Document
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2016
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


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Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. 
 
PPL Corporation
Yes  X   
No        
 
 
PPL Electric Utilities Corporation
Yes  X   
No        
 
 
LG&E and KU Energy LLC
Yes  X   
No        
 
 
Louisville Gas and Electric Company
Yes  X  
No        
 
 
Kentucky Utilities Company
Yes  X   
No        
 
 
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). 
 
PPL Corporation
Yes  X   
No        
 
 
PPL Electric Utilities Corporation
Yes  X   
No        
 
 
LG&E and KU Energy LLC
Yes  X   
No        
 
 
Louisville Gas and Electric Company
Yes  X   
No        
 
 
Kentucky Utilities Company
Yes  X   
No        
 
 
Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated
filer
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
 
PPL Corporation
[ X ]
[     ]
[     ]
[     ]
 
PPL Electric Utilities Corporation
[     ]
[     ]
[ X ]
[     ]
 
LG&E and KU Energy LLC
[     ]
[     ]
[ X ]
[     ]
 
Louisville Gas and Electric Company
[     ]
[     ]
[ X ]
[     ]
 
Kentucky Utilities Company
[     ]
[     ]
[ X ]
[     ]
 
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
 
PPL Corporation
Yes        
No  X   
 
 
PPL Electric Utilities Corporation
Yes        
No  X   
 
 
LG&E and KU Energy LLC
Yes        
No  X   
 
 
Louisville Gas and Electric Company
Yes        
No  X   
 
 
Kentucky Utilities Company
Yes        
No  X   
 
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
PPL Corporation
Common stock, $0.01 par value, 678,094,068 shares outstanding at August 3, 2016.
 
 
 
 
PPL Electric Utilities Corporation
Common stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at August 3, 2016.
 
 
 
 
LG&E and KU Energy LLC
PPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
 
 
 
 
Louisville Gas and Electric Company
Common stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at August 3, 2016.
 
 
 
 
Kentucky Utilities Company
Common stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at August 3, 2016.
 
This document is available free of charge at the Investors section of 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&E AND KU ENERGY LLC
LOUISVILLE GAS AND ELECTRIC COMPANY
KENTUCKY UTILITIES COMPANY
 
FORM 10-Q
FOR THE QUARTER ENDED June 30, 2016
 
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.
 
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
PART I.  FINANCIAL INFORMATION
 
 
Item 1.  Financial Statements
 
 
 
PPL Corporation and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Electric Utilities Corporation and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E and KU Energy LLC and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Louisville Gas and Electric Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kentucky Utilities Company
 
 
 
 
 
 
 
 
 
 
 
 
 




 
Combined Notes to Condensed Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.  OTHER INFORMATION
 
 
 
 
 








COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES
 
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 





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GLOSSARY OF TERMS AND ABBREVIATIONS
 
PPL Corporation and its subsidiaries
 
KU - Kentucky Utilities Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky.
 
LG&E - Louisville Gas and Electric Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas in Kentucky.
 
LKE - LG&E and KU Energy LLC, a subsidiary of PPL and the parent of LG&E, KU and other subsidiaries.
 
LKS - LG&E and KU Services Company, a subsidiary of LKE that provides services to LKE and its subsidiaries.
 
PPL - PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding, PPL Capital Funding, LKE and other subsidiaries.
 
PPL 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 Global 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 facilities management services primarily to PPL Electric and its affiliates.
 
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 Services - PPL Services Corporation, a subsidiary of PPL that provides administrative, management and support services to PPL and its subsidiaries.
 
PPL WPD Limited - an indirect U.K. subsidiary of PPL Global and parent to WPD plc.
 
WPD - refers to PPL WPD Limited and its subsidiaries.
 
WPD (East Midlands) - Western Power Distribution (East Midlands) plc, a British regional electricity distribution utility company.
 
WPD plc - Western Power Distribution plc, a direct U.K. subsidiary of PPL WPD Limited. 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.
 

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Other terms and abbreviations
 
£ - British pound sterling.
 
2015 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2015.
 
2001 Mortgage Indenture - PPL Electric's Indenture, dated as of August 1, 2001, to the Bank of New York Mellon (as successor to JPMorgan Chase Bank), as trustee, as supplemented.
 
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 Alternative Energy Portfolio Standard (AEPS).
 
AOCI - accumulated other comprehensive income or loss.
 
ARO - asset retirement obligation.
 
ATM Program - At-the-Market stock offering program.
 
BSER - Best System of Emission Reduction. The degree of emission reduction that EPA determines has been adequately demonstrated when taking into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirements. 
 
CCR(s) - Coal Combustion Residual(s). CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.
 
Clean Air Act - federal legislation enacted to address certain environmental issues related to air emissions, including acid rain, ozone and toxic air emissions.
 
Clean Water Act - federal legislation enacted to address certain environmental issues relating to water quality including effluent discharges, cooling water intake, and dredge and fill activities.
 
CPCN - Certificate of Public Convenience and Necessity. Authority granted by the KPSC pursuant to Kentucky Revised Statute 278.020 to provide utility service to or for the public or the construction of certain plant, equipment, property or facility for furnishing of utility service to the public.
 
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.
 
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 - PPL Amended and Restated 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

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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.
 
Earnings from Ongoing Operations - A non-GAAP financial measure of earnings adjusted for the impact of special items and used in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A).
 
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.
 
ELG(s) - Effluent Limitation Guidelines, regulations promulgated by the EPA.
 
EPA - Environmental Protection Agency, a U.S. government agency.
 
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.
 
GAAP - Generally Accepted Accounting Principles in the U.S.
 
GBP - British pound sterling.
 
GLT - Gas Line Tracker. The KPSC approved mechanism for 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.
 
KPSC - Kentucky Public Service Commission, the state agency that has jurisdiction over the regulation of rates and service of utilities in Kentucky.
 
LCIDA - Lehigh County Industrial Development Authority.
 
LIBOR - London Interbank Offered Rate.

Margins - A non-GAAP financial measure of performance used in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A).

MATS - Mercury and Air Toxics Standards, regulations promulgated by the EPA.
 
Moody's - Moody's Investors Service, Inc., a credit rating agency.
 
MW - megawatt, one thousand kilowatts.
 
NAAQS - National Ambient Air Quality Standards periodically adopted pursuant to the Clean Air Act.
 
NERC - North American Electric Reliability Corporation.
 
NGCC - Natural gas-fired combined-cycle generating plant.
 
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.
 
NSR - The new source review provisions of the Clean Air Act that impose stringent emission control requirements on new and modified sources of air emissions that result in emission increases beyond thresholds allowed by the Clean Air Act.
 
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.
 
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

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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.
 
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.
 
PPL EnergyPlus - prior to the June 1, 2015 spinoff of PPL Energy Supply, PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply that marketed and traded wholesale and retail electricity and gas, and supplied energy and energy services in competitive markets.  
 
PPL Energy Supply - prior to the June 1, 2015 spinoff, PPL Energy Supply, LLC, a subsidiary of PPL Energy Funding and the parent company of PPL EnergyPlus and other subsidiaries.
 
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 have continued 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.
 
Registrant(s) - refers to the Registrants named on the cover of this Report (each a "Registrant" and collectively, the "Registrants").
 
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 contributed to Talen Energy other than the competitive power generation business contributed by virtue of the spinoff of a newly formed parent of PPL Energy Supply.
 
RPI - Retail Price Index, is a measure of inflation in the United Kingdom published monthly by the Office for National Statistics.
 
SCRs - selective catalytic reduction, a pollution control process for the removal of nitrogen oxide from exhaust gas.

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.
 

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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.
 
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.
 
Superfund - federal environmental statute that addresses remediation of contaminated sites; states also have similar statutes.
 
Talen Energy - Talen Energy Corporation, the Delaware corporation formed to be the publicly traded company and owner of the competitive generation assets of PPL Energy Supply and certain affiliates of Riverstone.
 
Talen Energy Marketing - Talen Energy Marketing, LLC, PPL EnergyPlus' new name subsequent to the spinoff of PPL Energy Supply.
 
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.
 
VSCC - Virginia State Corporation Commission, the state agency that has jurisdiction over the regulation of Virginia corporations, including utilities.

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Forward-looking Information
 
Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical fact are "forward-looking statements" within the meaning of the federal securities laws. Although the Registrants believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct. Forward-looking statements are subject to many risks and uncertainties, and actual results may differ materially from the results discussed in forward-looking statements. In addition to the specific factors discussed in each Registrant's 2015 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.
 
challenges by intervenors to the return on equity granted in existing rate structures;
fuel supply and cost;
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 transmission and distribution operations, and customer energy use;
availability and operating costs of existing generation facilities;
the duration of and cost associated with outages at our generating facilities;
generation, transmission and distribution system conditions, and operating costs;
expansion of alternative and distributed sources of electricity generation and storage;
collective labor bargaining negotiations;
laws or regulations to reduce emissions of "greenhouse" gases or physical effects of climate change;
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 programs, including foreign currency and interest rate hedging;
our ability to attract and retain qualified employees;
volatility in demand for electricity;
market prices of commodity inputs for ongoing capital expenditures or key operational needs;
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;
defaults by counterparties or suppliers for energy, capacity, coal, natural gas or key commodities, goods or services;
volatility in the fair value of debt and equity securities and its impact on the value of assets in defined benefit plans, and the potential cash funding requirements if fair value declines;
interest rates and their effect on pension and retiree medical liabilities and interest payable on certain debt securities;
volatility in or the impact of other changes in financial 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;
the effect of changes in RPI on WPD's revenues and index linked debt;
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;
changes in political, regulatory or economic conditions in states, regions or countries where the Registrants or their subsidiaries conduct business;
the effect of the June 23, 2016 referendum in the U.K. to withdraw from the European Union;
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 achievement of performance targets set by Ofgem;
the impact of any state, federal or foreign investigations applicable to the Registrants and their subsidiaries and the energy industry;
the effect of any business or industry restructuring;
development of new projects, markets and technologies;
performance of new ventures; and
business dispositions or acquisitions and our ability to realize expected benefits from such business transactions.


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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.


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PART I.  FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, except share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating Revenues
$
1,785

 
$
1,781

 
$
3,796

 
$
4,011

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
Fuel
183

 
214

 
380

 
467

Energy purchases
147

 
170

 
380

 
499

Other operation and maintenance
425

 
467

 
875

 
923

Depreciation
231

 
216

 
460

 
432

Taxes, other than income
74

 
76

 
153

 
162

Total Operating Expenses
1,060

 
1,143

 
2,248

 
2,483

 
 
 
 
 
 
 
 
Operating Income
725

 
638

 
1,548

 
1,528

 
 
 
 
 
 
 
 
Other Income (Expense) - net
174

 
(102
)
 
235

 
(14
)
 
 
 
 
 
 
 
 
Interest Expense
224

 
215

 
448

 
424

 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
675

 
321

 
1,335

 
1,090

 
 
 
 
 
 
 
 
Income Taxes
192

 
71

 
371

 
288

 
 
 
 
 
 
 
 
Income from Continuing Operations After Income Taxes
483

 
250

 
964

 
802

 
 
 
 
 
 
 
 
Income (Loss) from Discontinued Operations (net of income taxes) (Note 8)


(1,007
)
 

 
(912
)
 
 
 
 
 
 
 
 
Net Income (Loss)
$
483

 
$
(757
)
 
$
964

 
$
(110
)
 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock:
 
 
 
 
 
 
 
Income from Continuing Operations After Income Taxes:
 
Basic
$
0.71

 
$
0.37

 
$
1.42

 
$
1.20

Diluted
$
0.71

 
$
0.37

 
$
1.41

 
$
1.19

Net Income (Loss):
 
 
 
 
 
 
 
Basic
$
0.71

 
$
(1.13
)
 
$
1.42

 
$
(0.17
)
Diluted
$
0.71

 
$
(1.13
)
 
$
1.41

 
$
(0.17
)
 
 
 
 
 
 
 
 
Dividends Declared Per Share of Common Stock
$
0.38

 
$
0.3725

 
$
0.76

 
$
0.7450

 
 
 
 
 
 
 
 
Weighted-Average Shares of Common Stock Outstanding (in thousands)
 
 
 
 
 
 
 
Basic
677,145

 
668,415

 
676,293

 
667,698

Diluted
680,729

 
671,286

 
679,773

 
670,013

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

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
483

 
$
(757
)
 
$
964

 
$
(110
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
Amounts arising during the period - gains (losses), net of tax (expense) benefit:
 

 
 

 
 
 
 
Foreign currency translation adjustments, net of tax of $0, $6, ($2), $1
268

 
(83
)
 
(196
)
 
(149
)
Available-for-sale securities, net of tax of $0, ($3), $0, ($9)

 
2

 

 
7

Qualifying derivatives, net of tax of $22, ($11), $7, ($7)
(85
)
 
21

 
(5
)
 
27

Defined benefit plans:
 

 
 

 
 
 
 
Prior service costs, net of tax of $0, $4, $0, $4

 
(6
)
 

 
(6
)
Net actuarial gain (loss), net of tax of ($1), ($36), ($1), ($36)
2

 
53

 
2

 
52

Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):
 

 
 

 
 
 
 
Available-for-sale securities, net of tax of $0, $1, $0, $2

 
(1
)
 

 
(2
)
Qualifying derivatives, net of tax of ($21), ($24), ($2), ($20)
85

 
27

 
7

 
10

Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $1
(1
)
 

 
(1
)
 
(1
)
Defined benefit plans:
 

 
 

 
 
 
 
Prior service costs, net of tax of $0, $0, $0, $0
1

 

 
1

 

Net actuarial loss, net of tax of ($8), ($12), ($17), ($25)
32

 
38

 
63

 
76

Total other comprehensive income (loss)
302

 
51

 
(129
)
 
14

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
785

 
$
(706
)
 
$
835

 
$
(96
)
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


4

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows from Operating Activities
 

 
 

Net income (loss)
$
964

 
$
(110
)
(Income) Loss from discontinued operations (net of income taxes)

 
912

Income from continuing operations (net of income taxes)
964

 
802

Adjustments to reconcile Income from continuing operations (net of taxes) to net cash provided by operating activities - continuing operations
 

 
 

Depreciation
460

 
432

Amortization
37

 
27

Defined benefit plans - expense (income)
(24
)
 
32

Deferred income taxes and investment tax credits
320

 
256

Unrealized (gains) losses on derivatives, and other hedging activities
(192
)
 
62

Stock-based compensation expense
18

 
38

Other
(11
)
 
11

Change in current assets and current liabilities
 

 
 

Accounts receivable
16

 
(74
)
Accounts payable
(39
)
 
(83
)
Unbilled revenues
(2
)
 
79

Prepayments
(66
)
 
(61
)
Counterparty collateral
76

 

Taxes payable
22

 
(129
)
Accrued interest
(85
)
 
(87
)
Other current liabilities
(47
)
 
(91
)
Other

 
13

Other operating activities
 
 
 
Defined benefit plans - funding
(224
)
 
(289
)
Other assets
2

 
(29
)
Other liabilities
(55
)
 
61

Net cash provided by operating activities - continuing operations
1,170

 
970

Net cash provided by operating activities - discontinued operations

 
343

Net cash provided by operating activities
1,170

 
1,313

Cash Flows from Investing Activities
 

 
 

Expenditures for property, plant and equipment
(1,346
)
 
(1,679
)
Expenditures for intangible assets
(14
)
 
(24
)
Proceeds from the sale of other investments

 
135

Other investing activities
13

 
(7
)
Net cash provided by (used in) investing activities - continuing operations
(1,347
)
 
(1,575
)
Net cash provided by (used in) investing activities - discontinued operations

 
(149
)
Net cash provided by (used in) investing activities
(1,347
)
 
(1,724
)
Cash Flows from Financing Activities
 

 
 

Issuance of long-term debt
1,020

 
88

Retirement of long-term debt
(684
)
 

Settlement of cross-currency swaps
46

 

Issuance of common stock
76

 
83

Payment of common stock dividends
(513
)
 
(500
)
Net increase (decrease) in short-term debt
(66
)
 
276

Other financing activities
(31
)
 
(18
)
Net cash provided by (used in) financing activities - continuing operations
(152
)
 
(71
)
Net cash provided by (used in) financing activities - discontinued operations

 
(546
)
Net cash distributions to parent from discontinued operations

 
132

Net cash provided by (used in) financing activities
(152
)
 
(485
)
Effect of Exchange Rates on Cash and Cash Equivalents
(15
)
 
(9
)
Net (Increase) Decrease in Cash and Cash Equivalents included in Discontinued Operations

 
352

Net Increase (Decrease) in Cash and Cash Equivalents
(344
)
 
(553
)
Cash and Cash Equivalents at Beginning of Period
836

 
1,399

Cash and Cash Equivalents at End of Period
$
492

 
$
846


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

5

Table of Contents


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)

 
June 30,
2016
 
December 31,
2015
Assets
 

 
 

 
 
 
 
Current Assets
 

 
 

Cash and cash equivalents
$
492

 
$
836

Accounts receivable (less reserve: 2016, $48; 2015, $41)
 

 
 

Customer
667

 
673

Other
44

 
59

Unbilled revenues
447

 
453

Fuel, materials and supplies
336

 
357

Prepayments
131

 
66

Price risk management assets
200

 
139

Other current assets
43

 
63

Total Current Assets
2,360

 
2,646

 
 
 
 
Property, Plant and Equipment
 

 
 

Regulated utility plant
35,226

 
34,399

Less:  accumulated depreciation - regulated utility plant
5,966

 
5,683

Regulated utility plant, net
29,260

 
28,716

Non-regulated property, plant and equipment
491

 
516

Less:  accumulated depreciation - non-regulated property, plant and equipment
157

 
165

Non-regulated property, plant and equipment, net
334

 
351

Construction work in progress
1,200

 
1,315

Property, Plant and Equipment, net
30,794

 
30,382

 
 
 
 
Other Noncurrent Assets
 

 
 

Regulatory assets
1,762

 
1,733

Goodwill
3,455

 
3,550

Other intangibles
708

 
679

Price risk management assets
285

 
156

Other noncurrent assets
164

 
155

Total Other Noncurrent Assets
6,374

 
6,273

 
 
 
 
Total Assets
$
39,528

 
$
39,301

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


6

Table of Contents


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)

 
June 30,
2016
 
December 31,
2015
Liabilities and Equity
 

 
 

 
 
 
 
Current Liabilities
 

 
 

Short-term debt
$
856

 
$
916

Long-term debt due within one year
219

 
485

Accounts payable
726

 
812

Taxes
106

 
85

Interest
211

 
303

Dividends
258

 
255

Customer deposits
326

 
326

Regulatory liabilities
99

 
145

Other current liabilities
607

 
549

Total Current Liabilities
3,408

 
3,876

 
 
 
 
Long-term Debt
18,949

 
18,563

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 

 
 

Deferred income taxes
3,749

 
3,440

Investment tax credits
134

 
128

Accrued pension obligations
1,074

 
1,405

Asset retirement obligations
513

 
536

Regulatory liabilities
935

 
945

Other deferred credits and noncurrent liabilities
441

 
489

Total Deferred Credits and Other Noncurrent Liabilities
6,846

 
6,943

 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)


 


 
 
 
 
Equity
 

 
 

Common stock - $0.01 par value (a)
7

 
7

Additional paid-in capital
9,766

 
9,687

Earnings reinvested
3,409

 
2,953

Accumulated other comprehensive loss
(2,857
)
 
(2,728
)
Total Equity
10,325

 
9,919

 
 
 
 
Total Liabilities and Equity
$
39,528

 
$
39,301

 
(a)
780,000 shares authorized; 677,549 and 673,857 shares issued and outstanding at June 30, 2016 and December 31, 2015.

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


7

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)  

 
Common
stock
shares
outstanding (a)
 
Common
stock
 
Additional
paid-in
capital
 
Earnings
reinvested
 
Accumulated
other
comprehensive
loss
 
Total
December 31, 2015
673,857

 
$
7

 
$
9,687

 
$
2,953

 
$
(2,728
)
 
$
9,919

Common stock issued
3,692

 


 
109

 
 
 
 
 
109

Stock-based compensation
 
 
 
 
(30
)
 
 
 
 
 
(30
)
Net income
 
 
 
 
 
 
964

 
 
 
964

Dividends and dividend equivalents
 
 
 
 
 
 
(515
)
 
 
 
(515
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
(129
)
 
(129
)
Adoption of stock-based compensation guidance cumulative effect adjustment (Note 2)
 
 
 
 
 
 
7

 
 
 
7

June 30, 2016
677,549

 
$
7

 
$
9,766

 
$
3,409

 
$
(2,857
)
 
$
10,325

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
665,849

 
$
7

 
$
9,433

 
$
6,462

 
$
(2,274
)
 
$
13,628

Common stock issued
3,665

 
 

 
111

 
 

 
 

 
111

Stock-based compensation
 

 
 

 
20

 
 

 
 

 
20

Net income (loss)
 

 
 

 
 

 
(110
)
 
 

 
(110
)
Dividends and dividend equivalents
 

 
 

 
 

 
(498
)
 
 

 
(498
)
Distribution of PPL Energy Supply (Note 8)
 
 
 
 
 
 
(3,200
)
 
(24
)
 
(3,224
)
Other comprehensive income (loss)
 

 
 

 
 

 
 

 
14

 
14

June 30, 2015
669,514

 
$
7

 
$
9,564

 
$
2,654

 
$
(2,284
)
 
$
9,941

 
(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

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating Revenues
$
495

 
$
476

 
$
1,080

 
$
1,106

 
 
 
 
 
 
 
 
Operating Expenses
 

 
 

 
 
 
 
Operation
 

 
 

 
 
 
 
Energy purchases
118

 
138

 
285

 
365

Energy purchases from affiliate

 
5

 

 
14

Other operation and maintenance
137

 
140

 
287

 
273

Depreciation
62

 
52

 
121

 
103

Taxes, other than income
24

 
25

 
53

 
60

Total Operating Expenses
341

 
360

 
746

 
815

 
 
 
 
 
 
 
 
Operating Income
154

 
116

 
334

 
291

 
 
 
 
 
 
 
 
Other Income (Expense) - net
5

 
2

 
8

 
4

 
 
 
 
 
 
 
 
Interest Expense
32

 
33

 
65

 
64

 
 
 
 
 
 
 
 
Income Before Income Taxes
127

 
85

 
277

 
231

 
 
 
 
 
 
 
 
Income Taxes
48

 
36

 
104

 
95

 
 
 
 
 
 
 
 
Net Income (a)
$
79

 
$
49

 
$
173

 
$
136

 
(a)
Net income equals comprehensive income.

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


10

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows from Operating Activities
 

 
 

Net income
$
173

 
$
136

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 

Depreciation
121

 
103

Amortization
15

 
14

Defined benefit plans - expense
7

 
8

Deferred income taxes and investment tax credits
107

 
39

Other
(10
)
 
(6
)
Change in current assets and current liabilities
 

 
 

Accounts receivable
(6
)
 
(24
)
Accounts payable
(26
)
 
(93
)
Unbilled revenue
3

 
25

Prepayments
3

 
(80
)
Regulatory assets and liabilities
(40
)
 
36

Taxes payable
(16
)
 
(55
)
Other
(6
)
 
(14
)
Other operating activities
 

 
 

Defined benefit plans - funding

 
(33
)
Other assets
11

 
(2
)
Other liabilities
(8
)
 
22

Net cash provided by operating activities
328

 
76

 
 
 
 
Cash Flows from Investing Activities
 

 
 

Expenditures for property, plant and equipment
(424
)
 
(480
)
Other investing activities
(3
)
 
(3
)
Net cash provided by (used in) investing activities
(427
)
 
(483
)
 
 
 
 
Cash Flows from Financing Activities
 

 
 

Issuance of long-term debt
224

 

Retirement of long-term debt
(224
)
 

Contributions from parent
200

 
160

Payment of common stock dividends to parent
(117
)
 
(107
)
Net increase (decrease) in short-term debt
6

 
168

Other financing activities
(2
)
 

Net cash provided by (used in) financing activities
87

 
221

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
(12
)
 
(186
)
Cash and Cash Equivalents at Beginning of Period
47

 
214

Cash and Cash Equivalents at End of Period
$
35

 
$
28

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

11

Table of Contents


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)

 
June 30,
2016
 
December 31,
2015
Assets
 

 
 

 
 
 
 
Current Assets
 

 
 

Cash and cash equivalents
$
35

 
$
47

Accounts receivable (less reserve: 2016, $23; 2015, $16)
 

 
 

Customer
286

 
286

Other
13

 
10

Accounts receivable from affiliates
3

 

Unbilled revenues
88

 
91

Materials and supplies
30

 
34

Prepayments
63

 
66

Other current assets
18

 
21

Total Current Assets
536

 
555

 
 
 
 
Property, Plant and Equipment
 

 
 

Regulated utility plant
9,110

 
8,734

Less: accumulated depreciation - regulated utility plant
2,656

 
2,573

Regulated utility plant, net
6,454

 
6,161

Construction work in progress
577

 
530

Property, Plant and Equipment, net
7,031

 
6,691

 
 
 
 
Other Noncurrent Assets
 

 
 

Regulatory assets
995

 
1,006

Intangibles
246

 
244

Other noncurrent assets
17

 
15

Total Other Noncurrent Assets
1,258

 
1,265

 
 
 
 
Total Assets
$
8,825

 
$
8,511

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


12

Table of Contents


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)

 
June 30,
2016
 
December 31,
2015
Liabilities and Equity
 

 
 

 
 
 
 
Current Liabilities
 

 
 

Short-term debt
$
6

 
$

Accounts payable
295

 
288

Accounts payable to affiliates
35

 
35

Taxes
8

 
24

Interest
34

 
37

Regulatory liabilities
74

 
113

Customer deposits
22

 
31

Other current liabilities
77

 
77

Total Current Liabilities
551

 
605

 
 
 
 
Long-term Debt
2,830

 
2,828

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 

 
 

Deferred income taxes
1,776

 
1,663

Accrued pension obligations
184

 
183

Regulatory liabilities
19

 
22

Other deferred credits and noncurrent liabilities
89

 
91

Total Deferred Credits and Other Noncurrent Liabilities
2,068

 
1,959

 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)


 


 
 
 
 
Equity
 

 
 

Common stock - no par value (a)
364

 
364

Additional paid-in capital
2,134

 
1,934

Earnings reinvested
878

 
821

Total Equity
3,376

 
3,119

 
 
 
 
Total Liabilities and Equity
$
8,825

 
$
8,511

 
(a)
170,000 shares authorized; 66,368 shares issued and outstanding at June 30, 2016 and December 31, 2015.

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


13

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
Common
stock
shares
outstanding
(a)
 
Common
stock
 
Additional
paid-in
capital
 
Earnings
reinvested
 
Total
December 31, 2015
66,368

 
$
364

 
$
1,934

 
$
821

 
$
3,119

Net income


 


 


 
173

 
173

Capital contributions from PPL


 


 
200

 


 
200

Dividends declared on common stock


 


 


 
(116
)
 
(116
)
June 30, 2016
66,368

 
$
364

 
$
2,134

 
$
878

 
$
3,376

 
 
 
 
 
 
 
 
 
 
December 31, 2014
66,368

 
$
364

 
$
1,603

 
$
750

 
$
2,717

Net income


 


 


 
136

 
136

Capital contributions from PPL (b)


 


 
207

 


 
207

Dividends declared on common stock


 


 


 
(107
)
 
(107
)
June 30, 2015
66,368

 
$
364

 
$
1,810

 
$
779

 
$
2,953

 
(a)
Shares in thousands. All common shares of PPL Electric stock are owned by PPL.
(b)
Includes non-cash contributions of $47 million.

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















14

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating Revenues
$
721

 
$
714

 
$
1,547

 
$
1,613

 
 
 
 
 
 
 
 
Operating Expenses
 

 
 

 
 

 
 

Operation
 

 
 

 
 

 
 

Fuel
182

 
214

 
380

 
467

Energy purchases
28

 
28

 
94

 
120

Other operation and maintenance
204

 
214

 
406

 
423

Depreciation
100

 
94

 
199

 
189

Taxes, other than income
15

 
15

 
30

 
29

Total Operating Expenses
529

 
565

 
1,109

 
1,228

 
 
 
 
 
 
 
 
Operating Income
192

 
149

 
438

 
385

 
 
 
 
 
 
 
 
Other Income (Expense) - net
(5
)
 
(1
)
 
(6
)
 
(2
)
 
 
 
 
 
 
 
 
Interest Expense
48

 
42

 
97

 
84

 
 
 
 
 
 
 
 
Interest Expense with Affiliate
4

 
1

 
8

 
1

 
 
 
 
 
 
 
 
Income Before Income Taxes
135

 
105

 
327

 
298

 
 
 
 
 
 
 
 
Income Taxes
51

 
45

 
123

 
121

 
 
 
 
 
 
 
 
Net Income
$
84

 
$
60

 
$
204

 
$
177

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


15

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)


Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
84

 
$
60

 
$
204

 
$
177

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Amounts arising during the period - gains (losses), net of tax (expense) benefit:
 
 
 
 
 
 
 
Defined benefit plans:
 
 
 
 
 
 
 
Net actuarial gain (loss), net of tax of ($1), $5, ($1), $5
1

 
(8
)
 
1

 
(8
)
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):
 
 
 
 
 
 
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $1
(1
)
 

 
(1
)
 
(1
)
Defined benefit plans:
 
 
 
 
 
 
 
Prior service costs, net of tax of $0, $0, $0, $0
1

 
1

 
1

 
1

Net actuarial loss, net of tax of ($1), ($1), ($1), ($1)
1

 

 
2

 
1

Total other comprehensive income (loss)
2

 
(7
)
 
3

 
(7
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
86

 
$
53

 
$
207

 
$
170


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


16

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows from Operating Activities
 

 
 

Net income
$
204

 
$
177

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 

Depreciation
199

 
189

Amortization
15

 
12

Defined benefit plans - expense
13

 
21

Deferred income taxes and investment tax credits
121

 
145

Other
(1
)
 
23

Change in current assets and current liabilities
 

 
 

Accounts receivable
5

 
13

Accounts payable
28

 
10

Unbilled revenues
(14
)
 
12

Fuel, materials and supplies
20

 
54

Income tax receivable
4

 
136

Taxes payable
(13
)
 
23

Accrued interest
(1
)
 

Other
(22
)
 
(30
)
Other operating activities
 

 
 

Defined benefit plans - funding
(45
)
 
(63
)
Expenditures for asset retirement obligations
(8
)
 
(3
)
Other assets
1

 
7

Other liabilities

 
(23
)
Net cash provided by operating activities
506

 
703

Cash Flows from Investing Activities
 

 
 

Expenditures for property, plant and equipment
(439
)
 
(630
)
Other investing activities

 
4

Net cash provided by (used in) investing activities
(439
)
 
(626
)
Cash Flows from Financing Activities
 

 
 

Net increase (decrease) in notes payable with affiliate
123

 
18

Net increase (decrease) in short-term debt
(126
)
 
(14
)
Debt issuance and credit facility costs
(1
)
 

Distributions to member
(114
)
 
(109
)
Contributions from member
37

 
20

Net cash provided by (used in) financing activities
(81
)
 
(85
)
Net Increase (Decrease) in Cash and Cash Equivalents
(14
)
 
(8
)
Cash and Cash Equivalents at Beginning of Period
30

 
21

Cash and Cash Equivalents at End of Period
$
16

 
$
13

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

17

Table of Contents


CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
June 30,
2016
 
December 31,
2015
Assets
 

 
 

 
 
 
 
Current Assets
 

 
 

Cash and cash equivalents
$
16

 
$
30

Accounts receivable (less reserve: 2016, $24; 2015, $23)
 

 
 

Customer
201

 
209

Other
15

 
17

Unbilled revenues
161

 
147

Fuel, materials and supplies
279

 
298

Prepayments
30

 
23

Regulatory assets
22

 
35

Other current assets
1

 
6

Total Current Assets
725

 
765

 
 
 
 
Property, Plant and Equipment
 

 
 

Regulated utility plant
12,414

 
11,906

Less: accumulated depreciation - regulated utility plant
1,301

 
1,163

Regulated utility plant, net
11,113

 
10,743

Construction work in progress
428

 
660

Property, Plant and Equipment, net
11,541

 
11,403

 
 
 
 
Other Noncurrent Assets
 

 
 

Regulatory assets
767

 
727

Goodwill
996

 
996

Other intangibles
110

 
123

Other noncurrent assets
81

 
76

Total Other Noncurrent Assets
1,954

 
1,922

 
 
 
 
Total Assets
$
14,220

 
$
14,090

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

18

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CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
June 30,
2016
 
December 31,
2015
Liabilities and Equity
 

 
 

 
 
 
 
Current Liabilities
 

 
 

Short-term debt
$
139

 
$
265

Long-term debt due within one year
219

 
25

Notes payable with affiliate
176

 
54

Accounts payable
236

 
266

Accounts payable to affiliates
5

 
5

Customer deposits
54

 
52

Taxes
33

 
46

Price risk management liabilities
6

 
5

Regulatory liabilities
25

 
32

Interest
31

 
32

Asset retirement obligations
76

 
50

Other current liabilities
104

 
135

Total Current Liabilities
1,104

 
967

 
 
 
 
Long-term Debt
 
 
 
 
 
 
 
Long-term debt
4,470

 
4,663

Long-term debt to affiliate
400

 
400

Total Long-term Debt
4,870

 
5,063

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 

 
 

Deferred income taxes
1,580

 
1,463

Investment tax credits
133

 
128

Accrued pension obligations
276

 
296

Asset retirement obligations
463

 
485

Regulatory liabilities
916

 
923

Price risk management liabilities
50

 
42

Other deferred credits and noncurrent liabilities
181

 
206

Total Deferred Credits and Other Noncurrent Liabilities
3,599

 
3,543

 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)


 


 
 
 
 
Member's equity
4,647

 
4,517

 
 
 
 
Total Liabilities and Equity
$
14,220

 
$
14,090

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


19

Table of Contents


CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
Member's
Equity
December 31, 2015
$
4,517

Net income
204

Contributions from member
37

Distributions to member
(114
)
Other comprehensive income (loss)
3

June 30, 2016
$
4,647

 
 
December 31, 2014
$
4,248

Net income
177

Contributions from member
20

Distributions to member
(109
)
Other comprehensive income (loss)
(7
)
June 30, 2015
$
4,329

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

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CONDENSED STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating Revenues
 
 
 
 
 
 
 
Retail and wholesale
$
317

 
$
323

 
$
692

 
$
740

Electric revenue from affiliate
6

 
8

 
17

 
30

Total Operating Revenues
323

 
331

 
709

 
770

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
Fuel
69

 
82

 
147

 
185

Energy purchases
23

 
23

 
85

 
111

Energy purchases from affiliate
3

 
5

 
5

 
8

Other operation and maintenance
92

 
103

 
179

 
199

Depreciation
42

 
40

 
83

 
82

Taxes, other than income
7

 
7

 
15

 
14

Total Operating Expenses
236

 
260

 
514

 
599

 
 
 
 
 
 
 
 
Operating Income
87

 
71

 
195

 
171

 
 
 
 
 
 
 
 
Other Income (Expense) - net
(5
)
 
(1
)
 
(5
)
 
(2
)
 
 
 
 
 
 
 
 
Interest Expense
18

 
13

 
35

 
26

 
 
 
 
 
 
 
 
Income Before Income Taxes
64

 
57

 
155

 
143

 
 
 
 
 
 
 
 
Income Taxes
24

 
22

 
59

 
55

 
 
 
 
 
 
 
 
Net Income (a)
$
40

 
$
35

 
$
96

 
$
88

 
(a)
Net income equals comprehensive income.

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


22

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CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)

 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows from Operating Activities
 

 
 

Net income
$
96

 
$
88

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 

Depreciation
83

 
82

Amortization
6

 
6

Defined benefit plans - expense
4

 
8

Deferred income taxes and investment tax credits
62

 
58

Other

 
24

Change in current assets and current liabilities
 

 
 

Accounts receivable
(2
)
 
13

Accounts receivable from affiliates
(7
)
 
7

Accounts payable
20

 
(12
)
Accounts payable to affiliates
8

 
(4
)
Unbilled revenues
(1
)
 
9

Fuel, materials and supplies
29

 
51

Income tax receivable
4

 
74

Taxes payable

 
9

Other
(6
)
 
(2
)
Other operating activities
 

 
 

Defined benefit plans - funding
(16
)
 
(25
)
Expenditures for asset retirement obligations
(6
)
 
(3
)
Other assets
(4
)
 
12

Other liabilities
3

 
(6
)
Net cash provided by operating activities
273

 
389

Cash Flows from Investing Activities
 

 
 

Expenditures for property, plant and equipment
(237
)
 
(349
)
Net cash provided by (used in) investing activities
(237
)
 
(349
)
Cash Flows from Financing Activities
 

 
 

Net increase (decrease) in short-term debt
(32
)
 
(5
)
Debt issuance and credit facility costs
(1
)
 

Payment of common stock dividends to parent
(61
)
 
(58
)
Contributions from parent
47

 
20

Net cash provided by (used in) financing activities
(47
)
 
(43
)
Net Increase (Decrease) in Cash and Cash Equivalents
(11
)
 
(3
)
Cash and Cash Equivalents at Beginning of Period
19

 
10

Cash and Cash Equivalents at End of Period
$
8

 
$
7

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


23

Table of Contents


CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)

 
June 30,
2016
 
December 31,
2015
Assets
 

 
 

 
 
 
 
Current Assets
 

 
 

Cash and cash equivalents
$
8

 
$
19

Accounts receivable (less reserve: 2016, $2; 2015, $1)
 

 
 

Customer
88

 
92

Other
10

 
11

Accounts receivable from affiliates
19

 
12

Unbilled revenues
68

 
67

Fuel, materials and supplies
122

 
151

Prepayments
14

 
5

Regulatory assets
8

 
16

Other current assets

 
2

Total Current Assets
337

 
375

 
 
 
 
Property, Plant and Equipment
 

 
 

Regulated utility plant
5,207

 
4,804

Less: accumulated depreciation - regulated utility plant
434

 
404

Regulated utility plant, net
4,773

 
4,400

Construction work in progress
130

 
390

Property, Plant and Equipment, net
4,903

 
4,790

 
 
 
 
Other Noncurrent Assets
 

 
 

Regulatory assets
440

 
424

Goodwill
389

 
389

Other intangibles
66

 
73

Other noncurrent assets
22

 
17

Total Other Noncurrent Assets
917

 
903

 
 
 
 
Total Assets
$
6,157

 
$
6,068

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

24

Table of Contents


CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)

 
June 30,
2016
 
December 31,
2015
Liabilities and Equity
 

 
 

 
 
 
 
Current Liabilities
 

 
 

Short-term debt
$
110

 
$
142

Long-term debt due within one year
219

 
25

Accounts payable
145

 
157

Accounts payable to affiliates
33

 
25

Customer deposits
26

 
26

Taxes
20

 
20

Price risk management liabilities
6

 
5

Regulatory liabilities
8

 
13

Interest
11

 
11

Asset retirement obligations
37

 
25

Other current liabilities
36

 
39

Total Current Liabilities
651

 
488

 
 
 
 
Long-term Debt
1,423

 
1,617

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 

 
 

Deferred income taxes
888

 
829

Investment tax credits
37

 
35

Accrued pension obligations
48

 
56

Asset retirement obligations
136

 
149

Regulatory liabilities
427

 
431

Price risk management liabilities
50

 
42

Other deferred credits and noncurrent liabilities
85

 
91

Total Deferred Credits and Other Noncurrent Liabilities
1,671

 
1,633

 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)


 


 
 
 
 
Stockholder's Equity
 

 
 

Common stock - no par value (a)
424

 
424

Additional paid-in capital
1,658

 
1,611

Earnings reinvested
330

 
295

Total Equity
2,412

 
2,330

 
 
 
 
Total Liabilities and Equity
$
6,157

 
$
6,068

 
(a)
75,000 shares authorized; 21,294 shares issued and outstanding at June 30, 2016 and December 31, 2015.

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


25

Table of Contents


CONDENSED STATEMENTS OF EQUITY
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)

 
Common
stock
shares
outstanding
(a)
 
Common
stock
 
Additional
paid-in
capital
 
Earnings
reinvested
 
Total
December 31, 2015
21,294

 
$
424

 
$
1,611

 
$
295

 
$
2,330

Net income


 


 


 
96

 
96

Capital contributions from LKE


 


 
47

 


 
47

Cash dividends declared on common stock


 


 


 
(61
)
 
(61
)
June 30, 2016
21,294

 
$
424

 
$
1,658

 
$
330

 
$
2,412

 
 
 
 
 
 
 
 
 
 
December 31, 2014
21,294

 
$
424

 
$
1,521

 
$
229

 
$
2,174

Net income


 


 


 
88

 
88

Capital contributions from LKE


 


 
20

 


 
20

Cash dividends declared on common stock


 


 


 
(58
)
 
(58
)
June 30, 2015
21,294

 
$
424

 
$
1,541

 
$
259

 
$
2,224

 
(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.


26

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CONDENSED STATEMENTS OF INCOME
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Operating Revenues
 
 
 
 
 
 
 
Retail and wholesale
$
404

 
$
391

 
$
855

 
$
873

Electric revenue from affiliate
3

 
5

 
5

 
8

Total Operating Revenues
407

 
396

 
860

 
881

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
Fuel
113

 
132

 
233

 
282

Energy purchases
5

 
5

 
9

 
9

Energy purchases from affiliate
6

 
8

 
17

 
30

Other operation and maintenance
107

 
109

 
213

 
213

Depreciation
58

 
54

 
116

 
107

Taxes, other than income
8

 
8

 
15

 
15

Total Operating Expenses
297

 
316

 
603

 
656

 
 
 
 
 
 
 
 
Operating Income
110

 
80

 
257

 
225

 
 
 
 
 
 
 
 
Other Income (Expense) - net
1

 
2

 
(1
)
 
1

 
 
 
 
 
 
 
 
Interest Expense
23

 
19

 
47

 
38

 
 
 
 
 
 
 
 
Income Before Income Taxes
88

 
63

 
209

 
188

 
 
 
 
 
 
 
 
Income Taxes
34

 
24

 
80

 
71

 
 
 
 
 
 
 
 
Net Income (a)
$
54

 
$
39

 
$
129

 
$
117

 
(a)
Net income approximates comprehensive income.

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


28

Table of Contents


CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)

 
Six Months Ended June 30,
 
2016
 
2015
Cash Flows from Operating Activities
 

 
 

Net income
$
129

 
$
117

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 

Depreciation
116

 
107

Amortization
7

 
4

Defined benefit plans - expense
3

 
6

Deferred income taxes and investment tax credits
77

 
84

Other
(1
)
 
(1
)
Change in current assets and current liabilities
 

 
 

Accounts receivable
11

 

Accounts receivable from affiliates
1

 

Accounts payable
11

 
27

Accounts payable to affiliates
12

 
(11
)
Unbilled revenues
(13
)
 
3

Fuel, materials and supplies
(9
)
 
3

Income tax receivable

 
60

Taxes payable
(3
)
 
14

Accrued interest
(1
)
 

Other
(10
)
 
(9
)
Other operating activities
 

 
 

Defined benefit plans - funding
(13
)
 
(19
)
Expenditures for asset retirement obligations
(2
)
 

Other assets
(3
)
 
(1
)
Other liabilities
(1
)
 
(24
)
Net cash provided by operating activities
311

 
360

Cash Flows from Investing Activities
 

 
 

Expenditures for property, plant and equipment
(201
)
 
(279
)
Other investing activities

 
4

Net cash provided by (used in) investing activities
(201
)
 
(275
)
Cash Flows from Financing Activities
 

 
 

Net increase (decrease) in short-term debt
(19
)
 
(9
)
Debt issuance and credit facility costs
(1
)
 

Payment of common stock dividends to parent
(113
)
 
(81
)
Contributions from parent
20

 

Net cash provided by (used in) financing activities
(113
)
 
(90
)
Net Increase (Decrease) in Cash and Cash Equivalents
(3
)
 
(5
)
Cash and Cash Equivalents at Beginning of Period
11

 
11

Cash and Cash Equivalents at End of Period
$
8

 
$
6

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


29

Table of Contents


CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)

 
June 30,
2016
 
December 31,
2015
Assets
 

 
 

 
 
 
 
Current Assets
 

 
 

Cash and cash equivalents
$
8

 
$
11

Accounts receivable (less reserve: 2016, $2; 2015, $2)
 

 
 

Customer
113

 
117

Other
4

 
9

Accounts receivable from affiliates

 
1

Unbilled revenues
93

 
80

Fuel, materials and supplies
157

 
147

Prepayments
16

 
8

Regulatory assets
14

 
19

Other current assets
1

 
4

Total Current Assets
406

 
396

 
 
 
 
Property, Plant and Equipment
 

 
 

Regulated utility plant
7,203

 
7,099

Less: accumulated depreciation - regulated utility plant
867

 
759

Regulated utility plant, net
6,336

 
6,340

Construction work in progress
295

 
267

Property, Plant and Equipment, net
6,631

 
6,607

 
 
 
 
Other Noncurrent Assets
 

 
 

Regulatory assets
327

 
303

Goodwill
607

 
607

Other intangibles
44

 
50

Other noncurrent assets
55

 
48

Total Other Noncurrent Assets
1,033

 
1,008

 
 
 
 
Total Assets
$
8,070

 
$
8,011

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

30

Table of Contents


CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)

 
June 30,
2016
 
December 31,
2015
Liabilities and Equity
 

 
 

 
 
 
 
Current Liabilities
 

 
 

Short-term debt
$
29

 
$
48

Accounts payable
73

 
88

Accounts payable to affiliates
52

 
39

Customer deposits
28

 
26

Taxes
17

 
20

Regulatory liabilities
17

 
19

Interest
15

 
16

Asset retirement obligations
39

 
25

Other current liabilities
33

 
44

Total Current Liabilities
303

 
325

 
 
 
 
Long-term Debt
2,327

 
2,326

 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 

 
 

Deferred income taxes
1,120

 
1,046

Investment tax credits
96

 
93

Accrued pension obligations
39

 
46

Asset retirement obligations
327

 
336

Regulatory liabilities
489

 
492

Other deferred credits and noncurrent liabilities
47

 
60

Total Deferred Credits and Other Noncurrent Liabilities
2,118

 
2,073

 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)


 


 
 
 
 
Stockholder's Equity
 

 
 

Common stock - no par value (a)
308

 
308

Additional paid-in capital
2,616

 
2,596

Accumulated other comprehensive loss
(1
)
 

Earnings reinvested
399

 
383

Total Equity
3,322

 
3,287

 
 
 
 
Total Liabilities and Equity
$
8,070

 
$
8,011

 
(a)
80,000 shares authorized; 37,818 shares issued and outstanding at June 30, 2016 and December 31, 2015.

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


31

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CONDENSED STATEMENTS OF EQUITY
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)

 
Common
stock
shares
outstanding
(a)
 
Common
stock
 
Additional
paid-in
capital
 
Earnings
reinvested
 
Accumulated
other
comprehensive
loss
 
Total
December 31, 2015
37,818

 
$
308

 
$
2,596

 
$
383

 
$

 
$
3,287

Capital contributions from LKE


 


 
20

 


 


 
20

Net income


 


 


 
129

 


 
129

Cash dividends declared on common stock


 


 


 
(113
)
 


 
(113
)
Other comprehensive income (loss)


 


 


 


 
(1
)
 
(1
)
June 30, 2016
37,818

 
$
308

 
$
2,616

 
$
399

 
$
(1
)
 
$
3,322

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
37,818

 
$
308

 
$
2,596

 
$
302

 
$

 
$
3,206

Net income


 


 


 
117

 


 
117

Cash dividends declared on common stock


 


 


 
(81
)
 


 
(81
)
Other comprehensive income (loss)


 


 


 


 
(1
)
 
(1
)
June 30, 2015
37,818

 
$
308

 
$
2,596

 
$
338

 
$
(1
)
 
$
3,241

 
(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

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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. 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 footnote disclosures 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, 2015 is derived from that Registrant's 2015 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 2015 Form 10-K. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016 or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.
 
The classification of certain prior period amounts has been changed to conform to the presentation in the June 30, 2016 financial statements.
 
(PPL)
 
"Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income includes the activities of PPL Energy Supply, substantially representing PPL's former Supply segment, which was spun off and distributed to PPL shareowners on June 1, 2015. In addition, the Statement of Cash Flows for the six months ended June 30, 2015 separately reports the cash flows of the discontinued operations. See Note 8 for additional information.
 
2. Summary of Significant Accounting Policies
 
(All Registrants)
 
The following accounting policy disclosures represent updates to Note 1 to each indicated Registrant's 2015 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 at a discount, which reflects a provision for uncollectible accounts. The alternative electricity suppliers have no continuing involvement or interest in the purchased accounts receivable. The purchased accounts receivable are initially recorded at fair value using a market approach based on the purchase price paid and are classified as Level 2 in the fair value hierarchy. During the three and six months ended June 30, 2016, PPL Electric purchased $297 million and $679 million of accounts receivable from unaffiliated third parties. During the three and six months ended June 30, 2015, PPL Electric purchased $276 million and $607 million of accounts receivable from unaffiliated third parties and $53 million and $146 million from PPL EnergyPlus. As a result of the June 1, 2015 spinoff of PPL Energy Supply and creation of Talen Energy, PPL EnergyPlus (renamed Talen Energy Marketing) is no longer an affiliate of PPL Electric. PPL Electric's purchases from Talen Energy Marketing subsequent to May 31, 2015 are included as purchases from an unaffiliated third party.

Discount Rate Change for U.K. Pension Plans (PPL)
 
In selecting the discount rate for its U.K. pension plans, WPD historically used a single weighted-average discount rate in the calculation of net periodic defined benefit cost. Effective January 1, 2016, WPD began using individual spot rates to measure service cost and interest cost to calculate net periodic defined benefit cost. For the three and six months ended June 30, 2016, this change in discount rate resulted in lower net periodic defined benefit costs recognized on the Statements of Income of $11 million ($9 million after-tax or $0.02 per share) and $22 million ($18 million after-tax or $0.03 per share).

33

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Foreign Currency Translation and Transactions (PPL)

WPD's functional currency is the GBP, which is the local currency in the U.K. As such, assets and liabilities are translated to U.S. dollars at the exchange rates on the date of consolidation and related revenues and expenses are generally translated at average exchange rates prevailing during the period included in PPL's results of operations. Adjustments resulting from foreign currency translation are recorded in AOCI.
 
PPL consolidates WPD on a one-month lag. Therefore, the impact of the decrease in the GBP to U.S. dollar exchange rate that occurred subsequent to the U.K.'s vote on June 23, 2016 to withdraw from the European Union is not reflected in PPL's June 30, 2016 financial statements. Using the June 30, 2016 GBP to U.S. dollar exchange rate of $1.34 as opposed to the May 31, 2016 exchange rate of $1.46 would have resulted in an additional foreign currency translation loss of $499 million recorded in AOCI, primarily reflecting a $991 million decrease in PP&E and a $228 million decrease in goodwill, partially offset by a decrease of $606 million in long-term debt.

Certain financial information provided for future periods in PPL’s 2015 Form 10-K is also impacted by the decrease in the GBP to U.S. dollar exchange rate.

New Accounting Guidance Adopted (All Registrants)
 
Accounting for Stock-Based Compensation
 
Effective January 1, 2016, the Registrants adopted accounting guidance to simplify the accounting for share-based payment transactions. The guidance requires excess tax benefits and tax deficiencies to be recorded as income tax benefit or expense on the statement of income, eliminates the requirement that excess tax benefits be realized before companies can recognize them and changes the threshold for statutory income tax withholding requirements to qualify for equity classification to the maximum statutory tax rates in the applicable jurisdictions. This guidance also changes the classification of excess tax benefits to an operating activity and employee taxes paid when shares are withheld to satisfy the employer's statutory income tax withholding obligation to a financing activity on the statement of cash flows and allows entities to make a policy election to either estimate forfeitures or recognize them when they occur. The adoption of this guidance had the following impacts:
 
Using the required prospective method of transition, for the three and six months ended June 30, 2016, PPL recorded tax benefits of $3 million and $11 million ($0.02 per share) and PPL Electric recorded tax benefits of $2 million and $7 million related to excess tax benefits for awards that were exercised and vested for the periods ending June 30, 2016. These amounts were recorded to Income taxes on the Statements of Income and Deferred income taxes on the Balance Sheets. The impact on LKE was not significant.

PPL elected to use the prospective method of transition for classifying excess tax benefits as an Operating activity on the Statement of Cash Flows. The amounts classified as Financing activities in the prior periods were not significant.

Upon adoption, using the required modified retrospective method of transition, PPL recorded a cumulative effect adjustment of $7 million to increase Earnings reinvested and decrease Deferred income taxes on the Balance Sheet related to prior period unrecognized excess tax benefits.

PPL has historically presented employee taxes paid for net settled awards as a Financing activity on the Statement of Cash Flows. Therefore, there is no transition impact for this requirement.

PPL has elected to recognize forfeitures when they occur. Due to past experience of insignificant forfeitures, there is no transition impact of this policy election.


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3. Segment and Related Information
 
(PPL)
 
See Note 2 in PPL's 2015 Form 10-K for a discussion of reportable segments and related information.

Financial data for the segments and reconciliation to PPL's consolidated results for the periods ended June 30 are:
 
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Income Statement Data
 
 
 
 
 
 
 
Revenues from external customers
 
 
 
 
 
 
 
U.K. Regulated
$
563

 
$
587

 
$
1,158

 
$
1,284

Kentucky Regulated
721

 
714

 
1,547

 
1,613

Pennsylvania Regulated
495

 
476

 
1,080

 
1,106

Corporate and Other
6

 
4

 
11

 
8

Total
$
1,785

 
$
1,781

 
$
3,796

 
$
4,011

 
 
 
 
 
 
 
 
Net Income (loss)
 

 
 

 
 

 
 

U.K. Regulated (a)
$
345

 
$
190

 
$
634

 
$
565

Kentucky Regulated
76

 
47

 
188

 
156

Pennsylvania Regulated
78

 
49

 
172

 
136

Corporate and Other (b)
(16
)
 
(36
)
 
(30
)
 
(55
)
Discontinued Operations (c)

 
(1,007
)
 

 
(912
)
Total
$
483

 
$
(757
)
 
$
964

 
$
(110
)
 
 
June 30,
2016
 
December 31,
2015
Balance Sheet Data
 

 
 

Assets
 

 
 

U.K. Regulated (d)
$
16,371

 
$
16,669

Kentucky Regulated
13,886

 
13,756

Pennsylvania Regulated
8,825

 
8,511

Corporate and Other (e)
446

 
365

Total assets
$
39,528

 
$
39,301

 
(a)
Includes unrealized gains and losses from hedging foreign-currency related economic activity. See Note 14 for additional information.
(b)
2015 includes transition costs to prepare the Talen Energy organization for the June 1, 2015 spinoff and reconfigure the remaining PPL Services functions. See Note 8 for additional information.
(c)
See Note 8 for additional information.
(d)
Includes $12.1 billion and $12.2 billion of net PP&E as of June 30, 2016 and December 31, 2015. WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.
(e)
Primarily consists of unallocated items, including cash, PP&E and the elimination of inter-segment transactions.

4. Earnings Per Share
 
(PPL)
 
Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the applicable period. Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding, increased by incremental shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares as calculated using the Treasury Stock Method. Incremental non-participating securities that have a dilutive impact are detailed in the table below.
 
Reconciliations of the amounts of income and shares of PPL common stock (in thousands) for the periods ended June 30 used in the EPS calculation are:
 

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Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Income (Numerator)
 

 
 

 
 

 
 

Income from continuing operations after income taxes
$
483

 
$
250

 
$
964

 
$
802

Less amounts allocated to participating securities
1

 
1

 
3

 
2

Income from continuing operations after income taxes available to PPL common shareowners - Basic and Diluted
$
482

 
$
249

 
$
961

 
$
800

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations (net of income taxes) available to PPL common shareowners - Basic and Diluted
$

 
$
(1,007
)
 
$

 
$
(912
)
 
 
 
 
 
 
 
 
Net income (loss)
$
483

 
$
(757
)
 
$
964

 
$
(110
)
Less amounts allocated to participating securities
1

 
1

 
3

 
2

Net income (loss) available to PPL common shareowners - Basic and Diluted
$
482

 
$
(758
)
 
$
961

 
$
(112
)
 
 
 
 
 
 
 
 
Shares of Common Stock (Denominator)
 

 
 

 
 

 
 

Weighted-average shares - Basic EPS
677,145

 
668,415

 
676,293

 
667,698

Add incremental non-participating securities:
 

 
 

 
 

 
 

Share-based payment awards
3,584

 
2,871

 
3,480

 
2,315

Weighted-average shares - Diluted EPS
680,729

 
671,286

 
679,773

 
670,013

 
 
 
 
 
 
 
 
Basic EPS
 

 
 

 
 

 
 

Available to PPL common shareowners:
 

 
 

 
 

 
 

Income from continuing operations after income taxes
$
0.71

 
$
0.37

 
$
1.42

 
$
1.20

Income (loss) from discontinued operations (net of income taxes)

 
(1.50
)
 

 
(1.37
)
Net Income (loss)
$
0.71

 
$
(1.13
)
 
$
1.42

 
$
(0.17
)
 
 
 
 
 
 
 
 
Diluted EPS
 

 
 

 
 

 
 

Available to PPL common shareowners:
 

 
 

 
 

 
 

Income from continuing operations after income taxes
$
0.71

 
$
0.37

 
$
1.41

 
$
1.19

Income (loss) from discontinued operations (net of income taxes)

 
(1.50
)
 

 
(1.36
)
Net Income (loss)
$
0.71

 
$
(1.13
)
 
$
1.41

 
$
(0.17
)
 
For the periods ended June 30, PPL issued common stock related to stock-based compensation plans and the DRIP as follows (in thousands):
 
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Stock-based compensation plans (a)
795

 
992

 
2,920

 
2,437

DRIP
370

 
424

 
772

 
843

 
(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 June 30, the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would have been antidilutive.
 
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Stock options
696

 
348

 
696

 
1,085

Performance units
78

 

 
39

 
73

 

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5. Income Taxes
 
Reconciliations of income taxes for the periods ended June 30 are as follows.
 
(PPL)
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Federal income tax on Income from Continuing Operations Before
Income Taxes at statutory tax rate - 35%
$
236

 
$
112

 
$
467

 
$
382

Increase (decrease) due to:
 

 
 

 
 

 
 

State income taxes, net of federal income tax benefit
9

 
9

 
22

 
29

Valuation allowance adjustments
3

 
5

 
9

 
8

Impact of lower U.K. income tax rates
(45
)
 
(36
)
 
(99
)
 
(98
)
Federal and state tax reserve adjustments (a)

 
(12
)
 

 
(12
)
Interest benefit on U.K. financing entities
(4
)
 
(3
)
 
(9
)
 
(11
)
Stock-based compensation (b)
(3
)
 

 
(11
)
 

Other
(4
)
 
(4
)
 
(8
)
 
(10
)
Total increase (decrease)
(44
)
 
(41
)
 
(96
)
 
(94
)
Total income taxes
$
192

 
$
71

 
$
371

 
$
288

 
(a)
During the three and six months ended June 30, 2015, PPL recorded a tax benefit to adjust the settled refund amount approved by Joint Committee of Taxation for the open audit years 1998 - 2011.
(b)
During the three and six months ended June 30, 2016, PPL recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 for additional information.

(PPL Electric)
 
 
 
 
 
 
 
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%
$
44

 
$
30

 
$
97

 
$
81

Increase (decrease) due to:
 

 
 

 
 

 
 

State income taxes, net of federal income tax benefit
8

 
4

 
18

 
14

Federal and state tax reserve adjustments

 
2

 

 
2

Depreciation not normalized
(2
)
 
(1
)
 
(3
)
 
(2
)
Stock-based compensation (a)
(2
)
 

 
(7
)
 

Other

 
1

 
(1
)
 

Total increase (decrease)
4

 
6

 
7

 
14

Total income taxes
$
48

 
$
36

 
$
104

 
$
95

 
(a)
During the three and six months ended June 30, 2016, PPL Electric recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 for additional information.

(LKE)  
 
 
 
 
 
 
 
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%
$
47

 
$
37

 
$
114

 
$
104

Increase (decrease) due to:
 

 
 

 
 

 
 

State income taxes, net of federal income tax benefit
5

 
4

 
12

 
11

Valuation allowance adjustments (a)

 
5

 

 
8

Stock-based compensation

 

 
(1
)
 

Other
(1
)
 
(1
)
 
(2
)
 
(2
)
Total increase (decrease)
4

 
8

 
9

 
17

Total income taxes
$
51

 
$
45

 
$
123

 
$
121


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(a)
Represents a valuation allowance against tax credits expiring in 2016 and 2017 that are more likely than not to expire before being utilized.
(LG&E)
 
 
 
 
 
 
 
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%
$
22

 
$
20

 
$
54

 
$
50

Increase (decrease) due to:
 

 
 

 
 

 
 

State income taxes, net of federal income tax benefit
2

 
2

 
6

 
5

Other

 

 
(1
)
 

Total increase (decrease)
2

 
2

 
5

 
5

Total income taxes
$
24

 
$
22

 
$
59

 
$
55

 
(KU)
 
 
 
 
 
 
 
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%
$
31

 
$
22

 
$
73

 
$
66

Increase (decrease) due to:
 

 
 

 
 

 
 

State income taxes, net of federal income tax benefit
3

 
2

 
7

 
7

Other

 

 

 
(2
)
Total increase (decrease)
3

 
2

 
7

 
5

Total income taxes
$
34

 
$
24

 
$
80

 
$
71


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. In April 2015, PPL was notified that the Joint Committee on Taxation approved PPL's settlement. In the second quarter of 2015, PPL recorded a tax benefit of $23 million, which included an estimate of interest on the refund. Of this amount, $11 million was reflected in continuing operations. PPL finalized the settlement of interest in the second quarter of 2016 and recorded an additional $3 million tax benefit.

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
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
Current Regulatory Assets:
 
 
 
 
 
 
 
Environmental cost recovery
$
6

 
$
24

 
$

 
$

      Generation formula rate
13

 
7

 

 

Transmission service charge
10

 
10

 
10

 
10

Other
5

 
7

 
2

 
3

Total current regulatory assets (a)
$
34

 
$
48

 
$
12

 
$
13

 
 
 
 
 
 
 
 

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PPL
 
PPL Electric
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
Noncurrent Regulatory Assets:
 
 
 
 
 
 
 
Defined benefit plans
$
800

 
$
809

 
$
460

 
$
469

Taxes recoverable through future rates
331

 
326

 
331

 
326

Storm costs
79

 
93

 
23

 
30

Unamortized loss on debt
66

 
68

 
41

 
42

Interest rate swaps
148

 
141

 

 

Accumulated cost of removal of utility plant
139

 
137

 
139

 
137

AROs
187

 
143

 

 

Other
12

 
16

 
1

 
2

Total noncurrent regulatory assets
$
1,762

 
$
1,733

 
$
995

 
$
1,006

Current Regulatory Liabilities:
 
 
 
 
 
 
 
Generation supply charge
$
26

 
$
41

 
$
26

 
$
41

Demand side management
10

 
8

 

 

Gas supply clause

 
6

 

 

Universal service rider
6

 
5

 
6

 
5

Transmission formula rate
27

 
48

 
27

 
48

Fuel adjustment clause
10

 
14

 

 

Storm damage expense
14

 
16

 
14

 
16

Other
6

 
7

 
1

 
3

Total current regulatory liabilities
$
99

 
$
145

 
$
74

 
$
113

 
 
 
 
 
 
 
 
Noncurrent Regulatory Liabilities:
 
 
 
 
 
 
 
Accumulated cost of removal of utility plant
$
695

 
$
691

 
$

 
$

Coal contracts (b)
8

 
17

 

 

Power purchase agreement - OVEC (b)
79

 
83

 

 

Net deferred tax assets
24

 
23

 

 

Act 129 compliance rider
19

 
22

 
19

 
22

Defined benefit plans
27

 
24

 

 

Interest rate swaps
80

 
82

 

 

Other
3

 
3

 

 

Total noncurrent regulatory liabilities
$
935

 
$
945

 
$
19

 
$
22


 
LKE
 
LG&E
 
KU
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
Current Regulatory Assets:
 
 
 
 
 
 
 
 
 
 
 
Environmental cost recovery
$
6

 
$
24

 
$
6

 
$
13

 
$

 
$
11

      Generation formula rate
13

 
7

 

 

 
13

 
7

Other
3

 
4

 
2

 
3

 
1

 
1

Total current regulatory assets
$
22

 
$
35

 
$
8

 
$
16

 
$
14

 
$
19

 
 
 
 
 
 
 
 
 
 
 
 

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LKE
 
LG&E
 
KU
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
Noncurrent Regulatory Assets:
 
 
 
 
 
 
 
 
 
 
 
Defined benefit plans
$
340

 
$
340

 
$
215

 
$
215

 
$
125

 
$
125

Storm costs
56

 
63

 
31

 
35

 
25

 
28

Unamortized loss on debt
25

 
26

 
16

 
17

 
9

 
9

Interest rate swaps
148

 
141

 
106

 
98

 
42

 
43

AROs
187

 
143

 
70

 
57

 
117

 
86

Plant retirement costs
5

 
6

 

 

 
5

 
6

Other
6

 
8

 
2

 
2

 
4

 
6

Total noncurrent regulatory assets
$
767

 
$
727

 
$
440

 
$
424

 
$
327

 
$
303

Current Regulatory Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Demand side management
$
10

 
$
8

 
$
5

 
$
4

 
$
5

 
$
4

Gas supply clause

 
6

 

 
6

 

 

Fuel adjustment clause
10

 
14

 
2

 
2

 
8

 
12

Other
5

 
4

 
1

 
1

 
4

 
3

Total current regulatory liabilities
$
25

 
$
32

 
$
8

 
$
13

 
$
17

 
$
19

 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent Regulatory Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accumulated cost of removal
of utility plant
$
695

 
$
691

 
$
304

 
$
301

 
$
391

 
$
390

Coal contracts (b)
8

 
17

 
3

 
7

 
5

 
10

Power purchase agreement - OVEC (b)
79

 
83

 
54

 
57

 
25

 
26

Net deferred tax assets
24

 
23

 
23

 
23

 
1

 

Defined benefit plans
27

 
24

 

 

 
27

 
24

Interest rate swaps
80

 
82

 
40

 
41

 
40

 
41

Other
3

 
3

 
3

 
2

 

 
1

Total noncurrent regulatory liabilities
$
916

 
$
923

 
$
427

 
$
431

 
$
489

 
$
492

  
(a)
These amounts are included in "Other current assets" on the Balance Sheets.
(b)
These liabilities were recorded as offsets to certain intangible assets that were recorded at fair value upon the acquisition of LKE by PPL.

Regulatory Matters
 
U.K. Activities (PPL)
 
Ofgem Review of Line Loss Calculation
 
In 2014, Ofgem issued its final decision on the DPCR4 line loss incentives and penalties mechanism. WPD began refunding its liability for over-recovery of line losses to customers on April 1, 2015 and will continue through March 31, 2019. The liability at June 30, 2016 was $39 million.
 
Kentucky Activities
 
CPCN and ECR Filings (PPL, LKE, LG&E and KU)
 
On January 29, 2016, LG&E and KU submitted applications to the KPSC for CPCNs and for ECR rate treatment regarding upcoming environmental construction projects relating to the EPA's regulations addressing the handling of coal combustion by-products and MATS. The construction projects are expected to begin in 2016 and continue through 2023 and are estimated to cost approximately $316 million at LG&E and $678 million at KU. On June 13, 2016, LG&E and KU filed a unanimous settlement agreement with intervenors in the proceedings. The proposed settlement provided for recovery of the costs incurred by LG&E and KU for the projects requested in the original applications, with adjustments for amortization or depreciation methods and periods for CCR impoundment projects. The proposed settlement also included the parties' support for LG&E's

40

Table of Contents


and KU's requested 10% authorized return on equity. On August 8, 2016, the KPSC issued an order approving the majority of the settlement's terms and provisions, but establishing a 9.8% authorized return on equity for these projects. Recovery of costs will commence with bills rendered on and after August 31, 2016.
 
Gas Franchise (LKE and LG&E)
 
LG&E’s existing gas franchise agreement for the Louisville/Jefferson County service area expired on March 31, 2016.  Pursuant to Kentucky law, upon expiration of a franchise, LG&E retains a revocable license to own and operate its facilities and to provide service. LG&E submitted a bid for a new franchise agreement on June 9, 2016 and is awaiting action from the Louisville/Jefferson County Metro Council. On July 28, 2016, Metro Council introduced an ordinance to award the bid to LG&E and assigned the ordinance to committee for review and recommendation. In the interim, LG&E continues to provide gas service to customers in this service area at existing rates, but without collecting or remitting a franchise fee. LG&E cannot predict the outcome of this matter but does not anticipate that it will have a material effect on its financial condition or results of operation.
 
Pennsylvania Activities (PPL and PPL Electric)
 
Act 129
 
Act 129 requires Pennsylvania Electric Distribution Companies (EDCs) to meet specified goals for reduction in customer electricity usage and peak demand by specified dates. EDCs not meeting the requirements of Act 129 are subject to significant penalties. In November 2015, PPL Electric filed with the PUC its Act 129 Phase III Energy Efficiency and Conservation Plan for the period June 1, 2016 through May 31, 2021. In January 2016, PPL Electric and the other parties reached a settlement of all major issues in the case and filed that settlement with the Administrative Law Judge. In June 2016, the PUC issued a final order approving PPL Electric's Phase III Plan as modified by the settlement, allowing PPL Electric to recover a maximum $313 million in program cost over the five-year period June 1, 2016 through May 31, 2021 through the Act 129 compliance rider.     
 
Act 129 also requires Default Service Providers (DSP) to provide electricity generation supply service to customers pursuant to a PUC-approved default service procurement plan through auctions, requests for proposal and bilateral contracts at the sole discretion of the DSP. Act 129 requires a mix of spot market purchases, short-term contracts and long-term contracts (4 to 20 years), with long-term contracts limited to 25% of load unless otherwise approved by the PUC. A DSP is able to recover the costs associated with its default service procurement plan.
 
PPL Electric has received PUC approval of biannual DSP procurement plans for all periods required under Act 129. In January 2016, PPL Electric filed a Petition for Approval of a new DSP procurement plan with the PUC for the period June 1, 2017 through May 31, 2021. The parties have reached a settlement on all but one issue in the proceeding. A partial settlement agreement and briefs on the litigated issue were submitted to the Administrative Law Judge in July 2016. This proceeding remains pending before the PUC. PPL Electric cannot predict the outcome of this proceeding.

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:
 

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June 30, 2016
 
December 31, 2015
 
Expiration
Date
 
Capacity
 
Borrowed
 
Letters of
Credit
and
Commercial
Paper
Issued
 
Unused
Capacity
 
Borrowed
 
Letters of
Credit
and
Commercial
Paper
Issued
PPL
 
 
 

 
 

 
 

 
 

 
 

 
 

U.K.
 
 
 

 
 

 
 

 
 

 
 

 
 

WPD plc
 
 
 

 
 

 
 

 
 

 
 

 
 

Syndicated Credit Facility
Jan 2021
 
£
210

 
£
138

 
£

 
£
72

 
£
133

 
£

WPD (South West)
 
 
 

 
 

 
 

 
 

 
 

 
 

Syndicated Credit Facility
July 2020
 
245

 
100

 

 
145

 

 

WPD (East Midlands)
 
 
 

 
 

 
 

 
 

 
 

 
 

Syndicated Credit Facility
July 2020
 
300

 
31

 

 
269

 

 

WPD (West Midlands)
 
 
 

 
 

 
 

 
 

 
 

 
 

Syndicated Credit Facility
July 2020
 
300

 

 

 
300

 

 

Uncommitted Credit Facilities
 
 
40

 

 
4

 
36

 

 
4

Total U.K. Credit Facilities (a)
 
 
£
1,095

 
£
269

 
£
4

 
£
822

 
£
133

 
£
4

U.S.
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Capital Funding
 
 
 
 
 
 
 
 
 
 
 
 
 
Syndicated Credit Facility
Jan 2021
 
$
700

 
$

 
$
320

 
$
380

 
$

 
$
151

Syndicated Credit Facility
Nov 2018
 
300

 

 

 
300

 

 
300

Bilateral Credit Facility
Mar 2017
 
150

 

 
17

 
133

 

 
20

Total PPL Capital Funding Credit Facilities
 
 
$
1,150

 
$

 
$
337

 
$
813

 
$

 
$
471

 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Electric
 
 
 

 
 

 
 

 
 

 
 

 
 

Syndicated Credit Facility
Jan 2021
 
$
400

 
$

 
$
7

 
$
393

 
$

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LKE
 
 
 

 
 

 
 

 
 

 
 

 
 

Syndicated Credit Facility (b)
Oct 2018
 
$
75

 
$

 
$

 
$
75

 
$
75

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 
 
 

 
 

 
 

 
 

 
 

 
 
Syndicated Credit Facility
Dec 2020
 
$
500

 
$

 
$
110

 
$
390

 
$

 
$
142

 
 
 
 
 
 
 
 
 
 
 
 
 
 
KU
 
 
 

 
 

 
 

 
 

 
 

 
 

Syndicated Credit Facility
Dec 2020
 
$
400

 
$

 
$
29

 
$
371

 
$

 
$
48

Letter of Credit Facility
Oct 2017
 
198

 

 
198

 

 

 
198

Total KU Credit Facilities
 
 
$
598

 
$

 
$
227

 
$
371

 
$

 
$
246

 
(a)
WPD plc's amounts borrowed at June 30, 2016 and December 31, 2015 were USD-denominated borrowings of $200 million for both periods, which bore interest at 1.27% and 1.83%. The unused capacity reflects the amount borrowed in GBP of £138 million as of the date borrowed. WPD (South West) amount borrowed at June 30, 2016 was a GBP-denominated borrowing which equated to $146 million and bore interest at 0.92%. WPD (East Midlands) amount borrowed at June 30, 2016 was a GBP-denominated borrowing which equated to $45 million and bore interest at 0.92%. At June 30, 2016, the unused capacity under the U.K. credit facilities was approximately $1.2 billion.
(b)
LKE's interest rate on outstanding borrowings at December 31, 2015 was 1.68%.

In July 2016, the expiration dates for the WPD (South West), WPD (East Midlands) and WPD (West Midlands) syndicated credit facilities were extended to July 2021.

PPL, 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:
 

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June 30, 2016
 
December 31, 2015
 
Weighted -
Average
Interest Rate
 
Capacity
 
Commercial
Paper
Issuances
 
Unused
Capacity
 
Weighted -
Average
Interest Rate
 
Commercial
Paper
Issuances
PPL Capital Funding
0.84%
 
$
1,000

 
$
320

 
$
680

 
0.78%
 
$
451

PPL Electric
0.75%
 
400

 
6

 
394

 

 

LG&E
0.70%
 
350

 
110

 
240

 
0.71%
 
142

KU
0.70%
 
350

 
29

 
321

 
0.72%
 
48

Total
 
 
$
2,100

 
$
465

 
$
1,635

 
 
 
$
641

 
(LKE)
 
See Note 11 for discussion of intercompany borrowings.
 
Long-term Debt
 
(PPL)

In May 2016, PPL Capital Funding issued $650 million of 3.10% Senior Notes due 2026. PPL Capital Funding received proceeds of $645 million, net of a discount and underwriting fees, which will be used to invest in or make loans to subsidiaries of PPL, to repay short-term debt and for general corporate purposes.

In May 2016, WPD (East Midlands) borrowed £100 million at 0.4975% under a new ten-year index linked term loan agreement, which will be used for general corporate purposes.

In May 2016, WPD plc repaid the entire $460 million principal amount of its 3.90% Senior Notes upon maturity.

(PPL and PPL Electric)
 
In March 2016, the LCIDA issued $116 million of Pollution Control Revenue Refunding Bonds, Series 2016A due 2029 and $108 million of Pollution Control Revenue Refunding Bonds, Series 2016B due 2027 on behalf of PPL Electric. The bonds were issued bearing interest at an initial term rate of 0.90% through their mandatory purchase dates of September 1, 2017 and August 15, 2017. The proceeds of the bonds were used to redeem $116 million of 4.70% Pollution Control Revenue Refunding Bonds, 2005 Series A due 2029 and $108 million of 4.75% Pollution Control Revenue Refunding Bonds, 2005 Series B due 2027 previously issued by the LCIDA on behalf of PPL Electric.
 
In connection with the issuance of each of these new series of LCIDA bonds, PPL Electric entered into a loan agreement with the LCIDA pursuant to which the LCIDA has loaned to PPL Electric the proceeds of the LCIDA bonds on payment terms that correspond to the LCIDA bonds. In order to secure its obligations under the loan agreement, PPL Electric issued $224 million of First Mortgage Bonds under its 2001 Mortgage Indenture, which also have payment terms that correspond to the LCIDA bonds.

(PPL)
 
ATM Program
 
In February 2015, PPL filed a registration statement with the SEC and 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. For the three and six months ended June 30, 2016, PPL did not issue any shares under the agreements. For the three and six months ended June 30, 2015, PPL issued 421,700 shares of common stock under the program at an average price of $33.73 per share, receiving net proceeds of $14 million.
 
Distributions
 
In May 2016, PPL declared a quarterly common stock dividend, payable July 1, 2016, of 38 cents per share (equivalent to $1.52 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.
 

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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, modify or terminate the projects. Any resulting transactions may impact future financial results. See Note 8 in the Registrants' 2015 Form 10-K for additional information.
 
(PPL)
 
Discontinued Operations
 
Spinoff of PPL Energy Supply
 
In June 2015, PPL completed the spinoff of PPL Energy Supply which combined its competitive power generation businesses with those of Riverstone to form a new, stand-alone, publicly traded company named Talen Energy.
 
Following completion of the spinoff, PPL shareowners owned 65% of Talen Energy and affiliates of Riverstone owned 35%. The spinoff had no effect on the number of PPL common shares owned by PPL shareowners or the number of shares of PPL common stock outstanding. The transaction is intended to be tax-free to PPL and its shareowners for U.S. federal income tax purposes.
 
PPL has no continuing ownership interest in or control of Talen Energy and Talen Energy Supply (formerly PPL Energy Supply). See Note 8 in PPL's 2015 Form 10-K for additional information.

Loss on Spinoff
 
In June 2015, in conjunction with the accounting for the spinoff, PPL evaluated whether the fair value of the Supply segment's net assets was less than the carrying value as of the June 1, 2015 spinoff date.

PPL considered several valuation methodologies to derive a fair value estimate of its Supply segment at the spinoff date. These methodologies included considering the closing "when-issued" Talen Energy market value on June 1, 2015 (the spinoff date), adjusted for the proportional share of the equity value attributable to the Supply segment, as well as, the valuation methods consistently used in PPL's goodwill impairment assessments - an income approach using a discounted cash flow analysis of the Supply segment and an alternative market approach considering market multiples of comparable companies.

Although the market value of Talen Energy approach utilized the most observable inputs of the three approaches, PPL considered certain limitations of the "when-issued" trading market for the spinoff transaction including the short trading duration, lack of liquidity in the market and anticipated initial Talen stock ownership base selling pressure, among other factors, and concluded that these factors limit this input being solely determinative of the fair value of the Supply segment. As such, PPL also considered the other valuation approaches in estimating the overall fair value, but ultimately assigned the highest weighting to the Talen Energy market value approach.

The following table summarizes PPL's fair value analysis:

Approach
 
Weighting
 
Weighted
Fair Value
(in billions)
Talen Energy Market Value
 
50%
 
$
1.4

Income/Discounted Cash Flow
 
30%
 
1.1

Alternative Market (Comparable Company)
 
20%
 
0.7

Estimated Fair Value
 
 
 
$
3.2


A key assumption included in the fair value estimate is the application of a control premium of 25% in the two market approaches. PPL concluded it was appropriate to apply a control premium in these approaches as the goodwill impairment testing guidance was followed in determining the estimated fair value of the Supply segment which had historically been a

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reporting unit for PPL. This guidance provides that the market price of an individual security (and thus the market capitalization of a reporting unit with publicly traded equity securities) may not be representative of the fair value of the reporting unit. This guidance also indicates that substantial value may arise to a controlling shareholder from the ability to take advantage of synergies and other benefits that arise from control over another entity, and that the market price of a company's individual share of stock does not reflect this additional value to a controlling shareholder. Therefore, the quoted market price need not be the sole measurement basis for determining the fair value, and including a control premium is appropriate in measuring the fair value of a reporting unit.

In determining the control premium, PPL reviewed premiums received during the last five years in market sales transactions obtained from observable independent power producer and hybrid utility transactions greater than $1 billion. Premiums for these transactions ranged from 5% to 42% with a median of approximately 25%. Given these metrics, PPL concluded a control premium of 25% to be reasonable for both of the market valuation approaches used.

Assumptions used in the discounted cash flow analysis included forward energy prices, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the Energy Supply portion of the Talen Energy business planning process at that time and a market participant discount rate.

Using these methodologies and weightings, PPL determined the estimated fair value of the Supply segment (classified as Level 3) was below its carrying value of $4.1 billion and recorded a loss on the spinoff of $879 million for the three and six months ended June 30, 2015, which is reflected in discontinued operations and is nondeductible for tax purposes. This amount served to reduce the basis of the net assets accounted for as a dividend at the June 1, 2015 spinoff date.

Costs of Spinoff

Employee-related costs incurred in the three and six months ended June 30, 2015 primarily included 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 Services employees who became PPL Energy Supply employees in connection with the transaction. PPL Energy Supply recognized $24 million of these costs at the spinoff closing date which are reflected in discontinued operations.

PPL also recorded $36 million and $42 million of third-party costs related to this transaction during the three and six months ended June 30, 2015. Of these costs, $29 million and $31 million were primarily for bank advisory, legal and accounting fees to facilitate the transaction, and are reflected in discontinued operations. An additional $7 million and $11 million of consulting and other costs were incurred to prepare the new Talen Energy organization for the spinoff and reconfigure the remaining PPL service functions. These costs are primarily recorded in "Other operation and maintenance" on the Statement of Income.

At the close of the transaction, $72 million ($42 million after-tax) of cash flow hedges, primarily unamortized losses on PPL interest rate swaps recorded in AOCI and designated as cash flow hedges of PPL Energy Supply's future interest payments, were reclassified into earnings and reflected in discontinued operations for the three and six months ended June 30, 2015.

Continuing Involvement (PPL and PPL Electric)
 
As a result of the spinoff, PPL and PPL Energy Supply entered into a Transition Services Agreement (TSA) that terminates no later than two years after the spinoff. Pursuant to the TSA, PPL is providing Talen Energy certain information technology, financial and accounting, human resource and other specified services. For the three and six months ended June 30, 2016, the amounts PPL billed Talen Energy for these services were $10 million and $20 million. For the period June 1, 2015 to June 30, 2015, the amounts PPL billed Talen Energy for these services were not significant. In general, the fees for the transition services allow the provider to recover its cost of the services, including overheads, but without margin or profit.
 
Additionally, prior to the spinoff, through the annual competitive solicitation process, PPL EnergyPlus was awarded supply contracts for a portion of the PLR generation supply for PPL Electric, which were retained by Talen Energy Marketing as part of the spinoff. PPL Electric's supply contracts with Talen Energy Marketing extend through November 2016. Energy purchases from PPL EnergyPlus were previously included in PPL Electric's Statements of Income as "Energy purchases from affiliate" but were eliminated in PPL's Consolidated Statements of Income.
 
For the three and six months ended June 30, 2016, PPL Electric's energy purchases from Talen Energy Marketing were $29 million and $83 million. For the period June 1, 2015 to June 30, 2015, PPL Electric's energy purchases from Talen Energy Marketing were not significant. These energy purchases are no longer considered affiliate transactions.


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Summarized Results of Discontinued Operations (PPL)
 
The operations of the Supply segment prior to the spinoff on June 1, 2015 are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income. Following are the components of Discontinued Operations in the Statement of Income for the periods ended June 30, 2015:
 
 
Three Months
 
Six Months
Operating revenues
$
483

 
$
1,427

Operating expenses
561

 
1,328

Other Income (Expense) - net
(29
)
 
(22
)
Interest expense (a)
112

 
150

Income (loss) before income taxes
(219
)
 
(73
)
Income tax expense (benefit)
(91
)
 
(40
)
Loss on spinoff
(879
)
 
(879
)
Income (Loss) from Discontinued Operations (net of income taxes)
$
(1,007
)
 
$
(912
)
 
(a)
Includes interest associated with the Supply Segment with no additional allocation as the Supply segment was sufficiently capitalized.

Development
 
Regional Transmission Line Expansion Plan (PPL and PPL Electric)
 
Northeast/Pocono
 
In October 2012, the FERC issued an order in response to PPL Electric's December 2011 request for ratemaking incentives for the Northeast/Pocono Reliability project (a new 58-mile, 230 kV transmission line that includes three new substations and upgrades to adjacent facilities). The FERC granted the incentive for inclusion in rate base of all prudently incurred construction work in progress costs but denied the requested incentive for a 100 basis point adder to the return on equity.
 
In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project. In January 2014, the PUC issued a final order approving the application. The line was energized in April 2016, completing the approximately $350 million project which includes additional substation security enhancements. Costs related to the project were capitalized and are included on the Balance Sheets, primarily in "Regulated utility plant."
 
9. Defined Benefits
 
(PPL, LKE and LG&E)
 
Certain net periodic defined benefit costs are applied to accounts that are further distributed among capital, expense and regulatory assets, 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 June 30:
 

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Pension Benefits
 
Three Months
 
Six Months
 
U.S.
 
U.K.
 
U.S.
 
U.K.
 
2016
 
2015
 
2016 (b)
 
2015
 
2016
 
2015
 
2016 (b)
 
2015
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
16

 
$
26

 
$
18

 
$
19

 
$
33

 
$
56

 
$
36

 
$
39

Interest cost
44

 
52

 
62

 
77

 
87

 
110

 
124

 
156

Expected return on plan assets
(58
)
 
(69
)
 
(132
)
 
(129
)
 
(114
)
 
(145
)
 
(265
)
 
(260
)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
3

 
2

 


 
 

 
4

 
4

 


 
 

Actuarial loss
10

 
22

 
36

 
40

 
25

 
47

 
73

 
79

Net periodic defined benefit costs (credits) (a)
$
15

 
$
33

 
$
(16
)
 
$
7

 
$
35

 
$
72

 
$
(32
)
 
$
14

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LKE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
6

 
$
6

 
 
 
 
 
$
12

 
$
13

 
 
 
 
Interest cost
18

 
17

 
 
 
 
 
35

 
34

 
 
 
 
Expected return on plan assets
(24
)
 
(22
)
 
 
 
 
 
(45
)
 
(44
)
 
 
 
 
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
3

 
2

 
 
 
 
 
4

 
4

 
 
 
 
Actuarial loss
5

 
9

 
 
 
 
 
10

 
17

 
 
 
 
Net periodic defined benefit costs
$
8

 
$
12

 
 
 
 
 
$
16

 
$
24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
 
 
 
 
$
1

 
$
1

 
 
 
 
Interest cost
4

 
4

 
 
 
 
 
7

 
7

 
 
 
 
Expected return on plan assets
(5
)
 
(5
)
 
 
 
 
 
(10
)
 
(10
)
 
 
 
 
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
1

 

 
 
 
 
 
2

 
1

 
 
 
 
Actuarial loss
1

 
3

 
 
 
 
 
3

 
6

 
 
 
 
Net periodic defined benefit costs
$
2

 
$
3

 
 
 
 
 
$
3

 
$
5

 
 
 
 

(a)
For the three and six months ended June 30, 2015, the total net periodic defined benefit cost includes $7 million and $18 million reflected in discontinued operations related to costs allocated from PPL's plans to PPL Energy Supply prior to the spinoff.
(b)
See Note 2 for a discussion of changes to the discount rate used for the U.K. Pension Plans.

 
Other Postretirement Benefits
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
PPL
 
 
 
 
 
 
 
Service cost
$
2

 
$
3

 
$
4

 
$
7

Interest cost
7

 
7

 
13

 
14

Expected return on plan assets
(6
)
 
(7
)
 
(11
)
 
(14
)
Net periodic defined benefit costs
$
3

 
$
3

 
$
6

 
$
7

 
 
 
 
 
 
 
 
LKE
 
 
 
 
 
 
 
Service cost
$
1

 
$
2

 
$
2

 
$
3

Interest cost
3

 
3

 
5

 
5

Expected return on plan assets
(1
)
 
(2
)
 
(3
)
 
(3
)
Amortization of prior service cost

 

 
1

 
1

Net periodic defined benefit costs
$
3

 
$
3

 
$
5

 
$
6

   

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(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. 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 costs of defined benefit plans sponsored by LKE. These allocations are based on participation in those plans, which management believes are reasonable. For the periods ended June 30, 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
 
Six Months
 
2016
 
2015
 
2016
 
2015
PPL Electric
$
5

 
$
8

 
$
11

 
$
16

LG&E
3

 
4

 
5

 
7

KU
3

 
4

 
6

 
9


10. Commitments and Contingencies
 
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 (e) 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, LKE, LG&E and KU)
 
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 Cane Run 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 Clean Air Act claim, 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. Oral argument before the Sixth Circuit was held in August 2015. In November 2015, the Sixth Circuit issued an opinion affirming the District Court's ruling that plaintiffs' state law claims are not preempted by the Clean Air Act and remanding the matter to the District Court for further proceedings. The District Court has issued an order setting a discovery schedule through the second quarter of 2017. PPL, LKE and LG&E cannot predict the outcome of this matter. LG&E retired one coal-fired unit at the Cane Run plant in March 2015 and the remaining two coal-fired units at the plant in June 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, costs and attorney's fees. In August 2015, the Court denied cross-motions for summary judgment filed by both parties and directed the parties to proceed

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with discovery. The parties have conducted discovery and settlement discussions in the matter. PPL, LKE and LG&E cannot predict the ultimate outcome of this matter, but believe the plant is operating in compliance with the permits and does not presently expect the matter to have a material effect on operations or result in significant losses beyond the amounts already recorded.
 
E.W. Brown Environmental Claims
 
In October 2015, KU received a notice of intent from Earthjustice and the Sierra Club informing certain federal and state agencies of the Sierra Club's intent to file a citizen suit, following expiration of the mandatory 60-day notification period, for alleged violations of the Clean Water Act. The claimant alleges discharges at the E.W. Brown plant in violation of applicable rules and the plant's water discharge permit. The claimant asserts that, unless the alleged discharges are promptly brought into compliance, it intends to seek civil penalties, injunctive relief and attorney's fees. In November 2015, the claimants submitted an amended notice of intent to add the Kentucky Waterways Alliance as a claimant. PPL, LKE and KU cannot predict the outcome of this matter or the potential impact on the operations of the E. W. Brown plant, including increased capital or operating costs, if any.
 
Trimble County Unit 2 Air Permit
 
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 the operations of the Trimble County plant, including increased capital or operating costs, if any.
 
Trimble County Water Discharge Permit
 
In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet (KEEC) 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 KEEC issued a final order upholding the permit, which was subsequently appealed by the environmental groups. In September 2013, the Franklin Circuit Court reversed the KEEC order upholding the permit and remanded the permit to the agency for further proceedings. LG&E and the KEEC appealed the order to the Kentucky Court of Appeals. In July 2015, the Court of Appeals upheld the lower court ruling. On February 10, 2016, the Kentucky Supreme Court issued an order granting discretionary review. PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or the potential impact on the operations of the Trimble County plant, including increased capital or operating costs, if any.
 
Regulatory Issues (All Registrants)
 
See Note 6 for information on regulatory matters related to utility rate regulation.

Electricity - Reliability Standards
 
The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk electric system in North America. 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 electric system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties for certain violations.
 
LG&E, KU and PPL Electric monitor their compliance with the Reliability Standards and continue to self-report or self-log potential violations of applicable reliability requirements and submit accompanying mitigation plans, as required. The resolution of a small number of potential violations is pending. Penalties incurred to date have not been significant. 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.
 

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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.
 
Environmental Matters
 
(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.

WPD's distribution businesses are subject to certain statutory and regulatory environmental requirements. In connection with the matters discussed below, it may be necessary for WPD to incur significant compliance costs, which costs may be recoverable through rates subject to the approval of Ofgem. PPL believes that WPD has taken and continues to take measures to comply with all applicable environmental laws and regulations.
 
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 neither WPD nor PPL Electric owns any generating plants, their exposure to related environmental compliance costs is reduced. 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.

Air

(PPL, LKE, LG&E and KU)
 
The Clean Air Act, which regulates air pollutants from mobile and stationary sources in the United States, has a significant impact on the operation of fossil fuel plants. The Clean Air Act requires the EPA periodically to review and establish concentration levels in the ambient air for six criteria pollutants to protect public health and welfare. These concentration levels are known as NAAQS. The six criteria pollutants are carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter and sulfur dioxide.
 
Federal environmental regulation of these criteria pollutants require states to adopt implementation plans, known as state implementation plans, for certain pollutants, which detail how the state will attain the standards that are mandated by the relevant law or regulation. Each state identifies the areas within its boundaries that meet the NAAQS (attainment areas) and those that do not (non-attainment areas), and must develop a state implementation plan both to bring non-attainment areas into compliance with the NAAQS and to maintain good air quality in attainment areas. In addition, for attainment of ozone and fine particulates standards, states in the eastern portion of the country, including Kentucky, are subject to a regional program developed by the EPA known as the Cross-State Air Pollution Rule. The NAAQS, future revisions to the NAAQS and state implementation plans, or future revisions to regional programs, may require installation of additional pollution controls, the costs of which PPL, LKE, LG&E and KU believe are subject to cost recovery.

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 different costs than anticipated.
 
National Ambient Air Quality Standards (NAAQS)
 
Under the Clean Air Act, the EPA is required to reassess the NAAQS for certain air pollutants on a five-year schedule. In 2008, the EPA revised the NAAQS for ozone and proposed to further strengthen the standard in November 2014. The EPA released a new ozone standard on October 1, 2015. The states and EPA will determine attainment with the new ozone standard through review of relevant ambient air monitoring data, with attainment or nonattainment designations scheduled no later than October 2017. 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 state's non-attainment. States that are not in the ozone transport region, including Kentucky, are working together to

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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 predicted at this time.
 
In 2010, the EPA finalized revised NAAQS 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 Jefferson County in Kentucky. Attainment must be achieved by 2018. PPL, LKE, LG&E and KU anticipate that certain previously required compliance measures, such as upgraded or new sulfur dioxide Scrubbers at certain plants and the retirement of coal-fired generating units at LG&E's Cane Run plant and KU's Green River plant, will help to achieve compliance with the new sulfur dioxide and ozone standards. If additional reductions are required, the costs could be significant.
 
Mercury and Air Toxics Standards (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, with an effective date of April 16, 2012. The MATS rule was challenged by industry groups and states and was upheld by the U.S. Court of Appeals for the D. C. Circuit Court (D.C. Circuit Court) in April 2014. A group of states subsequently petitioned the U.S. Supreme Court (Supreme Court) to review this decision and, in June 2015, the Supreme Court held that the EPA failed to properly consider costs when deciding to regulate hazardous air emissions from power plants under MATS. The Supreme Court remanded the matter to the D.C. Circuit Court, which in December 2015 remanded the rule to the EPA without vacating it. The EPA has proposed a supplemental finding regarding costs of the rule and has announced that it intends to make a final determination in 2016. The EPA's MATS rule remains in effect during the pendency of the ongoing proceedings.
 
LG&E and KU have installed significant controls in response to the MATS rule and in conjunction with compliance with other environmental requirements, including fabric-filter baghouses, upgraded Scrubbers or chemical additive systems for which appropriate KPSC authorization and/or ECR treatment has been received. LG&E and KU have received KPSC approval for a compliance plan providing for installation of additional MATS-related controls; however, the estimated cost of these controls is not expected to be significant for either LG&E or KU. PPL, LKE, LG&E and KU cannot predict the outcome of the MATS rule or its potential impact, if any, on plant operations, rate treatment or future capital or operating needs. See Note 6 for additional information.
 
New Source Review (NSR)
 
The NSR litigation brought by the EPA, states and environmental groups against coal-fired generating plants in past years continues to proceed through the courts. Although none of this litigation directly involves PPL, LKE, LG&E or KU, it can influence the permitting of large capital projects at LG&E's and KU's power plants, the costs of which cannot presently be determined but could be significant.
 
Climate Change
 
There is continuing world-wide attention focused on issues related to climate change. Most recently, on June 29, 2016, the President announced that the United States, Canada and Mexico have established the North American Climate, Clean Energy, and Environment Partnership Plan which specifies actions to promote clean energy, address climate change and protect the environment. The plan includes a goal to provide 50% of the energy used in North America from clean energy sources by 2025. The plan does not impose any nation-specific requirements.

In December 2015, 195 nations, including the U.S., signed the Paris Agreement on Climate which establishes a comprehensive framework for the reduction of greenhouse gas (GHG) emissions from both developed and developing nations. Although the agreement does not establish binding reduction requirements, it requires each nation to prepare, communicate and maintain GHG reduction commitments. Reductions can currently be achieved in a variety of ways, including energy conservation, power plant efficiency improvements, reduced utilization of coal-fired generation or replacing coal-fired generation with natural gas or renewable generation. Based on EPA's Clean Power Plan described below, the U.S. has committed to an initial reduction target of 26% to 28% below 2005 levels by 2025.

The UK has enacted binding carbon reduction requirements that are applicable to WPD. Under the UK law, WPD must purchase carbon allowances to offset emissions associated with WPD’s operations. The cost of these allowances is included in WPD’s current operating expenses. WPD expects these expenses to decrease as a result of energy efficiency measures and the removal of 18 fuel sources previously included in the allowance requirements.
 

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The EPA's Rules under Section 111 of the Clean Air Act
 
As further described below, the EPA finalized rules imposing GHG emission standards for both new and existing power plants in the United States. The EPA has also issued a proposed federal implementation plan that would apply to any states that fail to submit an acceptable state implementation plan under these rules. The EPA's authority to promulgate these regulations under Section 111 of the Clean Air Act has been challenged in the D.C. Circuit Court by several states and industry groups. On February 9, 2016, the Supreme Court stayed the rule for existing plants (the Clean Power Plan) pending the D.C. Circuit Court's review and subsequent review by the Supreme Court if a writ of certiorari is filed and granted.
 
The EPA's rule for new power plants imposes separate emission standards for coal and natural gas units based on the application of different technologies. The coal standard is based on the application of partial carbon capture and sequestration technology, but because this technology is not presently commercially available, the rule 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 natural gas-fired plants could have a significant industry-wide impact.
 
The EPA's Clean Power Plan
 
The EPA's rule for existing power plants, referred to as the Clean Power Plan, was published in the Federal Register in October 2015. The Clean Power Plan contains state-specific rate-based and mass-based reduction goals and guidelines for the development, submission and implementation of state implementation plans to achieve the state goals. State-specific goals were calculated from 2012 data by applying the EPA's broad interpretation and definition of the BSER, resulting in the most stringent targets to be met in 2030, with interim targets to be met beginning in 2022. The EPA believes it has offered some flexibility to the states as to how their compliance plans can be crafted, including the option to use a rate-based approach (limit emissions per megawatt hour) or a mass-based approach (limit total tons of emissions per year), and the option to demonstrate compliance through emissions trading and multi-state collaborations. Under the rate-based approach, Kentucky would need to make a 41% reduction from its 2012 emissions rate and under a mass-based approach it would need to make a 36% reduction. These reductions are significantly greater than initially proposed and present significant challenges to the state. If the Clean Power Plan is ultimately upheld and Kentucky fails to develop an approvable implementation plan by the applicable deadline, the EPA would impose a federal implementation plan that could be more stringent than what the state plan might provide. Depending on the provisions of the Kentucky implementation plan, LG&E and KU may need to modify their current portfolio of generating assets during the next decade and/or participate in an allowance trading program.
 
LG&E and KU are participating in the ongoing regulatory processes at the state and federal level. Various states, industry groups and individual companies including LKE have filed petitions for reconsideration with EPA and petitions for review with the D.C. Circuit Court challenging the Clean Power Plan. On February 9, 2016, the Supreme Court stayed the rule pending the D.C. Circuit Court's review. PPL, LKE, LG&E and KU cannot predict the outcome of this matter or the potential impact, if any, on plant operations, or future capital or operating costs. PPL, LKE, LG&E and KU believe that the costs, which could be significant, would be subject to cost recovery.
 
In April 2014, the Kentucky General Assembly passed legislation limiting 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 that the EPA has established for Kentucky.

Sulfuric Acid Mist Emissions (PPL, LKE and LG&E)

On June 30, 2016, the EPA issued a notice of violation under the Clean Air Act alleging that LG&E violated applicable rules relating to sulfuric acid mist emissions at its Mill Creek plant. The notice alleges failure to install proper controls, failure to operate the facility consistent with good air pollution control practice, and causing emissions exceeding applicable requirements or constituting a nuisance or endangerment. LG&E believes it has complied with applicable regulations during the relevant time period. Discussions between the EPA and LG&E are ongoing. PPL, LKE and LG&E are unable to predict the outcome of this matter or the potential impact on operations of the Mill Creek plant, including increased capital or operating costs, and potential civil penalties or remedial measures, if any.


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Water/Waste

(PPL, LKE, LG&E and KU)
 
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 became effective on October 19, 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 in the United States 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. The rule's requirements for covered CCR impoundments and landfills include implementation of groundwater monitoring and commencement or completion of closure activities generally between three and ten years from certain triggering events. This self-implementing rule requires posting of compliance documentation on a publicly accessible website and is enforceable solely through citizen suits. LG&E and KU are also subject to state rules applicable to CCR management which may potentially be modified to reflect some or all requirements of the federal rule. Industry groups, environmental groups, individual companies and others have filed legal challenges to the final rule which are pending before the D.C. Circuit Court of Appeals.
 
LG&E and KU have received KPSC approval for a compliance plan providing for construction of additional landfill capacity at the Brown Station, closure of impoundments at the Mill Creek, Trimble County, Brown, and Ghent stations, and construction of process water management facilities at those plants. In addition to the foregoing measures required for compliance with federal CCR rule requirements, LG&E and KU are also proposing to close impoundments at the retired Green River, Pineville and Tyrone plants to comply with applicable state law requirements. PPL, LKE, LG&E, and KU estimate the cost of these CCR compliance measures at $311 million for LG&E and $661 million for KU. See Note 6 for additional information.
 
In connection with the final CCR rule, LG&E and KU recorded increases to existing AROs during 2015. See Note 16 for additional information. Further changes to AROs, current capital plans or operating costs may be required as estimates are refined based on closure developments, groundwater monitoring results, and regulatory or legal proceedings. Costs relating to this rule are subject to rate recovery.
 
Clean Water Act
 
Regulations under the federal Clean Water Act dictate permitting and mitigation requirements for facilities and construction projects in the United States. Many of those requirements relate to power plant operations, including requirements related to the treatment of pollutants in effluents prior to discharge, the temperature of effluent discharges and the location, design and construction of cooling water intake structures at generating facilities, standards intended to protect aquatic organisms by reducing capture in the screens attached to cooling water intake structures (impingement) at generating facilities and the water volume brought into the facilities (entrainment). The requirements could impose significant costs for LG&E and KU which are subject to rate recovery.
 
Effluent Limitations Guidelines (ELGs)
 
On September 30, 2015, the EPA released its final effluent limitations guidelines for wastewater discharge permits for new and existing steam electric generating facilities. The rule provides strict technology-based discharge limitations for control of pollutants in scrubber wastewater, fly ash and bottom ash transport water, mercury control wastewater, gasification wastewater and combustion residual leachate. The new guidelines require deployment of additional control technologies providing physical, chemical and biological treatment of wastewaters. The guidelines also mandate operational changes including "no discharge" requirements for fly ash and bottom ash transport waters and mercury control wastewaters. The implementation date for individual generating stations will be determined by the states on a case-by-case basis according to criteria provided by the EPA, but the requirements of the rule must be fully implemented no later than 2023. It has not been decided how Kentucky intends to integrate the ELGs into its routine permit renewal process. Industry groups, environmental groups, individual companies and others have filed legal challenges to the final rule which have been consolidated before the United States Fifth Circuit Court of Appeals. LG&E and KU are developing compliance strategies and schedules. PPL, LKE, LG&E and KU are unable to fully estimate compliance costs or timing at this time, although certain preliminary estimates are included in current capital forecasts for applicable periods. Costs to comply with ELGs or other discharge limits, which are expected to be significant, are subject to rate recovery.


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Clean Water Act Section 316(b)
 
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 broad discretion 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 equipped with closed-cycle cooling, an acceptable option, would likely not incur substantial costs. Once-through systems would likely require additional technology to comply with the rule. Based on studies conducted by LG&E and KU to date, all plants will incur only insignificant operational costs. In addition, LG&E's Mill Creek Unit 1 is expected to incur capital costs. PPL, LKE, LG&E and KU are evaluating compliance strategies but do not presently expect the compliance costs, which are subject to rate recovery, to be significant.
 
(All Registrants)
 
Waters of the United States (WOTUS)
 
The U.S. Court of Appeals for the Sixth Circuit has issued a stay of EPA's rule on the definition of WOTUS pending the court's review of the rule. The effect of the stay is that the WOTUS rule is not in effect anywhere in the United States. The ultimate outcome of the court's review of the rule remains uncertain. Because of the strict permitting programs already in place in Kentucky and Pennsylvania, the Registrants do not expect the rule to have a significant impact on their operations.
 
Other Issues
 
The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the Toxic Substance Control Act, which was significantly updated on June 22, 2016. In 2010, the EPA had issued an Advanced Notice of Proposed Rulemaking for changes to these regulations. The rulemaking, which could lead to a phase-out in the United States of all or some equipment containing PCBs, is not likely to be affected by the revisions to the Toxic Substances Control Act. The EPA has postponed the release of revisions to its proposed rulemaking. The Registrants cannot predict at this time the outcome of the proposed EPA rulemaking and what impact, if any, it would have on their facilities, but the costs could be significant.
 
Superfund and Other Remediation (All Registrants)
 
PPL Electric is potentially responsible for costs at several sites listed by the EPA under the federal Superfund program, including the Columbia Gas Plant site, the Metal Bank site and the Brodhead 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. Should the EPA require different or additional measures in the future, however, or should PPL Electric's share of costs at multi-party sites increase substantially more than expected, the costs could be significant.
 
PPL Electric, LG&E and KU are investigating, responding to agency inquiries, remediating, or have completed the remediation of, several sites that were not addressed under a regulatory program such as Superfund, but for which PPL Electric, LG&E and KU may be liable for remediation. These include a number of former coal gas manufacturing plants in Pennsylvania and Kentucky previously owned or operated or currently owned by predecessors or affiliates of PPL Electric, LG&E and KU. To date, the costs of these sites have not been significant.
 
There are additional sites, formerly owned or operated by PPL Electric, LG&E and KU predecessors or affiliates. LG&E and KU lack information on the condition of such additional sites and are therefore unable to estimate any potential liability they may have or a range of reasonably possible losses, if any, related to these sites. At June 30, 2016 and December 31, 2015, PPL Electric had a recorded liability of $10 million representing its best estimate of the probable loss incurred to remediate additional sites previously owned or operated by PPL Electric predecessors or affiliates. Depending on the outcome of investigations at sites where investigations have not begun or been completed, or developments at sites for which information is incomplete, the costs of remediation and other liabilities could be significant and may be as much as approximately $30 million.
 
The EPA is evaluating the risks associated with polycyclic aromatic hydrocarbons and naphthalene, chemical by-products of coal gas manufacturing. As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil cleanup. This could require several PPL subsidiaries to take more extensive assessment and remedial actions at former coal gas manufacturing plants. PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.
 

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From time to time, PPL's subsidiaries in the United States 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 Electric, LG&E and KU.
 
Future cleanup or remediation work at sites under review, or at sites not yet identified, may result in significant additional costs for PPL, PPL Electric, LKE, LG&E and KU. Insurance policies maintained by LKE, LG&E and KU may be applicable to certain of the costs or other obligations related to these matters but the amount of insurance coverage or reimbursement cannot be estimated or assured.
 
European Union Creosote Ban (PPL)
 
In 2011, the European Commission amended the European Union Biocides Directive to ban the use of creosote in contact with soil. Creosote is a wood preservative used to extend the life of wooden poles that support power lines. Although European Union member countries were required to pass implementing laws by 2012, the U.K. has not passed an implementing law and there are no legal penalties for failing to do so. The recent U.K. referendum in favor of the U.K.'s departure from the European Union further reduces the likelihood that the U.K. would pass implementing law. In the unlikely event that the U.K. were to ban the use of creosote, WPD's creosote-treated wood poles would need to be replaced with an acceptable alternative at the time of routine replacement. WPD has 1.4 million wood poles in its system. There are currently no alternative wood preservatives available that are acceptable to the industry and/or regulators.

Other
 
Guarantees and Other Assurances
 
(All Registrants)
 
In the normal course of business, the Registrants enter into agreements that provide financial performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of credit issued by financial institutions and surety bonds issued by insurance companies. These agreements are entered into primarily to support or enhance the creditworthiness attributed to a subsidiary on a stand-alone basis or to facilitate the commercial activities in which these subsidiaries engage.
 
(PPL)
 
PPL fully and unconditionally guarantees all of the debt securities of PPL Capital Funding.
 
(All Registrants)
 
The table below details guarantees provided as of June 30, 2016. "Exposure" represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee. The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures." The total recorded liability at June 30, 2016, was $22 million for PPL and $17 million for LKE. The total recorded liability at December 31, 2015, was $25 million for PPL and $18 million for LKE. 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.
 

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Exposure at
June 30, 2016
 
Expiration
Date
PPL
 
 
 
 
Indemnifications related to the WPD Midlands acquisition
 
(a)
 
 
WPD indemnifications for entities in liquidation and sales of assets
$
10

(b)
 
2019
WPD guarantee of pension and other obligations of unconsolidated entities
105

(c)
 
 
 
 
 
 
 
PPL Electric
 
 
 
 
Guarantee of inventory value
21

(d)
 
2018
 
 
 
 
 
LKE
 
 
 
 
Indemnification of lease termination and other divestitures
301

(e)
 
2021 - 2023
 
 
 
 
 
LG&E and KU
 
 
 
 
LG&E and KU guarantee of shortfall related to OVEC
 
(f)
 
 
 
(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. Additionally, 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 June 30, 2016, 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)
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.
(e)
LKE provides certain indemnifications covering the due and punctual payment, performance and discharge by each party of its respective obligations. The most comprehensive of these guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under a 2009 Transaction Termination Agreement. This guarantee has a term of 12 years ending July 2021, and a maximum exposure of $200 million, exclusive of certain items such as government fines and penalties that fall outside the cap. Another WKE-related LKE guarantee covers other indemnifications related to the purchase price of excess power, 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. In October 2014, LKE's indemnitee filed a motion for discretionary review with the Kentucky Supreme Court seeking to overturn the arbitration decision, and such motion was denied by the court in September 2015. In September 2015, a counterparty issued a demand letter to LKE's indemnitee. In February 2016, the counterparty filed a complaint in Henderson, Kentucky Circuit Court, seeking an award of damages in the matter. LKE does not believe appropriate contractual, legal or commercial grounds exist for the claim made and has disputed the demands. LKE believes its indemnification obligations in the WKE matter remain subject to various uncertainties, including additional legal and contractual developments, as well as future prices, availability and demand for the subject excess power. The parties are conducting certain settlement discussions, however, 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 indemnified party. LKE cannot predict the ultimate outcomes of the indemnification circumstances, but does not expect such outcomes to result in significant losses above the amounts recorded.
(f)
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 included within a demand charge designed and expected to cover these costs over the term of the contract. LKE's proportionate share of OVEC's outstanding debt was $125 million at June 30, 2016, consisting of LG&E's share of $87 million and KU's share of $38 million. 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 2015 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.
 

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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
 
Support Costs (PPL Electric, LKE, LG&E and KU)
 
PPL Services and LKS provide their respective PPL and LKE subsidiaries and each other with administrative, management and support services. PPL EU Services provides the majority of financial, supply chain, human resources and facilities management services primarily to PPL Electric. PPL Services provides certain corporate functions to PPL Electric. 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 June 30, including amounts applied to accounts that are further distributed between capital and expense on the books of the recipients, based on methods that are believed to be reasonable.
 
 
Three Months
 
Six Months
 
2016
 
2015
 
2016
 
2015
PPL Electric from PPL Services
$
28

 
$
25

 
$
65

 
$
55

LKE from PPL Services
4

 
4

 
9

 
8

PPL Electric from PPL EU Services
16

 
17

 
33

 
32

LG&E from LKS
41

 
53

 
88

 
104

KU from LKS
49

 
58

 
105

 
114


In addition to the charges for services noted above, LKS makes payments on behalf of LG&E and KU for fuel purchases and other costs for products or services provided by third parties. 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.
 
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 June 30, 2016 and December 31, 2015, $176 million and $54 million were outstanding and were reflected in "Notes payable with affiliate" on the Balance Sheets. The interest rate on borrowings is equal to one-month LIBOR plus a spread. The interest rates on the outstanding borrowing at June 30, 2016 and December 31, 2015 were 1.97% and 1.74%.
 
LKE has a $400 million ten-year note with a PPL affiliate with an interest rate of 3.5%. At June 30, 2016 and December 31, 2015, the note was reflected in "Long-term debt to affiliate" on the Balance Sheets.

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)
 
"Other Income (Expense) - net" for the three and six months ended June 30, 2016 and 2015 consisted primarily of gains (losses) on foreign currency contracts to economically hedge PPL's translation risk related to its GBP denominated earnings in the U.K. See Note 14 for additional information on these derivatives.


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13. Fair Value Measurements
 
(All Registrants)
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models) and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of financial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values. During the three and six months ended June 30, 2016 and 2015, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 2015 Form 10-K for information on the levels in the fair value hierarchy.
 
Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:
 
 
June 30, 2016
 
December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
PPL
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
492

 
$
492

 
$

 
$

 
$
836

 
$
836

 
$

 
$

Restricted cash and cash equivalents (a)
33

 
33

 

 

 
33

 
33

 

 

Price risk management assets (b):
 

 
 

 


 


 
 

 
 

 
 

 
 

Foreign currency contracts
393

 

 
393

 

 
209

 

 
209

 

Cross-currency swaps
92

 

 
92

 

 
86

 

 
86

 

Total price risk management assets
485

 

 
485

 

 
295

 

 
295

 

Auction rate securities (c)
2

 

 

 
2

 
2

 

 

 
2

Total assets
$
1,012

 
$
525

 
$
485

 
$
2

 
$
1,166

 
$
869

 
$
295

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Price risk management liabilities (b):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate swaps
$
56

 
$

 
$
56

 
$

 
$
71

 
$

 
$
71

 
$

Foreign currency contracts

 

 

 

 
1

 

 
1

 

Total price risk management liabilities
$
56

 
$

 
$
56

 
$

 
$
72

 
$

 
$
72

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Electric
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
35

 
$
35

 
$

 
$

 
$
47

 
$
47

 
$

 
$

Restricted cash and cash equivalents (a)
2

 
2

 

 

 
2

 
2

 

 

Total assets
$
37

 
$
37

 
$

 
$

 
$
49

 
$
49

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LKE
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents       
$
16

 
$
16

 
$

 
$

 
$
30

 
$
30

 
$

 
$

Cash collateral posted to counterparties (d)
9

 
9

 

 

 
9

 
9

 

 

Total assets
$
25

 
$
25

 
$

 
$

 
$
39

 
$
39

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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June 30, 2016
 
December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Price risk management liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Interest rate swaps
$
56

 
$

 
$
56

 
$

 
$
47

 
$

 
$
47

 
$

Total price risk management liabilities
$
56

 
$

 
$
56

 
$

 
$
47

 
$

 
$
47

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Cash and cash equivalents
$
8

 
$
8

 
$

 
$

 
$
19

 
$
19

 
$

 
$

Cash collateral posted to counterparties (d)
9

 
9

 

 

 
9

 
9

 

 

Total assets
$
17

 
$
17

 
$

 
$

 
$
28

 
$
28

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Price risk management liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Interest rate swaps
$
56

 
$

 
$
56

 
$

 
$
47

 
$

 
$
47

 
$

Total price risk management liabilities
$
56

 
$

 
$
56

 
$

 
$
47

 
$

 
$
47

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
8

 
$
8

 
$

 
$

 
$
11

 
$
11

 
$

 
$

Total assets
$
8

 
$
8

 
$

 
$

 
$
11

 
$
11

 
$

 
$


(a)
Current portion is included in "Other current assets" and long-term portion is included in "Other noncurrent assets" on the Balance Sheets.
(b)
Current portion is included in "Price risk management assets" and "Other current liabilities" and noncurrent portion is included in "Price risk management assets" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets.
(c)
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.

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 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.

Nonrecurring Fair Value Measurements
 
See Note 8 for information regarding the estimated fair value of the Supply segment's net assets as of the June 1, 2015 spinoff date.

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.

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June 30, 2016
 
December 31, 2015
 
Carrying
Amount (a)
 
Fair Value
 
Carrying
Amount (a)
 
Fair Value
PPL
$
19,168

 
$
22,669

 
$
19,048

 
$
21,218

PPL Electric
2,830

 
3,359

 
2,828

 
3,088

LKE
5,089

 
5,773

 
5,088

 
5,384

LG&E
1,642

 
1,832

 
1,642

 
1,704

KU
2,327

 
2,666

 
2,326

 
2,467

 
(a)
Amounts are net of debt issuance costs.

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.
 
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 Risk Management Committee, comprised of senior management and chaired by the Director - Risk Management, 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, verification of risk and transaction limits, value-at-risk analyses (VaR, 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) and the coordination and reporting of the Enterprise Risk Management program.
 
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, 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 following summarizes the market risks that affect PPL and its subsidiaries.
 
Interest rate risk
 
PPL and its subsidiaries are exposed to interest rate risk associated with forecasted fixed-rate and existing floating-rate debt issuances. PPL and WPD hold 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. LKE and LG&E utilize over-the-counter interest rate swaps to limit exposure to market fluctuations on floating-rate debt. PPL, LKE, 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 and derivatives 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.

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


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Commodity price risk
 
PPL is exposed to commodity price risk through its domestic subsidiaries as described below.
 
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 commodity price risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the commodity price risk associated with the PLR obligation to the energy suppliers.
LG&E's and KU's rates include certain mechanisms for fuel and fuel-related expenses. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.

Volumetric risk
 
PPL is exposed to volumetric risk through its 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. Under the RIIO - ED1 price control period, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2015 Form 10-K for additional information on revenue recognition under RIIO - ED1.
PPL Electric, LG&E and KU are exposed to volumetric risk on retail sales, mainly due to weather and other economic conditions for which there is limited mitigation between rate cases.

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

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.
 
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.
 
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 had an obligation to return $76 million of cash collateral under master netting arrangements at June 30, 2016 and no obligation to return cash collateral under master netting arrangements at December 31, 2015.

LKE, LG&E and KU had no obligation to return cash collateral under master netting arrangements at June 30, 2016 and December 31, 2015.
 

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PPL, LKE and LG&E posted $9 million of cash collateral under master netting arrangements at June 30, 2016 and December 31, 2015.
 
KU did not post any cash collateral under master netting arrangements at June 30, 2016 and December 31, 2015.
 
See "Offsetting Derivative Instruments" below for a summary of derivative positions presented in the balance sheets where a right of setoff exists under these arrangements.
 
Interest Rate Risk
 
(All Registrants)
 
PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. Various financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolio, adjust the duration of the debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under PPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolio due to changes in benchmark interest rates. In addition, the interest rate risk of certain subsidiaries is potentially mitigated as a result of the existing regulatory framework or the timing of rate cases.

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. PPL held no such contracts at June 30, 2016.
 
At June 30, 2016, PPL held an aggregate notional value in cross-currency interest rate swap contracts of $802 million that range in maturity from 2017 through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes. In May 2016, $460 million of WPD's U.S. dollar-denominated senior notes were repaid upon maturity and $460 million notional value of cross-currency interest rate swap contracts matured. PPL recorded a $46 million gain upon settlement of the cross-currency interest rate swap contracts, which largely offset a loss recorded on the revaluation of U.S. dollar-denominated senior notes.
 
For the three and six months ended June 30, 2016, PPL had an insignificant amount of ineffectiveness associated with interest rate derivatives.

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 not probable of occurring.

PPL had no cash flow hedges reclassified into earnings associated with discontinued cash flow hedges for the three and six months ended June 30, 2016. As a result of the June 1, 2015 spinoff of PPL Energy Supply, all PPL cash flow hedges associated with PPL Energy Supply were ineffective and discontinued and therefore, reclassified into earnings and reflected in discontinued operations for the three and six months ended June 30, 2015. See Note 8 for additional information.
 
At June 30, 2016, 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 insignificant. Amounts are reclassified as the hedged interest expense is recorded.
 
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 June 30, 2016, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033.

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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. There were no such contracts outstanding at June 30, 2016.
 
At June 30, 2016, PPL had $22 million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI, compared to $19 million at December 31, 2015.
 
Economic Activity
 
PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At June 30, 2016, the total exposure hedged by PPL was approximately £1.7 billion (approximately $2.7 billion based on contracted rates). These contracts had termination dates ranging from July 2016 through November 2018.

At June 30, 2016, foreign currency hedges related to 2017 and 2018 anticipated earnings were valued at $296 million and were included in current and noncurrent "Price risk management assets" on the Balance Sheet. The notional amount of these hedges was approximately £1.3 billion (approximately $2.0 billion based on contracted rates) with termination dates from January 2017 through November 2018. In the third quarter of 2016, PPL settled the 2017 and 2018 hedges, resulting in approximately $310 million of cash received, and entered into new hedges at current market rates. The settlement will not have a material effect on earnings as the hedge values were previously marked to fair value and recognized in "Other Income (Expense) - net" on the Statement of Income each period.
 
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 and 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 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 June 30, 2016 and December 31, 2015.
 
See Notes 1 and 17 in each Registrant's 2015 Form 10-K for additional information on accounting policies related to derivative instruments.
 
(PPL)
 
The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets, excluding derivative instruments of discontinued operations.
 

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June 30, 2016
 
December 31, 2015
 
Derivatives designated as
hedging instruments
 
Derivatives not designated
as hedging instruments
 
Derivatives designated as
hedging instruments
 
Derivatives not designated
as hedging instruments
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Current:
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

Price Risk Management
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets/Liabilities (a):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate swaps (b)
$

 
$

 
$

 
$
6

 
$

 
$
24

 
$

 
$
5

Cross-currency swaps (b)
3

 

 

 

 
35

 

 

 

Foreign currency contracts

 

 
197

 

 
10

 

 
94

 
1

Total current
3

 

 
197

 
6

 
45

 
24

 
94

 
6

Noncurrent:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Price Risk Management
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Assets/Liabilities (a):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate swaps (b)

 

 

 
50

 

 

 

 
42

Cross-currency swaps (b)
89

 

 

 

 
51

 

 

 

Foreign currency contracts

 

 
196

 

 

 

 
105

 

Total noncurrent
89

 

 
196

 
50

 
51

 

 
105

 
42

Total derivatives
$
92

 
$

 
$
393

 
$
56

 
$
96

 
$
24

 
$
199

 
$
48

 
(a)
Current portion is included in "Price risk management assets" and "Other current liabilities" and noncurrent portion is included in "Price risk management assets" and "Other deferred credits and noncurrent liabilities" 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 periods ended June 30, 2016.

 
 
 
 
 
 
 
 
Three Months
 
Six Months
Derivative
Relationships
 
Derivative Gain
(Loss) Recognized in
OCI (Effective Portion)
 
Location of
Gain (Loss)
Recognized
in Income
on Derivative
 
Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
 
Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Gain (Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)
 
Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Three Months
 
Six Months
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(3
)
 
$
(21
)
 
Interest expense
 
$
(2
)
 
$

 
$
(3
)
 
$

Cross-currency swaps
 
(104
)
 
9

 
Interest expense
 
(1
)
 

 

 

 
 
 
 
 
 
Other income (expense) - net
 
(103
)
 

 
(6
)
 

Total
 
$
(107
)
 
$
(12
)
 
 
 
$
(106
)
 
$

 
$
(9
)
 
$

Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency contracts
 
$
1

 
$
4

 
 
 
 
 
 
 
 
 
 
 

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Derivatives Not Designated as
 
Location of Gain (Loss) Recognized in
 
 
 
 
Hedging Instruments
 
Income on Derivative
 
Three Months
 
Six Months
Foreign currency contracts
 
Other income (expense) - net
 
$
171

 
$
231

Interest rate swaps
 
Interest expense
 
(2
)
 
(4
)
 
 
Total
 
$
169

 
$
227

Derivatives Not Designated as
 
Location of Gain (Loss) Recognized as
 
 
 
 
Hedging Instruments
 
Regulatory Liabilities/Assets
 
Three Months
 
Six Months
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
(3
)
 
$
(9
)
 
The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the periods ended June 30, 2015.

 
 
 
 
 
 
 
 
Three Months
 
Six Months
Derivative
Relationships
 
Derivative Gain
(Loss) Recognized in
OCI (Effective Portion)
 
Location of
Gain (Loss)
Recognized
in Income
on Derivative
 
Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
 
Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Gain (Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)
 
Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 
Three Months
 
Six Months
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
17

 
$
(2
)
 
Interest expense
 
$
(3
)
 
$

 
$
(7
)
 
$

 
 
 
 
 
 
Discontinued operations
 

 
(77
)
 

 
(77
)
Cross-currency swaps
 
15

 
36

 
Interest expense
 
1

 

 
2

 

 
 
 
 
 
 
Other income (expense) - net
 
15

 

 
32

 

Commodity contracts
 

 

 
Discontinued operations
 
6

 
7

 
13

 
7

Total
 
$
32

 
$
34

 
 
 
$
19

 
$
(70
)
 
$
40

 
$
(70
)
Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Foreign currency contracts
 
$
(17
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 

Derivatives Not Designated as
 
Location of Gain (Loss) Recognized in
 
 
 
 
Hedging Instruments
 
Income on Derivative
 
Three Months
 
Six Months
Foreign currency contracts
 
Other income (expense) - net
 
$
(102
)
 
$
(14
)
Interest rate swaps
 
Interest expense
 
(2
)
 
(4
)
 
 
Total
 
$
(104
)
 
$
(18
)
Derivatives Designated as
 
Location of Gain (Loss) Recognized as
 
 
 
 
Hedging Instruments
 
Regulatory Liabilities/Assets
 
Three Months
 
Six Months
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
76

 
$
20

Derivatives Not Designated as
 
Location of Gain (Loss) Recognized as
 
 
 
 
Hedging Instruments
 
Regulatory Liabilities/Assets
 
Three Months
 
Six Months
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
7

 
$
3


(LKE)
 
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended June 30, 2015. All derivative instruments designated as cash flow hedges were terminated in 2015 and there is no activity in the current period.

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Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Regulatory Assets
 
Three Months
 
Six Months
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
76

 
$
20

 
(LG&E)
 
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended June 30, 2015. All derivative instruments designated as cash flow hedges were terminated in 2015 and there is no activity in the current period.
 
 
 
Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Regulatory Assets
 
Three Months
 
Six Months
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
38

 
$
10


(KU)
 
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended June 30, 2015. All derivative instruments designated as cash flow hedges were terminated in 2015 and there is no activity in the current period.
 
 
 
Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Regulatory Assets
 
Three Months
 
Six Months
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
38

 
$
10

 
(LKE and LG&E)
 
The following table presents the fair value and the location on the Balance Sheets of derivatives not designated as hedging instruments.
 
 
June 30, 2016
December 31, 2015
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Current:
 
 
 
 
 
 
 

Price Risk Management
 
 
 
 
 
 
 

Assets/Liabilities (a):
 
 
 
 
 
 
 

Interest rate swaps
$

 
$
6

 
$

 
$
5

Total current

 
6

 

 
5

Noncurrent:
 
 
 
 
 

 
 

Price Risk Management
 
 
 
 
 

 
 

Assets/Liabilities (a):
 
 
 
 
 

 
 

Interest rate swaps

 
50

 

 
42

Total noncurrent

 
50

 

 
42

Total derivatives
$

 
$
56

 
$

 
$
47

 
(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 periods ended June 30, 2016.
 

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

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 periods ended June 30, 2015.
 
 
 
Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Income on Derivatives
 
Three Months
 
Six Months
Interest rate swaps
 
Interest expense
 
$
(2
)
 
$
(4
)
 
 
Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Regulatory Assets
 
Three Months
 
Six Months
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
7

 
$
3

 
(PPL, LKE, LG&E and KU)
 
Offsetting Derivative Instruments
 
PPL, LKE, LG&E and KU or certain of their subsidiaries have master netting arrangements in place and also enter into agreements pursuant to which they purchase or sell 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 set off 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
 
 
 
Gross
 
Derivative
Instruments
 
Cash
Collateral
Received
 
Net
 
Gross
 
Derivative
Instruments
 
Cash
Collateral
Pledged
 
Net
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
$
485

 
$

 
$
76

 
$
409

 
$
56

 
$

 
$
9

 
$
47

LKE

 

 

 

 
56

 

 
9

 
47

LG&E

 

 

 

 
56

 

 
9

 
47

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
$
295

 
$
25

 
$

 
$
270

 
$
72

 
$
25

 
$
9

 
$
38

LKE

 

 

 

 
47

 

 
9

 
38

LG&E

 

 

 

 
47

 

 
9

 
38

 
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

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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 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 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.
 
(PPL, LKE and LG&E)
 
At June 30, 2016, 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
$
31

 
$
31

 
$
31

Aggregate fair value of collateral posted on these derivative instruments
8

 
8

 
8

Aggregate fair value of additional collateral requirements in the event of
 a credit downgrade below investment grade (a)
23

 
23

 
23

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

15. Goodwill and Other Intangible Assets
 
(PPL)
 
The change in the carrying amount of goodwill for the six months ended June 30, 2016 was due to the effect of foreign currency exchange rates on the U.K. Regulated segment.

The change in the other intangible assets for the six months ended June 30, 2016 was primarily due to an increase in the gross carrying amount of indefinite lived intangibles at WPD attributable to new easements of $47 million.

16. Asset Retirement Obligations

(PPL, LKE, LG&E and KU)

The changes in the carrying amounts of AROs were as follows.

 
PPL
 
LKE
 
LG&E
 
KU
Balance at December 31, 2015
$
586

 
$
535

 
$
175

 
$
360

Accretion
13

 
12

 
4

 
8

Effect of foreign currency exchange rates
(2
)
 

 

 

Obligations settled
(8
)
 
(8
)
 
(6
)
 
(2
)
Balance at June 30, 2016
$
589

 
$
539

 
$
173

 
$
366

 
LKE's, LG&E's and KU's ARO liabilities are primarily related to CCR closure costs. See Note 10 for information on the final CCR rule and Note 6 for information on the rate recovery applications with the KPSC. 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.

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17. Accumulated Other Comprehensive Income (Loss)
 
(PPL and LKE)
 
The after-tax changes in AOCI by component for the periods ended June 30 were as follows.
 
 
Foreign
currency
translation
adjustments
 
Unrealized gains (losses)
 
 
 
Defined benefit plans
 
 
 
 
Available-
for-sale
securities
 
Qualifying
derivatives
 
Equity
investees'
AOCI
 
Prior
service
costs
 
Actuarial
gain
(loss)
 
Total
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
$
(984
)
 
$

 
$
(5
)
 
$

 
$
(6
)
 
$
(2,164
)
 
$
(3,159
)
Amounts arising during the period
268

 

 
(85
)
 

 

 
2

 
185

Reclassifications from AOCI

 

 
85

 
(1
)
 
1

 
32

 
117

Net OCI during the period
268

 

 

 
(1
)
 
1

 
34

 
302

June 30, 2016
$
(716
)
 
$

 
$
(5
)
 
$
(1
)
 
$
(5
)
 
$
(2,130
)
 
$
(2,857
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
$
(520
)
 
$

 
$
(7
)
 
$

 
$
(6
)
 
$
(2,195
)
 
$
(2,728
)
Amounts arising during the period
(196
)
 

 
(5
)
 

 

 
2

 
(199
)
Reclassifications from AOCI

 

 
7

 
(1
)
 
1

 
63

 
70

Net OCI during the period
(196
)
 

 
2

 
(1
)
 
1

 
65

 
(129
)
June 30, 2016
$
(716
)
 
$

 
$
(5
)
 
$
(1
)
 
$
(5
)
 
$
(2,130
)
 
$
(2,857
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
$
(352
)
 
$
206

 
$
9

 
$

 
$
3

 
$
(2,177
)
 
$
(2,311
)
Amounts arising during the period
(83
)
 
2

 
21

 

 
(6
)
 
53

 
(13
)
Reclassifications from AOCI

 
(1
)
 
27

 

 

 
38

 
64

Net OCI during the period
(83
)
 
1

 
48

 

 
(6
)
 
91

 
51

Distribution of PPL Energy Supply (Note 8)

 
(207
)
 
(55
)
 

 

 
238

 
(24
)
June 30, 2015
$
(435
)
 
$

 
$
2

 
$

 
$
(3
)
 
$
(1,848
)
 
$
(2,284
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
$
(286
)
 
$
202

 
$
20

 
$
1

 
$
3

 
$
(2,214
)
 
$
(2,274
)
Amounts arising during the period
(149
)
 
7

 
27

 

 
(6
)
 
52

 
(69
)
Reclassifications from AOCI

 
(2
)
 
10

 
(1
)
 

 
76

 
83

Net OCI during the period
(149
)
 
5

 
37

 
(1
)
 
(6
)
 
128

 
14

Distribution of PPL Energy Supply (Note 8)

 
(207
)
 
(55
)
 

 

 
238

 
(24
)
June 30, 2015
$
(435
)
 
$

 
$
2

 
$

 
$
(3
)
 
$
(1,848
)
 
$
(2,284
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LKE
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
 
 
 
 
 
$

 
$
(10
)
 
$
(35
)
 
$
(45
)
Amounts arising during the period
 
 
 
 
 
 

 

 
1

 
1

Reclassifications from AOCI
 
 
 
 
 
 
(1
)
 
1

 
1

 
1

Net OCI during the period
 
 
 
 
 
 
(1
)
 
1

 
2

 
2

June 30, 2016
 
 
 
 
 
 
$
(1
)
 
$
(9
)
 
$
(33
)
 
$
(43
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
$

 
$
(10
)
 
$
(36
)
 
$
(46
)
Amounts arising during the period
 
 
 
 
 
 

 

 
1

 
1

Reclassifications from AOCI
 
 
 
 
 
 
(1
)
 
1

 
2

 
2

Net OCI during the period
 
 
 
 
 
 
(1
)
 
1

 
3

 
3

June 30, 2016
 
 
 
 
 
 
$
(1
)
 
$
(9
)
 
$
(33
)
 
$
(43
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Foreign
currency
translation
adjustments
 
Unrealized gains (losses)
 
 
 
Defined benefit plans
 
 
 
 
Available-
for-sale
securities
 
Qualifying
derivatives
 
Equity
investees'
AOCI
 
Prior
service
costs
 
Actuarial
gain
(loss)
 
Total
March 31, 2015
 
 
 
 
 
 
$
(1
)
 
$
(8
)
 
$
(36
)
 
$
(45
)
Amounts arising during the period
 
 
 
 
 
 

 

 
(8
)
 
(8
)
Reclassifications from AOCI
 
 
 
 
 
 

 
1

 

 
1

Net OCI during the period
 
 
 
 
 
 

 
1

 
(8
)
 
(7
)
June 30, 2015
 
 
 
 
 
 
$
(1
)
 
$
(7
)
 
$
(44
)
 
$
(52
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
$

 
$
(8
)
 
$
(37
)
 
$
(45
)
Amounts arising during the period
 
 
 
 
 
 

 

 
(8
)
 
(8
)
Reclassifications from AOCI
 
 
 
 
 
 
(1
)
 
1

 
1

 
1

Net OCI during the period
 
 
 
 
 
 
(1
)
 
1

 
(7
)
 
(7
)
June 30, 2015
 
 
 
 
 
 
$
(1
)
 
$
(7
)
 
$
(44
)
 
$
(52
)
 
(PPL)
 
The following table presents the gains (losses) and related income taxes for reclassifications from AOCI for the periods ended June 30. The defined benefit plan components of AOCI are not reflected in their entirety in the Statement of Income during the periods; rather, they are included in the computation of net periodic defined benefit costs (credits) and subject to capitalization. See Note 9 for additional information.
 
 
 
Three Months
 
Six Months
 
Affected Line Item on the
Details about AOCI
 
2016
 
2015
 
2016
 
2015
 
Statements of Income
Available-for-sale securities
 
$

 
$
2

 
$

 
$
4

 
Other Income (Expense) - net
Total Pre-tax
 

 
2

 

 
4

 
 
Income Taxes
 

 
(1
)
 

 
(2
)
 
 
Total After-tax
 

 
1

 

 
2

 
 
 
 
 
 
 
 
 
 
 
 
 
Qualifying derivatives
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
(2
)
 
(3
)
 
(3
)
 
(7
)
 
Interest Expense
 
 

 
(77
)
 

 
(77
)
 
Discontinued operations
Cross-currency swaps
 
(103
)
 
15

 
(6
)
 
32

 
Other Income (Expense) - net
 
 
(1
)
 
1

 

 
2

 
Interest Expense
Commodity contracts
 

 
13

 

 
20

 
Discontinued operations
Total Pre-tax
 
(106
)
 
(51
)
 
(9
)
 
(30
)
 
 
Income Taxes
 
21

 
24

 
2

 
20

 
 
Total After-tax
 
(85
)
 
(27
)
 
(7
)
 
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity investees' AOCI
 
1

 

 
1

 
2

 
Other Income (Expense) - net
Total Pre-tax
 
1

 

 
1

 
2

 
 
Income Taxes
 

 

 

 
(1
)
 
 
Total After-tax
 
1

 

 
1

 
1

 
 
 
 
 
 
 
 
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
 
 
 
 
 
Prior service costs
 
(1
)
 

 
(1
)
 

 
 
Net actuarial loss
 
(40
)
 
(50
)
 
(80
)
 
(101
)
 
 
Total Pre-tax
 
(41
)
 
(50
)
 
(81
)
 
(101
)
 
 
Income Taxes
 
8

 
12

 
17

 
25

 
 
Total After-tax
 
(33
)
 
(38
)
 
(64
)
 
(76
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications during the period
 
$
(117
)
 
$
(64
)
 
$
(70
)
 
$
(83
)
 
 

 

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18. New Accounting Guidance Pending Adoption
 
(All Registrants)
 
Accounting for Revenue from Contracts with Customers
 
In May 2014, the Financial Accounting Standards Board (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 after December 15, 2017 and interim periods within those years. Public business entities may early adopt this guidance in annual reporting periods beginning after December 15, 2016. The Registrants expect to adopt this guidance effective January 1, 2018.
 
The Registrants continue to assess the impact of adopting this guidance, as well as the transition method they will use, and are monitoring the development of industry specific application guidance which could impact those assessments.
 
Accounting for Leases
 
In February 2016, the FASB issued accounting guidance for leases. This new guidance requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). For income statement purposes, the FASB retained a dual model for lessees, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines.
 
Lessor accounting under the new guidance is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Similar to current practice, lessors will classify leases as operating, direct financing, or sales-type.
 
The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.
 
The Registrants are currently assessing the impact of adopting this guidance.

Accounting for Financial Instrument Credit Losses
 
In June 2016, the FASB issued accounting guidance that requires the use of a current expected credit loss (CECL) model for the measurement of credit losses on financial instruments within the scope of this guidance, which includes accounts receivable. The CECL model requires an entity to measure credit losses using historical information, current information and reasonable and supportable forecasts of future events, rather than the incurred loss impairment model required under current GAAP.

For public business entities, this guidance will be applied using a modified retrospective approach and is effective for fiscal years beginning after December 15, 2019, and interim periods within those years. All entities may early adopt this guidance beginning after December 15, 2018, including interim periods within those years.

The Registrants are currently assessing the impact of adopting this guidance and the period that they will adopt this guidance.

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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' 2015 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 and a discussion of important financial and operational developments.

"Results of Operations" for all registrants includes a "Statement of Income Analysis" which discusses significant changes in principal line items on the Statements of Income, comparing the three and six months ended June 30, 2016 with the same periods in 2015. For PPL, it also provides a detailed analysis of earnings by segment and a description of key factors expected to impact future earnings. The segment earnings discussion includes financial information prepared in accordance with GAAP as well as non-GAAP financial measures including "Earnings from Ongoing Operations" and "Margins". This discussion provides explanations of the non-GAAP financial measures and a reconciliation of the non-GAAP financial measures to the most comparable GAAP measure. For PPL Electric, LKE, LG&E and KU, a summary of earnings is also provided.

"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 a utility holding company. PPL, through its regulated utility subsidiaries, delivers electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia and Tennessee; delivers natural gas to customers in Kentucky; and generates electricity from power plants in Kentucky. In June 2015, PPL completed the spinoff of PPL Energy Supply which combined its competitive power generation businesses with those of Riverstone to form a new, stand-alone, publicly traded company named Talen Energy. See Note 8 in PPL's 2015 Form 10-K for additional information.

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

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PPL Corporation*
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Capital Funding
 Provides financing for the operations of PPL and certain subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.K.
Regulated Segment
 
 
Kentucky
Regulated Segment
 
 
Pennsylvania
Regulated Segment
 
 
PPL's reportable segments' results primarily represent the results of PPL Global, LKE and PPL Electric, except that the reportable segments are also allocated certain corporate level financing and other costs that are not included in the results of PPL Global, LKE and PPL Electric. PPL Global is not a registrant, however PPL Global's unaudited annual consolidated financial statements are furnished on a Form 8-K with the SEC.
 
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 the 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 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.
 
(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

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a public utility by the KPSC, the VSCC and the Tennessee Regulatory Authority, 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)
 
Following the June 1, 2015 spinoff of PPL Energy Supply, PPL completed its strategic transformation to a fully regulated business model consisting of seven diverse, high-performing utilities. These utilities are located in the U.K., Pennsylvania and Kentucky and each jurisdiction has different regulatory structures and customer classes. The Company believes this diverse portfolio provides strong earnings and dividend growth potential that will create significant value for its shareowners and positions PPL well for continued growth and success.
 
PPL's businesses of WPD, PPL Electric, LG&E and KU plan to achieve growth by providing efficient, reliable and safe operations and strong customer service, maintaining constructive regulatory relationships and achieving timely recovery of costs. These businesses are expected to achieve strong, long-term growth in rate base and RAV, as applicable, driven by planned significant capital expenditures to maintain existing assets and 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. Additionally, significant transmission rate base growth is expected through 2020 at PPL Electric.
 
For the U.S. businesses, our strategy is to recover capital project costs efficiently through various rate-making mechanisms, including periodic base rate case proceedings using forward test years, annual FERC formula rate mechanisms and other regulatory agency-approved recovery mechanisms designed to limit regulatory lag. In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on construction work-in-progress) that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. In addition, the KPSC requires a utility to obtain a CPCN prior to constructing a facility, unless the construction is an ordinary extension of existing facilities in the usual course of business or does not involve sufficient capital outlay to materially affect the utility's financial condition. Although such KPSC proceedings do not directly address cost recovery issues, the KPSC, in awarding a CPCN, concludes that the public convenience and necessity require the construction of the facility on the basis that the facility is the lowest reasonable cost alternative to address the need. In Pennsylvania, the FERC transmission formula rate, DSIC mechanism, Smart Meter Rider and other recovery mechanisms are in place to reduce regulatory lag and provide for timely recovery of and a return on prudently incurred costs.
 
Rate base growth in the domestic utilities is expected to result in strong earnings growth for the foreseeable future. Earnings from the U.K. Regulated segment are expected to decline from 2015 to 2016 during the transition to RIIO-ED1, as higher revenues resulting from the fast-track bonus are offset by higher levels of revenue profiling in the prior price control period (DPCR5) and a lower return on regulatory equity. In 2017, earnings are expected to decline mainly due to the unfavorable impact of lower GBP to U.S. dollar exchange rates. RAV growth is expected in the U.K. Regulated segment through the price control period and earnings are expected to grow after 2017 commensurate with RAV growth. See "Item 1. Business - Segment Information - U.K. Regulated Segment" of PPL's 2015 Form 10-K for additional information on RIIO-ED1.
 
To manage financing costs and access to credit markets, and to fund capital expenditures, a key objective of the Registrants is to maintain their 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, as applicable, related to changes in interest rates, foreign currency exchange rates and counterparty credit quality. To manage these risks, PPL generally uses contracts such as forwards, options and swaps. See "Financial Condition - Risk Management" below for further information. Earnings generated by PPL's U.K. subsidiaries are subject to foreign currency translation risk. Due to the significant earnings contributed from WPD, PPL enters into foreign currency contracts to economically hedge the value of the GBP versus the U.S. dollar. As of June 30, 2016, PPL's exposure to changes in the value of the GBP versus the U.S. dollar related to budgeted earnings of the U.K. Regulated segment was hedged 87% for the remainder of 2016, and 89% and 41% for 2017 and 2018. See "Financial and Operational Developments - U.K. Membership in European Union" for a discussion of the subsequent settlement of certain of these hedges. The U.K. subsidiaries also have currency exposure to the U.S. dollar to the extent of their U.S. dollar denominated debt. To manage these risks, PPL generally uses contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts.
 

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As discussed above, a key component of this strategy is to maintain constructive relationships with regulators in all jurisdictions in which we operate (U.K., U.S. federal and state). This is supported by our strong culture of integrity and delivering on commitments to our customers, regulators and shareowners, and a commitment to continue to improve our customer service, reliability and efficiency of operations.

Financial and Operational Developments

(PPL)
 
U.K. Membership in European Union

Significant uncertainty exists concerning the effects of the June 23, 2016 referendum in favor of the U.K. withdrawal from the European Union, including whether formal withdrawal will occur and the nature and duration of negotiations between the U.K. and the European Union as to the terms of any withdrawal.

As of June 30, 2016, PPL was well-hedged against certain short-term fluctuations that may occur in the value of the GBP versus the U.S. dollar. As it relates to budgeted earnings, PPL's 2016 foreign currency exposure was 87% hedged for the remainder of the year at an average rate of $1.57 per GBP. In addition, at June 30, 2016, PPL's 2017 and 2018 foreign currency exposure was hedged 89% and 41% at an average rate of $1.58 and $1.56 per GBP. At June 30, 2016, hedges related to 2017 and 2018 anticipated earnings were valued at $296 million and were included in current and noncurrent "Price risk management assets" on the Balance Sheet. The notional amount of these hedges was approximately £1.3 billion (approximately $2.0 billion based on contracted rates) with termination dates from January 2017 through November 2018. In the third quarter of 2016, PPL settled the 2017 and 2018 hedges, resulting in approximately $310 million of cash received, and entered into new hedges at current market rates. The settlement will not have a material effect on earnings as the hedge values were previously marked to fair value and recognized in "Other Income (Expense) - net" on the Statement of Income each period. The settlement will be treated as a special item in the third quarter of 2016, as the hedges related to future earnings. The new hedges entered into include forward contracts for 2017 and a combination of forward contracts and zero cost collars for 2018. PPL is now 95% and 50% hedged for 2017 and 2018 at an average rate of $1.32 and $1.30 per GBP. These average rates are based on the forward contracts and the floors in the collars.

PPL cannot predict either the short-term impact to foreign exchange rates or long-term impact on PPL's financial condition that may be experienced as a result of any actions that may be taken by the U.K. government to withdraw from the European Union, although such impacts could be significant.

PPL consolidates WPD on a one-month lag. Therefore, the impact of the decrease in the GBP to U.S. dollar exchange rate that occurred subsequent to the U.K.'s vote on June 23, 2016 to withdraw from the European Union is not reflected in PPL's June 30, 2016 financial statements. Using the June 30, 2016 GBP to U.S. dollar exchange rate of $1.34 as opposed to the May 31, 2016 exchange rate of $1.46 would have resulted in an additional foreign currency translation loss of $499 million recorded in AOCI, primarily reflecting a $991 million decrease in PP&E and a $228 million decrease in goodwill, partially offset by a decrease of $606 million in long-term debt.

Regulatory Requirements
 
(PPL, LKE, LG&E and KU)
 
The businesses of LKE, LG&E and KU are subject to extensive federal, state and local environmental laws, rules and regulations, including those pertaining to CCRs, GHGs, ELGs, MATS and the Clean Power Plan. See Note 6, Note 10 and Note 16 to the Financial Statements for a discussion of the other significant environmental matters.
 
(All Registrants)
 
The Registrants cannot predict the impact that future regulatory requirements may have on their financial condition or results of operations.
 

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(PPL)
 
Discontinued Operations
 
The operations of PPL's Supply segment prior to the June 1, 2015 spinoff are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the June 2015 Statement of Income.

See Note 8 to the Financial Statements for additional information related to the spinoff of PPL Energy Supply, including the components of Discontinued Operations.
 
U.K. Distribution Revenue Reduction
 
In December 2013, WPD and other U.K. DNOs announced agreements with the U.K. Department of Energy and Climate Change and Ofgem to a reduction of £5 per residential customer of electricity distribution revenues that otherwise would have been collected in the regulatory year beginning April 1, 2014. Full recovery of the revenue reduction in GBP, together with the associated carrying cost will occur in the regulatory year which began April 1, 2016. Under GAAP, WPD does not record a receivable for under-recovery of regulated income (which this reduction represents). As a result, revenues for the U.K. Regulated segment were adversely affected by $19 million ($15 million after-tax or $0.02 per share) in 2015 and $40 million ($31 million after-tax or $0.05 per share) in 2014. Revenues for the U.K. Regulated segment were positively affected by $10 million ($8 million after-tax or $0.01 per share) for the three and six months ended June 30, 2016. PPL projects revenues in 2016 will be positively affected by $40 million ($32 million after-tax or $0.05 per share) and revenues for 2017 will be positively affected by $17 million ($14 million after-tax or $0.02 per share).
 
Discount Rate Change for U.K. Pension Plans
 
In selecting the discount rate for its U.K. pension plans, WPD historically used a single weighted-average discount rate in the calculation of net periodic defined benefit cost. WPD began using individual spot rates to measure service cost and interest cost beginning with the calculation of 2016 net periodic defined benefit cost. For the three and six months ended June 30, 2016, this change in discount rate resulted in lower net periodic defined benefit costs recognized on PPL's Statement of Income of $11 million ($9 million after-tax or $0.02 per share) and $22 million ($18 million after-tax or $0.03 per share). Based on current estimates, PPL expects this change to reduce 2016 net periodic defined benefit costs recognized on PPL's Statement of Income by $44 million ($36 million after-tax or $0.05 per share). See "Application of Critical Accounting Policies-Defined Benefits" in PPL's 2015 Form 10-K for additional information.
 
Results of Operations
 
(PPL)
 
The "Statement of Income Analysis" discussion addresses significant changes in principal line items on PPL's Statements of Income, comparing the three and six months ended June 30, 2016 with the same periods in 2015. The discussion for PPL provides a review of results by reportable segment. The segment earnings discussion includes financial information prepared in accordance with GAAP as well as non-GAAP financial measures, including “Earnings from Ongoing Operations” and “Margins”. This discussion provides explanations of the non-GAAP financial measures and a reconciliation of those measures to the most comparable GAAP measure. "Statement of Income Analysis and Segment Earnings" are presented separately for PPL.
 
Tables analyzing changes in amounts between periods within "Segment Earnings" are presented on a constant U.K. foreign currency exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained. Results computed on a constant U.K. foreign currency exchange rate basis are calculated by translating current year results at the prior year weighted-average U.K. foreign currency exchange rate.
 
(PPL Electric, LKE, LG&E and KU)
 
A "Statement of Income Analysis, Earnings and Margins" is presented separately for PPL Electric, LKE, LG&E and KU.
The "Statement of Income Analysis" addresses significant changes in principal line items on the Statements of Income comparing the three and six months ended June 30, 2016 with the same periods in 2015 and provides a summary of earnings. The "Margins" discussion includes a reconciliation of non-GAAP financial measures to "Operating Income."
 

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

PPL Statement of Income Analysis, Segment Earnings and Margins

Statement of Income Analysis
 
Net income for the periods ended June 30 includes the following results.
 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Operating Revenues
$
1,785

 
$
1,781

 
$
4

 
$
3,796

 
$
4,011

 
$
(215
)
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
 
 
 
 
Fuel
183

 
214

 
(31
)
 
380

 
467

 
(87
)
Energy purchases
147

 
170

 
(23
)
 
380

 
499

 
(119
)
Other operation and maintenance
425

 
467

 
(42
)
 
875

 
923

 
(48
)
Depreciation
231

 
216

 
15

 
460

 
432

 
28

Taxes, other than income
74

 
76

 
(2
)
 
153

 
162

 
(9
)
Total Operating Expenses
1,060

 
1,143

 
(83
)
 
2,248

 
2,483

 
(235
)
Other Income (Expense) - net
174

 
(102
)
 
276

 
235

 
(14
)
 
249

Interest Expense
224

 
215

 
9

 
448

 
424

 
24

Income Taxes
192

 
71

 
121

 
371

 
288

 
83

Income from Continuing Operations After Income Taxes
483

 
250

 
233

 
964

 
802

 
162

Income (Loss) from Discontinued Operations (net of income taxes)

 
(1,007
)
 
1,007

 

 
(912
)
 
912

Net Income (Loss)
$
483

 
$
(757
)
 
$
1,240

 
$
964

 
$
(110
)
 
$
1,074


Operating Revenues
 
The increase (decrease) in operating revenues for the periods ended June 30, 2016 compared with 2015 was due to:

 
Three Months
 
Six Months
Domestic:
 
 
 
PPL Electric Distribution price (a)
$
24

 
$
74

PPL Electric Distribution volume

 
(34
)
PPL Electric PLR Revenue (b)
(27
)
 
(104
)
PPL Electric Transmission Formula Rate
20

 
35

LKE Base rates
32

 
68

LKE Volumes
(4
)
 
(70
)
LKE Fuel and other energy prices (b)
(28
)
 
(74
)
LKE ECR
11

 
22

Other

 
(6
)
Total Domestic
28

 
(89
)

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Three Months
 
Six Months
U.K.:
 
 
 
Price
23

 
(30
)
Volume
(5
)
 
(21
)
Foreign currency exchange rates
(29
)
 
(62
)
Other
(13
)
 
(13
)
Total U.K.
(24
)
 
(126
)
Total
$
4

 
$
(215
)

(a)
Distribution rate case effective January 1, 2016, resulted in increases of $33 million and $80 million for the three and six months ended June 30, 2016.
(b)
Decreases due to lower recoveries of fuel and energy purchases due to lower commodity costs at LKE and lower PLR energy purchases at PPL Electric as described below.

Fuel

Fuel decreased by $31 million for the three months ended June 30, 2016 compared with 2015, primarily due to a $28 million decrease in commodity costs.

Fuel decreased by $87 million for the six months ended June 30, 2016 compared with 2015, primarily due to a $61 million decrease in commodity costs and a $26 million decrease in volumes primarily due to milder weather in the first quarter of 2016.

Energy Purchases

Energy purchases decreased by $23 million for the three months ended June 30, 2016 compared with 2015, primarily due to lower PLR prices in 2016.

Energy purchases decreased by $119 million for the six months ended June 30, 2016 compared with 2015, primarily due to a $51 million decrease in PLR prices and a $40 million decrease in PLR volumes at PPL Electric and a $13 million decrease in natural gas prices and a $13 million decrease in natural gas volumes at LKE.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended June 30, 2016 compared with 2015 was due to:

 
Three Months
 
Six Months
Domestic:
 
 
 
LKE coal plant operations and maintenance (a)
$
(13
)
 
$
(22
)
PPL Electric Act 129 costs incurred
(3
)
 
(7
)
PPL Electric vegetation management
3

 
6

PPL Electric payroll-related costs
(9
)
 
(12
)
PPL Electric storm costs
3

 
6

Corporate costs previously included in discontinued operations (b)

 
9

Other
(1
)
 
7

U.K.:
 
 
 
Network maintenance
8

 
15

Pension expense (c)
(21
)
 
(43
)
Foreign currency exchange rates
(4
)
 
(8
)
Other
(5
)
 
1

Total
$
(42
)
 
$
(48
)
 
(a)
Represents the reduction of costs associated with the 2015 retirement of Cane Run units partially offset by Cane Run 7 operations.
(b)
The increase was due to corporate costs allocated to PPL Energy Supply (and included in discontinued operations) prior to the spin. As a result of the spinoff on June 1, 2015, these corporate costs now remain in continuing operations.
(c)
The decrease was primarily due to an increase in estimated returns on higher asset balances and lower interest cost due to a change in the discount rate methodology.

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Depreciation
 
Depreciation increased by $15 million and $28 million for the three and six months ended June 30, 2016 compared with 2015, primarily due to additional assets placed into service, primarily at the domestic utilities and WPD (partially offset by the impact of foreign currency exchange rates), net of retirements.
 
Other Income (Expense) - net
 
Other income (expense) - net increased by $276 million and $249 million for the three and six months ended June 30, 2016 compared with 2015, primarily due to changes in realized and unrealized gains (losses) on foreign currency contracts to economically hedge GBP denominated earnings from WPD.
 
Interest Expense 

The increase (decrease) in interest expense for the periods ended June 30, 2016 compared with 2015 was due to:

 
Three Months
 
Six Months
Long-term debt interest expense (a)
$
18

 
$
41

Foreign currency exchange rates
(6
)
 
(11
)
Other
(3
)
 
(6
)
Total
$
9

 
$
24

 
(a)
The increase in both periods was primarily due to debt issuances at WPD in November 2015 and LG&E and KU in September 2015 as well as higher interest rates on bonds refinanced in September 2015 at LG&E and KU.

Income Taxes 

The increase (decrease) in income taxes for the periods ended June 30, 2016 compared with 2015 was due to:

 
Three Months
 
Six Months
Change in pre-tax income at current period tax rates
$
124

 
$
78

Valuation allowances adjustments
(2
)
 
1

Impact of U.K. income tax rates
(9
)
 
(1
)
Federal and state tax reserve adjustments (a)
12

 
12

Stock-based compensation (b)
(3
)
 
(11
)
Other
(1
)
 
4

Total
$
121

 
$
83

 
(a)
During the three and six months ended June 30, 2015, PPL recorded a tax benefit to adjust the settled refund amount approved by Joint Committee on Taxation for the open audit years 1998-2011.
(b)
During the three and six months ended June 30, 2016, PPL recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 to the Financial Statements for additional information.

See Note 5 to the Financial Statements for additional information.
 
Income (Loss) from Discontinued Operations (net of income taxes)
 
Income (Loss) from Discontinued Operations (net of income taxes) includes the results of operations of PPL Energy Supply, which was spun off from PPL on June 1, 2015 and substantially represents PPL's former Supply segment. See "Discontinued Operations" in Note 8 to the Financial Statements for additional information.
 
Segment Earnings
 
PPL's earnings by reportable segments for the periods ended June 30 were as follows:
 

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Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
U.K. Regulated
$
345

 
$
190

 
$
155

 
$
634

 
$
565

 
$
69

Kentucky Regulated
76

 
47

 
29

 
188

 
156

 
32

Pennsylvania Regulated
78

 
49

 
29

 
172

 
136

 
36

Corporate and Other (a)
(16
)
 
(36
)
 
20

 
(30
)
 
(55
)
 
25

Discontinued Operations (b)

 
(1,007
)
 
1,007

 

 
(912
)
 
912

Net Income (Loss)
$
483

 
$
(757
)
 
$
1,240

 
$
964

 
$
(110
)
 
$
1,074

 
(a)
Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results. 2015 also includes certain costs related to the spinoff of PPL Energy Supply. See Note 8 to the Financial Statements for additional information.
(b)
As a result of the spinoff of PPL Energy Supply, substantially representing PPL's former Supply segment, the earnings of the Supply segment prior to the spinoff are included in Discontinued Operations. The three and six months ended June 30, 2015 includes an $879 million charge reflecting the difference between PPL's recorded value for the Supply segment and its estimated fair value as of the spinoff date, determined in accordance with applicable accounting rules under GAAP. See Note 8 to the Financial Statements for additional information.

Earnings from Ongoing Operations
 
Management utilizes "Earnings from Ongoing Operations" as a non-GAAP financial measure that should not be considered as an alternative to net income, an indicator of operating performance determined in accordance with GAAP. PPL believes that Earnings from Ongoing Operations is useful and meaningful to investors because it provides management's view of PPL's earnings performance as another criterion in making investment decisions. In addition, PPL's management uses Earnings from Ongoing Operations in measuring achievement of certain corporate performance goals, including targets for certain executive incentive compensation. Other companies may use different measures to present financial performance. 
 
Earnings from Ongoing Operations is adjusted for the impact of special items. Special items are presented in the financial tables on an after-tax basis with the related income taxes on special items separately disclosed. Income taxes on special items, when applicable, are calculated based on the effective tax rate of the entity where the activity is recorded. Special items include:
• Unrealized gains or losses on foreign currency-related economic hedges (as discussed below).
• Supply segment discontinued operations.
• Gains and losses on sales of assets not in the ordinary course of business.
• Impairment charges. 
• Workforce reduction and other restructuring effects.
• Acquisition and divestiture-related adjustments.
• Other charges or credits that are, in management's view, non-recurring or otherwise not reflective of the company's ongoing operations.
 
Unrealized gains or losses on foreign currency economic hedges include the changes in fair value of foreign currency contracts used to hedge GBP-denominated anticipated earnings. The changes in fair value of these contracts are recognized immediately within GAAP earnings. Management believes that excluding these amounts from Earnings from Ongoing Operations until settlement of the contracts provides a better matching of the financial impacts of those contracts with the economic value of PPL's underlying hedged earnings. See Note 14 to the Financial Statements and "Risk Management" below for additional information on foreign currency-related economic activity.

PPL's Earnings from Ongoing Operations by reportable segment for the periods ended June 30 were as follows:
 
 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
U.K. Regulated
$
241

 
$
243

 
$
(2
)
 
$
506

 
$
579

 
$
(73
)
Kentucky Regulated
76

 
59

 
17

 
188

 
168

 
20

Pennsylvania Regulated
78

 
49

 
29

 
172

 
136

 
36

Corporate and Other
(15
)
 
(22
)
 
7

 
(28
)
 
(35
)
 
7

Earnings from Ongoing Operations
$
380

 
$
329

 
$
51

 
$
838

 
$
848

 
$
(10
)

See "Reconciliation of Earnings from Ongoing Operations" below for a reconciliation of this non-GAAP financial measure to Net Income.

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U.K. Regulated Segment
 
The U.K. Regulated segment consists of PPL Global, which primarily includes WPD's regulated electricity distribution operations, the results of hedging the translation of WPD's earnings from GBP into U.S. dollars, and certain costs, such as U.S. income taxes, administrative costs and allocated financing costs. The U.K. Regulated segment represents 66% of PPL's Net Income for the six months ended June 30, 2016 and 41% of PPL's assets at June 30, 2016.
 
Net Income and Earnings from Ongoing Operations for the periods ended June 30 include the following results.
 
 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Operating revenues
$
563

 
$
587

 
$
(24
)
 
$
1,158


$
1,284

 
$
(126
)
Other operation and maintenance
85

 
104

 
(19
)
 
182

 
214

 
(32
)
Depreciation
60

 
59

 
1

 
120

 
118

 
2

Taxes, other than income
35

 
37

 
(2
)
 
70

 
73

 
(3
)
Total operating expenses
180

 
200

 
(20
)
 
372

 
405

 
(33
)
Other Income (Expense) - net
172

 
(100
)
 
272

 
233

 
(12
)
 
245

Interest Expense
104

 
103

 
1

 
210

 
203

 
7

Income Taxes
106

 
(6
)
 
112

 
175

 
99

 
76

Net Income
345


190

 
155

 
634


565

 
69

Less: Special Items
104

 
(53
)
 
157

 
128

 
(14
)
 
142

Earnings from Ongoing Operations
$
241

 
$
243

 
$
(2
)
 
$
506

 
$
579

 
$
(73
)
 
The following after-tax gains (losses), which management considers special items, impacted the U.K. Regulated segment's results and are excluded from Earnings from Ongoing Operations during the periods ended June 30.
 
 
Income Statement Line Item
 
Three Months
 
Six Months
 
 
2016
 
2015
 
2016
 
2015
Foreign currency-related economic hedges, net of tax of ($56), $38, ($69), $18 (a)
Other Income (Expense)-net
 
$
104

 
$
(71
)
 
$
128

 
$
(34
)
WPD Midlands acquisition-related adjustment, net of tax of $0, $0, $0, ($1)
Other operation and maintenance
 

 

 

 
2

Settlement of certain income tax positions (b)
Income Taxes
 

 
18

 

 
18

Total special items
 
 
$
104

 
$
(53
)
 
$
128

 
$
(14
)
 
(a)
Represents unrealized gains (losses) on contracts that economically hedge anticipated GBP-denominated earnings.
(b)
Relates to the April 2015 settlement of the IRS audit for the tax years 1998-2011. See Note 5 to the Financial Statements for additional information.

The changes in the components of the U.K. Regulated segment's results between these periods are due to the factors set forth below, which reflect amounts classified as U.K. Gross Margins, the items that management considers special and the effects of movements in foreign currency exchange, including the effects of foreign currency hedge contracts, on separate lines and not in their respective Statement of Income line items.
 

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Three Months
 
Six Months
U.K.
 

 
 
Gross margins
$
14

 
$
(55
)
Other operation and maintenance
11

 
23

Depreciation
(5
)
 
(10
)
Interest expense
(6
)
 
(18
)
Other
(3
)
 
(2
)
Income taxes
(5
)
 
17

U.S.
 
 
 
Interest expense and other
(3
)
 
(2
)
Income taxes
4

 
4

Foreign currency exchange, after-tax
(9
)
 
(30
)
Earnings from Ongoing Operations
(2
)
 
(73
)
Special items, after-tax
157

 
142

Net Income
$
155

 
$
69


U.K.
 
See "Margins - Changes in Margins" for an explanation of U.K. Gross Margins.

Lower other operation and maintenance for the three month period primarily due to $21 million from lower pension expense, partially offset by $8 million from higher network maintenance expense.

Lower other operation and maintenance for the six month period primarily due to $43 million from lower pension expense, partially offset by $15 million from higher network maintenance expense.
 
Kentucky Regulated Segment
 
The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations of LG&E and KU, as well as LG&E's regulated distribution and sale of natural gas. In addition, certain financing costs are allocated to the Kentucky Regulated segment. The Kentucky Regulated segment represents 20% of PPL's Net Income for the six months ended June 30, 2016 and 35% of PPL's assets at June 30, 2016.
 
Net Income and Earnings from Ongoing Operations for the periods ended June 30 include the following results.
 
 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Operating revenues
$
721

 
$
714

 
$
7

 
$
1,547

 
$
1,613

 
$
(66
)
Fuel  
182

 
214

 
(32
)
 
380

 
467

 
(87
)
Energy purchases
28

 
28

 

 
94

 
120

 
(26
)
Other operation and maintenance
204

 
214

 
(10
)
 
406

 
423

 
(17
)
Depreciation
100

 
94

 
6

 
199

 
189

 
10

Taxes, other than income
15

 
15

 

 
30

 
29

 
1

Total operating expenses
529

 
565

 
(36
)
 
1,109

 
1,228

 
(119
)
Other Income (Expense) - net
(5
)
 
(5
)
 

 
(6
)
 
(6
)
 

Interest Expense
64

 
56

 
8

 
129

 
111

 
18

Income Taxes
47

 
41

 
6

 
115

 
112

 
3

Net Income
76

 
47

 
29

 
188

 
156

 
32

Less: Special Items

 
(12
)
 
12

 

 
(12
)
 
12

Earnings from Ongoing Operations
$
76

 
$
59

 
$
17

 
$
188

 
$
168

 
$
20


The following after-tax gains (losses), which management considers special items, impacted the Kentucky Regulated segment's results and are excluded from Earnings from Ongoing Operations during the periods ended June 30.


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Income Statement Line Item
 
Three Months
 
Six Months
 
 
2016
 
2015
 
2016
 
2015
Certain valuation allowances, net of tax of $0, $0, $0, $0 (a)
Income Taxes
 
$

 
$
(8
)
 
$

 
$
(8
)
LKE acquisition-related adjustment, net of tax of $0, $0, $0, $0 (b)
Other Income (Expense)-net
 

 
(4
)
 

 
(4
)
Total special items
 
 
$

 
$
(12
)
 
$

 
$
(12
)

(a)
Recorded at LKE and represents a valuation allowance against tax credits expiring in 2016 and 2017 that are more likely than not to expire before being utilized.
(b)
Recorded at PPL and allocated to the Kentucky Regulated segment. The amount represents a settlement between E.ON AG (a German corporation and the indirect parent of E.ON US Investments Corp., the former parent of LKE) and PPL for a tax matter.

The changes in the components of the Kentucky Regulated segment's results between these periods are due to the factors set forth below, which reflect amounts classified as Kentucky Gross Margins and the items that management considers special on separate lines and not in their respective Statement of Income line items.
 
 
Three Months
 
Six Months
Kentucky Gross Margins
$
33

 
$
37

Other operation and maintenance
12

 
17

Depreciation
(2
)
 

Taxes, other than income

 
(1
)
Other income (expense) - net
(4
)
 
(4
)
Interest Expense
(8
)
 
(18
)
Income Taxes
(14
)
 
(11
)
Special items, after-tax
12

 
12

Net Income
$
29

 
$
32

 
See "Margins - Changes in Margins" for an explanation of Kentucky Gross Margins.

Lower other operation and maintenance for the three and six month periods primarily due to lower coal plant operations and maintenance expense as a result of units retired in 2015 at the Cane Run plant.

Higher interest expense for the three and six month periods primarily due to the September 2015 issuance of $550 million of incremental First Mortgage Bonds by LG&E and KU, higher interest rates on the September 2015 issuance of $500 million of First Mortgage Bonds by LG&E and KU used to retire the same amount of First Mortgage Bonds in November 2015 and $400 million of notes refinanced by LKE in November 2015.

Higher income taxes for the three and six month periods primarily due to higher pre-tax income.
 
Pennsylvania Regulated Segment
 
The Pennsylvania Regulated segment includes the regulated electricity transmission and distribution operations of PPL Electric. In addition, certain costs are allocated to the Pennsylvania Regulated segment. The Pennsylvania Regulated segment represents 18% of PPL's Net Income for the six months ended June 30, 2016 and 22% of PPL's assets at June 30, 2016.

Net Income and Earnings from Ongoing Operations for the periods ended June 30 include the following results.
 

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Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Operating revenues
$
495

 
$
476

 
$
19

 
$
1,080

 
$
1,106

 
$
(26
)
Energy purchases
 
 
 
 
 

 
 
 
 
 
 

External
118

 
138

 
(20
)
 
285

 
365

 
(80
)
Intersegment

 
5

 
(5
)
 

 
14

 
(14
)
Other operation and maintenance
138

 
140

 
(2
)
 
288

 
273

 
15

Depreciation
62

 
52

 
10

 
121

 
103

 
18

Taxes, other than income
24

 
25

 
(1
)
 
53

 
60

 
(7
)
Total operating expenses
342

 
360

 
(18
)
 
747

 
815

 
(68
)
Other Income (Expense) - net
5

 
2

 
3

 
8

 
4

 
4

Interest Expense
32

 
33

 
(1
)
 
65

 
64

 
1

Income Taxes
48

 
36

 
12

 
104

 
95

 
9

Net Income
78

 
49

 
29

 
172

 
136

 
36

Less: Special Items (a)

 

 

 

 

 

Earnings from Ongoing Operations
$
78

 
$
49

 
$
29

 
$
172

 
$
136

 
$
36

 
(a)
There are no items that management considers special for the periods presented.

The changes in the components of the Pennsylvania Regulated segment's results between these periods were due to the factors set forth below, which reflect amounts classified as Pennsylvania Gross Delivery Margins on a separate line and not in their respective Statement of Income line items.
 
 
Three Months
 
Six Months
Pennsylvania Gross Delivery Margins
$
44

 
$
74

Other operation and maintenance
3

 
(15
)
Depreciation
(10
)
 
(18
)
Taxes, other than income

 
1

Other Income (Expense) - net
3

 
4

Interest Expense
1

 
(1
)
Income Taxes
(12
)
 
(9
)
Net Income
$
29

 
$
36

 
See "Margins - Changes in Margins" for an explanation of Pennsylvania Gross Delivery Margins.

Higher other operation and maintenance expense for the six month period primarily due to $9 million of higher corporate service costs allocated to PPL Electric, $6 million of higher vegetation management expenses, $5 million of higher costs for additional work done by outside vendors and $4 million of higher non-recoverable storm costs, partially offset by $12 million of lower payroll related costs.

Higher depreciation expense for the three and six month periods primarily due to transmission and distribution additions placed into service related to the ongoing efforts to improve reliability and replace aging infrastructure, net of retirements.
 
Higher income taxes for the three and six month periods primarily due to higher pre-tax income, partially offset by tax benefits related to the application of new stock based compensation accounting guidance.

Reconciliation of Earnings from Ongoing Operations
 
The following tables contain after-tax gains (losses), in total, which management considers special items, that are excluded from Earnings from Ongoing Operations and a reconciliation to PPL's "Net Income (Loss)" for the periods ended June 30.
 

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2016 Three Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 
Discontinued
Operations
 
Total
Net Income (Loss)
$
345

 
$
76

 
$
78

 
$
(16
)
 
$

 
$
483

Less: Special Items (expense) benefit:
 

 
 

 
 

 
 

 
 
 
 
Foreign currency-related economic hedges, net of tax of ($56)
104

 

 

 

 

 
104

Spinoff of the Supply segment, net of tax of $0

 

 

 
(1
)
 

 
(1
)
Total Special Items
104

 

 

 
(1
)
 

 
103

Earnings from Ongoing Operations
$
241

 
$
76

 
$
78

 
$
(15
)
 
$

 
$
380

 
2015 Three Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 
Discontinued
Operations
 
Total
Net Income (Loss)
$
190

 
$
47

 
$
49

 
$
(36
)
 
$
(1,007
)
 
$
(757
)
Less: Special Items (expense) benefit:
 

 
 

 
 

 
 

 
 

 
 

Foreign currency-related economic hedges, net of tax of $38
(71
)
 

 

 

 

 
(71
)
Spinoff of the Supply segment:
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations, net of tax of $91

 

 

 

 
(1,007
)
 
(1,007
)
Transition and transaction costs, net of tax of ($3)

 

 

 
(12
)
 

 
(12
)
Employee transitional services, net of tax of $1

 

 

 
(1
)
 

 
(1
)
Separation benefits, net of tax of $1

 

 

 
(1
)
 

 
(1
)
Other:
 
 
 
 
 
 
 
 
 
 
 
Settlement of certain income tax positions
18

 

 

 

 

 
18

Certain valuation allowances, net of tax of $0

 
(8
)
 

 

 

 
(8
)
LKE acquisition-related adjustment, net of tax of $0

 
(4
)
 

 

 

 
(4
)
Total Special Items
(53
)
 
(12
)
 

 
(14
)
 
(1,007
)
 
(1,086
)
Earnings from Ongoing Operations
$
243

 
$
59

 
$
49

 
$
(22
)
 
$

 
$
329

 
2016 Six Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 
Discontinued
Operations
 
Total
Net Income (Loss)
$
634

 
$
188

 
$
172

 
$
(30
)
 
$

 
$
964

Less: Special Items (expense) benefit:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency-related economic hedges, net of tax of ($69)
128

 

 

 

 

 
128

Spinoff of the Supply segment, net of tax of $1

 

 

 
(2
)
 

 
(2
)
Total Special Items
128

 

 

 
(2
)
 

 
126

Earnings from Ongoing Operations
$
506

 
$
188

 
$
172

 
$
(28
)
 
$

 
$
838


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Table of Contents


 
2015 Six Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 
Discontinued
Operations
 
Total
Net Income (Loss)
$
565

 
$
156

 
$
136

 
$
(55
)
 
$
(912
)
 
$
(110
)
Less: Special Items (expense) benefit:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency-related economic hedges, net of tax of $18
(34
)
 

 

 

 

 
(34
)
Spinoff of the Supply segment:
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations, net of tax of $40

 

 

 

 
(912
)
 
(912
)
Transition and transaction costs, net of tax of ($1)

 

 

 
(15
)
 

 
(15
)
Employee transitional services, net of tax of $2

 

 

 
(3
)
 

 
(3
)
Separation benefits, net of tax of $1

 

 

 
(2
)
 

 
(2
)
Other:
 
 
 
 
 
 
 
 
 
 
 
WPD Midlands acquisition-related adjustment, net of tax of ($1)
2

 

 

 

 

 
2

Settlement of certain income tax positions
18

 

 

 

 

 
18

Certain valuation allowances, net of tax of $0

 
(8
)
 

 

 

 
(8
)
LKE acquisition-related adjustment, net of tax of $0

 
(4
)
 

 

 

 
(4
)
Total Special Items
(14
)
 
(12
)
 

 
(20
)
 
(912
)
 
(958
)
Earnings from Ongoing Operations
$
579

 
$
168

 
$
136

 
$
(35
)
 
$

 
$
848


Margins
 
Management also utilizes the following non-GAAP financial measures as indicators of performance for its businesses:
 
"U.K. Gross Margins" is a single financial performance measure of the electricity distribution operations of the U.K. Regulated segment. In calculating this measure, direct costs such as connection charges from National Grid, which owns and manages the electricity transmission network in England and Wales, and Ofgem license fees (recorded in "Other operation and maintenance" on the Statements of Income) are deducted from operating revenues, as they are costs passed through to customers. As a result, this measure represents the net revenues from the delivery of electricity across WPD's distribution network in the U.K. and directly related activities.
 
"Kentucky Gross Margins" is a single financial performance measure of the electricity generation, transmission and distribution operations of the Kentucky Regulated segment, LKE, LG&E and KU, as well as the Kentucky Regulated segment's, LKE's and LG&E's distribution and sale of natural gas. In calculating this measure, fuel, energy purchases and certain variable costs of production (recorded in "Other operation and maintenance" on the Statements of Income) are deducted from revenues. In addition, certain other expenses, recorded in "Other operation and maintenance", "Depreciation" and "Taxes, other than income" on the Statements of Income, associated with approved cost recovery mechanisms are offset against the recovery of those expenses, which are included in revenues. These mechanisms allow for direct recovery of these expenses and, in some cases, returns on capital investments and performance incentives. As a result, this measure represents the net revenues from electricity and gas operations.

"Pennsylvania Gross Delivery Margins" is a single financial performance measure of the electricity transmission and distribution delivery operations of the Pennsylvania Regulated segment and PPL Electric. In calculating this measure, utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, are offset with minimal impact on earnings. Costs associated with these mechanisms are recorded in "Energy purchases," "Other operation and maintenance," (which are primarily Act 129 and Universal Service program costs), and "Taxes, other than income," which is primarily gross receipts tax. This performance measure includes PLR energy purchases by PPL Electric from PPL EnergyPlus, which are reflected in "Energy purchases from affiliate" in the reconciliation tables. As a result of the June 2015 spinoff of PPL Energy Supply and the formation of Talen Energy, PPL EnergyPlus (renamed Talen Energy Marketing) is no longer an affiliate of PPL Electric. PPL Electric's purchases from Talen Energy Marketing subsequent to May 31, 2015 are reflected in "Energy Purchases" in the reconciliation tables. This measure represents the net revenues from the Pennsylvania Regulated segment's and PPL Electric's electricity delivery operations.

These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and report their results of operations.

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Management believes these measures provide additional useful criteria to make investment decisions. These performance measures are used, in conjunction with other information, by senior management and PPL's Board of Directors to manage operations and analyze actual results compared with budget.
 
Changes in Margins
 
The following table shows Margins by PPL's reportable segment and by component, as applicable, for the periods ended June 30 as well as the change between periods. The factors that gave rise to the changes are described following the table.
  
 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
U.K.
 

 
 

 
 

 
 

 
 

 
 

U.K. Gross Margins
$
534

 
$
547

 
$
(13
)
 
$
1,090

 
$
1,204

 
$
(114
)
Impact of changes in foreign currency exchange rates
 
 
 
 
(27
)
 
 
 
 
 
(59
)
Change in U.K. Gross Margins excluding impact of foreign currency exchange rates
 
 
 
 
$
14

 
 
 
 
 
$
(55
)
 
 
 
 
 
 
 
 
 
 
 
 
Kentucky Regulated
 
 
 
 
 
 
 
 
 
 
 
Kentucky Gross Margins
 
 
 
 
 
 
 
 
 
 
 
LG&E
$
209

 
$
206

 
$
3

 
$
437

 
$
436

 
$
1

KU
262

 
232

 
30

 
559

 
523

 
36

LKE
$
471

 
$
438

 
$
33

 
$
996

 
$
959

 
$
37

 
 
 
 
 
 
 
 
 
 
 
 
Pennsylvania Regulated
 
 
 
 
 
 
 
 
 
 
 
Pennsylvania Gross Delivery Margins
 
 
 
 
 
 
 
 
 
 
 
Distribution
$
216

 
$
193

 
$
23

 
$
474

 
$
435

 
$
39

Transmission
111

 
90

 
21

 
218

 
183

 
35

Total
$
327

 
$
283

 
$
44

 
$
692

 
$
618

 
$
74


U.K. Gross Margins
 
U.K. Gross Margins, excluding the impact of changes in foreign currency exchange rates, increased for the three months ended June 30, 2016 compared with 2015 primarily due to $38 million from the April 1, 2016 price increase, which includes $10 million of the recovery of prior customer rebates, partially offset by $20 million from the impact of the April 1, 2015 price decrease resulting from the commencement of RIIO-ED1.

U.K. Gross Margins, excluding the impact of changes in foreign currency exchange rates, decreased for the six months ended June 30, 2016 compared with 2015 primarily due to $89 million from the April 1, 2015 price decrease resulting from the commencement of RIIO-ED1 and lower volumes of $21 million primarily due to milder weather, partially offset by $38 million from the April 1, 2016 price increase, which includes $10 million of the recovery of prior customer rebates, and $21 million of other revenue adjustments in 2016.
 
Kentucky Gross Margins
 
Kentucky Gross Margins increased for the three months ended June 30, 2016 compared with 2015 primarily due to higher base rates of $32 million ($1 million at LG&E and $31 million at KU) and returns on additional environmental capital investments of $6 million ($5 million at LG&E and $1 million at KU).

Kentucky Gross Margins increased for the six months ended June 30, 2016 compared with 2015 primarily due to higher base rates of $68 million ($4 million at LG&E and $64 million at KU) and returns on additional environmental capital investments of $10 million at LG&E. The increase in base rates was the result of new rates approved by the KPSC effective July 1, 2015. These increases were partially offset by lower sales volumes of $28 million ($9 million at LG&E and $19 million at KU) primarily driven by milder weather.
 

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Table of Contents


Pennsylvania Gross Delivery Margins
 
Distribution
 
Distribution margins increased for the three months ended June 30, 2016 compared with 2015 primarily due to $24 million of higher base rates, effective January 1, 2016 as a result of the 2015 rate case.

Distribution margins increased for the six months ended June 30, 2016 compared with 2015 primarily due to $63 million of higher base rates, effective January 1, 2016, partially offset by a $25 million unfavorable impact of milder weather.
 
Transmission
 
Transmission margins increased for the three and six month periods ended June 30, 2016 compared with 2015 primarily due to returns on additional capital investments focused on replacing aging infrastructure and improving reliability.

Reconciliation of Margins
 
The following table contains the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the periods ended June 30.
 
2016 Three Months
 
2015 Three Months
 
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Delivery
Margins
 
Other (a)
 
Operating
Income (b)
 
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Delivery
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
553

(c)
$
721

 
$
495

 
$
16

 
$
1,785

 
$
575

(c)
$
714

 
$
476

 
$
16

 
$
1,781

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel

 
182

 

 
1

 
183

 

 
214

 

 

 
214

Energy purchases

 
28

 
118

 
1

 
147

 

 
28

 
138

 
4

 
170

Energy purchases from affiliate

 

 

 

 

 

 

 
5

 
(5
)
 

Other operation and maintenance
19

 
26

 
28

 
352

 
425

 
28

 
24

 
27

 
388

 
467

Depreciation

 
13

 

 
218

 
231

 

 
9

 

 
207

 
216

Taxes, other than income

 
1

 
22

 
51

 
74

 

 
1

 
23

 
52

 
76

Total Operating Expenses
19

 
250

 
168

 
623

 
1,060

 
28

 
276

 
193

 
646

 
1,143

Total   
$
534

 
$
471

 
$
327

 
$
(607
)
 
$
725

 
$
547

 
$
438

 
$
283

 
$
(630
)
 
$
638

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 Six Months
 
2015 Six Months
 
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Delivery
Margins
 
Other (a)
 
Operating
Income (b)
 
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Delivery
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
1,137

(c)
$
1,547

 
$
1,080

 
$
32

 
$
3,796

 
$
1,261

(c)
$
1,613

 
$
1,106

 
$
31

 
$
4,011

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel

 
380

 

 

 
380

 

 
467

 

 

 
467

Energy purchases

 
94

 
285

 
1

 
380

 

 
120

 
365

 
14

 
499

Energy purchases from affiliate

 

 

 

 

 

 

 
14

 
(14
)
 

Other operation and maintenance
47

 
49

 
53

 
726

 
875

 
57

 
49

 
53

 
764

 
923

Depreciation

 
26

 

 
434

 
460

 

 
16

 

 
416

 
432

Taxes, other than income

 
2

 
50

 
101

 
153

 

 
2

 
56

 
104

 
162

Total Operating Expenses
47

 
551

 
388

 
1,262

 
2,248

 
57

 
654

 
488

 
1,284

 
2,483

Total   
$
1,090

 
$
996

 
$
692

 
$
(1,230
)
 
$
1,548

 
$
1,204

 
$
959

 
$
618

 
$
(1,253
)
 
$
1,528

 

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Table of Contents


(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.
(c)
Excludes ancillary revenues of $10 million and $21 million for the three and six months ended June 30, 2016 and $12 million and $23 million for the three and six months ended June 30, 2015.

2016 Outlook
 
(PPL)
 
Higher reported earnings are expected in 2016 compared with 2015, primarily attributable to the results of the 2015 spinoff of the Supply segment. Higher earnings from ongoing operations are expected in 2016 compared with 2015, primarily attributable to increases in the Pennsylvania Regulated and Kentucky Regulated segments. The following projections and factors underlying these projections are provided for PPL's segments and the Corporate and Other category and the related Registrants.
 
(PPL's U.K. Regulated Segment)
 
Lower reported earnings are expected in 2016 compared with 2015, primarily driven by tax gains recorded in 2015. Slightly lower earnings from ongoing operations are projected in 2016 compared with 2015. This is due to higher interest expense, depreciation, the unfavorable impact of lower GBP exchange rates and income taxes, partially offset by higher revenues and lower operation and maintenance expense, including pension expense.

(PPL's Kentucky Regulated Segment and LKE, LG&E and KU)
 
Higher reported earnings and earnings from ongoing operations are projected in 2016 compared with 2015, primarily driven by electric and gas base rate increases effective July 1, 2015, higher returns on additional environmental capital investments, and lower operation and maintenance expense, partially offset by higher depreciation and higher interest expense.
 
(PPL's Pennsylvania Regulated Segment and PPL Electric)
 
Higher reported earnings and earnings from ongoing operations are projected in 2016 compared with 2015, primarily driven by higher base electricity rates for distribution effective January 1, 2016, and higher transmission earnings, partially offset by higher depreciation and a benefit received in 2015 from the release of a gross receipts tax reserve.
 
(PPL's Corporate and Other Category)
 
Relatively flat costs are projected in 2016 compared with 2015.
 
(All Registrants)
 
Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, Notes 6 and 10 to the Financial Statements and "Item 1A. Risk Factors" in this Form 10-Q (as applicable) and "Item 1. Business" and "Item 1A. Risk Factors" in the Registrants' 2015 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.
 

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PPL Electric: Statement of Income Analysis, Earnings and Margins

Statement of Income Analysis

Net income for the periods ended June 30 includes the following results.
 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Operating Revenues
$
495

 
$
476

 
$
19

 
$
1,080

 
$
1,106

 
$
(26
)
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
118

 
138

 
(20
)
 
285

 
365

 
(80
)
Energy purchases from affiliate

 
5

 
(5
)
 

 
14

 
(14
)
Other operation and maintenance
137

 
140

 
(3
)
 
287

 
273

 
14

Depreciation
62

 
52

 
10

 
121

 
103

 
18

Taxes, other than income
24

 
25

 
(1
)
 
53

 
60

 
(7
)
Total Operating Expenses
341

 
360

 
(19
)
 
746

 
815

 
(69
)
Other Income (Expense) - net
5

 
2

 
3

 
8

 
4

 
4

Interest Expense
32

 
33

 
(1
)
 
65

 
64

 
1

Income Taxes
48

 
36

 
12

 
104

 
95

 
9

Net Income
$
79

 
$
49

 
$
30

 
$
173

 
$
136

 
$
37


Operating Revenues
 
The increase (decrease) in operating revenues for the periods ended June 30, 2016 compared with 2015 was due to:

 
Three Months
 
Six Months
Distribution volume
$

 
$
(34
)
Distribution price (a)
24

 
74

PLR (b)
(27
)
 
(104
)
Transmission Formula Rate
20

 
35

Other
2

 
3

Total
$
19

 
$
(26
)

(a)
Distribution rate case effective January 1, 2016, resulted in increases of $33 million and $80 million for the three and six months ended June 30, 2016.
(b)
Decreases due to lower recoveries of energy purchases as described below.

Energy Purchases

Energy purchases decreased by $20 million for the three months ended June 30, 2016 compared with 2015, primarily due to lower PLR prices in 2016.

Energy purchases decreased by $80 million for the six months ended June 30, 2016 compared with 2015 due to lower PLR prices of $51 million, lower PLR volumes of $26 million and lower capacity volumes of $3 million.

Energy Purchases from Affiliate

Energy purchases from affiliate decreased by $5 million and $14 million for the three and six months ended June 30, 2016 compared with 2015 as a result of the June 1, 2015 PPL Energy Supply spinoff.


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Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended June 30, 2016 compared with 2015 was due to:

 
Three Months
 
Six Months
Corporate service costs
$

 
$
9

Contractor-related expenses
1

 
6

Vegetation management
3

 
6

Storm costs
3

 
6

Payroll-related costs
(9
)
 
(12
)
Act 129
(3
)
 
(7
)
Universal service programs
2

 
3

Other

 
3

Total
$
(3
)
 
$
14

 
Depreciation
 
Depreciation increased by $10 million and $18 million for the three and six months ended June 30, 2016 compared with 2015, primarily due to additional assets placed into service, related to the ongoing efforts to ensure the reliability of the delivery system and the replacement of aging infrastructure, net of retirements.
 
Taxes, Other Than Income
 
Taxes, other than income decreased by $7 million for the six months ended June 30, 2016 compared with 2015, primarily due to lower Pennsylvania gross receipts tax expense as a result of a decrease in retail electric revenues. This tax is included in "Pennsylvania Gross Delivery Margins."
 
Income Taxes

The increase (decrease) in income taxes for the periods ended June 30, 2016 compared with 2015 was due to:

 
Three Months
 
Six Months
Change in pre-tax income at current period tax rates
$
18

 
$
20

Stock-based compensation (a)
(2
)
 
(7
)
Federal and state tax reserve adjustments
(4
)
 
(4
)
Total
$
12

 
$
9

 
(a)
During the three and six months ended June 30, 2016, PPL Electric recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 to the Financial Statements for additional information.

See Note 5 to the Financial Statements for additional information.

Earnings

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net Income
$
79

 
$
49

 
$
173

 
$
136

Special item, gains (losses), after-tax (a)

 

 

 

 
(a)
There are no items management considers special for the periods presented.


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Earnings increased for the three month period in 2016 compared with 2015 primarily due to higher base electricity rates for distribution effective January 1, 2016, and higher transmission margins from additional capital investments.

Earnings increased for the six month period in 2016 compared with 2015 primarily due to higher base electricity rates for distribution effective January 1, 2016, and higher transmission margins, partially offset by the unfavorable impact of milder weather, higher other operation and maintenance and higher depreciation.
 
The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Pennsylvania Gross Delivery Margins on a separate line and not in their respective Statement of Income line items.
 
 
Three Months
 
Six Months
Pennsylvania Gross Delivery Margins
$
44

 
$
74

Other operation and maintenance
4

 
(14
)
Depreciation
(10
)
 
(18
)
Taxes, other than income

 
1

Other Income (Expense) - net
3

 
4

Interest Expense
1

 
(1
)
Income Taxes
(12
)
 
(9
)
Net Income
$
30

 
$
37

 
Margins
 
"Pennsylvania Gross Delivery Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended June 30
 
2016 Three Months
 
2015 Three Months
 
PA Gross
Delivery
Margins
 
Other (a)
 
Operating
Income (b)
 
PA Gross
Delivery
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
495

 
$

 
$
495

 
$
476

 
$

 
$
476

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
118

 

 
118

 
138

 

 
138

Energy purchases from affiliate

 

 

 
5

 

 
5

Other operation and maintenance
28

 
109

 
137

 
27

 
113

 
140

Depreciation

 
62

 
62

 

 
52

 
52

Taxes, other than income
22

 
2

 
24

 
23

 
2

 
25

Total Operating Expenses
168

 
173

 
341

 
193

 
167

 
360

Total   
$
327

 
$
(173
)
 
$
154

 
$
283

 
$
(167
)
 
$
116

 
 
 
 
 
 
 
 
 
 
 
 

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2016 Six Months
 
2015 Six Months
 
PA Gross
Delivery
Margins
 
Other (a)
 
Operating
Income (b)
 
PA Gross
Delivery
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
1,080

 
$

 
$
1,080

 
$
1,106

 
$

 
$
1,106

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
285

 

 
285

 
365

 

 
365

Energy purchases from affiliate

 

 

 
14

 

 
14

Other operation and maintenance
53

 
234

 
287

 
53

 
220

 
273

Depreciation

 
121

 
121

 

 
103

 
103

Taxes, other than income
50

 
3

 
53

 
56

 
4

 
60

Total Operating Expenses
388

 
358

 
746

 
488

 
327

 
815

Total   
$
692

 
$
(358
)
 
$
334

 
$
618

 
$
(327
)
 
$
291


(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.
 
LKE: Statement of Income Analysis, Earnings and Margins
 
Statement of Income Analysis
 
Net income for the periods ended June 30 includes the following results.
 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Operating Revenues
$
721

 
$
714

 
$
7

 
$
1,547

 
$
1,613

 
$
(66
)
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
 
 
 
 
Fuel
182

 
214

 
(32
)
 
380

 
467

 
(87
)
Energy purchases
28

 
28

 

 
94

 
120

 
(26
)
Other operation and maintenance
204

 
214

 
(10
)
 
406

 
423

 
(17
)
Depreciation
100

 
94

 
6

 
199

 
189

 
10

Taxes, other than income
15

 
15

 

 
30

 
29

 
1

Total Operating Expenses
529

 
565

 
(36
)
 
1,109

 
1,228

 
(119
)
Other Income (Expense) - net
(5
)
 
(1
)
 
(4
)
 
(6
)
 
(2
)
 
(4
)
Interest Expense
48

 
42

 
6

 
97

 
84

 
13

Interest Expense with Affiliate
4

 
1

 
3

 
8

 
1

 
7

Income Taxes
51

 
45

 
6

 
123

 
121

 
2

Net Income
$
84

 
$
60

 
$
24

 
$
204

 
$
177

 
$
27


Operating Revenues

The increase (decrease) in operating revenues for the periods ended June 30, 2016 compared with 2015 was due to:
 
Three Months
 
Six Months
Base rates
$
32

 
$
68

Volumes
(4
)
 
(70
)
Fuel and other energy prices (a)
(28
)
 
(74
)
ECR
11

 
22

Other
(4
)
 
(12
)
Total
$
7

 
$
(66
)

(a)
Decreases due to lower recoveries of fuel and energy purchases due to lower commodity costs as described below.

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Fuel

Fuel decreased $32 million for the three months ended June 30, 2016 compared with 2015, primarily due to a $28 million decrease in commodity costs.

Fuel decreased $87 million for the six months ended June 30, 2016 compared with 2015, due to a $61 million decrease in commodity costs and a $26 million decrease in volumes primarily due to milder weather in the first quarter of 2016.

Energy Purchases

Energy purchases decreased $26 million for the six months ended June 30, 2016 compared with 2015 due to $13 million of lower natural gas prices and a $13 million decrease in natural gas volumes resulting from milder weather during the first quarter of 2016.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended June 30, 2016 compared with 2015 was due to:

 
Three Months
 
Six Months
Coal plant operations and maintenance (a)
$
(13
)
 
$
(22
)
Other
3

 
5

Total
$
(10
)
 
$
(17
)
 
(a)
Represents the reduction of costs associated with the 2015 retirement of Cane Run units partially offset by Cane Run 7 operations.

Depreciation
 
Depreciation increased $6 million and $10 million for the three and six months ended June 30, 2016 compared with 2015 primarily due to additions to PP&E, net of retirements.

Interest Expense
 
Interest expense increased $9 million and $20 million for the three and six months ended June 30, 2016 compared with 2015 primarily due to the September 2015 issuance of $550 million of incremental First Mortgage Bonds by LG&E and KU, higher interest rates on the September 2015 issuance of $500 million of First Mortgage Bonds by LG&E and KU used to retire the same amount of First Mortgage Bonds in November 2015 and $400 million of notes refinanced in November 2015.

Income Taxes
 
Income taxes increased $6 million for the three months ended June 30, 2016 compared with 2015 primarily due to higher pre-tax income at current period tax rates of $11 million, partially offset by the establishment of a valuation allowance in 2015 on a deferred tax asset of $5 million.

Earnings

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net Income
$
84

 
$
60

 
$
204

 
$
177

Special items, gains (losses), after-tax

 
(8
)
 

 
(8
)
 
Excluding special items, earnings increased for the three month period in 2016 compared with 2015 primarily due to higher base electricity rates effective July 1, 2015 and lower other operation and maintenance, partially offset by higher interest expense.

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Excluding special items, earnings increased for the six month period in 2016 compared with 2015 primarily due to higher base electricity rates effective July 1, 2015 and lower other operation and maintenance, partially offset by higher interest expense and lower sales volumes primarily due to milder weather in the first quarter of 2016.
 
The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins and an item that management considers special on separate lines and not in their respective Statement of Income line items.  
 
Three Months
 
Six Months
Margin
$
33

 
$
37

Other operation and maintenance
12

 
17

Depreciation
(2
)
 

Taxes, other than income

 
(1
)
Other income (expense) - net
(4
)
 
(4
)
Interest expense
(9
)
 
(20
)
Income taxes
(14
)
 
(10
)
Special items, gains (losses), after-tax (a)
8

 
8

Net income
$
24

 
$
27


(a)
See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated Segment" for details of the special item.

Margins
 
"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the factors underlying changes between periods. Within PPL's discussion, LKE's Margins are referred to as "Kentucky Gross Margins."
 
The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended June 30.

 
2016 Three Months
 
2015 Three Months
 
Margins
 
Other (a)
 
Operating
Income (b)
 
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
721

 
$

 
$
721

 
$
714

 
$

 
$
714

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Fuel
182

 

 
182

 
214

 

 
214

Energy purchases
28

 

 
28

 
28

 

 
28

Other operation and maintenance
26

 
178

 
204

 
24

 
190

 
214

Depreciation
13

 
87

 
100

 
9

 
85

 
94

Taxes, other than income
1

 
14

 
15

 
1

 
14

 
15

Total Operating Expenses
250

 
279

 
529

 
276

 
289

 
565

Total   
$
471

 
$
(279
)
 
$
192

 
$
438

 
$
(289
)
 
$
149

 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents


 
2016 Six Months
 
2015 Six Months
 
Margins
 
Other (a)
 
Operating
Income (b)
 
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
1,547

 
$

 
$
1,547

 
$
1,613

 
$

 
$
1,613

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Fuel
380

 

 
380

 
467

 

 
467

Energy purchases
94

 

 
94

 
120

 

 
120

Other operation and maintenance
49

 
357

 
406

 
49

 
374

 
423

Depreciation
26

 
173

 
199

 
16

 
173

 
189

Taxes, other than income
2

 
28

 
30

 
2

 
27

 
29

Total Operating Expenses
551

 
558

 
1,109

 
654

 
574

 
1,228

Total   
$
996

 
$
(558
)
 
$
438

 
$
959

 
$
(574
)
 
$
385


(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.

LG&E: Statement of Income Analysis, Earnings and Margins
 
Statement of Income Analysis

Net income for the periods ended June 30 includes the following results.
 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Operating Revenues
 
 
 
 


 
 
 
 
 


Retail and wholesale
$
317

 
$
323

 
$
(6
)
 
$
692

 
$
740

 
$
(48
)
Electric revenue from affiliate
6

 
8

 
(2
)
 
17

 
30

 
(13
)
Total Operating Revenues
323

 
331

 
(8
)
 
709

 
770

 
(61
)
Operating Expenses
 
 
 
 


 
 
 
 
 


Operation
 
 
 
 
 
 
 
 
 
 
 
Fuel
69

 
82

 
(13
)
 
147

 
185

 
(38
)
Energy purchases
23

 
23

 

 
85

 
111

 
(26
)
Energy purchases from affiliate
3

 
5

 
(2
)
 
5

 
8

 
(3
)
Other operation and maintenance
92

 
103

 
(11
)
 
179

 
199

 
(20
)
Depreciation
42

 
40

 
2

 
83

 
82

 
1

Taxes, other than income
7

 
7

 

 
15

 
14

 
1

Total Operating Expenses
236

 
260

 
(24
)
 
514

 
599

 
(85
)
Other Income (Expense) - net
(5
)
 
(1
)
 
(4
)
 
(5
)
 
(2
)
 
(3
)
Interest Expense
18

 
13

 
5

 
35

 
26

 
9

Income Taxes
24

 
22

 
2

 
59

 
55

 
4

Net Income
$
40

 
$
35

 
$
5

 
$
96

 
$
88

 
$
8

 

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Table of Contents


Operating Revenues

The increase (decrease) in operating revenues for the periods ended June 30, 2016 compared with 2015 was due to:
 
Three Months
 
Six Months
Base rates
$
1

 
$
4

Volumes
(1
)
 
(34
)
Fuel and other energy prices (a)
(13
)
 
(44
)
ECR
7

 
16

Other
(2
)
 
(3
)
Total
$
(8
)
 
$
(61
)

(a)
Decreases due to lower recoveries of fuel and energy purchases due to lower commodity costs as described below.

Fuel

Fuel decreased $13 million for the three months ended June 30, 2016 compared with 2015, primarily due to a $9 million decrease in commodity costs.

Fuel decreased $38 million for the six months ended June 30, 2016 compared with 2015, due to a $17 million decrease in commodity costs and a $21 million decrease in volumes primarily due to milder weather in the first quarter of 2016.

Energy purchases

Energy purchases decreased $26 million for the six months ended June 30, 2016 compared with 2015 due to $13 million of lower natural gas prices and a $13 million decrease in natural gas volumes resulting from milder weather during the first quarter of 2016.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended June 30, 2016 compared with 2015 was due to:
 
Three Months
 
Six Months
Coal plant operations and maintenance (a)
$
(12
)
 
$
(21
)
Other
1

 
1

Total
$
(11
)
 
$
(20
)

(a)
Represents the reduction of costs associated with the 2015 retirement of Cane Run units partially offset by Cane Run 7 operations.

Interest Expense
 
Interest expense increased $5 million and $9 million for the three and six months ended June 30, 2016 compared with 2015 primarily due to the September 2015 issuance of $300 million of incremental First Mortgage Bonds and higher interest rates on the September 2015 issuance of $250 million of First Mortgage Bonds used to retire the same amount of First Mortgage Bonds in November 2015.

Earnings
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net Income
$
40

 
$
35

 
$
96

 
$
88

Special items, gains (losses), after-tax (a)

 

 

 


(a)
There are no items management considers special for the periods presented.
 

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Earnings increased for the three month period in 2016 compared with 2015 primarily due to higher returns on additional environmental capital investments and lower other operation and maintenance, partially offset by higher interest expense.

Earnings increased for the six month period in 2016 compared with 2015 primarily due to higher returns on additional environmental capital investments and lower other operation and maintenance, partially offset by higher interest expense and lower sales volumes primarily due to milder weather in the first quarter of 2016.

The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins on a separate line and not in their respective Statement of Income line items.
 
 
Three Months
 
Six Months
Margin
$
3

 
$
1

Other operation and maintenance
12

 
18

Depreciation
1

 
5

Other income (expense) - net
(4
)
 
(3
)
Interest expense
(5
)
 
(9
)
Income taxes
(2
)
 
(4
)
Net income
$
5

 
$
8

 
Margins
 
"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the factors underlying changes between periods. Within PPL's discussion, LG&E's Margins are included in "Kentucky Gross Margins."
 
The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended June 30.
 
 
2016 Three Months
 
2015 Three Months
 
Margins
 
Other (a)
 
Operating
Income (b)
 
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
323

 
$

 
$
323

 
$
331

 
$

 
$
331

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Fuel
69

 

 
69

 
82

 

 
82

Energy purchases, including affiliate
26

 

 
26

 
28

 

 
28

Other operation and maintenance
11

 
81

 
92

 
10

 
93

 
103

Depreciation
7

 
35

 
42

 
4

 
36

 
40

Taxes, other than income
1

 
6

 
7

 
1

 
6

 
7

Total Operating Expenses
114

 
122

 
236

 
125

 
135

 
260

Total   
$
209

 
$
(122
)
 
$
87

 
$
206

 
$
(135
)
 
$
71

 
 
 
 
 
 
 
 
 
 
 
 
 
2016 Six Months
 
2015 Six Months
 
Margins
 
Other (a)
 
Operating
Income (b)
 
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
709

 
$

 
$
709

 
$
770

 
$

 
$
770

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Fuel
147

 

 
147

 
185

 

 
185

Energy purchases, including affiliate
90

 

 
90

 
119

 

 
119

Other operation and maintenance
20

 
159

 
179

 
22

 
177

 
199

Depreciation
13

 
70

 
83

 
7

 
75

 
82

Taxes, other than income
2

 
13

 
15

 
1

 
13

 
14

Total Operating Expenses
272

 
242

 
514

 
334

 
265

 
599

Total   
$
437

 
$
(242
)
 
$
195

 
$
436

 
$
(265
)
 
$
171


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Table of Contents


 
(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.

KU: Statement of Income Analysis, Earnings and Margins

Statement of Income Analysis
 
Net income for the periods ended June 30 includes the following results.

 
Three Months
 
Six Months
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
Retail and wholesale
$
404

 
$
391

 
$
13

 
$
855

 
$
873

 
$
(18
)
Electric revenue from affiliate
3

 
5

 
(2
)
 
5

 
8

 
(3
)
Total Operating Revenues
407

 
396

 
11

 
860

 
881

 
(21
)
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
 
 
 
 
Fuel
113

 
132

 
(19
)
 
233

 
282

 
(49
)
Energy purchases
5

 
5

 

 
9

 
9

 

Energy purchases from affiliate
6

 
8

 
(2
)
 
17

 
30

 
(13
)
Other operation and maintenance
107

 
109

 
(2
)
 
213

 
213

 

Depreciation
58

 
54

 
4

 
116

 
107

 
9

Taxes, other than income
8

 
8

 

 
15

 
15

 

Total Operating Expenses
297

 
316

 
(19
)
 
603

 
656

 
(53
)
Other Income (Expense) - net
1

 
2

 
(1
)
 
(1
)
 
1

 
(2
)
Interest Expense
23

 
19

 
4

 
47

 
38

 
9

Income Taxes
34

 
24

 
10

 
80

 
71

 
9

Net Income
$
54

 
$
39

 
$
15

 
$
129

 
$
117

 
$
12


Operating Revenue
 
The increase (decrease) in operating revenue for the periods ended June 30, 2016 compared with 2015 was due to:
 
Three Months
 
Six Months
Base rates
$
31

 
$
64

Volumes
(4
)
 
(40
)
Fuel and other energy prices (a)
(19
)
 
(42
)
ECR
3

 
6

Other

 
(9
)
Total
$
11

 
$
(21
)

(a)
Decreases due to lower recoveries of fuel and energy purchases due to lower commodity costs as described below.

Fuel
 
Fuel decreased $19 million for the three months ended June 30, 2016 compared with 2015, due to lower costs of commodities.

Fuel decreased $49 million for the six months ended June 30, 2016 compared with 2015, due to a $44 million decrease in commodity costs and a $5 million decrease in volumes primarily due to milder weather in the first quarter of 2016.


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Energy Purchases from affiliate
 
Energy purchases from affiliate decreased $13 million for the six months ended June 30, 2016 compared with 2015, due to increased generation as a result of Cane Run Unit 7 being placed in-service during 2015.

Depreciation
 
Depreciation increased $4 million and $9 million for the three and six months ended June 30, 2016 compared with 2015 primarily due to additional assets placed into service, net of retirements.
 
Interest Expense
 
Interest expense increased $4 million and $9 million for the three and six months ended June 30, 2016 compared with 2015 primarily due to the September 2015 issuance of $250 million of incremental First Mortgage Bonds and higher interest rates on the September 2015 issuance of $250 million of First Mortgage Bonds used to retire the same amount of First Mortgage Bonds in November 2015

Income Taxes
 
Income taxes increased $10 million and $9 million for the three and six months ended June 30, 2016 compared with 2015 primarily due to higher pre-tax income.

Earnings
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net Income
$
54

 
$
39

 
$
129

 
$
117

Special items, gains (losses), after-tax (a)

 

 

 


(a)
There are no items management considers special for the periods presented.
 
Earnings increased for the three month period in 2016 compared with 2015 primarily due to higher base electricity rates effective July 1, 2015, partially offset by higher interest expense.
 
Earnings increased for the six month period in 2016 compared with 2015 primarily due to higher base electricity rates, effective July 1, 2015, partially offset by higher interest expense and lower sales volumes primarily due to milder weather in the first quarter of 2016.

The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins on a separate line and not in their respective Statement of Income line items.
 
 
Three Months
 
Six Months
Margin
$
30

 
$
36

Other operation and maintenance
3

 
2

Depreciation
(3
)
 
(5
)
Taxes, other than income

 
(1
)
Other income (expense) - net
(1
)
 
(2
)
Interest expense
(4
)
 
(9
)
Income taxes
(10
)
 
(9
)
Net income
$
15

 
$
12

 
Margins
 
"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful

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and the factors underlying changes between periods. Within PPL's discussion, KU's Margins are included in "Kentucky Gross Margins."
 
The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended June 30.
 
 
2016 Three Months
 
2015 Three Months
 
Margins
 
Other (a)
 
Operating
Income (b)
 
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
407

 
$

 
$
407

 
$
396

 
$

 
$
396

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Fuel
113

 

 
113

 
132

 

 
132

Energy purchases, including affiliate
11

 

 
11

 
13

 

 
13

Other operation and maintenance
15

 
92

 
107

 
14

 
95

 
109

Depreciation
6

 
52

 
58

 
5

 
49

 
54

Taxes, other than income

 
8

 
8

 

 
8

 
8

Total Operating Expenses
145

 
152

 
297

 
164

 
152

 
316

Total   
$
262

 
$
(152
)
 
$
110

 
$
232

 
$
(152
)
 
$
80

 
 
 
 
 
 
 
 
 
 
 
 
 
2016 Six Months
 
2015 Six Months
 
Margins
 
Other (a)
 
Operating
Income (b)
 
Margins
 
Other (a)
 
Operating
Income (b)
Operating Revenues
$
860

 
$

 
$
860

 
$
881

 
$

 
$
881

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Fuel
233

 

 
233

 
282

 

 
282

Energy purchases, including affiliate
26

 

 
26

 
39

 

 
39

Other operation and maintenance
29

 
184

 
213

 
27

 
186

 
213

Depreciation
13

 
103

 
116

 
9

 
98

 
107

Taxes, other than income

 
15

 
15

 
1

 
14

 
15

Total Operating Expenses
301

 
302

 
603

 
358

 
298

 
656

Total   
$
559

 
$
(302
)
 
$
257

 
$
523

 
$
(298
)
 
$
225


(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.

Financial Condition

The remainder of this Item 2 in this Form 10-Q is presented on a combined basis, providing information, as applicable, for all Registrants.


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Liquidity and Capital Resources

(All Registrants)

The Registrants had the following at:

 
PPL (a)
 
PPL Electric
 
LKE
 
LG&E
 
KU
June 30, 2016
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
492

 
$
35

 
$
16

 
$
8

 
$
8

Short-term debt
856

 
6

 
139

 
110

 
29

Notes payable with affiliate
 
 

 
176

 

 

December 31, 2015
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
836

 
$
47

 
$
30

 
$
19

 
$
11

Short-term debt
916

 

 
265

 
142

 
48

Notes payable with affiliate
 
 

 
54

 

 

 
(a)
At June 30, 2016, $88 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL would not anticipate a material incremental U.S. tax cost. Historically, dividends paid by foreign subsidiaries have been limited to distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 2015 Form 10-K for additional information on undistributed earnings of WPD.

(PPL)
 
The Statements of Cash Flows separately report the cash flows of the discontinued operations in 2015. The "Operating Activities", "Investing Activities" and "Financing Activities" sections below included only the cash flows of continuing operations.
 
(All Registrants)
 
Net cash provided by (used in) operating, investing and financing activities for the six month periods ended June 30, and the changes between periods, were as follows.

 
PPL
 
PPL Electric
 
LKE
 
LG&E
 
KU
2016
 
 
 
 
 
 
 
 
 
Operating activities
$
1,170

 
$
328

 
$
506

 
$
273

 
$
311

Investing activities
(1,347
)
 
(427
)
 
(439
)
 
(237
)
 
(201
)
Financing activities
(152
)
 
87

 
(81
)
 
(47
)
 
(113
)
2015
 
 
 
 
 
 
 
 
 
Operating activities
$
970

 
$
76

 
$
703

 
$
389

 
$
360

Investing activities
(1,575
)
 
(483
)
 
(626
)
 
(349
)
 
(275
)
Financing activities
(71
)
 
221

 
(85
)
 
(43
)
 
(90
)
Change  - Cash Provided (Used)
 
 
 
 
 
 
 
 
 
Operating activities
$
200

 
$
252

 
$
(197
)
 
$
(116
)
 
$
(49
)
Investing activities
228

 
56

 
187

 
112

 
74

Financing activities
(81
)
 
(134
)
 
4

 
(4
)
 
(23
)
 
Operating Activities
 
The components of the change in cash provided by (used in) operating activities for the six months ended June 30, 2016 compared with 2015 were as follows.
 

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PPL
 
PPL Electric
 
LKE
 
LG&E
 
KU
Change - Cash Provided (Used)
 
 
 
 
 
 
 
 
 
Net income
$
162

 
$
37

 
$
27

 
$
8

 
$
12

Non-cash components
(250
)
 
82

 
(43
)
 
(23
)
 
2

Working capital
308

 
117

 
(211
)
 
(100
)
 
(88
)
Defined benefit plan funding
65

 
33

 
18

 
9

 
6

Other operating activities
(85
)
 
(17
)
 
12

 
(10
)
 
19

Total
$
200

 
$
252

 
$
(197
)
 
$
(116
)
 
$
(49
)
 
(PPL)
 
PPL's cash provided by operating activities from continuing operations in 2016 increased $200 million in 2016 compared with 2015.
Income from continuing operations increased by $162 million between the periods, but included a decrease in net non-cash charges of $250 million. These net non-cash charges included a $254 million increase in unrealized gains on derivatives.
The $308 million increase in cash from changes in working capital was primarily due to an increase in taxes payable (primarily due to an increase in current income tax expense in 2016) and a decrease in accounts receivable, primarily due to milder winter weather in 2016.
Defined benefit plan funding was $65 million lower in 2016.

(PPL Electric)
 
PPL Electric's cash provided by operating activities in 2016 increased $252 million in 2016 compared with 2015.
The increase in non-cash components of $82 million in 2016 compared with 2015 was primarily due to an increase in deferred income tax expense and depreciation.
The $117 million increase in cash from changes in working capital was primarily due to a decrease in prepayments (primarily due to a decrease in tax payments) and an increase in taxes payable (primarily due to an decrease in current income tax benefit in 2016).
Defined benefit plan funding was $33 million lower in 2016.

(LKE)
 
LKE's cash provided by operating activities in 2016 decreased $197 million compared with 2015.
The decrease in cash from working capital was driven primarily by lower tax payments received from PPL for the use of prior year excess tax depreciation deductions. Other decreases in cash were related to accounts receivable and coal and natural gas inventories due to milder weather in 2016, and unbilled revenues due to lower weather volatility during the measurement periods in 2016, partially offset by lower payments on accounts payable due to lower fuel purchases.

(LG&E)
 
LG&E's cash provided by operating activities in 2016 decreased $116 million compared with 2015.
The decrease in cash from working capital was driven primarily by lower payments received from LKE for the use of prior year excess tax depreciation deductions. Other decreases in cash were related to accounts receivable and coal and natural gas inventories due to milder weather in 2016, and unbilled revenues due to lower weather volatility during the measurement periods in 2016, partially offset by lower payments on accounts payable due to lower fuel purchases.

(KU)
 
KU's cash provided by operating activities in 2016 decreased $49 million compared with 2015.
The decrease in cash from working capital was driven primarily by lower payments received from LKE for the use of prior year excess tax depreciation deductions. Other decreases in cash were related to coal inventory due to milder weather in 2016, and unbilled revenues due to lower weather volatility during the measurement periods in 2016, partially offset by lower accounts payable from affiliates due to energy purchases from LG&E and charges for prepaid costs from LKS.


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Investing Activities
 
(All Registrants)
 
Expenditures for Property, Plant and Equipment
 
Investment in PP&E is the primary investing activity of the registrants. The change in expenditures for PP&E for the six months ended June 30, 2016 compared with 2015 was as follows.
 
 
PPL
 
PPL Electric
 
LKE
 
LG&E
 
KU
Decrease
$
333

 
$
56

 
$
191

 
$
112

 
$
78


For PPL, the decrease in expenditures was due to lower project expenditures at WPD, PPL Electric Utilities, LG&E, and KU. The decrease in expenditures for WPD was primarily due to a decrease in expenditures to enhance system reliability associated with the end of the DPCR5 price control period and changes in foreign currency exchange rates. The decrease in expenditures for PPL Electric was primarily due to the completion of the Susquehanna-Roseland transmission project and the completion of the Northeast Pocono reliability project. The decrease in expenditures for LG&E was primarily driven by the completion of the environmental air projects at LG&E's Mill Creek plant. The decrease in expenditures for KU was primarily driven by the completion of the environmental air projects at KU's Ghent plant and the CCR project at KU's E.W. Brown plant.
 
Financing Activities
 
(All Registrants)
 
The components of the change in cash provided by (used in) financing activities for the six months ended June 30, 2016 compared with 2015 was as follows.
 
 
PPL
 
PPL Electric
 
LKE
 
LG&E
 
KU
Change - Cash Provided (Used)
 
 
 
 
 
 
 
 
 
Debt issuance/retirement, net
$
248

 
$

 
$

 
$

 
$

Settlement of cross-currency swaps
46

 

 

 

 

Stock issuances/redemptions, net
(7
)
 

 

 

 

Dividends
(13
)
 
(10
)
 

 
(3
)
 
(32
)
Capital contributions/distributions, net

 
40

 
12

 
27

 
20

Change in short-term debt, net
(342
)
 
(162
)
 
(112
)
 
(27
)
 
(10
)
Notes payable with affiliate

 

 
105

 

 

Other financing activities
(13
)
 
(2
)
 
(1
)
 
(1
)
 
(1
)
Total
$
(81
)
 
$
(134
)
 
$
4

 
$
(4
)
 
$
(23
)
 
See Note 7 to the Financial Statements in this Form 10-Q for information on 2016 short and long-term debt activity, equity transactions and PPL dividends. See the Registrants' 2015 Form 10-K for information on 2015 activity.
 
Credit Facilities
 
The Registrants maintain credit facilities to enhance liquidity, provide credit support and provide a backstop to commercial paper programs. Amounts borrowed under these credit facilities are reflected in "Short-term debt" on the Balance Sheets. At June 30, 2016, the total committed borrowing capacity and the use of that capacity under these credit facilities was as follows:
 

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External 
 
Committed
Capacity
 
Borrowed
 
Letters of
Credit
and
Commercial
Paper Issued
 
Unused
Capacity
PPL Capital Funding Credit Facilities
$
1,150

 
$

 
$
337

 
$
813

PPL Electric Credit Facility
400

 

 
7

 
393

 
 
 
 
 
 
 
 
LKE Credit Facility
75

 

 

 
75

LG&E Credit Facility
500

 

 
110

 
390

KU Credit Facilities
598

 

 
227

 
371

Total LKE
1,173

 

 
337

 
836

Total U.S. Credit Facilities (a)
$
2,723

 
$

 
$
681

 
$
2,042

Total U.K. Credit Facilities (b)
£
1,055

 
£
269

 
£

 
£
786

 
(a)
The commitments under the U.S. credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than the following percentages of the total committed capacity: PPL - 11%, PPL Electric - 7%, LKE - 21%, LG&E - 7% and KU - 37%.
(b)
The amounts borrowed at June 30, 2016 were a USD-denominated borrowing of $200 million and GPB-denominated borrowings which equated to $191 million. The unused capacity reflects the USD-denominated borrowing amount borrowed in GBP of £138 million as of the date borrowed. At June 30, 2016, the USD equivalent of unused capacity under the U.K. committed credit facilities was $1.1 billion.

The commitments under the U.K. credit facilities are provided by a diverse bank group, with no one bank providing more than 13% of the total committed capacity.
 
See Note 7 to the Financial Statements for further discussion of the Registrants' credit facilities.
 
Intercompany (LKE, LG&E and KU)
 
Committed
Capacity
 
Borrowed
 
Other Used
Capacity
 
Unused
Capacity
LKE Credit Facility
$
225

 
$
176

 
$

 
$
49

LG&E Money Pool (a)
500

 

 
110

 
390

KU Money Pool (a)
500

 

 
29

 
471


(a)
LG&E and KU participate in an intercompany money pool agreement whereby LKE, LG&E and/or KU make available funds up to $500 million at an interest rate based on a market index of commercial paper issues. However, the FERC has issued a maximum short-term debt limit for each utility at $500 million from any source.

See Note 11 to the Financial Statements for further discussion of intercompany credit facilities.
 
Commercial Paper (All Registrants)
 
PPL, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as necessary. Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's Syndicated Credit Facility. The following commercial paper programs were in place at June 30, 2016:
 
Capacity
 
Commercial
Paper
Issuances
 
Unused
Capacity
PPL Capital Funding
$
1,000

 
$
320

 
$
680

PPL Electric
400

 
6

 
394

 
 
 
 
 
 
LG&E
350

 
110

 
240

KU
350

 
29

 
321

Total LKE
700

 
139

 
561

Total PPL
$
2,100

 
$
465

 
$
1,635

 

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Table of Contents


Long-term Debt
 
(PPL)

In May 2016, PPL Capital Funding issued $650 million of 3.10% Senior Notes due 2026. PPL Capital Funding received proceeds of $645 million, net of a discount and underwriting fees, which will be used to invest in or make loans to subsidiaries of PPL, to repay short-term debt and for general corporate purposes.

In May 2016, WPD (East Midlands) borrowed £100 million at 0.4975% under a new ten-year index linked term loan agreement, which will be used for general corporate purposes.

In May 2016, WPD plc repaid the entire $460 million principal amount of its 3.90% Senior Notes upon maturity.

(PPL and PPL Electric)
 
In March 2016, the LCIDA issued $116 million of Pollution Control Revenue Refunding Bonds, Series 2016A due 2029 and $108 million of Pollution Control Revenue Refunding Bonds, Series 2016B due 2027 on behalf of PPL Electric. The bonds were issued bearing interest at an initial term rate of 0.90% through their mandatory purchase dates of September 1, 2017 and August 15, 2017. The proceeds of the bonds were used to redeem $116 million of 4.70% Pollution Control Revenue Refunding Bonds, 2005 Series A due 2029 and $108 million of 4.75% Pollution Control Revenue Refunding Bonds, 2005 Series B due 2027 previously issued by the LCIDA on behalf of PPL Electric.
 
In connection with the issuance of each of these new series of LCIDA bonds, PPL Electric entered into a loan agreement with the LCIDA pursuant to which the LCIDA has loaned to PPL Electric the proceeds of the LCIDA bonds on payment terms that correspond to the LCIDA bonds. In order to secure its obligations under the loan agreement, PPL Electric issued $224 million of First Mortgage Bonds under its 2001 Mortgage Indenture, which also have payment terms that correspond to the LCIDA bonds.
 
(PPL)
 
ATM Program
 
For the three and six months ended June 30, 2016, PPL did not issue any shares under the agreements. For the three and six months ended June 30, 2015, PPL issued 421,700 shares of common stock under the program at an average price of $33.73 per share, receiving net proceeds of $14 million.

Common Stock Dividends
 
In May 2016, PPL declared a quarterly common stock dividend, payable July 1, 2016, of 38 cents per share (equivalent to $1.52 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.

Capital Expenditures

Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions. In the second quarter of 2016, PPL decreased its projected capital spending for the period 2016 through 2020 related to distribution facilities by approximately $1.1 billion from the $9.5 billion projection previously disclosed in PPL's 2015 Form 10‑K. The decreased projected capital spending results from a change in the forecasted GBP to U.S. dollar exchange rate from $1.60 to $1.30 for WPD expenditures that decreased each yearly estimate by approximately $220 million.

Contractual Obligations

In the second quarter of 2016, PPL decreased its estimated contractual cash obligations by approximately $1.7 billion from the $39.1 billion estimate previously disclosed in PPL's 2015 Form 10-K. The decrease was primarily a result of the change in the GBP to U.S. dollar exchange rate from $1.50 to $1.34 as of June 30, 2016 for WPD's obligations. The decreases in PPL's estimated contractual cash obligations by year were as follows.


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Table of Contents


 
 
Total
 
2016
 
2017 - 2018
 
2019 - 2020
 
After 2020
Total Change in Contractual Cash Obligations
 
$
(1,700
)
 
$
(30
)
 
$
(81
)
 
$
(98
)
 
$
(1,491
)

Rating Agency Actions
 
(All Registrants)
 
Moody's and S&P have periodically reviewed the credit ratings of the debt of the Registrants and their subsidiaries. Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.
 
A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues. The credit ratings of the Registrants and their subsidiaries are based on information provided by the Registrants and other sources. The ratings of Moody's and S&P are not a recommendation to buy, sell or hold any securities of the Registrants or their subsidiaries. Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities. The credit ratings of the Registrants and their subsidiaries affect their liquidity, access to capital markets and cost of borrowing under their credit facilities.
 
The rating agencies have taken the following actions related to the Registrants and their subsidiaries during 2016:

(PPL)
 
In February 2016, Moody's and S&P affirmed their commercial paper ratings for PPL Capital Funding's $1.0 billion commercial paper program.

In May 2016, Moody's and S&P assigned ratings of Baa2 and BBB+ to PPL Capital Funding's $650 million 3.10% Senior Notes due 2026.

In June 2016, S&P assigned a long-term issuer rating of A- and a short-term issuer rating of A-2 to PPL Capital Funding.

(PPL Electric)
 
In February 2016, Moody's and S&P affirmed their commercial paper ratings for PPL Electric's $400 million commercial paper program.
 
In February 2016, Moody's and S&P assigned ratings of A1 and A to LCIDA's $116 million 0.90% Pollution Control Revenue Refunding Bonds due 2029 and $108 million 0.90% Pollution Control Revenue Refunding Bonds due 2027, issued on behalf of PPL Electric.
 
Ratings Triggers
 
(PPL, LKE, LG&E and KU)
 
Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, interest rate and foreign currency instruments (for PPL), contain provisions that require the posting of additional collateral or permit the counterparty to terminate the contract, if PPL's, LKE's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade. See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral requirements for PPL, LKE and LG&E for derivative contracts in a net liability position at June 30, 2016.
 
(All Registrants)
 
For additional information on the Registrants' liquidity and capital resources, see "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Registrants' 2015 Form 10-K.
 

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Risk Management
 
Market Risk
 
(All Registrants)
 
See Notes 13 and 14 to the Financial Statements for information about the Registrants' risk management objectives, valuation techniques and accounting designations.
 
The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions. Actual future results may differ materially from those presented. These are not precise indicators of expected future losses, but are rather only indicators of possible losses under normal market conditions at a given confidence level.
 
Interest Rate Risk
 
The Registrants and their subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. The Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of their debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolios due to changes in the absolute level of interest rates. In addition, the interest rate risk of certain subsidiaries is potentially mitigated as a result of the existing regulatory framework or the timing of rate cases.

The following interest rate hedges were outstanding at June 30, 2016.
 
 
Exposure
Hedged
 
Fair Value,
Net - Asset
(Liability) (a)
 
Effect of a
10% Adverse
Movement
in Rates (b)
 
Maturities
Ranging
Through
PPL
 

 
 

 
 

 
 
Cash flow hedges
 
 
 
 
 
 
 
Cross-currency swaps (c)
$
802

 
$
93

 
$
(103
)
 
2028
Economic hedges
 
 
 
 
 
 
 
Interest rate swaps (d)
179

 
(56
)
 
(2
)
 
2033
LKE
 
 
 
 
 
 
 
Economic hedges
 

 
 

 
 

 
 
Interest rate swaps (d)
179

 
(56
)
 
(2
)
 
2033
LG&E
 

 
 

 
 

 
 
Economic hedges
 

 
 

 
 

 
 
Interest rate swaps (d)
179

 
(56
)
 
(2
)
 
2033
 
(a)
Includes accrued interest, if applicable.
(b)
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes a 10% adverse movement in foreign currency exchange rates.
(c)
Cross-currency swaps are utilized to hedge the principal and interest payments of WPD's U.S. dollar-denominated senior notes. Changes in the fair value of these instruments are recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.
(d)
Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in the fair value of these derivatives are included in regulatory assets or regulatory liabilities.

The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios. The estimated impact of a 10% adverse movement in interest rates on interest expense at June 30, 2016 was insignificant for PPL, PPL Electric, LKE, LG&E and KU. The estimated impact of a 10% adverse movement in interest rates on the fair value of debt at June 30, 2016 is shown below.
 

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10% Adverse
Movement
in Rates
PPL
$
660

PPL Electric
139

LKE
177

LG&E
66

KU
99

 
Foreign Currency Risk (PPL)
 
PPL is exposed to foreign currency risk primarily through investments in U.K. affiliates. Under its risk management program, PPL may enter into financial instruments to hedge certain foreign currency exposures, including translation risk of expected earnings, firm commitments, recognized assets or liabilities, anticipated transactions and net investments.
 
The following foreign currency hedges were outstanding at June 30, 2016.
 
 
Exposure
Hedged
 
Fair Value,
Net - Asset
(Liability)
 
Effect of a
10%
Adverse
Movement
in Foreign
Currency
Exchange
Rates (a)
 
Maturities
Ranging
Through
Economic hedges (b)
£
1,731

 
$
393

 
$
(220
)
 
2018
 
(a)
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(b)
To economically hedge the translation risk of expected earnings denominated in GBP.

(All Registrants)
 
Commodity Price Risk
 
PPL is exposed to commodity price risk through its domestic subsidiaries as described below.

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 commodity price risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the commodity price risk associated with the PLR obligation to the energy suppliers.
LG&E's and KU's rates include certain mechanisms for fuel and fuel-related expenses. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.

Volumetric Risk
 
PPL is exposed to volumetric risk through its 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. Under the RIIO - ED1 price control period, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2015 Form 10-K for additional information on revenue recognition under RIIO - ED1.
PPL Electric, LG&E and KU are exposed to volumetric risk on retail sales, mainly due to weather and other economic conditions for which there is limited mitigation between rate cases.

Credit Risk (All Registrants)
 
See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Credit Risk" in the Registrants' 2015 Form 10-K for additional information.
 

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Foreign Currency Translation (PPL)
 
The value of the British pound sterling fluctuates in relation to the U.S. dollar. Changes in this exchange rate resulted in a foreign currency translation loss of $199 million for the six months ended June 30, 2016, which primarily reflected a $398 million decrease to PP&E and $95 million decrease to goodwill partially offset by a decrease of $294 million to net liabilities. Changes in this exchange rate resulted in a foreign currency translation loss of $149 million for the six months ended June 30, 2015, which primarily reflected a $299 million decrease to PP&E and $77 million decrease to goodwill partially offset by a decrease of $227 million to net liabilities. The impact of foreign currency translation is recorded in AOCI.
 
Related Party Transactions (All Registrants)
 
The Registrants are not aware of any material ownership interests or operating responsibility by senior management in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with the Registrants. See Note 11 to the Financial Statements for additional information on related party transactions for PPL Electric, LKE, LG&E and KU.
 
Acquisitions, Development and Divestitures (All Registrants)
 
The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with, modify or terminate the projects. Any resulting transactions may impact future financial results. See Note 8 to the Financial Statements for information on the more significant activities.

Environmental Matters (All Registrants)
 
Extensive federal, state and local environmental laws and regulations are applicable to PPL's, LKE's, LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of the Registrants' businesses. The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be significant. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed. Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the cost for their products or their demand for the Registrants' services. Increased capital and operating costs are subject to 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.
 
See Note 10 to the Financial Statements for a discussion of the more significant environmental matters including:
Legal Matters,
Climate Change,
Coal Combustion Residuals,
Effluent Limitations Guidelines,
Mercury and Air Toxics Standards,
National Ambient Air Quality Standards, and
Superfund and Other Remediation.

Additionally, see "Item 1. Business - Environmental Matters" in the Registrants' 2015 Form 10-K for additional information on environmental matters.
 
New Accounting Guidance (All Registrants)
 
See Notes 2 and 18 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.
 
Application of Critical Accounting Policies (All Registrants)
 
Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following table summarizes the accounting policies by Registrant that are particularly important to an understanding of the reported financial condition or results of operations, and require management to make estimates or other judgments of matters that are inherently uncertain. See "Item 7. Combined Management's Discussion and

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Analysis of Financial Condition and Results of Operations" in the Registrants' 2015 Form 10-K for a discussion of each critical accounting policy.
 
 
 
 
 
PPL
 
 
 
 
 
 
 
 
 
 
PPL
 
Electric
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Defined Benefits
X
 
X
 
X
 
X
 
X
Loss Accruals
X
 
X
 
X
 
X
 
X
Income Taxes
X
 
X
 
X
 
X
 
X
Goodwill Impairment
X
 
 
 
X
 
X
 
X
AROs
X
 
 
 
X
 
X
 
X
Price Risk Management
X
 
 
 
 
 
 
 
 
Regulatory Assets and Liabilities
X
 
X
 
X
 
X
 
X
Revenue Recognition - Unbilled Revenue
 
 
 
X
 
X
 
X
 
X


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PPL Corporation
PPL Electric Utilities Corporation
LG&E and KU Energy LLC
Louisville Gas and Electric Company
Kentucky Utilities Company

Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Reference is made to "Risk Management" in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations."
 
Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures.
 
The Registrants' principal executive officers and principal financial officers, based on their evaluation of the Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of June 30, 2016, the Registrants' disclosure controls and procedures are effective to ensure that material information relating to the Registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared. The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.
 
(b) Change in internal controls over financial reporting.
 
The Registrants' principal executive officers and principal financial officers have concluded that there were no changes in the Registrants' internal control over financial reporting during the Registrants' second fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrants' internal control over financial reporting.
  
PART II. OTHER INFORMATION

Item 1. Legal Proceedings
 
For information regarding pending administrative and judicial proceedings involving regulatory, environmental and other matters, which information is incorporated by reference into this Part II, see:
 
"Item 3. Legal Proceedings" in each Registrant's 2015 Form 10-K; and
Notes 6 and 10 to the Financial Statements.

Item 1A. Risk Factors
 
There have been no material changes in the Registrants' risk factors from those disclosed in "Item 1A. Risk Factors" of the Registrants' 2015 Form 10-K except the following:

(PPL)

Risks Relating to the Spinoff of PPL Energy Supply and Formation of Talen Energy Corporation

If the spinoff of PPL Energy Supply does not qualify as a tax-free distribution under Sections 355 and 368 of the Internal Revenue Code of 1986, as amended (the "Code"), including as a result of subsequent acquisitions of stock of PPL or Talen Energy, then PPL and/or its shareowners may be required to pay substantial U.S. federal income taxes.

Among other requirements, the completion of the June 1, 2015 spinoff of PPL Energy Supply and subsequent combination with RJS Power was conditioned upon PPL's receipt of a legal opinion of tax counsel to the effect that the spinoff will qualify as a reorganization pursuant to Section 368(a)(1)(D) and a tax-free distribution pursuant to Section 355 of the Code. Although receipt of such legal opinion was a condition to completion of the spinoff and subsequent combination, that legal opinion is not

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binding on the IRS. Accordingly, the IRS could reach conclusions that are different from those in the legal opinion. If, notwithstanding the receipt of such legal opinion, the IRS were to determine the distribution to be taxable, PPL would, and its shareowners could, depending on their individual circumstances, recognize a tax liability that could be substantial. In addition, notwithstanding the receipt of such legal opinion, if the IRS were to determine the merger to be taxable, PPL shareowners may, depending on their individual circumstances, recognize a tax liability that could be material.

In addition, the spinoff will be taxable to PPL pursuant to Section 355(e) of the Code if there is a 50% or greater change in ownership (by vote or value) of either PPL or Talen Energy, directly or indirectly, as part of a plan or series of related transactions that include the spinoff. Because PPL's shareowners collectively owned more than 50% of Talen Energy's common stock following the spinoff and subsequent combination, the combination alone will not cause the spinoff to be taxable to PPL under Section 355(e) of the Code. However, Section 355(e) of the Code might apply if acquisitions of stock of PPL before or after the spinoff, or of Talen Energy after the combination, were considered to be part of a plan or series of related transactions that include the spinoff. PPL is not aware of any such plan or series of transactions that include the spinoff.

On June 2, 2016, Talen Energy entered into a merger agreement with affiliates of Riverstone, pursuant to which a subsidiary of affiliates of Riverstone will merge with Talen Energy (the "Talen Merger"). Upon completion of the Talen Merger, which is subject to certain closing conditions, affiliates of Riverstone will convert their existing ownership of approximately 35% of the issued and outstanding common stock of Talen Energy into shares of the surviving corporation and each other share of Talen Energy common stock, subject to certain exceptions, will be cancelled and converted into the right to receive the cash merger consideration. Pursuant to the Separation Agreement entered into in consideration with the spinoff, receipt of a legal opinion of tax counsel to the effect that the spinoff will continue to qualify as a reorganization pursuant to Section 368(a)(1)(D) and a tax-free distribution pursuant to Section 355 of the Code following the completion of the Talen Merger shall be required to complete the Talen Merger. As described above, such legal opinion will not be binding on the IRS and accordingly, the IRS could reach conclusions that are different from those in the legal opinion. If, notwithstanding the receipt of such legal opinion, the IRS were to determine the distribution to be taxable, PPL and its shareowners could, depending on circumstances, recognize a tax liability that could be substantial.

Risks related to our U.K. segment

PPL’s earnings may be adversely affected as a result of the June 23, 2016 referendum in the U.K. to withdraw from the European Union.

Significant uncertainty exists concerning the effects of the June 23, 2016 referendum in favor of the U.K. withdrawal from the European Union, including whether formal withdrawal will occur and the nature and duration of negotiations between the U.K. and European Union as to the terms of any withdrawal. PPL cannot predict either the short-term impact on foreign exchange rates or long-term impact on PPL’s financial condition that may be experienced as a result of any actions that may be taken by the U.K. government to withdraw from the European Union, although such impacts could be significant.

Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 6. Exhibits
 
The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith. The balance of the Exhibits has heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference. Exhibits indicated by a [_] are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

3(a)
-
Amended and Restated Articles of Incorporation of PPL Corporation, effective as of May 25, 2016 (Exhibit 3(i) to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 26, 2016)
*4(a)
-
Amendment No. 12 to PPL Employee Stock Ownership Plan, dated April 27, 2016
*4(b)
-
Amendment No. 13 to PPL Employee Stock Ownership Plan, dated May 13, 2016
4(c)
-
Supplemental Indenture No. 15, dated as of May 17, 2016, among PPL Capital Funding, Inc., PPL Corporation and The Bank of New York Mellon (as successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank)), as Trustee (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 17, 2016)

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*10(a)
-
Second Amendment to Revolving Credit Agreement, dated as of March 17, 2016, to the March 26, 2014 Existing Credit Agreement, between PPL Capital Funding, Inc., the Borrower, PPL Corporation, the Guarantor, and The Bank of Nova Scotia, as the Administrative Agent and as a Lender
10(b)
-
£100,000,000 Term Loan Agreement, dated May 24, 2016, between Western Power Distribution (East Midlands) PLC and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 26, 2016)
*12(a)
-
PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(b)
-
PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(c)
-
LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
*12(d)
-
Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
*12(e)
-
Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
 
 
 
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended June 30, 2016, filed by the following officers for the following companies:
 
 
 
*31(a)
-
PPL Corporation's principal executive officer
*31(b)
-
PPL Corporation's principal financial officer
*31(c)
-
PPL Electric Utilities Corporation's principal executive officer
*31(d)
-
PPL Electric Utilities Corporation's principal financial officer
*31(e)
-
LG&E and KU Energy LLC's principal executive officer
*31(f)
-
LG&E and KU Energy LLC's principal financial officer
*31(g)
-
Louisville Gas and Electric Company's principal executive officer
*31(h)
-
Louisville Gas and Electric Company's principal financial officer
*31(i)
-
Kentucky Utilities Company's principal executive officer
*31(j)
-
Kentucky Utilities Company's principal financial officer
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended June 30, 2016, furnished by the following officers for the following companies:
 
 
 
*32(a)
-
PPL Corporation's principal executive officer and principal financial officer
*32(b)
-
PPL Electric Utilities Corporation's principal executive officer and principal financial officer
*32(c)
-
LG&E and KU Energy LLC's principal executive officer and principal financial officer
*32(d)
-
Louisville Gas and Electric Company's principal executive officer and principal financial officer
*32(e)
-
Kentucky Utilities Company's principal executive officer and principal financial officer
 
 
 
101.INS
-
XBRL Instance Document
101.SCH
-
XBRL Taxonomy Extension Schema
101.CAL
-
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
-
XBRL Taxonomy Extension Definition Linkbase
101.LAB
-
XBRL Taxonomy Extension Label Linkbase
101.PRE
-
XBRL Taxonomy Extension Presentation Linkbase


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.
 
 
 
PPL Corporation
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
 
Date:
August 9, 2016
/s/  Stephen K. Breininger
 
 
 
Stephen K. Breininger
Vice President and Controller
 
 
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Electric Utilities Corporation
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
 
Date:
August 9, 2016
/s/  Marlene C. Beers
 
 
 
Marlene C. Beers
Controller
 
 
 
(Principal Financial Officer and Principal Accounting Officer)
 
 

 
 
LG&E and KU Energy LLC
 
 
(Registrant)
 
 
 
 
 
 
 
Louisville Gas and Electric Company
 
 
(Registrant)
 
 
 
 
 
 
 
Kentucky Utilities Company
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
 
Date:
August 9, 2016
/s/  Kent W. Blake
 
 
 
Kent W. Blake
Chief Financial Officer
 
 
 
(Principal Financial Officer and Principal Accounting Officer)
 

115