ | 48 | | | | | $ | 58 | | | | | $ | 58 | | | | |
| | | | September 30, 2013 | | December 31, 2012 | | | September 30, 2014 | | December 31, 2013 |
| | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
KU | | | | | | | | | | | | | | | | | | |
LG&E | | LG&E | | | | | | | | | | | | | | | | |
Assets | Assets | | | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 9 | | $ | 9 | | | | | | $ | 21 | | $ | 21 | | | | | Cash and cash equivalents | | $ | 25 | | $ | 25 | | | | | | $ | 8 | | $ | 8 | | | | |
| Price risk management assets: | | | | | | | | | | | | | | | | | | Price risk management assets: | | | | | | | | | | | | | | | | |
| | Interest rate swaps | | | | | | | | | | | | | | | 7 | | | | | $ | 7 | | | | | Interest rate swaps | | 3 | | | | $ | 3 | | | | | | | | | | |
| Total price risk management assets | | | | | | | | | | | | | | | 7 | | | | | | 7 | | | | Cash collateral posted to counterparties (d) | | | 20 | | | 20 | | | | | | | | | 22 | | | 22 | | | | | | |
Total assets | Total assets | | $ | 9 | | $ | 9 | | | | | | | | $ | 28 | | $ | 21 | | $ | 7 | | | | Total assets | | $ | 48 | | $ | 45 | | $ | 3 | | | | | $ | 30 | | $ | 30 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | Liabilities | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | |
| Price risk management liabilities: | | | | | | | | | | | | | | | | | | Price risk management liabilities: | | | | | | | | | | | | | | | | |
| | Interest rate swaps | | $ | 7 | | | | | $ | 7 | | | | | | | | | | | | | | | | | Interest rate swaps | | $ | 44 | | | | | $ | 44 | | | | | $ | 36 | | | | | $ | 36 | | | |
Total price risk management liabilities | Total price risk management liabilities | | $ | 7 | | | | | $ | 7 | | | | | | | | | | | | | | | | Total price risk management liabilities | | $ | 44 | | | | | $ | 44 | | | | | $ | 36 | | | | | $ | 36 | | | |
| | | | | | | | | | | | | | | | | | | |
KU | | KU | | | | | | | | | | | | | | | | |
Assets | | Assets | | | | | | | | | | | | | | | | |
| | Cash and cash equivalents | | $ | 22 | | $ | 22 | | | | | | $ | 21 | | $ | 21 | | | | |
| | Price risk management assets: | | | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | 3 | | | | | $ | 3 | | | | | | | | | | | | | | | |
Total assets | | Total assets | | $ | 25 | | $ | 22 | | $ | 3 | | | | | $ | 21 | | $ | 21 | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Liabilities | | Liabilities | | | | | | | | | | | | | | | | |
| | Price risk management liabilities: | | | | | | | | | | | | | | | | |
| | | Interest rate swaps | | $ | 2 | | | | | $ | 2 | | | | | | | | | | | | | | | |
Total price risk management liabilities | | Total price risk management liabilities | | $ | 2 | | | | | $ | 2 | | | | | | | | | | | | | | | |
| 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. Represents cash collateral posted to offset the exposure with counterparties related to certain interest rate swaps under master netting arrangements that are not offset. |
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, 2014 is as follows: | | A reconciliation of net assets and liabilities classified as Level 3 for the periods ended September 30, 2014 is as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | | Three Months | | Nine Months | | | | Three Months | | Nine Months |
| | | | Energy | | Auction | | Cross- | | | | Energy | | Auction | | Cross- | | | | | | | Energy | | Auction | | Cross- | | | | Energy | | Auction | | Cross- | | |
| | | | Commodities, | | Rate | | Currency | | | | Commodities, | | Rate | | Currency | | | | | | | Commodities, | | Rate | | Currency | | | | Commodities, | | Rate | | Currency | | |
| | | | net | | Securities | | Swaps | | Total | | net | | Securities | | Swaps | | Total | | | | net | | Securities | | Swaps | | Total | | net | | Securities | | Swaps | | Total |
PPL | PPL | | | | | | | | | | | | | | | | | | PPL | | | | | | | | | | | | | | | | |
Balance at beginning of | Balance at beginning of | | | | | | | | | | | | | | | | | Balance at beginning of | | | | | | | | | | | | | | | | |
| period | | $ | 40 | | $ | 19 | | $ | 3 | | $ | 62 | | $ | 22 | | $ | 16 | | $ | 1 | | $ | 39 | period | | $ | 74 | | $ | 16 | | | | $ | 90 | | $ | 24 | | $ | 19 | | | | $ | 43 |
| | Total realized/unrealized | | | | | | | | | | | | | | | | | | | Total realized/unrealized | | | | | | | | | | | | | | | | |
| | gains (losses) | | | | | | | | | | | | | | | | | | | gains (losses) | | | | | | | | | | | | | | | | |
| | Included in earnings | | | 18 | | | | | | 18 | | 23 | | | | | | 23 | | Included in earnings | | (84) | | | | | | (84) | | (147) | | | | | | (147) |
| | Included in OCI (a) | | | | | | | (2) | | (2) | | | | | | 1 | | 1 | | Included in OCI (a) | | | | | | | | | | | | | | $ | (1) | | (1) |
| | Sales | | | | | | | | | | | (2) | | | | | | (2) | | Purchases | | | | | | | | | | (6) | | | | | | (6) |
| | Settlements | | | (2) | | | | | | (2) | | 1 | | | | | | 1 | | Sales | | 67 | | (3) | | | | 64 | | 67 | | (6) | | | | 61 |
| | Transfers into Level 3 | | | (7) | | | | | | | (7) | | 1 | | 3 | | 3 | | 7 | | Settlements | | (37) | | | | | | (37) | | 82 | | | | | | 82 |
| | Transfers out of Level 3 | | | (2) | | | | | | (1) | | | (3) | | | 2 | | | | | | (5) | | | (3) | | Transfers out of Level 3 | | | | | | | | | | | | | | | | | | | | | 1 | | | 1 |
Balance at end of period | Balance at end of period | | $ | 47 | | $ | 19 | | $ | | | $ | 66 | | $ | 47 | | $ | 19 | | $ | | | $ | 66 | Balance at end of period | | $ | 20 | | $ | 13 | | | | | $ | 33 | | $ | 20 | | $ | 13 | | $ | | | $ | 33 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | PPL Energy Supply | | | | | | | | | | | | | | | | | | PPL Energy Supply | | | | | | | | | | | | | | | | |
Balance at beginning of | Balance at beginning of | | | | | | | | | | | | | | | | | | Balance at beginning of | | | | | | | | | | | | | | | | |
| period | | $ | 40 | | $ | 16 | | | | $ | 56 | | $ | 22 | | $ | 13 | | | | $ | 35 | period | | $ | 74 | | $ | 13 | | | | $ | 87 | | $ | 24 | | $ | 16 | | | | $ | 40 |
| | Total realized/unrealized | | | | | | | | | | | | | | | | | | | Total realized/unrealized | | | | | | | | | | | | | | | | |
| | gains (losses) | | | | | | | | | | | | | | | | | | | gains (losses) | | | | | | | | | | | | | | | | |
| | Included in earnings | | | 18 | | | | | | 18 | | 23 | | | | | | 23 | | Included in earnings | | (84) | | | | | | (84) | | (147) | | | | | | (147) |
| | Sales | | | | | | | | | | | (2) | | | | | | (2) | | Purchases | | | | | | | | | | (6) | | | | | | (6) |
| | Settlements | | | (2) | | | | | | (2) | | 1 | | | | | | 1 | | Sales | | 67 | | (3) | | | | 64 | | 67 | | (6) | | | | 61 |
| | Transfers into Level 3 | | | (7) | | | | | | (7) | | 1 | | 3 | | | | 4 | | Settlements | | | (37) | | | | | | | | (37) | | | 82 | | | | | | | | 82 |
| | Transfers out of Level 3 | | | (2) | | | | | | | | | (2) | | | 2 | | | | | | | | | 2 | |
Balance at end of period | Balance at end of period | | $ | 47 | | $ | 16 | | | | | $ | 63 | | $ | 47 | | $ | 16 | | | | | $ | 63 | Balance at end of period | | $ | 20 | | $ | 10 | | | | $ | 30 | | $ | 20 | | $ | 10 | | | | $ | 30 |
| "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 September 30, 2012 is as follows: |
| | | | | | 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 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 | | 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 | | $ | 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 period | | $ | 47 | | $ | 19 | | $ | | | $ | 66 | | $ | 47 | | $ | 19 | | $ | | | $ | 66 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of | | | | | | | | | | | | | | | | | | | | | | | | |
| period | | $ | 40 | | $ | 16 | | | | | $ | 56 | | $ | 22 | | $ | 13 | | | | | $ | 35 |
| | Total realized/unrealized | | | | | | | | | | | | | | | | | | | | | | | | |
| | | gains (losses) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Included in earnings | | | 18 | | | | | | | | | 18 | | | 23 | | | | | | | | | 23 |
| | Sales | | | | | | | | | | | | | | | (2) | | | | | | | | | (2) |
| | Settlements | | | (2) | | | | | | | | | (2) | | | 1 | | | | | | | | | 1 |
| | Transfers into Level 3 | | | (7) | | | | | | | | | (7) | | | 1 | | | 3 | | | | | | 4 |
| | Transfers out of Level 3 | | | (2) | | | | | | | | | (2) | | | 2 | | | | | | | | | 2 |
Balance at end of period | | $ | 47 | | $ | 16 | | | | | $ | 63 | | $ | 47 | | $ | 16 | | | | | $ | 63 |
| "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:
| | | | September 30, 2014 |
| | | | Fair Value, net | | | | | | Range |
| | | | Asset | | Valuation | | Unobservable | | (Weighted |
| | | | (Liability) | | Technique | | Input(s) | | Average) (a) |
PPL | | | | | | | | | | | | |
Energy commodities | | | | | | | | | | | | |
| Natural gas contracts (b) | | $ | 9 | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 17% - 100% (36%) |
| Power sales contracts (c) | | | (31) | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 17% - 100% (68%) |
| FTR purchase contracts (d) | | | 4 | | Discounted cash flow | | Historical settled prices used to model forward prices | | 100% (100%) |
| Heat rate options (e) | | | 38 | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 24% - 52% (45%) |
| | | | | | | | | | |
Auction rate securities (f) | | | 13 | | Discounted cash flow | | Modeled from SIFMA Index | | 53% - 74% (64%) |
| | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | |
Energy commodities | | | | | | | | | | | | |
| Natural gas contracts (b) | | $ | 9 | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 17% - 100% (36%) |
| Power sales contracts (c) | | | (31) | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 17% - 100% (68%) |
| FTR purchase contracts (d) | | | 4 | | Discounted cash flow | | Historical settled prices used to model forward prices | | 100% (100%) |
| Heat rate options (e) | | | 38 | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 24% - 52% (45%) |
| | | | | | | | | | |
Auction rate securities (f) | | | 10 | | Discounted cash flow | | Modeled from SIFMA Index | | 57% - 74% (66%) |
| | | | December 31, 2013 |
| | | | Fair Value, net | | | | | | Range |
| | | | Asset | | Valuation | | Unobservable | | (Weighted |
| | | | (Liability) | | Technique | | Input(s) | | Average) (a) |
PPL | | | | | | | | | | | | |
Energy commodities | | | | | | | | | | | | |
| Retail naturalNatural gas sales contracts (b) | | $ | 35 36 | | Discounted cash flow | | Observable wholesaleProprietary model used to calculate forward prices used as proxy for retail delivery points | | 13%10% - 100% (80%(86%) |
| Heat rate call options (d)Power sales contracts (c) | | | 9 (12) | | Discounted cash flow | | Implied correlation, implied volatility, and market implied heat rate Proprietary model used to calculate forward prices | | 33%100% - 60% (58%) |
| FTR purchase contracts (g) | | | 3 | | Discounted cash flow | | Historical settled prices used to model forward prices | | 100% (100%) |
| | | | | | | | | | |
Auction rate securities (e)(f) | | | 19 | | Discounted cash flow | | Modeled from SIFMA Index | | 12%10% - 80% (64%(63%) |
| | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | |
Energy commodities | | | | | | | | | | | | |
| Retail naturalNatural gas sales contracts (b) | | $ | 35 36 | | Discounted cash flow | | Observable wholesaleProprietary model used to calculate forward prices used as proxy for retail delivery points | | 13%10% - 100% (80%(86%) |
| Heat rate call options (d)Power sales contracts (c) | | | 9 (12) | | Discounted cash flow | | Implied correlation, implied volatility, and market implied heat rate Proprietary model used to calculate forward prices | | 33%100% - 60% (58%) |
| FTR purchase contracts (g) | | | 3 | | Discounted cash flow | | Historical settled prices used to model forward prices | | 100% (100%) |
| | | | | | | | | | |
Auction rate securities (e)(f) | | | 16 | | Discounted cash flow | | Modeled from SIFMA Index | | 12% - 80% (63%) |
| | | | 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%10% - 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%80% (63%) |
| 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 September 30, 2013, retail natural gas sales contracts extend through 2019, and $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 purchase contracts increases/(decreases). As the forward price of natural gas increases/(decreases), the fair value of sales contracts (decreases)/increases. |
(c) | As forward market prices increase/(decrease), the fair value of contracts (decreases)/increases. As volumetric assumptions for contracts in a gain position increase/(decrease), the fair value of contracts increases/(decreases). As volumetric assumptions for contracts in a loss position increase/(decrease), the fair value of the contracts (decreases)/increases. |
(d) | As the forward price of basisimplied spread increases/(decreases), the fair value of the contracts increases/(decreases)/increases.. |
(d)(e) | At September 30, 2013, heat rate call options extend through 2020, and $1 million of theThe proprietary model used to calculate fair value is scheduled to deliver within the next 12 months.incorporates market heat rates, correlations and volatilities. 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 heat rate call optionscontracts increases/(decreases). |
(e)(f) | At September 30, 2013, auction rate securities have a weighted average contractual maturity of 22 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) | 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. |
(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 September 30 are reported in the Statements of Income as follows:
| | | Three Months |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Energy Commodities, net |
| | | | | | | | | | | |
| | | Unregulated | | Wholesale | | | | | | |
| | | Retail | | Energy | | Net Energy | | | | Energy |
| | | Electric and Gas | | Marketing | | Trading Margins | | Fuel | | Purchases |
| | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
PPL and PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total gains (losses) included in earnings | | $ | 3 | | $ | (3) | | $ | (8) | | $ | (4) | | $ | 11 | | $ | (8) | | $ | 3 | | | | | $ | 9 | | $ | (2) |
Change in unrealized gains (losses) relating | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| to positions still held at the reporting date | | | 3 | | | (2) | | | | | | (1) | | | 17 | | | 2 | | | | | | | | | | | | |
| | | 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 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months |
| | Energy Commodities, net |
| | Unregulated | | Unregulated | | | | | | | | Energy |
| | Wholesale Energy | | Retail Energy | | Fuel | | Purchases |
| | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
PPL and PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | |
Total gains (losses) included in earnings | $ | (102) | | $ | 3 | | $ | 16 | | $ | 3 | | | | | $ | 3 | | $ | 2 | | $ | 9 |
Change in unrealized gains (losses) relating | | | | | | | | | | | | | | | | | | | | | | | |
| to positions still held at the reporting date | | 6 | | | 17 | | | 13 | | | 3 | | | | | | | | | 1 | | | |
| | Nine Months |
| | Energy Commodities, net |
| | Unregulated | | Unregulated | | | | | | | | Energy |
| | Wholesale Energy | | Retail Energy | | Fuel | | Purchases |
| | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
PPL and PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | |
Total gains (losses) included in earnings | $ | (133) | | $ | (7) | | $ | (35) | | $ | 18 | | | | | $ | 3 | | $ | 21 | | $ | 9 |
Change in unrealized gains (losses) relating | | | | | | | | | | | | | | | | | | | | | | | |
| to positions still held at the reporting date | | 5 | | | 7 | | | (12) | | | 18 | | | | | | | | | (3) | | | 5 |
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 other standard industry models. For example,When the lowest level inputs that are significant to the fair value measurement of a full-requirement sales contract that delivers power to an illiquid delivery point may be measured by valuingare observable, 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.contract is classified as Level 2.
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 may include significant unobservable inputs such as delivery at a location where pricing is unobservable, assumptions for customer migration, delivery dates that are beyond the dates for which independent quotes are available, volumetric assumptions, 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.
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 Kentucky Registrants)KU)
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), 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 between Level 2 and Level 3 during 20132014 and 20122013 was the change in the significance of the credit valuation adjustment. Cross-currency swaps classified as Level 3 are valued by PPL's Treasury department, which reports to the CFO. Accounting personnel, who also report to the CFO, interpret analysis quarterly to 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.markets. |
· | InvestmentsThe fair value measurements of 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.2. 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. |
DebtThe fair value of debt securities areis generally measured using a market approach, including the use of matrix pricing.pricing models which incorporate observable inputs. Common inputs include benchmark yields, 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, future predicted cash flows, collateral performance and new issue data.
The debt securities held in the NDT funds at September 30, 2013 have a weighted-average coupon of 3.94% and a weighted-average maturity of 7.8 years.
Auction rate securities include Federal Family Education Loan Program guaranteed student loan revenue bonds, as well as various municipal bond issues. The probability 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 induring 2013 and 2012 was the change in discount rates and SIFMA Index.
Auction rate securities are valued by PPL's Treasury department, which reports to the CFO. Accounting personnel, who also report to the CFO, interpret the analysis quarterly to classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.
Nonrecurring Fair Value Measurements (PPL and PPL Energy Supply)
The following nonrecurring fair value measurement occurred during the nine months ended September 30, 2014, resulting in an asset impairment:
| | | Carrying | | Fair Value Measurements Using | | | |
| | | Amount (a) | | Level 3 | | Loss (b) |
PPL and PPL Energy Supply | | | | | | | | | |
Kerr Dam Project | | $ | 47 | | $ | 29 | | $ | 18 |
| Represents carrying value before fair value measurement. |
(b) | The loss on the Kerr Dam Project was recorded in the Supply segment and included in "Income (Loss) from Discontinued Operations (net of income taxes)" on PPL's and PPL Energy Supply's Statement of Income. |
The significant unobservable inputs used in and the quantitative information about the nonrecurring fair value measurement of assets and liabilities classified as Level 3 are as follows: |
| | | |
| | | Fair Value, net | | | | Significant | | Range |
| | | Asset | | Valuation | | Unobservable | | (Weighted |
| | | (Liability) | | Technique | | Input(s) | | Average)(a) |
PPL and PPL Energy Supply | | | | | | | | | | | |
Kerr Dam Project | | | | | | | | | | | |
| March 31, 2014 | $ | 29 | | Discounted cash flow | | Proprietary model used to calculate plant value | | 38% (38%) |
| The range and weighted average represent the percentage of fair value derived from the unobservable inputs. |
Kerr Dam Project
As disclosed in Note 11 in PPL's and PPL Energy Supply's 2013 Form 10-K, PPL Montana holds a joint operating license issued for the Kerr Dam Project. The license extends until 2035 and, between 2015 and 2025, the Confederated Salish and Kootenai Tribes of the Flathead Nation (the Tribes) have the option to purchase, hold and operate the Kerr Dam Project. The parties submitted the issue of the appropriate amount of the conveyance price to arbitration in February 2013. In March 2014, the arbitration panel issued its final decision holding that the conveyance price payable by the Tribes to PPL Montana is $18 million. As a result of the decision, PPL Energy Supply performed a recoverability test on the Kerr Dam Project and recorded an impairment charge. PPL Energy Supply performed an internal analysis using an income approach based on discounted cash flows (a proprietary PPL model) to assess the fair value of the Kerr Dam Project. Assumptions used in the PPL proprietary model were the conveyance price, forward energy price curves, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the business planning process and a market participant discount rate. Through this analysis, PPL Energy Supply determined the fair value of the Kerr Dam Project to be $29 million at March 31, 2014.
The assets were valued by the PPL Energy Supply Financial Department, which reports to the President of PPL Energy Supply. Accounting personnel, who report to the CFO, interpreted the analysis to appropriately classify the assets in the fair value hierarchy.
Financial Instruments Not Recorded at Fair Value (All Registrants)
The carrying amounts of contract adjustment payments related to the 2011 Purchase Contract component of the 2011 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. | | | 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 |
| | | September 30, 2014 | | December 31, 2013 |
| | | Carrying | | | | | Carrying | | | |
| | | Amount | | Fair Value | | Amount | | Fair Value |
Contract adjustment payments (a) | | | | | | | | | | | | |
| PPL | | | | | | | | $ | 21 | | $ | 22 |
Long-term debt | | | | | | | | | | | | |
| PPL | | $ | 20,757 | | $ | 22,854 | | | 20,907 | | | 22,177 |
| PPL Energy Supply | | | 2,218 | | | 2,267 | | | 2,525 | | | 2,658 |
| PPL Electric | | | 2,602 | | | 2,919 | | | 2,315 | | | 2,483 |
| LKE | | | 4,566 | | | 4,920 | | | 4,565 | | | 4,672 |
| LG&E | | | 1,353 | | | 1,443 | | | 1,353 | | | 1,372 |
| KU | | | 2,091 | | | 2,287 | | | 2,091 | | | 2,155 |
| ReflectedIncluded 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 short-term debt and is classified as Level 2.
Credit Concentration Associated with Financial Instruments
(All Registrants)
Contracts are entered into with many entities for the purchase and sale of energy. Many of these contracts qualify forWhen NPNS and, as such,is elected, 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 September 30, 2013, (PPL had credit exposure of $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 $541 million. The top ten counterparties including their affiliates accounted for $292 million, or 54%, of this exposure. Nine of these counterparties had an investment grade credit rating from S&P or 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 September 30, 2013,2014, PPL and PPL Energy Supply had credit exposure of $1.1 billion$649 million from energy trading partners, excluding exposure from related parties (PPL Energy Supply only) and the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, thisPPL and PPL Energy Supply's credit exposure was reduced to $540$319 million. The top ten counterparties including their affiliates accounted for $292$190 million, or 54%59%, of this exposure. Ninethese exposures. Eight of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 95%87% of the top ten exposure.exposures. The remaining counterparty hascounterparties have not been rated by S&P or Moody's, but isare current on itstheir obligations. See Note 11 for information regarding thePPL Energy Supply's related party credit exposure.
PPL Electric is exposed to credit risk under energy supply contracts (including its supply contracts with PPL EnergyPlus); however, its PUC-approved cost recovery mechanism is anticipated to substantially eliminatemitigate this exposure.
(Kentucky Registrants)LKE, LG&E and KU)
At September 30, 2013,2014, LKE's, LG&E's and KU's credit exposure was not significant.
14. Derivative Instruments and Hedging Activities
Risk Management Objectives
(All Registrants)
PPL has a risk management policy approved by the Board of Directors to manage market risk associated with commodities, interest rates on debt issuances and foreign exchange (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 market 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.NPNS is elected.
The table below summarizes the market risks that affect PPL and its 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 | | | | | | | | | | |
| = 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 risksrisk
· | PPL is exposed to market and commodity price basis and volumetric risk through its domestic subsidiaries as described below. VolumetricWPD is exposed to volumetric risk which 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 risksrisk 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 risksrisk from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to these risks.this risk. PPL Electric also mitigates its exposure to volumetric risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the volumetric risk associated with the PLR obligation to the energy suppliers. |
· | 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. |
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.rates, when appropriate, in connection with future debt issuances. This risk for PPL Electric, LG&E and KU is significantly mitigated due to recovery mechanisms in place. |
· | 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 and PPL Energy Supply isare 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. |
· | PPL is exposed to foreign currency exchange risk primarily associated with its investments in and earnings of 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, financial institutions, other wholesale customers and financial institutions.retail customers.
LKE, LG&E and KU are exposed to credit risk from 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, subject to regulatory review or other processes, appropriate incremental costs incurred by these entities would be recoverable from customers in future rates,through applicable rate mechanisms, 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. PPL's and PPL Energy Supply's obligation to return counterparty cash collateral under master netting arrangements was $14$10 million and $112$9 million at September 30, 20132014 and December 31, 2012.2013.
PPL Electric, LKE and LG&E had no obligation to return cash collateral under master netting arrangements at September 30, 20132014 and December 31, 2012.2013.
PPL, LKE and LG&E had posted $20 million and $22 million of cash collateral under master netting arrangements of $22 million and $32 million at September 30, 20132014 and December 31, 2012.2013.
PPL Energy Supply, PPL Electric and KU haddid not postedpost any cash collateral under master netting arrangements at September 30, 20132014 and December 31, 2012.2013.
See "Offsetting Derivative Investments" below for a summary of derivative positions presented in the balance sheets where a right of setoff exists under these arrangements.
(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 unregulated wholesale and unregulated 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 7,2987,369 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 3,3163,309 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 or NPNS is elected and therefore they 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 nine months ended September 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 atduring the three and nine months ended September 30, 2013.2014. At September 30, 2013,2014, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $47$21 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. There were no such reclassifications for the three and nine months ended September 30, 2014 and 2013.
For the three and nine months ended September 30, 20132014 and 2012, such reclassifications were insignificant.
For the three and nine months ended September 30, 2013, and 2012, hedge ineffectiveness associated with energy derivatives was insignificant.
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 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 includeincludes the ineffective portion of qualifying cash flow hedges (see "Cash Flow Hedges" above). The derivative contracts in this category that existed at September 30, 20132014 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.
The unrealized gains (losses) for economic activity for the periods ended September 30 were as follows.
| | | Three Months | | Nine Months |
| | | 2014 | | 2013 | | 2014 | | 2013 |
Operating Revenues | | | | | | | | | | | | |
| Unregulated wholesale energy | | $ | 299 | | $ | (49) | | $ | (581) | | $ | (281) |
| Unregulated retail energy | | | 2 | | | (2) | | | (20) | | | 10 |
Operating Expenses | | | | | | | | | | | | |
| Fuel | | | (9) | | | 3 | | | (3) | | | (2) |
| Energy purchases | | | (217) | | | 37 | | | 402 | | | 192 |
Commodity Price Risk (Trading)
PPL Energy Supply has a proprietary trading strategy which is utilized to take advantage of market opportunities.opportunities primarily in its geographic footprint. 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 "NetNet energy trading margins"margins, which are included in "Unregulated wholesale energy" on the Statements of Income, is not a significant part of PPL Energy Supply's business.were $58 million for the nine months ended September 30, 2014 and were insignificant for the three months ended September 30, 2014 and the three and nine months ended September 30, 2013.
Commodity Volumes
At September 30, 2013,2014, the net volumes of derivative (sales)/purchase contracts used in support of the various strategies discussed above were as follows.
| | | | Volume (a) | | | | Volumes (a) |
Commodity | | Unit of Measure | | 2013 (b) | | 2014 | | 2015 | | Thereafter | | Unit of Measure | | 2014 (b) | | 2015 | | 2016 | | Thereafter |
| | | | | | | | | | | | | | | | | | | | |
Power | | MWh | | (9,950,950) | | (28,280,182) | | (4,110,530) | | 10,991,752 | | MWh | | (12,324,114) | | (32,192,825) | | (1,488,139) | | 5,457,755 |
Capacity | | MW-Month | | (5,114) | | (14,418) | | (309) | | 1,990 | | MW-Month | | (4,070) | | (5,554) | | 501 | | 9 |
Gas | | MMBtu | | 12,653,279 | | 18,794,545 | | (3,852,725) | | 5,320,453 | | MMBtu | | 46,661,053 | | 59,985,428 | | 34,896,181 | | 6,831,035 |
Coal | | Tons | | | | (30,000) | | | | | |
FTRs | | MW-Month | | 5,056 | | 8,724 | | 1,465 | | | | MW-Month | | 1,457 | | 3,051 | | | | |
Oil | | Barrels | | (15,335) | | 300,000 | | 384,334 | | 371,466 | | Barrels | | (141,236) | | 374,062 | | 328,837 | | 274,872 |
| 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. |
(PPL, LKE, LG&E and Kentucky Registrants)KU)
PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. Various financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolio, adjust the duration of the debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under PPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolio due to changes in benchmark interest rates.
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 September 30, 2013, outstanding2014, PPL held an
aggregate notional value in interest rate swap contracts of $1.2 billion that 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 $2.3 billion at September 30, 2013 of which £300 million
(approximately $464 million based on spot rates) was related to WPD. Also included in this total are forward-starting interest rate2045. The amount outstanding includes swaps entered into by PPL on behalf of LG&E and KU. Realized gains and losses from theseon the LG&E and KU swaps are probable of recovery through regulated rates; as such, the fair value ofany gains and losses on these derivatives have been reclassified from AOCI toare included in regulatory assets or liabilities. The gainsliabilities and losses will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt whenat the time the underlying hedged transaction occurs.interest expense is recorded.
At September 30, 2013,2014, PPL held aan aggregate notional positionvalue in cross-currency interest rate swaps totalingswap contracts of $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 nine months ended September 30, 2014 and 2013, and 2012,PPL had no hedge ineffectiveness associated with interest rate derivatives. There were insignificant amounts of hedge ineffectiveness associated with interest rate derivatives was insignificant.for the nine months ended September 30, 2014 and 2013.
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. For the nine months ended September 30, 2014, PPL had an insignificant amount reclassified associated with discontinued cash flow hedges. There were no such reclassifications for the three months ended September 30, 2014 and the three and nine months ended September 30, 2013 and 2012.2013.
At September 30, 2013,2014, the accumulated net unrecognized after-tax gains (losses) on qualifying derivatives that are expected to be reclassified into earnings during the next 12 months were $(11)$(13) million. Amounts are reclassified as the hedged interest payments are made.expense is recorded.
(Kentucky Registrants)LKE, LG&E and KU)
In November 2012 and April 2013,Periodically, LG&E and KU enteredenter into forward-starting interest rate swaps with PPL that hedge the interest payments on new debt that is expected to be issued in 2013. In 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 on all of these swaps are probable of recovery through regulated rates; as such, the September settlementsany gains and the fair value of the newlosses on these derivatives were reclassified from AOCI toare included in regulatory assets or liabilities and are expected towill be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt whenat the time the underlying hedged transaction occurs.interest expense is recorded. For the three and nine months ended September 30, 2013,2014, there was no hedge ineffectiveness recorded for the interest rate derivatives. At September 30, 2013,2014, the total notional amount of forward starting interest rate swaps outstanding was $500$650 million (LG&E and KU each held contracts of $250$325 million) that matures. The swaps range in 2043.maturity through 2045. In October 2014, additional forward-starting swaps with PPL were entered into with notional amounts totaling $350 million ($175 million each for LG&E and KU). These swaps also range in maturity through 2045.
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 whenat the time the underlying hedged transaction occurs.interest expense is recorded. At September 30, 2013,2014, 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 and earnings of 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 September 30, 20132014 had a notional amount of £320£306 million (approximately $505$494 million based on contracted rates). The settlement dates of these contracts range from November 20132014 through June 2015.2016.
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 September 30, 2013,2014, the outstanding balances of the intercompany loans were £77£34 million (approximately $119$56 million based on spot rates). For the three and nine months ended September 30, 2013,2014, PPL recognized an insignificant amount of net investment hedge gains (losses) on the intercompany loans of $(9) million and $(3) million in the foreign currency translation adjustment component of OCI. Such amounts forFor the three and nine months ended September 30, 2012 were not significant.2013, PPL recognized $(9) million and $(3) million of net investment hedge gains (losses) on the intercompany loans in the foreign currency translation adjustment component of OCI.
At September 30, 2013,2014, PPL had $5$4 million of accumulated net investment hedge after tax gains (losses), after-tax, that were included in the foreign currency translation adjustment component of AOCI, compared to $14 million of gains (losses), after-taxan insignificant amount at December 31, 2012.2013.
Economic Activity
PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At September 30, 2013,2014, the total exposure hedged by PPL was approximately £1.3£1.6 billion (approximately $2.1$2.6 billion based on contracted rates). These contracts had termination dates ranging from October 20132014 through October 2015.December 2016.
(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 is elected. 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 changechanges in fair valuevalues 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 September 30, 20132014 and December 31, 2012.2013. PPL and PPL Energy Supply have many physical and financial commodity purchases and sales contracts that economically hedge commodity price risk but do not receive hedge accounting treatment. As such, realized and unrealized gains (losses) on these contracts are recorded currently in earnings. Generally each contract is considered a unit of account and PPL and PPL Energy Supply present gains (losses) on physical and financial commodity sales contracts in "Unregulated wholesale energy" or "Unregulated retail energy" and (gains) losses on physical and financial commodity purchase contracts in "Fuel" or "Energy purchases" on the Statements of Income. Certain of the economic hedging strategies employed by PPL Energy Supply utilize a combination of financial purchases and sales contracts which are similarly reported gross as an expense and revenue, respectively, on the Statements of Income. PPL Energy Supply records realized hourly net sales or purchases of physical power with PJM in its Statements of Income as "Unregulated wholesale energy" if in a net sales position and "Energy purchases" if in a net purchase position.
See Notes 1 and 19 in each Registrant's 20122013 Form 10-K for additional information on accounting policies related to derivative instruments.
The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.
| | | | | | | September 30, 2013 | | December 31, 2012 |
| | | | | | | Derivatives designated as | | Derivatives not designated | | Derivatives designated as | | Derivatives not designated |
| | | | | | | hedging instruments | | as hedging instruments (a) | | hedging instruments | | as hedging instruments (a) |
| | | | | | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
Current: | | | | | | | | | | | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets/Liabilities (b): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest rate swaps (c) | | $ | 83 | | $ | 16 | | | | | $ | 4 | | $ | 14 | | $ | 22 | | | | | $ | 5 |
| | | Cross-currency swaps | | | 1 | | | 1 | | | | | | | | | | | | 3 | | | | | | |
| | | Foreign currency | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | contracts | | | | | | 5 | | $ | | | | 24 | | | | | | 2 | | | | | | 23 |
| | | Commodity contracts | | | | | | | | | 961 | | | 773 | | | 59 | | | | | $ | 1,452 | | | 1,010 |
| | | | | Total current | | | 84 | | | 22 | | | 961 | | | 801 | | | 73 | | | 27 | | | 1,452 | | | 1,038 |
Noncurrent: | | | | | | | | | | | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets/Liabilities (b): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest rate swaps (c) | | | 3 | | | 1 | | | | | | 37 | | | 1 | | | | | | | | | 53 |
| | | Cross-currency swaps | | | 27 | | | | | | | | | | | | 14 | | | 1 | | | | | | |
| | | Foreign currency | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | contracts | | | | | | 6 | | | 1 | | | 32 | | | | | | | | | | | | 19 |
| | | Commodity contracts | | | | | | | | | 519 | | | 462 | | | 27 | | | | | | 530 | | | 556 |
| | | | | Total noncurrent | | | 30 | | | 7 | | | 520 | | | 531 | | | 42 | | | 1 | | | 530 | | | 628 |
Total derivatives | | $ | 114 | | $ | 29 | | $ | 1,481 | | $ | 1,332 | | $ | 115 | | $ | 28 | | $ | 1,982 | | $ | 1,666 |
| | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | | Derivatives designated as | | Derivatives not designated | | Derivatives designated as | | Derivatives not designated |
| | | | | | | hedging instruments | | as hedging instruments | | hedging instruments | | as hedging instruments |
| | | | | | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
Current: | | | | | | | | | | | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest rate swaps (b) | | | | | $ | 15 | | | | | $ | 4 | | $ | 82 | | | | | | | | $ | 4 |
| | | Cross-currency swaps (b) | | | | | | 6 | | | | | | | | | | | $ | 4 | | | | | | |
| | | Foreign currency | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | contracts | | | | | | 7 | | $ | 19 | | | 15 | | | | | | 16 | | | | | | 55 |
| | | Commodity contracts | | | | | | | | | 713 | | | 850 | | | | | | | | $ | 860 | | | 750 |
| | | | | Total current | | | | | | 28 | | | 732 | | | 869 | | | 82 | | | 20 | | | 860 | | | 809 |
(a) | $216 million and $300 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at September 30, 2013 and December 31, 2012. |
| | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | | Derivatives designated as | | Derivatives not designated | | Derivatives designated as | | Derivatives not designated |
| | | | | | | hedging instruments | | as hedging instruments | | hedging instruments | | as hedging instruments |
| | | | | | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities |
Noncurrent: | | | | | | | | | | | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest rate swaps (b) | | | 6 | | | 7 | | | | | | 38 | | | 9 | | | | | | | | | 32 |
| | | Cross-currency swaps (b) | | | | | | 41 | | | | | | | | | | | | 28 | | | | | | |
| | | Foreign currency | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | contracts | | | 6 | | | | | | 26 | | | 4 | | | | | | 4 | | | | | | 31 |
| | | Commodity contracts | | | | | | | | | 328 | | | 287 | | | | | | | | | 328 | | | 320 |
| | | | | Total noncurrent | | | 12 | | | 48 | | | 354 | | | 329 | | | 9 | | | 32 | | | 328 | | | 383 |
Total derivatives | | $ | 12 | | $ | 76 | | $ | 1,086 | | $ | 1,198 | | $ | 91 | | $ | 52 | | $ | 1,188 | | $ | 1,192 |
(b)(a) | Represents the location on the Balance Sheets. |
(c)(b) | Excludes accrued interest, if applicable. |
The after-tax balancesfollowing tables present the pre-tax effect of accumulated net gains (losses) (excluding net investment hedges)derivative instruments recognized in AOCI were $87 millionincome, OCI or regulatory assets and $132 million atregulatory liabilities for the periods ended September 30, 2013 and December 31, 2012. The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $231 million and $527 million at September 30, 2012 and December 31, 2011.2014.
| | | | | | | | | | | | | | 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 | | $ | (5) | | $ | (65) | | Interest expense | | $ | (5) | | | | | $ | (14) | | $ | 2 |
| Cross-currency swaps | | | (2) | | | (18) | | Interest expense | | | | | | | | | 1 | | | |
| | | | | | | | | | | Other income | | | | | | | | | | | | |
| | | | | | | | | | �� | | (expense) - net | | | 12 | | | | | | (17) | | | |
| Commodity contracts | | | | | | | | Unregulated wholesale | | | | | | | | | | | | |
| | | | | | | | | | | | energy | | | (2) | | | | | | (1) | | | |
| | | | | | | | | | | Energy purchases | | | 8 | | | | | | 23 | | | |
| | | | | | | | | | | Depreciation | | | 1 | | | | | | 2 | | | |
| | | | | | | | | | | Discontinued | | | | | | | | | | | | |
| | | | | | | | | | | | operations | | | 1 | | | | | | 6 | | | |
Total | | $ | (7) | | $ | (83) | | | | | $ | 15 | | | | | $ | | | $ | 2 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Investment Hedges: | | | | | | | | | | | | | | | | | | | | | |
| | Foreign currency contracts | | $ | 25 | | $ | 7 | | | | | | | | | | | | | | | |
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 | | $ | 134 | | $ | 38 |
Interest rate swaps | | Interest expense | | | (2) | | | (6) |
Commodity contracts | | Unregulated wholesale energy (a) | | | 617 | | | (2,520) |
| | Unregulated retail energy | | | 18 | | | (34) |
| | Fuel | | | (8) | | | (1) |
| | Energy purchases (b) | | | (505) | | | 1,937 |
| | Discontinued operations | | | 2 | | | 4 |
| | Total | | $ | 256 | | $ | (582) |
| | | | | | | | |
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 | | | | | $ | (6) |
Derivatives Designated as | | Location of Gain (Loss) Recognized as | | | | | | |
Hedging Instruments | | Regulatory Liabilities/Assets | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory assets - noncurrent | | $ | (4) | | $ | (4) |
| | Regulatory liabilities - noncurrent | | | 6 | | | 6 |
| The nine month period ended September 30, 2014 includes significant realized and unrealized losses on physical and financial commodity sales contracts due to the unusually cold weather experienced in the first quarter of 2014. |
(b) | The nine month period ended September 30, 2014 includes significant realized and unrealized gains on physical and financial commodity purchase contracts due to the unusually cold weather experienced in the first quarter of 2014. |
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 September 30, 2013.
| | | | | | | | | | Three Months | | Nine 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 |
Derivative | Derivative | | OCI (Effective Portion) | | | in Income | (Effective | | Effectiveness | | (Effective | | Effectiveness | Derivative | | OCI (Effective Portion) | | in Income | (Effective | | Effectiveness | | (Effective | | Effectiveness |
Relationships | Relationships | | Three Months | | Nine 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 | | $ | 25 | | $ | 102 | | Interest expense | | $ | (5) | | | | $ | (14) | | | Interest rate swaps | | $ | 25 | | $ | 102 | | Interest expense | | $ | (5) | | | | $ | (14) | | |
| Cross-currency swaps | | | (36) | | | 16 | | Interest expense | | | (1) | | | | | | | Cross-currency swaps | | (36) | | 16 | | Interest expense | | (1) | | | | | | |
| | | | | | | | | Other income | | | | | | | | | | | | | | | | | | Other income | | | | | | | | |
| | | | | | | | | | (expense) - net | | | (25) | | | | 45 | | | | | | | | | | (expense) - net | | (25) | | | | 45 | | |
| Commodity contracts | | | | | | | | Wholesale energy | | | | | | | | | | Commodity contracts | | | | | | Unregulated | | | | | | | | |
| | | | | | | | marketing | | | 58 | | | | 198 | | $ | 1 | | | | | | | | wholesale energy | | 54 | | | | 178 | | $ | 1 |
| | | | | | | | | | Depreciation | | | 1 | | | | 2 | | | | | | | | | | Energy purchases | | (11) | | | | (41) | | |
| | | | | | | | | | Energy purchases | | | (11) | | | | | | (41) | | | | | | | | | | | Depreciation | | 1 | | | | 2 | | |
| | | | | | | | | Discontinued | | | | | | | | |
| | | | | | | | | | | | operations | | | 4 | | | | | | 20 | | | |
Total | Total | | $ | (11) | | $ | 118 | | | | $ | 17 | | | | | $ | 190 | | $ | 1 | Total | | $ | (11) | | $ | 118 | | | | $ | 17 | | | | | $ | 190 | | $ | 1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Investment Hedges: | Net Investment Hedges: | | | | | | | | | | | | | | | | | | Net Investment Hedges: | | | | | | | | | | | | | | |
| | Foreign currency contracts | | $ | (22) | | $ | (5) | | | | | | | | | | | | | Foreign currency contracts | | $ | (22) | | $ | (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 | | $ | (117) | | $ | 6 |
Interest rate swaps | | Interest expense | | | (2) | | | (6) |
Commodity contracts | | Unregulated retail electric and gas | | | 3 | | | 18 |
| | Wholesale energy marketing | | | 104 | | | 144 |
| | Net energy trading margins (a) | | | 14 | | | 8 |
| | Fuel | | | 4 | | | 2 |
| | Energy purchases | | | (86) | | | (99) |
| | Total | | $ | (80) | | $ | 73 |
Derivatives Not Designated as | | Location of Gain (Loss) Recognized as | | | | | | |
Hedging Instruments | | Regulatory Liabilities/Assets | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory assets - noncurrent | | $ | 2 | | $ | 18 |
| | | | | | | | |
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 | | $ | (117) | | $ | 6 |
Interest rate swaps | | | Interest expense | | (2) | | (6) |
Commodity contracts | | | Unregulated wholesale energy | | 114 | | 139 |
| | | Unregulated retail energy | | 3 | | 18 |
| | | Fuel | | 4 | | 2 |
| | | Energy purchases | | (86) | | (99) |
| | | Discontinued operations | | | 4 | | | 13 |
| | | Total | | $ | (80) | | $ | 73 |
| | | | | | | |
Derivatives Not Designated as | | | Location of Gain (Loss) Recognized as | | | | |
Hedging Instruments | | | Regulatory Liabilities/Assets | | Three Months | | Nine Months |
| | | | | | | |
Interest rate swaps | | | Regulatory assets - noncurrent | | $ | 2 | | $ | 18 |
| | | | | | | |
| | | | | | | |
Derivatives Designated as | | Location of Gain (Loss) Recognized as | | | | | | Location of Gain (Loss) Recognized as | | | | |
Hedging Instruments | | Regulatory Liabilities/Assets | | Three Months | | Nine Months | | Regulatory Liabilities/Assets | | Three Months | | Nine Months |
| | | | | | | | | | | | |
Interest rate swaps | | Regulatory liabilities - noncurrent | | $ | 12 | | $ | 70 | | 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 September 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 |
| | | | | | | | | | | | | | 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 |
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 | | $ | 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. |
The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.
| | | | | | September 30, 2013 | | December 31, 2012 | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | Derivatives not designated | | Derivatives designated as | | Derivatives not designated | | | | | | Derivatives not designated | | Derivatives not designated |
| | | | | | as hedging instruments (a) | | hedging instruments | | as hedging instruments (a) | | | | | | as hedging instruments | | as hedging instruments |
| | | | | | Assets | | Liabilities | | Assets | | Liabilities | | Assets | | Liabilities | | | | | | Assets | | Liabilities | | Assets | | Liabilities |
Current: | Current: | | | | | | | | | | | | | | | | Current: | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | | | Price Risk Management | | | | | | | | |
| | Assets/Liabilities (b): | | | | | | | | | | | | | | | | | Assets/Liabilities (a): | | | | | | | | |
| | Commodity contracts | | $ | 961 | | $ | 773 | | $ | 59 | | | | | $ | 1,452 | | $ | 1,010 | | Commodity contracts | | $ | 713 | | $ | 850 | | $ | 860 | | $ | 750 |
| | | | Total current | | | 961 | | | 773 | | | 59 | | | | | | 1,452 | | | 1,010 | | | | Total current | | | 713 | | | 850 | | | 860 | | | 750 |
Noncurrent: | Noncurrent: | | | | | | | | | | | | | | | | Noncurrent: | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | | | Price Risk Management | | | | | | | | |
| | Assets/Liabilities (b): | | | | | | | | | | | | | | | | | Assets/Liabilities (a): | | | | | | | | |
| | Commodity contracts | | | 519 | | | 462 | | | 27 | | | | | | 530 | | | 556 | | Commodity contracts | | | 328 | | | 287 | | | 328 | | | 320 |
| | | | Total noncurrent | | | 519 | | | 462 | | | 27 | | | | | | 530 | | | 556 | | | | Total noncurrent | | | 328 | | | 287 | | | 328 | | | 320 |
Total derivatives | Total derivatives | | $ | 1,480 | | $ | 1,235 | | $ | 86 | | | | | $ | 1,982 | | $ | 1,566 | Total derivatives | | $ | 1,041 | | $ | 1,137 | | $ | 1,188 | | $ | 1,070 |
| $216 million and $300 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at September 30, 2013 and December 31, 2012. |
(b) | Represents the location on the Balance Sheets. |
The after-tax balancesfollowing tables present the pre-tax effect of accumulated net gains (losses)derivative instruments recognized in AOCI were $115 million and $211 million atincome or OCI for the periods ended September 30, 2013 and December 31, 2012. The after-tax balances of accumulated net gains (losses) in AOCI were $312 million and $605 million at September 30, 2012 and December 31, 2011.2014.
| | | | | | | | | | | | | Three Months | | Nine Months |
| | | | | | | | | | | | | | | | Gain (Loss) | | | | | Gain (Loss) |
| | | | | | | | | | | | | | | | | Recognized | | | | | Recognized |
| | | | | | | | | | | | | | | | in Income | | | | | in Income |
| | | | | | | | | | | | | | | | on Derivative | | | | | on Derivative |
| | | | | | | | | | Gain (Loss) | | (Ineffective | | Gain (Loss) | | (Ineffective |
| | | | | | | | Location of | | Reclassified | | Portion and | | Reclassified | | Portion and |
| | | | | Derivative Gain | | Gains (Losses) | | from AOCI | | Amount | | from AOCI | | Amount |
| | | | | (Loss) Recognized in | | Recognized | | into Income | | Excluded from | | into Income | | Excluded from |
Derivative | | OCI (Effective Portion) | | | in Income | (Effective | | Effectiveness | | (Effective | | Effectiveness |
Relationships | | Three Months | | Nine Months | | on Derivative | | Portion) | | Testing) | | Portion) | | Testing) |
Cash Flow Hedges: | | | | | | | | | | | | | | | | | | | | |
| Commodity contracts | | | | | | | | Unregulated wholesale | | | | | | | | | | | | |
| | | | | | | | | | | energy | | $ | (2) | | | | | $ | (1) | | | |
| | | | | | | | | | | Energy purchases | | | 8 | | | | | | 23 | | | |
| | | | | | | | | | | Depreciation | | | | | | | | | 1 | | | |
| | | | | | | | | | | Discontinued | | | | | | | | | | | | |
| | | | | | | | | | | | operations | | | 1 | | | | | | 6 | | | |
Total | | | | | | | | | | | $ | 7 | | | | | $ | 29 | | | |
Derivatives Not Designated as | | Location of Gain (Loss) Recognized in | | | | | | |
Hedging Instruments | | Income on Derivative | | Three Months | | Nine Months |
| | | | | | | | |
Commodity contracts | | Unregulated wholesale energy (a) | | $ | 617 | | $ | (2,520) |
| | Unregulated retail energy | | | 18 | | | (34) |
| | Fuel | | | (8) | | | (1) |
| | Energy purchases (b) | | | (505) | | | 1,937 |
| | Discontinued operations | | | 2 | | | 4 |
| | Total | | $ | 124 | | $ | (614) |
| The nine month period ended September 30, 2014 includes significant realized and unrealized losses on physical and financial commodity sales contracts due to the unusually cold weather experienced in the first quarter of 2014. |
(b) | The nine month period ended September 30, 2014 includes significant realized and unrealized gains on physical and financial commodity purchase contracts due to the unusually cold weather experienced in the first quarter of 2014. |
The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended September 30, 2013.
| | | | | | | | | | | | | Three Months | | Nine Months |
| | | | | | | | | | | | | | | | Gain (Loss) | | | | | Gain (Loss) |
| | | | | | | | | | | | | | | | | Recognized | | | | | Recognized |
| | | | | | | | | | | | | | | | in Income | | | | | in Income |
| | | | | | | | | | | | | | | | on Derivative | | | | | on Derivative |
| | | | | | | | | | Gain (Loss) | | (Ineffective | | Gain (Loss) | | (Ineffective |
| | | | | | | | Location of | | Reclassified | | Portion and | | Reclassified | | Portion and |
| | | | | Derivative Gain | | Gains (Losses) | | from AOCI | | Amount | | from AOCI | | Amount |
| | | | | (Loss) Recognized in | | Recognized | | into Income | | Excluded from | | into Income | | Excluded from |
Derivative | | OCI (Effective Portion) | | | in Income | (Effective | | Effectiveness | | (Effective | | Effectiveness |
Relationships | | Three Months | | Nine Months | | on Derivative | | Portion) | | Testing) | | Portion) | | Testing) |
Cash Flow Hedges: | | | | | | | | | | | | | | | | | | | | |
| Commodity contracts | | | | | | | | Wholesale energy | | | | | | | | | | | | |
| | | | | | | | | | | marketing | | $ | 58 | | | | | $ | 198 | | $ | 1 |
| | | | | | | | | | | Depreciation | | | 1 | | | | | | 2 | | | |
| | | | | | | | | | | Energy purchases | | | (11) | | | | | | (41) | | | |
Total | | | | | | | | | | | $ | 48 | | | | | $ | 159 | | $ | 1 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives Not Designated as | | Location of Gain (Loss) Recognized in | | | | | | |
Hedging Instrument | | Income on Derivative | | Three Months | | Nine Months |
| | | | | | | | |
Commodity contracts | | Unregulated retail electric and gas | | $ | 3 | | $ | 18 |
| | Wholesale energy marketing | | | 104 | | | 144 |
| | Net energy trading margins (a) | | | 14 | | | 8 |
| | Fuel | | | 4 | | | 2 |
| | Energy purchases | | | (86) | | | (99) |
| | 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 September 30, 2012.
| | | | | | | | | | | | | Three Months | | Nine Months |
| | | | | | | | | | | | | | | | Gain (Loss) | | | | | Gain (Loss) |
| | | | | | | | | | | | | | | | | Recognized | | | | | Recognized |
| | | | | | | | | | | | | | | | in Income | | | | | in Income |
| | | | | | | | | | | | | | | | on Derivative | | | | | on Derivative |
| | | | | | | | | | Gain (Loss) | | (Ineffective | | Gain (Loss) | | (Ineffective |
| | | | | | | | Location of | | Reclassified | | Portion and | | Reclassified | | Portion and |
| | | | | Derivative Gain | | Gains (Losses) | | from AOCI | | Amount | | from AOCI | | Amount |
| | | | | (Loss) Recognized in | | Recognized | | into Income | | Excluded from | | into Income | | Excluded from |
Derivative | | OCI (Effective Portion) | | | in Income | (Effective | | Effectiveness | | (Effective | | Effectiveness |
Relationships | | Three Months | | Nine Months | | on Derivative | | Portion) | | Testing) | | Portion) | | Testing) |
Cash Flow Hedges: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Wholesale energy | | | | | | | | | | | | |
| | Commodity contracts | | | | | $ | 99 | | | marketing | | $ | 174 | | | | | $ | 673 | | $ | (1) |
| | | | | | | | | | | Depreciation | | | | | | | | | 1 | | | |
| | | | | | | | | | | Energy purchases | | | (20) | | $ | 1 | | | (105) | | | (2) |
Total | | | | | $ | 99 | | | | | $ | 154 | | $ | 1 | | $ | 569 | | $ | (3) |
Derivatives Not Designated as | | Location of Gain (Loss) Recognized in | | | | | | |
Hedging Instruments | | Income on Derivative | | Three Months | | Nine Months |
| | | | | | | | |
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 | | $ | (119) | | $ | 215 |
(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. |
| | | | | | | | | | | | | Three Months | | Nine Months |
| | | | | | | | | | | | | | | | Gain (Loss) | | | | | Gain (Loss) |
| | | | | | | | | | | | | | | | | Recognized | | | | | Recognized |
| | | | | | | | | | | | | | | | in Income | | | | | in Income |
| | | | | | | | | | | | | | | | on Derivative | | | | | on Derivative |
| | | | | | | | | | Gain (Loss) | | (Ineffective | | Gain (Loss) | | (Ineffective |
| | | | | | | | Location of | | Reclassified | | Portion and | | Reclassified | | Portion and |
| | | | | Derivative Gain | | Gains (Losses) | | from AOCI | | Amount | | from AOCI | | Amount |
| | | | | (Loss) Recognized in | | Recognized | | into Income | | Excluded from | | into Income | | Excluded from |
Derivative | | OCI (Effective Portion) | | | in Income | (Effective | | Effectiveness | | (Effective | | Effectiveness |
Relationships | | Three Months | | Nine Months | | on Derivative | | Portion) | | Testing) | | Portion) | | Testing) |
Cash Flow Hedges: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Unregulated | | | | | | | | | | | | |
| | Commodity contracts | | | | | | | | | wholesale energy | | $ | 54 | | | | | $ | 178 | | $ | 1 |
| | | | | | | | | | | Energy purchases | | | (11) | | | | | | (41) | | | |
| | | | | | | | | | | Depreciation | | | 1 | | | | | | 2 | | | |
| | | | | | | | | | | Discontinued | | | | | | | | | | | | |
| | | | | | | | | | | | operations | | | 4 | | | | | | 20 | | | |
Total | | | | | | | | | | | $ | 48 | | | | | $ | 159 | | $ | 1 |
Derivatives Not Designated as | | Location of Gain (Loss) Recognized in | | | | | | |
Hedging Instruments | | Income on Derivative | | Three Months | | Nine Months |
| | | | | | | | |
Commodity contracts | | Unregulated wholesale energy | | $ | 114 | | $ | 139 |
| | Unregulated retail energy | | | 3 | | | 18 |
| | Fuel | | | 4 | | | 2 |
| | Energy purchases | | | (86) | | | (99) |
| | Discontinued operations | | | 4 | | | 13 |
| | Total | | $ | 39 | | $ | 73 |
The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.
| | | | | | | September 30, 2013 | | December 31, 2012 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Current: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | $ | 14 | | | $ | 14 | | | | |
| | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Noncurrent: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | $ | 6 | | $ | 4 | | | | | | | | |
| 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 assets and liabilities for the periods ended September 30, 2014.
Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory assets - noncurrent | | $ | (4) | | $ | (4) |
| | | | | | | | |
Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory liabilities - noncurrent | | $ | 6 | | $ | 6 |
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended September 30, 2013.
Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory liabilities - noncurrent | | $ | 12 | | $ | 70 |
The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.
| | | | | | | September 30, 2013 | | December 31, 2012 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Current: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | $ | 7 | | | $ | 7 | | | | |
| | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Noncurrent: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | $ | 3 | | $ | 2 | | | | | | | | |
| 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 assets and liabilities for the periods ended September 30, 2014.
| | | | | | |
Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory assets - noncurrent | | $ | (2) | | $ | (2) |
| | | | | | | | |
Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory liabilities - noncurrent | | $ | 3 | | $ | 3 |
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended September 30, 2013.
Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory liabilities - noncurrent | | $ | 6 | | $ | 35 |
The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.
| | | | | | | September 30, 2013 | | December 31, 2012 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Current: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | $ | 7 | | | $ | 7 | | | | |
| | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Noncurrent: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | $ | 3 | | $ | 2 | | | | | | | | |
| 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 assets and liabilities for the periods ended September 30, 2014.
Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory assets - noncurrent | | $ | (2) | | $ | (2) |
| | | | | | | | |
Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory liabilities - noncurrent | | $ | 3 | | $ | 3 |
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended September 30, 2013. Derivative Instruments | | Location of Gain (Loss) | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory liabilities - noncurrent | | $ | 6 | | $ | 35 |
The following table presents the fair value and the location on the Balance Sheets of derivatives not designated as hedging instruments.
| | | | | | | September 30, 2013 | | December 31, 2012 | |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Current: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | $ | 4 | | | | | | $ | 5 | |
| | | | | Total current | | | | | | 4 | | | | | | | 5 | |
Noncurrent: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | | 37 | | | | | | | 53 | |
| | | | | Total noncurrent | | | | | | 37 | | | | | | | 53 | |
Total derivatives | | | | | $ | 41 | | | | | | $ | 58 | |
| | | | | | | September 30, 2014 | | December 31, 2013 | |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Current: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | $ | 4 | | | | | | $ | 4 | |
| | | | | Total current | | | | | | 4 | | | | | | | 4 | |
Noncurrent: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | | 38 | | | | | | | 32 | |
| | | | | Total noncurrent | | | | | | 38 | | | | | | | 32 | |
Total derivatives | | | | | $ | 42 | | | | | | $ | 36 | |
| 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 September 30, 2014.
| | Location of Gain (Loss) Recognized in | | | | |
Derivative Instruments | | Income on Derivatives | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Interest expense | | $ | (2) | | $ | (6) |
| | | | | | | | |
| | Location of Gain (Loss) Recognized in | | | | |
Derivative Instruments | | Regulatory Assets | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Regulatory assets - noncurrent | | | | | $ | (6) |
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 September 30, 2013.
| | Location of Gain (Loss) Recognized in | | | | | | Location of Gain (Loss) Recognized in | | | | |
Derivative Instruments | | Income on Derivatives | | Three Months | | Nine Months | | Income on Derivatives | | Three Months | | Nine Months |
| | | | | | | | | | | | | | |
Interest rate swaps | | Interest expense | | $ | (2) | | $ | (6) | | Interest expense | | $ | (2) | | $ | (6) |
| | | | | | | | |
| | | Location of Gain (Loss) Recognized in | | | | |
Derivative Instruments | | | Regulatory Assets | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | | Regulatory assets - noncurrent | | $ | 2 | | $ | 18 |
| | 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 September 30, 2012.
| | Location of Gain (Loss) Recognized in | | | | |
Derivative Instruments | | Income on Derivatives | | Three Months | | Nine Months |
| | | | | | | | |
Interest rate swaps | | Interest expense | | $ | (2) | | $ | (6) |
| | 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 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. PPL, PPL Energy Supply, LKE, LG&E and KU and their subsidiaries also enter into agreements pursuant to which they trade certain
energy and other products. Under the agreements, upon termination of the agreement as a result of a default or other termination event, the non-defaulting party typically would have a right to setoff amounts owed under the agreement against any other obligations arising between the two parties (whether under the agreement or not), whether matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation.
PPL, PPL Energy Supply, LKE, LG&E and KU have elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivatives agreements. The table below summarizes the derivative positions presented in the balance sheets where a right of setoff exists under these arrangements and related cash collateral received or pledged.
| | | | | Assets | | Liabilities |
| | | | | | | | Eligible for Offset | | | | | | | | Eligible for Offset | | | |
| | | | | | | | | | | Cash | | | | | | | | | | | Cash | | | |
| | | | | | | | Derivative | | Collateral | | | | | | | | Derivative | | Collateral | | | |
| | | | | Gross | | Instruments | | Received | | Net | | Gross | | Instruments | | Pledged | | Net |
September 30, 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
PPL | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy Commodities | | $ | 1,480 | | $ | 1,122 | | $ | 14 | | $ | 344 | | $ | 1,235 | | $ | 1,122 | | | | | $ | 113 |
| Treasury Derivatives | | | 115 | | | 47 | | | | | | 68 | | | 126 | | | 47 | | $ | 22 | | | 57 |
Total | | $ | 1,595 | | $ | 1,169 | | $ | 14 | | $ | 412 | | $ | 1,361 | | $ | 1,169 | | $ | 22 | | $ | 170 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy Commodities | | $ | 1,480 | | $ | 1,122 | | $ | 14 | | $ | 344 | | $ | 1,235 | | $ | 1,122 | | | | | $ | 113 |
LKE | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury Derivatives | | | | | | | | | | | | | | $ | 55 | | | | | $ | 22 | | $ | 33 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
LG&E | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury Derivatives | | | | | | | | | | | | | | $ | 48 | | | | | $ | 22 | | $ | 26 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
KU | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury Derivatives | | | | | | | | | | | | | | $ | 7 | | | | | | | | $ | 7 |
December 31, 2012 | | | | | | | | | | | | | | | | | | |
| | | | | | Assets | | Liabilities |
| | | | | | | | Eligible for Offset | | | | | | Eligible for Offset | | |
| | | | | | | | | | Cash | | | | | | | | Cash | | |
| | | | | | | | | Derivative | | Collateral | | | | | | | | Derivative | | Collateral | | | |
| | | | | | Gross | | Instruments | | Received | | Net | | Gross | | Instruments | | Pledged | | Net |
September 30, 2014 | | September 30, 2014 | | | | | | | | | | | | | | | | |
PPL | PPL | | | | | | | | | | | | | | | | | | PPL | | | | | | | | | | | | | | | | |
| Energy Commodities | | $ | 2,068 | | $ | 1,413 | | $ | 111 | | $ | 544 | | $ | 1,566 | | $ | 1,413 | | $ | 9 | | $ | 144 | Energy Commodities | | $ | 1,041 | | $ | 915 | | $ | 9 | | $ | 117 | | $ | 1,137 | | $ | 915 | | $ | 102 | | $ | 120 |
| Treasury Derivatives | | | 29 | | | 19 | | | | | | 10 | | | 128 | | | 19 | | | 30 | | | 79 | Treasury Derivatives | | | 57 | | | 46 | | | | | | 11 | | | 137 | | | 46 | | | 21 | | | 70 |
Total | Total | | $ | 2,097 | | $ | 1,432 | | $ | 111 | | $ | 554 | | $ | 1,694 | | $ | 1,432 | | $ | 39 | | $ | 223 | Total | | $ | 1,098 | | $ | 961 | | $ | 9 | | $ | 128 | | $ | 1,274 | | $ | 961 | | $ | 123 | | $ | 190 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | PPL Energy Supply | | | | | | | | | | | | | | | | | | PPL Energy Supply | | | | | | | | | | | | | | | | |
| Energy Commodities | | $ | 2,068 | | $ | 1,413 | | $ | 111 | | $ | 544 | | $ | 1,566 | | $ | 1,413 | | $ | 9 | | $ | 144 | Energy Commodities | | $ | 1,041 | | $ | 915 | | $ | 9 | | $ | 117 | | $ | 1,137 | | $ | 915 | | $ | 102 | | $ | 120 |
LKE | LKE | | | | | | | | | | | | | | | | | | LKE | | | | | | | | | | | | | | | | |
| Treasury Derivatives | | $ | 14 | | | | | | | | $ | 14 | | $ | 58 | | | | | $ | 30 | | $ | 28 | Treasury Derivatives | | $ | 6 | | $ | 4 | | | | | $ | 2 | | $ | 46 | | $ | 4 | | $ | 19 | | $ | 23 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LG&E | LG&E | | | | | | | | | | | | | | | | | | LG&E | | | | | | | | | | | | | | | | |
| Treasury Derivatives | | $ | 7 | | | | | | | | $ | 7 | | $ | 58 | | | | | $ | 30 | | $ | 28 | Treasury Derivatives | | $ | 3 | | $ | 2 | | | | | $ | 1 | | $ | 44 | | $ | 2 | | $ | 19 | | $ | 23 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
KU | KU | | | | | | | | | | | | | | | | | | KU | | | | | | | | | | | | | | | | |
| Treasury Derivatives | | $ | 7 | | | | | | | | $ | 7 | | | | | | | | | | | | | Treasury Derivatives | | $ | 3 | | $ | 2 | | | | | $ | 1 | | $ | 2 | | $ | 2 | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
PPL | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy Commodities | | $ | 1,188 | | $ | 912 | | $ | 7 | | $ | 269 | | $ | 1,070 | | $ | 912 | | $ | 1 | | $ | 157 |
| Treasury Derivatives | | | 91 | | | 61 | | | | | | 30 | | | 174 | | | 61 | | | 23 | | | 90 |
Total | | $ | 1,279 | | $ | 973 | | $ | 7 | | $ | 299 | | $ | 1,244 | | $ | 973 | | $ | 24 | | $ | 247 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy Commodities | | $ | 1,188 | | $ | 912 | | $ | 7 | | $ | 269 | | $ | 1,070 | | $ | 912 | | $ | 1 | | $ | 157 |
LKE | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury Derivatives | | | | | | | | | | | | | | $ | 36 | | | | | $ | 20 | | $ | 16 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
LG&E | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury Derivatives | | | | | | | | | | | | | | $ | 36 | | | | | $ | 20 | | $ | 16 |
Credit Risk-Related Contingent Features
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.grade (i.e., below BBB- for S&P or Fitch, or Baa3 for Moody's). Some of these features also would allow the counterparty to require additional collateral upon each decreasedowngrade in the credit rating at levels that remain above investment grade. In either case, if the applicable credit rating were to fall below investment grade, (i.e., below BBB- for S&P or Fitch, or Baa3 for Moody's), and assuming no assignment to an investment grade affiliate were allowed, most of these credit contingent features require either immediate payment of the net liability as a termination payment or immediate and ongoing full collateralization on derivative instruments in net liability positions.
Additionally, certain derivative contracts contain credit risk-related contingent features that require adequate assurance of performance be provided if the other party has reasonable concerns regarding the performance of PPL's obligation under the
contract. A counterparty demanding adequate assurance could require a transfer of additional collateral or other security, including letters of credit, cash and guarantees from a creditworthy entity. This would typically involve negotiations among the parties. However, amounts disclosed below represent assumed immediate payment or immediate and ongoing full collateralization for derivative instruments in net liability positions with "adequate assurance" features.
(All Registrants except PPL Electric and KU)
At September 30, 2013,2014, derivative contracts in a net liability position that contain credit risk-related contingent features, collateral posted on those positions and the related 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 isare summarized as follows:
| | | | | | | PPL | | | | | | |
| | | | PPL | | Energy Supply | | LKE | | LG&E |
| | | | | | | | | | | | | | |
Aggregate fair value of derivative instruments in a net liability | | | | | | | | | | | | |
| position with credit risk-related contingent features | | $ | 178 | | $ | 115 | | $ | 29 | | $ | 29 |
Aggregate fair value of collateral posted on these derivative instruments | | | 39 | | | 17 | | | 22 | | | 22 |
Aggregate fair value of additional collateral requirements in the event of | | | | | | | | | | | | |
| a credit downgrade below investment grade (a) | | | 167 | | | 127 | | | 7 | | | 7 |
| | | | | | | PPL | | | | | | |
| | | | PPL | | Energy Supply | | LKE | | LG&E |
| | | | | | | | | | | | | | |
Aggregate fair value of derivative instruments in a net liability | | | | | | | | | | | | |
| position with credit risk-related contingent features | | $ | 179 | | $ | 118 | | $ | 27 | | $ | 27 |
Aggregate fair value of collateral posted on these derivative instruments | | | 119 | | | 99 | | | 20 | | | 20 |
Aggregate fair value of additional collateral requirements in the event of | | | | | | | | | | | | |
| a credit downgrade below investment grade (a) | | | 91 | (b) | 49 | (b) | 8 | | | 8 |
| Includes the effect of net receivables and payables already recorded on the Balance Sheet. |
(b) | During the second quarter of 2014, PPL Energy Supply experienced a downgrade in its corporate credit ratings to below investment grade. Amounts related to PPL Energy Supply represent net liability positions subject to further adequate assurance features. |
(PPL) | | | | | | | |
| | | | | | | | | | | | | | |
(PPL) | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The changes in the carrying amounts of goodwill by segment were as follows. |
| | | | | | | | | | | | | |
| | | | U.K. Regulated | | Kentucky Regulated | | Supply | | Total |
| | | | | | | | | | | |
Balance at December 31, 2013 (a) | $ | 3,143 | | $ | 662 | | $ | 420 | | $ | 4,225 |
| Allocation to discontinued operations (b) | | | | | | | | (82) | | | (82) |
| Effect of foreign currency exchange rates | | 44 | | | | | | | | | 44 |
Balance at September 30, 2014 (a) | $ | 3,187 | | $ | 662 | | $ | 338 | | $ | 4,187 |
| There were no accumulated impairment losses related to goodwill. |
(b) | Represents goodwill allocated to the Montana hydroelectric generating facilities which met the held for sale criteria at September 30, 2014. See Note 8 for additional information. |
For PPL Energy Supply, the change in the carrying amount of goodwill for the nine months ended September 30, 20132014 was due to goodwill allocated to the effect of foreign currency exchange rates onMontana hydroelectric generating facilities which met the U.K. Regulated segment.held for sale criteria at September 30, 2014. See Note 8 for additional information.
16. Asset Retirement Obligations | 16. Asset Retirement Obligations | | | | | | | | | | | 16. Asset Retirement Obligations | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(All Registrants except PPL Electric) | (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, 2012 | | $ | 552 | | $ | 375 | | $ | 131 | | $ | 62 | | $ | 69 | |
Balance at December 31, 2013 | | Balance at December 31, 2013 | | $ | 705 | | $ | 404 | | $ | 252 | | $ | 74 | | $ | 178 |
| Accretion expense | | 27 | | 22 | | | 4 | | | 2 | | | 2 | Accretion expense | | 34 | | 23 | | 10 | | 3 | | 7 |
| Obligations incurred | | 6 | | 6 | | | | | | | | | | Obligations incurred | | 14 | | 13 | | 1 | | | | 1 |
| Changes in estimated cash flow or settlement date | | 123 | | 1 | | | 122 | | | 17 | | | 105 | Changes in estimated cash flow or settlement date | | 11 | | (12) | | 23 | | 1 | | 22 |
| Effect of foreign currency exchange rates | | (2) | | | | | | | | | | | | Effect of foreign currency exchange rates | | 1 | | | | | | | | |
| Obligations settled | | | (12) | | | (6) | | | (6) | | | (6) | | | | Obligations settled | | | (8) | | | (5) | | | (3) | | | (3) | | | |
Balance at September 30, 2013 | | $ | 694 | | $ | 398 | | $ | 251 | | $ | 75 | | $ | 176 | |
Balance at September 30, 2014 | | Balance at September 30, 2014 | | $ | 757 | | $ | 423 | | $ | 283 | | $ | 75 | | $ | 208 |
Substantially all of the ARO balances are classified as noncurrent at September 30, 20132014 and December 31, 2012.2013.
(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 $335 million and $316 million at September 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 $804 million and $712 million at September 30, 2013 and December 31, 2012, and is included in "Nuclear plant decommissioning trust funds" on the Balance Sheets.this ARO. See Notes 13 and 17 for additional information on these assets.
(PPL, LKE, LG&E and Kentucky Registrants)KU)
AccretionLG&E's and KU's accretion and depreciation expense recorded by LG&E and KU is reversed on the income statement andare 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.
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.
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.
| | | | | | | September 30, 2013 | | December 31, 2012 |
| | | | | | | | | | Gross | | Gross | | | | | | | Gross | | Gross | | |
| | | | | | | Amortized | | Unrealized | | Unrealized | | | | Amortized | | Unrealized | | Unrealized | | |
| | | | | | | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value |
PPL | | | | | | | | | | | | | | | | | | | | | | | | |
| NDT funds: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cash and cash equivalents | | $ | 14 | | | | | | | | $ | 14 | | $ | 11 | | | | | | | | $ | 11 |
| | | Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | U.S. large-cap | | | 230 | | $ | 264 | | | | | | 494 | | | 222 | | $ | 190 | | | | | | 412 |
| | | | U.S. mid/small-cap | | | 31 | | | 43 | | | | | | 74 | | | 30 | | | 30 | | | | | | 60 |
| | | Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | U.S. Treasury | | | 90 | | | 6 | | | | | | 96 | | | 86 | | | 9 | | | | | | 95 |
| | | | U.S. government sponsored | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | agency | | | 5 | | | 1 | | | | | | 6 | | | 8 | | | 1 | | | | | | 9 |
| | | | Municipality | | | 74 | | | 2 | | $ | 1 | | | 75 | | | 78 | | | 5 | | $ | 1 | | | 82 |
| | | | Investment-grade corporate | | | 39 | | | 2 | | | 1 | | | 40 | | | 36 | | | 4 | | | | | | 40 |
| | | | Other | | | 3 | | | | | | | | | 3 | | | 3 | | | | | | | | | 3 |
| | | Receivables/payables, net | | | 2 | | | | | | | | | 2 | | | | | | | | | | | | |
| | | Total NDT funds | | | 488 | | | 318 | | | 2 | | | 804 | | | 474 | | | 239 | | | 1 | | | 712 |
| Auction rate securities | | | 20 | | | | | | 1 | | | 19 | | | 20 | | | | | | 1 | | | 19 |
| Total | | $ | 508 | | $ | 318 | | $ | 3 | | $ | 823 | | $ | 494 | | $ | 239 | | $ | 2 | | $ | 731 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | | |
| NDT funds: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cash and cash equivalents | | $ | 14 | | | | | | | | $ | 14 | | $ | 11 | | | | | | | | $ | 11 |
| | | Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | U.S. large-cap | | | 230 | | $ | 264 | | | | | | 494 | | | 222 | | $ | 190 | | | | | | 412 |
| | | | U.S. mid/small-cap | | | 31 | | | 43 | | | | | | 74 | | | 30 | | | 30 | | | | | | 60 |
| | | Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | U.S. Treasury | | | 90 | | | 6 | | | | | | 96 | | | 86 | | | 9 | | | | | | 95 |
| | | | U.S. government sponsored | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | agency | | | 5 | | | 1 | | | | | | 6 | | | 8 | | | 1 | | | | | | 9 |
| | | | Municipality | | | 74 | | | 2 | | $ | 1 | | | 75 | | | 78 | | | 5 | | $ | 1 | | | 82 |
| | | | Investment-grade corporate | | | 39 | | | 2 | | | 1 | | | 40 | | | 36 | | | 4 | | | | | | 40 |
| | | | Other | | | 3 | | | | | | | | | 3 | | | 3 | | | | | | | | | 3 |
| | | Receivables/payables, net | | | 2 | | | | | | | | | 2 | | | | | | | | | | | | |
| | | Total NDT funds | | | 488 | | | 318 | | | 2 | | | 804 | | | 474 | | | 239 | | | 1 | | | 712 |
| Auction rate securities | | | 17 | | | | | | 1 | | | 16 | | | 17 | | | | | | 1 | | | 16 |
| Total | | $ | 505 | | $ | 318 | | $ | 3 | | $ | 820 | | $ | 491 | | $ | 239 | | $ | 2 | | $ | 728 |
| | | | | | | September 30, 2014 | | December 31, 2013 |
| | | | | | | | | | Gross | | Gross | | | | | | | Gross | | Gross | | |
| | | | | | | Amortized | | Unrealized | | Unrealized | | | | Amortized | | Unrealized | | Unrealized | | |
| | | | | | | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value |
NDT funds: | | | | | | | | | | | | | | | | | | | | | | | | |
PPL and PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cash and cash equivalents | | $ | 17 | | | | | | | | $ | 17 | | $ | 14 | | | | | | | | $ | 14 |
| | | Equity securities | | | 281 | | $ | 384 | | | | | | 665 | | | 265 | | $ | 363 | | | | | | 628 |
| | | Debt securities | | | 217 | | | 11 | | $ | 1 | | | 227 | | | 217 | | | 7 | | $ | 3 | | | 221 |
| | | Receivables/payables, net | | | 2 | | | | | | | | | 2 | | | 1 | | | | | | | | | 1 |
| | | Total NDT funds | | $ | 517 | | $ | 395 | | $ | 1 | | $ | 911 | | $ | 497 | | $ | 370 | | $ | 3 | | $ | 864 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Auction rate securities | | | | | | | | | | | | | | | | | | | | | | | | |
| PPL | | $ | 14 | | | | | $ | 1 | | $ | 13 | | $ | 20 | | | | | $ | 1 | | $ | 19 |
| PPL Energy Supply | | | 11 | | | | | | 1 | | | 10 | | | 17 | | | | | | 1 | | | 16 |
See Note 13 for details on the securities held by the NDT funds.
There were no securities with credit losses at September 30, 20132014 and December 31, 2012.2013.
The following table shows the scheduled maturity dates of debt securities held at September 30, 2013.2014.
| | | Maturity | | Maturity | | Maturity | | Maturity | | | | | | Maturity | | Maturity | | Maturity | | Maturity | | |
| | | Less Than | 1-5 | 6-10 | in Excess | | | | | Less Than | | 1-5 | | 6-10 | | in Excess | | |
| | | 1 Year | Years | Years | of 10 Years | Total | | | 1 Year | | Years | | Years | | of 10 Years | | Total |
PPL | PPL | | | | | | | | | | | | | PPL | | | | | | | | | | |
Amortized cost | Amortized cost | | $ | 6 | | $ | 92 | | $ | 56 | | $ | 77 | | $ | 231 | Amortized cost | | $ | 13 | | $ | 85 | | $ | 58 | | $ | 75 | | $ | 231 |
Fair value | Fair value | | 6 | | | 96 | | | 58 | | 79 | | 239 | Fair value | | 13 | | 87 | | 61 | | 79 | | 240 |
| | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | PPL Energy Supply | | | | | | | | | | | | PPL Energy Supply | | | | | | | | | | |
Amortized cost | Amortized cost | | $ | 6 | | $ | 92 | | $ | 56 | | $ | 74 | | $ | 228 | Amortized cost | | $ | 13 | | $ | 85 | | $ | 58 | | $ | 72 | | $ | 228 |
Fair value | Fair value | | 6 | | | 96 | | | 58 | | 76 | | 236 | Fair value | | 13 | | 87 | | 61 | | 76 | | 237 |
The following table shows proceeds from and realized gains and losses on sales of available-for-sale securities for the periods ended September 30.
| | | Three Months | | Nine Months | | | Three Months | | Nine Months |
| | | 2013 | | 2012 | | 2013 | | 2012 | | | 2014 | | 2013 | | 2014 | | 2013 |
PPL | | | | | | | | | | |
PPL and PPL Energy Supply | | PPL and PPL Energy Supply | | | | | | | | |
Proceeds from sales of NDT securities (a) | Proceeds from sales of NDT securities (a) | | $ | 33 | | $ | 23 | | $ | 92 | | $ | 102 | Proceeds from sales of NDT securities (a) | | $ | 47 | | $ | 33 | | $ | 112 | | $ | 92 |
Other proceeds from sales | Other proceeds from sales | | | | | | | | 5 | Other proceeds from sales | | 3 | | | | 6 | | |
Gross realized gains (b) | Gross realized gains (b) | | 3 | | 2 | | 10 | | 15 | Gross realized gains (b) | | 9 | | 3 | | 17 | | 10 |
Gross realized losses (b) | Gross realized losses (b) | | 2 | | 2 | | 6 | | 8 | Gross realized losses (b) | | 2 | | 2 | | 6 | | 6 |
| | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | |
Proceeds from sales of NDT securities (a) | | $ | 33 | | $ | 23 | | $ | 92 | | $ | 102 | |
Other proceeds from sales | | | | | | | | 3 | |
Gross realized gains (b) | | 3 | | 2 | | 10 | | 15 | |
Gross realized losses (b) | | 2 | | 2 | | 6 | | 8 | |
| 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. |
1818.. Accumulated Other Comprehensive Income (Loss) (PPL and PPL Energy Supply)
The after-tax changes in AOCI by component for the three and nine monthsperiods ended September 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 |
PPL | PPL | | | | | | | | | | | | | | | | | PPL | | | | | | | | | | | | | | | | |
June 30, 2014 | | June 30, 2014 | $ | 117 | | $ | 190 | | $ | 61 | | $ | 1 | | $ | (4) | | $ | (1,764) | | $ | 1 | | $ | (1,398) |
Amounts arising during the period | | Amounts arising during the period | | (48) | | (1) | | (5) | | | | | | (1) | | | | (55) |
Reclassifications from AOCI | | Reclassifications from AOCI | | | | | (3) | | | (12) | | | | | | 1 | | | 29 | | | | | | 15 |
Net OCI during the period | | Net OCI during the period | | (48) | | | (4) | | | (17) | | | | | | 1 | | | 28 | | | | | | (40) |
September 30, 2014 | | September 30, 2014 | $ | 69 | | $ | 186 | | $ | 44 | | $ | 1 | | $ | (3) | | $ | (1,736) | | $ | 1 | | $ | (1,438) |
| | | | | | | | | | | | | | | | | | |
December 31, 2013 | | December 31, 2013 | $ | (11) | | $ | 173 | | $ | 94 | | $ | 1 | | $ | (6) | | $ | (1,817) | | $ | 1 | | $ | (1,565) |
Amounts arising during the period | | Amounts arising during the period | | 80 | | 18 | | (52) | | | | | | (3) | | | | 43 |
Reclassifications from AOCI | | Reclassifications from AOCI | | | | | (5) | | | 2 | | | | | | 3 | | | 84 | | | | | | 84 |
Net OCI during the period | | Net OCI during the period | | 80 | | | 13 | | | (50) | | | | | | 3 | | | 81 | | | | | | 127 |
September 30, 2014 | | September 30, 2014 | $ | 69 | | $ | 186 | | $ | 44 | | $ | 1 | | $ | (3) | | $ | (1,736) | | $ | 1 | | $ | (1,438) |
| | | | | | | | | | | | | | | | | | |
June 30, 2013 | June 30, 2013 | $ | (401) | | $ | 135 | | $ | 102 | | $ | 1 | | $ | (11) | | $ | (1,955) | | $ | 1 | | $ | (2,128) | June 30, 2013 | $ | (401) | | $ | 135 | | $ | 102 | | $ | 1 | | $ | (11) | | $ | (1,955) | | $ | 1 | | $ | (2,128) |
Amounts arising during the period | Amounts arising during the period | | 87 | | 15 | | (9) | | | | | | | | | | 93 | Amounts arising during the period | | 87 | | 15 | | (9) | | | | | | | | | | 93 |
Reclassifications from AOCI | Reclassifications from AOCI | | | | | | | | (6) | | | (1) | | | 2 | | | 33 | | | | | | 28 | Reclassifications from AOCI | | | | | | | | (6) | | | (1) | | | 2 | | | 33 | | | | | | 28 |
Net OCI during the period | Net OCI during the period | | 87 | | | 15 | | | (15) | | | (1) | | | 2 | | | 33 | | | | | | 121 | Net OCI during the period | | 87 | | | 15 | | | (15) | | | (1) | | | 2 | | | 33 | | | | | | 121 |
September 30, 2013 | September 30, 2013 | $ | (314) | | $ | 150 | | $ | 87 | | $ | | | $ | (9) | | $ | (1,922) | | $ | 1 | | $ | (2,007) | September 30, 2013 | $ | (314) | | $ | 150 | | $ | 87 | | $ | | | $ | (9) | | $ | (1,922) | | $ | 1 | | $ | (2,007) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2012 | December 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 period | Amounts arising during the period | | (165) | | 40 | | 77 | | | | | | | | | | (48) | Amounts arising during the period | | (165) | | 40 | | 77 | | | | | | | | | | (48) |
Reclassifications from AOCI | Reclassifications from AOCI | | | | | (2) | | | (122) | | | (1) | | | 5 | | | 101 | | | | | | (19) | Reclassifications from AOCI | | | | | (2) | | | (122) | | | (1) | | | 5 | | | 101 | | | | | | (19) |
Net OCI during the period | Net OCI during the period | | (165) | | | 38 | | | (45) | | | (1) | | | 5 | | | 101 | | | | | | (67) | Net OCI during the period | | (165) | | | 38 | | | (45) | | | (1) | | | 5 | | | 101 | | | | | | (67) |
September 30, 2013 | September 30, 2013 | $ | (314) | | $ | 150 | | $ | 87 | | $ | | | $ | (9) | | $ | (1,922) | | $ | 1 | | $ | (2,007) | September 30, 2013 | $ | (314) | | $ | 150 | | $ | 87 | | $ | | | $ | (9) | | $ | (1,922) | | $ | 1 | | $ | (2,007) |
| | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | PPL Energy Supply | | | | | | | | | | | | | | | | |
June 30, 2014 | | June 30, 2014 | | | | $ | 190 | | $ | 75 | | | | $ | (3) | | $ | (177) | | | | | $ | 85 |
Amounts arising during the period | | Amounts arising during the period | | | | (1) | | | | | | | | | | | | (1) |
Reclassifications from AOCI | | Reclassifications from AOCI | | | | | (3) | | | (5) | | | | | 1 | | | 1 | | | | | | (6) |
Net OCI during the period | | Net OCI during the period | | | | | (4) | | | (5) | | | | | 1 | | | 1 | | | | | | (7) |
September 30, 2014 | | September 30, 2014 | | | | $ | 186 | | $ | 70 | | | | $ | (2) | | $ | (176) | | | | | $ | 78 |
| | | | | | | | | | | | | | | | | | |
December 31, 2013 | | December 31, 2013 | | | | $ | 173 | | $ | 88 | | | | $ | (4) | | $ | (180) | | | | | $ | 77 |
Amounts arising during the period | | Amounts arising during the period | | | | 18 | | | | | | | | | | | | 18 |
Reclassifications from AOCI | | Reclassifications from AOCI | | | | | (5) | | | (18) | | | | | 2 | | | 4 | | | | | | (17) |
Net OCI during the period | | Net OCI during the period | | | | | 13 | | | (18) | | | | | 2 | | | 4 | | | | | | 1 |
September 30, 2014 | | September 30, 2014 | | | | $ | 186 | | $ | 70 | | | | | $ | (2) | | $ | (176) | | | | | $ | 78 |
| | | | | | | | | | | | | | | | | | |
June 30, 2013 | | June 30, 2013 | | | | $ | 135 | | $ | 144 | | | | $ | (8) | | $ | (257) | | | | | $ | 14 |
Amounts arising during the period | | Amounts arising during the period | | | | 15 | | | | | | | | | | | | 15 |
Reclassifications from AOCI | | Reclassifications from AOCI | | | | | | | | (29) | | | | | 1 | | | 3 | | | | | | (25) |
Net OCI during the period | | Net OCI during the period | | | | | 15 | | | (29) | | | | | 1 | | | 3 | | | | | | (10) |
September 30, 2013 | | September 30, 2013 | | | | $ | 150 | | $ | 115 | | | | $ | (7) | | $ | (254) | | | | | $ | 4 |
| | | | | | | | | | | | | | | | | | |
December 31, 2012 | | December 31, 2012 | | | | $ | 112 | | $ | 211 | | | | $ | (10) | | $ | (265) | | | | | $ | 48 |
Amounts arising during the period | | Amounts arising during the period | | | | 40 | | | | | | | | | | | | 40 |
Reclassifications from AOCI | | Reclassifications from AOCI | | | | | (2) | | | (96) | | | | | 3 | | | 11 | | | | | | (84) |
Net OCI during the period | | Net OCI during the period | | | | | 38 | | | (96) | | | | | 3 | | | 11 | | | | | | (44) |
September 30, 2013 | | September 30, 2013 | | | | $ | 150 | | $ | 115 | | | | | $ | (7) | | $ | (254) | | | | | $ | 4 |
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 September 30, 2013.30. 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.
| | | Three Months | | |
| | | PPL | | PPL Energy Supply | | Affected Line Item on the |
Details about AOCI | | 2014 | | 2013 | | 2014 | | 2013 | | Statements of Income |
| | | | | | | | | | | | | | | |
Available-for-sale securities | | $ | 7 | | $ | 1 | | $ | 7 | | $ | 1 | | Other Income (Expense) - net |
Total Pre-tax | | | 7 | | | 1 | | | 7 | | | 1 | | |
Income Taxes | | | (4) | | | (1) | | | (4) | | | (1) | | |
Total After-tax | | | 3 | | | | | | 3 | | | | | |
| | | | | | | | | | | | | | | |
Qualifying derivatives | | | | | | | | | | | | | | |
| Interest rate swaps | | | (5) | | | (5) | | | | | | | | Interest Expense |
| Cross-currency swaps | | | 12 | | | (25) | | | | | | | | Other Income (Expense) - net |
| | | | | | | (1) | | | | | | | | Interest Expense |
| Energy commodities | | | (2) | | | 54 | | | (2) | | | 54 | | Unregulated wholesale energy |
| | | | 8 | | | (11) | | | 8 | | | (11) | | Energy purchases |
| | | | 1 | | | 4 | | | 1 | | | 4 | | Discontinued operations |
| | | | 1 | | | 1 | | | | | | 1 | | Other |
Total Pre-tax | | | 15 | | | 17 | | | 7 | | | 48 | | |
Income Taxes | | | (3) | | | (11) | | | (2) | | | (19) | | |
Total After-tax | | | 12 | | | 6 | | | 5 | | | 29 | | |
| | | | | | | | | | | | | | | |
Equity investees' AOCI | | | | | | 1 | | | | | | | | Other Income (Expense) - net |
Total Pre-tax | | | | | | 1 | | | | | | | | |
Income Taxes | | | | | | | | | | | | | | |
Total After-tax | | | | | | 1 | | | | | | | | |
| | | | | | | | | | | | | | | |
Defined benefit plans | | | | | | | | | | | | | | |
| Prior service costs | | | (2) | | | (3) | | | (2) | | | (2) | | |
| Net actuarial loss | | | (38) | | | (45) | | | (1) | | | (5) | | |
Total Pre-tax | | | (40) | | | (48) | | | (3) | | | (7) | | |
Income Taxes | | | 10 | | | 13 | | | 1 | | | 3 | | |
Total After-tax | | | (30) | | | (35) | | | (2) | | | (4) | | |
| | | | | | | | | | | | | | | |
Total reclassifications during the period | | $ | (15) | | $ | (28) | | $ | 6 | | $ | 25 | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | Nine Months | | |
| | | PPL | | PPL Energy Supply | | Affected Line Item on the |
Details about AOCI | | 2014 | | 2013 | | 2014 | | 2013 | | Statements of Income |
| | | | | | | | | | | | | | | |
Available-for-sale securities | | $ | 11 | | $ | 4 | | $ | 11 | | $ | 4 | | Other Income (Expense) - net |
Total Pre-tax | | | 11 | | | 4 | | | 11 | | | 4 | | |
Income Taxes | | | (6) | | | (2) | | | (6) | | | (2) | | |
Total After-tax | | | 5 | | | 2 | | | 5 | | | 2 | | |
| | | | | | | | | | | | | | | |
Qualifying derivatives | | | | | | | | | | | | | | |
| Interest rate swaps | | | (12) | | | (14) | | | | | | | | Interest Expense |
| Cross-currency swaps | | | (17) | | | 45 | | | | | | | | Other Income (Expense) - net |
| | | | 1 | | | | | | | | | | | Interest Expense |
| Energy commodities | | | (1) | | | 178 | | | (1) | | | 178 | | Unregulated wholesale energy |
| | | | 23 | | | (41) | | | 23 | | | (41) | | Energy purchases |
| | | | 6 | | | 20 | | | 6 | | | 20 | | Discontinued operations |
| | | | 2 | | | 2 | | | 1 | | | 2 | | Other |
Total Pre-tax | | | 2 | | | 190 | | | 29 | | | 159 | | |
Income Taxes | | | (4) | | | (68) | | | (11) | | | (63) | | |
Total After-tax | | | (2) | | | 122 | | | 18 | | | 96 | | |
| | | | | | | | | | | | | | | |
Equity investees' AOCI | | | | | | 1 | | | | | | | | Other Income (Expense) - net |
Total Pre-tax | | | | | | 1 | | | | | | | | |
Income Taxes | | | | | | | | | | | | | | �� |
Total After-tax | | | | | | 1 | | | | | | | | |
| | | | | | | | | | | | | | | |
Defined benefit plans | | | | | | | | | | | | | | |
| Prior service costs | | | (6) | | | (8) | | | (4) | | | (5) | | |
| Net actuarial loss | | | (110) | | | (138) | | | (6) | | | (18) | | |
Total Pre-tax | | | (116) | | | (146) | | | (10) | | | (23) | | |
Income Taxes | | | 29 | | | 40 | | | 4 | | | 9 | | |
Total After-tax | | | (87) | | | (106) | | | (6) | | | (14) | | |
| | | | | | | | | | | | | | |
Total reclassifications during the period | | $ | (84) | | $ | 19 | | $ | 17 | | $ | 84 | | |
| | | Three Months |
| | | Affected Line Item on the Statements of Income |
| | | | | | | | | | | Other | | | | | | | | | | | | |
| | | Wholesale | | | | | | | | Income | | | | | | | | | | | | |
| | | energy | | Energy | | | | | (Expense), | | Interest | | Total | | Income | | Total |
Details about AOCI | | marketing | | purchases | | Depreciation | | net | | Expense | | Pre-tax | | Taxes | | After-tax |
PPL | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | $ | 1 | | | | | $ | 1 | | $ | (1) | | | |
Qualifying derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | | | | | | | | | | | | $ | (5) | | | (5) | | | 2 | | $ | (3) |
| Cross-currency swaps | | | | | | | | | | | | (25) | | | (1) | | | (26) | | | 7 | | | (19) |
| Energy commodities | | $ | 58 | | $ | (11) | | $ | 1 | | | | | | | | | 48 | | | (20) | | | 28 |
| Total | | $ | 58 | | $ | (11) | | $ | 1 | | $ | (25) | | $ | (6) | | | 17 | | | (11) | | | 6 |
Equity investees' AOCI | | | | | | | | | | | $ | 1 | | | | | | 1 | | | | | | 1 |
Defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | | | | | | | | | | | | | | | | | | (3) | | | 1 | | | (2) |
| Net actuarial loss | | | | | | | | | | | | | | | | | | (45) | | | 12 | | | (33) |
| Total | | | | | | | | | | | | | | | | | $ | (48) | | $ | 13 | | | (35) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total reclassifications | | | | | | | | | | | | | | | | | | | | | | |
| during the period | | | | | | | | | | | | | | | | | | | | | | | $ | (28) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | $ | 1 | | | | | $ | 1 | | $ | (1) | | | |
Qualifying derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy commodities | | $ | 58 | | $ | (11) | | $ | 1 | | | | | | | | | 48 | | | (19) | | $ | 29 |
Defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | | | | | | | | | | | | | | | | | | (2) | | | 1 | | | (1) |
| Net actuarial loss | | | | | | | | | | | | | | | | | | (5) | | | 2 | | | (3) |
| Total | | | | | | | | | | | | | | | | | $ | (7) | | $ | 3 | | | (4) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total reclassifications | | | | | | | | | | | | | | | | | | | | | | |
| during the period | | | | | | | | | | | | | | | | | | | | | | | $ | 25 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months |
| | | Affected Line Item on the Statements of Income |
| | | | | | | | | | | Other | | | | | | | | | | | | |
| | | Wholesale | | | | | | | | Income | | | | | | | | | | | | |
| | | energy | | Energy | | | | | (Expense), | | Interest | | Total | | Income | | Total |
Details about AOCI | | marketing | | purchases | | Depreciation | | net | | Expense | | Pre-tax | | Taxes | | After-tax |
PPL | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | $ | 4 | | | | | $ | 4 | | $ | (2) | | $ | 2 |
Qualifying derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | | | | | | | | | | | | $ | (14) | | | (14) | | | 6 | | | (8) |
| Cross-currency swaps | | | | | | | | | | | | 45 | | | | | | 45 | | | (10) | | | 35 |
| Energy commodities | | $ | 198 | | $ | (41) | | $ | 2 | | | | | | | | | 159 | | | (64) | | | 95 |
| Total | | $ | 198 | | $ | (41) | | $ | 2 | | $ | 45 | | $ | (14) | | | 190 | | | (68) | | | 122 |
Equity investees' AOCI | | | | | | | | | | | $ | 1 | | | | | | 1 | | | | | | 1 |
Defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | | | | | | | | | | | | | | | | | | (8) | | | 3 | | | (5) |
| Net actuarial loss | | | | | | | | | | | | | | | | | | (138) | | | 37 | | | (101) |
| Total | | | | | | | | | | | | | | | | | $ | (146) | | $ | 40 | | | (106) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total reclassifications | | | | | | | | | | | | | | | | | | | | | | |
| during the period | | | | | | | | | | | | | | | | | | | | | | | $ | 19 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | $ | 4 | | | | | $ | 4 | | $ | (2) | | $ | 2 |
Qualifying derivatives | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy commodities | | $ | 198 | | $ | (41) | | $ | 2 | | | | | | | | | 159 | | | (63) | | | 96 |
Defined benefit plans | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | | | | | | | | | | | | | | | | | | (5) | | | 2 | | | (3) |
| Net actuarial loss | | | | | | | | | | | | | | | | | | (18) | | | 7 | | | (11) |
| Total | | | | | | | | | | | | | | | | | $ | (23) | | $ | 9 | | | (14) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total reclassifications | | | | | | | | | | | | | | | | | | | | | | |
| during the period | | | | | | | | | | | | | | | | | | | | | | | $ | 84 |
(LKE and KU)
For the three and nine months ended September 30, 2013, the changes in AOCI and the effect of reclassifications from AOCI on the statement of income for LKE and KU were insignificant.
19. New Accounting Guidance Pending Adoption
(All Registrants)
Accounting for Obligations Resulting from Joint and Several Liability ArrangementsReporting of Discontinued Operations
Effective January 1,In April 2014, the Registrants will retrospectively adoptFinancial Accounting Standards Board (FASB) issued accounting guidance that changes the criteria for determining what should be classified as a discontinued operation and also changes the recognition, measurementrelated presentation and disclosure requirements. A discontinued operation may include a component of certain obligations resulting from jointan entity or a group of components of an entity, or a business activity.
A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the entity's operations and several liability arrangementsfinancial results when the amountany of the obligation is fixed atfollowing occurs: (1) The components of an entity or group of components of an entity meets the reporting date. If the obligation is determinedcriteria to be classified as held for sale, (2) The component of an entity or group of components of an entity is disposed of by sale, or (3) The component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in the scope ofa distribution to owners in a spinoff).
For public business entities, this guidance it willshould be measuredapplied prospectively to all disposals (or classifications as held for sale) of components of an entity that occur within the sum of the amount the reporting entity agreed to payannual periods beginning on the basis of its arrangements among its co-obligorsor after December 15, 2014, 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.interim periods within those years. Early adoption is permitted.
The Registrants are assessing in which period they will adopt this new guidance. The new guidance will impact the potential impactamounts presented as discontinued operations on the Statements of adoption, which is not expected to be material.Income and will enhance the related disclosure requirements.
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 EntityRevenue from Contracts with Customers
Effective January 1,In May 2014, PPL will prospectively adoptthe FASB issued accounting guidance that requiresestablishes a cumulative translation adjustmentcomprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be released into earnings when an entity ceases to have a controlling financial interestentitled in a subsidiaryexchange for those goods 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. services.
For the step acquisition of previously held equity method investments that are foreignpublic business entities, this guidance clarifiescan be applied using either a full retrospective or modified retrospective transition method, beginning in annual reporting periods beginning after December 15, 2016 and interim periods within those years. Early adoption is not permitted. The Registrants will adopt this guidance effective January 1, 2017.
The Registrants are currently assessing the impact of adopting this guidance, as well as the transition method they will use.
Reporting Uncertainties about an Entity's Ability to Continue as a Going Concern
In August 2014, the FASB issued accounting guidance which will require management to assess, for each interim and annual period, whether there are conditions or events that raise substantial doubt about an entity's ability to continue as a going concern. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the amount of accumulated other comprehensive income that is reclassified and included inentity will be unable to meet its obligations as they become due within one year after 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.
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 indate the financial statements are issued.
When management identifies conditions or events that raise substantial doubt about an entity's ability to continue as a reductiongoing concern, management is required 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 lawdisclose information that enables users 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 to understand the principal conditions or events that raised substantial doubt about the entity's ability to continue as a liabilitygoing concern and management's evaluation of the significance of those conditions or events. If substantial doubt about the entity's ability to continue as a going concern has been alleviated as a result of management's plan, the entity should disclose information that allows the users of the financial statements to understand those plans. If the substantial doubt about the entity's ability to continue as a going concern is not alleviated by management's plans, management's plans to mitigate the conditions or events that gave rise to the substantial doubt about the entity's ability to continue as a going concern should be combined with deferred tax assets.disclosed, as well as a statement that there is substantial doubt the entity's ability to continue as a going concern within one year after the date the financial statements are issued.
For all entities, this guidance should be applied prospectively within the annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted.
The Registrants are assessing in which period they will adopt this new guidance. The adoption of this guidance is not expected to have a significant impact on the Registrants.
Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
In November 2014, the FASB issued guidance that clarifies how current accounting guidance should be interpreted when evaluating the economic characteristics and risks of a host contract of a hybrid financial instrument issued in the form of a share. This guidance does not change the current criteria for determining whether separation of an embedded derivative feature from a hybrid financial instrument is required. Entities are still required to evaluate whether the economic risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria.
An entity should consider the substantive terms and features of the entire hybrid financial instrument, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract to determine whether the host contract is more akin to a debt instrument or more akin to an equity instrument. An entity should assess the relative strength of the debt-like and equity-like terms and features when determining how to weight those terms and features.
For public business entities, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and should be applied using a modified retrospective method for existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year the guidance is adopted. Early adoption is permitted. Retrospective application is permitted but not required.
The Registrants will adopt this guidance on January 1, 2016. The Registrants are currently assessing this guidance, which is not expected to have a significant impact on the Registrants.
Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations
(All Registrants)
This combined Item"Item 2. "Management'sCombined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL Corporation and each of 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.Registrants. 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 the Registrants' Condensed Consolidated Financial Statements and the accompanying Notes and with the Registrants' 20122013 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 each Registrant and itsRegistrant's business strategy, selected information ona summary of PPL's segment earnings, a description of key factors expected to impact future earnings and a discussion of important financial and operational developments. |
· | "Results of Operations" for PPL provides a more detailed analysis of earnings by segment, and for the Subsidiary Registrants includes a summary of earnings and ends with "Statement of Income Analysis," which includesearnings. For all Registrants, "Margins" provides explanations of non-GAAP financial measures and "Statement of Income Analysis" addresses significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 20132014 with the same periods in 2012.2013. |
· | "Financial Condition - Liquidity and Capital Resources" provides an analysis of the Registrants' liquidity positionpositions and credit profiles. This section also includes a discussion of rating agency actions. |
· | "Financial Condition - Risk Management" provides an explanation of the Registrants' risk management programs relating to market and credit risk. |
(PPL)
PPL, headquartered in Allentown, Pennsylvania, is an energy and utility holding company that throughcompany. Through subsidiaries, PPL delivers electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia and Tennessee; delivers natural gas to customers in Kentucky; generates electricity from power plants in the northeastern, northwestern and southeastern U.S.,; and markets wholesale andor retail energy primarily in the northeastern and northwestern portions of the U.S., delivers electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia and Tennessee and delivers natural gas to customers in Kentucky.
PPL's principal subsidiaries are shown below (* denotes an SEC registrant):
| | | | | | | | | PPL Corporation* | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | PPL Capital Funding | | | | | | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | PPL Global ● Engages in the regulated 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 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | U.K. Regulated Segment | | Kentucky Regulated Segment | | Pennsylvania Regulated Segment | | Supply Segment | | |
PPL's reportable segments' results primarily represent the results of its related Subsidiary Registrant(s),Registrants, 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.Registrants. The U.K. Regulated segment does not have a related Subsidiary Registrant.
(PPL and PPL Energy Supply)
In June 2014, PPL and PPL Energy Supply executed definitive agreements with affiliates of Riverstone to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy. See "Business Strategy" and "Financial and Operational Developments - Other Financial and Operational Developments - Anticipated Spinoff of PPL Energy Supply" below for additional information.
(PPL Energy Supply)
PPL Energy Supply, headquartered in Allentown, Pennsylvania is an indirect wholly owned subsidiary of PPL and 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 a direct wholly owned subsidiary of PPL and a regulated public utility that 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. LKEPPL and a holding company that 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 corporate 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 wholly owned subsidiary of LKE and 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 the FERC under the Federal Power Act. LG&E is a wholly owned subsidiary of LKE.
(KU)
KU, headquartered in Lexington, Kentucky, is a wholly owned subsidiary of LKE and 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 the FERC under the Federal Power Act. KU is a wholly owned subsidiary of LKE.
(All Registrants except PPL Electric)
The capacity (summer rating) of regulatedserves its Virginia customers under the Old Dominion Power name 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. |
its Kentucky and Tennessee customers under the KU name.
(PPL and PPL Energy Supply)
In recognition of the changes in recent years in the wholesale power markets, PPL performed an in-depth analysis of its business mix to determine the best available opportunities to maximize the value of its competitive generation business for shareowners. As a result, in June 2014, PPL and PPL Energy Supply executed definitive agreements with affiliates of Riverstone to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy. Under the terms of the agreements, at closing, PPL will spin off to PPL shareowners the parent of PPL Energy Supply, recently formed for purposes of this transaction, which by merging with a special purpose subsidiary of Talen Energy, will immediately thereafter become a subsidiary of Talen Energy. Substantially contemporaneous with the spinoff and merger, RJS Power will be contributed, directly or indirectly, by its owners to become a subsidiary of Talen Energy. Following completion of these transactions, PPL shareowners will own 65% of Talen Energy and affiliates of Riverstone will own 35%. PPL will have no continuing ownership interest in, control of, or affiliation with Talen Energy and PPL's shareowners will receive a number of Talen Energy shares at closing based on the number of PPL shares owned as of the spinoff record date. The spinoff will have no effect on the number of PPL common shares owned by PPL shareowners or the number of shares of PPL common stock outstanding. The transaction is intended to be tax-free to PPL and its shareowners for U.S. federal income tax purposes and is subject to customary closing conditions, including receipt of certain regulatory approvals by the NRC, FERC, DOJ and PUC. In addition, there must be available, subject to certain conditions, at least $1 billion of undrawn capacity, after excluding any letters of credit or other credit support measures posted in connection with energy marketing and trading transactions then outstanding, under a Talen Energy (or its subsidiaries) revolving credit or similar facility. The transaction is expected to close in the first or second quarter of 2015. Talen Energy will own and operate a diverse mix of approximately 14,000 MW (after proposed divestitures to meet FERC market power standards) of generating capacity in certain U.S. competitive energy markets primarily in PJM and ERCOT.
Following the transaction, PPL will focus solely on its regulated utilities businesses in the U.K., Kentucky and Pennsylvania, serving more than 10 million customers. PPL intends to maintain a strong balance sheet and to manage its finances consistent with maintaining investment grade credit ratings and providing a competitive total shareowner return, including an attractive dividend. In connection with the transaction, and following any required transition services period, PPL is targeting to reduce its annual corporate support costs by an estimated $185 million. This includes $110 million of corporate support costs to be transferred to Talen Energy and $75 million of corporate support costs to be eliminated as a result of workforce reductions and other corporate cost savings.
See "Financial and Operational Developments - Other Financial and Operational Developments - Anticipated Spinoff of PPL Energy Supply" and "Part II. Other Information - Item 1A. Risk Factors" below for additional information.
The strategy for PPL Energy Supply is to achieve disciplined optimization of energy supply marginsoptimize the value from its competitive generation asset and marketing portfolios 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 and positive cash flow during thethis current and projected period of low commodityenergy and capacity 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 provide efficient, reliable and safe operations and strong customer service, maintain constructive regulatory relationships and achieve timely recovery of costs. These regulated businesses also focus on providing competitively priced energy to customers and achieving stable, long-term growth in earnings and rate base, or RAV, as applicable. Both rate base and RAV are expected to grow for the foreseeable future as a result of significant capital expenditure programs to maintain existing assets and improvingto improve system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to electriccoal-fired electricity generation facilities. These regulated businesses
focus on timelyFuture RAV for WPD will also be affected by RIIO-ED1, effective April 1, 2015, as the recovery of costs, efficient, reliableperiod for assets placed in service after that date will be extended from 20 to 45 years. In addition, incentive targets have been adjusted in RIIO-ED1, resulting in lower overall incentive revenues available to be earned. See "Financial and safe operations, strong customer serviceOperational Developments - Other Financial and constructive regulatory relationships.Operational Developments - RIIO-ED1 - Fast Tracking" below for additional information.
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 and a return on, as appropriate, prudently incurred costs. In Pennsylvania, the recently approvedFERC transmission formula rate, DSIC mechanism will help PPL Electricand other recovery mechanisms are in place to reduce regulatory lag and provide for timely recovery of distribution reliability-related capital investment.and a return on, as appropriate, prudently incurred costs. See "Distribution System Improvement Charge" below for additional information on the implementation of the DSIC mechanism"Item 1. Business - Segment Information - U.K. Regulated Segment - Revenues and Regulation" in PPL's 2013 and "RIIO-ED1" belowForm 10-K for changes to the regulatory framework intended to encourage investment in regulated infrastructurethe U.K. applicable to WPD beginning in April 2015.
(PPL)
Earnings generated by PPL's U.K. subsidiaries are subject to foreign currency translation risk. The U.K. subsidiaries also have currency exposure to the U.S. dollar to the extent they have U.S. dollar denominated debt. To manage these risks, PPL generally uses contracts such as forwards, options and cross currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts.
(All Registrants)
To manage financing costs and access to credit markets, and to fund capital expenditure programs,expenditures, a key objective forof the Registrants is to maintain strongtargeted 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. To manage these risks, PPL generally uses contracts such as forwards, options, swaps and insurance contracts.
Financial and Operational Developments
EarningsPPL's earnings by component of PPL's reportable segments for the periods ended September 30 were as follows.follows:
| | | Three Months | | Nine Months | | | Three Months | | Nine Months |
| | | 2013 | | 2012 | | % Change | | 2013 | | 2012 | | % Change | | | 2014 | | 2013 | | % Change | | 2014 | | 2013 | | % 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 | |
U.K. Regulated | | U.K. Regulated | | $ | 295 | | $ | 183 | | | 61 | | $ | 688 | | $ | 741 | | | (7) |
Kentucky Regulated | | Kentucky Regulated | | 82 | | 93 | | (12) | | 247 | | 227 | | 9 |
Pennsylvania Regulated | | Pennsylvania Regulated | | 57 | | 51 | | 12 | | 194 | | 160 | | 21 |
Supply | | Supply | | 86 | | 91 | | (5) | | 16 | | 122 | | (87) |
Corporate and Other (a) | | Corporate and Other (a) | | | (23) | | | (8) | | 188 | | | (103) | | | (22) | | 368 |
Net Income Attributable to | Net Income Attributable to | | | | | | | | | | | | | Net Income Attributable to | | | | | | | | | | | | |
| PPL Shareowners | | $ | 410 | | $ | 355 | | | 15 | | $ | 1,228 | | $ | 1,167 | | | 5 | PPL Shareowners | | $ | 497 | | $ | 410 | | | 21 | | $ | 1,042 | | $ | 1,228 | | | (15) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
EPS - basic | EPS - basic | | $ | 0.65 | | $ | 0.61 | | 7 | | $ | 2.03 | | $ | 2.00 | | 2 | EPS - basic | | $ | 0.74 | | $ | 0.65 | | | 14 | | $ | 1.60 | | $ | 2.03 | | | (21) |
EPS - diluted (b) | EPS - diluted (b) | | $ | 0.62 | | $ | 0.61 | | 2 | | $ | 1.90 | | $ | 2.00 | | (5) | EPS - diluted (b) | | $ | 0.74 | | $ | 0.62 | | | 19 | | $ | 1.57 | | $ | 1.90 | | | (17) |
(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.2014 includes certain costs related to the anticipated spinoff of PPL Energy Supply. See the following table of special items for additional information. |
(b) | See "Equity"2011 Equity Units" below and Note 4 to the Financial Statements 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 duringfor the periods ended September 30. See PPL's "Results of Operations -– Segment Earnings" for details of theseeach segment's special items.
| | | Three Months | | Nine Months | | | Three Months | | Nine Months |
| | | 2013 | | 2012 | | Change | | 2013 | | 2012 | | Change | | | 2014 | | 2013 | | Change | | 2014 | | 2013 | | Change |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.K. Regulated | U.K. Regulated | | $ | (16) | | $ | 41 | | $ | (57) | | $ | 78 | | $ | 39 | | $ | 39 | U.K. Regulated | | $ | 111 | | $ | (16) | | $ | 127 | | $ | 20 | | $ | 78 | | $ | (58) |
Kentucky Regulated | Kentucky Regulated | | | | | | | | | | | | 2 | | | (1) | | 3 | Kentucky Regulated | | (1) | | | | (1) | | | | 2 | | | (2) |
Pennsylvania Regulated | | Pennsylvania Regulated | | 2 | | | | 2 | | (2) | | | | (2) |
Supply | Supply | | | (6) | | | (105) | | | 99 | | | (49) | | | 3 | | | (52) | Supply | | 41 | | (6) | | 47 | | (144) | | (49) | | (95) |
Corporate and Other (a) | | Corporate and Other (a) | | | (17) | | | | | | (17) | | | (73) | | | | | | (73) |
Total PPL | Total PPL | | $ | (22) | | $ | (64) | | $ | 42 | | $ | 31 | | $ | 41 | | $ | (10) | Total PPL | | $ | 136 | | $ | (22) | | $ | 158 | | $ | (199) | | $ | 31 | | $ | (230) |
(a) | The three month period includes $3 million of deferred income tax expense to adjust valuation allowances on deferred tax assets for state net operating loss carryforwards, $3 million of external transaction costs and $11 million of separation benefits related to the anticipated spinoff of PPL Energy Supply. The nine month period includes $49 million of deferred income tax expense to adjust valuation allowances on deferred tax assets for state net operating loss carryforwards, $13 million of external transaction costs and $11 million of separation benefits related to the anticipated spinoff of PPL Energy Supply. See Note 8 to the Financial Statements for additional information. |
The changes in PPL's reportable segments results for the three and nine-month periods,nine months ended September 30, 2014 compared with 2013, excluding the impact of special items, were due to the following factors (on an after-tax basis):
· | IncreaseThe decrease at the U.K. Regulated segment for the three-monththree month period was primarily due to higher electricity delivery pricesU.S. and lower U.K. income taxes resulting from a tax benefit recorded in the prior year and higher taxes in 2014 related to cash repatriation, and higher depreciation and higher financing costs, partially offset by an accrual for over-recovery of current-yearhigher utility revenues lower sales volume due to weatherthe April 2014 price increase and higherlower operation and maintenance expense. Increase at the U.K. Regulated segmentexpenses. The increase for the nine-monthnine month period was primarily due to higher electricity delivery prices, increased sales volumeutility revenues due to April 2014 and April 2013 price increases, net of adverse weather impacts, and lower U.K.pension expense, partially offset by higher U.S. income taxes resulting from a tax benefit recorded in the prior year and higher taxes in 2014 related to cash repatriation, and higher depreciation and higher financing costs. |
income taxes, partially offset by an accrual for over-recovery of current-year revenues, higher operation and maintenance expense and higher depreciation.
· | IncreasesThe decrease at the Kentucky Regulated segment for both periodsthe three month period was primarily due to lower sales volumes due to mild weather, higher base rates that became effective January 1, 2013operation and returns from additional environmental capital investments. The three-month period was alsomaintenance expenses and higher financing costs, 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 fromreturns on additional environmental capital investments. The increase for the nine-monthnine month period was alsoprimarily due to lower operationreturns on additional environmental capital investments and maintenance expense,higher sales volumes driven by unusually cold weather in the first quarter of 2014, partially offset by higher depreciation.operation and maintenance expenses driven by storm-related expenses and timing of generation maintenance outages, and higher depreciation expense. |
· | DecreaseThe Pennsylvania Regulated segment earnings for the three month period were flat. The increase for the nine month period was primarily due to returns on additional transmission and distribution improvement capital investments, and higher sales volume driven by unusually cold weather in the first quarter of 2014, partially offset by higher financing costs. |
· | The decrease at the Supply segment for the three-monththree month period was primarily due to lower baseloadmargins due to lower hedged energy prices and lower baseload generation, highercapacity prices, partially offset by favorable asset performance, lower income taxes resulting from an adjustment of deferred tax assets recorded in the prior year, lower operation and maintenance expenseexpenses and higher income taxes.lower financing costs. The decline in segment earnings was partially offset by higher capacity prices. Decrease at the Supply segmentdecrease for the nine-monthnine month period was 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 favorable asset performance, net benefits due to unusually cold weather in the first quarter of 2014, higher capacity prices, higher intermediate and peaking margins and higher baseload generation. The highergains on certain commodity positions, lower income taxes for both periods resulted primarilyresulting from a non-cashan adjustment of deferred tax assets.assets recorded in the prior year and lower financing costs. |
See "Results of Operations" below for further discussion of PPL's reportable segments and analysis of results of operations.
(PPL)
Excluding special items, higherlower earnings are expected in 20132014 compared with 2012. However, 2013, earnings are expected to decline on a diluted EPS basisprimarily due to higher average shares treated as outstanding.lower energy margins in the Supply segment. The factors underlying these projections by segment and Subsidiary Registrant are reflecteddiscussed below (on an after-tax basis).
(PPL's U.K. Regulated Segment)
Excluding special items, higher earnings are projected in 20132014 compared with 2012,2013, primarily driven by higher electricity delivery pricesrevenue and lower pension expense, partially offset by higher income taxes, partially offsethigher depreciation and higher financing costs.
(PPL's Kentucky Regulated Segment and LKE, LG&E and KU)
Excluding special items, lower earnings are projected in 2014 compared with 2013, primarily driven 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 drivenfinancing costs, partially offset by base rate increases and returns on additional environmental capital investments.investments and increased sales volumes.
(PPL's Pennsylvania Regulated Segment and PPL Electric)
Excluding special items, higher earnings are projected in 20132014 compared with 2012,2013, primarily driven by higher distribution revenues from the January 1, 2013 base rate increase and higher transmission margins, due to additionalreturns on distribution improvement capital investment,investments and a benefit from a change in estimate of a regulatory liability, partially offset by higher depreciationfinancing costs and higher interest expense.income taxes.
(PPL's Supply Segment and PPL Energy Supply)
Excluding special items, lower earnings are projected in 20132014 compared with 2012,2013, primarily driven by lower energy prices, higher fuel costs, higher depreciation, higher taxes and higher financing costs,capacity prices, partially offset by the net benefits due to unusually cold weather in the first quarter of 2014, lower operationfinancing costs and maintenance expense, higher capacity prices and higher baseload generation output.lower income taxes.
(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 and "Item 1A. Risk Factors" in this Form 10-Q (as applicable) and "Item 1. Business" and "Item 1A. Risk Factors" in the Registrants' 20122013 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.
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, theThe 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 either to either temporarily or permanently close, or place in long-term reserve status, and/or impair certain of their coal-fired generating plants.
(PPL and PPL Energy Supply)
In 2012,the fourth quarter of 2013, management tested the Brunner Island and Montour plants for impairment and concluded neither was impaired as of December 31, 2013. There were no events or changes in circumstances that indicated a recoverability test was required to be performed in 2014. The carrying value of the Pennsylvania coal-fired generation assets was $2.5 billion as of September 30, 2014 ($1.3 billion for Brunner Island and $1.2 billion for Montour).
As a result of current economic and market conditions, the announced transaction with affiliates of Riverstone to form Talen Energy, PPL Energy Supply's current sub-investment grade credit rating and Talen Energy's expected sub-investment grade credit rating, PPL Energy Supply announcedis reviewing its intention, beginningbusiness and operational plans. This review includes capital and operation and maintenance expenditures, its hedging strategies and potential plant modifications to burn lower cost fuels. See "Margins - Changes 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. PPLNon-GAAP Financial Measures - Unregulated Gross 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 KUMargins" below for additional information regarding the anticipated retirement of these units as well as planson energy margins. Full-year 2014 energy margins are projected to buildbe lower compared to 2013 due to a combined-cycle natural gas facilityhigher average hedge price in Kentucky.2013, partially offset by higher pricing on unhedged generation.
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.
(All Registrants)
The Registrants cannot predict the future impact that future economic and market conditions and changes in regulatory requirements may have on their financial condition or results of operations.
Labor Union Agreements
(PPL, PPL Energy Supply and PPL Electric)
PPL, PPL Energy Supply and PPL Electric finalized a new three-year labor agreement with IBEW local 1600 in May 2014 and the agreement was ratified in early June 2014. As part of efforts to reduce operations and maintenance expenses, the new agreement offered a one-time voluntary retirement window to certain bargaining unit employees. As a result, in the second quarter of 2014, estimated separation benefits of $29 million were recorded ($23 million for PPL Energy Supply and $6 million for PPL Electric). During the three months ended September 30, 2014, based on final employee acceptances of the offer, PPL reduced the previously recorded estimated amounts by $9 million ($6 million for PPL Energy Supply and $3 million for PPL Electric). As a result, for the nine months ended September 30, 2014, the following total separation benefits have been recorded.
| | | | | | | | | |
| | | | | PPL Energy | | |
| | PPL | | Supply | | PPL Electric |
| | | | | | | | | |
Pension Benefits | | $ | 13 | | $ | 11 | | $ | 2 |
Severance Compensation | | | 7 | | | 6 | | | 1 |
Total Separation Benefits | | $ | 20 | | $ | 17 | | $ | 3 |
| | | | | | | | | |
Number of Employees | | | 121 | | | 105 | | | 15 |
The separation benefits are included in "Other operation and maintenance" on the Statement of Income. The liability for pension benefits is included in "Accrued pension obligations" on the Balance Sheet at September 30, 2014. All of the severance compensation was paid in the third quarter of 2014. The remaining terms of the new labor agreement are not expected to have a significant impact on the financial results of PPL, PPL Energy Supply or PPL Electric.
(LKE, LG&E and KU)
In August 2014, KU and the USWA ratified a three-year labor agreement through August 2017 containing 2.5% wage increases for each year. The agreement covers approximately 74 employees.
In November 2014, LG&E and the IBEW ratified a three-year labor agreement through November 2017 containing 2.5% wage increases for each year. The agreement covers approximately 700 employees.
Anticipated Spinoff of PPL Energy Supply
(PPL, PPL Energy Supply and PPL Electric)
Following the announcement of the transaction to form Talen Energy as discussed in "Business Strategy" above, efforts were initiated to identify the appropriate staffing for Talen Energy and for PPL and its subsidiaries following completion of the spinoff. Organizational plans were substantially completed in the third quarter of 2014 and staffing selections are in progress and expected to be completed by the end of 2014.
The new organizational plans identify the need to resize and restructure the organizations of both PPL and PPL Energy Supply. As a result, during the third quarter of 2014, estimated charges for employee separation benefits were recorded in "Other operation and maintenance" on the Statement of Income and in "Other current liabilities" on the Balance Sheet as follows.
| | | | | PPL Energy | | PPL |
| | PPL | | Supply | | Electric |
| | | | | | | | | |
Separation benefits | | $ | 30 | | $ | 12 | | $ | 1 |
Number of positions | | | 265 | | | 100 | | | 10 |
The separation benefits incurred include cash severance compensation, lump sum COBRA reimbursement payments and outplacement services. As staffing selections are completed, revisions to the estimated costs will be recognized primarily in the fourth quarter of 2014.
Additional costs to be incurred include accelerated stock based compensation and pro-rated performance based cash incentive and stock based compensation awards primarily for PPL Energy Supply employees and for PPL employees who will become PPL Energy Supply employees in connection with the transaction. These costs will be recognized at the spinoff closing date. PPL and PPL Energy Supply estimate these additional costs will be in the range of $30 million to $40 million.
(PPL)
As a result of the spinoff announcement, PPL recorded $3 million and $49 million of deferred income tax expense during the three and nine months ended September 30, 2014 to adjust valuation allowances on deferred tax assets primarily for state net operating loss carryforwards that were previously supported by the future earnings of PPL Energy Supply.
In addition, PPL recorded $5 million and $21 million of third-party costs during the three and nine months ended September 30, 2014 related to this transaction primarily in "Other Income (Expense) - net" on the Statement of Income, for investment bank advisory, legal, consulting and accounting fees. PPL currently estimates a range of total third-party costs that will ultimately be incurred of between $60 million and $70 million.
The assets and liabilities of PPL Energy Supply will continue to be classified as "held and used" on PPL's Balance Sheet until the closing of the transaction. The spinoff announcement was evaluated and determined not to be an event or a change in circumstance that required a recoverability test or a goodwill impairment assessment. However, an impairment loss could be recognized by PPL at the spinoff date if the aggregate carrying amount of PPL Energy Supply's assets and liabilities exceeds its aggregate fair value at that date. PPL cannot currently predict whether an impairment loss will be recorded at the spinoff date.
(PPL Energy Supply)
PPL Energy Supply will treat the combination with RJS Power as an acquisition, as PPL Energy Supply will be considered the accounting acquirer in accordance with business combination accounting guidance.
Montana Hydro Sale Agreement (PPL and PPL Energy Supply)
In September 2013, PPL Montana executed a definitive agreement to sell to NorthWestern 633 MW of hydroelectric generating facilities located in Montana for $900 million in cash, subject to certain adjustments. Total net cash proceeds of the sale are currently estimated to be $880 million. In September 2014, the MPSC approved the transaction. As a result, these hydroelectric generating facilities met the" held for sale" criteria in the third quarter of 2014. The sale is expected to close in the fourth quarter of 2014. See Note 8 to the Financial Statements for additional information including the components of Discontinued Operations in the Statements of Income and Balance Sheets.
(PPL)
Ofgem Review of Line Loss Calculation
In March 2014, Ofgem is currently consultingissued its final decision on the methodology to be used by all network operators to calculate the final line loss incentive/penaltyincentives and penalties for the DPCR4. Based on information received from OfgemDPCR4, which ended in 2013, WPD currently estimates the potential loss exposure for this matter to beMarch 2010. As a result, in the rangefirst quarter of $932014 WPD recorded an increase of $65 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 theits existing liability with reductionsa reduction to "Utility" revenuerevenues on the Statement of Income. PPL cannot predictIn June 2014, WPD applied for judicial review of certain of Ofgem's decisions related to closing out the outcomeDPCR4 line loss mechanism. The court has set a hearing for November 20, 2014 to hear WPD's application for permission to seek judicial review. The primary relief sought is for Ofgem to reconsider the overall proportionality of this matter.penalties imposed on WPD. The entire process could last through the second quarter of 2015. WPD's total recorded liability at September 30, 2014 was $105 million, all of which will be refunded to customers beginning April 1, 2015 through March 31, 2019. See Note 6 to the Financial Statements for additional information.
RIIO-ED1 - Fast Tracking
In October 2010,February 2014, WPD elected to accept the decision of Ofgem announced changes to set 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 averagereal cost of capital. Ofgem has also indicated that the depreciation of the RAV, for RAV additions after April 1, 2015, will change from 20 yearsequity to 45 years, but that it will consider transition arrangements.
As previously reported, on July 1, 2013, WPD filed its business plans with Ofgem forbe used during the RIIO-ED1 period at 6.4% compared to 6.7% proposed by WPD, 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 earningremain in 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"process. The change in the 2012 Form 10-K for additional information.cost of equity is
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
available
not expected 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 thehave a significant impact on the calculationresults of diluted EPS.operations for PPL. Also, in February 2014, Ofgem published formal confirmation that WPD's Business Plans submitted by its four DNOs have been accepted as submitted, or "fast-tracked," for the eight-year price control period starting April 1, 2015. Fast tracking affords several benefits to the WPD DNOs including the ability to collect additional revenue equivalent to 2.5% of total annual expenditure during the eight-year price control period, or approximately $35 million annually, greater revenue certainty and a higher level of cost savings retention. The period to challenge the fast tracking expired in June 2014 and no third parties have filed objections. See "Item 1. Business - Segment Information - U.K. Regulated Segment" of PPL's 2013 Form 10-K for additional information on RIIO-ED1.
Tax LitigationDistribution Revenue Reduction
As discussed in PPL's 2013 Form 10-K, in December 2013, WPD and other U.K. DNOs announced agreements with the U.K. Department of Energy and Climate Change and Ofgem to a reduction of £5 per residential customer of electricity distribution revenues that otherwise would have been collected in the regulatory year beginning April 1, 2014. Full recovery of the revenue reduction, together with the associated carrying cost, was expected to occur during the regulatory year beginning April 1, 2015 for three of the WPD DNOs, and over the eight year RIIO-ED1 regulatory period for the fourth DNO. However, in July 2014, Ofgem decided that full recovery will occur for all WPD DNOs in the regulatory year beginning April 1, 2016. PPL projects that, as a result of this change and changes in foreign exchange rate assumptions, 2014 and 2015 earnings for its U.K. Regulated segment will now be adversely affected by $31 million and $16 million, respectively, and earnings for 2016 will be positively affected by $33 million with the remainder to be recovered in later periods.
2011 Equity Units
In May 2013,March 2014, PPL Capital Funding remarketed $978 million of 4.32% Junior Subordinated Notes due 2019 that were originally issued in April 2011 as a component of PPL's 2011 Equity Units. In connection with the U.S. Supreme Court reversed the December 2011 rulingremarketing, PPL Capital Funding retired $228 million of the U. S. Court4.32% Junior Subordinated Notes due 2019 and issued $350 million of Appeals2.189% Junior Subordinated Notes due 2017 and $400 million 3.184% of Junior Subordinated Notes due 2019. Simultaneously the newly issued Junior Subordinated Notes were exchanged for $350 million of 3.95% Senior Notes due 2024 and $400 million of 5.00% Senior Notes due 2044. In May 2014, PPL issued 31.7 million shares of common stock at $30.86 per share to settle the 2011 Purchase Contracts. PPL received net cash proceeds of $978 million, which were used to repay short-term debt and for general corporate purposes.
Kerr Dam Project Arbitration Decision and Impairment (PPL Energy Supply)
PPL Montana holds a joint operating license issued for the Third Circuit, onKerr Dam Project. The license extends until 2035 and, between 2015 and 2025, the creditability for U.S. income tax purposesConfederated Salish and Kootenai Tribes of the U.K. Windfall Profits Tax paidFlathead Nation (the Tribes) have the option to purchase, hold and operate the Kerr Dam Project. The parties submitted the issue of the appropriate amount of the conveyance price to arbitration in February 2013. In March 2014, the arbitration panel issued its final decision holding that the conveyance price payable by a U.K. subsidiary of PPL.the Tribes to PPL Montana is $18 million. As a result of thisthe decision, in the first quarter of 2014 PPL Energy Supply performed a recoverability test on the Kerr Dam Project and recorded an income tax benefitimpairment charge of $44$18 million for($10 million after-tax) to reduce the nine months ended September 30, 2013.carrying amount to its fair value, at that time, of $29 million. See Note 513 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.
Susquehanna Turbine Blade Inspection 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 madecontinues to make 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.March 2014, Unit 2 completed aits planned turbine inspection outage to replace blades. Unit 1 completed its planned refueling and turbine inspection outage in June 2014. Similar blade
replacements were completed and modifications will also be implemented to reduce the likelihood of blade cracking, including the installation of shorter last stage blades on one of the low pressure turbines. In the second and third quarters of 2014, Unit 2 was shut down for blade 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.as well as additional maintenance. The financial impact of the Unit 2 outage isoutages was not material. PPL Susquehanna continueswill continue to monitor blade performance and work with the turbine manufacturer to identify and resolve the issues causing the blade cracking.
Colstrip Unit 4 OutageRegional Transmission Expansion Plan (PPL Energy Supply)and PPL Electric)
In July 2014, PPL Electric announced that it had submitted a proposal to PJM to build a new regional transmission line. PPL Electric is pursuing approval of this project from Pennsylvania, New Jersey, New York and Maryland. The proposed line would run from western Pennsylvania into New York and New Jersey and also south into Maryland, covering approximately
On July 1, 2013, Colstrip Unit 4 automatically shut down as
725 miles. The proposed line would enhance the ability to move power inter-regionally and intra-regionally resulting in a result of damage that occurredmore reliable, robust and cost effective system. As proposed, the project would begin in 2017 and the unit's generator.line would be in operation between 2023 and 2025. The repair to Unit 4project is estimated to cost between $30 million and $40 million and is expected$4 billion 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.$6 billion.
Storm Damage Expense Rider (SDER)( (PPL Electric)PPL and PPL Electric)
Distribution System Improvement Charge
Act 11 authorizesIn its December 28, 2012 final rate case order, the PUC directed PPL Electric to approve two specific ratemaking mechanisms - the use offile 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.proposed SDER. In MayMarch 2013, PPL Electric filed its proposed SDER with the PUC approvedand, as part of that filing, requested recovery of the 2012 qualifying storm costs related to Hurricane Sandy. In April 2014, the PUC issued a final order approving the SDER. The SDER will be effective January 1, 2015 and initially include actual storm costs compared to collections from December 2013 through November 2014. As a result of the order, PPL Electric's proposed DSIC, with an initial rate effective JulyElectric reduced its regulatory liability by $12 million related to collections in excess of costs incurred from January 1, 2013 subject to refund after hearings.November 30, 2013 that are not required to be refunded to customers. Also, as part of the order, PPL Electric can recover Hurricane Sandy storm damage costs through the SDER over a three-year period beginning January 2015. On June 20, 2014, the Office of Consumer Advocate filed a petition for review of the April 2014 order with the Commonwealth Court of Pennsylvania. The case remains pending. See "Pennsylvania Activities - Storm Damage Expense Rider" in Note 6 to the Financial Statements for additional information.
Rate Case Proceedings
FERC Wholesale Formula Rates (PPLLKE 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)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 estimatescharge cost-based rates with a subsequent true-up to actual costs, replacing the current formula which uses prior-year cost amounts.does not include a true-up. KU's application proposed an authorized 10.7% return on equity. Subject to regulatory approval,equity of 10.7%. Certain elements, including the new formula rate, maybecame effective April 23, 2014, subject to refund. In April 2014, nine municipalities submitted notices of termination, under the original notice period provisions, to cease taking power under the wholesale requirements contracts. Such terminations are to be effective in 2019, except in the case of one municipality with a 2017 effective date. In July 2014, KU agreed on settlement terms with the two municipal customers that did not provide termination notices and filed the settlement proposal with the FERC for its approval. In August 2014, the FERC issued an order on the interim settlement agreement allowing the proposed rates to become effective pending a final order. If approved, the settlement agreement will resolve the rate case with respect to these two municipalities, including an authorized return on equity of 10% or the return on equity awarded to other parties in this case, whichever is lower. Also in July 2014, KU made a contractually required filing with the FERC that addressed certain rate recovery matters affecting the nine terminating municipalities during mid-2014.the remaining term of their contracts. KU and the terminating municipalities continue settlement discussions in this proceeding. KU cannot currently predict the outcome of its FERC applications regarding its wholesale power agreements with the municipalities.
In April 2013,Rate Case Proceedings (LKE, LG&E and KU)
On November 4, 2014, LG&E and KU filed an applicationannounced that on November 26, 2014, they anticipate filing requests with the VSCC to increaseKPSC for increases in annual Virginia base electricity revenue byrates of approximately $7$30 million representingat LG&E and approximately $153 million at KU and an increase in annual base gas rates of approximately $14 million at LG&E. The proposed base rate increases would result in electricity rate increases of 2.7% at LG&E and 9.6%. at KU proposed an authorized 10.8% return on equity. In October 2013, KU filedand a stipulation reached with VSCC staff proposing a revenuegas rate increase of $4.7 million, representing an increase4.2% at LG&E and would become effective in July 2015. LG&E's and KU's applications each include a request for authorized returns-on-equity of 6.9%10.50%. If approved byThe applications are based on a forecasted test year of July 1, 2015 through June 30, 2016. LG&E and KU cannot predict the VSCC, new base rates would go into effect on December 1, 2013.outcome of these proceedings.
(PPL)
The discussion for PPL provides a review of results by reportable segment and concludes with a "Statement of Income Analysis," which includessegment. The "Margins" discussion provides explanations of Kentuckynon-GAAP financial measures (Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins.Margins) and a reconciliation of non-GAAP financial measures to "Operating Income." The "Statement of Income Analysis" alsodiscussion addresses significant changes in principal line items on PPL's Statements of Income, comparing the three and nine months ended September 30, 20132014 with the same periods in 2012.2013. "Segment Earnings, Margins and Statement of Income Analysis" is presented separately for PPL.
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," whichearnings. The "Margins" discussion includes a reconciliation of a non-GAAP financial measuremeasures to "Operating Income" and "Statement of Income Analysis" addresses significant changes in principal line items on the Statements of Income comparing the three and nine months ended September 30, 20132014 with the same periods in 2012.2013. "Earnings, Margins 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, Margins and Statement of Income Analysis U.K. Regulated Segment
The U.K. Regulated segment consists of PPL Global, which primarily includes WPD's regulated electricity distribution operations and certain costs, such as U.S. income taxes, administrative costs and allocated financing costs. The U.K. Regulated segment represents 60%66% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 20132014 and 32%34% of PPL's assets at September 30, 2013.2014.
Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results:
| | | Three Months | | Nine Months | | | Three Months | | Nine Months |
| | | 2013 | | 2012 | | % Change | | 2013 | | 2012 | | % Change | | | 2014 | | 2013 | | % Change | | 2014 | | 2013 | | % Change |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Utility revenues | Utility revenues | | $ | 534 | | $ | 518 | | 3 | | $ | 1,731 | | $ | 1,613 | | 7 | Utility revenues | | $ | 632 | | $ | 534 | | 18 | | $ | 1,928 | | $ | 1,731 | | 11 |
Energy-related businesses | Energy-related businesses | | | 9 | | | 10 | | (10) | | | 32 | | | 34 | | (6) | Energy-related businesses | | | 12 | | | 9 | | 33 | | | 36 | | | 32 | | 13 |
| Total operating revenues | | | 543 | | | 528 | | 3 | | | 1,763 | | | 1,647 | | 7 | Total operating revenues | | | 644 | | | 543 | | 19 | | | 1,964 | | | 1,763 | | 11 |
Other operation and maintenance | Other operation and maintenance | | 111 | | 101 | | 10 | | | 340 | | 326 | | 4 | Other operation and maintenance | | 110 | | 111 | | (1) | | 335 | | 340 | | (1) |
Depreciation | Depreciation | | 73 | | 69 | | 6 | | | 219 | | 206 | | 6 | Depreciation | | 86 | | 73 | | 18 | | 256 | | 219 | | 17 |
Taxes, other than income | Taxes, other than income | | 36 | | 36 | | | | | 109 | | 108 | | 1 | Taxes, other than income | | 41 | | 36 | | 14 | | 119 | | 109 | | 9 |
Energy-related businesses | Energy-related businesses | | | 7 | | | 8 | | (13) | | | 21 | | | 24 | | (13) | Energy-related businesses | | | 8 | | | 7 | | 14 | | | 23 | | | 21 | | 10 |
| Total operating expenses | | | 227 | | | 214 | | 6 | | | 689 | | | 664 | | 4 | Total operating expenses | | | 245 | | | 227 | | 8 | | | 733 | | | 689 | | 6 |
Other Income (Expense) - net | Other Income (Expense) - net | | (117) | | (50) | | 134 | | | 7 | | (39) | | (118) | Other Income (Expense) - net | | 136 | | (117) | | (216) | | 40 | | 7 | | 471 |
Interest Expense | Interest Expense | | 102 | | 106 | | (4) | | | 313 | | 314 | | | Interest Expense | | 115 | | 102 | | 13 | | 352 | | 313 | | 12 |
Income Taxes | Income Taxes | | | (86) | | | (44) | | 95 | | | 27 | | | 67 | | (60) | Income Taxes | | | 125 | | | (86) | | (245) | | | 231 | | | 27 | | 756 |
Net Income Attributable to PPL Shareowners | Net Income Attributable to PPL Shareowners | | $ | 183 | | $ | 202 | | (9) | | $ | 741 | | $ | 563 | | 32 | Net Income Attributable to PPL Shareowners | | $ | 295 | | $ | 183 | | 61 | | $ | 688 | | $ | 741 | | (7) |
The changes in the componentsresults of the U.K. Regulated segment's resultssegment between these periods were due to the factors set forth below, which reflect reclassifications for certain items that management considers special.special and effects of foreign currency exchange on separate lines within the table and not in their respective Statement of Income line items. See below for additional detail of thesethe special items.
| | | Three Months | | Nine Months | | | Three Months | | Nine Months |
| | | | | | | | | | | |
U.K. | U.K. | | | | | U.K. | | | | |
| Utility revenues | | $ | 44 | | $ | 187 | Utility revenues | | $ | 21 | | $ | 75 |
| Other operation and maintenance | | (9) | | (19) | Other operation and maintenance | | 7 | | 19 |
| Depreciation | | (6) | | (17) | Depreciation | | (4) | | (18) |
| Interest expense | | 3 | | (4) | Interest expense | | (6) | | (15) |
| Other | | 2 | | 2 | Other | | | | (2) |
| Income taxes | | 8 | | (13) | Income taxes | | (13) | | (16) |
U.S. | U.S. | | | | | U.S. | | | | |
| Interest expense and other | | | | 1 | Interest expense and other | | 2 | | 1 |
| Income taxes | | (5) | | 4 | Income taxes | | (14) | | (36) |
Foreign currency exchange, after-tax | | Foreign currency exchange, after-tax | | (8) | | (3) |
Special items, after-tax | | Special items, after-tax | | | 127 | | | (58) |
Total | | Total | | $ | 112 | | $ | (53) |
| | | Three Months | | Nine Months |
| | | | | | | |
Foreign currency exchange rates, after-tax (a) | | | 1 | | | (2) |
Special items, after-tax | | | (57) | | | 39 |
Total | | $ | (19) | | $ | 178 |
(a) | Includes the effect of realized gains (losses) on foreign currency economic hedges. |
· | Higher utility revenues for the three-monththree month period primarily due to $74a $35 million impact from the April 1, 20132014 price increase, partially offset by a $22 million accrual for over-recovered revenue and $10$12 million of lower volume due primarily to weather. |
| Higher utility revenues for the nine-monthnine month period primarily due to $187a $154 million impact from the April 1, 20132014 and 20122013 price increases, and $18partially offset by $68 million of higherlower volume due primarily to weather partially offset by a $22and $7 million accrual for over-recovered revenue.of adverse customer mix. |
· | HigherLower other operation and maintenance for the three- and nine-month periodsthree month period primarily due to $11 million of lower pension expense, partially offset by $8 million of higher engineering management expense. |
| Lower other operation and maintenance for the nine month period primarily due to $29 million of lower pension expense, partially offset by $14 million of higher network maintenance expense. |
· | Higher depreciation expense for the three-three and nine-monthnine month periods primarily due to PP&E additions.additions, net. |
· | Higher interest expense for the three and nine month periods primarily due to the October 2013 debt issuance. |
· | LowerHigher income taxes for the three-monththree month period primarily due to $16$5 million from U.K. tax rate changes partially offset bythat provided a net one-time benefit in 2013 and higher pre-tax income, which increased income taxes by $8$4 million. |
Higher income taxes for the nine-monthnine 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.$14 million.
· | Higher income taxes for the three-monththree month period primarily due to an $8 million increase to income tax expense attributable to a revision in the expected taxable amount of cash repatriation in 2013.2014. |
| 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. |
Higher income taxes for the nine month period primarily due to a $19 million benefit in 2013 related to a ruling obtained from the IRS regarding 2010 U.K. earnings and profits calculations and an $18 million increase attributable to the expected taxable amount of cash repatriation in 2014.
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 | | | Income Statement | | Three Months | | Nine Months |
| | | Line Item | | 2013 | | 2012 | | 2013 | | 2012 | | | Line Item | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Other Income | | | | | | | | | | | Other Income | | | | | | | | |
Foreign currency-related economic hedges, net of tax of $44, $18, $5, $17 (a) | (Expense)-net | | $ | (82) | | $ | (30) | | $ | (8) | | $ | (28) | |
Foreign currency-related economic hedges, net of tax of ($60), $44, ($39), $5 (a) | | Foreign currency-related economic hedges, net of tax of ($60), $44, ($39), $5 (a) | (Expense)-net | | $ | 111 | | $ | (82) | | $ | 72 | | $ | (8) |
WPD Midlands acquisition-related adjustments: | WPD Midlands acquisition-related adjustments: | | | | | | | | | | | WPD Midlands acquisition-related adjustments: | | | | | | | | | |
| | | Other Operation | | | | | | | | | | | | Other Operation | | | | | | | | |
| Separation benefits, net of tax of $1, $1, $1, $3 | and Maintenance | | (2) | | (1) | | (4) | | | (9) | Separation benefits, net of tax of $0, $1, $0, $1 | and Maintenance | | | | (2) | | | | (4) |
| | | Other Operation | | | | | | | | | | | | Other Operation | | | | | | | | |
| Other acquisition-related adjustments, net of tax of $0, $0, $0, ($1) | and Maintenance | | | | (2) | | (2) | | | 2 | Other acquisition-related adjustments, net of tax of $0, $0, $0, $0 | and Maintenance | | | | | | | | (2) |
Other: | Other: | | | | | | | | | | | Other: | | | | | | | | | |
| Windfall Profits Tax litigation (b) | Income Taxes | | | | | | 43 | | | | 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 WPD line loss accrual, net of tax of $0, $5, $13, $10 (c) | Utility Revenues | | | | (16) | | (52) | | (35) |
| Change in U.K. tax rate (d) | Income Taxes | | | 84 | | | 74 | | | 84 | | | 74 | Change in U.K. income tax rate (d) | Income Taxes | | | | | | 84 | | | | | | 84 |
Total | Total | | | $ | (16) | | $ | 41 | | $ | 78 | | $ | 39 | Total | | | $ | 111 | | $ | (16) | | $ | 20 | | $ | 78 |
(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, onconcerning the creditability for income tax purposes of the U.K. Windfall Profits Tax. As a result of the U.S. Supreme Court ruling, PPL recorded an income tax benefit during the nine-month 2013 period.nine months ended September 30, 2013. See Note 5 to the Financial Statements for additional information. |
(c) | WPD Midlands recorded adjustments to its line loss accrual during the three and nine months ended September 30, 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. In March 2014, Ofgem issued its final decision on the DPCR4 line loss incentives and penalties mechanism. As a result, WPD increased its existing liability by $65 million for over-recovery of line losses during the nine months ended September 30, 2014. See Note 6 to the Financial Statements for additional information. |
(d) | The U.K. Finance Act of 2013, enacted in July 2013, reduced the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015. The U.K. Finance Act of 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013. As a result, PPL reduced its net deferred tax liability and recognized a deferred tax benefit in the three and nine-monthnine month periods of 2013 and 2012.2013. |
Kentucky Regulated Segment
The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations. This segment also includes LKE'soperations of LG&E and KU, as well as LG&E'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%24% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 20132014 and 25%26% of PPL's assets at September 30, 2013.2014.
Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results:
| | | Three Months | | Nine Months | | | Three Months | | Nine Months |
| | | 2013 | | 2012 | | % Change | | 2013 | | 2012 | | % Change | | | 2014 | | 2013 | | % Change | | 2014 | | 2013 | | % Change |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Utility revenues | Utility revenues | | $ | 744 | | $ | 732 | | 2 | | $ | 2,226 | | $ | 2,095 | | 6 | Utility revenues | | $ | 753 | | $ | 744 | | 1 | | $ | 2,409 | | $ | 2,226 | | 8 |
Fuel | Fuel | | 237 | | 249 | | (5) | | 684 | | 677 | | 1 | Fuel | | 240 | | 237 | | 1 | | 748 | | 684 | | 9 |
Energy purchases | Energy purchases | | 23 | | 27 | | (15) | | 146 | | 135 | | 8 | Energy purchases | | 24 | | 23 | | 4 | | 184 | | 146 | | 26 |
Other operation and maintenance | Other operation and maintenance | | 188 | | 186 | | 1 | | 582 | | 589 | | (1) | Other operation and maintenance | | 197 | | 188 | | 5 | | 609 | | 582 | | 5 |
Depreciation | Depreciation | | 84 | | 87 | | (3) | | 249 | | 259 | | (4) | Depreciation | | 89 | | 84 | | 6 | | 262 | | 249 | | 5 |
Taxes, other than income | Taxes, other than income | | | 12 | | | 11 | | 9 | | | 36 | | | 34 | | 6 | Taxes, other than income | | | 13 | | | 12 | | 8 | | | 39 | | | 36 | | 8 |
| Total operating expenses | | | 544 | | | 560 | | (3) | | | 1,697 | | | 1,694 | | | Total operating expenses | | | 563 | | | 544 | | 3 | | | 1,842 | | | 1,697 | | 9 |
Other Income (Expense) - net | Other Income (Expense) - net | | (4) | | (4) | | | | (6) | | (14) | | (57) | Other Income (Expense) - net | | (2) | | (4) | | (50) | | (6) | | (6) | | |
Interest Expense | Interest Expense | | 49 | | 54 | | (9) | | 165 | | 163 | | 1 | Interest Expense | | 56 | | 49 | | 14 | | 164 | | 165 | | (1) |
Income Taxes | Income Taxes | | 54 | | 42 | | 29 | | 132 | | 70 | | 89 | Income Taxes | | 50 | | 54 | | (7) | | 150 | | 132 | | 14 |
Income (Loss) from Discontinued Operations | Income (Loss) from Discontinued Operations | | | | | | | | n/a | | | 1 | | | (6) | | (117) | Income (Loss) from Discontinued Operations | | | | | | | | n/a | | | | | | 1 | | (100) |
Net Income Attributable to PPL Shareowners | Net Income Attributable to PPL Shareowners | | $ | 93 | | $ | 72 | | 29 | | $ | 227 | | $ | 148 | | 53 | Net Income Attributable to PPL Shareowners | | $ | 82 | | $ | 93 | | (12) | | $ | 247 | | $ | 227 | | 9 |
The changes in the componentsresults of the Kentucky Regulated segment's resultssegment between these periods were due to the factors set forth below, which reflect reclassifications for items included inamounts classified as Kentucky Gross Margins and certain items that management considers special.special on separate lines within the table and not in their respective Statement of Income line items. See below for additional detail of thesethe special items.
| | Three Months | | Nine Months | | Three Months | | Nine Months |
| | | | | | | | | |
Kentucky Gross Margins | | $ | 42 | | $ | 151 | | $ | 3 | | $ | 76 |
Other operation and maintenance | | | (4) | | 4 | | (8) | | (26) |
Depreciation | | | (9) | | (26) | | (4) | | (10) |
Taxes, other than income | | | (1) | | (2) | |
Other Income (Expense) - net | | | | | 7 | |
Interest Expense | | | 5 | | (2) | |
Income Taxes | | | (12) | | (56) | |
Interest expense | | | (7) | | 1 |
Other | | | 2 | | (1) |
Income taxes | | | 4 | | (18) |
Special items, after-tax | | | | | | 3 | | | (1) | | | (2) |
Total | | $ | 21 | | $ | 79 | | $ | (11) | | $ | 20 |
· | See "Statement of Income Analysis - Margins -"Margins – Changes in Non-GAAP Financial Measures" for an explanation of Kentucky Gross Margins. |
· | LowerHigher other operation and maintenance for the nine-monththree month period primarily due to $18$3 million of lowerhigher bad debt expense and $2 million of higher gas maintenance. |
| Higher other operation and maintenance for the nine month period primarily due to $8 million of higher costs due to the timing and scope of scheduled coal plantgeneration maintenance, outages. This decrease was partially offset by $8 million of higher administrativestorm expense and general expenses and $4 millionhigher bad debt expense of adjustments to regulatory assets and liabilities.$7 million. |
· | Higher depreciation expense for the three and nine-monthnine 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.PP&E additions, net. |
· | Higher other income (expense) - netinterest expense for the nine-monththree month period primarily due to losses from the EEI investment recordedissuance of $500 million of First Mortgage Bonds in 2012. The EEI investment was fully impairedNovember 2013. |
· | Lower interest expense for the nine month period primarily due to a $10 million loss on extinguishment of debt in 2013 related to the remarketing of the PPL Capital Funding Junior Subordinated Notes component of the 2010 Equity Units and simultaneous exchange into Senior Notes in the fourthsecond quarter of 2012.2013, and a $5 million decrease due to lower rates on the related Senior Notes as compared with the Junior Subordinated Notes. This decrease was partially offset by increased 2014 expense of $14 million due to the issuance of $500 million of First Mortgage Bonds in November 2013. |
· | Higher income taxes for the three and nine-month periodsnine month period primarily due to higher pre-tax income. |
The following after-tax gains (losses), which management considers special items, also impacted the change in pre-tax income at current period tax rates.Kentucky Regulated segment's results during the periods ended September 30. |
The following after-tax gains (losses), which management considers special items, also impacted the Kentucky Regulated segment's results during the periods ended September 30.
| | | Income Statement | | Three Months | | Nine Months |
| | | Line Item | | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | | | | | | | |
LKE acquisition-related adjustments: | | | | | | | | | | | | | |
| Income Taxes and Other | | | | | | | | | | | | |
| Net operating loss carryforward and other tax-related adjustments | Operation and Maintenance | | | | | | | | | | | $ | 4 |
Other: | | | | | | | | | | | | | |
| LKE discontinued operations (a) | Discontinued Operations | | | | | | | | $ | 1 | | | (5) |
| EEI adjustments, net of tax of $0, $0, $0, $0 (b) | Other Income (Expense)-net | | | | | | | | | 1 | | | |
Total | | | | | | | | | $ | 2 | | $ | (1) |
| | | Income Statement | | Three Months | | Nine Months |
| | | Line Item | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | |
| EEI adjustments, net of tax of $0, $0, $0, $0 (a) | Other Income (Expense)-net | | $ | (1) | | | | | | | | $ | 1 |
| LKE discontinued operations | Discontinued Operations | | | | | | | | | | | | 1 |
Total | | | $ | (1) | | | | | | | | $ | 2 |
(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'sthe regulated electricity transmission and distribution operations.operations of PPL Electric. In addition, certain financing costs are allocated to the Pennsylvania Regulated segment. The Pennsylvania Regulated segment represents 13%19% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 20132014 and 15% of PPL's assets at September 30, 2013.2014.
Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months | | Nine Months | | | Three Months | | Nine Months |
| | | 2013 | | 2012 | | % Change | | 2013 | | 2012 | | % Change | | | 2014 | | 2013 | | % Change | | 2014 | | 2013 | | % Change |
| | | | | | | | | | | | | | |
Utility revenues | Utility revenues | | | | | | | | | | | | | Utility revenues | | $ | 477 | | $ | 464 | | 3 | | $ | 1,518 | | $ | 1,391 | | 9 |
| 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 | Energy purchases | | | | | | | | | | | | | Energy purchases | | | | | | | | | | | | |
| External | | 144 | | 137 | | 5 | | 436 | | 410 | | 6 | External | | 128 | | 144 | | (11) | | 431 | | 436 | | (1) |
| Intersegment | | 11 | | 23 | | (52) | | 37 | | 61 | | (39) | Intersegment | | 20 | | 11 | | 82 | | 68 | | 37 | | 84 |
Other operation and maintenance | Other operation and maintenance | | 134 | | 148 | | (9) | | 391 | | 431 | | (9) | Other operation and maintenance | | 133 | | 134 | | (1) | | 402 | | 391 | | 3 |
Depreciation | Depreciation | | 45 | | 41 | | 10 | | 132 | | 119 | | 11 | Depreciation | | 47 | | 45 | | 4 | | 137 | | 132 | | 4 |
Taxes, other than income | Taxes, other than income | | | 25 | | | 24 | | 4 | | | 77 | | | 72 | | 7 | Taxes, other than income | | | 25 | | | 25 | | | | | 80 | | | 77 | | 4 |
| Total operating expenses | | | 359 | | | 373 | | (4) | | | 1,073 | | | 1,093 | | (2) | Total operating expenses | | | 353 | | | 359 | | (2) | | | 1,118 | | | 1,073 | | 4 |
Other Income (Expense) - net | Other Income (Expense) - net | | 2 | | 3 | | (33) | | 5 | | 6 | | (17) | Other Income (Expense) - net | | 3 | | 2 | | 50 | | 6 | | 5 | | 20 |
Interest Expense | Interest Expense | | 30 | | 25 | | 20 | | 80 | | 73 | | 10 | Interest Expense | | 33 | | 30 | | 10 | | 91 | | 80 | | 14 |
Income Taxes | Income Taxes | | | 26 | | | 16 | | 63 | | | 83 | | | 47 | | 77 | Income Taxes | | | 37 | | | 26 | | 42 | | | 121 | | | 83 | | 46 |
Net Income | | 51 | | 33 | | 55 | | 160 | | 99 | | 62 | |
Net Income Attributable to Noncontrolling Interests | | | | | | | | n/a | | | | | | 4 | | (100) | |
Net Income Attributable to PPL Shareowners | Net Income Attributable to PPL Shareowners | | $ | 51 | | $ | 33 | | 55 | | $ | 160 | | $ | 95 | | 68 | Net Income Attributable to PPL Shareowners | | $ | 57 | | $ | 51 | | 12 | | $ | 194 | | $ | 160 | | 21 |
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 inamounts classified as Pennsylvania Gross Delivery Margins.Margins and a certain item that management considers special on separate lines and not in their respective Statement of Income line items. See below for additional detail of the special item.
| | Three Months | | Nine Months | | Three Months | | Nine Months |
| | | | | | | | | | |
Pennsylvania Gross Delivery Margins | | $ | 31 | | $ | 92 | | $ | 12 | | $ | 85 |
Other operation and maintenance | | 8 | | 28 | | 4 | | 4 |
Depreciation | | (4) | | (13) | | (1) | | (5) |
Interest Expense | | (5) | | (7) | |
Interest expense | | | (3) | | (11) |
Other | | (2) | | (3) | | 1 | | 1 |
Income Taxes | | (10) | | (36) | |
Noncontrolling Interests | | | | | | 4 | |
Income taxes | | | (9) | | (38) |
Special item, after-tax | | | | 2 | | | (2) |
Total | | $ | 18 | | $ | 65 | | $ | 6 | | $ | 34 |
· | See "Statement of Income Analysis - Margins"Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania Gross Delivery Margins. |
· | Lower other operation and maintenance for the three-monthnine month period primarily due to $18 million of lower stormpayroll related costs of $8 million, lower corporate servicedue to more project costs of $3 million and lower rent expense of $3 million,being capitalized in 2014, partially offset by $9 million of higher vegetation management expensestorm costs and $5 million of $6 million.higher support group costs. |
Lower other operation and maintenance for the nine-month period primarily due to lower storm costs of $9 million, lower corporate service costs of $13 million and lower rent expense of $4 million.
· | Higher depreciation for the three and nine-month periods primarily due to the impact of PP&E additions related to the ongoing efforts to ensure the reliability of the delivery system and replace aging infrastructure. |
· | Higher interest expense for the three and nine-month periodsnine month period primarily due to the issuance of first mortgage bonds in August 2012July 2013 and July 2013.June 2014. |
· | Higher income taxes for the three and nine-monthnine month periods primarily due to higher pre-tax income. |
The following after-tax gains (losses), which management considers a special item, also impacted the Pennsylvania Regulated segment's results during the periods ended September 30.
| | | Income Statement | | Three Months | | Nine Months |
| | | Line Item | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | |
| Other Operation | | | | | | | | | | | | |
Separation benefits - bargaining unit voluntary program, net of tax of ($1), $0, $1, $0 (a) | and Maintenance | | $ | 2 | | | | | $ | (2) | | | |
(a) | In June 2014, PPL Electric's largest IBEW local ratified a new three-year labor agreement. In connection with the new agreement, bargaining unit one-time voluntary retirement benefits were recorded in the second quarter and adjusted in the third quarter of 2014. See Note 10 to the Financial Statements for additional information. |
Supply Segment
The Supply segment primarily consists of PPL Energy Supply's energywholesale, retail, marketing and trading activities, as well as its competitive generation operations. In addition, certain financing and other costs are allocated to the Supply segment. The Supply segment represents 10%2% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 20132014 and 27%24% of PPL's assets at September 30, 2013.2014.
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 |
Energy revenues | | | | | | | | | | | | | | | | |
| External (a) | | $ | 1,209 | | $ | 567 | | 113 | | $ | 3,248 | | $ | 3,673 | | (12) |
| Intersegment | | | 11 | | | 23 | | (52) | | | 37 | | | 61 | | (39) |
Energy-related businesses | | | 143 | | | 133 | | 8 | | | 378 | | | 346 | | 9 |
| Total operating revenues | | | 1,363 | | | 723 | | 89 | | | 3,663 | | | 4,080 | | (10) |
Fuel (a) | | | 258 | | | 321 | | (20) | | | 780 | | | 728 | | 7 |
Energy purchases | | | | | | | | | | | | | | | | |
| External (a) | | | 388 | | | (150) | | (359) | | | 1,085 | | | 1,288 | | (16) |
| Intersegment | | | 1 | | | 1 | | | | | 3 | | | 2 | | 50 |
Other operation and maintenance | | | 243 | | | 221 | | 10 | | | 748 | | | 769 | | (3) |
Depreciation | | | 80 | | | 75 | | 7 | | | 237 | | | 210 | | 13 |
Taxes, other than income | | | 18 | | | 19 | | (5) | | | 51 | | | 54 | | (6) |
Energy-related businesses | | | 138 | | | 129 | | 7 | | | 366 | | | 339 | | 8 |
| Total operating expenses | | | 1,126 | | | 616 | | 83 | | | 3,270 | | | 3,390 | | (4) |
Other Income (Expense) - net | | | 2 | | | 6 | | (67) | | | 18 | | | 15 | | 20 |
Other-Than-Temporary Impairments | | | 1 | | | | | n/a | | | 1 | | | 1 | | |
Interest Expense | | | 54 | | | 62 | | (13) | | | 174 | | | 163 | | 7 |
Income Taxes | | | 92 | | | 3 | | 2,967 | | | 113 | | | 180 | | (37) |
Net Income Attributable to Noncontrolling Interests | | | 1 | | | | | n/a | | | 1 | | | | | n/a |
Net Income Attributable to PPL Shareowners | | $ | 91 | | $ | 48 | | 90 | | $ | 122 | | $ | 361 | | (66) |
In June 2014, PPL and PPL Energy Supply, which primarily represents PPL's Supply segment, executed definitive agreements with affiliates of Riverstone to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy. Upon completion of this transaction, PPL will no longer have a Supply segment. See Note 8 to the Financial Statements for additional information.
Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results: |
| | | | | | | | | | | | | | | | | |
| | | Three Months | | Nine Months |
| | | 2014 | | 2013 | | % Change | | 2014 | | 2013 | | % Change |
Energy revenues | | | | | | | | | | | | | | | | |
| External (a) (b) | | $ | 1,392 | | $ | 1,178 | | 18 | | $ | 1,116 | | $ | 3,138 | | (64) |
| Intersegment | | | 20 | | | 11 | | 82 | | | 68 | | | 37 | | 84 |
Energy-related businesses | | | 179 | | | 143 | | 25 | | | 459 | | | 378 | | 21 |
| Total operating revenues | | | 1,591 | | | 1,332 | | 19 | | | 1,643 | | | 3,553 | | (54) |
Fuel (a) | | | 212 | | | 258 | | (18) | | | 953 | | | 780 | | 22 |
Energy purchases (a) (c) | | | 708 | | | 389 | | 82 | | | (893) | | | 1,088 | | (182) |
Other operation and maintenance | | | 232 | | | 232 | | | | | 746 | | | 714 | | 4 |
Depreciation | | | 74 | | | 75 | | (1) | | | 225 | | | 223 | | 1 |
Taxes, other than income | | | 14 | | | 14 | | | | | 45 | | | 40 | | 13 |
Energy-related businesses | | | 172 | | | 138 | | 25 | | | 451 | | | 366 | | 23 |
| Total operating expenses | | | 1,412 | | | 1,106 | | 28 | | | 1,527 | | | 3,211 | | (52) |
Other Income (Expense) - net | | | 10 | | | 1 | | 900 | | | 23 | | | 17 | | 35 |
Interest Expense | | | 45 | | | 52 | | (13) | | | 138 | | | 166 | | (17) |
Income Taxes | | | 65 | | | 89 | | (27) | | | (5) | | | 98 | | (105) |
Income (Loss) from Discontinued Operations | | | 7 | | | 6 | | 17 | | | 10 | | | 28 | | (64) |
Net Income Attributable to Noncontrolling Interests | | | | | | 1 | | (100) | | | | | | 1 | | (100) |
Net Income Attributable to PPL Shareowners | | $ | 86 | | $ | 91 | | (5) | | $ | 16 | | $ | 122 | | (87) |
(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. |
(b) | The nine month period ended September 30, 2014 includes significant realized and unrealized losses on physical and financial commodity sales contracts due to the unusually cold weather experienced in the first quarter of 2014. |
(c) | The nine month period ended September 30, 2014 includes significant realized and unrealized gains on physical and financial commodity purchase contracts due to the unusually cold weather experienced in the first quarter of 2014. |
The changes in the componentsresults of the Supply segment's resultssegment between these periods were due to the factors set forth below, which reflect reclassifications for items included inamounts classified as Unregulated Gross Energy Margins and certain items that management considers special.special on separate lines within the table and not in their respective Statement of Income line items. See below for additional detail of these special items.
| | Three Months | | Nine Months | | Three Months | | Nine Months |
| | | | | | | | | |
Unregulated Gross Energy Margins | | $ | (9) | | $ | (204) | | $ | (137) | | $ | (83) |
Other operation and maintenance | | (18) | | 11 | | 6 | | 3 |
Depreciation | | (5) | | (27) | |
Taxes, other than income | | (1) | | 3 | |
Other Income (Expense) - net | | (4) | | 6 | | 11 | | 7 |
Interest expense | | 8 | | (11) | | 6 | | 28 |
Other | | (4) | | (2) | | 5 | | (4) |
Income Taxes | | (23) | | 37 | |
Income taxes | | | 58 | | 39 |
Discontinued operations, after-tax | | | (1) | | (1) |
Special items, after-tax | | | 99 | | | (52) | | | 47 | | | (95) |
Total | | $ | 43 | | $ | (239) | | $ | (5) | | $ | (106) |
· | See "Statement of Income Analysis - Margins"Margins - Changes in Non-GAAP Financial Measures" for an explanation of Unregulated Gross Energy Margins. |
· | Higher other operation and maintenance for the three-month period primarily due to Montour outage costs in 2013 with no comparable outage in 2012. |
Lower other operation and maintenance for the nine-month period primarily due to $23 million of outage costs at Brunner Island mainly due to timing and $9 million due to lower project costs at PPL Susquehanna, partially offset by $13 million of Montour 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 depreciationincome (expense) for the three and nine-monthnine month periods, primarily due to PP&E additions. The nine-month period also includes $6 million attributable toearnings on the Ironwood Acquisition.nuclear decommissioning trust fund. |
· | HigherLower interest expense for the nine-monthnine month period primarily due to lower capitalized interestthe repayment of debt in July and December 2013. |
· | HigherLower income taxes for the three-month period primarilythree and nine month periods due to $26lower pre-tax income, which decreased income taxes by $39 million and $22 million. Additionally, the three and nine months ended September 2013 included an increase of higher adjustments to$28 million in valuation allowances in 2013 on Pennsylvania net operating loss carryforwards and a $6 million benefit from a state tax rate change recorded in 2012, partially offset by lower pre-tax income in 2013, which reduced income taxes by $10 million.losses. |
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 September 30.
| | | Income Statement | | Three Months | | Nine Months | | | Income Statement | | Three Months | | Nine Months |
| | | Line Item | | 2013 | | 2012 | | 2013 | | 2012 | | | Line Item | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted energy-related economic activity - net, net of tax of $4, $63, $32, ($16) | (a) | | $ | (6) | | $ | (95) | | $ | (47) | | $ | 23 | |
Impairments: | | | | | | | | | | | |
Adjusted energy-related economic activity - net, net of tax of ($31), $4, $80, $32 | | Adjusted energy-related economic activity - net, net of tax of ($31), $4, $80, $32 | (a) | | $ | 46 | | $ | (6) | | $ | (116) | | $ | (47) |
| Adjustments - nuclear decommissioning trust investments, net of tax of $0, $0, $0, ($2) | Other Income-net | | | | | | | | | 1 | | Discontinued | | | | | | | | |
Kerr Dam Project impairment, net of tax of $0, $0, $7, $0 (b) | | Kerr Dam Project impairment, net of tax of $0, $0, $7, $0 (b) | Operations | | | | | | (10) | | |
Other: | Other: | | | | | | | | | | | Other: | | | | | | | | | |
| Change in tax accounting method related to repairs | Income Taxes | | | | | | (3) | | | | Change in tax accounting method related to repairs | Income Taxes | | | | | | | | (3) |
| | Other Operation | | | | | | | | | | | Other Operation | | | | | | | | |
| Counterparty bankruptcy, net of tax of $0, $0, ($1), $5 (b) | and Maintenance | | | | | | 1 | | | (6) | Counterparty bankruptcy, net of tax of $0, $0, $0, ($1) | and Maintenance | | | | | | | | 1 |
| Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0 | (c) | | | | | | | | | 1 | | Other Operation | | | | | | | | |
| | | Other Operation | | | | | | | | | | Separation benefits - bargaining unit voluntary program, net of tax of ($2), $0, $7, $0 (c) | and Maintenance | | 2 | | | | (11) | | |
| Ash basin leak remediation adjustment, net of tax of $0, $0, $0, ($1) | and Maintenance | | | | | | | | | 1 | | | Other Operation | | | | | | | | |
| Coal contract modification payments, net of tax of $0, $7, $0, $12 (d) | Fuel | | | | | | (10) | | | | | | (17) | Separation benefits - spinoff, net of tax of $5, $0, $5, $0 (d) | and Maintenance | | | (7) | | | | | | (7) | | | |
Total | Total | | | $ | (6) | | $ | (105) | | $ | (49) | | $ | 3 | Total | | | $ | 41 | | $ | (6) | | $ | (144) | | $ | (49) |
(a) | Represents unrealized gains (losses), after-tax, on economic activity. See "Reconciliation of"Commodity Price Risk (Non-trading) - Economic Activity" below. |
(b) | In October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code. In 2012, PPL EnergyPlus recorded an additional allowance for unpaid amounts under the long-term power contract. In March 2012, the U.S. Bankruptcy Court for the District of Montana approved the request to terminate the contract, effective April 1, 2012. In June 2013, PPL EnergyPlus received an approval for an administrative claim in the amount of $2 million. |
(c) | Recorded in "Wholesale energy marketing - Realized" on the Statement of Income. |
(d) | As a result of lower electricity and natural gas prices, coal-fired generation output decreased during 2012. Contract modification payments were incurred to reduce 2012 and 2013 contracted coal deliveries. |
Reconciliation of Economic Activity
The following table reconciles unrealized pre-tax gains (losses) for the periods ended September 30, to the special item identified as "Adjusted energy-related economic activity - net."
| | | | 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 |
| | | | 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. Amounts have been adjusted for insignificant amounts for option premiums. |
(b) | See Note 13 to the Financial Statements for additional information. |
Statement of Income Analysis --(c) | In June 2014, PPL Energy Supply's largest IBEW local ratified a new three-year labor agreement. In connection with the new agreement, bargaining unit one-time voluntary retirement benefits were recorded in the second quarter and adjusted in the third quarter of 2014. See Note 10 to the Financial Statements for additional information. |
(d) | In September 2014, PPL Energy Supply recorded separation benefits related to the anticipated spinoff transaction. See Note 8 to the Financial Statements for additional information. |
Non-GAAP Financial Measures
Management utilizes the following non-GAAP financial measures as indicators of performance for its businesses.
· | "Kentucky Gross Margins" is a single financial performance measure of the Kentucky Regulated segment's, LKE's, LG&E's and KU's electricity generation, transmission and distribution operations as well as itsLKE's and LG&E's distribution and sale of natural gas. In calculating this measure, fuel, and energy purchases and certain variable costs of production (recorded as "Other operation and maintenance" on the Statements of Income) are deducted from revenues. In addition, utility revenuescertain other expenses, recorded as "Other operation and expensesmaintenance" and "Depreciation" on the Statements of Income, associated with approved cost recovery mechanisms are offset.offset against the recovery of those expenses, which are included in revenues. These mechanisms allow for direct recovery of certainthese expenses returnand, in some cases, returns on capital investments and performance incentives. Certain costs associated with these mechanisms, primarily ECR, DSM and GLT, are recorded as "Other operation and maintenance" and "Depreciation." As a result, this measure represents the net revenues from the electricelectricity and gas operations. |
· | "Pennsylvania Gross Delivery Margins" is a single financial performance measure of the Pennsylvania Regulated segment's and PPL Electric's electricelectricity 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 (in "Energy purchases from affiliate" in PPL Electric's reconciliation table). As a result, this measure represents the net revenues from the Pennsylvania Regulated segment's and PPL Electric's electricelectricity delivery operations. |
· | "Unregulated Gross Energy Margins" is a single financial performance measure of the Supply segment's and PPL Energy Supply's competitive energy non-trading and trading activities. Non-trading activities, which are managed on a geographic basis that is aligned with the generation fleet.basis. In calculating this measure, energy revenues, including operating revenues associated with certain businesses classified as discontinued operations, are offset by the cost of fuel, energy purchases, and certain other operation and maintenance expenses, primarily ancillary charges, and gross receipts tax, which is recorded in "Taxes, other than income.income," and operating expenses associated with certain businesses classified as discontinued operations. This performance measure is relevant to PPL due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins." This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant fluctuations in unrealized gains and losses. Such factors could result in gains or losses being recorded in either "Wholesale"Unregulated wholesale energy, marketing"" "Unregulated retail energy" 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 recordedreflected in "PLR intersegment utility revenue (expense)" in the reconciliation table below (in "Wholesale"Unregulated wholesale energy marketing to affiliate" in PPL Energy Supply's reconciliation table). "Unregulated Gross Energy Margins" excludes adjusted energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of the competitive generation assets, full-requirement sales contracts and retail activities. This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the delivery period that was hedged. Adjusted energy-related economic activity also includes the premium amortization associated with options and for 2012 the ineffective portion of qualifying cash flow hedges and realized economic activitypremium amortization associated with the monetization of certain full-requirement sales contracts in 2010. This economicoptions. Unrealized gains and losses related to this activity wasare deferred with the exception of the full-requirement sales contracts that were monetized, and included in "Unregulated Gross Energy Margins" over the delivery period of the item that was hedged or upon realization. |
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 thetheir results of their operations. Management believes that these measures provide additional useful 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 determiningto determine variable compensation.
Reconciliation of Non-GAAP Financial Measures
The following tables containtable contains the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the periods ended September 30.
| | | | | | 2013 Three Months | | 2012 Three Months |
| | | | | | | | | | Unregulated | | | | | | | | | | | Unregulated | | | | | | |
| | | | | | Kentucky | | PA Gross | | Gross | | | | | | | Kentucky | | PA Gross | | Gross | | | | | |
| | | | | | 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 | | | | | | | Kentucky | | PA Gross | | Gross | | | | | |
| | | | | | 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 |
| | | | | | 2014 Three Months | | 2013 Three Months |
| | | | | | | | | | Unregulated | | | | | | | | | | | Unregulated | | | | | | |
| | | | | | Kentucky | | PA Gross | | Gross | | | | | | | | Kentucky | | PA Gross | | Gross | | | | | |
| | | | | | Gross | | Delivery | | Energy | | | | | Operating | | Gross | | Delivery | | Energy | | | | | | Operating |
| | | | | | Margins | | Margins | | Margins | | Other (a) | | Income (b) | | Margins | | Margins | | Margins | | Other (a) | | Income (b) |
Operating Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utility | | $ | 753 | | $ | 477 | | | | | $ | 630 | (c) | | $ | 1,860 | | $ | 744 | | $ | 464 | | | | | $ | 531 | (c) | | $ | 1,739 |
| PLR intersegment utility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | revenue (expense) (d) | | | | | | (20) | | $ | 20 | | | | | | | | | | | | | (11) | | $ | 11 | | | | | | | |
| Unregulated wholesale energy | | | | | | | | | 813 | | | 296 | (e) | | | 1,109 | | | | | | | | | 963 | | | (50) | (e) | | | 913 |
| Unregulated retail energy | | | | | | | | | 280 | | | 2 | (e) | | | 282 | | | | | | | | | 266 | | | (3) | (e) | | | 263 |
| Energy-related businesses | | | | | | | | | | | | 198 | | | | 198 | | | | | | | | | | | | 159 | | | | 159 |
| | | Total Operating Revenues | | | 753 | | | 457 | | | 1,113 | | | 1,126 | | | | 3,449 | | | 744 | | | 453 | | | 1,240 | | | 637 | | | | 3,074 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fuel | | | 240 | | | | | | 203 | | | 9 | (e) | | | 452 | | | 237 | | | | | | 256 | | | 1 | (e) | | | 494 |
| Energy purchases | | | 24 | | | 128 | | | 495 | | | 212 | (e) | | | 859 | | | 23 | | | 144 | | | 428 | | | (40) | (e) | | | 555 |
| Other operation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | maintenance | | | 27 | | | 25 | | | 4 | | | 628 | | | | 684 | | | 26 | | | 19 | | | 5 | | | 608 | | | | 658 |
| Depreciation | | | 2 | | | | | | | | | 305 | | | | 307 | | | 1 | | | | | | | | | 283 | | | | 284 |
| Taxes, other than income | | | | | | 25 | | | 11 | | | 56 | | | | 92 | | | | | | 23 | | | 9 | | | 54 | | | | 86 |
| Energy-related businesses | | | | | | | | | 2 | | | 184 | | | | 186 | | | | | | | | | 5 | | | 146 | | | | 151 |
| | | Total Operating Expenses | | | 293 | | | 178 | | | 715 | | | 1,394 | | | | 2,580 | | | 287 | | | 186 | | | 703 | | | 1,052 | | | | 2,228 |
| Income (Loss) from | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discontinued Operations | | | | | | | | | 33 | | | (33) | (f) | | | | | | | | | | | | 31 | | | (31) | (f) | | | |
Total | | $ | 460 | | $ | 279 | | $ | 431 | | $ | (301) | | | $ | 869 | | $ | 457 | | $ | 267 | | $ | 568 | | $ | (446) | | | $ | 846 |
| | | | | | 2013 Nine Months | | 2012 Nine Months |
| | | | | | | | | | Unregulated | | | | | | | | | | | Unregulated | | | | | | |
| | | | | | Kentucky | | PA Gross | | Gross | | | | | | | Kentucky | | PA Gross | | Gross | | | | | |
| | | | | | Gross | | Delivery | | Energy | | | | | Income | | Gross | | Delivery | | Energy | | | | | | Income |
| | | | | | Margins | | Margins | | Margins | | Other (a) | | (b) | | Margins | | Margins | | Margins | | Other (a) | | (b) |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fuel | | | 684 | | | | | | 778 | | | 2 | | | | 1,464 | | | 677 | | | | | | 695 | | | 33 | (g) | | 1,405 |
| Energy purchases | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realized | | | 146 | | | 436 | | | 1,282 | | | (9) | | | | 1,855 | | | 135 | | | 410 | | | 1,669 | | | 39 | (e) | | | 2,253 |
| | | Unrealized economic | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | activity | | | | | | | | | | | | (192) | (f) | | | (192) | | | | | | | | | | | | (420) | (f) | | | (420) |
| Other operation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | maintenance | | | 74 | | | 62 | | | 13 | | | 1,894 | | | | 2,043 | | | 76 | | | 74 | | | 12 | | | 1,933 | | | | 2,095 |
| Depreciation | | | 3 | | | | | | | | | 856 | | | | 859 | | | 39 | | | | | | | | | 774 | | | | 813 |
| Taxes, other than income | | | | | | 70 | | | 27 | | | 175 | | | | 272 | | | | | | 67 | | | 27 | | | 174 | | | | 268 |
| Energy-related businesses | | | | | | | | | 5 | | | 398 | | | | 403 | | | | | | | | | | | | 363 | | | | 363 |
| Intercompany eliminations | | | | | | (3) | | | 3 | | | | | | | | | | | | | (3) | | | 2 | | | 1 | | | | |
| | | Total Operating Expenses | | | 907 | | | 565 | | | 2,108 | | | 3,124 | | | | 6,704 | | | 927 | | | 548 | | | 2,405 | | | 2,897 | | | | 6,777 |
Total | | $ | 1,319 | | $ | 786 | | $ | 1,450 | | $ | (1,247) | | | $ | 2,308 | | $ | 1,168 | | $ | 694 | | $ | 1,654 | | $ | (1,229) | | | $ | 2,287 |
| | | | | | 2014 Nine Months | | 2013 Nine Months |
| | | | | | | | | | Unregulated | | | | | | | | | | | Unregulated | | | | | | |
| | | | | | Kentucky | | PA Gross | | Gross | | | | | | | Kentucky | | PA Gross | | Gross | | | | | |
| | | | | | Gross | | Delivery | | Energy | | | | | Operating | | Gross | | Delivery | | Energy | | | | | | Operating |
| | | | | | Margins | | Margins | | Margins | | Other (a) | | Income (b) | | Margins | | Margins | | Margins | | Other (a) | | Income (b) |
Operating Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Utility | | $ | 2,409 | | $ | 1,518 | | | | | $ | 1,925 | (c) | | $ | 5,852 | | $ | 2,226 | | $ | 1,391 | | | | | $ | 1,727 | (c) | | $ | 5,344 |
| PLR intersegment utility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | revenue (expense) (d) | | | | | | (68) | | $ | 68 | | | | | | | | | | | | | (37) | | $ | 37 | | | | | | | |
| Unregulated wholesale energy | | | | | | | | | 792 | | | (589) | (e) | | | 203 | | | | | | | | | 2,664 | | | (284) | (e) | | | 2,380 |
| Unregulated retail energy | | | | | | | | | 933 | | | (24) | (e) | | | 909 | | | | | | | | | 747 | | | 8 | (e) | | | 755 |
| Energy-related businesses | | | | | | | | | | | | 512 | | | | 512 | | | | | | | | | | | | 423 | | | | 423 |
| | | Total Operating Revenues | | | 2,409 | | | 1,450 | | | 1,793 | | | 1,824 | | | | 7,476 | | | 2,226 | | | 1,354 | | | 3,448 | | | 1,874 | | | | 8,902 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fuel | | | 748 | | | | | | 950 | | | 3 | (e) | | | 1,701 | | | 684 | | | | | | 778 | | | 2 | (e) | | | 1,464 |
| Energy purchases | | | 184 | | | 431 | | | (478) | | | (421) | (e) | | | (284) | | | 146 | | | 436 | | | 1,285 | | | (204) | (e) | | | 1,663 |
| Other operation and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | maintenance | | | 75 | | | 74 | | | 17 | | | 1,916 | | | | 2,082 | | | 74 | | | 62 | | | 13 | | | 1,860 | | | | 2,009 |
| Depreciation | | | 6 | | | | | | | | | 907 | | | | 913 | | | 3 | | | | | | | | | 842 | | | | 845 |
| Taxes, other than income | | | 1 | | | 74 | | | 34 | | | 174 | | | | 283 | | | | | | 70 | | | 27 | | | 164 | | | | 261 |
| Energy-related businesses | | | | | | | | | 6 | | | 486 | | | | 492 | | | | | | | | | 5 | | | 398 | | | | 403 |
| | | Total Operating Expenses | | | 1,014 | | | 579 | | | 529 | | | 3,065 | | | | 5,187 | | | 907 | | | 568 | | | 2,108 | | | 3,062 | | | | 6,645 |
| Income (Loss) from | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discontinued Operations | | | | | | | | | 103 | | | (103) | (f) | | | | | | | | | | | | 110 | | | (110) | (f) | | | |
Total | | $ | 1,395 | | $ | 871 | | $ | 1,367 | | $ | (1,344) | | | $ | 2,289 | | $ | 1,319 | | $ | 786 | | $ | 1,450 | | $ | (1,298) | | | $ | 2,257 |
(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 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. |
(f) | RepresentsIncludes energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described involatility. See "Commodity Price Risk (Non-trading) - Economic Activity" withinin Note 14 to the Financial Statements. |
(g)(f) | Includes economic activity related to fuelRepresents the revenues associated with the hydroelectric generating facilities located in Montana that are classified as describeddiscontinued operations. These revenues are not reflected in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to"Operating Income" on the Financial Statements. The three and nine months ended September 30, 2012 include a pre-tax lossStatements of $17 million and $29 million related to coal contract modification payments.Income. |
Changes in Non-GAAP Financial Measures
The following table shows the non-GAAP financial measures by PPL's reportable segment and by component, as applicable, for the periods ended September 30 as well as the change between periods. The factors that gave rise to the changes are described belowfollowing the table.
| | | | Three Months | | Nine Months | | | | Three Months | | Nine Months |
| | | | 2013 | | 2012 | | Change | | 2013 | | 2012 | | Change | | | | 2014 | | 2013 | | Change | | 2014 | | 2013 | | Change |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Kentucky Regulated | Kentucky Regulated | | | | | | | | | | | | | | Kentucky Regulated | | | | | | | | | | | | |
Kentucky Gross Margins | Kentucky Gross Margins | | | | | | | | | | | | | | Kentucky Gross Margins | | | | | | | | | | | | |
| LKE | | $ | 457 | | $ | 415 | | $ | 42 | | $ | 1,319 | | $ | 1,168 | | $ | 151 | | LG&E | | $ | 212 | | $ | 210 | | $ | 2 | | $ | 633 | | $ | 595 | | $ | 38 |
| | LG&E | | | 210 | | 198 | | 12 | | 595 | | 552 | | 43 | | KU | | | 248 | | | 247 | | | 1 | | | 762 | | | 724 | | | 38 |
| | KU | | | 247 | | 216 | | 31 | | 724 | | 616 | | 108 | |
LKE | | LKE | | $ | 460 | | $ | 457 | | $ | 3 | | $ | 1,395 | | $ | 1,319 | | $ | 76 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pennsylvania Regulated | Pennsylvania Regulated | | | | | | | | | | | | | | | | | | | Pennsylvania Regulated | | | | | | | | | | | | |
PA Gross Delivery Margins | | | | | | | | | | | | | |
Pennsylvania Gross Delivery Margins | | Pennsylvania Gross Delivery Margins | | | | | | | | | | | | |
| | Distribution | | $ | 201 | | $ | 185 | | $ | 16 | | $ | 607 | | $ | 544 | | $ | 63 | | Distribution | | $ | 194 | | $ | 201 | | $ | (7) | | $ | 631 | | $ | 607 | | $ | 24 |
| | Transmission | | | 66 | | | 51 | | | 15 | | | 179 | | | 150 | | | 29 | | Transmission | | | 85 | | | 66 | | | 19 | | | 240 | | | 179 | | | 61 |
Total | Total | | $ | 267 | | $ | 236 | | $ | 31 | | $ | 786 | | $ | 694 | | $ | 92 | Total | | $ | 279 | | $ | 267 | | $ | 12 | | $ | 871 | | $ | 786 | | $ | 85 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Supply | Supply | | | | | | | | | | | | | | | Supply | | | | | | | | | | | | |
Unregulated Gross Energy Margins | Unregulated Gross Energy Margins | | | | | | | | | | | | | | | | | | | Unregulated Gross Energy Margins | | | | | | | | | | | | |
Non-trading | | | | | | | | | | | | | | | | | | | |
| | Eastern U.S. | | $ | 504 | | $ | 521 | | $ | (17) | | $ | 1,283 | | $ | 1,417 | | $ | (134) | | Eastern U.S. | | $ | 376 | | $ | 516 | | $ | (140) | | $ | 1,211 | | $ | 1,285 | | $ | (74) |
| | Western U.S. | | 52 | | 67 | | (15) | | 166 | | 230 | | (64) | | Western U.S. | | | 55 | | | 52 | | | 3 | | | 156 | | | 165 | | | (9) |
Net energy trading | | | 12 | | | (11) | | | 23 | | | 1 | | | 7 | | | (6) | |
Total | Total | | $ | 568 | | $ | 577 | | $ | (9) | | $ | 1,450 | | $ | 1,654 | | $ | (204) | Total | | $ | 431 | | $ | 568 | | $ | (137) | | $ | 1,367 | | $ | 1,450 | | $ | (83) |
Kentucky Gross Margins
Kentucky Gross Margins increased $42 million for the three months ended September 30, 20132014 compared with 2012,2013 primarily due to higher base ratesreturns on additional environmental capital investments of $23$15 million ($108 million at LG&E and $13$7 million at KU), environmental cost recoveries added to base rates of $13 million (at KU), returns from additional environmental capital investments of $8 million ($3 million at LG&E and $5 million at KU) and higher fuel recoveries of $6 million ($3 million at LG&E and $3 million at KU), partially offset by lower volumes of $13$8 million ($74 million at LG&E and $6 million at KU). The change in volumes was primarily attributable to mild weather as cooling degree days decreased 16% compared to the same period in 2012.conditions.
Kentucky Gross Margins increased $151 million for the nine months ended September 30, 20132014 compared with 2012,2013 primarily due to higher base ratesreturns on additional environmental capital investments of $72$42 million ($3119 million at LG&E and $41$23 million at KU), environmental cost recoveries added to base rateshigher volumes of $45$16 million ($35 million at LG&E and $42$11 million at KU), returns from additional environmental capital investmentshigher demand revenue of $18$7 million ($95 million at LG&E and $9$2 million at KU) and higher fuel recoveries of $11 million ($3 millionoff-system sales at LG&E of $7 million. The change in volumes, demand revenue and $8 million at KU).
The increaseoff-system sales were driven by unusually cold weather in base rates was the resultfirst quarter of new KPSC rates effective January 1, 2013 at LG&E and KU. The environmental cost recoveries added to base rates were due to the transfer of the 2005 and 2006 ECR plans into base rates as a result of the 2012 Kentucky rate cases for LG&E and KU. This transfer results in 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.2014.
Pennsylvania Gross Delivery Margins
Distribution
Distribution margins increased for the three months ended September 30, 2013 compared with 2012, primarily due to an $18 million favorable effect of price as a result of higher base rates, effective January 1, 2013, partially offset by unfavorable weather of $4 million.
Distribution marginsMargins increased for the nine months ended September 30, 20132014 compared with 20122013 primarily due to a $50$14 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013,distribution improvement capital investments and a $6 million favorable weather effect of $9 million and higher volumesunusually cold weather in the first quarter of $4 million.2014. See "Pennsylvania Activities - Storm Damage Expense Rider" in Note 6 to the Financial Statements for additional information.
Transmission
Transmission marginsMargins increased for the three and nine months ended September 30, 20132014 compared with 2012,2013 primarily due to increased capital investments and the recovery of additional costs through the FERC formula-based rates.investments.
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) |
Eastern U.S.
Eastern margins decreased for the three months ended September 30, 2014 compared with 2013 primarily due to lower baseload energy prices of $82 million, lower capacity prices of $67 million and net losses on certain commodity positions of $12 million, partially offset by favorable asset performance of $15 million.
Eastern margins decreased for the nine months ended September 30, 2014 compared with 2013 primarily due to lower baseload energy prices of $283 million, partially offset by favorable asset performance of $66 million, net gains on certain commodity positions of $48 million, higher capacity prices of $34 million and gas optimization of $19 million.
During the first quarter of 2014, the PJM region experienced unusually cold weather conditions, higher demand and congestion patterns, causing rising natural gas and electricity prices in spot and near-term forward markets. Due to these market dynamics, PPL Energy Supply captured opportunities on unhedged generation, which were primarily offset by under-hedged full-requirement sales contracts and retail electric. The net benefit, due to the aforementioned weather and related market dynamics, was $38 million for the nine months ended September 30, 2014 compared with 2013.
Western U.S.
Western margins increased for the three months ended September 30, 2014 compared with 2013 due to increased availability of coal and hydro units of $15 million, partially offset by lower energy prices of $13 million.
Western margins decreased for the nine months ended September 30, 2014 compared with 2013 primarily due to lower energy prices.
Statement of Income Analysis -- | | |
| | | | | | | | | |
Utility Revenues | | |
| | | | | | | | | |
The increase (decrease) in utility revenues for the periods ended September 30, 2014 compared with 2013 was due to: |
| | | | | | | | | |
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 |
| | | | | Three Months | | Nine Months |
Domestic: | | | | | | |
| PPL Electric (a) | | $ | 14 | | $ | 128 |
| LKE (b) | | | 9 | | | 183 |
| Total Domestic | | | 23 | | | 311 |
| | | | | | | | | |
U.K.: | | | | | | |
| Price (c) | | | 35 | | | 154 |
| Foreign currency exchange rates | | | 57 | | | 142 |
| Volume (d) | | | (12) | | | (68) |
| Line loss accrual adjustments (e) | | | 21 | | | (20) |
| Customer mix | | | | | | (7) |
| Other | | | (3) | | | (4) |
| Total U.K. | | | 98 | | | 197 |
Total | | $ | 121 | | $ | 508 |
(a) | See "Pennsylvania Gross Delivery Margins" for further information. |
(b) | See "Kentucky Gross Margins" for further information. |
(c) | The three and nine-month periods weremonth period was impacted by a price increase effective April 1, 2013. The nine-month2014 and the nine month period was also impacted by a price increaseincreases effective April 1, 2012.2014 and April 1, 2013. |
(d) | The increasedecrease for the nine-month periodthree and nine month periods was primarily due to the favorableadverse effect of weather. |
(e) | The decrease for the three and nine-monthnine month periods was due to a reductionwere impacted by unfavorable accrual adjustments in revenue2013 based on information provided by Ofgem regardingOfgem's consultation documents on the calculation ofDPCR4 line loss incentive/penalty for all network operators related to DPCR4.incentives and penalties. The nine month period was also impacted by unfavorable accrual adjustments in 2014 based on Ofgem's final decision on this matter in March 2014. 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. |
Certain Operating Revenues and Expenses Included in "Margins"
The following Statement of Income line items and their related increase (decrease) during the periods ended September 30, 2014 compared with 2013 are included above within "Margins" and are not discussed separately.
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) |
| | | Three Months | | Nine Months |
| | | | | | | |
Unregulated wholesale energy (a) | | $ | 196 | | $ | (2,177) |
Unregulated retail energy | | | 19 | | | 154 |
Fuel | | | (42) | | | 237 |
Energy purchases (b) | | | 304 | | | (1,947) |
(a) | The decreasenine month period ended September 30, 2014 includes significant realized and unrealized losses on physical and financial commodity sales contracts due to the unusually cold weather experienced in the first quarter of 2014. |
(b) | The nine month period ended September 30, 2014 includes significant realized and unrealized gains on physical and financial commodity purchase contracts due to the unusually cold weather experienced in the first quarter of 2014. |
Other Operation and Maintenance | | | | | |
| | | | | | | |
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2014 compared with 2013 was due to: |
| | | | | | | |
| | | Three Months | | Nine Months |
Domestic: | | | | | |
| PPL Susquehanna (a) | $ | 4 | | $ | 23 |
| PPL Energy Supply fossil and hydroelectric plants (b) | | (14) | | | (20) |
| PPL Electric storm costs | | 7 | | | 21 |
| PPL Electric payroll-related costs | | (8) | | | (18) |
| LKE generation and gas maintenance | | 3 | | | 10 |
| LKE storm expense | | | | | 8 |
| LKE bad debt expense | | 3 | | | 7 |
| Bargaining unit one-time voluntary retirement benefits (Note 10) | | (9) | | | 20 |
| Separation benefits related to spinoff of PPL Energy Supply (Note 8) | | 30 | | | 30 |
| Other | | 10 | | | (6) |
U.K.: | | | | | |
| Network maintenance (c) | | (2) | | | 14 |
| Foreign currency exchange rates | | 9 | | | 23 |
| Pension | | (11) | | | (29) |
| Engineering management | | 8 | | | (1) |
| WPD Midlands acquisition-related separation benefits | | (3) | | | (5) |
| Other | | (1) | | | (4) |
Total | $ | 26 | | $ | 73 |
(a) | The increase for the nine-monthnine month period iswas 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.project costs. |
(b) | The decrease for the three and nine month periods isperiod was primarily due to outage costs of $10 million and the timingelimination of $5 million and scope$16 million of scheduled outages.rent expense associated with the Colstrip lease which was terminated in December 2013. |
(c) | The decreaseincrease for the three and nine month period was primarily due to vegetation management and fault repair due to increased 2014 storm activity. |
Depreciation increased by $23 million and $68 million for the three and nine months ended September 30, 2014 compared with 2013, primarily due to additions to PP&E, net.
Taxes, Other Than Income | | | | | | |
| | | | | | | |
The increase (decrease) in taxes, other than income for the periods ended September 30, 2014 compared with 2013 was due to: |
| | | | | | | |
| | | Three Months | | Nine Months |
| | | | | | | |
Pennsylvania gross receipts tax (a) | | $ | 1 | | $ | 10 |
Foreign currency exchange rates | | | 4 | | | 9 |
Other | | | 1 | | | 3 |
Total | | $ | 6 | | $ | 22 |
(a) | The increase for the nine month period was primarily due to higher retail electric revenues. This tax is included in "Unregulated Gross Energy Margins" and "Pennsylvania Gross Delivery Margins." |
Other Income (Expense) - net | | | | | | |
| | | | | | |
The increase (decrease) in other income (expense) - net for the periods ended September 30, 2014 compared with 2013 was due to: |
| | | | | | |
| | Three Months | | Nine Months |
| | | | | | |
Change in the fair value of economic foreign currency exchange contracts (Note 14) | | $ | 251 | | $ | 32 |
Earnings on securities in NDT funds | | | 7 | | | 9 |
Transaction costs related to spinoff of PPL Energy Supply (Note 8) | | | (2) | | | (18) |
Other | | | 5 | | | (3) |
Total | | $ | 261 | | $ | 20 |
| | | | | | |
See Note 12 to the Financial Statements for additional information. |
Interest Expense | | | |
| | | | | | | |
The increase (decrease) in interest expense for the periods ended September 30, 2014 compared with 2013 was due to: |
| | | | |
| | | Three Months | | Nine Months |
| | | | | | | |
Long-term debt interest expense (a) | | $ | 9 | | $ | 9 |
Hedging activity and ineffectiveness | | | (6) | | | (9) |
Net amortization of debt discounts, premiums and issuance costs | | | | | | (4) |
Capitalized interest and debt component of AFUDC (b) | | | 2 | | | 11 |
Foreign currency exchange rates | | | 10 | | | 23 |
Other | | | (1) | | | (2) |
Total | | $ | 14 | | $ | 28 |
(a) | The increase for both periods iswas primarily due to debt issuances at PPL Electric in June 2014, LKE in November 2013 and WPD (West Midlands) in October 2013, partially offset by repayment of debt at PPL Energy Supply in December and July 2013. The nine month period also increased due to a reductiondebt issuance at PPL Electric in Act 129 energy efficiency and conservation plan costs for Phase 1 programs. Phase 1 ended May 31,July 2013. |
(d)(b) | These costs are offset by revenues reflectedPrimarily due to the Holtwood hydroelectric expansion project placed in "Utility" onservice in November 2013. |
Income Taxes | | |
| | | | | | | |
The increase (decrease) in income taxes for the Statement of Income.periods ended September 30, 2014 compared with 2013 was due to: |
(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. |
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
| | | |
| | | Three Months | | Nine Months |
| | | | | | | |
Change in pre-tax income at current period tax rates | | $ | 107 | | $ | (3) |
State valuation allowance adjustments (a) | | | (35) | | | 11 |
Federal income tax credits | | | 3 | | | 5 |
Federal and state tax reserve adjustments (b) | | | | | | 41 |
Federal and state tax return adjustments | | | 6 | | | 6 |
U.S. income tax on foreign earnings net of foreign tax credit (c) | | | 16 | | | 42 |
U.K. Finance Act adjustments (d) | | | 93 | | | 93 |
State deferred tax rate change | | | | | | 3 |
Impact of lower U.K. income tax rates | | | (6) | | | (15) |
Other | | | | | | 8 |
Total | | $ | 184 | | $ | 191 |
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 forAs a result of the PPL Energy Supply spinoff announcement, PPL recorded $3 million and $49 million of deferred income tax expense during the three and nine-month periods was duenine months ended September 30, 2014 to debt issuances by PPL Capital Funding in March 2013 and October 2012, and by PPL Electric in July 2013 and August 2012, partially offsetadjust valuation allowances on deferred tax assets primarily for state net operating loss carryforwards that were previously supported by the impactearnings of lower interest rates resulting from the remarketing of the 2010 Equity Units.PPL Energy Supply. |
| 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) |
(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 ofby the U.S. Court of Appeals for the Third Circuit, onconcerning the creditability, for income tax purposes, of the U.K. Windfall Profits Tax for tax purposes.Tax. 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) | For the three and nine months ended September 30, 2014, PPL recorded $19 million and $40 million increases to income tax expense primarily attributable to the expected taxable amount of cash repatriation in 2014. |
| During the three and nine months ended September 30, 2013, PPL recorded a $10 million and $24 million increaseincreases 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 bewas reflected on an amended 2010 U.S. tax return.returns. |
(d) | The U.K.'s Finance Act of 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.
Income (Loss) from Discontinued Operations (net of income taxes)
Income (Loss) from Discontinued Operations (net of income taxes) primarily includes the results of operations of the Montana hydroelectric generating facilities for all periods presented. See "Discontinued Operations - Montana Hydro Sale Agreement" in Note 8 to the Financial Statements for additional information. Income (Loss) from Discontinued Operations (net of income taxes) decreased by $20 million for the nine months ended September 30, 2014 compared with the same period in 2013. The decrease was primarily due to the Kerr Dam Project impairment of $10 million after-tax recorded in March 2014 and lower energy margins due to lower energy prices. See Note 13 to the Financial Statements for additional information on income taxes.the Kerr Dam Project impairment.
PPL Energy Supply: Earnings, Margins and Statement of Income Analysis
Earnings | | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | | September 30, | | September 30, |
| | | 2013 | | 2012 | | 2013 | | 2012 | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | | | |
Net Income Attributable to PPL Energy Supply Member | Net Income Attributable to PPL Energy Supply Member | | $ | 124 | | $ | 54 | | $ | 172 | | $ | 382 | Net Income Attributable to PPL Energy Supply Member | | $ | 101 | | $ | 124 | | $ | 48 | | $ | 172 |
Special items, after-tax | | (6) | | (105) | | | (49) | | 3 | |
Special items, gains (losses), after-tax | | Special items, gains (losses), after-tax | | | 41 | | | (6) | | | (144) | | | (49) |
Excluding special items, the decrease in earnings for the three-monththree month period wasin 2014 compared with 2013 decreased, primarily due to lower baseloadmargins due to lower hedged energy prices and lower baseload generation and highercapacity prices, partially offset by favorable asset performance, lower operation and maintenance expense partially offset by higher capacity prices. The decreaseand lower financing costs. Earnings for the nine-monthnine month period wasdecreased, primarily due to lower baseload energy prices, higher fuel costs and higher depreciation, partially offset by favorable asset performance, net benefits from unusually cold weather in the first quarter of 2014, higher capacity prices, higher intermediate and peaking margins, higher baseload generationgains on certain commodity positions and lower income taxes.financing costs.
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 inamounts classified as Unregulated Gross Energy Margins and certain items that
management considers special.special on separate lines within the table and not in their respective Statement of Income line items. See PPL's "Results of Operations -– Segment Earnings -– Supply Segment" for the details of the special items.
| | Three Months | | Nine Months | | Three Months | | Nine Months |
| | | | | | | | | |
Unregulated Gross Energy Margins | | $ | (9) | | $ | (204) | | $ | (137) | | $ | (83) |
Other operation and maintenance | | (19) | | 11 | | 6 | | 3 |
Depreciation | | (7) | | (31) | |
Taxes, other than income | | (2) | | 2 | |
Other Income (Expense) - net | | (3) | | 5 | | 11 | | 7 |
Interest Expense | | 4 | | (8) | |
Interest expense | | | 6 | | 28 |
Energy-related businesses | | | 13 | | 7 |
Other | | (1) | | 1 | | 2 | | (1) |
Income Taxes | | 8 | | 66 | |
Income taxes | | | 30 | | 11 |
Discontinued operations, after-tax | | | ��(1) | | (1) |
Special items, after-tax | | | 99 | | | (52) | | | 47 | | | (95) |
Total | | $ | 70 | | $ | (210) | | $ | (23) | | $ | (124) |
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.
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. |
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.
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 | | | 2014 Three Months | | 2013 Three Months |
| | | | PA Gross | | | | | | | PA Gross | | | | | | | | Unregulated | | | | | | | Unregulated | | | | | |
| | | | Delivery | | | | Operating | | Delivery | | | | Operating | | | Gross Energy | | | | | Operating | | Gross Energy | | | | | Operating |
| | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) |
Operating Revenues | Operating Revenues | | | | | | | | | | | | | | | Operating Revenues | | | | | | | | | | | | | | |
| | Unregulated wholesale energy | $ | 813 | | $ | 296 | (c) | | $ | 1,109 | | $ | 963 | | $ | (50) | (c) | | $ | 913 |
| | Unregulated wholesale energy | | | | | | | | | | | | | | |
| | | to affiliate | | 20 | | | | | 20 | | 11 | | | | | 11 |
| Retail electric | | $ | 1,388 | | | | $ | 1,388 | | $ | 1,303 | | | | $ | 1,303 | Unregulated retail energy | | 280 | | 3 | (c) | | 283 | | 266 | | (1) | (c) | | 265 |
| Electric revenue from affiliate | | | 3 | | | | | | 3 | | | 3 | | | | | | 3 | Energy-related businesses | | | | | 189 | | | | 189 | | | | | | 143 | | | | 143 |
| | Total Operating Revenues | | | 1,391 | | | | | | 1,391 | | | 1,306 | | | | | | 1,306 | | Total Operating Revenues | | 1,113 | | | 488 | | | | 1,601 | | | 1,240 | | | 92 | | | | 1,332 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | | | |
| Energy purchases | | 436 | | | | | | 436 | | | 410 | | | | | | 410 | Fuel | | 203 | | 9 | (c) | | 212 | | 256 | | 2 | (c) | | 258 |
| Energy purchases from affiliate | | 37 | | | | | | 37 | | | 61 | | | | | | 61 | Energy purchases | | 495 | | 213 | (c) | | 708 | | 428 | | (39) | (c) | | 389 |
| Other operation and maintenance | | 62 | | $ | 329 | | | 391 | | | 74 | | $ | 357 | | | 431 | Other operation and maintenance | | 4 | | 228 | | | 232 | | 5 | | 227 | | | 232 |
| Depreciation | | | | | 132 | | | 132 | | | | | | 119 | | | 119 | Depreciation | | | | 74 | | | 74 | | | | 75 | | | 75 |
| Taxes, other than income | | | 70 | | | 7 | | | 77 | | | 67 | | | 5 | | | 72 | Taxes, other than income | | 11 | | 3 | | | 14 | | 9 | | 5 | | | 14 |
| | Total Operating Expenses | | | 605 | | | 468 | | | 1,073 | | | 612 | | | 481 | | | 1,093 | Energy-related businesses | | 2 | | | 170 | | | | 172 | | | 5 | | | 133 | | | | 138 |
| | | Total Operating Expenses | | 715 | | 697 | | | 1,412 | | 703 | | 403 | | | 1,106 |
| | Income (Loss) from | | | | | | | | | | | | | | |
| | | Discontinued Operations | | 33 | | | (33) | (d) | | | | | | 31 | | | (31) | (d) | | | |
Total | Total | | $ | 786 | | $ | (468) | | $ | 318 | | $ | 694 | | $ | (481) | | $ | 213 | Total | $ | 431 | | $ | (242) | | | $ | 189 | | $ | 568 | | $ | (342) | | | $ | 226 |
| | | | | | 2014 Nine Months | | 2013 Nine Months |
| | | | | | Unregulated | | | | | | | | Unregulated | | | | | | |
| | | | | | Gross Energy | | | | | Operating | | Gross Energy | | | | | | Operating |
| | | | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) |
Operating Revenues | | | | | | | | | | | | | | | | | | | | |
| Unregulated wholesale energy | | $ | 792 | | $ | (589) | (c) | | $ | 203 | | $ | 2,664 | | $ | (284) | (c) | | $ | 2,380 |
| Unregulated wholesale energy | | | | | | | | | | | | | | | | | | | | |
| | to affiliate | | | 68 | | | | | | | 68 | | | 37 | | | | | | | 37 |
| Unregulated retail energy | | | 933 | | | (20) | (c) | | | 913 | | | 747 | | | 11 | (c) | | | 758 |
| Energy-related businesses | | | | | | 469 | | | | 469 | | | | | | 378 | | | | 378 |
| | | Total Operating Revenues | | | 1,793 | | | (140) | | | | 1,653 | | | 3,448 | | | 105 | | | | 3,553 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 2014 Nine Months | | 2013 Nine Months |
| | | | | | Unregulated | | | | | | | | Unregulated | | | | | | |
| | | | | | Gross Energy | | | | | Operating | | Gross Energy | | | | | | Operating |
| | | | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) |
Operating Expenses | | | | | | | | | | | | | | | | | | | | |
| Fuel | | | 950 | | | 3 | (c) | | | 953 | | | 778 | | | 2 | (c) | | | 780 |
| Energy purchases | | | (478) | | | (415) | (c) | | | (893) | | | 1,285 | | | (197) | (c) | | | 1,088 |
| Other operation and maintenance | | | 17 | | | 729 | | | | 746 | | | 13 | | | 701 | | | | 714 |
| Depreciation | | | | | | 225 | | | | 225 | | | | | | 223 | | | | 223 |
| Taxes, other than income | | | 34 | | | 11 | | | | 45 | | | 27 | | | 13 | | | | 40 |
| Energy-related businesses | | | 6 | | | 445 | | | | 451 | | | 5 | | | 361 | | | | 366 |
| | | Total Operating Expenses | | | 529 | | | 998 | | | | 1,527 | | | 2,108 | | | 1,103 | | | | 3,211 |
| Income (Loss) from | | | | | | | | | | | | | | | | | | | | |
| | Discontinued Operations | | | 103 | | | (103) | (d) | | | | | | 110 | | | (110) | (d) | | | |
Total | | $ | 1,367 | | $ | (1,241) | | | $ | 126 | | $ | 1,450 | | $ | (1,108) | | | $ | 342 |
(a) | Represents amounts excluded from Margins. |
(b) | As reported on the Statements of Income. |
(c) | Includes energy-related economic activity, which is subject to fluctuations in value due to market price volatility. See "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements. |
(d) | Represents the revenues associated with the hydroelectric generating facilities located in Montana that are classified as discontinued operations. These revenues are not reflected in "Operating Income" on the Statements of Income. |
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) |
Statement of Income Analysis --
Certain Operating Revenues and Expenses Included in "Margins"
The following Statement of Income line items and their related increase (decrease) during the periods ended September 30, 2014 compared with 2013 are included above within "Margins" and are not discussed separately.
| | | Three Months | | Nine Months |
| | | | | | | |
Unregulated wholesale energy (a) | | $ | 196 | | $ | (2,177) |
Unregulated wholesale energy to affiliate | | | 9 | | | 31 |
Unregulated retail energy | | | 18 | | | 155 |
Fuel | | | (46) | | | 173 |
Energy purchases (b) | | | 319 | | | (1,981) |
(a) | The decrease wasnine month period ended September 30, 2014 includes significant realized and unrealized losses on physical and financial commodity sales contracts due to a reductionthe unusually cold weather experienced in Act 129 energy efficiency and conservation plan costs for Phase 1 programs. Phase 1 ended May 31, 2013.the first quarter of 2014. |
(b) | The decrease was partiallynine month period ended September 30, 2014 includes significant realized and unrealized gains on physical and financial commodity purchase contracts due to storm insurance policy premiums for coverage that wasthe unusually cold weather experienced in place in 2012 but was not renewed in 2013.the first quarter of 2014. |
Energy-Related Businesses
Depreciation
DepreciationNet contributions from energy-related businesses increased by $4$12 million and $13$6 million for the three and nine months ended September 30, 20132014 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 for2013. During the three and nine months ended September 30, 2013 compared with 2012, primarily due2014, PPL Energy Supply recorded $14 million and $17 million increases to higher Pennsylvania gross receipts tax expense due"Energy-related businesses" revenues on the 2014 Statement of Income related to higher retail electricity revenue. This tax is includedprior periods and the timing of revenue recognition for a mechanical contracting and engineering subsidiary. See Note 1 to the Financial Statements for additional information. The increase for the nine month period was partially offset by losses of $9 million recognized in "Pennsylvania Gross Delivery Margins."2014 related to overruns in costs to complete a project.
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 |
Other Operation and Maintenance | | | | | |
| | | | | | |
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2014 compared with 2013 was due to: |
| | |
| | Three Months | | Nine Months |
| | | | | | |
PPL Susquehanna (a) | $ | 4 | | $ | 23 |
Fossil and hydroelectric plants (b) | | (14) | | | (20) |
PPL EnergyPlus | | (2) | | | 2 |
Bargaining unit one-time voluntary retirement benefits (Note 10) | | (6) | | | 17 |
Separation benefits related to spinoff of PPL Energy Supply (Note 8) | | 12 | | | 12 |
Other | | 6 | | | (2) |
Total | $ | | | $ | 32 |
(a) | The increase for the nine month period was primarily due to project costs. |
(b) | The decrease for the three and nine month period was primarily due to outage costs of $10 million and the elimination of $5 million and $16 million of rent expense associated with the Colstrip lease which was terminated in December 2013. |
Other Income (Expense) - net
Other income (expense) – net increased by $9 million and $6 million for the three and nine months ended September 30, 2014 compared with 2013, primarily due to higher earnings on securities in NDT funds.
Interest Expense | | | | | | |
| | | | | | | |
The increase (decrease) in interest expense for the periods ended September 30, 2014 compared with 2013 was due to: |
| | | | | | | |
| | Three Months | | Nine Months |
| | | | | | | |
Long-term debt interest expense (a) | | $ | (12) | | $ | (38) |
Capitalized interest (b) | | | 4 | | | 12 |
Other | | | 2 | | | (2) |
Total | | $ | (6) | | $ | (28) |
(a) | The decrease was primarily due to the repayment of debt issuances in August 2012December and July 2013. |
(b) | The decreaseincrease was primarily due to the June 2012 redemption of all 2.5 million shares of preference stock.Holtwood hydroelectric expansion project placed in service in November 2013. |
Income Taxes | | | | | | |
| | | | | | |
The increase (decrease) in income taxes for the periods ended September 30, 2014 compared with 2013 was due to: |
| | | |
| | Three Months | | Nine Months |
| | | | | | |
Change in pre-tax income at current period tax rates | | $ | 2 | | $ | (75) |
State valuation allowance adjustments | | | (4) | | | (4) |
Federal and state tax reserve adjustments | | | (1) | | | (6) |
State deferred tax rate change | | | | | | 3 |
Other | | | 6 | | | 7 |
Total | | $ | 3 | | $ | (75) |
See Note 5 to the Financial Statements for additional information.
Income (Loss) from Discontinued Operations (net of income taxes)
Income (Loss) from Discontinued Operations (net of income taxes) includes the results of operations of the Montana hydroelectric generating facilities for all periods presented. See "Discontinued Operations - Montana Hydro Sale Agreement" in Note 8 to the Financial Statements for additional information. Income (Loss) from Discontinued Operations (net of income taxes) decreased by $18 million for the nine months ended September 30, 2014 compared with the same period in 2013. The decrease was primarily due to the Kerr Dam Project impairment of $10 million after-tax recorded in March 2014 and lower energy margins due to lower energy prices. See Note 13 to the Financial Statements for additional information on the Kerr Dam Project impairment.
PPL Electric: Earnings, Margins and Statement of Income Analysis
Earnings | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | |
Net Income | | $ | 57 | | $ | 51 | | $ | 194 | | $ | 160 |
Special item, gains (losses), after-tax | | | 2 | | | | | | (2) | | | |
Excluding a special item, earnings for the three month period in 2014 compared with 2013 were flat. Earnings for the nine month period in 2014 compared with 2013 increased, primarily due to returns on additional transmission and distribution improvement capital investments and higher sales volumes driven by unusually cold weather in the first quarter of 2014, partially offset by higher interest expense.
The table below quantifies the changes in the components of Net Income between these periods, which reflects amounts classified as Pennsylvania Gross Delivery Margins and a certain item that management considers special on separate lines
within the table and not in their respective Statement of Income line items. See PPL's Results of Operations - Segment Earnings - Pennsylvania Regulated Segment" for details of the special item.
| | Three Months | | Nine Months |
| | | | | | |
Pennsylvania Gross Delivery Margins | | $ | 12 | | $ | 85 |
Other operation and maintenance | | | 4 | | | 4 |
Depreciation | | | (1) | | | (5) |
Interest expense | | | (3) | | | (11) |
Other | | | 1 | | | 1 |
Income taxes | | | (9) | | | (38) |
Special item, after-tax | | | 2 | | | (2) |
Total | | $ | 6 | | $ | 34 |
"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 - 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.
| | | | | 2014 Three Months | | 2013 Three Months |
| | | | | PA Gross | | | | | | | PA Gross | | | | | |
| | | | | Delivery | | | | Operating | | Delivery | | | | | Operating |
| | | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) |
Operating Revenues | $ | 477 | | | | | $ | 477 | | $ | 464 | | | | | $ | 464 |
| | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | |
| Energy purchases | | 128 | | | | | | 128 | | | 144 | | | | | | 144 |
| Energy purchases from affiliate | | 20 | | | | | | 20 | | | 11 | | | | | | 11 |
| Other operation and maintenance | | 25 | | $ | 108 | | | 133 | | | 19 | | $ | 115 | | | 134 |
| Depreciation | | | | | 47 | | | 47 | | | | | | 45 | | | 45 |
| Taxes, other than income | | 25 | | | | | | 25 | | | 23 | | | 2 | | | 25 |
| | | Total Operating Expenses | | 198 | | | 155 | | | 353 | | | 197 | | | 162 | | | 359 |
Total | $ | 279 | | $ | (155) | | $ | 124 | | $ | 267 | | $ | (162) | | $ | 105 |
| | | | | 2014 Nine Months | | 2013 Nine Months |
| | | | | PA Gross | | | | | | | PA Gross | | | | | |
| | | | | Delivery | | | | Operating | | Delivery | | | | | Operating |
| | | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) |
Operating Revenues | $ | 1,518 | | | | | $ | 1,518 | | $ | 1,391 | | | | | $ | 1,391 |
| | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | |
| Energy purchases | | 431 | | | | | | 431 | | | 436 | | | | | | 436 |
| Energy purchases from affiliate | | 68 | | | | | | 68 | | | 37 | | | | | | 37 |
| Other operation and maintenance | | 74 | | $ | 328 | | | 402 | | | 62 | | $ | 329 | | | 391 |
| Depreciation | | | | | 137 | | | 137 | | | | | | 132 | | | 132 |
| Taxes, other than income | | 74 | | | 6 | | | 80 | | | 70 | | | 7 | | | 77 |
| | | Total Operating Expenses | | 647 | | | 471 | | | 1,118 | | | 605 | | | 468 | | | 1,073 |
Total | $ | 871 | | $ | (471) | | $ | 400 | | $ | 786 | | $ | (468) | | $ | 318 |
(a) | Represents amounts excluded from Margins. |
(b) | As reported on the Statements of Income. |
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 |
Statement of Income Analysis --
Certain Operating Revenues and Expenses Included in "Margins"
The following Statement of Income line items and their related increase (decrease) during the periods ended September 30, 2014 compared with 2013 are included above within "Margins" and are not discussed separately.
| | | Three Months | | Nine Months |
| | | | | | | |
Operating revenues | | $ | 13 | | $ | 127 |
Energy purchases | | | (16) | | | (5) |
Energy purchases from affiliate | | | 9 | | | 31 |
Other Operation and Maintenance | | | | | |
| | | | | | |
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2014 compared with 2013 was due to: |
| | |
| | Three Months | | Nine Months |
| | | | | | |
| | | | | |
Payroll-related costs | $ | (8) | | $ | (18) |
Vegetation management | | (2) | | | 3 |
Storm costs | | 7 | | | 21 |
Corporate service | | 2 | | | 5 |
Bargaining unit one-time voluntary retirement benefits (Note 10) | | (3) | | | 3 |
Other | | 3 | | | (3) |
Total | $ | (1) | | $ | 11 |
Interest Expense
Interest expense increased by $11 million for the nine months ended September 30, 2014 compared with 2013, primarily due to a debt issuance in June 2014 and July 2013.
Income Taxes | | | | | | |
| | | | | | |
The increase (decrease) in income taxes for the periods ended September 30, 2014 compared with 2013 was due to: |
| | | | | | |
| | Three Months | | Nine Months |
| | | | | | |
Change in pre-tax income at current period tax rates | | $ | 7 | | $ | 30 |
Federal and state tax reserve adjustments | | | 2 | | | 5 |
Other | | | 2 | | | 3 |
Total | | $ | 11 | | $ | 38 |
See Note 5 to the Financial Statements for additional information on income taxes.information.
LKE: Earnings, Margins and Statement of Income Analysis
Earnings | | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | | September 30, | | September 30, |
| | | 2013 | | 2012 | | 2013 | | 2012 | | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | | | | | | | | | | |
Net Income | Net Income | | $ | 100 | | $ | 83 | | $ | 260 | | $ | 180 | Net Income | | $ | 91 | | $ | 100 | | $ | 271 | | $ | 260 |
Special items, after-tax | | | | | | | 2 | | (1) | |
Excluding special items,Earnings decreased for the increasesthree month period in earnings for both periods were2014 compared with 2013 primarily due to lower sales volume due to mild weather, higher electricityoperation and gas base rates that went into effect January 1,maintenance expenses and higher financing costs, partially offset by returns on additional environmental capital investments. Earnings increased for the nine month period in 2014 compared with 2013 primarily due to returns fromon additional environmental capital investments, higher sales volumes, higher demand revenue and higher fuel recovery,off-system sales, partially offset by higher depreciation (due to environmental costs related tooperation and maintenance expense driven by storm-related expenses and timing and scope of generation maintenance. The changes in volumes, demand revenue and off-system sales were driven by unusually cold weather in 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.first quarter of 2014.
The table below quantifies the changes in components of Net Income between these periods, which reflect reclassifications for items includedamounts classified as Margins on a separate line within the table and not 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 |
their respective Statement of Income Analysis --line items.
| | Three Months | | Nine Months |
| | | | | | |
Margins | | $ | 3 | | $ | 76 |
Other operation and maintenance | | | (8) | | | (26) |
Depreciation | | | (4) | | | (10) |
Interest expense | | | (5) | | | (14) |
Other | | | 1 | | | (3) |
Income taxes | | | 4 | | | (12) |
Total | | $ | (9) | | $ | 11 |
"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 onan explanation of 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 | | | | 2014 Three Months | | 2013 Three Months |
| | | | | | | | Operating | | | | | | Operating | | | | | | | | Operating | | | | | | Operating |
| | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) | | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Revenues | Operating Revenues | | $ | 2,226 | | | | $ | 2,226 | | $ | 2,095 | | | | | $ | 2,095 | Operating Revenues | | $ | 753 | | | | $ | 753 | | $ | 744 | | | | $ | 744 |
| | | | | | | | | | | | | | | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | |
| Fuel | | 684 | | | | | | 684 | | | 677 | | | | | | 677 | Fuel | | 240 | | | | 240 | | 237 | | | | 237 |
| Energy purchases | | 146 | | | | | | 146 | | | 135 | | | | | | 135 | Energy purchases | | 24 | | | | 24 | | 23 | | | | 23 |
| Other operation and maintenance | | 74 | | $ | 508 | | | 582 | | | 76 | | $ | 513 | | | 589 | Other operation and maintenance | | 27 | | $ | 170 | | 197 | | 26 | | $ | 162 | | 188 |
| Depreciation | | 3 | | | 246 | | | 249 | | | 39 | | | 220 | | | 259 | Depreciation | | 2 | | 87 | | 89 | | 1 | | 83 | | 84 |
| Taxes, other than income | | | �� | | | 36 | | | 36 | | | | | | 34 | | | 34 | Taxes, other than income | | | | | | 13 | | | 13 | | | | | | 12 | | | 12 |
| | Total Operating Expenses | | | 907 | | | 790 | | | 1,697 | | | 927 | | | 767 | | | 1,694 | | Total Operating Expenses | | | 293 | | | 270 | | | 563 | | | 287 | | | 257 | | | 544 |
Total | Total | | $ | 1,319 | | $ | (790) | | $ | 529 | | $ | 1,168 | | $ | (767) | | $ | 401 | Total | | $ | 460 | | $ | (270) | | $ | 190 | | $ | 457 | | $ | (257) | | $ | 200 |
| | | | | | 2014 Nine Months | | | 2013 Nine Months |
| | | | | | | | | | Operating | | | | | | | | Operating |
| | | | | | Margins | | Other (a) | | Income (b) | | | Margins | | Other (a) | | Income (b) |
| | | | | | | | | | | | | | | | | |
Operating Revenues | | $ | 2,409 | | | | | $ | 2,409 | | | $ | 2,226 | | | | | $ | 2,226 |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | |
| Fuel | | | 748 | | | | | | 748 | | | | 684 | | | | | | 684 |
| Energy purchases | | | 184 | | | | | | 184 | | | | 146 | | | | | | 146 |
| Other operation and maintenance | | | 75 | | $ | 534 | | | 609 | | | | 74 | | $ | 508 | | | 582 |
| Depreciation | | | 6 | | | 256 | | | 262 | | | | 3 | | | 246 | | | 249 |
| Taxes, other than income | | | 1 | | | 38 | | | 39 | | | | | | | 36 | | | 36 |
| | | Total Operating Expenses | | | 1,014 | | | 828 | | | 1,842 | | | | 907 | | | 790 | | | 1,697 |
Total | | $ | 1,395 | | $ | (828) | | $ | 567 | | | $ | 1,319 | | $ | (790) | | $ | 529 |
(a) | Represents amounts excluded from Margins. |
(b) | As reported on the Statements of Income. |
Statement of Income Analysis --
Certain Operating Revenues and Expenses included in "Margins"
The following Statement of Income line items and their related increase during the periods ended September 30, 2014 compared with 2013 are included above within "Margins" and are not discussed separately.
| | | Three Months | | Nine Months |
| | | | | | | |
Operating revenues | | $ | 9 | | $ | 183 |
Fuel | | | 3 | | | 64 |
Energy purchases | | | 1 | | | 38 |
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. |
Other Operation and Maintenance | | | | | |
| | | | | | |
The increase in other operation and maintenance expense for the periods ended September 30, 2014 compared with 2013 was due to: |
| | |
| Three Months | | Nine Months |
| | | | | | |
Timing and scope of generation maintenance | $ | 1 | | $ | 8 |
Storm expenses | | | | | 8 |
Bad debt expense | | 3 | | | 7 |
Gas maintenance | | 2 | | | 2 |
Other | | 3 | | | 2 |
Total | $ | 9 | | $ | 27 |
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) - netDepreciation 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$5 million and $64$13 million for the three and nine months ended September 30, 20132014 compared with 20122013 primarily due to additions to PP&E, net.
Interest Expense
Interest expense increased by $5 million and $14 million for the three and nine months ended September 30, 2014 compared with 2013 primarily due to the issuance of $500 million of First Mortgage Bonds in November 2013.
Income Taxes
Income taxes decreased by $4 million for the three months ended September 30, 2014 compared with 2013 and increased by $12 million for the nine months ended September 30, 2014 compared with 2013 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&ELG&E:: Earnings, Margins 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 increasesEarnings |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | |
Net Income | | $ | 46 | | $ | 49 | | $ | 133 | | $ | 122 |
Earnings decreased for the three month period in earnings for both periods were2014 compared with 2013 primarily due to lower sales volumes due to mild weather, higher electricityoperation and gas base rates that went into effect January 1,maintenance expenses and higher financing costs partially offset by returns on additional environmental capital investments. Earnings increased for the nine month period in 2014 compared with 2013 primarily due to returns fromon additional environmental capital investments, higher sales volume, higher demand revenue and higher fuel recovery. The increase for the three-month period was partially offset by loweroff-system sales volumes. The increase for the nine-month period was partially offset by higher income taxes.operation and maintenance expense driven by storm-related expenses. The changes in volumes, demand revenue and off-system sales were driven by unusually cold weather in the first quarter of 2014.
The table below quantifies the changes in the components of Net Income between these periods, which reflect reclassifications for items includedamounts classified as Margins on a separate line within the table and not in Margins.
| | 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 |
their respective Statement of Income Analysis --line items.
Margins | | Three Months | | Nine Months |
| | | | | | |
Margins | | $ | 2 | | $ | 38 |
Other operation and maintenance | | | (2) | | | (5) |
Depreciation | | | (1) | | | (5) |
Interest expense | | | (3) | | | (7) |
Other | | | 1 | | | (1) |
Income taxes | | | | | | (9) |
Total | | $ | (3) | | $ | 11 |
"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 onan explanation of 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 | | | | 2014 Three Months | | 2013 Three Months |
| | | | | | | | Operating | | | | | | Operating | | | | | | | | Operating | | | | | | Operating |
| | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) | | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Revenues | Operating Revenues | | $ | 1,049 | | | | $ | 1,049 | | $ | 990 | | | | | $ | 990 | Operating Revenues | | $ | 347 | | | | $ | 347 | | $ | 343 | | | | $ | 343 |
| | | | | | | | | | | | | | | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | |
| Fuel | | 284 | | | | | | 284 | | | 281 | | | | | | 281 | Fuel | | 99 | | | | 99 | | 100 | | | | 100 |
| Energy purchases | | 135 | | | | | | 135 | | | 119 | | | | | | 119 | Energy purchases, including affiliate | | 23 | | | | 23 | | 20 | | | | 20 |
| Other operation and maintenance | | 34 | | $ | 244 | | | 278 | | | 36 | | $ | 241 | | | 277 | Other operation and maintenance | | 12 | | $ | 82 | | 94 | | 13 | | $ | 80 | | 93 |
| Depreciation | | 1 | | | 109 | | | 110 | | | 2 | | | 112 | | | 114 | Depreciation | | 1 | | 38 | | 39 | | | | 37 | | 37 |
| Taxes, other than income | | | | | | 18 | | | 18 | | | | | | 17 | | | 17 | Taxes, other than income | | | | | | 6 | | | 6 | | | | | | 6 | | | 6 |
| | Total Operating Expenses | | | 454 | | | 371 | | | 825 | | | 438 | | | 370 | | | 808 | | Total Operating Expenses | | | 135 | | | 126 | | | 261 | | | 133 | | | 123 | | | 256 |
Total | Total | | $ | 595 | | $ | (371) | | $ | 224 | | $ | 552 | | $ | (370) | | $ | 182 | Total | | $ | 212 | | $ | (126) | | $ | 86 | | $ | 210 | | $ | (123) | | $ | 87 |
| | | | | | 2014 Nine Months | | | 2013 Nine Months |
| | | | | | | | | | Operating | | | | | | | | Operating |
| | | | | | Margins | | Other (a) | | Income (b) | | | Margins | | Other (a) | | Income (b) |
| | | | | | | | | | | | | | | | | | | |
Operating Revenues | | $ | 1,170 | | | | | $ | 1,170 | | | $ | 1,049 | | | | | $ | 1,049 |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | |
| Fuel | | | 320 | | | | | | 320 | | | | 284 | | | | | | 284 |
| Energy purchases, including affiliate | | | 178 | | | | | | 178 | | | | 135 | | | | | | 135 |
| Other operation and maintenance | | | 37 | | $ | 249 | | | 286 | | | | 34 | | $ | 244 | | | 278 |
| Depreciation | | | 2 | | | 114 | | | 116 | | | | 1 | | | 109 | | | 110 |
| Taxes, other than income | | | | | | 19 | | | 19 | | | | | | | 18 | | | 18 |
| | | Total Operating Expenses | | | 537 | | | 382 | | | 919 | | | | 454 | | | 371 | | | 825 |
Total | | $ | 633 | | $ | (382) | | $ | 251 | | | $ | 595 | | $ | (371) | | $ | 224 |
(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 |
Statement of Income Analysis --
(a) | Increase (decrease) is due to the timing and scope of scheduled outages. |
Certain Operating Revenues and Expenses included in "Margins"
The following Statement of Income line items and their related increase (decrease) during the periods ended September 30, 2014 compared with 2013 are included above within "Margins" and are not discussed separately.
| | | Three Months | | Nine Months |
| | | | | | | |
Retail and wholesale | | $ | 2 | | $ | 93 |
Electric revenue from affiliate | | | 2 | | | 28 |
Fuel | | | (1) | | | 36 |
Energy purchases | | | 2 | | | 38 |
Energy purchases from affiliate | | | 1 | | | 5 |
Other Operation and Maintenance
Other operation and maintenance expense increased by $8 million for the nine months ended September 30, 2014 compared with 2013 primarily due to storm expenses of $4 million and bad debt expense of $2 million.
Depreciation increased by $2 million and $6 million for the three and nine months ended September 30, 2014 compared with 2013 primarily due to additions to PP&E, net.
(b) | Increase for the nine-month period is primarily due to an increase in outside services of $5 million. |
Depreciation
Interest Expense
The increase (decrease) in depreciationInterest expense increased by $3 million and $7 million for the periodsthree and nine months ended September 30, 20132014 compared with 2012 was2013 primarily due to:
| | Three Months | | Nine Months |
| | | | | | |
Lower depreciation rates effective January 1, 2013 | $ | (2) | | $ | (6) |
Additions to PP&E | | 1 | | | 2 |
Total | $ | (1) | | $ | (4) |
to the issuance of $250 million of First Mortgage Bonds in November 2013.
Income Taxes
Income taxes increased by $15$9 million for the nine months ended September 30, 20132014 compared with 20122013 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, Margins 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,Earnings |
| | | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | | |
Net Income | | $ | 56 | | $ | 63 | | $ | 173 | | $ | 171 |
Earnings decreased for the increasesthree month period in earnings for both periods were2014 compared with 2013 primarily due to lower sales volume due to mild weather, higher electricity base rates that went into effect January 1,operation and maintenance expense and higher financing costs partially offset by returns on additional environmental capital investments. Earnings increased for the nine month period in 2014 compared with 2013 primarily due to returns fromon additional environmental capital investments, higher sales volumes, higher demand revenue and higher fuel recovery,off-system sales partially offset by higher depreciation (due to environmental costs related toother operation and maintenance expense driven by the 2005timing and 2006 ECR plans now being includedscope of generation maintenance. The changes in base ratesvolumes, demand revenue and excluded from Margins) and higher income taxes. The increase foroff-system sales were driven by unusually cold weather in the three-month period was partially offset by lower sales volumes.first quarter of 2014.
The table below quantifies the changes in the components of Net Income between these periods, which reflect reclassifications for items includedamounts classified as Margins on a separate line within the table and not 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 |
their respective Statement of Income Analysis --line items.
| | Three Months | | Nine Months |
| | | | | | |
Margins | | $ | 1 | | $ | 38 |
Other operation and maintenance | | | (5) | | | (18) |
Depreciation | | | (3) | | | (5) |
Interest expense | | | (2) | | | (7) |
Other | | | | | | (1) |
Income taxes | | | 2 | | | (5) |
Total | | $ | (7) | | $ | 2 |
"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 onan explanation of 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.
| | | | | | 2014 Three Months | | | 2013 Three Months |
| | | | | | | | | | Operating | | | | | | | | Operating |
| | | | | | Margins | | Other (a) | | Income (b) | | | Margins | | Other (a) | | Income (b) |
| | | | | | | | | | | | | | | | | |
Operating Revenues | | $ | 422 | | | | | $ | 422 | | | $ | 414 | | | | | $ | 414 |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | | | | |
| Fuel | | | 141 | | | | | | 141 | | | | 137 | | | | | | 137 |
| Energy purchases, including affiliate | | | 17 | | | | | | 17 | | | | 16 | | | | | | 16 |
| Other operation and maintenance | | | 14 | | $ | 83 | | | 97 | | | | 13 | | $ | 78 | | | 91 |
| Depreciation | | | 2 | | | 48 | | | 50 | | | | 1 | | | 45 | | | 46 |
| Taxes, other than income | | | | | | 7 | | | 7 | | | | | | | 6 | | | 6 |
| | | Total Operating Expenses | | | 174 | | | 138 | | | 312 | | | | 167 | | | 129 | | | 296 |
Total | | $ | 248 | | $ | (138) | | $ | 110 | | | $ | 247 | | $ | (129) | | $ | 118 |
| | | | | | 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 | | | | 2014 Nine Months | | 2013 Nine Months |
| | | | | | | | Operating | | | | | | Operating | | | | | | | | Operating | | | | | | Operating |
| | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) | | | | Margins | | Other (a) | | Income (b) | | Margins | | Other (a) | | Income (b) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating Revenues | Operating Revenues | | $ | 1,229 | | | | $ | 1,229 | | $ | 1,165 | | | | $ | 1,165 | Operating Revenues | | $ | 1,324 | | | | $ | 1,324 | | $ | 1,229 | | | | $ | 1,229 |
| | | | | | | | | | | | | | | |
Operating Expenses | Operating Expenses | | | | | | | | | | | | | | | | | | Operating Expenses | | | | | | | | | | | | |
| Fuel | | 400 | | | | | | 400 | | | 396 | | | | | | 396 | Fuel | | 428 | | | | 428 | | 400 | | | | 400 |
| Energy purchases | | 63 | | | | | | 63 | | | 76 | | | | | | 76 | Energy purchases, including affiliate | | 91 | | | | 91 | | 63 | | | | 63 |
| Other operation and maintenance | | 40 | | $ | 246 | | | 286 | | | 41 | | $ | 245 | | | 286 | Other operation and maintenance | | 38 | | $ | 264 | | 302 | | 40 | | $ | 246 | | 286 |
| Depreciation | | 2 | | | 136 | | | 138 | | | 36 | | | 109 | | | 145 | Depreciation | | 4 | | 141 | | 145 | | 2 | | 136 | | 138 |
| Taxes, other than income | | | | | | 18 | | | 18 | | | | | | 17 | | | 17 | Taxes, other than income | | | 1 | | | 19 | | | 20 | | | | | | 18 | | | 18 |
| | Total Operating Expenses | | | 505 | | | 400 | | | 905 | | | 549 | | | 371 | | | 920 | | Total Operating Expenses | | | 562 | | | 424 | | | 986 | | | 505 | | | 400 | | | 905 |
Total | Total | | $ | 724 | | $ | (400) | | $ | 324 | | $ | 616 | | $ | (371) | | $ | 245 | Total | | $ | 762 | | $ | (424) | | $ | 338 | | $ | 724 | | $ | (400) | | $ | 324 |
(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) | | $ | |
Statement of Income Analysis --
(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. |
DepreciationCertain Operating Revenues and Expenses included in "Margins"
The following Statement of Income line items and their related increase (decrease) in depreciation forduring the periods ended September 30, 20132014 compared with 2012 was due to:2013 are included above within "Margins" and are not discussed separately.
| | Three Months | | Nine Months |
| | | | | | |
Lower depreciation rates effective January 1, 2013 | $ | (4) | | $ | (10) |
Additions to PP&E | | 1 | | | 4 |
Other | | | | | (1) |
Total | $ | (3) | | $ | (7) |
| | | Three Months | | Nine Months |
| | | | | | | |
Retail and wholesale | | $ | 7 | | $ | 90 |
Electric revenue from affiliate | | | 1 | | | 5 |
Fuel | | | 4 | | | 28 |
Energy purchases | | | (1) | | | |
Energy purchases from affiliate | | | 2 | | | 28 |
Other Income (Expense) - netOther Operation and Maintenance | | | | | |
| | | | | | |
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2014 compared with 2013 was due to: |
| | |
| | Three Months | | Nine Months |
| | | | | | |
Timing and scope of generation maintenance | $ | 2 | | $ | 10 |
Storm expenses | | | | | 4 |
Bad debt | | 2 | | | 4 |
Other | | 2 | | | (2) |
Total | $ | 6 | | $ | 16 |
Other income (expense) - netDepreciation 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.
Income Taxes
Income taxes increased by $6 million and $31$7 million for the three and nine months ended September 30, 20132014 compared with 20122013 primarily due to additions to PP&E, net.
Interest Expense
Interest expense increased by $2 million and $7 million for the three and nine months ended September 30, 2014 compared with 2013 primarily due to the issuance of $250 million of First Mortgage Bonds in November 2013.
Income Taxes
Income taxes decreased by $2 million for the three months ended September 30, 2014 compared with 2013 and increased by $5 million for the nine months ended September 30, 2014 compared with 2013 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 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 | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
The remainder of this Item 2 in this Form 10-Q is 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 Energy | | | | | | | | | | | | |
| | PPL (a) | | Supply | | PPL Electric | | LKE | | LG&E | | KU |
September 30, 2014 | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,188 | | $ | 194 | | $ | 111 | | $ | 47 | | $ | 25 | | $ | 22 |
Short-term debt | | | 1,099 | | | 590 | | | | | | 348 | | | 143 | | | 130 |
Notes payable with affiliates | | | | | | | | | | | | 22 | | | | | | |
| | | | | | | | | | | | | | | | | | |
December 31, 2013 | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,102 | | $ | 239 | | $ | 25 | | $ | 35 | | $ | 8 | | $ | 21 |
Notes receivable from affiliates | | | | | | | | | 150 | | | 70 | | | | | | |
Short-term debt | | | 701 | | | | | | 20 | | | 245 | | | 20 | | | 150 |
(a) | At September 30, 2014, $409 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL may be subject to additional U.S. taxes, net of allowable foreign income tax credits. Historically, dividends paid by foreign subsidiaries have been limited to distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 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-monthnine month periods ended September 30, and the changes between periods were as follows.
| | | | | PPL Energy | | | | | | | | | | | | PPL Energy | | | | | | | | |
| | PPL | | Supply | | PPL Electric | | LKE | | LG&E | | KU | | PPL | | Supply | | PPL Electric | | LKE | | LG&E | | KU |
2013 | | | | | | | | | | | | | |
2014 | | | | | | | | | | | | | |
Operating activities | | $ | 2,223 | | $ | 583 | | $ | 327 | | $ | 713 | | $ | 352 | | $ | 419 | | $ | 2,628 | | $ | 465 | | $ | 412 | | $ | 851 | | $ | 327 | | $ | 486 |
Investing activities | | (2,788) | | (351) | | (697) | | (879) | | (366) | | (510) | | (2,974) | | (344) | | (562) | | (773) | | (422) | | (418) |
Financing activities | | 966 | | (94) | | 455 | | 144 | | 4 | | 79 | | 419 | | (166) | | 236 | | (66) | | 112 | | (67) |
| | | | | | | | | | | | | | | | | | | | | | | | |
2012 | | | | | | | | | | | | | |
2013 | | | | | | | | | | | | | |
Operating activities | | $ | 2,094 | | $ | 674 | | $ | 261 | | $ | 646 | | $ | 267 | | $ | 410 | | $ | 2,223 | | $ | 583 | | $ | 327 | | $ | 723 | | $ | 362 | | $ | 419 |
Investing activities | | (2,116) | | (308) | | (614) | | (519) | | (196) | | (331) | | (2,788) | | (351) | | (697) | | (889) | | (376) | | (510) |
Financing activities | | (240) | | (313) | | 64 | | (96) | | (48) | | (68) | | 966 | | (94) | | 455 | | 144 | | 4 | | 79 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change - Cash Provided (Used) | | | | | | | | | | | | | | | | | | | | | | | | |
Operating activities | | $ | 129 | | $ | (91) | | $ | 66 | | $ | 67 | | $ | 85 | | $ | 9 | | $ | 405 | | $ | (118) | | $ | 85 | | $ | 128 | | $ | (35) | | $ | 67 |
Investing activities | | (672) | | (43) | | (83) | | (360) | | (170) | | (179) | | (186) | | 7 | | 135 | | 116 | | (46) | | 92 |
Financing activities | | 1,206 | | 219 | | 391 | | 240 | | 52 | | 147 | | (547) | | (72) | | (219) | | (210) | | 108 | | (146) |
Operating Activities
The components of the change in cash provided by (used in) operating activities for the nine months ended September 30, 20132014 compared with 20122013 were as follows.
| | | | | | | | PPL Energy | | | | | | | | | | | | |
| | | | | PPL | | Supply | | PPL Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | | | | |
Change - Cash Provided (Used) | | | | | | | | | | | | | | | | | | |
| | Net income | | $ | (187) | | $ | (125) | | $ | 34 | | $ | 11 | | $ | 11 | | $ | 2 |
| | Non-cash components | | | 30 | | | (108) | | | (52) | | | 149 | | | (3) | | | 64 |
| | Working capital | | | 364 | | | (34) | | | 36 | | | (32) | | | (13) | | | (11) |
| | Defined benefit plan funding | | | 183 | | | 75 | | | 68 | | | 116 | | | 33 | | | 58 |
| | Other operating activities | | | 15 | | | 74 | | | (1) | | | (116) | | | (63) | | | (46) |
| Total | | $ | 405 | | $ | (118) | | $ | 85 | | $ | 128 | | $ | (35) | | $ | 67 |
(PPL)
The increase in cash from changes in components of working capital was partially due to an increase in taxes payable (primarily due to increased taxable income in 2014), and a decrease in uncertain tax positions in 2013 (primarily due to the
| | | | | | | | 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
Windfall Profits Tax ruling in 2013 - see Note 5 to the Financial Statements), and a reduction in collateral returned to counterparties.
(PPL Energy Supply)
The decrease in non-cash components of net income primarily consisted of $105an increase in deferred income tax benefits partially offset by an increase in unrealized hedging losses.
(PPL Electric)
The decrease in non-cash components of net income primarily consisted of a decrease in deferred income tax expense.
(LKE)
LKE's non-cash components of net income included a $152 million relatedincrease in deferred income taxes primarily due 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.utilization of net operating losses. The decrease in cash from changes in components of working capital was driven 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 accountstaxes payable due to timing of fuel purchase commitmentstax payments 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 increasechange in accounts payable due to timing of fuel purchase commitments and payments, partially offset by increasesthe change in accounts receivable and unbilled revenues due to extended payment termsweather and higher rates. The increase
(LG&E)
LG&E's decrease in cash from LG&E's other operating activities was driven primarily by $49 millionchanges in proceeds from the settlementcomponents of interest rate swaps.
KU's decrease in working capital was driven primarily by higher fuel inventory purchasesa decrease in 2013 and increases in accounts receivable and unbilled revenuestaxes payable due to extended payment termstiming of tax payments and higher rates, offset by an increasethe change in accounts payable due to timing of fuel purchase commitments and payments. Thepayments and intercompany tax settlements with LKE, partially offset by the change in accounts receivable and unbilled revenues due to weather and higher rates.
(KU)
KU's non-cash components of net income included a $56 million increase in deferred income taxes primarily due to utilization of net operating losses. KU's decrease in cash from KU's other operating activitieschanges in components of working capital was driven primarily by $49 milliona decrease in proceeds fromtaxes payable due to timing of tax payments, partially offset by the settlement of interest rate swaps.change in accounts receivable and unbilled revenues due to weather and higher rates.
Investing Activities
Expenditures for Property, Plant and Equipment
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, 20132014 compared with 20122013 was as follows.
| | | | | PPL Energy | | | | | | | | | | | | |
| | PPL | | Supply | | PPL Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | |
(Increase) Decrease | | $ | (690) | | $ | 119 | | $ | (281) | | $ | (366) | | $ | (183) | | $ | (181) |
| | | | | PPL Energy | | | | | | | | | | | | |
| | PPL | | Supply | | PPL Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | |
(Increase) Decrease | | $ | (110) | | $ | 65 | | $ | (12) | | $ | 48 | | $ | (46) | | $ | 94 |
The increase in expenditures for PP&E for PPL was primarily due to increases of $190 million at WPD (primarily due to projects to enhance system reliability at WPD and PPL Electric, the Susquehanna-Roseland transmissioneffect of foreign currency exchange rates) and the changes in project expenditures at PPL Electric,Energy Supply, LG&E and KU. The decrease in expenditures at PPL Energy Supply was partially due to expenditures made in 2013 for the Holtwood hydroelectric expansion project. The increase in expenditures for LG&E was primarily due to environmental air projects at LG&E's Mill Creek plant and KU's Ghent plants andGLT projects, partially offset by lower expenditures for the construction of Cane Run Unit 7. The decrease in expenditures for KU was related to lower expenditures for the construction of Cane Run Unit 7 and environmental CCR projects at KU's Ghent and E.W. Brown plants, partially offset by higher expenditures for LG&Eenvironmental air projects at KU's Ghent and KU.E.W. Brown plants.
Other Significant Changes in Components of Investing Activities
For PPL and PPL Energy Supply, the change in investing activities for the nine months ended September 30, 2014 compared with 2013 reflects increases of $200 million and $208 million in restricted cash and cash equivalents. These changes were primarily related to increased cash margin requirements in 2014 of $199 million to support PPL Energy Supply's commodity
Expenditures for PP&E decreased at
hedging program primarily due to higher forward prices. PPL Energy Supply primarily relatedinitially borrowed under its short-term credit facilities to the Rainbow hydroelectric redevelopment and Holtwood expansion projects and timing of nuclear fuel purchases.help fund these increased margin requirements.
ForPPL and PPL Energy Supply also had investing inflows of $164 million for the nine months ended September 30, 2014 from U.S. Department of Treasury grants for the Rainbow and Holtwood hydroelectric expansion projects. See Note 8 to the Financial Statements for additional information.
PPL Electric received $150 million during the change in cash provided by (used in) investing activities was also impacted primarily by the change innine months ended September 30, 2014 on notes receivable from affiliates of ($198) million and $210 million.affiliates.
Financing Activities
The components of the change in cash provided by (used in) financing activities for the nine months ended September 30, 20132014 compared with 20122013 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 |
| | | | | | PPL Energy | | | | | | | | | | | | |
| | | PPL | | Supply | | PPL Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | | |
Change - Cash Provided (Used) | | | | | | | | | | | | | | | | | | |
| Long-term debt issuances/retirements, net | | $ | (802) | | $ | 1 | | $ | (62) | | | | | | | | | |
| Stock issuances/redemptions, net | | | (298) | | | | | | | | | | | | | | | |
| Dividends | | | (73) | | | | | | (27) | | | | | $ | (16) | | $ | (29) |
| Capital contributions/distributions, net | | | | | | (1,020) | | | (110) | | $ | (218) | | | 19 | | | (26) |
| Change in short-term debt, net | | | 546 | | | 946 | | | (20) | | | 16 | | | 106 | | | (90) |
| Other financing activities | | | 80 | | | 1 | | | | | | (8) | | | (1) | | | (1) |
| Total | | $ | (547) | | $ | (72) | | $ | (219) | | $ | (210) | | $ | 108 | | $ | (146) |
For the nine months ended September 30, 2014, PPL required $547 million less cash from financing activities primarily due to improvements in cash from operations of $405 million which were able to support the significant capital expenditure programs of its subsidiaries.
For the nine months ended September 30, 2014, PPL Electric required $219 million less cash from financing activities primarily due to the receipt of $150 million on notes receivable from affiliates (as described in "Investing Activities" above) and improvements in cash from operations of $85 million.
Under the terms of the definitive agreements related to the spinoff transaction, PPL Energy Supply will not receive additional equity contributions from its member for the remainder of 2014 and is expected to make a distribution to its member, and ultimately to PPL primarily to distribute the proceeds from the sale of the Montana hydroelectric business, currently estimated at $880 million, expected to occur in the fourth quarter of 2014, and for an amount not to exceed $191 million during the first quarter of 2015.
See Note 7 to the Financial Statements in this Form 10-Q for information on 20132014 short and long-term debt activity, equity transactions and PPL dividends. See the Registrant's 2012Registrants' 2013 Form 10-K for information on 20122013 activity.
Credit Facilities
The Registrants maintain credit facilities to enhance liquidity, provide liquiditycredit support and provide a backstop to backstop commercial paper issuances. Theprograms. Amounts borrowed under these credit facilities are reflected in "Short-term debt" on the Balance Sheets. At September 30, 2014, the total committed borrowing capacity and the use of the borrowingsthat capacity under these credit facilities at September 30, 2013 was as follows.
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 |
| | | | | | | | | Letters of | | | |
| | | | | | | | | Credit | | | |
| | | | | | | | | and | | | |
| | | Committed | | | | Commercial | | Unused |
| | | Capacity | | Borrowed | | Paper Issued | | Capacity |
| | | | | | | | | |
PPL Capital Funding Credit Facilities | | $ | 750 | | | | | | | | $ | 750 |
PPL Energy Supply Credit Facilities | | | 3,150 | | $ | 590 | | $ | 195 | | | 2,365 |
PPL Electric Credit Facility | | | 300 | | | | | | 1 | | | 299 |
| | | | | | | | | | | | | |
| | | | | | | | | Letters of | | | |
| | | | | | | | | Credit | | | |
| | | | | | | | | and | | | |
| | | Committed | | | | Commercial | | Unused |
| | | Capacity | | Borrowed | | Paper Issued | | Capacity |
LKE Credit Facility | | | 75 | | | 75 | | | | | | |
LG&E Credit Facility | | | 500 | | | | | | 143 | | | 357 |
KU Credit Facilities | | | 598 | | | | | | 328 | | | 270 |
Total LKE | | | 1,173 | | | 75 | | | 471 | | | 627 |
| Total U.S. Credit Facilities (a) | | $ | 5,373 | | $ | 665 | | $ | 667 | | $ | 4,041 |
| | | | | | | | | | | | | |
Total U.K. Credit Facilities (b) | | £ | 1,055 | | £ | 97 | | | | | £ | 958 |
(a) | The commitments under the U.S. credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than the following percentages of the total committed capacity: 8% for PPL's domestic credit facilities, 9% forPPL - 10%, PPL Energy Supply 5% for- 10%, PPL Electric 13% for- 7%, LKE 6% for- 11%, LG&E - 7% and 22% for KU.KU - 21%. |
(b) | In October 2013, LKE entered intoThe amount borrowed at September 30, 2014 was a $75 million syndicated credit facility that expires in October 2018. |
(c) | USD-denominated borrowing of $161 million. At September 30, 2013,2014, the USD equivalent of unused capacity under WPD'sthe U.K. committed credit facilities was $1.3$1.6 billion. |
| The commitments under WPD'sthe U.K. credit facilities are provided by a diverse bank group, with no one bank providing more than 13% of the total committed capacity. |
InAs a result of the proposed spinoff transaction, PPL Energy Supply has syndicated a $1.85 billion credit facility which is currently fully committed. This syndicated credit facility will replace the existing $3 billion PPL Energy Supply syndicated credit facility and will be effective upon closing of the spinoff transaction. See "Overview – Business Strategy" and "Financial and Operational Developments - Other Financial and Operational Developments - Anticipated Spinoff of PPL Energy Supply" above for additional information.
During the second quarter of 2014, PPL Energy Supply's corporate credit rating was lowered to below investment grade. At September 2013,30, 2014, the additional collateral posted as a result of the downgrade was $169 million. PPL Electric terminatedEnergy Supply primarily issued letters of credit under its asset-backed commercial paper program sponsored bycredit facilities noted above to post the required collateral. PPL Energy Supply continues to have adequate access to the capital markets and adequate capacity under its credit facilities and does not expect a financial institution. See Note 7material change in PPL's and PPL Electric's 2012 Form 10-K for more information regardingits financing costs as a result of the asset-backed commercial paper program.downgrade.
See Note 7 to the Financial Statements for further discussion of the Registrants' credit facilities.
Intercompany (All Registrants except PPL)(LKE, LG&E and KU)
| | 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 |
| | Committed | | | | Unused |
| | Capacity | | Borrowed | | Capacity |
| | | | | | | | | |
LKE Credit Facility | | $ | 225 | | $ | 22 | | $ | 203 |
LG&E Money Pool (a) | | | 500 | | | | | | 500 |
KU Money Pool (a) | | | 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 whenas necessary. Commercial paper issuances are supported by the respective Registrant's Syndicated Credit Facility.
When outstanding, the amountsOutstanding commercial paper issuances are reflected in "Short-term debt" on the Balance Sheets. The following amounts were outstanding at:At September 30, 2014, the available capacity and the use of that capacity was as follows:
| | 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 |
| | | | | | Commercial | | |
| | | | | | Paper | | Unused |
| | | Capacity | | Issuances | | Capacity |
| | | | | | | | | |
PPL Electric | | $ | 300 | | | | | $ | 300 |
LG&E | | | 350 | | $ | 143 | | | 207 |
KU | | | | 350 | | | 130 | | | 220 |
Total LKE | | | 700 | | | 273 | | | 427 |
| Total PPL | | $ | 1,000 | | $ | 273 | | $ | 727 |
(a) | In April 2013, the capacity was increased from $250 million.August 2014, PPL Energy Supply terminated its commercial paper program. |
Long-term Debt and Equity Securities(PPL, PPL Energy Supply and PPL Electric)
(PPLThe long-term debt and Kentucky Registrants)equity securities activity for the nine months ended September 30, 2014 was:
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. | | | | Debt | | Net Stock |
| | | | Issuances (a) | | Retirements | | Issuances |
| | | | | | | | | | | |
| PPL | | $ | 296 | | $ | 545 | | $ | 1,037 |
| PPL Energy Supply | | | | | | 308 | | | |
| PPL Electric | | | 296 | | | 10 | | | |
| | | | | | | | | | | |
Non-cash Transactions: | | | | | | | | | |
| PPL (b) | | $ | 750 | | $ | 750 | | | |
(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. |
(c) | The debt issuances primarily include $1.150 billion relating toRepresents the remarketing of Junior Subordinated Notes that were issued as a component of PPL's 20102011 Equity Units and simultaneously exchanged into Senior Notes.Units. |
In October 2014, PPL implemented a legal entity restructuring within the U.K. regulated segment in order to rationalize the U.K. structure to enhance future financing of U.K. operations, improve internal cash management and simplify the U.K. companies' regulatory reporting. In October 2014, in connection with the restructuring, Western Power Distribution Ltd (WPD Ltd), the new holding company of the four DNOs, became the co-obligor of the debt securities of PPL WEM ($460 million 3.9% Senior Notes due 2016 and $500 million 5.375% Senior Notes due 2021) and PPL WW ($100 million 7.25% Senior Notes due 2017 and $202 million 7.375% Senior Notes due 2028), whereby WPD Ltd will service the debt securities post-restructuring. Also, in October 2014, PPL WW transferred its £210 million syndicated credit facility to WPD Ltd.
See Note 7The restructuring is not expected to the Financial Statements for further discussionhave a material impact on PPL's results of Long-term Debt and Equity Securities.operations.
Common Stock Dividends (PPL)
In August 2013,2014, PPL declared its quarterly common stock dividend, payable October 1, 2013,2014, at 36.7537.25 cents per share (equivalent to $1.47$1.49 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
(All Registrants)
Fitch, Moody's, S&P and S&PFitch periodically review the credit ratings on the debt securities of 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 the Registrants and their subsidiaries are based on information provided by the Registrants and other sources. The ratings of Fitch, Moody's, S&P and S&PFitch are not a recommendation to buy, sell or hold any securities of 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 the Registrants' or their subsidiaries' The credit ratings could result in higher borrowing costs and reduced access to capital markets. Theof the Registrants and their subsidiaries have no credit rating triggers that would result in the reduction ofaffect their liquidity, access to capital markets or the accelerationand cost of maturity dates of outstanding debt.borrowing under their credit facilities.
The rating agencies tookhave taken the following actions related to the Registrants and their subsidiaries during 2013:2014:
(PPL)
In January 2014, Moody's affirmed its ratings and revised its outlook to stable for PPL.
In March 2013,2014, Moody's, S&P and Fitch Moody's and S&P assigned ratings of BB+, Ba1Baa3, BBB- and BB+BBB, respectively, to PPL Capital Funding's $450$350 million 5.90% Junior Subordinated3.95% Senior Notes due 2073.2024 and $400 million 5.00% Senior Notes due 2044. Fitch also assigned a stable outlook to these notes.
In May 2013,April 2014, Moody's affirmed its ratings with a stable outlook for PPL WEM, WPD (East Midlands), WPD (West Midlands), PPL WW, WPD (South Wales) and WPD (South West).
In April 2014, Fitch affirmed its ratings with a stable outlook for PPL and PPL Capital Funding.
In June 2014, Moody's affirmed its ratings and revised its outlook to positive for PPL and PPL Capital Funding.
In June 2014, S&P affirmed its ratings for PPL, PPL Capital Funding, PPL WEM, WPD (East Midlands), WPD (West Midlands), PPL WW, WPD (South Wales) and WPD (South West) and placed the issuers on CreditWatch with positive implications.
In June 2014, Fitch affirmed its ratings with a stable outlook for PPL and PPL Capital Funding.
In August 2014, Fitch affirmed its ratings and revised its outlook to negative for WPD (South Wales). Fitch also affirmed its ratings with a stable outlook for PPL WW and WPD (South West).
In October 2014, Fitch affirmed and withdrew its long-term and short-term issuer default ratings for PPL Capital Funding.
In October 2014, Moody's and S&P affirmed their ratings and outlooks for WPD (East Midlands), WPD (West Midlands), WPD (South Wales) and WPD (South West). In addition, Moody's and S&P have assigned Baa3, P-3, Stable and BBB, A-2, CreditWatch Positive long and short-term issuer ratings to Western Power Distribution Ltd, the new holding company for the four DNOs, following a legal entity restructuring implemented in October 2014. See "Long-term Debt and Equity Securities" above for additional information on the restructuring. The issuer ratings of PPL WW and PPL WEM have also been withdrawn.
(PPL and PPL Energy Supply)
In April 2014, Fitch affirmed its ratings with a negative outlook for PPL Energy Supply.
In May 2014, S&P lowered its long-term issuer rating and senior unsecured rating from BBB to BB+ and its commercial paper rating and short-term issuer rating from A-2 to A-3 with a stable outlook for PPL Energy Supply.
In June 2014, Moody's lowered its senior unsecured rating from Baa2 to Ba1 and its commercial paper rating and short-term issuer rating from P-2 to Not Prime with a negative outlook for PPL Energy Supply. Moody's also assigned a Corporate Family Rating of Ba1, a Probability of Default Rating of Ba1-PD and a Speculative Grade Liquidity rating of SGL-1 to PPL Energy Supply.
In June 2014, S&P lowered its long-term issuer rating and senior unsecured rating from BB+ to BB and its commercial paper rating and short-term issuer rating from A-3 to B for PPL Energy Supply and placed the issuer on CreditWatch with negative implications.
In June 2014, Fitch lowered its long-term issuer default rating and senior unsecured debt rating from BBB- to BB and its commercial paper rating and short-term issuer default rating from F3 to B for PPL Energy Supply and placed the issuer on Rating Watch Negative.
(PPL and PPL Electric)
In January 2014, Moody's upgraded its long-term issuer rating and senior unsecured rating from Baa2 to Baa1 and senior secured rating from A3 to A2, affirmed its commercial paper rating and revised its outlook to stable for PPL Electric.
In April 2014, Fitch affirmed its ratings with a stable outlook for PPL Electric.
In June 2014, S&P affirmed its ratings for PPL Electric and placed the issuer on CreditWatch with positive implications.
In June 2014, Moody's, S&P, and Fitch assigned ratings of BBB, Baa3A2, A- and BBB-A-, respectively, to PPL Capital Funding's $250 million 1.90% Senior Notes due 2018, $600 million 3.40% Senior Notes due 2023 andElectric's $300 million 4.70% Senior Notes4.125% First Mortgage Bonds due 2043.2044. Fitch also assigned a stable outlook to these notes.
(PPL, LKE, LG&E and KU)
In September 2013, FitchJanuary 2014, Moody's affirmed the BBB-, issuer default rating, BBB, senior unsecured ratingits ratings and revised its outlook to stable outlook at PPL WW.for LKE.
In September 2013, Fitch affirmed the BBB+,January 2014, Moody's upgraded its long-term issuer default rating, A-,ratings and senior unsecured rating, F2 short-term issuer default ratingratings from Baa1 to A3 and senior secured ratings from A2 to A1, affirmed its commercial paper ratings and revised its outlook to stable outlook at WPD (South Wales) WPD (South West).
In September 2013, Moody'sfor LG&E 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)KU.
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.
In August 2013,2014, 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+.
(PPL, LKE and KU)
In July 2013, S&P confirmed the AA+its 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 and KU's 2006 Series B Environmental Facilities Revenue Refunding Bonds.
In April 2014, Fitch affirmed its ratings with a stable outlook for LKE, LG&E and KU.
In June 2014, S&P also confirmedaffirmed its ratings for LKE, LG&E and KU and placed the A-1+ short term ratingissuers on theseCreditWatch with positive implications.
In June 2014, Moody's affirmed its ratings and revised its outlook to positive for LKE.
In June 2014, S&P affirmed its ratings for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds, KU's 2004 Series A and 2008 Series A Environmental Facilities Revenue Bonds and KU's 2006 Series B Environmental Facilities Revenue Refunding Bonds and placed them on CreditWatch with positive implications.
In September 2014, Moody's affirmed its ratings for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds, KU's 2004 Series A and 2008 Series A Environmental Facilities Revenue Bonds and KU's 2006 Series B Environmental Facilities Revenue Refunding Bonds.
In October 2014, S&P affirmed its ratings for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds, KU's 2004 Series A and 2008 Series A Environmental Facilities Revenue Bonds and KU's 2006 Series B Environmental Facilities Revenue Refunding Bonds.
Ratings Triggers
(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 instruments (for PPL) instruments,, contain provisions that require the posting of additional collateral or permit the counterparty to terminate the contract, if PPL's, PPL Energy Supply's, LKE's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade. See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been requiredrequirements for PPL, PPL Energy Supply, LKE and LG&E for derivative contracts in a net liability position at September 30, 2013.2014.
Capital Expenditures
(PPL)
Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions. In the second quarter of 2014, PPL increased its projected capital spending for the period 2014 through 2018 related to distribution facilities by approximately $0.3 billion from the previously disclosed $1.9 billion projection included in PPL's 2013 Form 10-K. The increased projected capital spending results from a change in the forecasted foreign currency exchange rate for WPD expenditures that increased each yearly estimate by approximately $70 million.
(PPL, LKE, LG&E and KU)
LG&E and KU continue to evaluate their future capacity requirements with the possibility that reduced or delayed capacity needs may result in adjustments to the timing of previously estimated capacity construction. See Note 8 to the Financial Statements for additional information.
(All Registrants)
For additional information on the Registrants' liquidity and capital resources, see "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Registrants' 20122013 Form 10-K.
Market Risk
(All Registrants)
See Notes 13 and 14 to the Financial Statements for information about the 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, LKE, LG&E and KU)
LG&E's and KU's retail electric and natural gas rates and municipal wholesale electric 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. LG&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 information.
(PPL and PPL Electric)
PPL Electric is exposed to market price and volumetric risks from its obligation as a PLR. The PUC has approved a cost recovery mechanism that allows PPL Electric to pass through to customers the cost associated with fulfilling its PLR obligation. This cost recovery mechanism substantially eliminates PPL Electric's exposure to market price risk. PPL Electric also mitigates its exposure to volumetric risk by entering into full-requirement energy supply contracts for the majority of its PLR obligations. These supply contracts transfer the volumetric risk associated with the PLR obligation to the energy suppliers.
(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).
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 tabletables 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 |
| | Gains (Losses) |
| | Three Months | | Nine Months |
| | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | |
Fair value of contracts outstanding at the beginning of the period | | $ | (178) | | $ | 285 | | $ | 107 | | $ | 473 |
Contracts realized or otherwise settled during the period | | | (64) | | | (95) | | | 421 | | | (332) |
Fair value of new contracts entered into during the period (a) | | | (17) | | | 2 | | | (14) | | | 48 |
Other changes in fair value | | | 140 | | | 25 | | | (633) | | | 28 |
Fair value of contracts outstanding at the end of the period | | $ | (119) | | $ | 217 | | $ | (119) | | $ | 217 |
(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, 2013,2014, based on the observability of the information used to determine the fair value.
| | | Net Asset (Liability) | | | Net Asset (Liability) |
| | | Maturity | | | | | | Maturity | | | | | Maturity | | | | | | Maturity | | |
| | | Less Than | | Maturity | | Maturity | | in Excess | | Total Fair | | | Less Than | | Maturity | | Maturity | | in Excess | | Total Fair |
| | | 1 Year | | 1-3 Years | | 4-5 Years | | of 5 Years | | Value | | | 1 Year | | 1-3 Years | | 4-5 Years | | of 5 Years | | Value |
Source of Fair Value | Source of Fair Value | | | | | | | | | | | | | Source of Fair Value | | | | | | | | | | |
Prices based on significant observable inputs (Level 2) | Prices based on significant observable inputs (Level 2) | | $ | 166 | | $ | 11 | | $ | (2) | | $ | 5 | | $ | 180 | Prices based on significant observable inputs (Level 2) | | $ | (126) | | $ | 1 | | $ | 9 | | | | $ | (116) |
Prices based on significant unobservable inputs (Level 3) | Prices based on significant unobservable inputs (Level 3) | | | 12 | | | 21 | | | 4 | | | | | | 37 | Prices based on significant unobservable inputs (Level 3) | | | (11) | | | 7 | | | 1 | | | | | | (3) |
Fair value of contracts outstanding at the end of the period | Fair value of contracts outstanding at the end of the period | | $ | 178 | | $ | 32 | | $ | 2 | | $ | 5 | | $ | 217 | Fair value of contracts outstanding at the end of the period | | $ | (137) | | $ | 8 | | $ | 10 | | | | | $ | (119) |
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. LG&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.
| | Gains (Losses) |
| | Three Months | | Nine Months |
| | 2014 | | 2013 | | 2014 | | 2013 |
| | | | | | | | | | | | |
Fair value of contracts outstanding at the beginning of the period | | $ | 72 | | $ | 18 | | $ | 11 | | $ | 29 |
Contracts realized or otherwise settled during the period | | | (54) | | | (3) | | | (57) | | | (5) |
Fair value of new contracts entered into during the period (a) | | | 24 | | | 12 | | | 6 | | | (4) |
Other changes in fair value | | | (19) | | | 1 | | | 63 | | | 8 |
Fair value of contracts outstanding at the end of the period | | $ | 23 | | $ | 28 | | $ | 23 | | $ | 28 |
| | 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, 2013,2014, based on the observability of the information used to determine the fair value.
| | Net Asset (Liability) | | Net Asset (Liability) |
| | Maturity | | | | | | Maturity | | | | Maturity | | | | | | Maturity | | |
| | Less Than | | Maturity | | Maturity | | in Excess | | Total Fair | | Less Than | | Maturity | | Maturity | | in Excess | | Total Fair |
| | 1 Year | | 1-3 Years | | 4-5 Years | | of 5 Years | | Value | | 1 Year | | 1-3 Years | | 4-5 Years | | of 5 Years | | Value |
Source of Fair Value | | | | | | | | | | | | | | | | | | | | | | |
Prices quoted in active markets for identical instruments (Level 1) | | $ | 3 | | | | | | | | $ | 3 | | $ | 2 | | | | | | | | $ | 2 |
Prices based on significant observable inputs (Level 2) | | 5 | | $ | 8 | | $ | 2 | | | | 15 | | (3) | | $ | (2) | | $ | 3 | | | | (2) |
Prices based on significant unobservable inputs (Level 3) | | | 2 | | | 4 | | | 1 | | $ | 3 | | | 10 | | | 1 | | | 5 | | | 7 | | $ | 10 | | | 23 |
Fair value of contracts outstanding at the end of the period | | $ | 10 | | $ | 12 | | $ | 3 | | $ | 3 | | $ | 28 | | $ | | | $ | 3 | | $ | 10 | | $ | 10 | | $ | 23 |
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, 20132014 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 |
| | | | | | Non-Trading |
| | | Trading VaR | | VaR |
95% Confidence Level, Five-Day Holding Period | | | | | | |
| Period End | | $ | 5 | | $ | 10 |
| Average for the Period | | | 8 | | | 10 |
| High | | | 10 | | | 15 |
| Low | | | 5 | | | 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, 2013.2014.
Interest Rate Risk (All Registrants)
The Registrants and their subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. The Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of their debt portfolios 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 the debt portfolioportfolios due to changes in the absolute level of interest rates.
The following interest rate hedges were outstanding at September 30, 2013. |
| | | | | | | | | | | | |
The following interest rate hedges were outstanding at September 30, 2014.
| | | | | | | Effect of a | | |
| | | | | Fair Value, | | 10% Adverse | | Maturities |
| | | Exposure | | Net - Asset | | Movement | | Ranging |
| | | Hedged | | (Liability) (a) | | in Rates (b) | | Through |
PPL | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
| Interest rate swaps (c) | | $ | 1,200 | | $ | (16) | | $ | (51) | | 2045 |
| Cross-currency swaps (d) | | | 1,262 | | | (49) | | | (176) | | 2028 |
Economic hedges | | | | | | | | | | | |
| Interest rate swaps (e) | | | 179 | | | (43) | | | (3) | | 2033 |
LKE | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
| Interest rate swaps (c) | | | 650 | | | 2 | | | (34) | | 2045 |
Economic hedges | | | | | | | | | | | |
| Interest rate swaps (e) | | | 179 | | | (43) | | | (3) | | 2033 |
LG&E | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
| Interest rate swaps (c) | | | 325 | | | 1 | | | (17) | | 2045 |
Economic hedges | | | | | | | | | | | |
| Interest rate swaps (e) | | | 179 | | | (43) | | | (3) | | 2033 |
KU | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
| Interest rate swaps (c) | | | 325 | | | 1 | | | (17) | | 2045 |
| | | | | | | Effect of a | | |
| | | | | Fair Value, | | 10% Adverse | | Maturities |
| | | Exposure | | Net - Asset | | Movement | | Ranging |
| | | Hedged | | (Liability) (a) | | in Rates (b) | | Through |
PPL | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
| Interest rate swaps (c) | | $ | 2,264 | | $ | 68 | | $ | (92) | | 2044 |
| Cross-currency swaps (d) | | | 1,262 | | | 26 | | | (171) | | 2028 |
Economic activity | | | | | | | | | | | |
| Interest rate swaps (e) | | | 179 | | | (41) | | | (3) | | 2033 |
LKE | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
| Interest rate swaps (c) | | | 500 | | | (14) | | | (36) | | 2043 |
Economic activity | | | | | | | | | | | |
| Interest rate swaps (e) | | | 179 | | | (41) | | | (3) | | 2033 |
LG&E | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
| Interest rate swaps (c) | | | 250 | | | (7) | | | (18) | | 2043 |
Economic activity | | | | | | | | | | | |
| Interest rate swaps (e) | | | 179 | | | (41) | | | (3) | | 2033 |
KU | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | |
| Interest rate swaps (c) | | | 250 | | | (7) | | | (18) | | 2043 |
(a) | Includes accrued interest, if applicable. |
(b) | Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates. |
(c) | Changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or regulatory liabilities, if recoverable through rates. The changes in fair value of these instruments are thenregulated rates and reclassified into earnings in the same period during which the item being hedged affects earnings. |
(d) | Cross-currency swaps are utilized to hedge the principal and interest payments and principal of WPD's U.S. dollar-denominated senior notes. Changes in the fair value of these instruments are recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings. |
(e) | Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or regulatory liabilities. |
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, 20132014 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 |
| | | | | | PPL Energy | | | PPL | | | | | | | | | |
| | | PPL | | Supply | | | Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | | |
Increase in interest | | Not | | Not | | | Not | | | Not | | | Not | | | Not |
| expense | | Significant | | Significant | | | Significant | | Significant | | Significant | | | Significant |
Increase in fair value | | | | | | | | | | | | | | | | | | |
| of debt | | $ | 745 | | $ | 46 | | $ | 134 | | $ | 140 | | $ | 44 | | $ | 83 |
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, 2013.2014.
| | | | | | | Effect of a | | | | | | | | | Effect of a | | |
| | | | | | | 10% | | | | | | | | | 10% | | |
| | | | | | | Adverse | | | | | | | | | Adverse | | |
| | | | | | | Movement | | | | | | | | | Movement | | |
| | | | | | | in Foreign | | | | | | | | | in Foreign | | |
| | | | | Fair Value, | | Currency | | Maturities | | | | | Fair Value, | | Currency | | Maturities |
| | | Exposure | | Net - Asset | | Exchange | | Ranging | | | Exposure | | Net - Asset | | Exchange | | Ranging |
| | | Hedged | | (Liability) | | Rates (a) | | Through | | | Hedged | | (Liability) | | Rates (a) | | Through |
| | | | | | | | | | | | | | | | | | | | | |
Net investment hedges (b) | Net investment hedges (b) | | £ | 320 | | $ | (11) | | $ | (51) | | 2015 | Net investment hedges (b) | | £ | 306 | | $ | (1) | | $ | (49) | | 2016 |
Economic activity (c) | | 1,350 | | | (55) | | | (208) | | 2015 | |
Economic hedges (c) | | Economic hedges (c) | | 1,600 | | 26 | | (245) | | 2016 |
(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 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 incomeearnings 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, 2013,2014, 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, 2013,2014, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $60$70 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 2012the Registrants' 2013 Form 10-K for additional information.
Foreign Currency Translation (PPL)
The value of the British pound sterling fluctuates in relation to the U.S. dollar. Changes in this exchange rate resulted in a foreign currency translation gain of $75 million for the nine months ended September 30, 2014, which primarily reflected a $193 million increase to PP&E and goodwill offset by an increase of $118 million to net liabilities. 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)
The Registrants are not aware of any material ownership interests or operating responsibility by senior management of the Registrants in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with the Registrants.
See Note 11 to the Financial Statements for additional information on related party 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.
(PPL and PPL Energy Supply)
See Note 8 to the Financial Statements for information on the anticipated spinoff of PPL Energy Supply and the Montana hydro sale agreement.
(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 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.changed. 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 costscost for their products or their demand for the Registrants' services.
The following is a discussion of the more significant environmental matters. See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in the Registrants' 20122013 Form 10-K for additional information on environmental matters.
GHG Regulations
In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards. Also, by Presidential Memorandum the EPA was directed to issue a new proposal for new power plants by September 20, 2013, with a final rule to be issued in a timely fashion thereafter, and to issue proposed standards for existing power plants by June 1, 2014 with a final rule by June 1, 2015. The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.
The EPA's re-proposal for new power plants was released on September 20, 2013. The EPA's dependence on carbon capture and sequestration, a technology which is not presently commercially viable, effectively precludes the construction of new coal plants. The proposal is further problematic as the proposed standards for new gas plants may not be achievable at all times. PPL will comment on the rule to this effect. Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.
Additionally, the Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may lead to more costly regulatory requirements. Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect PPL, PPL Electric, LKE, LG&E and KU and others in the industry as transmission system modifications to improve the ability to withstand major storms may be needed in order to meet those requirements.
Climate Change
Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage, as applicable, to the Registrants' generation assets, electricity transmission and distributiondelivery 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.
In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing GHG emissions in the U.S. 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 revised proposal for new power plants (a prior proposal was issued in 2012) 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 30, 2016.
The EPA's revised proposal to regulate new sources under Section 111(b) of the Clean Air Act was published in the Federal Register on January 8, 2014. The proposed limits for coal plants can only be achieved through carbon capture and sequestration, a technology that is not presently commercially viable and, therefore, effectively preclude the construction of new coal plants. The proposed standards for new gas plants may also not be continuously achievable.
The EPA's proposed regulation addressing GHG emissions from existing power plants under Section 111(d) of the Clean Air Act was published in the Federal Register on June 18, 2014. The proposal contains very stringent, state-specific rate-based reduction goals to be achieved in two phases (2020-2029 and 2030 and beyond). The EPA believes it has offered some flexibility to the states as to how state plans can be crafted, including the option to demonstrate compliance on a mass basis or through a multi-state collaboration, however, the EPA's proposed broad definition of the "best system of emission reduction" (BSER) substantially limits this flexibility. On October 30, 2014, the EPA issued a Notice of Data Availability seeking comments on several issues including providing additional flexibility in meeting compliance deadlines, addressing disparities in state-specific targets, and incorporating a regionalized approach to demonstrating compliance. The Registrants are analyzing the proposal and potential impacts. The regulation of GHG emissions from 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 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 the Registrants and others in the industry as modifications to electricity delivery systems to improve the ability to withstand major storms may be needed in order to meet those requirements.
Waters of the United States
On April 21, 2014, the EPA and the U.S. Army Corps of Engineers published a proposed rule which greatly expands the Clean Water Act definition of Waters of the United States. If the definition is expanded as proposed, permits and other regulatory requirements may be imposed for many matters presently not covered (including vegetation management for transmission lines and activities affecting storm water conveyances and wetlands), the implications of which could be significant. Both the U.S. House and Senate are considering legislation to block this regulation.
(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. ARCRA. Under a litigation settlement agreement involving certain environmental groups, the EPA has agreed to issue its final rulemaking is currently expected by the end of 2014, as a result of litigation by environmental groups.December 2014. Regulations could impact handling, disposal and/or beneficial use of CCRs. Recent ash spills that have occurred within the utility industry may precipitate more stringent regulation of both active and legacy CCR sites. 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.non-hazardous.
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 authorizerules governing state permit programs. It remains uncertain whether similar legislation will likelywould 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.finalized as proposed. 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.to be issued by September 2015, which is contingent upon the EPA meeting its deadline for issuing the final CCR regulation. 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. Pending finalization of the ELGs, certain states (including Pennsylvania and Kentucky) and environmental groups are proposing more stringent 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.
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, whichAct/316(b)
The EPA's final 316(b) rule for existing facilities, became effective on October 14, 2014, and regulates cooling water intakes for power plants.intake structures and their impact on aquatic organisms. The draft rule has two provisions: requiring installation of Best Technology Available (BTA)allows states considerable authority to interpret the rule. The rule requires all existing facilities to choose between several options to reduce mortality ofthe impact to aquatic organisms that arebecome trapped against water intake screens (impingement) and to determine the intake structure's impact on aquatic organisms pulled into the plantthrough a plant's 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 thosePlants already equipped with closed-cycle cooling, systems. PPL's,an acceptable option, would likely not incur costs. Once-through systems would likely require additional technology to comply with rule. PPL, PPL Energy Supply's, LKE's,Supply, LKE, LG&E's&E and KU'sKU are evaluating compliance strategies but do not presently expect the compliance costs couldto 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.material.
MATS
TheIn February 2012, 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 beingwhich was challenged by industry groups and states.states, was upheld by the D.C. Circuit Court in April 2014. On July 14, 2014, a coalition of 23 states filed a petition seeking Supreme Court review of this decision. The rule provides for a three-year compliance deadline with the potential for a one-year extension as provided under the statute. The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants. PPL, PPL Energy Supply, LKE, LG&E and KU are generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls at PPL Energy Supply and approved ECR plans to install additional controls at some of LG&E's and KU's Kentucky plants. Additionally,With respect to PPL Energy Supply's Pennsylvania plants, PPL Energy Supply is evaluatingbelieves that installation of chemical additive systems for mercury controland other controls may be necessary at Brunner Island, and modificationscertain coal-fired plants, the capital cost of which is not expected to existing controls at Colstrip for improved particulate matter reductions.be significant. PPL Energy Supply continues to analyze the potential impact of MATS on operating costs. 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,The Corette plant asset group was determined to be impaired in December 2013. See "Application of Critical Accounting Policies - Asset Impairment (Excluding Investments)" in PPL's and PPL hasEnergy Supply's 2013 Form 10-K for additional information. LG&E, KU and PPL Energy Supply have received approval for two compliance extensions in Kentucky,for certain plants and PPL Energy Supply has requested an extensiona pending request, which was submitted on September 15, 2014, for one of its plants in Pennsylvania. Other extension requests are under consideration.Colstrip plant.
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 1LG&E's 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.
TheKU's anticipated retirements of certain coal-fired electricity generating units at the Cane Run and Green River plants are in response to thisMATS 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, the CSAPR targeted sources in the eastern U.S. In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court) stayed implementation of the CSAPR, leaving the CAIR in place. Subsequently, in August 2012, the D.C. Circuit Court vacated and remanded the CSAPR back to the EPA for further rulemaking, again leaving the CAIR in place in the interim, and in June 2013interim. In April 2014, the U.S. Supreme Court granted the EPA's petition for review ofreversed and remanded the D.C. Circuit Court's decision. Oral argument beforeAugust 2012 decision and on October 23, 2014, the U.S. SupremeD.C. Circuit Court has been scheduled for December 2013. Prior to a revised rule fromlifted the EPA, coal-fired generating plants could face tighter nitrous oxide emission limitations through state action.stay of CSAPR, granting EPA's request.
The PPL, PPL Energy Supply, LKE, LG&E and KU plantsare preparing for Phase 1 annual trading programs for nitrogen oxide and sulfur dioxide to commence on January 1, 2015. Phase 1 ozone season trading will begin on May 1, 2015. Phase 2 reductions impacting the annual and ozone season trading programs would take effect in Pennsylvania2017 and Kentuckycontinue into the future. Based on analyses conducted in 2011 to prepare for CSAPR compliance, PPL, PPL Energy Supply, LKE, LG&E and KU do not anticipate significant compliance costs, however these analyses will continuebe reviewed under current market and operating conditions 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.make further assessments on compliance impacts.
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 includingthrough the application, among other things, 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 byrequirements for sulfur dioxide and nitrogen oxides. Although the D.C. Circuit Court recently lifted the CSAPR stay in response to vacatea U.S. Supreme Court action in April 2014, decisions by the EPA and remand CSAPR exposesthe courts will determine whether power plants located in the eastern U.S., including PPL Energy Supply'sPPL's plants in Pennsylvania and PPL's plants in Kentucky, will be subject to additional reductions in sulfur dioxide and nitrogen oxides as required by BART.
The EPA signed its final Federal Implementation Plan (FIP) 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'sthe 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). Both PPL is participating in litigation regarding this matter beforeand environmental groups have appealed the final FIP to the U.S. Court of Appeals for the Ninth Circuit.Circuit and litigation is ongoing.
National Ambient Air Quality Standards(Kentucky Registrants)
In 2008, the EPA revised the National Ambient Air Quality Standard for ozone. As a result, states in the ozone transport region (OTR), including Pennsylvania, are required by the Clean Air Act to impose additional reductions in nitrogen oxide emissions based upon reasonably available control technologies. The PADEP has issued a draft rule requiring reasonable reductions; however, the proposal is being questioned as too lenient by the EPA, other OTR states and environmental groups. The PADEP may impose more stringent emission limits than those set forth in the proposed rule which could have a significant impact on PPL Energy Supply's Pennsylvania coal plants. The EPA is expected to further tighten the ozone standard in the near term, which may require further nitrogen oxide reductions, particularly within the OTR.
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.2014. 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, dependingEPA also designated part of Yellowstone County, Montana as a non-attainment area. 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. States are working on designations for other areas according to the timeline outlined in the EPA's proposed Data Requirements Rule issued in April 2014.
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 an understanding of the reported financial condition or results of operations, and require management to make estimates or other judgments of matters that are inherently uncertain. See "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" in each Registrant's 2012the Registrants' 2013 Form 10-K for a discussion of each critical accounting policy.
| | | | | | PPL | | PPL | | | | | | | | | |
| | | PPL | | Energy Supply | | Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | |
Defined Benefits | | X | | X | | X | | X | | X | | X |
Loss Accruals | | X | | X | | X | | X | | X | | X |
Income Taxes | | X | | X | | X | | X | | X | | X |
Asset Impairments (Excluding Investments) | | X | | X | | | | X | | X | | X |
AROs | | X | | X | | | | X | | X | | X |
Price Risk Management | | X | | X | | | | X | | X | | X |
Regulatory Assets and Liabilities | | X | | | | X | | X | | X | | X |
Revenue Recognition - unbilled revenue | | | | | | | | X | | X | | X | | X |
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 "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations."
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company, and Kentucky Utilities Company
The Registrants' principal executive officers and principal financial officers, based on their evaluation of the Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of September 30, 2013,2014, the Registrants' disclosure controls and procedures are effective to ensure that material information relating to the Registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared. The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.
(b) Change in internal controls over financial reporting.
PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company, and Kentucky Utilities Company
As reported in the June 30, 2013 Form 10-Q, the principal executive officers and principal financial officers of the Registrants concluded that the implementation of a financial consolidation and reporting system for PPL and its primary U.S. subsidiaries resulted in a material change to the Registrants' internal control over financial reporting. The new system enhances the consolidation of subsidiary accounts, provides reporting tools for analysis and automates certain aspects of financial statement preparation for each of the Registrants. Processes and controls over the consolidation and reporting processes that were previously considered to be effective were replaced with new or modified controls that were also determined to be effective.
The new consolidation and reporting system was subject to extensive testing and data reconciliation during implementation. Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes.
The Registrants' principal executive officers and principal financial officers have concluded that there were no other changes in the Registrants' 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 concluded that the implementation of a new general ledger system and a financial reporting system at WPD resulted in a material change to its internal control over financial reporting. The general ledger system that was implemented at WPD replaced the existing mainframe system and resulted in more automation and enhanced controls over
general ledger processing and consolidation. The reporting system that was implemented at WPD improves and automates controls over data transfer included in PPL's consolidation process and improves controls over GAAP and foreign currency adjustments. In each of the WPD system implementations, controls that were previously determined to be effective were replaced with new or modified controls that were also determined to be effective.
The general ledger and reporting systems were subject to extensive testing and data reconciliation during their implementation. Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes remain effective. Risks related to the system implementations at WPD were also partially mitigated by PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD results and their incorporation into PPL's consolidated financial statements.
The Registrant's principal executive officer and principal financial officer have concluded that there were no other changes in the Registrant's internal control over financial reporting during the Registrant's third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For additional information regarding 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 20122013 Form 10-K; and |
| · | | Notes 5, 6 and 10 to the Financial Statements. |
PPL Corporation and PPL Energy Supply, LLC
The proposed spinoff of PPL Energy Supply and combination with RJS Power are contingent upon the satisfaction of a number of conditions and may present difficulties that could have an adverse effect on us.
The proposed spinoff of the business of PPL Energy Supply and the subsequent combination with RJS Power to form Talen Energy are complex transactions, subject to various conditions, and may be affected by unanticipated developments or changes in market conditions. On November 5, 2014, Talen Energy filed a registration statement with the SEC containing detailed information regarding Talen Energy. Completion of the proposed spinoff of PPL Energy Supply and subsequent combination with RJS Power will be contingent upon a number of factors, including that (i) PPL receives a favorable opinion of tax counsel as described below; (ii) the SEC declares effective Talen Energy's registration statement relating to the registration of Talen Energy common stock and no SEC stop order suspending effectiveness of the registration
statement be in effect prior to the PPL Energy Supply spinoff; (iii) the Talen Energy common stock be authorized for listing on the New York Stock Exchange; (iv) certain regulatory approvals, including approval by the NRC and the FERC, a Hart-Scott-Rodino review and certain approvals by the PUC be obtained and (v) there be available, subject to certain conditions, at least $1 billion of undrawn capacity after excluding any letters of credit or other credit support measures posted in connection with energy marketing and trading transactions then outstanding, under a Talen Energy (or its subsidiaries) revolving credit or similar facility. The spinoff and subsequent combination with RJS Power may be terminated by mutual written consent of the parties or subject to certain other circumstances, including the failure to complete these transactions by June 30, 2015 or, if the required regulatory approvals have not been obtained at such time but the other conditions to the consummation of these transactions have been or are capable of being satisfied, December 31, 2015. For these and other reasons, the spinoff and the subsequent combination may not be completed on the terms or within the expected timeframe that we announced, if at all. Further, if the spinoff and the subsequent combination are completed, such transactions may not achieve the intended results.
If the proposed spinoff of the business of PPL Energy Supply does not qualify as a tax-free spinoff under Sections 355 and 368 of the Internal Revenue Code of 1986, as amended (the "Code"), including as a result of subsequent acquisitions of stock of PPL or Talen Energy, then PPL and/or its shareowners may be required to pay substantial U.S. federal income taxes.
The proposed spinoff of the business of PPL Energy Supply and the subsequent combination with RJS Power are conditioned upon PPL's receipt of an opinion of tax counsel to the effect that, among other matters, the spinoff will qualify as tax-free under Sections 355 and 368 of the Code to PPL and its shareowners for U.S. federal income tax purposes. Receipt of the opinion of tax counsel will satisfy a condition to completion of the spinoff and subsequent combination. An opinion of tax counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the spinoff that are different from the conclusions reached in the opinion. PPL is not aware of any facts or circumstances that would cause the factual statements or representations on which the opinion will be based to be materially different from the facts at the time of the spinoff. If, notwithstanding the receipt of the opinion of tax counsel, the IRS were to determine the spinoff to be taxable, PPL would, and its shareowners may, depending on their individual circumstances, recognize a tax liability that could be substantial.
In addition, the spinoff will be taxable to PPL pursuant to Section 355(e) of the Code if there is a 50% or more change in ownership of either PPL or Talen Energy, directly or indirectly, as part of a plan or series of related transactions that include the spinoff. Because PPL's shareowners will collectively own more than 50% of Talen Energy's common stock following the spinoff and subsequent combination, the combination alone will not cause the spinoff to be taxable to PPL under Section 355(e) of the Code. However, Section 355(e) of the Code might apply if acquisitions of stock of PPL before or after the spinoff, or of Talen Energy after the combination, are considered to be part of a plan or series of related transactions that include the spinoff. PPL is not aware of any such plan or series of transactions that include the spinoff.
PPL may not be successful in realizing the full amount of annual savings anticipated to be available as a result of the proposed spinoff of PPL Energy Supply.
In connection with the spinoff of PPL Energy Supply, and following any required transition services period, PPL is targeting to reduce its annual corporate support costs by an estimated $185 million. This includes $110 million of corporate support costs to be transferred to Talen Energy and $75 million of corporate support costs to be eliminated as a result of workforce reductions and other corporate cost savings. If for any reason PPL cannot realize all or a significant portion of the $75 million corporate cost savings it could have an adverse effect on PPL's results of operations, including PPL's ability to maintain or increase its dividend to shareowners.
PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
There have been no material changes in the Registrants' risk factors from those disclosed in "Item 1A. Risk Factors" of the 20122013 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| | | | | | | | | | | | | |
| Issuer Purchase of Equity Securities during the Third Quarter of 2013: | | | |
| | | | | | | | | | | | | |
| | | | (a) | (b) | (c) | (d) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | Maximum Number (or |
| | | | | | | | | | | | | Approximate Dollar |
| | | | | | | | | | Total Number of | Value) of Shares |
| | | | | | | | | | Shares (or Units) | (or Units) that May |
| | | | Total Number of | Average Price | Purchased as Part of | Yet Be Purchased |
| | | | Shares (or Units) | Paid per Share | Publicly Announced | Under the Plans |
Period | | | Purchased (1) | (or Unit) | Plans of Programs | or Programs |
July 1 to July 31, 2013 | | | | | | |
August 1 to August 31, 2013 | | | 750,000 | $30.81 | | |
September 1 to September 30, 2013 | | | 750,000 | $31.00 | | |
Total | | | 1,500,000 | $30.91 | | |
(1) | | Represents shares of common stock repurchased in the open market to offset a portion of shares issued under stock based compensation plans. |
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
PPL Electric Utilities Corporation
Effective October 31, 2013, PPL Electric amended and restated its Articles of Incorporation and Bylaws, copies of which are filed as exhibits 3(a) and 3(b), respectively, to this report.
The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith. The balance of the Exhibits havehas 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.
1(a)
| - | Second Supplemental Indenture, dated as of October 30, 2014, between PPL WEM Holdings plc, The Bank of New York Mellon, as Trustee, and Western Power Distribution Limited |
-
| - | Third Supplemental Indenture, dated as of October 31, 2014, among PPL WW Holdings Limited (formerly known as Western Power Distribution Holdings Limited), Western Power Distribution Limited and Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company), as Trustee under the Indenture |
| - | Transfer Deed, dated as of October 31, 2014, between PPL WW Holdings Limited, Western Power Distribution Limited and Mizuho Bank, Ltd., as Facility Agent |
| - | $65,000,000 Revolving Credit Agreement, dated as of August 20, 2014, among PPL Capital Funding, Inc., as the Borrower, PPL Corporation, as the Guarantor, the Lenders from time to time party thereto and Canadian Imperial Bank of Commerce, New York Branch, as Administrative Agent and Issuing Lender |
| - | Notice of Automatic Extension, dated as of September 29, 2014, pursuant to Section 4.03 of the WPD West Midlands £400 million 3.875% Senior Unsecured Notes due$300,000,000 Amended and Restated Credit Agreement dated as of July 28, 2014 among PPL Electric Utilities Corporation, the lending institutions party thereto from time to time and Wells Fargo Bank, National Association, as Administrative Agent |
10(c) | - | $198,309,583.05 Letter of Credit Agreement dated as of October 17, 20241, 2014 among Kentucky Utilities Company, as the Borrower, the Lenders from time to time party hereto and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrative Agent (Exhibit 1.110.1 to PPL CorporationKentucky Utilities Company Form 8-K Report (File No. 1-11459)1-3464) dated October 18, 2013) |
1(b)
| -
| Final Terms of WPD East Midlands £40 million 1.676% Notes due 2052 (Exhibit 1.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
|
1(c)
| -
| Final Terms of WPD East Midlands £25 million 1.676% Notes due 2052 (Exhibit 1.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
|
2(a)
| -
| Purchase and Sale Agreement by and between PPL Montana, LLC and NorthWestern Corporation, dated as of September 26, 2013 (Exhibit 2.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
|
2(b)
| -
| Lease Termination Agreement by and between PPL Montana, LLC, Montana OL3 LLC and Montana OP3 LLC, dated as of September 26, 2013 (Exhibit 2.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
|
2(c)
| -
| Lease Termination Agreement by and between PPL Montana, LLC, Montana OL4 LLC and Montana OP4 LLC, dated as of September 26, 2013 (Exhibit 2.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
|
2(d)
| -
| Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.4 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
|
2(e)
| -
| Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.5 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
|
*3(a)
| -
| Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation, effective as 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) 2, 2014) |
| - | PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
| - | PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges |
| - | PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
| - | LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges |
| - | Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges |
| - | Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges |
| | |
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended September 30, 2013,2014, filed by the following officers for the following companies: |
| | |
| - | PPL Corporation's principal executive officer |
| - | PPL Corporation's principal financial officer |
| - | PPL Energy Supply, LLC's principal executive officer |
| - | PPL Energy Supply, LLC's principal financial officer |
| - | PPL Electric Utilities Corporation's principal executive officer |
| - | PPL Electric Utilities Corporation's principal financial officer |
| - | LG&E and KU Energy LLC's principal executive officer |
| - | LG&E and KU Energy LLC's principal financial officer |
| - | Louisville Gas and Electric Company's principal executive officer |
| - | Louisville Gas and Electric Company's principal financial officer |
| - | Kentucky Utilities Company's principal executive officer |
| - | Kentucky Utilities Company's principal financial officer |
|
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended September 30, 2013,2014, furnished by the following officers for the following companies: |
| | |
| - | PPL Corporation's principal executive officer and principal financial officer |
| - | PPL Energy Supply, LLC's principal executive officer and principal financial officer |
| - | PPL Electric Utilities Corporation's principal executive officer and principal financial officer |
| - | LG&E and KU Energy LLC's principal executive officer and principal financial officer |
| - | Louisville Gas and Electric Company's principal executive officer and principal financial officer |
| - | 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 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.
| PPL Corporation |
| (Registrant) | |
| | |
| PPL Energy Supply, LLC |
| (Registrant) | |
| | |
| | |
| | |
Date: November 1, 20137, 2014 | /s/ Vincent SorgiStephen K. Breininger | |
| Vincent SorgiStephen K. Breininger | |
| Vice President and Controller | |
| (Principal Accounting Officer) | |
| | |
| | |
| | |
| PPL Electric Utilities Corporation |
| (Registrant) | |
| | |
| | |
| | |
Date: November 1, 20137, 2014 | /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: November 1, 20137, 2014 | /s/ Kent W. Blake | |
| Kent W. Blake Chief Financial Officer | |
| (Principal Financial Officer and Principal Accounting Officer) | |
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