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Kentucky Utilities

Filed: 6 May 15, 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 March 31, 2015
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
   
1-905

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 CorporationYes X   No        
 PPL Electric Utilities CorporationYes X   No        
 LG&E and KU Energy LLCYes  X   No        
 Louisville Gas and Electric CompanyYes X  No        
 Kentucky Utilities CompanyYes 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 CorporationYes X   No        
 PPL Electric Utilities CorporationYes X   No        
 LG&E and KU Energy LLCYes X   No        
 Louisville Gas and Electric CompanyYes X   No        
 Kentucky Utilities CompanyYes 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 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 CorporationYes       No X    
 PPL Electric Utilities CorporationYes       No X    
 LG&E and KU Energy LLCYes       No X    
 Louisville Gas and Electric CompanyYes       No X    
 Kentucky Utilities CompanyYes       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, 668,107,248 shares outstanding at April 30, 2015.
   
 PPL Electric Utilities CorporationCommon stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at April 30, 2015.
   
 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 April 30, 2015.
   
 Kentucky Utilities CompanyCommon stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at April 30, 2015.

 

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 ELECTRIC UTILITIES CORPORATION

LG&Eand KU Energy LLC

Louisville Gas and Electric Company

Kentucky Utilities Company

 

FORM 10-Q

FOR THE QUARTER ENDEDMarch 31, 2015

 

 

Table of Contents

 

This combined Form 10-Q is separately filed by the following Registrants in their individual capacity: PPL Corporation, 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. Beginning in the first quarter of 2015, PPL Energy Supply, LLC is filing a separate Form 10-Q.

 

Unless otherwise specified, references in this Report, individually, to PPL Corporation, 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
  
GLOSSARY OF TERMS AND ABBREVIATIONS
FORWARD-LOOKING INFORMATION1
PART I.  FINANCIAL INFORMATION 
 Item 1.  Financial Statements 
  PPL Corporation and Subsidiaries 
   Condensed Consolidated Statements of Income3
   Condensed Consolidated Statements of Comprehensive Income4
   Condensed Consolidated Statements of Cash Flows5
   Condensed Consolidated Balance Sheets6
   Condensed Consolidated Statements of Equity8
  PPL Electric Utilities Corporation and Subsidiaries 
   Condensed Consolidated Statements of Income10
   Condensed Consolidated Statements of Cash Flows11
   Condensed Consolidated Balance Sheets12
   Condensed Consolidated Statements of Equity14
  LG&E and KU Energy LLC and Subsidiaries 
   Condensed Consolidated Statements of Income16
   Condensed Consolidated Statements of Cash Flows17
   Condensed Consolidated Balance Sheets18
   Condensed Consolidated Statements of Equity20
  Louisville Gas and Electric Company 
   Condensed Statements of Income22
   Condensed Statements of Cash Flows23
   Condensed Balance Sheets24
   Condensed Statements of Equity26
  Kentucky Utilities Company 
   Condensed Statements of Income28
   Condensed Statements of Cash Flows29
   Condensed Balance Sheets30
   Condensed Statements of Equity32
      
 
 

 

 

 Combined Notes to Condensed Financial Statements (Unaudited) 
  1.   Interim Financial Statements33
  2.   Summary of Significant Accounting Policies33
  3.   Segment and Related Information34
  4.   Earnings Per Share35
  5.   Income Taxes36
  6.   Utility Rate Regulation37
  7.   Financing Activities40
  8.   Acquisitions, Development and Divestitures42
  9.   Defined Benefits44
  10. Commitments and Contingencies45
  11. Related Party Transactions58
  12. Other Income (Expense) - net59
  13. Fair Value Measurements and Credit Concentration59
  14. Derivative Instruments and Hedging Activities65
  15. Goodwill75
  16. Asset Retirement Obligations75
  17. Available-for-Sale Securities75
  18. Accumulated Other Comprehensive Income (Loss)76
  19. New Accounting Guidance Pending Adoption77
 Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 
  Overview80
   Introduction80
   Business Strategy82
   Financial and Operational Developments83
    PPL Corporation and Subsidiaries - Earnings83
    2015 Outlook84
    Other Financial and Operational Developments85
  Results of Operations87
   PPL Corporation and Subsidiaries - Segment Earnings, Margins and Statement of Income Analysis88
   PPL Electric Utilities Corporation and Subsidiaries - Earnings, Margins and Statement of Income
   Analysis
96
   LG&E and KU Energy LLC and Subsidiaries - Earnings, Margins and Statement of Income Analysis97
   Louisville Gas and Electric Company - Earnings, Margins and Statement of Income Analysis99
   Kentucky Utilities Company - Earnings, Margins and Statement of Income Analysis100
  Financial Condition101
   Liquidity and Capital Resources101
   Risk Management106
   Foreign Currency Translation110
   Related Party Transactions110
   Acquisitions, Development and Divestitures110
   Environmental Matters110
  New Accounting Guidance114
  Application of Critical Accounting Policies114
 Item 3.  Quantitative and Qualitative Disclosures About Market Risk115
 Item 4.  Controls and Procedures115
PART II.  OTHER INFORMATION 
 Item 1.  Legal Proceedings115
 Item 1A.  Risk Factors115
 Item 4.  Mine Safety Disclosures115
 Item 6.  Exhibits116
SIGNATURES118
COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES119
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER 
     PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002124
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER 
     PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002134
       

 

 
 

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 EU Services- PPL EU Services Corporation, a subsidiary of PPL that, beginning in 2015, provides support services and corporate functions such as financial, supply chain, human resources and information technology services primarily to PPL Electric and its affiliates.

 

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 WPD Ltd - an indirect U.K. subsidiary of PPL Global. PPL WPD Ltd holds a liability for a closed defined benefit pension plan and a receivable with WPD Ltd.

 

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

i
 

 

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 WPD Ltd and its subsidiaries together with a sister company PPL WPD Ltd.

 

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

 

WPD Ltd - Western Power Distribution Limited, an indirect U.K. subsidiary of PPL Global. Its principal indirectly owned subsidiaries are WPD (East Midlands), WPD (South Wales), WPD (South West) and WPD (West Midlands).

 

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.

 

2014 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2014 Form 10-K.

 

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.

 

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.

 

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(s) - Coal Combustion Residual(s). CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.

ii
 

 

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.

 

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.

 

DNO - Distribution Network Operator in the U.K.

 

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 -Edison Electric Institute,the association that represents U.S. investor-owned electric companies.

 

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

 

EPS - earnings per share.

 

Equity Unit(s) - a PPL equity unit, issued in April 2011, consisting of a 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.

 

ERCOT - the Electric Reliability Council of Texas, operator of the electricity transmission network and electricity energy market in most of Texas.

 

E.W. Brown- a generating station in Kentucky with capacity of 1,594 MW.

 

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.

iii
 

 

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.

 

Holdco- Talen Energy Holdings, Inc., a Delaware Corporation, which was formed for the purposes of the spinoff transaction.

 

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 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.

 

Ironwood Facility - a natural gas combined-cycle unit in Lebanon, Pennsylvania with a summer rating of 660 MW.

 

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.

 

MATS- Mercury and Air Toxics Standards.

 

MDEQ- Montana Department of Environmental Quality.

 

MEIC- Montana Environmental Information Center.

 

MMBtu- One million British Thermal Units.

 

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

 

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

 

MW - megawatt, one thousand kilowatts.

 

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

 

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.

iv
 

 

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.

 

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 (RPI) 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, which will continue from April 2015 under RIIO-ED1. RAV is intended to represent expenditures that have a long-term benefit to WPD (similar to capital projects for the U.S. regulated businesses that are generally included in rate base).

 

RCRA - Resource Conservation and Recovery Act of 1976.

 

RECs - Renewable Energy Credits.

 

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." RIIO-ED1 refers to the initial eight-year rate review period applicable to WPD which commenced April 1, 2015.

 

Riverstone - Riverstone Holdings LLC, a Delaware limited liability company and ultimate parent company of the entities that own the competitive power generation business to be contributed to Talen Energy other than the competitive power generation business to be contributed by virtue of the spinoff of a newly formed parent of PPL Energy Supply.

 

RJS Power - RJS Generation Holdings LLC, a Delaware limited liability company controlled by Riverstone, that owns the competitive power generation business to be contributed by its owners to Talen Energy other than the competitive power generation business to be contributed by virtue of the spinoff of a newly formed parent of PPL Energy Supply.

 

RMC - Risk Management Committee.

 

v
 

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.

 

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 future owner of the competitive generation assets of PPL Energy Supply and certain affiliates of Riverstone.

 

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.

 

Total shareowner return- the change in market value of a share of the Company's common stock plus the value of all dividends paid on a share of the common stock during the applicable performance period, divided by the price of the common stock as of the beginning of the performance period. The price used for purposes of this calculation is the average share price for the 20 trading days at the beginning and end of the applicable period.

 

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.

 

vi
 

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 2014 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;
·the effectiveness of our risk management techniques, including hedging;
·the effect on our operations and ability to comply with new statutory and regulatory requirements related to derivative financial instruments;
·our ability to attract and retain qualified employees;
·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;
1
 
·development of new projects, markets and technologies;
·performance of new ventures; and
·business dispositions or acquisitions, including the anticipated formation of Talen Energy via the spinoff of PPL Energy Supply and subsequent combination with Riverstone's competitive generation business and our ability to realize expected benefits from such business transactions.

 

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

 

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

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 March 31,
     2015 2014
Operating Revenues        
 Utility $2,214 $2,162
 Unregulated wholesale energy  521  (1,457)
 Unregulated retail energy  310  348
 Energy-related businesses  120  141
 Total Operating Revenues  3,165  1,194
          
Operating Expenses      
 Operation      
  Fuel  604  758
  Energy purchases  321  (1,494)
  Other operation and maintenance  668  668
 Depreciation  293  300
 Taxes, other than income  101  101
 Energy-related businesses  111  138
 Total Operating Expenses  2,098  471
          
Operating Income  1,067  723
          
Other Income (Expense) - net  95  (23)
      
Interest Expense  247  262
          
Income from Continuing Operations Before Income Taxes  915  438
          
Income Taxes  268  114
          
Income from Continuing Operations After Income Taxes  647  324
          
Income (Loss) from Discontinued Operations (net of income taxes)     (8)
          
Net Income $647 $316
          
          
Earnings Per Share of Common Stock:      
 Income from Continuing Operations After Income Taxes Available to PPL  
  Common Shareowners:      
  Basic $0.97 $0.51
  Diluted $0.96 $0.50
 Net Income Available to PPL Common Shareowners:      
  Basic $0.97 $0.50
  Diluted $0.96 $0.49
          
Dividends Declared Per Share of Common Stock $0.3725 $0.3725
          
Weighted-Average Shares of Common Stock Outstanding(in thousands)      
  Basic  666,974  630,749
  Diluted  668,732  663,939

 

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 March 31,
     2015 2014
          
Net income $ 647 $ 316
          
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   (66)   131
  Available-for-sale securities, net of tax of ($6), ($6)   5   5
  Qualifying derivatives, net of tax of $4, $25   6   (46)
  Defined benefit plans:      
   Net actuarial gain (loss), net of tax of $0, $0   (1)   
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):      
  Available-for-sale securities, net of tax of $1, $1   (1)   (1)
  Qualifying derivatives, net of tax of $4, ($4)   (17)   19
  Equity investees' other comprehensive (income) loss, net of      
   tax of $1, $0   (1)   
  Defined benefit plans:      
   Prior service costs, net of tax of $0, ($1)      1
   Net actuarial loss, net of tax of ($13), ($9)   38   27
Total other comprehensive income (loss)   (37)   136
          
Comprehensive income (loss) $ 610 $ 452

 

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)
          
     Three Months Ended March 31,
     2015 2014
Cash Flows from Operating Activities      
 Net income $ 647 $ 316
 Adjustments to reconcile net income to net cash provided by operating activities      
  Depreciation   293   305
  Amortization   57   60
  Defined benefit plans - expense   28   21
  Deferred income taxes and investment tax credits   124   (26)
  Unrealized (gains) losses on derivatives, and other hedging activities   (90)   241
  Adjustment to WPD line loss accrual      65
  Stock compensation expense   28   28
  Other   4   5
 Change in current assets and current liabilities      
  Accounts receivable   (143)   (185)
  Accounts payable   (139)   93
  Unbilled revenues   111   (33)
  Fuel, materials and supplies   149   96
  Prepayments   (81)   (70)
  Taxes payable   44   126
  Other current liabilities   (172)   (59)
  Other   38   10
 Other operating activities      
  Defined benefit plans - funding   (271)   (135)
  Other assets   (1)   (3)
  Other liabilities   47   76
   Net cash provided by operating activities   673   931
Cash Flows from Investing Activities      
 Expenditures for property, plant and equipment   (942)   (892)
 Expenditures for intangible assets   (20)   (16)
 Purchases of nuclear plant decommissioning trust investments   (43)   (32)
 Proceeds from the sale of nuclear plant decommissioning trust investments   38   27
 Proceeds from the receipt of grants      56
 Net (increase) decrease in restricted cash and cash equivalents   (10)   (334)
 Other investing activities   (13)   8
   Net cash provided by (used in) investing activities   (990)   (1,183)
Cash Flows from Financing Activities      
 Retirement of long-term debt   (1)   (239)
 Issuance of common stock   35   15
 Payment of common stock dividends   (250)   (234)
 Net increase (decrease) in short-term debt   133   878
 Other financing activities   (14)   (28)
   Net cash provided by (used in) financing activities   (97)   392
Effect of Exchange Rates on Cash and Cash Equivalents   (2)   14
Net Increase (Decrease) in Cash and Cash Equivalents   (416)   154
Cash and Cash Equivalents at Beginning of Period   1,751   1,102
Cash and Cash Equivalents at End of Period $ 1,335 $ 1,256

 

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)
     March 31, December 31,
     2015 2014
Assets      
          
Current Assets      
 Cash and cash equivalents $ 1,335 $ 1,751
 Short-term investments   135   120
 Restricted cash and cash equivalents   190   180
 Accounts receivable (less reserve:  2015, $47; 2014, $46)      
  Customer   1,104   923
  Other   127   171
 Unbilled revenues   621   735
 Fuel, materials and supplies   687   836
 Prepayments   168   87
 Deferred income taxes   155   129
 Price risk management assets   1,119   1,158
 Regulatory assets   23   37
 Other current assets   35   32
 Total Current Assets   5,699   6,159
          
Investments      
 Nuclear plant decommissioning trust funds   965   950
 Other investments   34   35
 Total Investments   999   985
          
Property, Plant and Equipment      
 Regulated utility plant   30,852   30,568
 Less:  accumulated depreciation - regulated utility plant   5,413   5,361
  Regulated utility plant, net   25,439   25,207
 Non-regulated property, plant and equipment      
  Generation   11,309   11,310
  Nuclear fuel   749   624
  Other   893   885
 Less:  accumulated depreciation - non-regulated property, plant and equipment   6,516   6,404
  Non-regulated property, plant and equipment, net   6,435   6,415
 Construction work in progress   3,085   2,975
 Property, Plant and Equipment, net   34,959   34,597
          
Other Noncurrent Assets      
 Regulatory assets   1,610   1,562
 Goodwill   3,964   4,005
 Other intangibles   920   925
 Price risk management assets   437   319
 Other noncurrent assets   333   312
 Total Other Noncurrent Assets   7,264   7,123
          
Total Assets $ 48,921 $ 48,864

 

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)
     March 31, December 31,
     2015 2014
Liabilities and Equity      
          
Current Liabilities      
 Short-term debt $ 1,595 $ 1,466
 Long-term debt due within one year   1,535   1,535
 Accounts payable   1,128   1,356
 Taxes   274   230
 Interest   345   314
 Dividends   249   249
 Price risk management liabilities   1,073   1,126
 Regulatory liabilities   109   91
 Other current liabilities   909   1,076
 Total Current Liabilities   7,217   7,443
          
Long-term Debt   18,772   18,856
          
Deferred Credits and Other Noncurrent Liabilities      
 Deferred income taxes   4,627   4,450
 Investment tax credits   157   159
 Price risk management liabilities   333   252
 Accrued pension obligations   1,457   1,756
 Asset retirement obligations   739   739
 Regulatory liabilities   987   992
 Other deferred credits and noncurrent liabilities   596   589
 Total Deferred Credits and Other Noncurrent Liabilities   8,896   8,937
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Equity      
  Common stock - $0.01 par value (a)   7   7
  Additional paid-in capital   9,480   9,433
  Earnings reinvested   6,860   6,462
  Accumulated other comprehensive loss   (2,311)   (2,274)
 Total Equity   14,036   13,628
          
Total Liabilities and Equity $ 48,921 $ 48,864

 

(a)780,000 shares authorized; 667,713 and 665,849 shares issued and outstanding at March 31, 2015 and December 31, 2014.

 

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)   
        
    Common               
     stock           Accumulated   
    shares     Additional     other   
    outstanding  Common  paid-in  Earnings  comprehensive   
    (a)  stock  capital  reinvested  loss  Total
               
December 31, 2014  665,849 $ 7 $ 9,433 $ 6,462 $ (2,274) $ 13,628
Common stock issued  1,864      54         54
Stock-based compensation        (7)         (7)
Net income           647      647
Dividends and dividend                 
  equivalents           (249)      (249)
Other comprehensive                 
 income (loss)              (37)   (37)
March 31, 2015  667,713 $ 7 $ 9,480 $ 6,860 $ (2,311) $ 14,036
                  
December 31, 2013  630,321 $ 6 $ 8,316 $ 5,709 $ (1,565) $ 12,466
Common stock issued  1,096      30         30
Stock-based compensation        6         6
Net income           316      316
Dividends and dividend                 
  equivalents           (237)      (237)
Other comprehensive                 
 income (loss)              136   136
March 31, 2014  631,417 $ 6 $ 8,352 $ 5,788 $ (1,429) $ 12,717

 

(a)Shares in thousands. Each share entitles the holder to one vote on any question presented at any shareowners' meeting.

 

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

8
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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9
 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)      
(Millions of Dollars)     
         
         
    Three Months Ended March 31,
    2015 2014
       
Operating Revenues $ 630 $ 592
         
Operating Expenses      
 Operation      
  Energy purchases   227   189
  Energy purchases from affiliate   9   27
  Other operation and maintenance   133   134
 Depreciation   51   45
 Taxes, other than income   35   32
 Total Operating Expenses   455   427
         
Operating Income   175   165
         
Other Income (Expense) - net   2   2
         
Interest Expense   31   29
         
Income Before Income Taxes   146   138
         
Income Taxes   59   53
         
Net Income (a) $ 87 $ 85

 

(a)Net income approximates comprehensive income.

 

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

10
 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Three Months Ended
     March 31,
     2015 2014
Cash Flows from Operating Activities      
 Net income $ 87 $ 85
 Adjustments to reconcile net income to net cash provided by operating activities      
  Depreciation   51   45
  Amortization   6   4
  Defined benefit plans - expense   4   3
  Deferred income taxes and investment tax credits   5   25
  Other   (3)   (14)
 Change in current assets and current liabilities      
  Accounts receivable   (73)   (107)
  Accounts payable   (39)   22
  Prepayments   (60)   (61)
  Other   (6)   (1)
 Other operating activities      
  Defined benefit plans - funding   (33)   (19)
  Other assets   (1)   4
  Other liabilities   17   10
   Net cash provided by (used in) operating activities   (45)   (4)
         
Cash Flows from Investing Activities      
 Expenditures for property, plant and equipment   (224)   (201)
 Net (increase) decrease in notes receivable from affiliates      150
 Other investing activities   (1)   9
   Net cash provided by (used in) investing activities   (225)   (42)
         
Cash Flows from Financing Activities      
 Retirement of long-term debt      (10)
 Contributions from parent   50   65
 Payment of common stock dividends to parent   (44)   (32)
 Net increase (decrease) in short-term debt   85   40
   Net cash provided by (used in) financing activities   91   63
         
Net Increase (Decrease) in Cash and Cash Equivalents   (179)   17
Cash and Cash Equivalents at Beginning of Period   214   25
Cash and Cash Equivalents at End of Period $ 35 $ 42

 

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

11
 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     March 31, December 31,
     2015 2014
Assets      
          
Current Assets      
 Cash and cash equivalents $ 35 $ 214
 Accounts receivable (less reserve: 2015, $17; 2014, $17)      
  Customer   403   312
  Other   27   44
 Unbilled revenues   115   113
 Materials and supplies   38   43
 Prepayments   70   10
 Deferred income taxes   66   58
 Regulatory assets   3   12
 Other current assets   12   13
 Total Current Assets   769   819
          
Property, Plant and Equipment      
 Regulated utility plant   7,717   7,589
 Less: accumulated depreciation - regulated utility plant   2,555   2,517
  Regulated utility plant, net   5,162   5,072
 Construction work in progress   837   738
 Property, Plant and Equipment, net   5,999   5,810
          
Other Noncurrent Assets      
 Regulatory assets   891   897
 Intangibles   237   235
 Other noncurrent assets   25   24
 Total Other Noncurrent Assets   1,153   1,156
          
Total Assets $ 7,921 $ 7,785

 

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

12
 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     March 31, December 31,
     2015 2014
Liabilities and Equity      
          
Current Liabilities      
 Short-term debt $ 85   
 Long term debt due within one year   100 $ 100
 Accounts payable   301   325
 Accounts payable to affiliates   70   70
 Taxes   90   85
 Interest   26   34
 Regulatory liabilities   85   76
 Other current liabilities   80   103
 Total Current Liabilities   837   793
          
Long-term Debt   2,503   2,502
          
Deferred Credits and Other Noncurrent Liabilities      
 Deferred income taxes   1,497   1,483
 Accrued pension obligations   182   212
 Regulatory liabilities   26   18
 Other deferred credits and noncurrent liabilities   66   60
 Total Deferred Credits and Other Noncurrent Liabilities   1,771   1,773
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Equity      
 Common stock - no par value (a)   364   364
 Additional paid-in capital   1,653   1,603
 Earnings reinvested   793   750
 Total Equity   2,810   2,717
          
Total Liabilities and Equity $ 7,921 $ 7,785

 

(a)170,000 shares authorized; 66,368 shares issued and outstanding at March 31, 2015 and December 31, 2014.

 

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

13
 

 

CONDENSED CONSOLIDATED STATEMENTS OF 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
                 
December 31, 2014  66,368 $ 364 $ 1,603 $ 750 $ 2,717
Net income           87   87
Capital contributions from PPL        50      50
Cash dividends declared on common stock           (44)   (44)
March 31, 2015  66,368 $ 364 $ 1,653 $ 793 $ 2,810
              
December 31, 2013  66,368 $ 364 $ 1,340 $ 645 $ 2,349
Net income           85   85
Capital contributions from PPL        65      65
Cash dividends declared on common stock           (32)   (32)
March 31, 2014  66,368 $ 364 $ 1,405 $ 698 $ 2,467

 

(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.

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15
 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)      
(Millions of Dollars)     
          
     Three Months Ended March 31,
      2015  2014
       
Operating Revenues $ 899 $ 934
       
Operating Expenses      
 Operation      
  Fuel   253   277
  Energy purchases   92   124
  Other operation and maintenance   209   206
 Depreciation   95   86
 Taxes, other than income   14   13
 Total Operating Expenses   663   706
          
Operating Income   236   228
          
Other Income (Expense) - net   (1)   (2)
      
Interest Expense   42   42
          
Income Before Income Taxes   193   184
          
Income Taxes   76   69
          
Net Income (a) $ 117 $ 115

 

(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
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
           
     Three Months Ended March 31,
     2015  2014
Cash Flows from Operating Activities       
 Net income $ 117  $ 115
 Adjustments to reconcile net income to net cash provided by operating activities       
  Depreciation   95    86
  Amortization   6    6
  Defined benefit plans - expense   11    8
  Deferred income taxes and investment tax credits   75    74
  Other   17    (1)
 Change in current assets and current liabilities       
  Accounts receivable   (39)    (39)
  Accounts payable   (18)    22
  Unbilled revenues   32    36
  Fuel, materials and supplies   71    53
  Income tax receivable   134    (11)
  Taxes payable   (11)    (14)
  Accrued interest   37    36
  Other   (21)    (24)
 Other operating activities       
  Defined benefit plans - funding   (53)    (38)
  Other assets   (6)    1
  Other liabilities   4    
   Net cash provided by operating activities   451    310
Cash Flows from Investing Activities       
 Expenditures for property, plant and equipment   (321)    (272)
 Net (increase) decrease in notes receivable from affiliates       66
 Other investing activities   4    
   Net cash provided by (used in) investing activities   (317)    (206)
Cash Flows from Financing Activities       
 Net increase (decrease) in notes payable with affiliates   (1)    
 Net increase (decrease) in short-term debt   (91)    (45)
 Distributions to member   (23)    (104)
 Contributions from member       40
   Net cash provided by (used in) financing activities   (115)    (109)
Net Increase (Decrease) in Cash and Cash Equivalents   19    (5)
Cash and Cash Equivalents at Beginning of Period   21    35
Cash and Cash Equivalents at End of Period $ 40  $ 30

 

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

17
 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     March 31, December 31,
     2015 2014
Assets      
          
Current Assets      
 Cash and cash equivalents $ 40 $ 21
 Accounts receivable (less reserve: 2015, $26; 2014, $25)      
  Customer   268   231
  Other   14   18
 Unbilled revenues   135   167
 Fuel, materials and supplies   239   311
 Prepayments   23   28
 Income taxes receivable   2   136
 Deferred income taxes   21   16
 Regulatory assets   20   25
 Other current assets   6   3
 Total Current Assets   768   956
          
Property, Plant and Equipment      
 Regulated utility plant   10,069   10,007
 Less: accumulated depreciation - regulated utility plant   1,049   1,067
  Regulated utility plant, net   9,020   8,940
 Other, net   4   5
 Construction work in progress   1,672   1,559
 Property, Plant and Equipment, net   10,696   10,504
          
Other Noncurrent Assets      
 Regulatory assets   719   665
 Goodwill   996   996
 Other intangibles   161   174
 Other noncurrent assets   103   101
 Total Other Noncurrent Assets   1,979   1,936
          
Total Assets $ 13,443 $ 13,396

 

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

18
 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     March 31, December 31,
     2015 2014
Liabilities and Equity      
          
Current Liabilities      
 Short-term debt $ 484 $ 575
 Long-term debt due within one year   900   900
 Notes payable with affiliates   40   41
 Accounts payable   350   399
 Accounts payable to affiliates   3   2
 Customer deposits   52   52
 Taxes   25   36
 Price risk management liabilities   5   5
 Price risk management liabilities with affiliates   122   66
 Regulatory liabilities   24   15
 Interest   60   23
 Other current liabilities   115   131
 Total Current Liabilities   2,180   2,245
          
Long-term Debt   3,667   3,667
          
Deferred Credits and Other Noncurrent Liabilities      
 Deferred income taxes   1,324   1,241
 Investment tax credits   130   131
 Accrued pension obligations   256   305
 Asset retirement obligations   266   274
 Regulatory liabilities   961   974
 Price risk management liabilities   47   43
 Other deferred credits and noncurrent liabilities   270   268
 Total Deferred Credits and Other Noncurrent Liabilities   3,254   3,236
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Member's equity   4,342   4,248
          
Total Liabilities and Equity $ 13,443 $ 13,396

 

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

19
 

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
    
   Member's
   Equity
    
December 31, 2014 $ 4,248
Net income   117
Distributions to member   (23)
March 31, 2015 $ 4,342
    
December 31, 2013 $ 4,150
Net income   115
Contributions from member   40
Distributions to member   (104)
Other comprehensive income (loss)   (1)
March 31, 2014 $ 4,200

 

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

20
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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21
 

 

CONDENSED STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Unaudited)      
(Millions of Dollars)     
          
     Three Months Ended March 31,
     2015 2014
Operating Revenues      
 Retail and wholesale $ 417 $ 442
 Electric revenue from affiliate   22   37
 Total Operating Revenues   439   479
          
Operating Expenses      
 Operation      
  Fuel   103   117
  Energy purchases   88   118
  Energy purchases from affiliate   3   6
  Other operation and maintenance   96   98
 Depreciation   42   38
 Taxes, other than income   7   6
 Total Operating Expenses   339   383
          
Operating Income   100   96
          
Other Income (Expense) - net   (1)   (2)
          
Interest Expense   13   12
      
Income Before Income Taxes   86   82
          
Income Taxes   33   30
          
Net Income (a) $ 53 $ 52

 

(a)Net income equals comprehensive income.

 

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

22
 

 

CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)
           
     Three Months Ended March 31,
     2015  2014
Cash Flows from Operating Activities       
 Net income $ 53  $ 52
 Adjustments to reconcile net income to net cash provided by operating activities       
  Depreciation��  42    38
  Amortization   3    3
  Defined benefit plans - expense   4    2
  Deferred income taxes and investment tax credits   31    6
  Other   14    (5)
 Change in current assets and current liabilities       
  Accounts receivable   (16)    (18)
  Accounts receivable from affiliates   11    (22)
  Accounts payable   (15)    14
  Accounts payable to affiliates       (7)
  Unbilled revenues   18    22
  Fuel, materials and supplies   56    44
  Income tax receivable   74    
  Taxes payable   (7)    21
  Accrued interest   9    9
  Other   (3)    (4)
 Other operating activities       
  Defined benefit plans - funding   (22)    (9)
  Other assets   (1)    1
  Other liabilities       2
   Net cash provided by operating activities   251    149
Cash Flows from Investing Activities       
 Expenditures for property, plant and equipment   (173)    (116)
   Net cash provided by (used in) investing activities   (173)    (116)
Cash Flows from Financing Activities       
 Net increase (decrease) in short-term debt   (48)    (5)
 Payment of common stock dividends to parent   (23)    (27)
   Net cash provided by (used in) financing activities   (71)    (32)
Net Increase (Decrease) in Cash and Cash Equivalents   7    1
Cash and Cash Equivalents at Beginning of Period   10    8
Cash and Cash Equivalents at End of Period $ 17  $ 9

 

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

23
 

 

CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     March 31, December 31,
     2015 2014
Assets      
          
Current Assets      
 Cash and cash equivalents $ 17 $ 10
 Accounts receivable (less reserve: 2015, $2; 2014, $2)      
  Customer   121   107
  Other   9   11
 Unbilled revenues   58   76
 Accounts receivable from affiliates   13   23
 Fuel, materials and supplies   105   162
 Prepayments   7   8
 Income taxes receivable      74
 Regulatory assets   12   21
 Other current assets   5   1
 Total Current Assets   347   493
          
Property, Plant and Equipment      
 Regulated utility plant   4,016   4,031
 Less: accumulated depreciation - regulated utility plant   398   456
  Regulated utility plant, net   3,618   3,575
 Construction work in progress   761   676
 Property, Plant and Equipment, net   4,379   4,251
          
Other Noncurrent Assets      
 Regulatory assets   422   397
 Goodwill   389   389
 Other intangibles   91   97
 Other noncurrent assets   36   35
 Total Other Noncurrent Assets   938   918
          
Total Assets $ 5,664 $ 5,662

 

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

24
 

 

CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
     March 31, December 31,
     2015 2014
Liabilities and Equity      
          
Current Liabilities      
 Short-term debt $ 216 $ 264
 Long-term debt due within one year   250   250
 Accounts payable   222   240
 Accounts payable to affiliates   20   20
 Customer deposits   25   25
 Taxes   12   19
 Price risk management liabilities   5   5
 Price risk management liabilities with affiliates   61   33
 Regulatory liabilities   14   10
 Interest   15   6
 Other current liabilities   37   42
 Total Current Liabilities   877   914
          
Long-term Debt   1,103   1,103
       
Deferred Credits and Other Noncurrent Liabilities      
 Deferred income taxes   735   700
 Investment tax credits   36   36
 Accrued pension obligations   34   57
 Asset retirement obligations   64   66
 Regulatory liabilities   454   458
 Price risk management liabilities   47   43
 Other deferred credits and noncurrent liabilities   110   111
 Total Deferred Credits and Other Noncurrent Liabilities   1,480   1,471
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Stockholder's Equity      
 Common stock - no par value (a)   424   424
 Additional paid-in capital   1,521   1,521
 Earnings reinvested   259   229
 Total Equity   2,204   2,174
          
Total Liabilities and Equity $ 5,664 $ 5,662

 

(a)75,000 shares authorized; 21,294 shares issued and outstanding at March 31, 2015 and December 31, 2014.

 

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

25
 

 

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
                 
December 31, 2014 21,294 $424 $1,521 $229 $2,174
Net income          53  53
Cash dividends declared on common stock          (23)  (23)
March 31, 2015 21,294 $424 $1,521 $259 $2,204
                 
December 31, 2013 21,294 $424 $1,364 $172 $1,960
Net income          52  52
Cash dividends declared on common stock          (27)  (27)
March 31, 2014  21,294 $424 $1,364 $197 $1,985

 

(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.

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27
 

 

CONDENSED STATEMENTS OF INCOME
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)
          
     Three Months Ended March 31,
     2015 2014
Operating Revenues      
 Retail and wholesale $ 482 $ 492
 Electric revenue from affiliate   3   6
 Total Operating Revenues   485   498
          
Operating Expenses      
 Operation      
  Fuel   150   160
  Energy purchases   4   6
  Energy purchases from affiliate   22   37
  Other operation and maintenance   104   98
 Depreciation   53   48
 Taxes, other than income   7   7
 Total Operating Expenses   340   356
          
Operating Income   145   142
          
Other Income (Expense) - net   (1)   
          
Interest Expense   19   19
          
Income Before Income Taxes   125   123
          
Income Taxes   47   46
          
Net Income (a) $ 78 $ 77

 

(a)Net income approximates comprehensive income.

 

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

28
 

 

CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)
           
     Three Months Ended March 31,
     2015  2014
Cash Flows from Operating Activities       
 Net income $ 78  $ 77
 Adjustments to reconcile net income to net cash provided by operating activities       
  Depreciation   53    48
  Amortization   3    3
  Defined benefit plans - expense   3    2
  Deferred income taxes and investment tax credits   43    34
  Other   2    2
 Change in current assets and current liabilities       
  Accounts receivable   (25)    (24)
  Accounts payable   1    15
  Accounts payable to affiliates   (14)    16
  Unbilled revenues   14    14
  Fuel, materials and supplies   15    9
  Income tax receivable   60    
  Taxes payable   (1)    (12)
  Accrued interest   19    18
  Other   (5)    (9)
 Other operating activities       
  Defined benefit plans - funding   (15)    (3)
  Other assets   (3)    
  Other liabilities   1    1
   Net cash provided by operating activities   229    191
Cash Flows from Investing Activities       
 Expenditures for property, plant and equipment   (148)    (154)
 Other investing activities   4    
   Net cash provided by (used in) investing activities   (144)    (154)
Cash Flows from Financing Activities       
 Net increase (decrease) in short-term debt   (43)    (40)
 Payment of common stock dividends to parent   (30)    (37)
 Contributions from parent       40
   Net cash provided by (used in) financing activities   (73)    (37)
Net Increase (Decrease) in Cash and Cash Equivalents   12    
Cash and Cash Equivalents at Beginning of Period   11    21
Cash and Cash Equivalents at End of Period $ 23  $ 21

 

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

29
 

 

CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          
     March 31, December 31,
     2015 2014
Assets      
          
Current Assets      
 Cash and cash equivalents $ 23 $ 11
 Accounts receivable (less reserve: 2015, $3; 2014, $2)      
  Customer   147   124
  Other   5   6
 Unbilled revenues   77   91
 Fuel, materials and supplies   134   149
 Prepayments   7   10
 Income taxes receivable      60
 Regulatory assets   8   4
 Other current assets   11   4
 Total Current Assets   412   459
          
Property, Plant and Equipment      
 Regulated utility plant   6,053   5,976
 Less: accumulated depreciation - regulated utility plant   651   611
  Regulated utility plant, net   5,402   5,365
 Other, net   1   1
 Construction work in progress   908   880
 Property, Plant and Equipment, net   6,311   6,246
          
Other Noncurrent Assets      
 Regulatory assets   297   268
 Goodwill   607   607
 Other intangibles   70   77
 Other noncurrent assets   57   58
 Total Other Noncurrent Assets   1,031   1,010
          
Total Assets $ 7,754 $ 7,715

 

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

30
 

 

CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
     March 31, December 31,
     2015 2014
Liabilities and Equity      
          
Current Liabilities      
 Short-term debt $ 193 $ 236
 Long-term debt due within one year   250   250
 Accounts payable   114   141
 Accounts payable to affiliates   33   47
 Customer deposits   27   27
 Taxes   13   14
 Price risk management liabilities with affiliates   61   33
 Regulatory liabilities   10   5
 Interest   30   11
 Other current liabilities   48   41
 Total Current Liabilities   779   805
          
Long-term Debt   1,841   1,841
          
Deferred Credits and Other Noncurrent Liabilities      
 Deferred income taxes   933   884
 Investment tax credits   94   95
 Accrued pension obligations   44   59
 Asset retirement obligations   202   208
 Regulatory liabilities   507   516
 Other deferred credits and noncurrent liabilities   101   101
 Total Deferred Credits and Other Noncurrent Liabilities   1,881   1,863
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Stockholder's Equity      
 Common stock - no par value (a)   308   308
 Additional paid-in capital   2,596   2,596
 Accumulated other comprehensive income (loss)   (1)   
 Earnings reinvested   350   302
 Total Equity   3,253   3,206
          
Total Liabilities and Equity $ 7,754 $ 7,715

 

(a)80,000 shares authorized; 37,818 shares issued and outstanding at March 31, 2015 and December 31, 2014.

 

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

31
 

 

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
                  
December 31, 2014 37,818 $308 $2,596 $302    $3,206
Net income          78     78
Cash dividends declared on common stock           (30)      (30)
Other comprehensive income (loss)            $(1)  (1)
March 31, 2015 37,818 $308 $2,596 $350 $(1) $3,253
                  
December 31, 2013 37,818 $308 $2,505 $230 $1 $3,044
Net income          77      77
Capital contributions from LKE       40         40
Cash dividends declared on common stock          (37)     (37)
Other comprehensive income (loss)              (1)  (1)
March 31, 2014 37,818 $308 $2,545 $270 $  $ 3,123

 

(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.

32
 

 

 

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, 2014 is derived from that Registrant's 2014 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 2014 Form 10-K. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015 or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.

 

The classification of certain prior period amounts has been changed to conform to the presentation in the March 31, 2015 financial statements.

 

(PPL)

 

"Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income includes the activities of PPL Montana's hydroelectric generating facilities sold in the fourth quarter of 2014. See Note 8 for additional information. The Statements of Cash Flows do not separately report the cash flows of the Discontinued Operations.

 

2. Summary of Significant Accounting Policies

 

(All Registrants)

 

The following accounting policy disclosures represent updates to Note 1 in each Registrant's 2014 Form 10-K and should be read in conjunction with those disclosures.

 

Accounts Receivable(PPL and PPL Electric)

 

In accordance with a PUC-approved purchase of accounts receivable program, 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 months ended March 31, 2015, PPL Electric purchased $331 million of accounts receivable from unaffiliated third parties and $93 million from PPL EnergyPlus. During the three months ended March 31, 2014, PPL Electric purchased $362 million of accounts receivable from unaffiliated third parties and $105 million from PPL EnergyPlus.

 

Depreciation (PPL)

 

Effective January 1, 2015, after completing a review of the useful lives of its distribution network assets, WPD extended the weighted average useful lives of these assets to 69 years from 55 years. For the three months ended March 31, 2015, this change in useful lives resulted in lower depreciation of $20 million ($16 million after-tax or $0.02 per share).

33
 

 

New Accounting Guidance Adopted(All Registrants)

 

Reporting of Discontinued Operations

 

Effective January 1, 2015, the Registrants prospectively adopted accounting guidance that changes the criteria for determining what should be classified as a discontinued operation and the related presentation and disclosure requirements. A discontinued operation may include a component of an entity or a group of components of an entity, or a business activity.

A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results when any of the following occurs: (1) The components of an entity or group of components of an entity meets the criteria to be classified as held for sale, (2) The component of an entity or group of components of an entity is disposed of by sale, or (3) The component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff).

 

The initial adoption of this guidance did not have a significant impact on the Registrants but will impact the amounts presented as discontinued operations and will enhance the related disclosure requirements related to future disposals or held for sale classifications.

 

3. Segment and Related Information

 

(PPL)

 

See Note 2 in PPL's 2014 Form 10-K for a discussion of reportable segments and related information.

 

In June 2014, PPL and PPL Energy Supply, which substantially represents PPL's Supply segment, executed definitive agreements with affiliates of Riverstone to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy. The transaction is expected to occur on June 1, 2015. 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 March 31 are:

 

        Three Months
      2015 2014
Income Statement Data            
Revenues from external customers            
 U.K. Regulated       $ 697 $ 648
 Kentucky Regulated         899   934
 Pennsylvania Regulated         630   591
 Supply (a)         937   (982)
 Corporate and Other         2   3
Total       $ 3,165 $ 1,194
                 
Intersegment electric revenues            
 Supply       $ 9 $ 27
                 
Net Income            
 U.K. Regulated (a)       $ 375 $ 206
 Kentucky Regulated         109   107
 Pennsylvania Regulated         87   85
 Supply (a)         95   (75)
 Corporate and Other (b)         (19)   (7)
Total       $ 647 $ 316

 

   March 31, December 31,
   2015 2014
Balance Sheet Data      
Assets      
 U.K. Regulated $ 16,275 $ 16,005
 Kentucky Regulated   13,109   13,062
 Pennsylvania Regulated   7,921   7,785
 Supply   10,631   11,025
 Corporate and Other (c)   985   987
Total assets $ 48,921 $ 48,864

 

(a)Includes unrealized gains and losses from economic activity. See Note 14 for additional information.
(b)2015 includes most of the transaction and transition costs related to the anticipated spinoff of PPL Energy Supply. See Note 8 for additional information.
(c)Primarily consists of unallocated items, including cash, PP&E and the elimination of inter-segment transactions.
34
 

 

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 period ended March 31 used in the EPS calculation are:

 

       Three Months
         2015 2014
Income (Numerator)            
Income from continuing operations after income taxes $ 647 $ 324
Less amounts allocated to participating securities         3   2
Income from continuing operations after income taxes available to PPL common shareowners - Basic   644   322
Plus interest charges (net of tax) related to Equity Units (a)            9
Income from continuing operations after income taxes available to PPL common shareowners - Diluted $ 644 $ 331
                
Income (loss) from discontinued operations (net of income taxes) available to PPL common shareowners - Basic      
and Diluted $  $ (8)
                
Net income       $ 647 $ 316
Less amounts allocated to participating securities         3   2
Net income available to PPL common shareowners - Basic         644   314
Plus interest charges (net of tax) related to Equity Units (a)            9
Net income available to PPL common shareowners - Diluted       $ 644 $ 323
                
Shares of Common Stock (Denominator)            
Weighted-average shares - Basic EPS         666,974   630,749
Add incremental non-participating securities:            
  Share-based payment awards         1,758   1,511
  Equity Units (a)            31,679
Weighted-average shares - Diluted EPS         668,732   663,939
                
Basic EPS            
Available to PPL common shareowners:            
  Income from continuing operations after income taxes       $ 0.97 $ 0.51
  Income (loss) from discontinued operations (net of income taxes)            (0.01)
  Net Income Available to PPL common shareowners       $ 0.97 $ 0.50
                
Diluted EPS            
Available to PPL common shareowners:            
  Income from continuing operations after income taxes       $ 0.96 $ 0.50
  Income (loss) from discontinued operations (net of income taxes)            (0.01)
  Net Income Available to PPL common shareowners       $ 0.96 $ 0.49

 

(a)In 2014, the If-Converted Method was applied to the Equity Units prior to the March 2014 settlement.

 

For the periods ended March 31, PPL issued common stock related to stock-based compensation plans as follows (in thousands):

 

    Three Months
        2015 2014
               
Stock-based compensation plans (a)         1,445   1,096
DRIP         419   

 

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

 

For the periods ended March 31, the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would have been antidilutive.

35
 

 

 

    Three Months
      2015 2014
             
Stock options         1,473   2,540
Performance units         146   
Restricted stock units            123

 

5. Income Taxes

 

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

 

(PPL)
                 
        Three Months
          2015 2014
             
Federal income tax on Income from Continuing Operations Before            
 Income Taxes at statutory tax rate - 35%       $ 320 $ 153
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit         25   3
  Valuation allowance adjustments         3   
  Impact of lower U.K. income tax rates         (62)   (44)
  U.S. income tax on foreign earnings - net of foreign tax credit         (1)   11
  Intercompany interest on U.K. financing entities         (8)   (2)
  Other         (9)   (7)
   Total increase (decrease)         (52)   (39)
Total income taxes       $ 268 $ 114

 

(PPL Electric)            
             
        Three Months
          2015 2014
                 
             
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%       $ 51 $ 48
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit         10   8
  Other         (2)   (3)
   Total increase (decrease)         8   5
Total income taxes       $ 59 $ 53

 

(LKE)              
                 
        Three Months
          2015 2014
             
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%       $ 68 $ 64
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit         7   7
  Valuation allowance adjustments         3   
  Other         (2)   (2)
   Total increase (decrease)         8   5
Total income taxes       $ 76 $ 69

 

(LG&E)            
                 
        Three Months
          2015 2014
             
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%       $ 30 $ 29
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit         3   3
  Other            (2)
   Total increase (decrease)         3   1
Total income taxes       $ 33 $ 30
36
 

 

 

(KU)            
                 
        Three Months
          2015 2014
             
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%       $ 44 $ 43
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit         4   4
  Other         (1)   (1)
   Total increase (decrease)         3   3
Total income taxes       $ 47 $ 46

 

Other(PPL)

 

In February 2015, PPL and the IRS Appeals division reached a settlement on the amount of PPL's refund from its open audits for the years 1998 - 2011. The settlement was required to be reviewed and approved by the Joint Committee on Taxation (JCT) before it is considered final. In April 2015, PPL was notified that the JCT approved PPL's settlement.  Subject to a final determination of interest on the refund, PPL expects to record a tax benefit in the range of $20 million to $30 million in the second quarter of 2015 related to the settlement of previously unrecognized tax benefits.

 

6. Utility Rate Regulation

 

(All Registrants)

 

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

 

   PPL PPL Electric
   March 31, December 31, March 31, December 31,
   2015 2014 2015 2014
              
Current Regulatory Assets:            
 Environmental cost recovery $ 10 $ 5      
 Gas supply clause   1   15      
 Fuel adjustment clause   4   4      
 Transmission service charge      6    $ 6
 Other   8   7 $ 3   6
Total current regulatory assets $ 23 $ 37 $ 3 $ 12
              
Noncurrent Regulatory Assets:            
 Defined benefit plans $ 705 $ 720 $ 367 $ 372
 Taxes recoverable through future rates   317   316   317   316
 Storm costs   116   124   42   46
 Unamortized loss on debt   76   77   48   49
 Interest rate swaps   182   122      
 Accumulated cost of removal of utility plant   117   114   117   114
 AROs   87   79      
 Other   10   10      
Total noncurrent regulatory assets $ 1,610 $ 1,562 $ 891 $ 897

 

Current Regulatory Liabilities:            
 Generation supply charge $ 26 $ 28 $ 26 $ 28
 Demand side management   13   2      
 Gas supply clause   6   6      
 Transmission formula rate   49   42   49   42
 Storm damage expense   7   3   7   3
 Gas line tracker   2   3      
 Other   6   7   3   3
Total current regulatory liabilities $ 109 $ 91 $ 85 $ 76
              
Noncurrent Regulatory Liabilities:            
 Accumulated cost of removal of utility plant $ 695 $ 693      
 Coal contracts (a)   49   59      
 Power purchase agreement - OVEC (a)   90   92      
 Net deferred tax assets   25   26      
 Act 129 compliance rider   26   18 $ 26 $ 18
 Defined benefit plans   16   16      
 Interest rate swaps   84   84      
 Other   2   4      
Total noncurrent regulatory liabilities $ 987 $ 992 $ 26 $ 18
37
 

 

   LKE LG&E KU
   March 31, December 31, March 31, December 31, March 31, December 31,
   2015 2014 2015 2014 2015 2014
                    
Current Regulatory Assets:                  
 Environmental cost recovery $ 10 $ 5 $ 7 $ 4 $ 3 $ 1
 Gas supply clause   1   15   1   15      
 Fuel adjustment clause   4   4   4   2      2
 Other   5   1         5   1
Total current regulatory assets $ 20 $ 25 $ 12 $ 21 $ 8 $ 4
                    
Noncurrent Regulatory Assets:                  
 Defined benefit plans $ 338 $ 348 $ 208 $ 215 $ 130 $ 133
 Storm costs   74   78   41   43   33   35
 Unamortized loss on debt   28   28   18   18   10   10
 Interest rate swaps   182   122   121   89   61   33
 AROs   87   79   30   28   57   51
 Other   10   10   4   4   6   6
Total noncurrent regulatory assets $ 719 $ 665 $ 422 $ 397 $ 297 $ 268

 

Current Regulatory Liabilities:                  
  Demand side management $ 13 $ 2 $ 5 $ 1 $ 8 $ 1
  Gas supply clause   6   6   6   6      
  Gas line tracker   2   3   2   3      
  Other   3   4   1      2   4
Total current regulatory liabilities $ 24 $ 15 $ 14 $ 10 $ 10 $ 5
                     
Noncurrent Regulatory Liabilities:                  
 Accumulated cost of removal                  
  of utility plant $ 695 $ 693 $ 304 $ 302 $ 391 $ 391
 Coal contracts (a)   49   59   21   25   28   34
 Power purchase agreement - OVEC (a)   90   92   62   63   28   29
 Net deferred tax assets   25   26   24   24   1   2
 Defined benefit plans   16   16         16   16
 Interest rate swaps   84   84   42   42   42   42
 Other   2   4   1   2   1   2
Total noncurrent regulatory liabilities $ 961 $ 974 $ 454 $ 458 $ 507 $ 516

 

(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)

 

RIIO-ED1

 

On April 1, 2015, the RIIO-ED1 eight-year price control period commenced for WPD's four DNOs. See "Item 1. Business - Segment Information - U. K. Regulated Segment" of PPL's 2014 Form 10-K for additional information on RIIO-ED1.

 

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 liability by $65 million for over-recovery of line losses with a reduction to "Utility" revenues on the Statement of Income. The liability at March 31, 2015 of $97 million will be refunded to customers from April 1, 2015 through March 31, 2019.

 

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

 

Rate Case Proceedings

 

On November 26, 2014, LG&E and KU filed requests with the KPSC for increases in annual base electricity rates for LG&E's electric and gas operations and KU's electric operations. On April 20, 2015, LG&E and KU, and the other parties to the proceeding, filed a unanimous settlement agreement with the KPSC. Among other things, the proposed settlement provides for increases in the annual revenue requirements associated with KU base electric rates of $125 million and LG&E base gas rates of $7 million. The annual revenue requirement associated with base electric rates at LG&E will not increase. The settlement did not establish a specific return on equity with respect to the base rates, however an authorized 10% return on equity will be utilized in the ECR and GLT mechanisms. The settlement agreement provides for deferred recovery of

38
 

costs associated with Green River Units 3 and 4 through their retirement. The new regulatory asset will be amortized over three years. The settlement also provides regulatory asset treatment for the difference between pension expense currently booked in accordance with LG&E and KU's pension accounting policy and such an expense using a 15 year amortization period for actuarial gains and losses. The proposed settlement remains subject to KPSC approval. If approved, the new rates and all elements of the settlement would be effective July 1, 2015.

 

Pennsylvania Activities(PPL and PPL Electric)

 

Rate Case Proceeding

 

On March 31, 2015, PPL Electric filed a request with the PUC for an increase in its annual distribution revenue requirement of approximately $167.5 million.  The proposal would result in a rate increase of 3.9% on a total bill basis and is expected to become effective on January 1, 2016.  PPL Electric's application includes a request for an authorized return-on-equity of 10.95%.  The application is based on a fully projected future test year of January 1, 2016 through December 31, 2016. PPL Electric cannot predict the outcome of this proceeding.

 

Distribution System Improvement Charge (DSIC)

 

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 is in a period of significant capital investment to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets.

 

On March 31, 2015, PPL Electric filed a petition requesting a waiver of the DSIC cap of 5% of billed revenues and approval to increase the maximum allowable DSIC from 5% to 7.5% for service rendered after January 1, 2016. PPL Electric filed the petition concurrently with its 2015 rate case and is requesting that the PUC consolidate these two proceedings. PPL Electric cannot predict the outcome of this proceeding.

 

Storm Damage Expense Rider (SDER)

 

In its December 28, 2012 final rate case order, the PUC directed PPL Electric to file a proposed SDER. The SDER is a reconcilable automatic adjustment clause under which PPL Electric annually will compare actual storm costs to storm costs allowed in base rates and refund or recoup any differences from customers. 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. In April 2014, the PUC issued a final order approving the SDER with a January 1, 2015 effective date and initially including actual storm costs compared to collections for December 2013 through November 2014. As a result, PPL Electric reduced its regulatory liability by $12 million in March 2014. Also, as part of the April 2014 order, PPL Electric was authorized to recover Hurricane Sandy storm damage costs through the SDER of $29 million over a three-year period beginning January 1, 2015.

 

On June 20, 2014, the Office of Consumer Advocate (OCA) filed a petition with the Commonwealth Court of Pennsylvania requesting that the Court reverse and remand the April 2014 order permitting PPL Electric to establish the SDER. This matter remains pending before the Commonwealth Court. On January 15, 2015, the PUC issued a final order closing an investigation related to an OCA complaint concerning PPL Electric's October 2014 preliminary SDER calculation and modified the effective date of the SDER to February 1, 2015.

 

Smart Meter Rider (SMR)

 

Act 129 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 requirements of Act 129. PPL Electric recovered the cost of its evaluations through a cost recovery mechanism, the Smart Meter Rider. 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

39
 

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. On April 30, 2015, the Administrative Law Judge assigned by the PUC to review PPL Electric's Smart Meter Plan issued a recommended decision approving the plan with minor modifications. The recommended decision is subject to final approval by and remains pending before the PUC.

 

Federal Matters

 

FERC Wholesale Formula Rates(LKE and KU)

 

In September 2013, KU filed an application with the FERC to adjust the formula rate under which KU provides wholesale requirements power sales to 12 municipal customers. Among other changes, the application requests an amended formula whereby KU would charge cost-based rates with a subsequent true-up to actual costs, replacing the current formula which does not include a true-up. KU's application proposed an authorized return on equity of 10.7%. Certain elements, including the new formula rate, became effective April 23, 2014, subject to refund. In April 2014, nine municipalities submitted notices of termination, under the original notice period provisions, to cease taking power under the wholesale requirements contracts. Such terminations are to be effective in 2019, except in the case of one municipality with a 2017 effective date. In addition, a tenth municipality which has a previously settled termination date of 2016 has given notice that it will transfer service in June 2015. In July 2014, KU agreed on settlement terms with the two municipal customers that did not provide termination notices and filed the settlement proposal with the FERC for its approval. In August 2014, the FERC issued an order on the interim settlement agreement allowing the proposed rates to become effective pending a final order. If approved, the settlement agreement will resolve the rate case with respect to these two municipalities, including an authorized return on equity of 10% or the return on equity awarded to other parties in this case, whichever is lower. Also in July 2014, KU made a contractually required filing with the FERC that addressed certain rate recovery matters affecting the nine terminating municipalities during the remaining term of their contracts. KU and the terminating municipalities continue settlement discussions in this proceeding. KU cannot currently predict the outcome of its FERC applications regarding its wholesale power agreements with the municipalities.

 

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 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:

 

       March 31, 2015 December 31, 2014
                Letters of      Letters of
                Credit       Credit
                and       and
                Commercial       Commercial
       Expiration      Paper Unused   Paper
        Date Capacity Borrowed Issued Capacity Borrowed Issued
PPL                    
U.K.                    
 WPD Ltd.                    
  Syndicated Credit Facility Dec. 2016 £ 210 £ 130    £ 80 £ 103   
 WPD (South West)                    
  Syndicated Credit Facility July 2019   245         245      
 WPD (East Midlands)                    
  Syndicated Credit Facility July 2019   300   147      153   64   
 WPD (West Midlands)                    
  Syndicated Credit Facility July 2019   300         300      
 Uncommitted Credit Facilities     65    £ 5   60    £ 5
   Total U.K. Credit Facilities (a)   £ 1,120 £ 277 £ 5 £ 838 £ 167 £ 5
                           
40
 

 

 

       March 31, 2015 December 31, 2014
                Letters of      Letters of
                Credit       Credit
                and       and
                Commercial       Commercial
       Expiration      Paper Unused   Paper
        Date Capacity Borrowed Issued Capacity Borrowed Issued
U.S.                    
 PPL Capital Funding                    
  Syndicated Credit Facility July 2019 $ 300       $ 300      
  Syndicated Credit Facility Nov. 2018   300         300      
  Bilateral Credit Facility Mar. 2016   150    $ 32   118    $ 21
  Uncommitted Credit Facility       65      1   64      1
   Total PPL Capital Funding Credit Facilities $ 815    $ 33 $ 782    $ 22
                           
 PPL Energy Supply                    
  Syndicated Credit Facility (b) Nov. 2017 $ 3,000 $ 600 $ 267 $ 2,133 $ 630 $ 121
                           
PPL Electric                    
 Syndicated Credit Facility July 2019 $ 300    $ 86 $ 214    $ 1
                           
LKE                    
 Syndicated Credit Facility (b) Oct. 2018 $ 75 $ 75       $ 75   
��                          
LG&E                    
 Syndicated Credit Facility July 2019 $ 500    $ 216 $ 284    $ 264
                           
KU                    
 Syndicated Credit Facility July 2019 $ 400    $ 193 $ 207    $ 236
 Letter of Credit Facility Oct. 2017   198      198         198
   Total KU Credit Facilities   $ 598    $ 391 $ 207    $ 434

 

(a)WPD Ltd.'s amounts borrowed at March 31, 2015 and December 31, 2014 were USD-denominated borrowings of $200 million and $161 million, which bore interest at 1.87% and 1.86%. WPD (East Midlands) amounts borrowed at March 31, 2015 and December 31, 2014 were GBP-denominated borrowings which equated to $226 million and $100 million, which bore interest at 1.00% for both periods. At March 31, 2015, the unused capacity under the U.K. credit facilities was $1.3 billion.
(b)At March 31, 2015, PPL Energy Supply's and LKE's interest rates on outstanding borrowings were 2.12% and 1.68%. At December 31, 2014, PPL Energy Supply's and LKE's interest rates on outstanding borrowings were 2.05% and 1.67%.

 

(PPL)

 

PPL Energy Supply's Letter of Credit Facility and Uncommitted Credit Facilities that existed at December 31, 2014 have either expired or matured during the first quarter of 2015. Any previously issued letters of credit under these facilities were either terminated or reissued under the PPL Energy Supply Syndicated Credit Facility at March 31, 2015.

 

(All Registrants)

 

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:

 

       March 31, 2015 December 31, 2014
       Weighted -    Commercial   Weighted - Commercial
       Average    Paper Unused Average Paper
       Interest Rate Capacity Issuances Capacity Interest Rate Issuances
                        
 PPL Electric 0.57% $ 300 $ 85 $ 215      
 LG&E 0.63%   350   216   134  0.42% $ 264
 KU 0.62%   350   193   157  0.49%   236
   Total   $ 1,000 $ 494 $ 506    $ 500

 

(PPL)

 

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 March 31, 2015, PPL Energy Supply had not requested any capacity for the issuance of letters of credit under this arrangement.

 

41
 

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 2019, but is subject to automatic one-year renewals under certain conditions. There were $88 million of secured obligations outstanding under this facility at March 31, 2015.

 

(LKE)

 

See Note 11 for discussion of intercompany borrowings.

 

(PPL)

 

At-the-Market Stock Offering Program

 

On February 26, 2015, PPL entered into two separate equity distribution agreements, pursuant to which PPL may sell, from time to time, up to an aggregate of $500 million of its common stock. During the period ended March 31, 2015, no sales of common stock under the equity distribution agreements were made.

 

Distributions

 

In February 2015, PPL declared its quarterly common stock dividend, payable April 1, 2015, at 37.25 cents per share (equivalent to $1.49 per annum). Future dividends, declared at the discretion of the Board of Directors, will depend 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 2014 Form 10-K for additional information.

 

(PPL)

 

Divestitures

 

Anticipated Spinoff of PPL Energy Supply

 

In June 2014,PPL and PPL Energy Supply executed definitive agreements with affiliates of Riverstone to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy. Under the terms of the agreements, at closing, PPL will spin off to PPL shareowners a newly formed entity, Holdco, which at such time will own all of the membership interests of PPL Energy Supply and all of the common stock of Talen Energy. Immediately following the spinoff, Holdco will merge with a special purpose subsidiary of Talen Energy, with Holdco continuing as the surviving company to the merger and as a wholly owned subsidiary of Talen Energy and the sole owner of PPL Energy Supply. Substantially contemporaneous with the spinoff and merger, RJS Power will be contributed by its owners to become a subsidiary of Talen Energy. Following completion of these transactions, PPL shareowners will own 65% of Talen Energy and affiliates of Riverstone will own 35%. PPL will have no continuing ownership interest in, control of, or affiliation with Talen Energy. 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 required regulatory approvals from the NRC, FERC, DOJ and PUC, all of which were received by mid-April 2015. In addition, there must be available, subject to certain conditions, at least $1 billion of undrawn credit capacity under a revolving credit or similar facility of Talen Energy or one or more of its subsidiaries. Any letters of credit or other credit support measures posted in connection with energy marketing and trading transactions at the time of the spinoff are excluded from this calculation.

 

In connection with the FERC approval, PPL and RJS Power agreed thatwithin 12 months after closing of the transaction, Talen Energy will divest approximately 1,300 MW of generating assets in one of two groups of assets (from PPL Energy

42
 

Supply's existing portfolio, this includes either the Holtwood and Wallenpaupack hydroelectric facilities or the Ironwood facility), and limit PJM energy market offers from assets it would retain in the other group to cost-based offers.

 

On April 29, 2015, PPL's Board of Directors declared the distribution of Holdco to PPL's shareowners of record on May 20, 2015, with the spinoff to occur on June 1, 2015. Based on the number of shares of PPL common stock outstanding at April 29, 2015, the distribution ratio is expected to be approximately 0.125 shares of Talen common stock for each share of PPL common stock. The final ratio will be determined after the 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.

 

Following the announcement of the transaction to form Talen Energy, efforts were initiated to identify the appropriate staffing for Talen Energy and for PPL and its subsidiaries following completion of the spinoff.  Organizational plans were substantially completed in 2014. The new organizational plans identified the need to resize and restructure the organizations and as a result, in 2014, estimated charges for employee separation benefits were recorded. See Note 8 in the 2014 Form 10-K for additional information. The separation benefits include cash severance compensation, lump sum COBRA reimbursement payments and outplacement services.  Most separations and payment of separation benefits are expected to be completed by the end of 2015. At March 31, 2015 and December 31, 2014, the recorded liabilities related to the separation benefits were $19 million and $30 million, which are included in "Other current liabilities" on the Balance Sheets.

 

Additional employee-related costs to be incurred primarily include accelerated stock-based compensation and pro-rated performance-based cash incentive and stock-based compensation awards, primarily for PPL Energy Supply employees and for PPL employees who have become PPL Energy Supply employees in connection with the transaction. These costs will be recognized at the spinoff closing date. PPL estimates these additional costs will be in the range of $30 million to $40 million.

 

PPL recorded $6 million of third-party costs during the three months ended March 31, 2015 related to this transaction. Of these costs, $2 million were primarily for legal and accounting fees to facilitate the transaction, and are recorded in "Other Income (Expense) - net" on the Statement of Income. An additional $4 million of consulting and other costs were incurred to ready the new Talen Energy organization and reconfigure the remaining PPL service functions. These costs are recorded in "Other operation and maintenance" on the Statement of Income. PPL recorded $27 million of third-party costs in 2014 related to this transaction. PPL currently estimates a range of total third-party costs that will ultimately be incurred of between $60 million and $70 million.

 

The assets and liabilities of PPL's Supply segment will continue to be classified as "held and used" on PPL's Balance Sheet until the closing of the transaction, at which time the operations of the Supply segment will be classified as discontinued operations. At the close of the transaction, unamortized losses on PPL interest rate swaps recorded in AOCI and designated as hedges of PPL Energy Supply's future interest payments will be reclassified into earnings and reflected in discontinued operations. The amount of these unamortized losses deferred in AOCI at March 31, 2015 was $55 million after-tax.

 

In conducting its annual goodwill impairment assessment in the fourth quarter of 2014 for its Supply segment reporting unit, PPL determined that the estimated fair value of the Supply segment exceeded its carrying value and no impairment was recognized. PPL had not identified any indicators of impairment as of March 31, 2015, but cannot predict whether an impairment loss will be recorded at the spinoff date. An impairment loss would be recognized by PPL at the spinoff date if the aggregate carrying amount of the Supply segment's assets and liabilities exceed their aggregate fair value at that date and would be reflected in discontinued operations. Upon completion of this transaction, PPL will no longer have a Supply segment.

 

Discontinued Operations

 

Montana Hydro Sale

 

In November 2014, PPL Montana completed the sale to NorthWestern of 633 MW of hydroelectric generating facilities located in Montana for approximately $900 million in cash. The proceeds will remain with PPL and not transfer to Talen Energy as a result of the spinoff. The sale included 11 hydroelectric power facilities and related assets, included in the Supply segment.

 

Following are the components of Discontinued Operations in the Statement of Income for the three months ended March 31.

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          2014
             
Operating revenues          $ 29
Interest expense (a)            2
Income (loss) before income taxes (b)            (10)
Income (Loss) from Discontinued Operations (net of income taxes) (b)            (8)

 

(a)Represents allocated interest expense based upon the discontinued operations share of the net assets of PPL Energy Supply.
(b)Includes an impairment charge related to the Kerr Dam Project. See Note 13 for additional information.

 

Development

 

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

 

Construction activity is nearing completion and testing is in progress on the previously announced NGCC unit, Cane Run Unit 7, scheduled to be operational in the second quarter of 2015. On March 31, 2015, LG&E retired an older coal-fired generating unit at the Cane Run plant and anticipates retiring the remaining two coal-fired units at the Cane Run plant in the third quarter of 2015. There were no significant losses related to this retirement.

 

In October 2013, LG&E and KU announced plans for a 10 MW solar generation facility to be operational in 2016 at a cost of approximately $36 million. In December 2014, a final order was issued by the KPSC approving the request to construct the solar generating facility at E.W. Brown.

 

9. Defined Benefits

 

(PPL, LKE and LG&E)

 

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, and its subsidiaries, LKE and its subsidiaries and LG&E for the periods ended March 31:

 

    Pension Benefits Other Postretirement Benefits
    U.S. U.K.  
    2015 2014 2015 2014 2015 2014
PPL                  
Service cost $ 32 $ 26 $ 20 $ 18 $ 4 $ 3
Interest cost   59   59   79   88   7   8
Expected return on plan assets   (79)   (74)   (131)   (130)   (7)   (6)
Amortization of:                  
  Prior service cost   2   5            
  Actuarial (gain) loss   25   7   39   33      
Net periodic defined benefit costs (credits) $ 39 $ 23 $ 7 $ 9 $ 4 $ 5
                     
LKE                  
Service cost $ 7 $ 6       $ 1 $ 1
Interest cost   17   17         2   2
Expected return on plan assets   (22)   (20)         (1)   (1)
Amortization of:                  
  Prior service cost   2   1         1   1
  Actuarial (gain) loss   8   3            
Net periodic defined benefit costs (credits) $ 12 $ 7       $ 3 $ 3
                     
LG&E                  
Interest cost $ 3 $ 4            
Expected return on plan assets   (5)   (5)            
Amortization of:                  
  Prior service cost   1   1            
  Actuarial (gain) loss   3   1            
Net periodic defined benefit costs (credits) $ 2 $ 1            

 

(PPL Electric, LG&E and KU)

 

In addition to the specific plans it sponsors, LG&E is allocated costs of defined benefit plans sponsored by LKE based on its participation in those plans, which management believes are reasonable. PPL Electric and KU do not directly sponsor any defined benefit plans. PPL Electric is allocated costs of defined benefit plans sponsored by PPL Services and KU is allocated

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costs of defined benefit plans sponsored by LKE based on their participation in those plans, which management believes are reasonable.For the periods ended March 31, PPL Services allocated the following net periodic defined benefit costs to PPL Electric, and LKE allocated the following net periodic defined benefit costs to LG&E and KU.

 

    Three Months
      2015 2014
     ��       
PPL Electric       $ 8 $ 5
             
LG&E         3   2
KU         5   3

 

10. Commitments and Contingencies

 

(PPL)

 

All commitments and contingencies related to PPL Energy Supply and its subsidiaries will remain with PPL Energy Supply and its subsidiaries at the spinoff date without recourse, except as otherwise provided in the definitive agreements entered into in connection with the spinoff of Talen Energy.

 

Energy Purchase Commitments

 

(PPL Electric)

 

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

 

Legal Matters

 

(All Registrants)

 

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

 

WKE Indemnification(PPL and LKE)

 

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

 

(PPL)

 

Sierra Club Litigation

 

On March 6, 2013, the Sierra Club and MEIC filed a complaint in the U.S. District Court, District of Montana, Billings Division against PPL Montana and the other Colstrip Steam Electric Station (Colstrip) co-owners: Avista Corporation, Puget Sound Energy, Portland General Electric Company, NorthWestern and PacifiCorp.  PPL Montana operates Colstrip on behalf of the co-owners.  The complaint alleges certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements and listed 39 separate claims for relief.  The complaint requests injunctive relief and civil penalties on average of $36,000 per day per violation, including a request that the owners remediate environmental damage and that $100,000 of the civil penalties be used for beneficial mitigation projects.

 

In July 2013, the Sierra Club and MEIC filed an additional Notice of Intent to Sue, identifying additional plant projects that are alleged not to be in compliance with the Clean Air Act and, in September 2013, filed an amended complaint. The amended complaint dropped all claims regarding pre-2001 plant projects, as well as the plaintiffs' Title V and opacity claims. It did, however, add claims with respect to a number of post-2000 plant projects, which effectively increased the number of projects subject to the litigation by about 40. PPL Montana and the other Colstrip owners filed a motion to dismiss the amended complaint in October 2013. In May 2014, the court dismissed the plaintiffs' independent Best Available Control Technology claims and their Prevention of Significant Deterioration (PSD) claims for three projects, but denied the owners' motion to dismiss the plaintiffs' other PSD claims on statute of limitation grounds. On August 27, 2014, the Sierra Club and MEIC filed a second amended complaint. This complaint includes the same causes of action articulated in the first amended complaint, but alleges those claims in regard to only eight projects at the plant between 2001 and 2013. On September 26, 2014, the Colstrip owners filed an answer to the second amended complaint. Discovery has been completed. In April 2015,

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the plaintiffs indicated they intend to pursue claims related to only four of the remaining projects. In January 2015, trial as to liability in this matter was rescheduled to November 16, 2015. A trial date with respect to remedies, if there is a finding of liability, has not been scheduled. PPL believes it and the other co-owners have numerous defenses to the allegations set forth in this complaint and will vigorously assert the same. PPL cannot predict the ultimate outcome of this matter at this time.

 

Notice of Intent to File Suit

 

In October 2014, PPL Energy Supply received a notice letter from the Chesapeake Bay Foundation (CBF) alleging violations of the Clean Water Act and Pennsylvania Clean Streams Law at the Brunner Island generation plant. The letter was sent to PPL Brunner Island and the PADEP and is intended to provide notice of the alleged violations and CBF's intent to file suit in Federal court after expiration of the 60 day statutory notice period.  Among other things, the letter alleges that PPL Brunner Island failed to comply with the terms of its National Pollutant Discharge Elimination System permit and associated regulations related to the application of nutrient credits to the facility's discharges of nitrogen into the Susquehanna River.  The letter also alleges that PADEP has failed to ensure that credits generated from nonpoint source pollution reduction activities that PPL Brunner Island applies to its discharges meet the eligibility and certification requirements under PADEP's nutrient trading program regulations.  If a court-approved settlement cannot be reached, CBF plans to seek injunctive relief, monetary penalties, fees and costs of litigation. PPL cannot predict the outcome of this matter.

 

Proposed Legislation - Pacific Northwest

 

In the first quarter of 2015, legislation was proposed in the State of Oregon to eliminate, over time, the sale of electricity in Oregon from coal-fired generating facilities, and in the State of Washington to provide a means of cost recovery to utility owners of coal-fired generating facilities who commit to retire such facilities. Both proposals are in early stages of consideration and PPL cannot predict whether any legislation seeking to achieve the objectives of the Oregon or Washington legislation will be enacted. Were such legislation to be enacted as proposed, such laws, either individually or collectively, would not be expected to have a material adverse effect on PPL's financial condition or results of operation.

 

(PPL, LKE and LG&E)

 

Cane Run Environmental Claims

 

In December 2013, six residents, on behalf of themselves and others similarly situated, filed a class action complaint against LG&E and PPL in the U.S. District Court for the Western District of Kentucky alleging violations of the Clean Air Act and RCRA. In addition, these plaintiffs assert common law claims of nuisance, trespass and negligence. These plaintiffs seek injunctive relief and civil penalties, plus costs and attorney fees, for the alleged statutory violations. Under the common law claims, these plaintiffs seek monetary compensation and punitive damages for property damage and diminished property values for a class consisting of residents within four miles of the plant. In their individual capacities, these plaintiffs seek compensation for alleged adverse health effects. In response to a motion to dismiss filed by PPL and LG&E, in July 2014, the court dismissed the plaintiffs' RCRA claims and all but one of its Clean Air Act claims, but declined to dismiss their common law tort claims. Upon motion of LG&E and PPL, the district court certified for appellate review the issue of whether the state common law claims are preempted by federal statute. In December 2014, the U.S. Court of Appeals for the Sixth Circuit issued an order granting appellate review regarding the above matter and such issues as may appropriately be presented by the parties and determined by the court. PPL, LKE and LG&E cannot predict the outcome of this matter or the potential impact on operations of the Cane Run plant. LG&E retired one coal-fired unit at the Cane Run plant in March 2015 and anticipates retiring the remaining two coal-fired units at the Cane Run plant in the third quarter of 2015.

 

Mill Creek Environmental Claims

 

In May 2014, the Sierra Club filed a citizen suit against LG&E in the U.S. District Court for the Western District of Kentucky for alleged violations of the Clean Water Act. The Sierra Club alleges that various discharges at the Mill Creek plant constitute violations of the plant's water discharge permit. The Sierra Club seeks civil penalties, injunctive relief, plus costs and attorney's fees. The parties have filed various cross-motions for summary judgment which are pending before the court. PPL, LKE and LG&E cannot predict the outcome of this matter or the potential impact on the operations of the Mill Creek plant but believe the plant is operating in compliance with the permits.

 

Regulatory Issues

 

(All Registrants)

 

See Note 6 for information on regulatory matters related to utility rate regulation.

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(PPL and PPL Electric)

 

New Jersey Capacity Legislation

 

In January 2011, New Jersey enacted a law (the Act) that PPL believes would intervene in the wholesale capacity market to create incentives for the development of new, in-state electricity generation facilities even when, under the FERC-approved PJM economic model, such new generation would not be economic. The Act could depress capacity prices in PJM in the short-term, impacting PPL Energy Supply's revenues, and harm the long-term ability of the PJM capacity market to encourage necessary generation investment throughout PJM.

 

In February 2011, PPL and several other companies filed a complaint in U.S. District Court in New Jersey challenging the Act on the grounds that it violates the Supremacy and Commerce clauses of the U.S. Constitution and requesting relief barring implementation. In October 2013, the U.S. District Court in New Jersey issued a decision finding the Act unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in interstate commerce. The decision was appealed to the U.S. Court of Appeals for the Third Circuit (Third Circuit) by CPV Power Development, Inc., Hess Newark, LLC and the State of New Jersey (the Appellants). In September 2014, the Third Circuit affirmed the District Court's decision. In December 2014, the Appellants filed a petition for certioraribefore the U.S. Supreme Court. In March 2015, the U.S. Supreme Court requested the U.S. Solicitor General to submit briefs expressing its views as to the issues raised in this case.

 

Maryland Capacity Order

 

In April 2012, the Maryland Public Service Commission (MD PSC) ordered (Order) three electric utilities in Maryland to enter into long-term contracts to support the construction of new electricity generating facilities in Maryland the intent of which, PPL believed, was to encourage the construction of new generation even when, under the FERC-approved PJM economic model, such new generation would not be economic. The MD PSC action could depress capacity prices in PJM in the short-term, impacting PPL Energy Supply's revenues, and harm the long-term ability of the PJM capacity market to encourage necessary generation investment throughout PJM.

 

In April 2012, PPL and several other companies filed a complaint in U.S. District Court (District Court) in Maryland challenging the Order on the grounds that it violates the Supremacy and Commerce clauses of the U.S. Constitution and requested declaratory and injunctive relief barring implementation of the order by the MD PSC Commissioners. In September 2013, the District Court issued a decision finding the Order unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in interstate commerce. The decision was appealed to the U.S. Court of Appeals for the Fourth Circuit (Fourth Circuit) by CPV Power Development, Inc. and the State of Maryland (the Appellants). In June 2014, the Fourth Circuit affirmed the District Court's opinion and subsequently denied the Appellants' motion for rehearing. In December 2014, the Appellants filed a petition for certiorari before the U.S. Supreme Court. In March 2015, the U.S. Supreme Court requested the U.S. Solicitor General to submit briefs expressing its views as to the issues raised in this case.

 

Pacific Northwest Markets(PPL)

 

Through its subsidiaries, PPL Energy Supply made spot market bilateral sales of power in the Pacific Northwest during the period from December 2000 through June 2001. Several parties subsequently claimed refunds at FERC as a result of these sales. In June 2003, the FERC terminated proceedings to consider whether to order refunds for spot market bilateral sales made in the Pacific Northwest, including sales made by PPL Montana, during the period December 2000 through June 2001. In August 2007, the U.S. Court of Appeals for the Ninth Circuit reversed the FERC's decision and ordered the FERC to consider additional evidence. In October 2011, FERC initiated proceedings to consider additional evidence. In July 2012, PPL Montana and the City of Tacoma, one of the two parties claiming refunds at FERC, reached a settlement whereby PPL Montana paid $75 thousand to resolve the City of Tacoma's $23 million claim. The settlement does not resolve the remaining claim outstanding by the City of Seattle for approximately $50 million. Hearings before a FERC Administrative Law Judge (ALJ) regarding the City of Seattle's refund claims were completed in October 2013 and briefing was completed in January 2014. In March 2014, the ALJ issued an initial decision denying the City of Seattle's complaint against PPL Montana. The initial decision is pending review by the FERC. In June 2015, the United States Court of Appeals for the Ninth Circuit will hold oral argument on an appeal from the FERC's October 2011 order setting out the remand process that FERC has followed from 2011 to the present.

 

Although PPL and its subsidiaries believe they have not engaged in any improper trading or marketing practices affecting the Pacific Northwest markets, PPL cannot predict the outcome of the above-described proceedings or whether any subsidiaries

47
 

will be the subject of any additional governmental investigations or named in other lawsuits or refund proceedings. Consequently, PPL cannot estimate a range of reasonably possible losses, if any, related to this matter.

 

(All Registrants)

 

Electricity - Reliability Standards

 

The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system. The FERC oversees this process and independently enforces the Reliability Standards.

 

The Reliability Standards have the force and effect of law and apply to certain users of the bulk power electricity system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.

 

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

 

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

 

In October 2012, the FERC initiated its consideration of proposed changes to Reliability Standards to address the impacts of geomagnetic disturbances on the reliable operation of the bulk-power system, which might, among other things, lead to a requirement to install equipment that blocks geomagnetically induced currents on implicated transformers. In May 2013, FERC issued Order No. 779, requiring NERC to submit two types of Reliability Standards for FERC's approval. The first type would require certain owners and operators of the nation's electricity infrastructure, such as the Registrants, to develop and implement operational procedures to mitigate the effects of geomagnetic disturbances on the bulk-power system. This NERC proposed standard was filed by NERC with FERC for approval in January 2014, and was approved in June 2014. The second type is to require owners and operators of the bulk-power system to assess certain geomagnetic disturbance events and develop and implement plans to protect the bulk-power system from those events. This proposal was filed by NERC with FERC for approval by January 22, 2015 and is pending consideration by FERC. The Registrants may be required to make significant expenditures in new equipment or modifications to their facilities to comply with the new requirements. The Registrants are unable to predict the amount of any expenditures that may be required as a result of the adoption of any Reliability Standards for geomagnetic disturbances.

 

Environmental Matters - Domestic

 

(All Registrants)

 

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

 

LG&E and KU are entitled to recover, through the ECR mechanism, certain costs of complying with the Clean Air Act, as amended, and those federal, state or local environmental requirements applicable to coal combustion wastes and by-products from facilities that generate electricity from coal in accordance with approved compliance plans. Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before the companies' respective state regulatory authorities, or the FERC, if applicable. Because PPL Electric does not own any generating plants, its exposure to related environmental compliance costs is reduced. As PPL Energy Supply is not a rate-regulated entity, it cannot seek to recover environmental compliance costs through the mechanism of rate recovery. PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.

 

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(All Registrants except PPL Electric)

 

Air

 

CSAPR

 

The EPA's CSAPR addresses the interstate transport of fine particulates and ozone by regulating emissions of sulfur dioxide and nitrogen oxide. In accordance with an October 2014 U.S. Court of Appeals decision, CSAPR establishes interstate allowance trading programs for sulfur dioxide and nitrogen oxide emissions from fossil-fueled plants in two phases: Phase 1 commenced in January 2015 and Phase 2 commences in 2017. Sulfur dioxide emissions are subject to an annual trading program and nitrogen oxide emissions are subject to annual and ozone season programs. Oral arguments pertaining to outstanding challenges to the EPA's CSAPR were heard before the D.C. Circuit Court during February 2015.

 

Although PPL, LKE, LG&E and KU do not anticipate significant costs to comply with these programs, changes in market or operating conditions could result in impacts that are higher than anticipated.

 

National Ambient Air Quality Standards

 

In 2008, the EPA revised the National Ambient Air Quality Standard for ozone. As a result, states in the ozone transport region (OTR), including Pennsylvania, are required by the Clean Air Act to impose additional reductions in nitrogen oxide emissions based upon reasonably available control technologies (RACT). The PADEP is expected to finalize a RACT rule in 2015 requiring some fossil-fueled plants to operate at more stringent nitrogen oxide emission rates. The EPA proposed to further strengthen the ozone standard in November 2014, which could lead to further nitrogen oxide reductions, for PPL's fossil-fueled plants within the OTR. The EPA is under court order to finalize the standard by October 1, 2015. States are also obligated to address interstate transport issues associated with new ozone standards through the establishment of "good neighbor" state implementation plans for those states that are found to contribute significantly to another states' non-attainment. In January 2015, the EPA issued a policy memo to state agencies to facilitate the development of these plans for the 2008 standard, including modeling data defining state contributions. The implementation of such plans could have an impact on the structure and stringency of CSAPR Phase 2 reductions (discussed above), or it could lead to the development of a new ozone transport rule. Non-OTR states, including Kentucky, are working together to evaluate further nitrogen oxide reductions from fossil-fueled plants with SCRs. The nature and timing of any additional reductions resulting from these evaluations cannot be determined at this time.

 

In 2010, the EPA finalized a new National Ambient Air Quality Standard for sulfur dioxide and required states to identify areas that meet those standards and areas that are in "non-attainment". In July 2013, the EPA finalized non-attainment designations for parts of the country, including part of Yellowstone County in Montana (Billings area) and part of Jefferson County in Kentucky. Attainment must be achieved by 2018. Pursuant to a consent decree between the EPA and Sierra Club approved on March 2, 2015, states are working to finalize designations for other areas by the 2017 or 2020 deadline depending on which designation methodology is used. PPL, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CSAPR (as discussed above), or the MATS, or the Regional Haze Rules (as discussed below), such as upgraded or new sulfur dioxide scrubbers at certain plants and, in the case of LG&E and KU, the previously announced retirement of coal-fired generating units at the Cane Run, Green River and Tyrone plants, will help to achieve compliance with the new sulfur dioxide standard. If additional reductions were to be required, the financial impact could be significant. The short-term impact on the Corette plant from the EPA's final designation of part of Yellowstone County in Montana as non-attainment (as noted above) is not expected to be significant, as the operations were suspended and the plant was retired in March 2015. In addition, MDEQ recently submitted a request to the EPA for a determination that this area is in attainment. If the EPA agrees with this request, then the deadlines associated with non-attainment would be suspended.

 

In December 2012, the EPA issued final rules that tighten the annual National Ambient Air Quality Standard for fine particulates. The rules were challenged by industry groups, and in May 2014 the D.C. Circuit Court upheld them. On January 15, 2015, the EPA published a final rule establishing area designations under the standard. Non-attainment areas in Pennsylvania and Kentucky were identified; however, EPA recently approved state implementation plan revisions for both states that improved these classifications. PPL Energy Supply, LG&E and KU plants in Pennsylvania and Kentucky will not be expected to make further reductions towards achieving attainment.

 

Until final rules are promulgated, non-attainment designations are finalized and state compliance plans are developed, PPL, LKE, LG&E and KU cannot predict the ultimate outcome of the new National Ambient Air Quality standards for ozone, sulfur dioxide and particulate matter.

 

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MATS

 

In February 2012, the EPA finalized the MATS rule requiring reductions of mercury and other hazardous air pollutants from fossil-fuel fired power plants, known as the MATS, with an effective date of April 16, 2012. The rule was challenged by industry groups and states and was upheld by the D.C. Circuit Court in April 2014. A group of states subsequently petitioned the U.S. Supreme Court to review this decision and on March 25, 2015, oral arguments were heard as to one issue - whether or not EPA unreasonably refused to consider costs when determining whether the MATS regulation was appropriate and necessary. A U.S. Supreme Court decision is expected by June 30, 2015. The rule provides for a three-year compliance deadline with the potential for one- and two-year extensions as provided under the statute. PPL, LKE, LG&E and KU have completed installation or upgrading of relevant environmental controls at affected plants or have received compliance extensions, as applicable.

 

At the time the MATS rule was proposed, LG&E and KU filed requests with the KPSC for environmental cost recovery based on their expected need to install environmental controls including chemical additive and fabric-filter baghouses to remove air pollutants. Recovery of the cost of certain controls was granted by the KPSC in December 2011. LG&E's March 2015 retirement of one coal-fired generating unit at Cane Run and LG&E's and KU's anticipated retirement of remaining coal-fired electricity generating units located at Cane Run and Green River in 2015 and 2016 are in response to MATS and other environmental regulations. The retirement of these units is not expected to have a material impact on the financial condition or results of operations of PPL, LKE, LG&E or KU.

 

PPL believes that installation of chemical additive systems and other controls may be necessary at certain coal-fired plants in Pennsylvania, the capital cost of which is not expected to be significant. PPL continues to analyze the potential impact of MATS on operating costs. With respect to PPL's Montana plants, modifications to the air pollution controls installed at Colstrip are required, the cost of which is not expected to be significant. Operations were suspended and the Corette plant was retired in March 2015 due to expected market conditions and the costs to comply with the MATS requirements.

 

PPL, LKE, LG&E and KU are conducting in-depth reviews of the EPA's amendments to the final rule and certain proposed corrections, none of which are currently expected to be significant.

 

Regional Haze and Visibility

 

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

 

The primary power plant emissions affecting visibility are sulfur dioxide, nitrogen oxides and particulates. To date, the focus of regional haze regulation has been the western U.S. As for the eastern U.S., the EPA had determined that region-wide reductions under the CSAPR trading program could, in most instances, be utilized under state programs to satisfy BART requirements for sulfur dioxide and nitrogen oxides. However, the EPA's determination is being challenged by environmental groups and others.

 

LG&E's Mill Creek Units 3 and 4 are required to reduce sulfuric acid mist emissions because they were determined to have a significant regional haze impact. These reductions are required in the regional haze state implementation plan that the Kentucky Division for Air Quality submitted to the EPA. LG&E is currently installing sorbent injection technology to comply with these reductions, the costs of which are not expected to be significant.

 

In Montana, the EPA Region 8 developed the regional haze plan as the MDEQ declined to do so. The EPA finalized the Federal Implementation Plan (FIP) for Montana in September 2012. The final FIP assumed no additional controls for Corette or Colstrip Units 3 and 4, but proposed stricter limits for Corette and Colstrip Units 1 and 2. PPL Energy Supply was meeting these stricter permit limits at Corette without any significant changes to operations, although other requirements have led to the suspension of operations and the retirement of Corette in March 2015 (see "MATS" discussion above). Under the final FIP, Colstrip Units 1 and 2 may require additional controls, including the possible installation of an SNCR and other technology, to meet more stringent nitrogen oxides and sulfur dioxide limits. The cost of these potential additional controls, if required, could be significant. Both PPL and environmental groups have appealed the final FIP to the U.S. Court of Appeals for the Ninth Circuit, oral argument was heard in May 2014, and the parties are awaiting a decision.

 

New Source Review (NSR)

 

The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants. The EPA has asserted that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR requirements under the Clean Air Act. PPL, LKE, LG&E and KU received various EPA information requests in 2007 and

50
 

2009, but have received no further communications from the EPA related to those requests since providing their responses. In January 2009, PPL and other companies that own or operate the Keystone plant in Pennsylvania received a notice of violation from the EPA alleging that certain projects were undertaken without proper NSR compliance. The companies responded to the EPA and the matter remains open. In May and November 2012, PPL Montana received information requests from the EPA regarding projects undertaken during a Spring 2012 maintenance outage at Colstrip Unit 1. The EPA requests remain an open matter. In September 2012, PPL Montana received an information request from the MDEQ regarding Colstrip Unit 1 and other projects. MDEQ formally suspended this request on June 6, 2014 in consideration of pending litigation (see "Legal Matters - Sierra Club Litigation" above). PPL, LKE, LG&E and KU cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.

 

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

 

If any PPL subsidiary is found to have violated NSR regulations by significantly increasing pollutants through a major plant modification, the subsidiary would, among other things, be required to meet stringent permit limits reflecting Best Available Control Technology (BACT) for pollutants meeting the National Ambient Air Quality Standards (NAAQS) in the area and reflecting Lowest Achievable Emission Rates for pollutants not meeting the NAAQS in the area. The costs to meet such limits, including installation of technology at certain units, could be material.

 

Trimble County Unit 2 Air Permit(PPL, LKE, LG&E and KU)

 

The Sierra Club and other environmental groups petitioned the Kentucky Environmental and Public Protection Cabinet to overturn the air permit issued for the Trimble County Unit 2 baseload coal-fired generating unit, but the agency upheld the permit in an order issued in September 2007. In response to subsequent petitions by environmental groups, the EPA ordered certain non-material changes to the permit which, in January 2010, were incorporated into a final revised permit issued by the Kentucky Division for Air Quality. In March 2010, the environmental groups petitioned the EPA to object to the revised state permit. Until the EPA issues a final ruling on the pending petition and all available appeals are exhausted, PPL, LKE, LG&E and KU cannot predict the outcome of this matter or the potential impact on plant operations, including increased capital costs, if any.

 

Climate Change

 

(All Registrants)

 

As a result of the April 2007 U.S. Supreme Court decision that the EPA has authority under the Clean Air Act to regulate carbon dioxide emissions from new motor vehicles, in April 2010 the EPA and the U.S. Department of Transportation issued new light-duty vehicle emissions standards that applied beginning with 2012 model year vehicles. The EPA also clarified that this standard, beginning in 2011, authorized regulation of carbon dioxide emissions from stationary sources under the NSR and Title V operating permit provisions of the Clean Air Act. The EPA's rules were challenged in court and on June 23, 2014, the U.S. Supreme Court ruled that the EPA has the authority to regulate carbon dioxide emissions under these provisions of the Clean Air Act but only for stationary sources that would otherwise have been subject to these provisions due to significant increases in emissions of other pollutants. As a result, any new sources or major modifications to an existing GHG source causing a net significant increase in carbon dioxide emissions must comply with BACT permit limits for carbon dioxide if it would otherwise be subject to BACT or lowest achievable emissions ratelimits due to significant increases in other pollutants.

 

In June 2013, President Obama released his Climate Action Plan that reiterates the goal of reducing GHG emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing more restrictive energy efficiency standards. Additionally, the Climate Action Plan calls for the U.S. to prepare for the impacts of climate change. Requirements related to this Plan could affect the Registrants and others in the industry as modifications may be needed to electricity delivery systems to improve the ability to withstand major storms in order to meet those requirements. As further described below, the EPA has proposed rules pursuant to this directive, which it expects to finalize in the second or third quarter of 2015. The EPA has also announced that it will develop a federal implementation plan which would apply to any states that fail to submit an acceptable state implementation plan. The EPA's authority to promulgate these regulations under Section 111 of the Clean Air Act when the sources are already regulated under Section 112 is under challenge in the D.C. Circuit Court. Oral arguments were heard on April 16, 2015.

 

In January 2014, the EPA issued a revised proposal to regulate carbon dioxide emissions from new power plants. The revised proposal calls for separate emission standards for coal and gas units based on the application of different

51
 

technologies. The coal standard is based on the application of partial carbon capture and sequestration technology, but because this technology is not presently commercially available, the revised proposal effectively precludes the construction of new coal-fired plants. The standard for NGCC power plants is the same as the EPA proposed in 2012 and is not continuously achievable. The preclusion of new coal-fired plants and the compliance difficulties posed for new gas-fired plants could have a significant industry-wide impact.

 

In June 2014, the EPA issued proposed regulations addressing carbon dioxide emissions from existing power plants. The existing plant proposal contains state-specific rate-based reduction goals and guidelines for the development, submission and implementation of state plans to achieve the state goals. State-specific goals were calculated from 2012 data by applying EPA's broad interpretation and definition of the Best System of Emission Reduction resulting in stringent targets to be met in two phases (2020-2029 and 2030 and beyond). The EPA believes it has offered some flexibility to the states as to how state compliance plans can be crafted, including the option to demonstrate compliance on a mass basis and through multi-state collaborations. The EPA is also proposing potential state plan extensions based on the type of plan filed (single or multi state). PPL has analyzed the proposal and identified potential impacts and solutions in comments filed on December 1, 2014. PPL also submitted Supplemental Comments to FERC through EEI, advocating for reliability coordination and relief in response to technical conferences hosted by FERC on the reliability implications of implementing this rule. The regulation of carbon dioxide emissions from existing power plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.

 

In June 2014, the EPA also proposed a regulation addressing carbon dioxide emissions from existing power plants that are modified or reconstructed. The Registrants, however, do not expect a significant impact from this rulemaking as there are no plans to modify or reconstruct their existing plants in a manner that would trigger the proposed requirements.

 

(PPL)

 

Based on the stringent GHG reduction requirements in the EPA's proposed rule for existing plants, and based on information gained from public input, the PADEP is no longer expecting to achieve all required GHG reductions by solely increasing efficiency at existing fossil-fuel plants and/or reducing their generation as set forth in the PADEP's April 10, 2014 white paper. In October 2014, the Governor of Pennsylvania signed into law Act 175 of 2014, requiring the PADEP to obtain General Assembly approval of any state plan addressing GHG emissions under the EPA's GHG rules for existing plants. The law includes provisions to minimize the exposure to a federal implementation plan due to legislative delay.

 

The MDEQ, at the request of the Governor of Montana, has issued a white paper outlining possible regulatory scenarios to implement the EPA's proposed GHG rule for existing plants, including a combination of increasing energy efficiency at coal-fired plants, adding more low- and zero-carbon generation, and carbon sequestration at Colstrip. The white paper was made public in September 2014 and the MDEQ has held public meetings to present the white paper and gather comments. Legislation drafted to require legislative approval of any related plan formulated by MDEQ was tabled.

 

(PPL, LKE, LG&E and KU)

 

In April 2014, the Kentucky General Assembly passed legislation which limits the measures that the Kentucky Energy and Environment Cabinet may consider in setting performance standards to comply with the EPA's regulations governing GHG emissions from existing sources. The legislation provides that such state GHG performance standards shall be based on emission reductions, efficiency measures, and other improvements available at each power plant, rather than renewable energy, end-use energy efficiency, fuel switching and re-dispatch. These statutory restrictions may make it more difficult for Kentucky to achieve the GHG reduction levels which the EPA has proposed for Kentucky.

 

(All Registrants except PPL Electric)

 

A number of lawsuits have been filed asserting common law claims including nuisance, trespass and negligence against various companies with GHG emitting plants and, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims. In September 2009, the U.S. Court of Appeals for the Second Circuit in the case of AEP v. Connecticut reversed a federal district court's decision and ruled that several states and public interest groups, as well as the City of New York, could sue five electric utility companies under federal common law for allegedly causing a public nuisance as a result of their emissions of GHGs. In June 2011, the U.S. Supreme Court overturned the Second Circuit and held that such federal common law claims were displaced by the Clean Air Act and regulatory actions of the EPA. In addition, in Comer v. Murphy Oil (Comer case), the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) declined to overturn a district court ruling that plaintiffs did not have standing to pursue state common law claims against companies that emit GHGs. The complaint in the Comer case named the previous indirect parent of LKE as a defendant based upon emissions from the Kentucky plants. In January 2011, the U.S. Supreme Court denied a petition to reverse the Fifth Circuit's ruling. In May 2011, the plaintiffs in the Comer case filed a substantially similar

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complaint in federal district court in Mississippi against 87 companies, including KU and three other indirect subsidiaries of LKE, under a Mississippi statute that allows the re-filing of an action in certain circumstances. In March 2012, the Mississippi federal district court granted defendants' motions to dismiss the state common law claims. Plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit, and in May 2013, the Fifth Circuit affirmed the district court's dismissal of the case. Additional litigation in federal and state courts over such issues is continuing. The Registrants cannot predict the outcome of these lawsuits or estimate a range of reasonably possible losses, if any.

 

Renewable Energy Legislation

 

(PPL and PPL Electric)

 

In Pennsylvania, House Bill 100 was introduced in February 2015, proposing to increase AEPS solar and Tier 1 targets. A similar bill is in the process of being introduced in the Senate (no bill number is available at this time). PPL and PPL Electric cannot predict the outcome of this legislative effort.

 

(PPL)

 

In New Jersey, a bill (S-1475) has been introduced to increase the current Renewable Portfolio Standard (RPS) to 30% from Class I sources by 2020. The chairman of the Senate Environmental Committee convened a workgroup to look at further changes to New Jersey's RPS law to enable New Jersey to meet emissions goals established in the state's Global Warming Response Act. A bill (S-2444) was subsequently introduced to mandate that 80% of New Jersey's electricity be generated from renewable resources by 2050. PPL cannot predict the outcome of this legislation.

 

(All Registrants)

 

The Registrants believe there are financial, regulatory and operational uncertainties related to the implementation of renewable energy mandates that will need to be resolved before the impact of such requirements on them can be estimated. Such uncertainties, among others, include the need to provide back-up supply to augment intermittent renewable generation, potential generation over-supply and downward pressure on energy prices that could result from such renewable generation and back-up, impacts to PJM's capacity market and the need for substantial changes to transmission and distribution systems to accommodate renewable energy sources. These uncertainties are not directly addressed by proposed legislation. PPL cannot predict the effect on their competitive plants' future competitive position, results of operation, cash flows and financial position of renewable energy mandates that may be adopted, although the costs to implement and comply with any such requirements could be significant.

 

Water/Waste

 

(All Registrants except PPL Electric)

 

Coal Combustion Residuals (CCRs)

 

On April 17, 2015, the EPA published its final rule regulating CCRs. CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes. The rule will become effective on October 14, 2015. It imposes extensive new requirements, including location restrictions, design and operating standards, groundwater monitoring and corrective action requirements and closure and post-closure care requirements on CCR impoundments and landfills that are located on active power plants and not closed. Under the rule, the EPA will regulate CCRs as non-hazardous under Subtitle D of RCRA and allow beneficial use of CCRs, with some restrictions. This self-implementing rule requires posting of compliance documentation on a publicly accessible website and is enforceable through citizen suits. PPL expects that its plants using surface impoundments for management and disposal of CCRs or the past management of CCRs and continued use to manage waste waters will be most impacted by this rule. The rule's requirements for covered CCR impoundments and landfills include commencement or completion of closure activities generally between three and ten years from certain triggering events. PPL, LKE, LG&E and KU also anticipate incurring capital or operation and maintenance costs prior to that time to address other provisions of the rule, such as groundwater monitoring and disposal facility modifications, or to implement various compliance strategies.

 

PPL, LKE, LG&E and KU are reviewing the rule and are still evaluating its financial and operational impact. It is expected that these requirements will result in increases to existing AROs which will be recorded in the second quarter of 2015. PPL, LKE, LG&E and KU are not yet able to determine an estimate of the expected increases to the existing AROs. PPL, LKE, LG&E and KU believe relevant costs relating to this rule are subject to future rate recovery before the respective state regulatory agencies, or the FERC, as applicable.

 

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Effluent Limitations Guidelines (ELGs) and Standards

 

In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate. The EPA's proposed ELG regulations contain requirements that would affect the inspection and operation of CCR facilities if finalized as proposed. The proposal contains alternative approaches, some of which could significantly impact PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's coal-fired plants. The final regulation is expected to be issued by the third or fourth quarter of 2015. At the present time, PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant. Pending finalization of the ELGs, certain states (including Pennsylvania and Kentucky) and environmental groups are proposing more stringent technology-based limits in permit renewals. Depending on the final limits imposed, the costs of compliance could be significant and costs could be imposed ahead of federal timelines.

 

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

 

In May 2011, LG&E submitted an application for a special waste landfill permit to handle CCRs generated at the Trimble County plant. In May 2013, the Kentucky Division of Waste Management denied the permit application on the grounds that the proposed facility would violate the Kentucky Cave Protection Act because it would eliminate an on-site karst feature considered to be a cave. In January 2014, LG&E submitted to the Kentucky Division of Waste Management a landfill permit application for an alternate site adjacent to the plant. LG&E has also applied for other necessary regulatory approvals including a dredge and fill permit from the U.S. Army Corps of Engineers, in which proceeding the EPA or the public have submitted certain comments to which LG&E and KU are responding. PPL, LKE, LG&E and KU are unable to determine the potential impact of this matter until all permits are issued and any resulting legal challenges are concluded.

 

Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky

 

(All Registrants except PPL Electric)

 

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

 

(PPL)

 

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

 

In September 2012, Earthjustice filed an affidavit pursuant to Montana's Major Facility Siting Act (MFSA) that sought review of the AOC by Montana's Board of Environmental Review (BER) on behalf of the Sierra Club, the MEIC and the National Wildlife Federation. In September 2012, PPL Montana filed an election with the BER to have this proceeding conducted in Montana state district court as contemplated by the MFSA. In October 2012, Earthjustice filed a petition for review of the AOC in the Montana state district court in Rosebud County. This matter was stayed in December 2012. In April 2014, Earthjustice filed a motion for leave to amend the petition for review and to lift the stay which was granted by the court in May 2014. PPL Montana and the MDEQ responded to the amended petition and filed partial motions to dismiss in July 2014, which were both denied in October 2014. Discovery is ongoing, and a bench trial is set for April 2016.

 

Clean Water Act 316(b)(All Registrants except PPL Electric)

 

The EPA's final 316(b) rule for existing facilities became effective in October 2014, and regulates cooling water intake structures and their impact on aquatic organisms. States are allowed considerable authority to make site-specific determinations under the rule. The rule requires existing facilities to choose between several options to reduce the impact to aquatic organisms that become trapped against water intake screens (impingement) and to determine the intake structure's impact on aquatic organisms pulled through a plant's cooling water system (entrainment). Plants already equipped with closed-cycle cooling, an acceptable option, would likely not incur substantial costs. Once-through systems would likely

54
 

require additional technology to comply with the rule. Mill Creek Unit 1 and Brunner Island (all units) are the only units expected to be impacted. PPL, LKE, LG&E and KU are evaluating compliance strategies but do not presently expect the compliance costs to be material.

 

(All Registrants)

 

Waters of the United States (WOTUS)

 

In April 2014, the EPA and the U.S. Army Corps of Engineers (Army Corps) published a proposed rule defining WOTUS that could greatly expand the federal government's interpretation of what constitutes WOTUS subject to regulation under the Clean Water Act. If the definition is expanded as proposed by the EPA and the Army Corps, permits and other regulatory requirements may be imposed for many matters presently not covered (including vegetation management for transmission lines and activities affecting storm water conveyances and wetlands), the implications of which could be significant. The EPA plans to make certain changes to the proposed regulation based on comments received. The U.S. House and Senate are considering legislation to block this regulation. Until a final rule is issued, the Registrants cannot predict the outcome of the pending rulemaking. A final rule is expected by summer 2015.

 

Other Issues

 

The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the Toxic Substance Control Act, which currently allow certain PCB articles to remain in use. In April 2010, the EPA issued an Advanced Notice of Proposed Rulemaking for changes to these regulations. This rulemaking could lead to a phase-out of all or some PCB-containing equipment. The EPA is planning to propose the revised regulations in 2015. PCBs are found, in varying degrees, in all of the Registrants' operations. The Registrants cannot predict at this time the outcome of these proposed EPA regulations and what impact, if any, they would have on their facilities, but the costs could be significant.

 

(PPL)

 

A subsidiary of PPL Energy Supply has investigated alternatives to exclude fish from the discharge channel at its Brunner Island plant. In June 2012, a Consent Order and Agreement (COA) with the PADEP was signed, allowing the subsidiary to study a change in a cooling tower operational method that may keep fish from entering the channel. The COA required a retrofit of impingement control technology at the intakes to the cooling towers, at a cost that would have been significant. Based on the results of the first year of study, the PADEP has suggested closing the COA and writing a new COA to resolve the issue. PPL is in negotiations with the agency at this time. PPL cannot predict at this time the outcome of the proposed new COA and what impact, if any, it would have on their facilities, but the costs could be significant.

 

(PPL, LKE, LG&E and KU)

 

In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010, which covers water discharges from the Trimble County plant. In November 2010, the Cabinet issued a final order upholding the permit. In December 2010, the environmental groups appealed the order to the Trimble Circuit Court, but the case was subsequently transferred to the Franklin Circuit Court. In September 2013, the court reversed the Cabinet order upholding the permit and remanded the permit to the agency for further proceedings. In October 2013, LG&E filed a notice of appeal with the Kentucky Court of Appeals. In February 2015, oral arguments occurred in the appellate proceeding. PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible losses, if any.

 

Superfund and Other Remediation(All Registrants)

 

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

 

PPL Electric, LG&E and KU are remediating, have completed the remediation of, or are responding to agency inquiries regarding several sites that were not addressed under a regulatory program such as Superfund, but for which PPL Electric, LG&E and KU may be liable for remediation. These include a number of former coal gas manufacturing plants in Pennsylvania and Kentucky previously owned or operated or currently owned by predecessors or affiliates of PPL Electric, LG&E and KU. To date, the costs of these sites have not been significant. There are additional sites, formerly owned or

55
 

operated by PPL Electric, LG&E and KU predecessors or affiliates, for which PPL Electric, LG&E and KU lack information on current site conditions and are therefore unable to predict what, if any, potential liability they may have.

 

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

 

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

 

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

 

Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in significant additional costs for PPL, PPL Electric, LG&E and KU.

 

Environmental Matters - WPD(PPL)

 

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

 

Other

 

Nuclear Insurance(PPL)

 

The Price-Anderson Act is a United States Federal law governing liability-related issues and ensures the availability of funds for public liability claims arising from an incident at any U.S. licensed nuclear facility. It also seeks to limit the liability of nuclear reactor owners for such claims from any single incident. At March 31, 2015, the liability limit per incident is $13.6 billion for such claims which is funded by insurance coverage from American Nuclear Insurers and an industry assessment program.

 

Under the industry assessment program, in the event of a nuclear incident at any of the reactors covered by The Price-Anderson Act, as amended, PPL Susquehanna could be assessed up to $255 million per incident, payable at $38 million per year.

 

Additionally, PPL Susquehanna purchases property insurance programs from NEIL, an industry mutual insurance company of which PPL Susquehanna is a member. At March 31, 2015, facilities at the Susquehannaplant are insured against property damage losses up to $2.0 billion. PPL Susquehanna also purchases an insurance program that provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions.

 

Under the NEIL property and replacement power insurance programs, PPL Susquehanna could be assessed retrospective premiums in the event of the insurers' adverse loss experience. This maximum assessment is $46 million at March 31, 2015. Effective April 1, 2015, this maximum assessment increased to $55 million. PPL Energy Supply has additional coverage that, under certain conditions, may reduce this exposure.

 

Guarantees and Other Assurances

 

(All Registrants)

 

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

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(PPL)

 

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

 

(All Registrants)

 

The table below details guarantees provided as of March 31, 2015. "Exposure" represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee. The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities", "Indemnification for sales of assets" and "Indemnification of lease termination and other divestitures." The total recorded liability at March 31, 2015 and December 31, 2014, was $37 million and $38 million for PPL and $19 million for LKE for both periods. For reporting purposes, on a consolidated basis, all guarantees of PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.

 

  Exposure at Expiration
  March 31, 2015 Date
PPL      
Indemnifications related to the WPD Midlands acquisition   (a)  
WPD indemnifications for entities in liquidation and sales of assets $ 11(b) 2018
WPD guarantee of pension and other obligations of unconsolidated entities   114(c)  
Indemnifications for sales of assets   1,150(d) 2016 - 2025
       
PPL Electric      
Guarantee of inventory value   32(e) 2017
       
LKE      
Indemnification of lease termination and other divestitures   301(f) 2021 - 2023
       
LG&E and KU      
LG&E and KU guarantee of shortfall related to OVEC   (g)  

 

(a)Indemnifications related to certain liabilities, including a specific unresolved tax issue and those relating to properties and assets owned by the seller that were transferred to WPD Midlands in connection with the acquisition. A cross indemnity has been received from the seller on the tax issue.The maximum exposure and expiration of these indemnifications cannot be estimated because the maximum potential liability is not capped and the expiration date is not specified in the transaction documents.
(b)Indemnification to the liquidators and certain others for existing liabilities or expenses or liabilities arising during the liquidation process. The indemnifications are limited to distributions made from the subsidiary to its parent either prior or subsequent to liquidation or are not explicitly stated in the agreements. The indemnifications generally expire two to seven years subsequent to the date of dissolution of the entities. The exposure noted only includes those cases where the agreements provide for specific limits.

 

In connection with their sales of various businesses, WPD and its affiliates have provided the purchasers with indemnifications that are standard for such transactions, including indemnifications for certain pre-existing liabilities and environmental and tax matters or have agreed to continue their obligations under existing third-party guarantees, either for a set period of time following the transactions or upon the condition that the purchasers make reasonable efforts to terminate the guarantees. Finally, WPD and its affiliates remain secondarily responsible for lease payments under certain leases that they have assigned to third parties.
(c)Relates to certain obligations of discontinued or modified electric associations that were guaranteed at the time of privatization by the participating members. Costs are allocated to the members and can be reallocated if an existing member becomes insolvent. At March 31, 2015, WPD has recorded an estimated discounted liability for which the expected payment/performance is probable. Neither the expiration date nor the maximum amount of potential payments for certain obligations is explicitly stated in the related agreements, and as a result, the exposure has been estimated.
(d)Indemnifications are governed by the specific sales agreement and include breach of the representations, warranties and covenants, and liabilities for certain other matters. The maximum exposure with respect to certain indemnifications and the expiration of the indemnifications cannot be estimated because the maximum potential liability is not capped by the transaction documents and the expiration date is based on the applicable statute of limitations. The exposure and expiration date noted is based on those cases in which the agreements provide for specific limits. The exposure at March 31, 2015 includes amounts related to the sale of the Montana Hydroelectric facilities. See Note 8 for additional information related to the sale.
(e)A third party logistics firm provides inventory procurement and fulfillment services. The logistics firm has title to the inventory, however, upon termination of the contracts, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold.
(f)LKE provides certain indemnifications, the most significant of which relate to the termination of the WKE lease in July 2009. These guarantees cover the due and punctual payment, performance and discharge by each party of its respective present and future obligations. The most comprehensive of these WKE-related guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under the WKE Transaction Termination Agreement. This guarantee has a term of 12 years ending July 2021, and a cumulative maximum exposure of $200 million. Certain items such as government fines and penalties fall outside the cumulative cap. Another WKE-related LKE guarantee covers other indemnifications, has a term expiring in 2023, and a maximum exposure of $100 million. In May 2012, LKE's indemnitee received an unfavorable arbitration panel's decision interpreting this matter, which granted LKE's indemnitee certain rights of first refusal to purchase excess power at a market-based price rather than at an absolute fixed price. In January 2013, LKE's indemnitee commenced a proceeding in the Kentucky Court of Appeals appealing a December 2012 order of the Henderson Circuit Court, confirming the arbitration award. In May 2014, the Court of Appeals issued an opinion affirming the lower court decision.  LKE's indemnitee filed a Motion for Discretionary Review with the Kentucky Supreme Court in October 2014.  LKE believes its indemnification obligations in this matter remain subject to various uncertainties, including potential for additional legal challenges regarding the arbitration decision as well as future prices, availability and demand for the subject excess power. LKE continues to evaluate various legal and commercial options with respect to this indemnification matter. The ultimate outcomes of the WKE termination-related indemnifications cannot be predicted at this time. Additionally, LKE has indemnified various third parties related to historical obligations for other divested subsidiaries and affiliates. The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an
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indemnified party. However, LKE is not aware of formal claims under such indemnities made by any party at this time. LKE cannot predict the ultimate outcomes of indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.

(g)Pursuant to the OVEC power purchase contract, LG&E and KU are obligated to pay for their share of OVEC's excess debt service, post-retirement and decommissioning costs, as well as any shortfall from amounts currently included within a demand charge designed and currently expected to cover these costs over the term of the contract.The maximum exposure and the expiration date of these potential obligations are not presently determinable. See "Energy Purchase Commitments" and "Guarantees and Other Assurances" in Note 13 in PPL's, LKE's, LG&E's and KU's 2014 Form 10-K for additional information on the OVEC power purchase contract.

 

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

 

PPL, on behalf of itself and certain of its subsidiaries, maintains insurance that covers liability assumed under contract for bodily injury and property damage. The coverage provides maximum aggregate coverage of $225 million. This insurance may be applicable to obligations under certain of these contractual arrangements.

 

11. Related Party Transactions

 

PLR Contracts/Purchase of Accounts Receivable(PPL Electric)

 

PPL Electric holds competitive solicitations for PLR generation supply. PPL EnergyPlus has been awarded a portion of the PLR generation supply through these competitive solicitations. The purchases from PPL EnergyPlus are included in PPL Electric's Statements of Income as "Energy purchases from affiliate".

 

Under the standard Default Service Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits. PPL EnergyPlus is required to post collateral with PPL Electric when: (a) the market price of electricity to be delivered by PPL EnergyPlus exceeds the contract price for the forecasted quantity of electricity to be delivered; and (b) this market price exposure exceeds a contractual credit limit. PPL EnergyPlus does not have an established credit limit. At March 31, 2015, PPL EnergyPlus was not required to post collateral. In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.

 

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

 

Support Costs(All Registrants except PPL)

 

PPL Services and LKS provide their respective PPL and LKE subsidiaries with administrative, management and support services.  In 2015, PPL EU Services was formed to provide the majority of financial, supply chain, human resources and facilities management services primarily to PPL Electric.  PPL Services will continue to provide certain corporate functions. For all service companies, the costs of these services are charged to the respective recipients as direct support costs.  General costs that cannot be directly attributed to a specific entity are allocated and charged to the respective recipients as indirect support costs.  PPL Services and PPL EU Services use a three-factor methodology that includes the applicable recipients' invested capital, operation and maintenance expenses and number of employees to allocate indirect costs.  LKS bases its indirect allocations on the subsidiaries' number of employees, total assets, revenues, number of customers and/or other statistical information.PPL Services, PPL EU Services and LKS charged the following amounts for the periods ended March 31, and believe these amounts are reasonable, including amounts applied to accounts that are further distributed between capital and expense.

 

    Three Months
      2015 2014
             
PPL Electric from PPL Services       $ 30 $ 41
LKE from PPL Services         4   4
PPL Electric from PPL EU Services         15   
             
LG&E from LKS         51   48
KU from LKS         56   53

 

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

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Intercompany Borrowings(LKE)

 

LKE maintains a $225 million revolving line of credit with a PPL Energy Funding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates. At March 31, 2015 and December 31, 2014, $40 and $41 million were outstanding and were reflected in "Notes payable with affiliates" on the consolidated Balance Sheets. The interest rate on borrowings is equal to one-month LIBOR plus a spread. The interest rates on the outstanding borrowing at March 31, 2015 and December 31, 2014 were 1.67% and 1.65%. Interest on the revolving line of credit was not significant for the three months ended March 31, 2015 and 2014.

 

Intercompany Derivatives(LKE, LG&E and KU)

 

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

 

Other(PPL Electric, LG&E and KU)

 

See Note 9 for discussions regarding intercompany allocations associated with defined benefits.

 

12. Other Income (Expense) - net

 

(PPL)

 

The components of "Other Income (Expense) - net" for the periods ended March 31 were:

 

    Three Months
    2015 2014
Other Income      
 Earnings on securities in NDT funds $ 7 $ 6
 Interest income   1   1
 AFUDC - equity component   4   3
 Miscellaneous   5   2
 Total Other Income   17   12
Other Expense      
 Economic foreign currency exchange contracts (Note 14)   (88)   24
 Charitable contributions   5   7
 Spinoff of PPL Energy Supply transaction costs (Note 8)   2     
 Miscellaneous   3   4
 Total Other Expense   (78)   35
Other Income (Expense) - net $ 95 $ (23)

   

(All Registrants except PPL)

 

The components of "Other Income (Expense) - net" for the three months ended March 31, 2015 and 2014 for PPL Electric, LKE, LG&E and KU were not significant.

 

13. Fair Value Measurements and Credit Concentration

 

(All Registrants)

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of financial assets and liabilities is measured on a net basis.Transfers between levels are recognized at end-of-reporting-period values. During the three months ended March 31, 2015 and 2014, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 2014 Form 10-K for information on the levels in the fair value hierarchy.

 

59
 

 

Recurring Fair Value Measurements

 

The assets and liabilities measured at fair value were:

 

     March 31, 2015 December 31, 2014
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL                        
Assets                        
 Cash and cash equivalents $ 1,335 $ 1,335       $ 1,751 $ 1,751      
 Short-term investments   135   135         120   120      
 Restricted cash and cash equivalents (a)   231   231         224   224      
 Price risk management assets:                        
  Energy commodities   1,298   2 $ 1,136 $ 160   1,318   6 $ 1,171 $ 141
  Foreign currency contracts   209      209      130      130   
  Cross-currency swaps   49      49      29      28   1
 Total price risk management assets   1,556   2   1,394   160   1,477   6   1,329   142
 NDT funds:                        
  Cash and cash equivalents   20   20         19   19      
  Equity securities                        
   U.S. large-cap   620   461   159      611   454   157   
   U.S. mid/small-cap   93   38   55      89   37   52   
  Debt securities                        
   U.S. Treasury   97   97         99   99      
   U.S. government sponsored agency   8      8      9      9   
   Municipality   76      76      76      76   
   Investment-grade corporate   45      45      42      42   
   Other   3      3      3      3   
  Receivables (payables), net   3   1   2      2      2   
 Total NDT funds   965   617   348      950   609   341   
 Auction rate securities (b)   10         10   10         10
Total assets $ 4,232 $ 2,320 $ 1,742 $ 170 $ 4,532 $ 2,710 $ 1,670 $ 152
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,163 $ 2 $ 1,130 $ 31 $ 1,217 $ 5 $ 1,182 $ 30
  Interest rate swaps   235      235      156      156   
  Foreign currency contracts   6      6      2      2   
  Cross-currency swaps   2      2      3      3   
 Total price risk management liabilities $ 1,406 $ 2 $ 1,373 $ 31 $ 1,378 $ 5 $ 1,343 $ 30
                            
PPL Electric                        
Assets                        
 Cash and cash equivalents $ 35 $ 35       $ 214 $ 214      
 Restricted cash and cash equivalents (c)   2   2         3   3      
Total assets $ 37 $ 37       $ 217 $ 217      

 

LKE                        
Assets                        
 Cash and cash equivalents        $ 40 $ 40       $ 21 $ 21      
 Cash collateral posted to counterparties (d)   22   22         21   21      
Total assets $ 62 $ 62       $ 42 $ 42      
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps $ 174    $ 174    $ 114    $ 114   
Total price risk management liabilities $ 174    $ 174    $ 114    $ 114   
                            
LG&E                        
Assets                        
 Cash and cash equivalents $ 17 $ 17       $ 10 $ 10      
 Cash collateral posted to counterparties (d)   22   22         21   21      
Total assets $ 39 $ 39       $ 31 $ 31      
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps $ 113    $ 113    $ 81    $ 81   
Total price risk management liabilities $ 113    $ 113    $ 81    $ 81   
                            
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  March 31, 2015 December 31, 2014
  Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
KU                        
Assets                        
 Cash and cash equivalents $ 23 $ 23       $ 11 $ 11      
Total assets $ 23 $ 23       $ 11 $ 11      
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps $ 61    $ 61    $ 33    $ 33   
Total price risk management liabilities $ 61    $ 61    $ 33    $ 33   
                            

 

(a)Current portion is included in "Restricted cash and cash equivalents" and long-term portion is included in "Other noncurrent assets" on the Balance Sheets.
(b)Included in "Other investments" on the Balance Sheets.
(c)Current portion is included in "Other current assets" and long-term portion is included in "Other noncurrent assets" on the Balance Sheets.
(d)Included in "Other noncurrent assets" on the Balance Sheets. Represents cash collateral posted to offset the exposure with counterparties related to certain interest rate swaps under master netting arrangements that are not offset.

 

A reconciliation of net assets and liabilities classified as Level 3 for the three months ended March 31 is as follows:
                             
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      2015 2014
      Energy Auction Cross-    Energy Auction Cross-   
      Commodities, Rate Currency    Commodities,  Rate Currency   
       net Securities Swaps Total  net Securities Swaps Total
PPL                        
Balance at beginning of                        
 period $ 111 $ 10 $ 1 $ 122 $ 24 $ 19    $ 43
  Total realized/unrealized                        
   gains (losses)                        
    Included in earnings  (17)         (17)  (135)        (135)
    Included in OCI (a)         6   6       $(1)  (1)
  Sales                 (3)     (3)
  Settlements   30         30   128         128
  Transfers into Level 3   4         4            
  Transfers out of Level 3   1     (7)   (6)         1   1
Balance at end of period $ 129 $ 10 $  $ 139 $ 17 $ 16 $  $ 33

 

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

 

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

 

    March 31, 2015
    Fair Value, net     Range
    Asset Valuation Unobservable (Weighted
    (Liability) Technique Input(s) Average) (a)
PPL            
Energy commodities            
 Natural gas contracts (b) $ 49 Discounted cash flow Proprietary model used to calculate forward prices 11% - 100% (43%)
 Power sales contracts (c)   1 Discounted cash flow Proprietary model used to calculate forward prices 10% - 100% (82%)
 Heat rate options (e)   79 Discounted cash flow Proprietary model used to calculate forward prices 22% - 44% (40%)
           
Auction rate securities (f)   10 Discounted cash flow Modeled from SIFMA Index 41% - 69% (53%)
              
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    December 31, 2014
    Fair Value, net     Range
    Asset Valuation Unobservable (Weighted
    (Liability) Technique Input(s) Average) (a)
PPL            
Energy commodities            
 Natural gas contracts (b) $ 59 Discounted cash flow Proprietary model used to calculate forward prices 11% - 100% (52%)
 Power sales contracts (c)   (1) Discounted cash flow Proprietary model used to calculate forward prices 10% - 100% (59%)
 FTR purchase contracts (d)   3 Discounted cash flow Historical settled prices used to model forward prices  100% (100%)
 Heat rate options (e)   50 Discounted cash flow Proprietary model used to calculate forward prices 23% - 51% (45%)
           
Auction rate securities (f)   10 Discounted cash flow Modeled from SIFMA Index 44% - 69% (63%)
           
Cross-currency swaps (g)   1 Discounted cash flow Credit valuation adjustment  15% (15%)

 

(a)For energy commodities and auction rate securities, the range and weighted average represent the percentage of fair value derived from the unobservable inputs. For cross-currency swaps, the range and weighted average represent the percentage change in fair value due to the unobservable inputs used in the model to calculate the credit valuation adjustment.
(b)As the forward price of natural gas increases/(decreases), the fair value of purchase contracts increases/(decreases). As the forward price of natural gas increases/(decreases), the fair value of sales contracts (decreases)/increases.
(c)As forward market prices increase/(decrease), the fair value of contracts (decreases)/increases. As volumetric assumptions for contracts in a gain position increase/(decrease), the fair value of contracts increases/(decreases). As volumetric assumptions for contracts in a loss position increase/(decrease), the fair value of the contracts (decreases)/increases.
(d)As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases).
(e)The proprietary model used to calculate fair value incorporates market heat rates, correlations and volatilities. As the market implied heat rate increases/(decreases), the fair value of the contracts increases/(decreases).
(f)The model used to calculate fair value incorporates an assumption that the auctions will continue to fail. As the modeled forward rates of the SIFMA Index increase/(decrease), the fair value of the securities increases/(decreases).
(g)The credit valuation adjustment incorporates projected probabilities of default and estimated recovery rates. As the credit valuation adjustment increases/(decreases), the fair value of the swaps (decreases)/increases.

 

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

 

  Energy Commodities, net
  Unregulated Unregulated Energy
  Wholesale Energy Retail Energy Purchases
  2015 2014 2015 2014 2015 2014
PPL                 
Total gains (losses) included in earnings$ 21 $ (89) $ (40) $ (63) $ 2 $ 17
Change in unrealized gains (losses) relating                 
 to positions still held at the reporting date  25   (13)   (9)   (33)   1   1

 

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

 

Energy commodity contracts are generally valued using the income approach, except for exchange-traded derivative contracts, which are valued using the market approach and are classified as Level 1. Level 2 contracts are valued using inputs which may include quotes obtained from an exchange (where there is insufficient market liquidity to warrant inclusion in Level 1), binding and non-binding broker quotes, prices posted by ISOs or published tariff rates. Furthermore, independent quotes are obtained from the market to validate the forward price curves. Energy commodity contracts include forwards, futures, swaps, options and structured transactions and may be offset with similar positions in exchange-traded markets. To the extent possible, fair value measurements utilize various inputs that include quoted prices for similar contracts or market-corroborated inputs. In certain instances, these contracts may be valued using models, including standard option valuation models and other standard industry models. When the lowest level inputs that are significant to the fair value measurement of a contract are observable, the contract is classified as Level 2.

 

When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3. Level 3 contracts are valued using PPL proprietary models which may include significant unobservable inputs such as delivery at a location where pricing is unobservable, delivery dates that are beyond the dates for which independent quotes are available, volumetric assumptions, implied volatilities, implied correlations, and market implied heat rates. Forward transactions, including forward transactions classified as Level 3, are analyzed by PPL's Risk Management department. Accounting personnel interpret the analysis quarterly to appropriately classify the forward transactions in the fair value hierarchy.

62
 

Valuation techniques are evaluated periodically. Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on PPL's own creditworthiness (for net liabilities) and its counterparties' creditworthiness (for net assets). PPL's credit department assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment.

 

In certain instances, energy commodity contracts are transferred between Level 2 and Level 3. The primary reasons for the transfers during 2015 were changes in the availability of market information and changes in the significance of the unobservable inputs utilized in the valuation of the contracts.

 

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

 

To manage interest rate risk, PPL, LKE, LG&E and KU use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps. To manage foreign currency exchange risk, PPL uses foreign currency contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency contracts. An income approach is used to measure the fair value of these contracts, utilizing readily observable inputs, such as forward interest rates (e.g., LIBOR and government security rates) and forward foreign currency exchange rates (e.g., GBP), as well as inputs that may not be observable, such as credit valuation adjustments. In certain cases, market information cannot practicably be obtained to value credit risk and therefore internal models are relied upon. These models use projected probabilities of default and estimated recovery rates based on historical observances. When the credit valuation adjustment is significant to the overall valuation, the contracts are classified as Level 3. For PPL, the primary reason for the transfers between Level 2 and Level 3 during 2015 and 2014 was the change in the significance of the credit valuation adjustment. Cross-currency swaps are valued by PPL's Treasury department. Accounting personnel interpret analysis quarterly to classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.

 

(PPL)

 

NDT Funds

 

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

 

·The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets.

 

·The fair value measurements of investments in commingled equity funds are classified as Level 2. These fair value measurements are based on firm quotes of net asset values per share, which are not obtained from a quoted price in an active market.

 

The fair value of debt securities is generally measured using a market approach, including the use of pricing models which incorporate observable inputs. Common inputs include benchmark yields, relevant trade data, broker/dealer bid/ask prices, benchmark securities and credit valuation adjustments. When necessary, the fair value of debt securities is measured using the income approach, which incorporates similar observable inputs as well as payment data, future predicted cash flows, collateral performance and new issue data.

 

Auction Rate Securities

 

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

 

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

 

Auction rate securities are valued by PPL's Treasury department. Accounting personnel interpret the analysis quarterly to classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.

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Nonrecurring Fair Value Measurements(PPL)

 

The following nonrecurring fair value measurement occurred during the three months ended March 31, 2014, resulting in an asset impairment:

 

    Carrying Fair Value Measurements Using   
   Amount (a) Level 3 Loss (b)
PPL         
Kerr Dam Project $ 47 $ 29 $ 18

 

(a)Represents carrying value before fair value measurement.
(b)The loss on the Kerr Dam Project was recorded in the Supply segment and included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the 2014 Statement of Income.

 

The significant unobservable inputs used in and the quantitative information about the nonrecurring fair value measurement of assets and liabilities classified as Level 3 are as follows:
    
   Fair Value, net   Significant Range
   Asset Valuation Unobservable (Weighted
   (Liability) Technique Input(s) Average)(a)
Kerr Dam Project           
 March 31, 2014$29 Discounted cash flow Proprietary model used to calculate plant value 38% (38%)

 

(a)The range and weighted average represent the percentage of fair value derived from the unobservable inputs.

 

Kerr Dam Project

 

PPL Montana previously held a joint operating license issued for the Kerr Dam Project. The license extends until 2035 and, between 2015 and 2025, the Confederated Salish and Kootenai Tribes of the Flathead Nation (the Tribes) have the option to purchase, hold and operate the Kerr Dam Project. The parties submitted the issue of the appropriate amount of the conveyance price to arbitration in February 2013. In March 2014, the arbitration panel issued its final decision holding that the conveyance price payable by the Tribes for the Kerr Dam Project is $18 million. As a result of the decision, PPL Energy Supply performed a recoverability test on the Kerr Dam Project and recorded an impairment charge. PPL Energy Supply performed an internal analysis using an income approach based on discounted cash flows (a PPL proprietary model) to assess the fair value of the Kerr Dam Project.  Assumptions used in the PPL proprietary model were the conveyance price, forward energy price curves, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the business planning process and a market participant discount rate. Through this analysis, PPL Energy Supply determined the fair value of the Kerr Dam Project to be $29 million at March 31, 2014. The Kerr Dam Project was included in the sale of the Montana Hydroelectric facilities and the assets were removed from the Balance Sheet. See Note 8 for additional information.

 

The assets were valued by the PPL Energy Supply Financial Department.  Accounting personnel interpreted the analysis to appropriately classify the assets in the fair value hierarchy.

 

Financial Instruments Not Recorded at Fair Value(All Registrants)

 

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

 

   March 31, 2015 December 31, 2014
   Carrying    Carrying   
   Amount Fair Value Amount Fair Value
              
PPL $ 20,307 $ 23,258 $ 20,391 $ 22,670
PPL Electric   2,603   3,084   2,602   2,990
              
LKE   4,567   5,091   4,567   4,946
LG&E   1,353   1,493   1,353   1,455
KU   2,091   2,396   2,091   2,313

 

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

64
 

 

Credit Concentration Associated with Financial Instruments

 

(All Registrants)

 

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

 

(PPL)

 

At March 31, 2015, PPL had credit exposure of $692 million from energy trading partners, excluding the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, PPL's credit exposure was reduced to $402 million. The top ten counterparties including their affiliates accounted for $220 million, or 55%, of these exposures. Eight of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 75% of the top ten exposures. The remaining counterparties are rated below investment grade, but are current on their obligations.

 

(PPL Electric)

 

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

 

(LKE, LG&E and KU)

 

At March 31, 2015, LKE's, LG&E's and KU's credit exposure was not significant.

 

14. Derivative Instruments and Hedging Activities

 

Risk Management Objectives

 

(All Registrants)

 

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

 

Market Risk

 

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

 

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

 

   PPL PPL Electric LKE LG&E KU
                 
Commodity price risk (including basis and volumetric risk) X M M M M
Interest rate risk:               
 Debt issuances X M M M M
 Defined benefit plans X M M M M
 NDT securities X        
Equity securities price risk:               
 Defined benefit plans X M M M M
 NDT securities X        
 Future stock transactions X        
Foreign currency risk - WPD investment and earnings X        
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X= PPL actively mitigates market risks through its risk management programs described above.
M= The regulatory environments for PPL's regulated entities, by definition, significantly mitigate market risk.

 

Commodity price risk

 

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

 

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

 

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

 

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

 

Interest rate risk

 

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

 

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

 

Equity securities price risk

 

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

 

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

 

Foreign currency risk

 

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

 

Credit Risk

 

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

 

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

 

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

 

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

 

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

 

Master Netting Arrangements

 

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

 

PPL's obligation to return counterparty cash collateral under master netting arrangements was $11 million at March 31, 2015 and December 31, 2014.

 

PPL Electric, LKE and LG&E had no obligation to return cash collateral under master netting arrangements at March 31, 2015 and December 31, 2014.

 

PPL, LKE and LG&E posted $22 million and $21 million of cash collateral under master netting arrangements at March 31, 2015 and December 31, 2014.

 

PPL Electric and KU did not post any cash collateral under master netting arrangements at March 31, 2015 and December 31, 2014.

 

See "Offsetting Derivative Investments" below for a summary of derivative positions presented in the balance sheets where a right of setoff exists under these arrangements.

 

(PPL)

 

Commodity Price Risk (Non-trading)

 

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

 

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

 

PPL Energy Supply has a formal hedging program to economically hedge the forecasted purchase and sale of electricity and related fuels for its competitive baseload generation fleet, which includes 6,496 MW (summer rating) of nuclear, coal and hydroelectric generating capacity. PPL Energy Supply attempts to optimize the overall value of its competitive intermediate and peaking fleet, which includes 3,252 MW (summer rating) of natural gas and oil-fired generation. PPL Energy Supply's marketing portfolio is comprised of full-requirement sales contracts and related supply contracts, retail natural gas and electricity sales contracts and other marketing activities. The strategies that PPL Energy Supply uses to hedge its full-requirement sales contracts include purchasing energy (at a liquid trading hub or directly at the load delivery zone), capacity and RECs in the market and/or supplying the energy, capacity and RECs from its generation assets.

 

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

 

Cash Flow Hedges

 

Certain derivative contracts have qualified for hedge accounting so that the effective portion of a derivative's gain or loss is deferred in AOCI and reclassified into earnings when the forecasted transaction occurs. In 2015 and 2014, there were no active cash flow hedges and there was no hedge ineffectiveness associated with energy derivatives. At March 31, 2015, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $18 million. Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time periods and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedge transaction is probable of not occurring.There were no such reclassifications for the three months ended March 31, 2015 and 2014.

 

Economic Activity

 

Many derivative contracts economically hedge the commodity price risk associated with electricity, natural gas, oil and other commodities but do not receive hedge accounting treatment because they were not eligible for hedge accounting or because hedge accounting was not elected. These derivatives hedge a portion of the economic value of PPL Energy Supply's competitive generation assets and unregulated full-requirement and retail contracts, which are subject to changes in fair value due to market price volatility and volume expectations. The derivative contracts in this category that existed at March 31, 2015 range in maturity through 2020.

 

Examples of economic activity may include hedges on sales of baseload generation, certain purchase contracts used to supply full-requirement sales contracts, FTRs or basis swaps used to hedge basis risk associated with the sale of competitive generation or supplying full-requirement sales contracts, Spark Spread hedging contracts, retail electric and natural gas activities, and fuel oil swaps used to hedge price escalation clauses in coal transportation and other fuel-related contracts. PPL Energy Supply also uses options, which include the sale of call options and the purchase of put options tied to a particular generating unit. Since the physical generating capacity is owned, price exposure is generally capped at the price at which the generating unit would be dispatched and therefore does not expose PPL Energy Supply to uncovered market price risk.

 

The unrealized gains (losses) for economic activity for the periods ended March 31 were as follows.

 

         Three Months
       2015 2014
Operating Revenues            
 Unregulated wholesale energy       $ (92) $ (789)
 Unregulated retail energy         (13)   (26)
Operating Expenses            
 Fuel            (1)
 Energy purchases         145   580

 

Commodity Price Risk (Trading)

 

PPL Energy Supply has a proprietary trading strategy which is utilized to take advantage of market opportunities primarily in its geographic footprint. As a result, PPL Energy Supply may at times create a net open position in its portfolio that could result in losses if prices do not move in the manner or direction anticipated. Net energy trading margins, which are included in "Unregulated wholesale energy" on the Statements of Income, were insignificant for the three months ended March 31, 2015 and 2014.

 

Commodity Volumes

 

At March 31, 2015, the net volumes of derivative (sales)/purchase contracts used in support of the various strategies discussed above were as follows.

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    Volumes (a)
Commodity Unit of Measure 2015 (b) 2016 2017 Thereafter
           
Power MWh  (30,874,062)  (8,521,382)  (248,329)  2,236,333
Capacity MW-Month  (3,998)  (878)  6  3
Gas MMBtu  157,995,389  87,545,701  13,742,416  20,314,625
FTRs MW-Month  532      
Oil Barrels  300,328  387,429  257,483  60,000

 

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

 

Interest Rate Risk

 

(PPL, LKE, LG&E and KU)

 

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

 

Cash Flow Hedges

 

(PPL)

 

Interest rate risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financings. Financial interest rate swap contracts that qualify as cash flow hedges may be entered into to hedge floating interest rate risk associated with both existing and anticipated debt issuances. At March 31, 2015, PPL held an aggregate notional value in interest rate swap contracts of $1.6 billion that range in maturity through 2045. The amount outstanding includes swaps entered into by PPL on behalf of LG&E and KU. Realized gains and losses on the LG&E and KU swaps are probable of recovery through regulated rates; as such, any gains and losses on these derivatives are included in regulatory assets or liabilities and will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt at the time the underlying hedged interest expense is recorded.

 

At March 31, 2015, PPL held an aggregate notional value in cross-currency interest rate swap contracts of $1.3 billion that range in maturity from 2016 through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.

 

For the three months ended March 31, 2015, PPL had no hedge ineffectiveness associated with interest rate derivatives and an insignificant amount for the three months ended March 31, 2014.

 

Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time period and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedged transaction is probable of not occurring.PPL had no such reclassifications for the three months ended March 31, 2015 associated with discontinued cash flow hedges and an insignificant amount reclassified for the three months ended March 31, 2014.

 

At March 31, 2015, the accumulated net unrecognized after-tax gains (losses) on qualifying derivatives that are expected to be reclassified into earnings during the next 12 months were $(13) million. In addition, see Note 8 for unamortized losses on PPL interest rate swaps expected to be reclassified into earnings and reflected in discontinued operations at the close of the spinoff transaction. Amounts are reclassified as the hedged interest expense is recorded.

 

(LKE, LG&E and KU)

 

Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL that have terms identical to forward-starting swaps entered into by PPL with third parties. Realized gains and losses on all of these swaps are probable of recovery through regulated rates; as such, any gains and losses on these derivatives are included in regulatory assets or liabilities and will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt at the time the underlying hedged interest expense is recorded. At March 31, 2015, the total notional amount of forward starting interest rate swaps outstanding was $1 billion (LG&E and KU each held contracts of $500 million). The swaps range in maturity through 2045.

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Economic Activity(PPL, LKE and LG&E)

 

LG&E enters into interest rate swap contracts that economically hedge interest payments on variable rate debt. Because realized gains and losses from the swaps, including a terminated swap contract, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense. Realized gains and losses are recognized in "Interest Expense" on the Statements of Income at the time the underlying hedged interest expense is recorded. At March 31, 2015, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033.

 

Foreign Currency Risk

 

(PPL)

 

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

 

Net Investment Hedges

 

PPL enters into foreign currency contracts on behalf of a subsidiary to protect the value of a portion of its net investment in WPD. The contracts outstanding at March 31, 2015 had a notional amount of £217 million (approximately $355 million based on contracted rates). The settlement dates of these contracts range from May 2015 through June 2016.

 

At March 31, 2015, PPL had $24 million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI, compared to $14 million at December 31, 2014.

 

Economic Activity

 

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At March 31, 2015, the total exposure hedged by PPL was approximately £1.3 billion (approximately $2.1 billion based on contracted rates). These contracts had termination dates ranging from April 2015 through March 2017.

 

Accounting and Reporting

 

(All Registrants)

 

All derivative instruments are recorded at fair value on the Balance Sheet as an asset or liability unless NPNS is elected. NPNS contracts for PPL Energy Supply include certain full-requirement sales contracts, other physical purchase and sales contracts and certain retail energy and physical capacity contracts, and for PPL Electric include certain full-requirement purchase contracts and other physical purchase contracts. Changes in the fair value of derivatives not designated as NPNS are recognized currently in earnings unless specific hedge accounting criteria are met and designated as such, except for the changes in fair values of LG&E's and KU's interest rate swaps that are recognized as regulatory assets or regulatory liabilities. See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at March 31, 2015 and December 31, 2014. PPL Energy Supply has many physical and financial commodity purchases and sales contracts that economically hedge commodity price risk but do not receive hedge accounting treatment. As such, realized and unrealized gains (losses) on these contracts are recorded currently in earnings. Generally each contract is considered a unit of account and PPL presents gains (losses) on physical and financial commodity sales contracts in "Unregulated wholesale energy" or "Unregulated retail energy" and (gains) losses on physical and financial commodity purchase contracts in "Fuel" or "Energy purchases" on the Statements of Income. Certain of the economic hedging strategies employed by PPL Energy Supply utilize a combination of financial purchases and sales contracts which are similarly reported gross as an expense and revenue, respectively, on PPL's Statements of Income. PPL records realized hourly net sales or purchases of physical power with PJM in its Statements of Income as "Unregulated wholesale energy" if in a net sales position and "Energy purchases" if in a net purchase position.

 

See Notes 1 and 17 in each Registrant's 2014 Form 10-K for additional information on accounting policies related to derivative instruments.

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(PPL)

 

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

 

       March 31, 2015 December 31, 2014
       Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
       hedging instruments as hedging instruments hedging instruments as hedging instruments
       Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:                        
 Price Risk Management                        
  Assets/Liabilities (a):                        
   Interest rate swaps (b)    $ 160    $ 5    $ 94    $ 5
   Cross-currency swaps (b) $ 1   2            3      
   Foreign currency                        
    contracts   24    $ 106   2 $ 12    $ 67   
   Commodity contracts         988   904         1,079   1,024
     Total current   25   162   1,094   911   12   97   1,146   1,029
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (a):                        
   Interest rate swaps (b)      23      47      14      43
   Cross-currency swaps (b)   48            29         
   Foreign currency                        
    contracts   10      69   4   5      46   2
   Commodity contracts         310   259         239   193
     Total noncurrent   58   23   379   310   34   14   285   238
Total derivatives $ 83 $ 185 $ 1,473 $ 1,221 $ 46 $ 111 $ 1,431 $ 1,267

 

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

 

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

 

              2015 2014
                 Gain (Loss)    Gain (Loss)
                 Recognized    Recognized
                 in Income    in Income
              on Derivative Gain (Loss) on Derivative
           Gain (Loss) (Ineffective Reclassified (Ineffective
        Location of Reclassified Portion and from AOCI Portion and
     Derivative Gain Gain (Loss) from AOCI Amount into Amount
     (Loss) Recognized in Recognized into Income Excluded from Income Excluded from
Derivative  OCI (Effective Portion)  in Income (Effective Effectiveness (Effective Effectiveness
Relationships 2015 2014 on Derivative Portion) Testing) Portion) Testing)
Cash Flow Hedges:                    
 Interest rate swaps $ (19) $ (46) Interest expense $ (4)    $ (5) $ 2
 Cross-currency swaps   21   (25) Interest expense   1         
           Other income            
            (expense) - net   17      (29)   
 Commodity contracts       Unregulated            
            wholesale energy   (2)      (1)   
           Energy purchases   8      7   
           Depreciation   1      1   
           Discontinued operations         2   
Total $ 2 $ (71)    $ 21    $ (25) $ 2
                         
Net Investment Hedges:                     
  Foreign currency contracts $ 16 $ (4)               
                        
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Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments  Income on Derivative 2015 2014
         
Foreign currency contracts Other income (expense) - net $ 88 $ (24)
Interest rate swaps Interest expense   (2)   (2)
Commodity contracts Unregulated wholesale energy (a)   (229)   (3,042)
  Unregulated retail energy   (39)   (64)
  Fuel   (3)   (1)
  Energy purchases (b)   196   2,364
  Discontinued operations      (2)
  Total $ 11 $ (771)
         
         
Derivatives Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments Regulatory Liabilities/Assets 2015 2014
         
Interest rate swaps Regulatory assets- noncurrent $ (56)   
         
Derivatives Not Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments Regulatory Liabilities/Assets 2015 2014
         
Interest rate swaps Regulatory assets - noncurrent $ (4) $ (4)

 

(a)2014 includes significant realized and unrealized losses on physical and financial commodity sales contracts due to the unusually cold weather.
(b)2014 includes significant realized and unrealized gains on physical and financial commodity purchase contracts due to the unusually cold weather.

 

(LKE)

 

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

 

       March 31, 2015 December 31, 2014
       Assets Liabilities  Assets Liabilities
Current:             
 Price Risk Management             
  Assets/Liabilities (a):             
   Interest rate swaps    $ 122     $ 66

 

(a)Represents the location on the Balance Sheets.

 

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the three months ended March 31.

 

  Location of Gain (Loss) Recognized in      
Derivative Instruments Regulatory Assets 2015 2014
         
Interest rate swaps Regulatory assets - noncurrent $ (56)   
         

 

(LG&E)

 

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

 

       March 31, 2015 December 31, 2014
       Assets Liabilities  Assets Liabilities
Current:             
 Price Risk Management             
  Assets/Liabilities (a):             
   Interest rate swaps    $ 61     $ 33

 

(a)Represents the location on the Balance Sheets.

 

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the three months ended March 31.

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  Location of Gain (Loss) Recognized in      
Derivative Instruments Regulatory Assets 2015 2014
         
Interest rate swaps Regulatory assets - noncurrent $ (28)   

 

(KU)

 

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

 

       March 31, 2015 December 31, 2014
       Assets Liabilities  Assets Liabilities
Current:             
 Price Risk Management             
  Assets/Liabilities (a):             
   Interest rate swaps    $ 61     $ 33

 

(a)Represents the location on the Balance Sheets.

 

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the three months ended March 31.

 

  Location of Gain (Loss) Recognized in      
Derivative Instruments Regulatory Assets 2015 2014
         
Interest rate swaps Regulatory assets - noncurrent $ (28)   

 

(LKE and LG&E)

 

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

 

       March 31, 2015 December 31, 2014
       Assets Liabilities  Assets Liabilities
Current:             
 Price Risk Management             
  Assets/Liabilities (a):             
   Interest rate swaps    $ 5     $ 5
     Total current      5       5
Noncurrent:             
 Price Risk Management             
  Assets/Liabilities (a):             
   Interest rate swaps      47       43
     Total noncurrent      47       43
Total derivatives    $ 52     $ 48

 

(a)Represents the location on the Balance Sheets.

 

The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets for the three months ended March 31.

 

  Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives 2015 2014
         
Interest rate swaps Interest expense $ (2) $ (2)
         
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets 2015 2014
         
Interest rate swaps Regulatory assets - noncurrent $ (4) $ (4)

 

(All Registrants except PPL Electric)

 

Offsetting Derivative Instruments

 

PPL, LKE, LG&E and KU or certain of their subsidiaries have master netting arrangements or similar agreements in place including derivative clearing agreements with futures commission merchants (FCMs) to permit the trading of cleared

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

 

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

 

   Assets Liabilities
      Eligible for Offset       Eligible for Offset   
         Cash          Cash   
      Derivative Collateral       Derivative Collateral   
   Gross Instruments Received Net Gross Instruments Pledged Net
                          
March 31, 2015                        
PPL                        
 Energy Commodities $ 1,298 $ 990 $ 11 $ 297 $ 1,163 $ 990 $ 49 $ 124
 Treasury Derivatives   258   105      153   243   105   21   117
Total $ 1,556 $ 1,095 $ 11 $ 450 $ 1,406 $ 1,095 $ 70 $ 241
                          
LKE                        
 Treasury Derivatives             $ 174    $ 21 $ 153
                          
LG&E                        
 Treasury Derivatives             $ 113    $ 21 $ 92
                          
KU                        
 Treasury Derivatives             $ 61    $  $ 61
                          
December 31, 2014                        
PPL                        
 Energy Commodities $ 1,318 $ 1,060 $ 10 $ 248 $ 1,217 $ 1,060 $ 58 $ 99
 Treasury Derivatives   159   65      94   161   65   21   75
Total $ 1,477 $ 1,125 $ 10 $ 342 $ 1,378 $ 1,125 $ 79 $ 174
                          
LKE                        
 Treasury Derivatives             $ 114    $ 20 $ 94
                          
LG&E                        
 Treasury Derivatives             $ 81    $ 20 $ 61
                          
KU                        
 Treasury Derivatives             $ 33       $ 33

 

Credit Risk-Related Contingent Features

 

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

 

Additionally, certain derivative contracts contain credit risk-related contingent features that require adequate assurance of performance be provided if the other party has reasonable concerns regarding the performance of PPL's, LKE's, LG&E's, and KU's obligations under the contracts. A counterparty demanding adequate assurance could require a transfer of additional collateral or other security, including letters of credit, cash and guarantees from a creditworthy entity. This would typically

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involve negotiations among the parties. However, amounts disclosed below represent assumed immediate payment or immediate and ongoing full collateralization for derivative instruments in net liability positions with "adequate assurance" features.

 

(All Registrants except PPL Electric and KU)

 

At March 31, 2015, derivative contracts in a net liability position that contain credit risk-related contingent features, collateral posted on those positions and the related effect of a decrease in credit ratings below investment grade are summarized as follows:

 

    PPL LKE LG&E
            
Aggregate fair value of derivative instruments in a net liability position with credit risk-related         
 contingent features $ 241 $ 31 $ 31
Aggregate fair value of collateral posted on these derivative instruments   140   22   22
Aggregate fair value of additional collateral requirements in the event of         
 a credit downgrade below investment grade (a)   128(b)  10   10

 

(a)Includes the effect of net receivables and payables already recorded on the Balance Sheet.
(b)PPL Energy Supply's credit rating is currently below investment grade. Amounts related to PPL Energy Supply represent net liability positions subject to further adequate assurance features.

 

15. Goodwill

 

(PPL)

 

The change in the carrying amount of goodwill for the three months ended March 31, 2015 was due to the effect of foreign currency exchange rates on the U.K. Regulated segment.

 

16.  Asset Retirement Obligations            
               
(All Registrants except PPL Electric)          
               
The changes in the carrying amounts of AROs were as follows.        
               
               
    PPL LKE LG&E KU
               
Balance at December 31, 2014 $ 761 $ 285 $ 74 $ 211
 Accretion   12   3   1   2
 Effect of foreign currency exchange rates   (1)         
 Obligations settled   (1)   (1)   (1)   
Balance at March 31, 2015 $ 771 $ 287 $ 74 $ 213

 

Substantially all of the ARO balances are classified as noncurrent at March 31, 2015 and December 31, 2014.

 

See Note 10 for information on a CCR rule that is expected to require the recording of additional AROs in the second quarter of 2015.

 

(PPL)

 

PPL's most significant ARO relates to the decommissioning of the Susquehanna nuclear plant. See Notes 13 and 17 for additional information on the assets in the NDT funds that are legally restricted for the purposes of settling this ARO.

 

(All Registrants except PPL Electric)

 

LG&E's and KU's accretion and ARO-related depreciation expense are recorded as a regulatory asset, such that there is no net earnings impact.

 

17. Available-for-Sale Securities

 

(PPL)

 

Securities held by the NDT funds and auction rate securities are classified as available-for-sale. Available-for-sale securities are carried on the Balance Sheets at fair value. Unrealized gains and losses on these securities are reported, net of tax, in OCI

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or are recognized currently in earnings when a decline in fair value is determined to be other-than-temporary. The specific identification method is used to calculate realized gains and losses.

 

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

 

       March 31, 2015 December 31, 2014
          Gross Gross      Gross Gross  
       Amortized  Unrealized  Unrealized   Amortized  Unrealized  Unrealized  
       Cost Gains Losses Fair Value  Cost  Gains Losses Fair Value
NDT funds:                        
   Cash and cash equivalents $ 20       $ 20 $ 19       $ 19
   Equity securities   287 $ 426      713   283 $ 417      700
   Debt securities   218   12 $ 1   229   218   11      229
   Receivables/payables, net   3         3   2         2
   Total NDT funds $ 528 $ 438 $ 1 $ 965 $ 522 $ 428    $ 950
                              
Auction rate securities                        
 PPL $ 11    $ 1 $ 10 $ 11    $ 1 $ 10

 

See Note 13 for details on the securities held by the NDT funds.

 

There were no securities with credit losses at March 31, 2015 and December 31, 2014.

 

The following table shows the scheduled maturity dates of debt securities held at March 31, 2015.

 

   Maturity Maturity Maturity Maturity   
    Less Than 1-5 6-10 in Excess   
   1 Year Years Years of 10 Years Total
                
Amortized cost $ 11 $ 82 $ 67 $ 69 $ 229
Fair value   11   84   70   74   239

 

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

 

     Three Months
       2015 2014
             
Proceeds from sales of NDT securities (a)       $ 38 $ 27
Other proceeds from sales            3
Gross realized gains (b)         5   3
Gross realized losses (b)         3   1

 

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

 

18. Accumulated Other Comprehensive Income (Loss)

 

(PPL)

 

The after-tax changes in AOCI by component for the three months ended March 31 were as follows.

 

  Foreign Unrealized gains (losses)    Defined benefit plans   
  currency Available-    Equity Prior Actuarial Transition   
  translation for-sale Qualifying investees' service gain asset   
  adjustments securities derivatives AOCI costs (loss) (obligation) Total
                        
December 31, 2014$ (286) $ 202 $ 20 $ 1 $ 3 $ (2,215) $ 1 $ (2,274)
Amounts arising during the period  (66)   5   6         (1)      (56)
Reclassifications from AOCI     (1)   (17)   (1)      38      19
Net OCI during the period  (66)   4   (11)   (1)      37      (37)
March 31, 2015$ (352) $ 206 $ 9 $  $ 3 $ (2,178) $ 1 $ (2,311)
                         
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  Foreign Unrealized gains (losses)    Defined benefit plans   
  currency Available-    Equity Prior Actuarial Transition   
  translation for-sale Qualifying investees' service gain asset   
  adjustments securities derivatives AOCI costs (loss) (obligation) Total
                        
December 31, 2013$ (11) $ 173 $ 94 $ 1 $ (6) $ (1,817) $ 1 $ (1,565)
Amounts arising during the period  131   5   (46)               90
Reclassifications from AOCI     (1)   19      1   27      46
Net OCI during the period  131   4   (27)      1   27      136
March 31, 2014$ 120 $ 177 $ 67 $ 1 $ (5) $ (1,790) $ 1 $ (1,429)

 

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

 

      Affected Line Item on the
Details about AOCI 2015 2014  Statements of Income
           
Available-for-sale securities $ 2 $ 2  Other Income (Expense) - net
Total Pre-tax   2   2   
Income Taxes   (1)   (1)   
Total After-tax   1   1   
           
Qualifying derivatives         
 Interest rate swaps   (4)   (3)  Interest Expense
 Cross-currency swaps   17   (29)  Other Income (Expense) - net
     1     Interest Expense
 Energy commodities   (2)   (1)  Unregulated wholesale energy
     8   7  Energy purchases
        2  Discontinued operations
     1   1  Other
Total Pre-tax   21   (23)   
Income Taxes   (4)   4   
Total After-tax   17   (19)   
           
Equity investees' AOCI   2     Other Income (Expense) - net
Total Pre-tax   2      
Income Taxes   (1)      
Total After-tax   1      
           
Defined benefit plans         
 Prior service costs      (2)   
 Net actuarial loss   (51)   (36)   
Total Pre-tax   (51)   (38)   
Income Taxes   13   10   
Total After-tax   (38)   (28)   
           
Total reclassifications during the period $ (19) $ (46)   

 

19. New Accounting Guidance Pending Adoption

 

(All Registrants)

 

Accounting for Revenue from Contracts with Customers

 

In May 2014, the FASB issued accounting guidance that establishes a comprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

For public business entities, this guidance can be applied using either a full retrospective or modified retrospective transition method, beginning in annual reporting periods beginning after December 15, 2016 and interim periods within those years. Early adoption is not permitted. The Registrants will adopt this guidance effective January 1, 2017.

 

The Registrants are currently assessing the impact of adopting this guidance, as well as the transition method they will use.

 

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Reporting Uncertainties about an Entity's Ability to Continue as a Going Concern

 

In August 2014, the FASB issued accounting guidance which will require management to assess, for each interim and annual period, whether there are conditions or events that raise substantial doubt about an entity's ability to continue as a going concern. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued.

 

When management identifies conditions or events that raise substantial doubt about an entity's ability to continue as a going concern, management is required to disclose information that enables users of the financial statements to understand the principal conditions or events that raised substantial doubt about the entity's ability to continue as a going concern and management's evaluation of the significance of those conditions or events. If substantial doubt about the entity's ability to continue as a going concern has been alleviated as a result of management's plan, the entity should disclose information that allows the users of the financial statements to understand those plans. If the substantial doubt about the entity's ability to continue as a going concern is not alleviated by management's plans, management's plans to mitigate the conditions or events that gave rise to the substantial doubt about the entity's ability to continue as a going concern should be disclosed, as well as a statement that there is substantial doubt the entity's ability to continue as a going concern within one year after the date the financial statements are issued.

 

For all entities, this guidance should be applied prospectively within the annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted.

 

The Registrants will adopt this guidance for the annual period ending December 31, 2016. The adoption of this guidance is not expected to have a significant impact on the Registrants.

 

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

 

In November 2014, the FASB issued guidance that clarifies how current accounting guidance should be interpreted when evaluating the economic characteristics and risks of a host contract of a hybrid financial instrument issued in the form of a share. This guidance does not change the current criteria for determining whether separation of an embedded derivative feature from a hybrid financial instrument is required. Entities are still required to evaluate whether the economic risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria.

 

An entity should consider the substantive terms and features of the entire hybrid financial instrument, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract to determine whether the host contract is more akin to a debt instrument or more akin to an equity instrument. An entity should assess the relative strength of the debt-like and equity-like terms and features when determining how to weight those terms and features.

 

For public business entities, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and should be applied using a modified retrospective method for existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year the guidance is adopted. Early adoption is permitted. Retrospective application is permitted but not required.

 

The Registrants will adopt this guidance on January 1, 2016. The adoption of this guidance is not expected to have a significant impact on the Registrants.

 

Income Statement Presentation of Extraordinary and Unusual Items

 

In January 2015, the FASB issued accounting guidance that eliminates the concept of extraordinary items, which requires an entity to separately classify, present in the income statement and disclose material events and transactions that are both unusual and occur infrequently. The requirement to report material events or transactions that are unusual or infrequent as a separate component of income from continuing operations has been retained, as has the requirement to separately present the nature and financial effects of each event or transaction in the income statement as a separate component of continuing operations or disclose them within the notes to the financial statements. The scope of these requirements has been expanded to include items that are both unusual and occur infrequently.

 

For all entities, this guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted provided that an entity applies the guidance from the beginning of the fiscal year of adoption. The guidance may be applied either retrospectively or prospectively.

 

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The Registrants will adopt this guidance on January 1, 2016. The adoption of this guidance is not expected to have a significant impact on the Registrants.

 

Simplifying the Presentation of Debt Issuance Costs

 

In April 2015, the FASB issued accounting guidance to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with the presentation of debt discounts.

 

For public business entities, this guidance should be applied retrospectively for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted.

 

The Registrants are assessing in which period they will adopt this new guidance. The adoption of this guidance will require the Registrants to reclassify debt issuance costs from assets to long-term debt, and is not expected to have a significant impact on the Registrants.

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

 

(All Registrants)

 

This "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL Corporation, PPL Electric, LKE, LG&E and KU. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant. The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures. Within combined disclosures, amounts are disclosed for any Registrant when significant.

 

The following should be read in conjunction with the Registrants' Condensed Consolidated Financial Statements and the accompanying Notes and with the Registrants' 2014 Form 10-K. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted.

 

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

 

·"Overview" provides a description of each Registrant's business strategy, a description of key factors expected to impact future earnings and a discussion of important financial and operational developments.

 

·"Results of Operations" for PPL provides a detailed analysis of earnings by segment, and forPPL Electric, LKE, LG&E and KU,includes a summary of earnings. For all Registrants, "Margins" provides explanations of non-GAAP financial measures and "Statement of Income Analysis" addresses significant changes in principal line items on the Statements of Income, comparing the three months ended March 31, 2015 with the same period in 2014.

 

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

 

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

 

Overview

 

Introduction

 

(PPL)

 

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

 

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

 

         PPL Corporation*        
                            
                  PPL Capital Funding      
    
                         
                        
   

PPL Global

Engages in the regulated distribution of electricity in the U.K.

  

LKE*

 

 

PPL Electric*

Engages in the regulated transmission and distribution of electricity in Pennsylvania

  

PPL Energy Supply*

 

  
                            
                            
   

LG&E*

Engages in the regulated generation, transmission, distribution and sale of electricity and distribution and sale of natural gas in Kentucky

  

KU*

Engages in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky

  

PPL EnergyPlus

Performs energy marketing and trading activities

Purchases fuel

  

PPL Generation

Engages in the competitive generation of electricity, primarily in Pennsylvania and Montana

                        
   U.K. Regulated
Segment
 Kentucky Regulated Segment Pennsylvania Regulated Segment Supply
Segment
  

 

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

 

In June 2014, PPL and PPL Energy Supply executed definitive agreements with affiliates of Riverstone to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy. See "Business Strategy" and "Financial and Operational Developments - Other Financial and Operational Developments - Anticipated Spinoff of PPL Energy Supply" below for additional information. Beginning in the first quarter of 2015, PPL Energy Supply is filing a separate Form 10-Q.

 

In addition to PPL, the other Registrants included in this filing are as follows.

 

(PPL Electric)

 

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

 

(LKE)

 

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

 

(LG&E)

 

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

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(KU)

 

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

 

Business Strategy

 

(All Registrants)

 

The strategy for the regulated businesses of WPD, PPL Electric, LG&E and KU is to provide efficient, reliable and safe operations and strong customer service, maintain constructive regulatory relationships and achieve timely recovery of costs. These regulated businesses also focus on providing competitively priced energy to customers and achieving stable, long-term growth in earnings and rate base, or RAV, as applicable. Both rate base and RAV are expected to grow for the foreseeable future as a result of significant capital expenditure programs to maintain existing assets and to improve system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to coal-fired electricity generation facilities.

 

For the U.K. regulated businesses, effective April 1, 2015 for the RIIO-ED1 price control period, 80% of network related expenditures are added to the RAV and, together with adjustments for inflation as measured by Retail Price Index (RPI) and a return on the RAV, recovered through allowed revenue with the remaining 20% of expenditures being recovered in the current regulatory year. RAV is intended to represent expenditures that have a long-term benefit to WPD (similar to capital projects for the U.S. regulated businesses). The RAV balance at March 31, 2015 will continue to be recovered over 20 years and additions after April 1, 2023 will be recovered over 45 years; a transitional arrangement will gradually change the life over the current price control period which commenced April 1, 2015, resulting in an expected average useful life of 35 years for RAV additions in that period. In addition, incentive targets have been adjusted in RIIO-ED1, resulting in lower overall incentive revenues available to be earned. See "Financial and Operational Developments - Other Financial and Operational Developments - RIIO-ED1" below for additional information.

 

For the U. S. regulated businesses, recovery of capital project costs is attained through various rate-making mechanisms, including periodic base rate case proceedings, FERC formula rate mechanisms, and other regulatory agency-approved recovery mechanisms. In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on certain construction work-in-progress) that reduce regulatory lag and provide for timely recovery of and a return on, as appropriate, prudently incurred costs. In Pennsylvania, the FERC transmission formula rate, DSIC mechanism and other recovery mechanisms are in place to reduce regulatory lag and provide for timely recovery of and a return on, as appropriate, prudently incurred costs.

 

To manage financing costs and access to credit markets, and to fund capital expenditures, a key objective of the Registrants is to maintain investment grade credit ratings and adequate liquidity positions. In addition, the Registrants have financial and operational risk management programs that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility related to, as applicable, changes in energy and fuel prices, interest rates, counterparty credit quality and the operating performance of generating units. To manage these risks, PPL generally uses contracts such as forwards, options, swaps and insurance contra