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Kentucky Utilities

Filed: 30 Jul 14, 8:00pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2014
OR
[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

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


 
 

 

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

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

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

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

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

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

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

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

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

 PPL CorporationCommon stock, $0.01 par value, 664,381,143 shares outstanding at July 25, 2014.
   
 PPL Energy Supply, LLCPPL Corporation indirectly holds all of the membership interests in PPL Energy Supply, LLC.
   
 PPL Electric Utilities CorporationCommon stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at July 25, 2014.
   
 LG&E and KU Energy LLCPPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
   
 Louisville Gas and Electric CompanyCommon stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at July 25, 2014.
   
 Kentucky Utilities CompanyCommon stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at July 25, 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 JUNE 30, 2014


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 in accordance with GAAP.  This presentation has been applied where identification of particular subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis.
  Page
   
 
1 
PART I.  FINANCIAL INFORMATION  
 Item 1.  Financial Statements  
  PPL Corporation and Subsidiaries  
   3 
   4 
   5 
   6 
   8 
  PPL Energy Supply, LLC and Subsidiaries  
   9 
   10 
   11 
   12 
   14 
  PPL Electric Utilities Corporation and Subsidiaries  
   16 
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   18 
   20 
  LG&E and KU Energy LLC and Subsidiaries  
   22 
   23 
   24 
   26 

 
 

 


  Louisville Gas and Electric Company 
   28
   29
   30
   32
  Kentucky Utilities Company 
   34
   35
   36
   38
 Combined Notes to Condensed Financial Statements (Unaudited) 
  39
  39
  40
  41
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  44
  47
  50
  52
  53
  67
  68
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  76
  88
  88
  88
  89
  91
 Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 
  93
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    96
    97
    98
  101
   102
   112
   115
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 GLOSSARY OF TERMS AND ABBREVIATIONS

PPL Corporation and its subsidiaries

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 electricity 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 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 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, 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").

 
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Subsidiary Registrant(s) - Registrants that are direct or indirect wholly owned subsidiaries of PPL:  PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

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

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

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.

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.

2013 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 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 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.

 
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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 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 640 MW (141 MW and 499 MW to LG&E and KU) 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.

COBRA - Consolidated Omnibus Budget Reconciliation Act, which provides individuals the option to temporarily continue employer group health insurance coverage after termination of employment.

CPCN - Certificate of Public Convenience and Necessity.  Authority granted by the KPSC pursuant to Kentucky Revised Statute 278.020 to provide utility service to or for the public or the construction of certain plant, equipment, property or facility for the 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. five-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 costs and revenues lost by implementing DSM 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 that 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.

 
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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, known as source and sink.

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

GBP - British pound sterling.

GHG - greenhouse gas(es).

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

Green River Unit 5 - a natural gas combined-cycle unit proposed to be built in Kentucky, jointly owned by LG&E and KU, which is expected to provide additional electric generating capacity of 700MW (280 MW and 420 MW of LG&E and KU, respectively).

IBEW - International Brotherhood of Electrical Workers.

If-Converted Method - A method applied to calculate diluted EPS for a company with outstanding convertible debt.  The method is applied as follows:  Interest charges (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.

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

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.

LIBOR - London Interbank Offered Rate.

LTIIP - Long Term Infrastructure Improvement Plan.

MATS - Mercury and Air Toxics Standards.

MDEQ - Montana Department of Environmental Quality.

 
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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 summer rating capacities of 2,120 MW.

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

PJM - PJM Interconnection, L.L.C., operator of the electricity transmission network and electricity 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, which are components of the 2010 and 2011 Equity Units.

 
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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 Expansion Plan - PJM conducts a long-range Regional Transmission Expansion Planning process that identifies changes and additions to the grid necessary 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.

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 electricity generating assets to be contributed to Talen Energy other than those assets to be contributed by virtue of the spinoff of PPL Energy Supply.

RJS Power - RJS Power Holdings LLC, a Delaware limited liability company controlled by Riverstone, currently expected to hold the competitive generation assets to be contributed to Talen Energy other than those assets to be contributed by virtue of the spinoff 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.  It also requires an independent auditor to make its own assessment.

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.

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

 
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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 statute 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 electricity 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.

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.

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 that 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 2013 Form 10-K 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 realize expected benefits from such business transactions.

 
1

 


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

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

 
2

 

PART I.  FINANCIAL INFORMATION
ITEM 1. Financial Statements
                
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)            
(Millions of Dollars, except share data)      
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2014  2013  2014  2013 
Operating Revenues          
 
Utility
 $ 1,830  $ 1,655  $ 3,992  $ 3,605 
 
Unregulated wholesale energy
   591    1,401    (838)   1,544 
 
Unregulated retail energy
   280    257    629    494 
 
Energy-related businesses
   173    137    314    264 
 
Total Operating Revenues
   2,874    3,450    4,097    5,907 
             
Operating Expenses            
 Operation            
  
Fuel
   491    441    1,249    970 
  
Energy purchases
   351    1,051    (1,143)   1,108 
  
Other operation and maintenance
   741    698    1,438    1,374 
 
Depreciation
   312    286    617    570 
 
Taxes, other than income
   93    86    197    182 
 
Energy-related businesses
   168    130    306    252 
 
Total Operating Expenses
   2,156    2,692    2,664    4,456 
                
Operating Income
   718    758    1,433    1,451 
                
Other Income (Expense) - net
   (82)   13    (105)   135 
                
Interest Expense
   258    258    522    509 
                
Income from Continuing Operations Before Income Taxes
   378    513    806    1,077 
                
Income Taxes
   149    109    261    260 
                
Income from Continuing Operations After Income Taxes
   229    404    545    817 
                
Income (Loss) from Discontinued Operations (net of income taxes)
        1         1 
                
Net Income Attributable to PPL Shareowners
 $ 229  $ 405  $ 545  $ 818 
                
Amounts Attributable to PPL Shareowners:            
 
Income from Continuing Operations After Income Taxes
 $ 229  $ 404  $ 545  $ 817 
 
Income (Loss) from Discontinued Operations (net of income taxes)
        1         1 
 
Net Income
 $ 229  $ 405  $ 545  $ 818 
                
Earnings Per Share of Common Stock:            
 Income from Continuing Operations After Income Taxes Available to PPL  
  Common Shareowners:            
  
Basic
 $0.35  $0.68  $ 0.84  $1.39 
  
Diluted
 $0.34  $0.63  $ 0.83  $1.28 
 Net Income Available to PPL Common Shareowners:            
  
Basic
 $0.35  $0.68  $0.84  $1.39 
  
Diluted
 $0.34  $0.63  $0.83  $1.28 
                
Dividends Declared Per Share of Common Stock
 $0.3725  $0.3675  $0.7450  $0.7350 
                
Weighted-Average Shares of Common Stock Outstanding (in thousands)
            
  
Basic
   653,132    589,834    642,002   586,683 
  
Diluted
   665,792    664,615    664,927   661,263 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
3

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2014  2013  2014  2013 
                
Net income
 $ 229  $ 405  $ 545  $ 818 
                
Other comprehensive income (loss):            
Amounts arising during the period - gains (losses), net of tax (expense)            
 benefit:            
  
Foreign currency translation adjustments, net of tax of $5, ($1), $6, ($7)
   (3)   (7)   128    (252)
  
Available-for-sale securities, net of tax of ($15), ($2), ($21), ($27)
   14    2    19    25 
  
Qualifying derivatives, net of tax of $4, ($23), $29, ($43)
   (1)   24    (47)   86 
  Defined benefit plans:            
   
Net actuarial gain (loss), net of tax of $2, $0, $2, $0
   (2)        (2)     
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):            
  
Available-for-sale securities, net of tax of $1, $0, $2, $1
   (1)   (1)   (2)   (2)
  
Qualifying derivatives, net of tax of $5, $22, $1, $57
   (5)   (36)   14    (116)
  Defined benefit plans:            
   
Prior service costs, net of tax of ($1), ($1), ($2), ($2)
   1    2    2    3 
   
Net actuarial loss, net of tax of ($8), ($12), ($17), ($25)
   28    34    55    68 
Total other comprehensive income (loss) attributable to PPL            
 
Shareowners
   31    18    167    (188)
                
Comprehensive income (loss) attributable to PPL Shareowners
 $ 260  $ 423  $ 712  $ 630 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
4

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Six Months Ended June 30,
     2014  2013 
Cash Flows from Operating Activities      
 
Net income
 $ 545  $ 818 
 Adjustments to reconcile net income to net cash provided by operating activities      
  
Depreciation
   617    570 
  
Amortization
   112    113 
  
Defined benefit plans - expense
   59    91 
  
Deferred income taxes and investment tax credits
   133    291 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   301    (11)
  
Adjustment to WPD line loss accrual
   65    24 
  
Other
   51    26 
 Change in current assets and current liabilities      
  
Accounts receivable
   (73)   (189)
  
Accounts payable
   (99)   (75)
  
Unbilled revenues
   161    144 
  
Fuel, materials and supplies
   52    29 
  
Prepayments
   (35)   (64)
  
Counterparty collateral
   (15)   (61)
  
Taxes payable
   51    128 
  
Uncertain tax positions
        (98)
  
Accrued interest
   (107)   (119)
  
Other
   (82)   (142)
 Other operating activities      
  
Defined benefit plans - funding
   (218)   (468)
  
Other assets
   1    (64)
  
Other liabilities
   64    4 
   
Net cash provided by operating activities
   1,583    947 
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (1,854)   (1,797)
 
Expenditures for intangible assets
   (48)   (40)
 
Purchases of nuclear plant decommissioning trust investments
   (73)   (66)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   65    59 
 
Proceeds from the receipt of grants
   56    4 
 
Net (increase) decrease in restricted cash and cash equivalents
   (251)   (17)
 
Other investing activities
   2    23 
   
Net cash provided by (used in) investing activities
   (2,103)   (1,834)
Cash Flows from Financing Activities      
 
Issuance of long-term debt
   296    450 
 
Retirement of long-term debt
   (239)   (9)
 
Repurchase of common stock
        (28)
 
Issuance of common stock
   1,017    259 
 
Payment of common stock dividends
   (470)   (426)
 
Contract adjustment payments
   (21)   (48)
 
Net increase (decrease) in short-term debt
   107    563 
 
Other financing activities
   (19)   (51)
   
Net cash provided by (used in) financing activities
   671    710 
Effect of Exchange Rates on Cash and Cash Equivalents
   16    (13)
Net Increase (Decrease) in Cash and Cash Equivalents
   167    (190)
Cash and Cash Equivalents at Beginning of Period
   1,102    901 
Cash and Cash Equivalents at End of Period
 $ 1,269   711 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
5

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
     June 30, December 31,
     2014  2013 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 1,269  $ 1,102 
 
Restricted cash and cash equivalents
   332    83 
 Accounts receivable (less reserve:  2014, $47; 2013, $64)      
  
Customer
   981    923 
  
Other
   115    97 
 
Unbilled revenues
   680    835 
 
Fuel, materials and supplies
   651    702 
 
Prepayments
   160    153 
 
Deferred income taxes
   317    246 
 
Price risk management assets
   954    942 
 
Regulatory assets
   29    33 
 
Other current assets
   49    37 
 
Total Current Assets
   5,537    5,153 
          
Investments      
 
Nuclear plant decommissioning trust funds
   911    864 
 
Other investments
   39    43 
 
Total Investments
   950    907 
          
Property, Plant and Equipment      
 
Regulated utility plant
   29,473    27,755 
 
Less:  accumulated depreciation - regulated utility plant
   5,291    4,873 
  
Regulated utility plant, net
   24,182    22,882 
 Non-regulated property, plant and equipment      
  
Generation
   11,858    11,881 
  
Nuclear fuel
   624    591 
  
Other
   864    834 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,294    6,172 
  
Non-regulated property, plant and equipment, net
   7,052    7,134 
 
Construction work in progress
   3,197    3,071 
 
Property, Plant and Equipment, net
   34,431    33,087 
          
Other Noncurrent Assets      
 
Regulatory assets
   1,242    1,246 
 
Goodwill
   4,301    4,225 
 
Other intangibles
   952    947 
 
Price risk management assets
   423    337 
 
Other noncurrent assets
   357    357 
 
Total Other Noncurrent Assets
   7,275    7,112 
       
Total Assets
 $ 48,193  $ 46,259 

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

 
6

 


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
     June 30, December 31,
     2014  2013 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 808  $ 701 
 
Long-term debt due within one year
   304    315 
 
Accounts payable
   1,178    1,308 
 
Taxes
   124    114 
 
Interest
   223    325 
 
Dividends
   248    232 
 
Price risk management liabilities
   1,259    829 
 
Regulatory liabilities
   82    90 
 
Other current liabilities
   930    998 
 
Total Current Liabilities
   5,156    4,912 
          
Long-term Debt
   20,819    20,592 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   4,261    3,928 
 
Investment tax credits
   278    342 
 
Price risk management liabilities
   498    415 
 
Accrued pension obligations
   1,080    1,286 
 
Asset retirement obligations
   712    687 
 
Regulatory liabilities
   1,026    1,048 
 
Other deferred credits and noncurrent liabilities
   628    583 
 
Total Deferred Credits and Other Noncurrent Liabilities
   8,483    8,289 
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Equity      
  
Common stock - $0.01 par value (a)
   7    6 
  
Additional paid-in capital
   9,358    8,316 
  
Earnings reinvested
   5,768    5,709 
  
Accumulated other comprehensive loss
   (1,398)   (1,565)
 
Total Equity
   13,735    12,466 
          
Total Liabilities and Equity
 $ 48,193  $ 46,259 

(a)780,000 shares authorized; 664,018 and 630,321 shares issued and outstanding at June 30, 2014 and December 31, 2013.

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

 
7

 

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
                    
March 31, 2014
  631,417  $ 6  $ 8,352  $ 5,788  $ (1,429)      $ 12,717 
Common stock issued (b)
  32,601    1    997                   998 
Stock-based compensation (c)
            9                   9 
Net income
                 229              229 
Dividends and dividend                    
 
equivalents (d)
                 (249)             (249)
Other comprehensive                    
 
income (loss)
                      31         31 
June 30, 2014
  664,018  $ 7  $ 9,358  $ 5,768  $ (1,398)      $ 13,735 
                       
December 31, 2013
  630,321  $ 6  $ 8,316  $ 5,709  $ (1,565)      $ 12,466 
Common stock issued (b)
  33,697    1    1,027                   1,028 
Stock-based compensation (c)
            15                   15 
Net income
                 545              545 
Dividends and dividend                    
 
equivalents (d)
                 (486)             (486)
Other comprehensive                    
 
income (loss)
                      167         167 
June 30, 2014
  664,018  $ 7  $ 9,358  $ 5,768  $ (1,398)      $ 13,735 
                       
March 31, 2013
  583,214  $ 6  $ 6,988  $ 5,676  $ (2,146) $ 18  $ 10,542 
Common stock issued (b)
  9,338         245                   245 
Common stock repurchased
  (930)        (28)                  (28)
Cash settlement of equity forward                    
 
agreements
            (13)                  (13)
Stock-based compensation (c)
            3                   3 
Net income
                 405              405 
Dividends and dividend                    
 
equivalents (d)
                 (218)             (218)
Other comprehensive                    
 
income (loss)
                      18         18 
June 30, 2013
  591,622  $ 6  $ 7,195  $ 5,863  $ (2,128) $ 18  $ 10,954 
                       
December 31, 2012
  581,944  $ 6  $ 6,936  $ 5,478  $ (1,940) $ 18  $ 10,498 
Common stock issued (b)
  10,608         282                   282 
Common stock repurchased
  (930)        (28)                  (28)
Cash settlement of equity forward                    
 
agreements
            (13)                  (13)
Stock-based compensation (c)
            18                   18 
Net income
                 818              818 
Dividends and dividend                    
 
equivalents (d)
                 (433)             (433)
Other comprehensive                    
 
income (loss)
                      (188)        (188)
June 30, 2013
  591,622  $ 6  $ 7,195  $ 5,863  $ (2,128) $ 18  $ 10,954 

(a)Shares in thousands.  Each share entitles the holder to one vote on any question presented at any shareowners' meeting.
(b)Each period includes shares of common stock issued through various stock and incentive compensation plans.  The 2014 periods include the May issuance of shares of common stock to settle the 2011 Purchase Contracts.  See Note 7 for additional information.  The 2013 periods include the April issuance of shares of common stock to settle the forward sales agreements.
(c)The three and six months ended June 30, 2014 include $12 million and $39 million and the three and six months ended June 30, 2013 include $8 million and $36 million of stock-based compensation expense related to new and existing unvested equity awards.  The three and six months ended June 30, 2014 include $(3) million and $(24) million and the three and six months ended June 30, 2013 include $(5) million and $(18) 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.
(d)Includes dividends and dividend equivalents on PPL common stock and restricted stock units.

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

 
8

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)      
(Millions of Dollars)      
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2014  2013  2014  2013 
Operating Revenues            
 
Unregulated wholesale energy
 $ 591  $ 1,401  $ (838) $ 1,544 
 
Unregulated wholesale energy to affiliate
   21    12    48    26 
 
Unregulated retail energy
   281    257    632    495 
 
Energy-related businesses
   155    122    280    235 
 
Total Operating Revenues
   1,048    1,792    122    2,300 
                
Operating Expenses              
 Operation              
  
Fuel
   259    224    741    522 
  
Energy purchases
   203    898    (1,601)   699 
  
Other operation and maintenance
   296    270    554    505 
 
Depreciation
   82    79    162    157 
 
Taxes, other than income
   16    16    37    33 
 
Energy-related businesses
   155    118    279    228 
 
Total Operating Expenses
   1,011    1,605    172    2,144 
                
Operating Income (Loss)
   37    187    (50)   156 
                
Other Income (Expense) - net
   8    12    14    16 
                
Interest Expense
   35    46    69    92 
                
Income (Loss) Before Income Taxes
   10    153    (105)   80 
                
Income Taxes
   (3)   67    (52)   32 
                
Net Income (Loss) Attributable to PPL Energy Supply Member
 $ 13  $ 86  $ (53) $ 48 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
9

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2014  2013  2014  2013 
                
Net income (loss)
 $ 13  $ 86  $ (53) $ 48 
                
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), ($2), ($21), ($27)
   14    2    19    25 
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):            
  
Available-for-sale securities, net of tax of $1, $0, $2, $1
   (1)   (1)   (2)   (2)
  
Qualifying derivatives, net of tax of $5, $23, $9, $44
   (8)   (37)   (13)   (67)
  Defined benefit plans:            
   
Prior service costs, net of tax of $0, $0, ($1), ($1)
        1    1    2 
   
Net actuarial loss, net of tax of ($1), ($3), ($2), ($5)
   2    4    3    8 
Total other comprehensive income (loss) attributable to            
 
PPL Energy Supply Member
   7    (31)   8    (34)
                
Comprehensive income (loss) attributable to PPL Energy            
 
Supply Member
 $ 20  $ 55  $ (45) $ 14 
                
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
10

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Six Months Ended June 30,
     2014  2013 
Cash Flows from Operating Activities      
 
Net income (loss)
 $ (53) $ 48 
 Adjustments to reconcile net income (loss) to net cash provided by operating activities          
  
Depreciation
   162    157 
  
Amortization
   77    71 
  
Defined benefit plans - expense
   32    26 
  
Deferred income taxes and investment tax credits
   (120)   98 
  
Impairment of assets
   18      
  
Unrealized (gains) losses on derivatives, and other hedging activities
   232    91 
  
Other
   10    5 
 Change in current assets and current liabilities      
  
Accounts receivable
   25    6 
  
Accounts payable
   (55)   (62)
  
Unbilled revenues
   67    96 
  
Prepayments
   (16)   (67)
  
Counterparty collateral
   (15)   (61)
  
Price risk management assets and liabilities
   (33)   (2)
  
Other
   (20)   (15)
 Other operating activities      
  
Defined benefit plans - funding
   (32)   (106)
  
Other assets
   (1)   (38)
  
Other liabilities
   12    (20)
   
Net cash provided by operating activities
   290    227 
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (176)   (241)
 
Expenditures for intangible assets
   (24)   (23)
 
Purchases of nuclear plant decommissioning trust investments
   (73)   (66)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   65    59 
 
Proceeds from the receipt of grants
   56    3 
 
Net (increase) decrease in restricted cash and cash equivalents
   (258)   (24)
 
Other investing activities
   7    10 
   
Net cash provided by (used in) investing activities
   (403)   (282)
Cash Flows from Financing Activities      
 
Contributions from member
   730    105 
 
Distributions to member
   (914)   (408)
 
Net increase (decrease) in short-term debt
   324    219 
 
Other financing activities
   (2)   (9)
   
Net cash provided by (used in) financing activities
   138    (93)
Net Increase (Decrease) in Cash and Cash Equivalents
   25    (148)
 
Cash and Cash Equivalents at Beginning of Period
   239    413 
 
Cash and Cash Equivalents at End of Period
 $ 264  $ 265 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
11

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     June 30, December 31,
     2014  2013 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 264  $ 239 
 
Restricted cash and cash equivalents
   326    68 
 Accounts receivable (less reserve:  2014, $2; 2013, $21)        
  
Customer
   206    233 
  
Other
   102    97 
 
Accounts receivable from affiliates
   42    45 
 
Unbilled revenues
   219    286 
 
Fuel, materials and supplies
   349    358 
 
Prepayments
   36    20 
 
Deferred income taxes
   105      
 
Price risk management assets
   954    860 
 
Other current assets
   31    27 
 
Total Current Assets
   2,634    2,233 
        
Investments      
 
Nuclear plant decommissioning trust funds
   911    864 
 
Other investments
   34    37 
 
Total Investments
   945    901 
        
Property, Plant and Equipment      
 Non-regulated property, plant and equipment        
  
Generation
   11,866    11,891 
  
Nuclear fuel
   624    591 
  
Other
   291    288 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,139    6,046 
  
Non-regulated property, plant and equipment, net
   6,642    6,724 
 
Construction work in progress
   386    450 
 
Property, Plant and Equipment, net
   7,028    7,174 
        
Other Noncurrent Assets      
 
Goodwill
   86    86 
 
Other intangibles
   267    266 
 
Price risk management assets
   420    328 
 
Other noncurrent assets
   79    86 
 
Total Other Noncurrent Assets
   852    766 
        
Total Assets
 $ 11,459  $ 11,074 

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

 
12

 


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     June 30, December 31,
     2014  2013 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 324      
 
Long-term debt due within one year
   304  $ 304 
 
Accounts payable
   309    393 
 
Accounts payable to affiliates
   2    4 
 
Taxes
   30    31 
 
Interest
   22    22 
 
Price risk management liabilities
   1,133    750 
 
Other current liabilities
   229    278 
 
Total Current Liabilities
   2,353    1,782 
          
Long-term Debt
   2,219    2,221 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,183    1,114 
 
Investment tax credits
   144    205 
 
Price risk management liabilities
   347    320 
 
Accrued pension obligations
   104    111 
 
Asset retirement obligations
   406    393 
 
Other deferred credits and noncurrent liabilities
   134    130 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,318    2,273 
          
Commitments and Contingent Liabilities (Note 10)      
       
Member's Equity
   4,569    4,798 
          
Total Liabilities and Equity
 $ 11,459  $ 11,074 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
13

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Non-   
  Member's controlling   
  equity interests Total
          
March 31, 2014
 $ 4,079       $ 4,079 
Net income (loss)
   13         13 
Other comprehensive income (loss)
   7         7 
Contributions from member
   730         730 
Distributions
   (260)        (260)
June 30, 2014
 $ 4,569       $ 4,569 
          
December 31, 2013
 $ 4,798       $ 4,798 
Net income (loss)
   (53)        (53)
Other comprehensive income (loss)
   8         8 
Contributions from member
   730         730 
Distributions
   (914)        (914)
June 30, 2014
 $ 4,569       $ 4,569 
          
March 31, 2013
 $ 3,476  $ 18  $ 3,494 
Net income
   86         86 
Other comprehensive income (loss)
   (31)        (31)
Contributions from member
   105         105 
Distributions
   (95)        (95)
June 30, 2013
 $ 3,541  $ 18  $ 3,559 
          
December 31, 2012
 $ 3,830  $ 18  $ 3,848 
Net income
   48         48 
Other comprehensive income (loss)
   (34)        (34)
Contributions from member
   105         105 
Distributions
   (408)        (408)
June 30, 2013
 $ 3,541  $ 18  $ 3,559 

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

 
14

 
 





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15

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)            
(Millions of Dollars)      
               
    Three Months Ended Six Months Ended
    June 30, June 30,
    2014  2013  2014  2013 
             
Operating Revenues
 $ 449  $ 414  $ 1,041  $ 927 
               
Operating Expenses              
 Operation              
  
Energy purchases
   114    120    303    292 
  
Energy purchases from affiliate
   21    12    48    26 
  
Other operation and maintenance
   135    124    269    257 
 
Depreciation
   45    44    90    87 
 
Taxes, other than income
   23    22    55    52 
 
Total Operating Expenses
   338    322    765    714 
               
Operating Income
   111    92    276    213 
               
Other Income (Expense) - net
   1    2    3    3 
               
Interest Expense
   29    25    58    50 
               
Income Before Income Taxes
   83    69    221    166 
               
Income Taxes
   31    24    84    57 
               
Net Income (a)
 $ 52  $ 45  $ 137  $ 109 

(a)Net income approximates comprehensive income.

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

 
16

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Six Months Ended
     June 30,
     2014  2013 
Cash Flows from Operating Activities      
 
Net income
 $ 137  $ 109 
 Adjustments to reconcile net income to net cash provided by operating activities          
  
Depreciation
   90    87 
  
Amortization
   9    10 
  
Defined benefit plans - expense
   11    10 
  
Deferred income taxes and investment tax credits
   44    81 
  
Other
   (17)   (5)
 Change in current assets and current liabilities      
  
Accounts receivable
   (80)   (56)
  
Accounts payable
   (33)   (37)
  
Unbilled revenues
   34    36 
  
Prepayments
   (40)   (18)
  
Taxes payable
   8    18 
  
Other
   2    (38)
 Other operating activities      
  
Defined benefit plans - funding
   (19)   (88)
  
Other assets
   5      
  
Other liabilities
   (3)   6 
   
Net cash provided by operating activities
   148    115 
          
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (436)   (451)
 
Expenditures for intangible assets
   (22)   (13)
 
Net (increase) decrease in notes receivable from affiliates
   150      
 
Other investing activities
   13    9 
   
Net cash provided by (used in) investing activities
   (295)   (455)
          
Cash Flows from Financing Activities      
 
Issuance of long-term debt
   296      
 
Retirement of long-term debt
   (10)     
 
Contributions from parent
   95    205 
 
Payment of common stock dividends to parent
   (87)   (66)
 
Net increase (decrease) in short-term debt
   (20)   85 
 
Other financing activities
   (3)     
   
Net cash provided by (used in) financing activities
   271    224 
          
Net Increase (Decrease) in Cash and Cash Equivalents
   124    (116)
Cash and Cash Equivalents at Beginning of Period
   25    140 
Cash and Cash Equivalents at End of Period
 $ 149  $ 24 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
17

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     June 30, December 31,
     2014  2013 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 149  $ 25 
 Accounts receivable (less reserve: 2014, $17; 2013, $18)        
  
Customer
   361    284 
  
Other
   8    5 
 
Accounts receivable from affiliates
   4    4 
 
Notes receivable from affiliate
        150 
 
Unbilled revenues
   82    116 
 
Materials and supplies
   35    35 
 
Prepayments
   51    40 
 
Deferred income taxes
   84    85 
 
Other current assets
   13    22 
 
Total Current Assets
   787    766 
          
Property, Plant and Equipment      
 
Regulated utility plant
   7,168    6,886 
 
Less: accumulated depreciation - regulated utility plant
   2,488    2,417 
  
Regulated utility plant, net
   4,680    4,469 
 
Other, net
   2    2 
 
Construction work in progress
   744    591 
 
Property, Plant and Equipment, net
   5,426    5,062 
          
Other Noncurrent Assets      
 
Regulatory assets
   771    772 
 
Intangibles
   233    211 
 
Other noncurrent assets
   35    35 
 
Total Other Noncurrent Assets
   1,039    1,018 
          
Total Assets
 $ 7,252  $ 6,846 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
18

 


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     June 30, December 31,
     2014  2013 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
      $ 20 
 
Long term debt due within one year
        10 
 
Accounts payable
 $ 292    295 
 
Accounts payable to affiliates
   50    57 
 
Taxes
   15    51 
 
Interest
   34    34 
 
Regulatory liabilities
   72    76 
 
Other current liabilities
   75    82 
 
Total Current Liabilities
   538    625 
          
Long-term Debt
   2,602    2,305 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,463    1,399 
 
Accrued pension obligations
   85    96 
 
Regulatory liabilities
   12    15 
 
Other deferred credits and noncurrent liabilities
   58    57 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,618    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
   695    645 
 
Total Equity
   2,494    2,349 
          
Total Liabilities and Equity
 $ 7,252  $ 6,846 

(a)170,000 shares authorized; 66,368 shares issued and outstanding at June 30, 2014 and December 31, 2013.

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

 
19

 

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
                
March 31, 2014
  66,368  $ 364  $ 1,405  $ 698  $ 2,467 
Net income
                 52    52 
Capital contributions from PPL
            30         30 
Cash dividends declared on common stock
                 (55)   (55)
June 30, 2014
  66,368  $ 364  $ 1,435  $ 695  $ 2,494 
                
December 31, 2013
  66,368  $ 364  $ 1,340  $ 645  $ 2,349 
Net income
                 137    137 
Capital contributions from PPL
            95         95 
Cash dividends declared on common stock
                 (87)   (87)
June 30, 2014
  66,368  $ 364  $ 1,435  $ 695  $ 2,494 
                
March 31, 2013
  66,368  $ 364  $ 1,195  $ 602  $ 2,161 
Net income
                 45    45 
Capital contributions from PPL
            145         145 
Cash dividends declared on common stock
                 (41)   (41)
June 30, 2013
  66,368  $ 364  $ 1,340  $ 606  $ 2,310 
                
December 31, 2012
  66,368  $ 364  $ 1,135  $ 563  $ 2,062 
Net income
                 109    109 
Capital contributions from PPL
            205         205 
Cash dividends declared on common stock
                 (66)   (66)
June 30, 2013
  66,368  $ 364  $ 1,340  $ 606  $ 2,310 

(a)Shares in thousands.  All common shares of PPL Electric stock are owned by PPL.

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

 
20

 







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21

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)            
(Millions of Dollars)      
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2014  2013   2014   2013 
             
Operating Revenues
 $ 722  $ 682  $ 1,656  $ 1,482 
             
Operating Expenses            
 Operation            
  
Fuel
   231    216    508    447 
  
Energy purchases
   36    37    160    123 
  
Other operation and maintenance
   206    197    412    394 
 
Depreciation
   87    83    173    165 
 
Taxes, other than income
   13    12    26    24 
 
Total Operating Expenses
   573    545    1,279    1,153 
                
Operating Income
   149    137    377    329 
                
Other Income (Expense) - net
   (2)        (4)   (2)
             
Interest Expense
   41    36    83    73 
                
Interest Expense with Affiliate
        1         1 
                
Income from Continuing Operations Before Income Taxes
   106    100    290    253 
                
Income Taxes
   41    37    110    94 
                
Income from Continuing Operations After Income Taxes
   65    63    180    159 
                
Income (Loss) from Discontinued Operations (net of income taxes)
        1         1 
                
Net Income (a)
 $ 65  $ 64  $ 180  $ 160 

(a)Net income approximates comprehensive income.

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

 
22

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
        
  Six Months Ended June 30,
     2014   2013 
Cash Flows from Operating Activities       
 
Net income
 $ 180   $ 160 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   173     165 
  
Amortization
   12     14 
  
Defined benefit plans - expense
   12     27 
  
Deferred income taxes and investment tax credits
   149     95 
  
Other
   1     (6)
 Change in current assets and current liabilities       
  
Accounts receivable
   (24)    (62)
  
Accounts payable
   (5)    36 
  
Accounts payable to affiliates
   (2)      
  
Unbilled revenues
   27     (2)
  
Fuel, materials and supplies
   43     25 
  
Taxes payable
   (10)      
  
Other
   1     2 
 Other operating activities       
  
Defined benefit plans - funding
   (40)    (156)
  
Other assets
   (3)    (3)
  
Other liabilities
   2     2 
   
Net cash provided by operating activities
   516     297 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (556)    (579)
 
Net (increase) decrease in notes receivable from affiliates
   54       
 
Net (increase) decrease in restricted cash and cash equivalents
   1     10 
 
Other investing activities
         1 
   
Net cash provided by (used in) investing activities
   (501)    (568)
Cash Flows from Financing Activities       
 
Net increase (decrease) in notes payable with affiliates
         47 
 
Net increase (decrease) in short-term debt
   75     127 
 
Distributions to member
   (221)    (69)
 
Contributions from member
   119     146 
   
Net cash provided by (used in) financing activities
   (27)    251 
Net Increase (Decrease) in Cash and Cash Equivalents
   (12)    (20)
Cash and Cash Equivalents at Beginning of Period
   35     43 
Cash and Cash Equivalents at End of Period
 $ 23   $ 23 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
23

 

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     June 30, December 31,
     2014  2013 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 23   35 
 Accounts receivable (less reserve: 2014, $26; 2013, $22)      
  
Customer
   238    224 
  
Other
   23    20 
 
Unbilled revenues
   153    180 
 
Fuel, materials and supplies
   235    278 
 
Prepayments
   27    21 
 
Notes receivable from affiliates
   16    70 
 
Deferred income taxes
   108    159 
 
Regulatory assets
   27    27 
 
Other current assets
   4    3 
 
Total Current Assets
   854    1,017 
          
Property, Plant and Equipment      
 
Regulated utility plant
   9,036    8,526 
 
Less: accumulated depreciation - regulated utility plant
   922    778 
  
Regulated utility plant, net
   8,114    7,748 
 
Other, net
   3    3 
 
Construction work in progress
   1,809    1,793 
 
Property, Plant and Equipment, net
   9,926    9,544 
          
Other Noncurrent Assets      
 
Regulatory assets
   471    474 
 
Goodwill
   996    996 
 
Other intangibles
   197    221 
 
Other noncurrent assets
   101    98 
 
Total Other Noncurrent Assets
   1,765    1,789 
          
Total Assets
 $ 12,545  $ 12,350 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
24

 


CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     June 30, December 31,
     2014  2013 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 320  $ 245 
 
Accounts payable
   335    346 
 
Accounts payable to affiliates
   1    3 
 
Customer deposits
   50    50 
 
Taxes
   29    39 
 
Price risk management liabilities
   4    4 
 
Regulatory liabilities
   10    14 
 
Interest
   23    23 
 
Other current liabilities
   121    111 
 
Total Current Liabilities
   893    835 
          
Long-term Debt
   4,566    4,565 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,065    965 
 
Investment tax credits
   133    135 
 
Accrued pension obligations
   114    152 
 
Asset retirement obligations
   255    245 
 
Regulatory liabilities
   1,014    1,033 
 
Price risk management liabilities
   38    32 
 
Other deferred credits and noncurrent liabilities
   242    238 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,861    2,800 
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Member's equity
   4,225    4,150 
          
Total Liabilities and Equity
 $ 12,545  $ 12,350 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
25

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
    
   Member's
   Equity
    
March 31, 2014
 $ 4,200 
Net income
   65 
Contributions from member
   79 
Distributions to member
   (117)
Other comprehensive income (loss)
   (2)
June 30, 2014
 $ 4,225 
    
December 31, 2013
 $ 4,150 
Net income
   180 
Contributions from member
   119 
Distributions to member
   (221)
Other comprehensive income (loss)
   (3)
June 30, 2014
 $ 4,225 
    
March 31, 2013
 $3,952 
Net income
   64 
Contributions from member
   71 
Distributions to member
   (65)
June 30, 2013
 $ 4,022 
    
December 31, 2012
 $3,786 
Net income
   160 
Contributions from member
   146 
Distributions to member
   (69)
Other comprehensive income (loss)
   (1)
June 30, 2013
 $ 4,022 

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

 
26

 







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27

 

CONDENSED STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Unaudited)            
(Millions of Dollars)      
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2014  2013  2014  2013 
Operating Revenues            
 
Retail and wholesale
 $ 320  $ 302  $ 762  $ 671 
 
Electric revenue from affiliate
   24    14    61    35 
 
Total Operating Revenues
   344    316    823    706 
                
Operating Expenses            
 Operation            
  
Fuel
   104    88    221    184 
  
Energy purchases
   29    31    147    111 
  
Energy purchases from affiliate
   2    3    8    4 
  
Other operation and maintenance
   94    94    192    185 
 
Depreciation
   39    37    77    73 
 
Taxes, other than income
   7    6    13    12 
 
Total Operating Expenses
   275    259    658    569 
                
Operating Income
   69    57    165    137 
                
Other Income (Expense) - net
   (1)   (1)   (3)   (2)
                
Interest Expense
   12    10    24    20 
                
Income Before Income Taxes
   56    46    138    115 
                
Income Taxes
   21    17    51    42 
                
Net Income (a)
 $ 35  $ 29  $ 87  $ 73 

(a)Net income equals comprehensive income.

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

 
28

 

CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)
        
  Six Months Ended June 30,
     2014   2013 
Cash Flows from Operating Activities       
 
Net income
 $ 87   $ 73 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   77     73 
  
Amortization
   6     6 
  
Defined benefit plans - expense
   5     9 
  
Deferred income taxes and investment tax credits
   20     21 
  
Other
   (4)      
 Change in current assets and current liabilities       
  
Accounts receivable
   (25)    (9)
  
Accounts payable
   (5)    13 
  
Accounts payable to affiliates
   (4)    (2)
  
Unbilled revenues
   19     2 
  
Fuel, materials and supplies
   44     25 
  
Taxes payable
   2     12 
  
Other
   (4)    6 
 Other operating activities       
  
Defined benefit plans - funding
   (10)    (44)
  
Other assets
   (2)    (1)
  
Other liabilities
   (4)    2 
   
Net cash provided by operating activities
   202     186 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (249)    (236)
 
Net (increase) decrease in restricted cash and cash equivalents
   1     10 
   
Net cash provided by (used in) investing activities
   (248)    (226)
Cash Flows from Financing Activities       
 
Net increase (decrease) in short-term debt
   50     25 
 
Payment of common stock dividends to parent
   (60)    (48)
 
Contributions from parent
   53     54 
   
Net cash provided by (used in) financing activities
   43     31 
Net Increase (Decrease) in Cash and Cash Equivalents
   (3)    (9)
Cash and Cash Equivalents at Beginning of Period
   8     22 
Cash and Cash Equivalents at End of Period
 $ 5    13 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
29

 

CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     June 30, December 31,
     2014  2013 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 5  $ 8 
 Accounts receivable (less reserve: 2014, $2; 2013, $2)      
  
Customer
   102    102 
  
Other
   14    9 
 
Unbilled revenues
   66    85 
 
Accounts receivable from affiliates
   17      
 
Fuel, materials and supplies
   110    154 
 
Prepayments
   9    7 
 
Regulatory assets
   24    17 
 
Other current assets
   3    3 
 
Total Current Assets
   350    385 
          
Property, Plant and Equipment      
 
Regulated utility plant
   3,564    3,383 
 
Less: accumulated depreciation - regulated utility plant
   397    332 
  
Regulated utility plant, net
   3,167    3,051 
 
Construction work in progress
   750    651 
 
Property, Plant and Equipment, net
   3,917    3,702 
          
Other Noncurrent Assets      
 
Regulatory assets
   306    303 
 
Goodwill
   389    389 
 
Other intangibles
   108    120 
 
Other noncurrent assets
   35    35 
 
Total Other Noncurrent Assets
   838    847 
          
Total Assets
 $ 5,105  $ 4,934 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
30

 


CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
     June 30, December 31,
     2014  2013 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 70  $ 20 
 
Accounts payable
   200    166 
 
Accounts payable to affiliates
   20    24 
 
Customer deposits
   24    24 
 
Taxes
   13    11 
 
Price risk management liabilities
   4    4 
 
Regulatory liabilities
   9    9 
 
Interest
   6    6 
 
Other current liabilities
   30    32 
 
Total Current Liabilities
   376    296 
          
Long-term Debt
   1,353    1,353 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   603    582 
 
Investment tax credits
   37    38 
 
Accrued pension obligations
   10    19 
 
Asset retirement obligations
   70    68 
 
Regulatory liabilities
   472    482 
 
Price risk management liabilities
   38    32 
 
Other deferred credits and noncurrent liabilities
   106    104 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,336    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
   1,417    1,364 
 
Earnings reinvested
   199    172 
 
Total Equity
   2,040    1,960 
          
Total Liabilities and Equity
 $ 5,105  $ 4,934 

(a)75,000 shares authorized; 21,294 shares issued and outstanding at June 30, 2014 and December 31, 2013.

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

 
31

 

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
                 
March 31, 2014
  21,294  $424  $1,364  $197  $1,985 
Net income
           35    35 
Capital contributions from LKE
        53       53 
Cash dividends declared on common stock
           (33)   (33)
June 30, 2014
 21,294  $ 424  $ 1,417  $ 199  $ 2,040 
                 
December 31, 2013
 21,294  $424  $1,364  $172  $ 1,960 
Net income
           87    87 
Capital contributions from LKE
        53       53 
Cash dividends declared on common stock
           (60)   (60)
June 30, 2014
 21,294  $ 424  $ 1,417  $ 199  $ 2,040 
                 
March 31, 2013
 21,294  $424  $1,303  $133  $1,860 
Net income
           29    29 
Capital contributions from LKE
        29       29 
Cash dividends declared on common stock
           (29)   (29)
June 30, 2013
  21,294  $ 424  $ 1,332  $ 133  $ 1,889 
                 
December 31, 2012
 21,294  $424  $1,278  $108  $1,810 
Net income
           73    73 
Capital contributions from LKE
        54       54 
Cash dividends declared on common stock
           (48)   (48)
June 30, 2013
  21,294  $ 424  $ 1,332  $ 133  $ 1,889 

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

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

 
32

 








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33

 

CONDENSED STATEMENTS OF INCOME
Kentucky Utilities Company
(Unaudited)            
(Millions of Dollars)      
                
     Three Months Ended Six Months Ended
     June 30, June 30,
     2014  2013  2014  2013 
Operating Revenues            
 
Retail and wholesale
 $ 402  $ 380  $ 894  $ 811 
 
Electric revenue from affiliate
   2    3    8    4 
 
Total Operating Revenues
   404    383    902    815 
                
Operating Expenses            
 Operation            
  
Fuel
   127    128    287    263 
  
Energy purchases
   7    6    13    12 
  
Energy purchases from affiliate
   24    14    61    35 
  
Other operation and maintenance
   107    98    205    195 
 
Depreciation
   47    46    95    92 
 
Taxes, other than income
   6    6    13    12 
 
Total Operating Expenses
   318    298    674    609 
                
Operating Income
   86    85    228    206 
                
Other Income (Expense) - net
        2         1 
                
Interest Expense
   20    17    39    34 
                
Income Before Income Taxes
   66    70    189    173 
                
Income Taxes
   26    26    72    65 
                
Net Income (a)
 $ 40  $ 44  $ 117  $ 108 

(a)Net income approximates comprehensive income.

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

 
34

 

CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)
        
  Six Months Ended June 30,
     2014   2013 
Cash Flows from Operating Activities       
 
Net income
 $ 117   $ 108 
 Adjustments to reconcile net income to net cash provided by operating activities       
  
Depreciation
   95     92 
  
Amortization
   4     7 
  
Defined benefit plans - expense
   2     12 
  
Deferred income taxes and investment tax credits
   89     72 
  
Other
   5     (2)
 Change in current assets and current liabilities       
  
Accounts receivable
   (44)    (39)
  
Accounts payable
   10     33 
  
Accounts payable to affiliates
   13     (7)
  
Unbilled revenues
   8     (4)
  
Fuel, materials and supplies
   (1)      
  
Taxes payable
   (19)    (10)
  
Other
   16     5 
 Other operating activities       
  
Defined benefit plans - funding
   (3)    (61)
  
Other assets
   (1)    (3)
  
Other liabilities
   6     (13)
   
Net cash provided by operating activities
   297     190 
Cash Flows from Investing Activities       
 
Expenditures for property, plant and equipment
   (305)    (341)
 
Other investing activities
         1 
   
Net cash provided by (used in) investing activities
   (305)    (340)
Cash Flows from Financing Activities       
 
Net increase (decrease) in short-term debt
   25     102 
 
Payment of common stock dividends to parent
   (86)    (55)
 
Contributions from parent
   66     92 
   
Net cash provided by (used in) financing activities
   5     139 
Net Increase (Decrease) in Cash and Cash Equivalents
   (3)    (11)
Cash and Cash Equivalents at Beginning of Period
   21     21 
Cash and Cash Equivalents at End of Period
 $ 18   $ 10 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
35

 

CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     June 30, December 31,
     2014  2013 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 18   21 
 Accounts receivable (less reserve: 2014, $4; 2013, $4)      
  
Customer
   136    122 
  
Other
   34    9 
 
Unbilled revenues
   87    95 
 
Fuel, materials and supplies
   125    124 
 
Prepayments
   8    4 
 
Regulatory assets
   3    10 
 
Other current assets
   5    6 
 
Total Current Assets
   416    391 
          
Property, Plant and Equipment      
 
Regulated utility plant
   5,472    5,143 
 
Less: accumulated depreciation - regulated utility plant
   525    446 
  
Regulated utility plant, net
   4,947    4,697 
 
Other, net
   1    1 
 
Construction work in progress
   1,055    1,139 
 
Property, Plant and Equipment, net
   6,003    5,837 
          
Other Noncurrent Assets      
 
Regulatory assets
   165    171 
 
Goodwill
   607    607 
 
Other intangibles
   89    101 
 
Other noncurrent assets
   59    56 
 
Total Other Noncurrent Assets
   920    935 
          
Total Assets
 $ 7,339  $ 7,163 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
36

 


CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
     June 30, December 31,
     2014  2013 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 175  $ 150 
 
Accounts payable
   125    159 
 
Accounts payable to affiliates
   38    25 
 
Customer deposits
   26    26 
 
Taxes
   14    33 
 
Regulatory liabilities
   1    5 
 
Interest
   11    11 
 
Other current liabilities
   58    36 
 
Total Current Liabilities
   448    445 
          
Long-term Debt
   2,091    2,091 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   747    658 
 
Investment tax credits
   96    97 
 
Accrued pension obligations
   2    11 
 
Asset retirement obligations
   185    177 
 
Regulatory liabilities
   542    551 
 
Other deferred credits and noncurrent liabilities
   88    89 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,660    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
   261    230 
 
Total Equity
   3,140    3,044 
          
Total Liabilities and Equity
 $ 7,339  $ 7,163 

(a)80,000 shares authorized; 37,818 shares issued and outstanding at June 30, 2014 and December 31, 2013.

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

 
37

 

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
                  
March 31, 2014
  37,818  $308  $2,545  $270     $ 3,123 
Net income
           40       40 
Capital contributions from LKE
        26          26 
Cash dividends declared on common stock
           (49)      (49)
June 30, 2014
 37,818  $ 308  $ 2,571  $ 261       $ 3,140 
                  
December 31, 2013
 37,818  $308  $2,505  $230  $ 1  $3,044 
Net income
           117       117 
Capital contributions from LKE
        66          66 
Cash dividends declared on common stock
           (86)      (86)
Other comprehensive income (loss)
              (1)   (1)
June 30, 2014
 37,818  $ 308  $ 2,571  $ 261  $    $ 3,140 
                  
March 31, 2013
 37,818  $308  $2,398  $177  $ 1  $2,884 
Net income
           44       44 
Capital contributions from LKE
        42          42 
Cash dividends declared on common stock
           (42)      (42)
June 30, 2013
 37,818  $ 308  $ 2,440  $ 179  $ 1  $ 2,928 
                  
December 31, 2012
 37,818  $308  $2,348  $126  $ 1  $2,783 
Net income
           108       108 
Capital contributions from LKE
        92          92 
Cash dividends declared on common stock
           (55)      (55)
June 30, 2013
 37,818  $ 308  $ 2,440  $ 179  $ 1  $ 2,928 

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

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

 
38

 

Combined Notes to Condensed Financial Statements (Unaudited)


1.  Interim Financial Statements

(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, 2013 is derived from that Registrant's 2013 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 2013 Form 10-K.  The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 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 June 30, 2014 financial statements.

2.  Summary of Significant Accounting Policies

(All Registrants)

The following accounting policy disclosures represent updates to Note 1 in each Registrant's 2013 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 six months ended June 30, 2014, PPL Electric purchased $253 million and $614 million of accounts receivable from unaffiliated third parties and $79 million and $184 million from PPL EnergyPlus.  During the three and six months ended June 30, 2013, PPL Electric purchased $220 million and $479 million of accounts receivable from unaffiliated third parties and $70 million and $147 million from PPL EnergyPlus.
 
New Accounting Guidance Adopted (All Registrants)

Accounting for Obligations Resulting from Joint and Several Liability Arrangements

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

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

 
39

 


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

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

The initial adoption of this guidance did not 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 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 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 impact on the Registrants.

3.  Segment and Related Information

(PPL)

See Note 2 in PPL's 2013 Form 10-K for a discussion of reportable segments and related information.

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, independent power producer named Talen Energy.  Upon completion of this transaction, PPL will no longer have a Supply segment.  See Note 8 for additional information.

Financial data for the segments and reconciliation to PPL's consolidated results for the periods ended June 30 are:

      Three Months Six Months
  2014  2013  2014  2013 
Income Statement Data            
Revenues from external customers            
 U.K. Regulated $ 672  $ 572  $ 1,320  $ 1,220 
 Kentucky Regulated   722    682    1,656    1,482 
 Pennsylvania Regulated   448    413    1,039    925 
 Supply (a)   1,027    1,780    74    2,274 
 Corporate and Other   5    3    8    6 
Total $ 2,874  $ 3,450  $ 4,097  $ 5,907 
                 
Intersegment electric revenues            
 Supply $ 21  $ 12  $ 48  $ 26 
                 
Net Income Attributable to PPL Shareowners            
 U.K. Regulated (a) $ 187  $ 245  $ 393  $ 558 
 Kentucky Regulated   58    49    165    134 
 Pennsylvania Regulated   52    45    137    109 
 Supply (a)   5    77    (70)   31 
 Corporate and Other (c)   (73)   (11)   (80)   (14)
Total $ 229  $ 405  $ 545  $ 818 


 
40

 


   June 30, December 31,
   2014  2013 
Balance Sheet Data      
Assets      
 U.K. Regulated $ 16,496  $ 15,895 
 Kentucky Regulated   12,211    12,016 
 Pennsylvania Regulated   7,252    6,846 
 Supply   11,793    11,408 
 Corporate and Other (b)   441    94 
Total assets $ 48,193  $ 46,259 

(a)Includes unrealized gains and losses from economic activity.  See Note 14 for additional information.
(b)Primarily consists of unallocated items, including cash, PP&E and the elimination of inter-segment transactions.
(c)2014 includes certain costs related to the anticipated spinoff of PPL Energy Supply, including deferred income tax expense and third party costs.  See Note 8 for additional information.

4.  Earnings Per Share

(PPL)

Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the applicable period.  Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding, increased by incremental shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares as calculated using the Treasury Stock method or the If-Converted Method, as applicable.  Incremental non-participating securities that have a dilutive impact are detailed in the table below.

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

     Three Months Six Months
     2014  2013  2014  2013 
Income (Numerator)            
Income from continuing operations after income taxes attributable to PPL            
 shareowners $ 229  $ 404  $ 545  $ 817 
Less amounts allocated to participating securities   1    2    3    4 
Income from continuing operations after income taxes available to PPL            
 common shareowners - Basic   228    402    542    813 
Plus interest charges (net of tax) related to Equity Units (a)        15    9    30 
Income from continuing operations after income taxes available to PPL            
 common shareowners - Diluted $ 228  $ 417  $ 551  $ 843 
                
Income (loss) from discontinued operations (net of income taxes) available            
 to PPL common shareowners - Basic and Diluted $    $ 1  $    $ 1 
                
Net income attributable to PPL shareowners $ 229  $ 405  $ 545  $ 818 
Less amounts allocated to participating securities   1    2    3    4 
Net income available to PPL common shareowners - Basic   228    403    542    814 
Plus interest charges (net of tax) related to Equity Units (a)        15    9    30 
Net income available to PPL common shareowners - Diluted $ 228  $ 418  $ 551  $ 844 
                
Shares of Common Stock (Denominator)            
Weighted-average shares - Basic EPS   653,132    589,834    642,002    586,683 
Add incremental non-participating securities:            
  Share-based payment awards   2,100    1,133    1,806    971 
  Equity Units (a)   10,560    73,388    21,119    72,689 
  Forward sale agreements        260         920 
Weighted-average shares - Diluted EPS   665,792    664,615    664,927    661,263 
                
Basic EPS            
  Net Income Available to PPL common shareowners $ 0.35  $ 0.68  $ 0.84  $ 1.39 
                
Diluted EPS            
  Net Income Available to PPL common shareowners $ 0.34  $ 0.63  $ 0.83  $ 1.28 

(a)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.

 
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For the periods ended June 30, PPL issued common stock related to stock-based compensation plans, ESOP and DRIP as follows (in thousands):

  Three Months Six Months
    2014  2013  2014  2013 
               
Stock-based compensation plans (a)   922    938    2,018    1,384 
ESOP                  275 
DRIP                  549 

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

For the periods ended June 30, the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would have been antidilutive.

  Three Months Six Months
  2014  2013  2014  2013 
             
Stock options   790    2,192    2,060    5,486 
Performance units   1    5    1    108 
Restricted stock units             61    58 

5.  Income Taxes

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

(PPL)
                 
      Three Months Six Months
      2014  2013  2014  2013 
             
Federal income tax on Income from Continuing Operations Before            
 Income Taxes at statutory tax rate - 35% $ 132  $ 180  $ 282  $ 377 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   (7)   14    (5)   17 
  State valuation allowance adjustments (a)   46         46      
  Impact of lower U.K. income tax rates   (31)   (25)   (76)   (63)
  U.S. income tax on foreign earnings - net of foreign tax credit (b)   10    (7)   21    (5)
  Federal and state tax reserve adjustments (c)        (39)        (40)
  Federal income tax credits   (1)   (2)   (2)   (5)
  Amortization of investment tax credit   (1)   (2)   (3)   (5)
  Depreciation not normalized   (2)   (1)   (4)   (4)
  State deferred tax rate change   3         3      
  Other        (9)   (1)   (12)
   Total increase (decrease)   17    (71)   (21)   (117)
Total income taxes $ 149  $ 109  $ 261  $ 260 

(a)As a result of the spinoff announcement, PPL recorded deferred income tax expense during the three and six months ended June 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.
(b)During the three and six months ended June 30, 2014, PPL recorded income tax expense primarily attributable to the expected taxable amount of cash repatriation in 2014.

During the three and six months ended June 30, 2013, PPL recorded a $14 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 offset by a $19 million income tax benefit associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that was reflected on amended 2010 U.S. tax returns.
(c)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 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.  In May 2013, the Supreme Court reversed the Third Circuit's opinion and ruled that the WPT is a creditable tax.  As a result of the Supreme Court ruling, PPL recorded a tax benefit of $44 million during the three and six months ended June 30, 2013, of which $19 million relates to interest.

 
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(PPL Energy Supply)            
                 
      Three Months Six Months
      2014  2013  2014  2013 
Federal income tax on Income (Loss) Before Income Taxes at statutory            
 tax rate - 35% $ 4  $ 54  $ (37) $ 28 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit (a)   (9)   9    (18)   3 
  Federal and state tax reserve adjustments   1    7    1    6 
  Federal income tax credits             (1)   (3)
  State deferred tax rate change   3         3      
  Other   (2)   (3)        (2)
   Total increase (decrease)   (7)   13    (15)   4 
Total income taxes $ (3) $ 67  $ (52) $ 32 

(a)During the second quarter of 2014, PPL Energy Supply recorded a $9 million credit to income tax expense, comprised of a $4 million credit to income tax expense recorded in 2013 and a $5 million credit related to an adjustment to the annual estimated effective income tax rate utilized to calculate income tax expense for the three months ended March 31, 2014.  The adjustment to the annual estimated effective income tax rate had no impact on income tax expense for the six months ended June 30, 2014.  The adjustment related to 2013 is not material to previously-issued financial statements and is not expected to be material to the full year results for 2014.

(PPL Electric)            
                 
      Three Months Six Months
      2014  2013  2014  2013 
             
Federal income tax on Income Before Income Taxes at statutory            
 tax rate - 35% $ 29  $ 24  $ 77  $ 58 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   4    3    12    8 
  Federal and state tax reserve adjustments   (1)   (2)   (1)   (4)
  Depreciation not normalized   (1)   (1)   (3)   (4)
  Other             (1)   (1)
   Total increase (decrease)   2         7    (1)
Total income taxes $ 31  $ 24  $ 84  $ 57 

(LKE)            
                 
      Three Months Six Months
      2014  2013  2014  2013 
             
Federal income tax on Income from Continuing Operations Before            
 Income Taxes at statutory tax rate - 35% $ 37  $ 35  $ 102  $ 89 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   4    3    10    8 
  Other        (1)   (2)   (3)
   Total increase (decrease)   4    2    8    5 
Total income taxes from continuing operations $ 41  $ 37  $ 110  $ 94 

(LG&E)            
                 
      Three Months Six Months
      2014  2013  2014  2013 
             
Federal income tax on Income Before Income Taxes at statutory            
  tax rate - 35% $ 20  $ 16  $ 48  $ 40 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   2    1    5    4 
  Other   (1)        (2)   (2)
   Total increase (decrease)   1    1    3    2 
Total income taxes $ 21  $ 17  $ 51  $ 42 


 
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(KU)            
                 
      Three Months Six Months
      2014  2013  2014  2013 
             
Federal income tax on Income Before Income Taxes at statutory            
 tax rate - 35% $ 23  $ 25  $ 66  $ 61 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   2    2    7    6 
  Other   1    (1)   (1)   (2)
   Total increase (decrease)   3    1    6    4 
Total income taxes $ 26  $ 26  $ 72  $ 65 

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
   June 30, December 31, June 30, December 31,
   2014  2013  2014  2013 
              
Current Regulatory Assets:            
 Environmental cost recovery $ 1  $ 7           
 Gas supply clause   20    10           
 Fuel adjustment clause        2           
 Demand side management   3    8           
 Other   5    6  $ 2  $ 6 
Total current regulatory assets $ 29  $ 33  $ 2  $ 6 
              
Noncurrent Regulatory Assets:            
 Defined benefit plans $ 493  $ 509  $ 252  $ 257 
 Taxes recoverable through future rates   312    306    312    306 
 Storm costs   135    147    49    53 
 Unamortized loss on debt   80    85    53    57 
 Interest rate swaps   51    44           
 Accumulated cost of removal of utility plant   105    98    105    98 
 AROs   58    44           
 Other   8    13         1 
Total noncurrent regulatory assets $ 1,242  $ 1,246  $ 771  $ 772 

Current Regulatory Liabilities:            
 Generation supply charge $ 30  $ 23  $ 30  $ 23 
 Environmental cost recovery   1                
 Gas supply clause   2    3           
 Transmission service charge   6    8    6    8 
 Fuel adjustment clause        4           
 Transmission formula rate   32    20    32    20 
 Universal service rider      10       10 
 Storm damage expense   2    14    2    14 
 Gas line tracker   7    6           
 Other   2    2    2    1 
Total current regulatory liabilities $ 82  $ 90  $ 72  $ 76 
              
Noncurrent Regulatory Liabilities:            
 Accumulated cost of removal of utility plant $ 694  $ 688           
 Coal contracts (a)   78    98           
 Power purchase agreement - OVEC (a)   96    100           
 Net deferred tax assets   28    30           
 Act 129 compliance rider   12    15  $ 12  $ 15 
 Defined benefit plans   28    26           
 Interest rate swaps   84    86           
 Other   6    5           
Total noncurrent regulatory liabilities $ 1,026  $ 1,048  $ 12  $ 15 


 
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   LKE LG&E KU
   June 30, December 31, June 30, December 31, June 30, December 31,
   2014  2013  2014  2013  2014  2013 
                    
Current Regulatory Assets:                  
 Environmental cost recovery $ 1  $ 7  $ 1  $ 2       $ 5 
 Gas supply clause   20    10    20    10           
 Fuel adjustment clause        2         2           
 Demand side management   3    8    2    3  $ 1    5 
 Other   3         1         2      
Total current regulatory assets $ 27  $ 27  $ 24  $ 17  $ 3  $ 10 
                    
Noncurrent Regulatory Assets:                  
 Defined benefit plans $ 241  $ 252  $ 162  $ 164  $ 79  $ 88 
 Storm costs   86    94    47    51    39    43 
 Unamortized loss on debt   27    28    18    18    9    10 
 Interest rate swaps   51    44    51    44           
 AROs   58    44    25    21    33    23 
 Other   8    12    3    5    5    7 
Total noncurrent regulatory assets $ 471  $ 474  $ 306  $ 303  $ 165  $ 171 

Current Regulatory Liabilities:                  
  Environmental cost recovery $ 1                 $ 1      
  Gas supply clause   2  $ 3  $ 2  $ 3           
  Fuel adjustment clause        4                 $ 4 
  Gas line tracker   7    6    7    6           
  Other        1                   1 
Total current regulatory liabilities $ 10  $ 14  $ 9  $ 9  $ 1  $ 5 
                     
Noncurrent Regulatory Liabilities:                  
 Accumulated cost of removal                  
  of utility plant $ 694  $ 688  $ 303  $ 299  $ 391  $ 389 
 Coal contracts (a)   78    98    34    43    44    55 
 Power purchase agreement - OVEC (a)   96    100    66    69    30    31 
 Net deferred tax assets   28    30    25    26    3    4 
 Defined benefit plans   28    26              28    26 
 Interest rate swaps   84    86    42    43    42    43 
 Other   6    5    2    2    4    3 
Total noncurrent regulatory liabilities $ 1,014  $ 1,033  $ 472  $ 482  $ 542  $ 551 

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

Regulatory Matters

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 June 30, 2014 was $106 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 during the first half of 2014 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 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 KU)

CPCN Filings

In January 2014, LG&E and KU filed an application for a CPCN with the KPSC requesting approval to build a NGCC generating unit 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 for up to 90 days in order to allow the companies to assess the potential impact of certain events on their future capacity needs, including the receipt of termination

 
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notices to be generally effective in 2019 from certain KU municipal wholesale customers.  In May 2014, the KPSC granted that request and scheduled an informal conference for August 2014.  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 CPCN filing.  See "Federal Matters - FERC Formula Rates" below for additional information relating to the municipal wholesale customers.

Pennsylvania Activities (PPL and PPL Electric)

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 with the PUC and, as part of that filing, requested recovery of the 2012 qualifying storm costs related to Hurricane Sandy.  PPL Electric proposed that the SDER become effective January 1, 2013 at a zero rate with qualifying storm costs incurred in 2013 and the 2012 Hurricane Sandy costs included in rates effective January 1, 2014.  As 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.  On April 3, 2014, the PUC issued a final order approving the SDER.  The SDER will be effective January 1, 2015 and will initially include actual storm costs compared to collections from December 2013 through November 2014.  As a result of the order, PPL Electric reduced 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 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 February 2013, PPL Electric received an order from the PUC granting permission to defer qualifying costs in excess of insurance recoveries associated with Hurricane Sandy.  At June 30, 2014 and December 31, 2013, $29 million was included on the 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.

Act 129 requires Default Service Providers (DSP) to provide electricity 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.

In January 2013, the PUC approved PPL Electric's DSP procurement plan for the period June 1, 2013 through May 31, 2015.  In April 2014, PPL Electric filed a new DSP procurement plan with the PUC for the period June 1, 2015 through May 31, 2017.  Hearings before the PUC are scheduled for August 2014.  PPL Electric cannot predict the outcome of this proceeding, which remains pending before the PUC.

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 conducted pilot projects and technical evaluations of its current advanced metering technology and concluded that the current technology does not meet all of the Act 129 requirements.  PPL Electric recovered the cost of its evaluations 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 became effective January 1, 2014.  On June 30, 2014, PPL Electric filed 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 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.  PPL Electric cannot predict the outcome of this proceeding.

 
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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 and in an order entered on May 23, 2013, the PUC approved PPL Electric's proposed DSIC with an initial rate effective July 1, 2013, subject to refund after hearings.  The PUC also assigned four technical recovery calculation issues to the Office of Administrative Law Judge for hearing and preparation of a recommended decision.  The case remains pending before the PUC.

Federal Matters

FERC Formula Rates (PPL and PPL Electric)

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 1 filed under the FERC's Uniform System of Accounts.

PPL Electric initiated its formula rate 2012, 2011 and 2010 Annual Updates.  Each update was subsequently challenged by a group of municipal customers, whose challenges were opposed by PPL Electric.  Between 2011 and 2013, numerous hearings before the FERC and settlement conferences were convened in an attempt to resolve these matters.  Beginning in the second half of 2013, PPL Electric and the group of municipal customers exchanged confidential settlement proposals.  PPL and PPL Electric cannot predict the outcome of the foregoing proceedings, which remain pending before the FERC.

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 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.  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 the remaining term of their contracts.  KU cannot currently predict the outcome of its FERC applications regarding its wholesale power agreements with the municipalities.

7.  Financing Activities

Credit Arrangements and Short-term Debt

(All Registrants)

The Registrants maintain credit facilities to enhance liquidity, provide credit support and provide a backstop to commercial paper programs.  For reporting purposes, on a consolidated basis, the credit facilities and commercial paper programs of PPL Energy Supply, PPL Electric, 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:

 
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       June 30, 2014 December 31, 2013
                Letters of      Letters of
                Credit       Credit
                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 (c) Jan. 2017   245          245       
  WPD (East Midlands)                    
   Syndicated Credit Facility (c) Apr. 2016   300          300       
  WPD (West Midlands)                    
   Syndicated Credit Facility (c) Apr. 2016   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 (b) Nov. 2018 $ 300        $ 300  $ 270    
  Bilateral Credit Facility Mar. 2015   150     $ 11    139       
   Total PPL Capital Funding Credit Facilities   $ 450     $ 11  $ 439  $ 270    
                           
PPL Energy Supply                    
 Syndicated Credit Facility (b) Nov. 2017 $ 3,000  $ 175  $ 264  $ 2,561     $ 29 
 Letter of Credit Facility Mar. 2015   150       143    7       138 
 Uncommitted Credit Facilities (c)     175       77    98       77 
   Total PPL Energy Supply Credit Facilities $ 3,325  $ 175  $ 484  $ 2,666     $ 244 
                           
PPL Electric                    
 Syndicated Credit Facility (c) Oct. 2017 $ 300     $ 1  $ 299     $ 21 
                           
LKE                    
 Syndicated Credit Facility (b) Oct. 2018 $ 75  $ 75        $ 75    
                           
LG&E                    
 Syndicated Credit Facility (c) Nov. 2017 $ 500     $ 70  $ 430     $ 20 
                           
KU                    
 Syndicated Credit Facility (c) Nov. 2017 $ 400     $ 175  $ 225     $ 150 
 Letter of Credit Facility May 2016   198       198          198 
   Total KU Credit Facilities   $ 598     $ 373  $ 225     $ 348 

(a)PPL WW's amounts borrowed at June 30, 2014 and December 31, 2013 were USD-denominated borrowings of $164 million and $166 million, which bore interest at 1.85% and 1.87%.  At June 30, 2014, the unused capacity under the U.K. credit facilities was $1.8 billion.
(b)At June 30, 2014, interest rates on outstanding borrowings were 2.04% for PPL Energy Supply and 1.65% for LKE.  At December 31, 2013, interest rates on outstanding borrowings were 1.79% for PPL Capital Funding and 1.67% for LKE.
(c)In July 2014, the expiration dates for the WPD (South West), WPD (East Midlands), WPD (West Midlands), LG&E and KU syndicated credit facilities were extended to July 2019 and the PPL Electric syndicated credit facility was extended to October 2018.  Also, in July 2014, PPL Energy Supply extended the expiration date for its uncommitted credit facility to July 2015.

In July 2014, PPL Capital Funding entered into an additional $300 million credit facility expiring in July 2019.  The credit agreement allows for borrowings at market-based rates plus a spread, which is based upon PPL Capital Funding's senior unsecured long-term debt rating.  In addition, PPL Capital Funding may request certain lenders under the credit agreement to issue letters of credit, which issuances reduce available borrowing capacity.  PPL Capital Funding intends to use this credit facility for general corporate purposes of PPL and its affiliates, including for making investments in or loans to affiliates to support infrastructure investments by PPL's operating companies.  PPL Capital Funding will pay customary commitment and letter of credit issuance fees under the credit agreement.

The credit agreement contains a financial covenant requiring PPL Capital Funding's debt to total capitalization not to exceed 70% (as calculated pursuant to the credit agreement), and other customary covenants.  Failure to meet the covenants beyond applicable grace periods and certain other events, including the occurrence of a Change of Control (as defined in the credit agreement), could result in acceleration of due dates of any borrowings, cash collateralization of outstanding letters of credit and/or termination of the credit agreement.  The credit agreement also contains certain customary representations and warranties that must be made and certain other conditions that must be met for PPL Capital Funding to borrow or to cause the issuing lender to issue letters of credit.

 
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PPL Energy Supply, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as 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:
 
 
       June 30, 2014 December 31, 2013
       Weighted -    Commercial   Weighted - Commercial
       Average    Paper Unused Average Paper
       Interest Rate Capacity Issuances Capacity Interest Rate Issuances
                        
 PPL Energy Supply 0.75% $ 750  $ 149  $ 601       
 PPL Electric     300       300   0.23% $ 20 
 LG&E 0.29%   350    70    280   0.29%   20 
 KU 0.29%   350    175    175   0.32%   150 
   Total   $ 1,750  $ 394  $ 1,356     $ 190 

(PPL and PPL Energy Supply)

PPL Energy Supply maintains a $500 million Facility Agreement expiring June 2017, which provides PPL Energy Supply 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 June 30, 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 2018, but is subject to automatic one-year renewals under certain conditions.  There were $41 million of secured obligations outstanding under this facility at June 30, 2014.

(PPL Electric and LKE)

See Note 11 for discussion of intercompany borrowings.

Long-term Debt and Equity Securities

(PPL)

In 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 remarketing, PPL Capital Funding retired $228 million of the 4.32% Junior Subordinated Notes due 2019 and issued $350 million of 2.189% Junior Subordinated Notes due 2017 and $400 million of 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 2024 and $400 million of 5.00% Senior Notes due 2044.  The transaction was accounted for as a debt extinguishment, resulting in a $(9) million gain (loss) on extinguishment of the Junior Subordinated Notes, recorded to "Interest Expense" on the Statement of Income.  Except for the $228 million retirement of the 4.32% Junior Subordinated Notes and fees related to the transactions, the activity was non-cash and was excluded from the Statement of Cash Flows for the six months ended June 30, 2014.  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.

(PPL and PPL Electric)

In June 2014, PPL Electric issued $300 million of 4.125% First Mortgage Bonds due 2044.  PPL Electric received proceeds of $294 million, net of a discount and underwriting fees, which will be used for capital expenditures, to repay short-term debt and for general corporate purposes.


 
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Distributions (PPL)

In May 2014, PPL declared its quarterly common stock dividend, payable July 1, 2014, at 37.25 cents per share (equivalent to $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.

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.
 
Divestitures

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, independent power producer named Talen Energy.  Under the terms of the agreements, at closing, PPL will spin off PPL Energy Supply to PPL shareowners and simultaneously combine that business with RJS Power.  Upon closing, 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, the FERC, the DOJ and the 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 have been initiated to identify the appropriate staffing for Talen Energy and for PPL and its subsidiaries following completion of the spinoff.  Organizational plans are expected to be completed by the end of 2014.  As a result, charges for employee separation and related costs are anticipated to be recorded in future periods.  The separation costs to be incurred include cash severance compensation, lump sum COBRA reimbursement payments, accelerated stock-based compensation vesting, pro-rated performance-based cash incentive and stock-based compensation awards and outplacement services.  At present, there is considerable uncertainty as to the range of costs that will be incurred and when those costs will be recognized, as the amount of each category of costs will depend on the number of employees leaving the company, current position and compensation level, years of service and expected separation date.  Additionally, certain of these costs are expected to be reimbursed to PPL by Talen Energy upon closing of the transaction.  As a result, a range of the separation costs associated with the spinoff transaction and the timing of when those costs will be recognized cannot be reasonably estimated at this time but could be material.

(PPL)

As a result of the spinoff announcement, PPL recorded $46 million of deferred income tax expense during the three and six months ended June 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 $16 million of third-party costs during the three and six months ended June 30, 2014 related to this transaction in "Other Income (Expense) - net" on the Statement of Income, primarily for investment bank advisory, legal, consulting and accounting fees.  PPL cannot currently estimate a range of total third-party costs that will ultimately be incurred; however, additional costs of at least $26 million will be recognized upon closing of the transaction.
 
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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 its hydroelectric generating facilities located in Montana (with a generation capacity of 633 MW) for $900 million in cash, subject to certain adjustments.  The sale, which is not expected to close before the fourth quarter of 2014, includes 11 hydroelectric power facilities and related assets.  In April 2014, the DOJ and Federal Trade Commission granted early termination of PPL Montana's and NorthWestern's notifications under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.  The sale remains subject to closing conditions, including receipt of regulatory approvals by the FERC and the MPSC and certain third-party consents.  Due to the uncertainties related to certain of these conditions as of June 30, 2014, 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.

Development

Hydroelectric Expansion Projects (PPL and PPL Energy Supply)

In January 2014, the U.S. Department of Treasury awarded $56 million for Specified Energy Property in Lieu of Tax Credits for the Rainbow hydroelectric redevelopment project in Great Falls, Montana.  PPL Energy Supply accepted and accounted for the receipt of the grant in the first quarter of 2014.  PPL Energy Supply is required to recapture $60 million of investment tax credits previously recorded related to the Rainbow 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 six months ended June 30, 2014, and will not be significant in future periods.

In 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 will account for the receipt of the grant in the third quarter of 2014.  PPL Energy Supply is 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 is not expected to be significant in 2014 or future periods.

Future Capacity Needs (PPL, LKE, LG&E and KU)

Construction activity continues on the previously announced NGCC unit, Cane Run Unit 7, scheduled to be operational in May 2015.  In October 2013, LG&E and KU announced plans to build a second NGCC unit, Green River Unit 5, at KU's Green River generating site.  Subject to finalizing details, regulatory applications, permitting and construction schedules, the facility would have approximately 700 MW of capacity and cost $700 million and was originally planned to be operational in 2018.  At the same time, LG&E and KU also announced plans for a 10 MW solar generation facility to be operational in 2016 and to cost approximately $36 million. As a result of developing uncertainty as to the need for the new capacity, in April 2014 LG&E and KU asked the KPSC to hold the related CPCN case in abeyance for 90 days. In May 2014, the KPSC granted that request and scheduled an informal conference for August 2014.  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.

 
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9.  Defined Benefits

(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.  As such, the majority 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 June 30:

    Pension Benefits
    Three Months Six Months
    U.S. U.K. U.S. U.K.
    2014  2013  2014  2013  2014  2013  2014  2013 
PPL                        
Service cost $ 25  $ 32  $ 18  $ 16  $ 51  $ 63  $ 36  $ 34 
Interest cost   58    53    90    78    117    107    178    159 
Expected return on plan assets   (75)   (73)   (132)   (113)   (149)   (147)   (262)   (231)
Amortization of:                        
  Prior service cost   5    5              10    11           
  Actuarial (gain) loss   8    20    33    37    15    40    66    75 
Net periodic defined benefit                        
 costs (credits) prior to                        
 termination benefits   21    37    9    18    44    74    18    37 
Termination benefits (a)   20                   20                
Net periodic defined benefit                          
 costs (credits) $ 41  $ 37  $ 9  $ 18  $ 64  $ 74  $ 18  $ 37 

    Pension Benefits
    Three Months Six Months
    2014  2013  2014  2013 
PPL Energy Supply            
Service cost $ 2  $ 2  $ 3  $ 4 
Interest cost   2    2    4    4 
Expected return on plan assets   (3)   (2)   (5)   (5)
Amortization of:            
  Actuarial (gain) loss   1         1    1 
Net periodic defined benefit costs (credits) $ 2  $ 2  $ 3  $ 4 
               
LKE            
Service cost $ 5  $ 6  $ 11  $ 13 
Interest cost   16    15    33    31 
Expected return on plan assets   (21)   (20)   (41)   (41)
Amortization of:            
  Prior service cost   1    1    2    2 
  Actuarial (gain) loss   3    9    6    17 
Net periodic defined benefit costs (credits) $ 4  $ 11  $ 11  $ 22 
               
LG&E            
Service cost $ 1       $ 1  $ 1 
Interest cost   3  $ 4    7    7 
Expected return on plan assets   (5)   (5)   (10)   (10)
Amortization of:            
  Prior service cost             1