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 months ended March 31, 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 March 31, 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 three months ended March 31, 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 months ended March 31, 2016,
PPL Electric purchased $382 million of accounts receivable from unaffiliated third parties. During the three months ended March
31, 2015, PPL Electric purchased $331 million of accounts receivable from unaffiliated third parties and $93 million from PPL EnergyPlus.
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 months ended March 31, 2016, this change in discount rate resulted in lower net periodic defined benefit costs recognized
on the Statement of Income of $11 million ($9 million after-tax or $0.01 per share).
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,
PPL recorded a tax benefit of $8 million ($0.01 per share) and PPL Electric recorded a tax benefit of $5 million related to excess
tax benefits for awards that were exercised and vested for the period ending March 31, 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.
|
|
·
|
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.
|
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 March 31 are:
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
2016
|
|
2015
|
Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Regulated
|
|
|
|
|
|
|
|
$
|
595
|
|
$
|
697
|
|
Kentucky Regulated
|
|
|
|
|
|
|
|
|
826
|
|
|
899
|
|
Pennsylvania Regulated
|
|
|
|
|
|
|
|
|
585
|
|
|
630
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
5
|
|
|
4
|
Total
|
|
|
|
|
|
|
|
$
|
2,011
|
|
$
|
2,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Regulated (a)
|
|
|
|
|
|
|
|
$
|
289
|
|
$
|
375
|
|
Kentucky Regulated
|
|
|
|
|
|
|
|
|
112
|
|
|
109
|
|
Pennsylvania Regulated
|
|
|
|
|
|
|
|
|
94
|
|
|
87
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
(14)
|
|
|
(19)
|
|
Discontinued Operations (b)
|
|
|
|
|
|
|
|
|
|
|
|
95
|
Total
|
|
|
|
|
|
|
|
$
|
481
|
|
$
|
647
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
Balance Sheet Data
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
U.K. Regulated (c)
|
|
$
|
15,802
|
|
$
|
16,669
|
|
Kentucky Regulated
|
|
|
13,777
|
|
|
13,756
|
|
Pennsylvania Regulated
|
|
|
8,720
|
|
|
8,511
|
|
Corporate and Other (d)
|
|
|
410
|
|
|
365
|
Total assets
|
|
$
|
38,709
|
|
$
|
39,301
|
|
(a)
|
Includes unrealized gains and losses from hedging foreign-currency related
economic activity. See Note 14 for additional information.
|
|
(b)
|
See Note 8 for additional information.
|
|
(c)
|
Includes $11.4 billion and $12.2 billion of net PP&E as of March
31, 2016 and December 31, 2015. WPD is not subject to accounting for the effects of certain types of regulation as prescribed by
GAAP.
|
|
(d)
|
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 March 31 used in the EPS calculation
are:
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Income (Numerator)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations after income taxes
|
|
$
|
481
|
|
$
|
552
|
Less amounts allocated to participating securities
|
|
|
|
|
|
|
|
|
2
|
|
|
3
|
Income from continuing operations after income taxes available to PPL common shareowners - Basic and Diluted
|
|
$
|
479
|
|
$
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations (net of income taxes) available to PPL common shareowners - Basic
|
|
|
|
|
|
|
and Diluted
|
|
|
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
$
|
481
|
|
$
|
647
|
Less amounts allocated to participating securities
|
|
|
|
|
|
|
|
|
2
|
|
|
3
|
Net income available to PPL common shareowners - Basic and Diluted
|
|
|
|
|
|
|
|
$
|
479
|
|
$
|
644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Shares of Common Stock (Denominator)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares - Basic EPS
|
|
|
|
|
|
|
|
|
675,441
|
|
|
666,974
|
Add incremental non-participating securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment awards
|
|
|
|
|
|
|
|
|
3,376
|
|
|
1,758
|
Weighted-average shares - Diluted EPS
|
|
|
|
|
|
|
|
|
678,817
|
|
|
668,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Available to PPL common shareowners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations after income taxes
|
|
|
|
|
|
|
|
$
|
0.71
|
|
$
|
0.83
|
|
|
Income (loss) from discontinued operations (net of income taxes)
|
|
|
|
|
|
|
|
|
|
|
|
0.14
|
|
|
Net Income
|
|
|
|
|
|
|
|
$
|
0.71
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Available to PPL common shareowners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations after income taxes
|
|
|
|
|
|
|
|
$
|
0.71
|
|
$
|
0.82
|
|
|
Income (loss) from discontinued operations (net of income taxes)
|
|
|
|
|
|
|
|
|
|
|
|
0.14
|
|
|
Net Income
|
|
|
|
|
|
|
|
$
|
0.71
|
|
$
|
0.96
|
For
the periods ended March 31, PPL issued common stock related to stock-based compensation plans and the DRIP as follows (in thousands):
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation plans (a)
|
|
|
|
|
|
|
|
|
2,125
|
|
|
1,445
|
DRIP
|
|
|
|
|
|
|
|
|
402
|
|
|
419
|
|
(a)
|
Includes stock options exercised, vesting of performance units, vesting
of restricted stock and restricted stock units and conversion of stock units granted to directors.
|
For the periods
ended March 31, the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would
have been antidilutive.
|
|
|
|
Three Months
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
696
|
|
|
1,473
|
Performance units
|
|
|
|
|
|
|
|
|
|
|
|
146
|
5.
Income Taxes
Reconciliations of income taxes for the periods ended March 31 are
as follows.
(PPL)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax on Income from Continuing Operations Before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes at statutory tax rate - 35%
|
|
|
|
|
|
|
|
$
|
231
|
|
$
|
269
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
|
|
|
|
|
|
|
13
|
|
|
14
|
|
|
Valuation allowance adjustments
|
|
|
|
|
|
|
|
|
6
|
|
|
9
|
|
|
Impact of lower U.K. income tax rates
|
|
|
|
|
|
|
|
|
(54)
|
|
|
(62)
|
|
|
Interest benefit on U.K. financing entities
|
|
|
|
|
|
|
|
|
(5)
|
|
|
(7)
|
|
|
Stock-based compensation (a)
|
|
|
|
|
|
|
|
|
(8)
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
(4)
|
|
|
(6)
|
|
|
|
Total increase (decrease)
|
|
|
|
|
|
|
|
|
(52)
|
|
|
(52)
|
Total income taxes
|
|
|
|
|
|
|
|
$
|
179
|
|
$
|
217
|
|
(a)
|
During the three
months ended March 31, 2016, PPL recorded an $8 million tax benefit related to the application of new stock-based compensation
accounting guidance. See Note 2 for additional information.
|
(PPL Electric)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%
|
|
|
|
|
|
|
|
$
|
53
|
|
$
|
51
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
|
|
|
|
|
|
|
9
|
|
|
10
|
|
|
Stock-based compensation (a)
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
(1)
|
|
|
(2)
|
|
|
|
Total increase (decrease)
|
|
|
|
|
|
|
|
|
3
|
|
|
8
|
Total income taxes
|
|
|
|
|
|
|
|
$
|
56
|
|
$
|
59
|
|
(a)
|
During the three months ended March 31, 2016, PPL Electric recorded
a $5 million tax benefit related to the application of new stock-based compensation accounting guidance. See Note 2 for additional
information.
|
(LKE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%
|
|
|
|
|
|
|
|
$
|
67
|
|
$
|
68
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
|
|
|
|
|
|
|
7
|
|
|
7
|
|
|
Valuation allowance adjustments
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
(1)
|
|
|
(2)
|
|
|
|
Total increase (decrease)
|
|
|
|
|
|
|
|
|
5
|
|
|
8
|
Total income taxes
|
|
|
|
|
|
|
|
$
|
72
|
|
$
|
76
|
(LG&E)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%
|
|
|
|
|
|
|
|
$
|
32
|
|
$
|
30
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
|
|
|
|
|
|
|
3
|
|
|
3
|
|
|
|
Total increase (decrease)
|
|
|
|
|
|
|
|
|
3
|
|
|
3
|
Total income taxes
|
|
|
|
|
|
|
|
$
|
35
|
|
$
|
33
|
(KU)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%
|
|
|
|
|
|
|
|
$
|
42
|
|
$
|
44
|
Increase (decrease) due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefit
|
|
|
|
|
|
|
|
|
4
|
|
|
4
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
Total increase (decrease)
|
|
|
|
|
|
|
|
|
4
|
|
|
3
|
Total income taxes
|
|
|
|
|
|
|
|
$
|
46
|
|
$
|
47
|
6.
Utility Rate Regulation
(All Registrants)
The
following table provides information about the regulatory assets and liabilities of cost-based rate-regulated utility operations.
|
|
|
PPL
|
|
PPL Electric
|
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Regulatory Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental cost recovery
|
|
$
|
6
|
|
$
|
24
|
|
|
|
|
|
|
|
Transmission service charge
|
|
|
7
|
|
|
10
|
|
$
|
7
|
|
$
|
10
|
|
Other
|
|
|
13
|
|
|
14
|
|
|
2
|
|
|
3
|
Total current regulatory assets (a)
|
|
$
|
26
|
|
$
|
48
|
|
$
|
9
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Regulatory Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
$
|
801
|
|
$
|
809
|
|
$
|
465
|
|
$
|
469
|
|
Taxes recoverable through future rates
|
|
|
328
|
|
|
326
|
|
|
328
|
|
|
326
|
|
Storm costs
|
|
|
84
|
|
|
93
|
|
|
26
|
|
|
30
|
|
Unamortized loss on debt
|
|
|
68
|
|
|
68
|
|
|
43
|
|
|
42
|
|
Interest rate swaps
|
|
|
145
|
|
|
141
|
|
|
|
|
|
|
|
Accumulated cost of removal of utility plant
|
|
|
139
|
|
|
137
|
|
|
139
|
|
|
137
|
|
AROs
|
|
|
165
|
|
|
143
|
|
|
|
|
|
|
|
Other
|
|
|
17
|
|
|
16
|
|
|
2
|
|
|
2
|
Total noncurrent regulatory assets
|
|
$
|
1,747
|
|
$
|
1,733
|
|
$
|
1,003
|
|
$
|
1,006
|
Current Regulatory Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generation supply charge
|
|
$
|
30
|
|
$
|
41
|
|
$
|
30
|
|
$
|
41
|
|
Demand side management
|
|
|
11
|
|
|
8
|
|
|
|
|
|
|
|
Gas supply clause
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
Universal service rider
|
|
|
6
|
|
|
5
|
|
|
6
|
|
|
5
|
|
Transmission formula rate
|
|
|
37
|
|
|
48
|
|
|
37
|
|
|
48
|
|
Fuel adjustment clause
|
|
|
16
|
|
|
14
|
|
|
|
|
|
|
|
Storm damage expense
|
|
|
15
|
|
|
16
|
|
|
15
|
|
|
16
|
|
Other
|
|
|
4
|
|
|
7
|
|
|
1
|
|
|
3
|
Total current regulatory liabilities
|
|
$
|
119
|
|
$
|
145
|
|
$
|
89
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Regulatory Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated cost of removal of utility plant
|
|
$
|
693
|
|
$
|
691
|
|
|
|
|
|
|
|
Coal contracts (b)
|
|
|
14
|
|
|
17
|
|
|
|
|
|
|
|
Power purchase agreement - OVEC (b)
|
|
|
82
|
|
|
83
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
22
|
|
|
23
|
|
|
|
|
|
|
|
Act 129 compliance rider
|
|
|
25
|
|
|
22
|
|
$
|
25
|
|
$
|
22
|
|
Defined benefit plans
|
|
|
24
|
|
|
24
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
79
|
|
|
82
|
|
|
|
|
|
|
|
Other
|
|
|
3
|
|
|
3
|
|
|
|
|
|
|
Total noncurrent regulatory liabilities
|
|
$
|
942
|
|
$
|
945
|
|
$
|
25
|
|
$
|
22
|
|
|
|
|
LKE
|
|
LG&E
|
|
KU
|
|
|
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Current Regulatory Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental cost recovery
|
|
$
|
6
|
|
$
|
24
|
|
$
|
6
|
|
$
|
13
|
|
|
|
|
$
|
11
|
|
Gas supply clause
|
|
|
|
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
Gas line tracker
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
Other
|
|
|
10
|
|
|
9
|
|
|
|
|
|
1
|
|
$
|
10
|
|
|
8
|
Total current regulatory assets
|
|
$
|
17
|
|
$
|
35
|
|
$
|
7
|
|
$
|
16
|
|
$
|
10
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Regulatory Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
$
|
336
|
|
$
|
340
|
|
$
|
211
|
|
$
|
215
|
|
$
|
125
|
|
$
|
125
|
|
Storm costs
|
|
|
58
|
|
|
63
|
|
|
32
|
|
|
35
|
|
|
26
|
|
|
28
|
|
Unamortized loss on debt
|
|
|
25
|
|
|
26
|
|
|
16
|
|
|
17
|
|
|
9
|
|
|
9
|
|
Interest rate swaps
|
|
|
145
|
|
|
141
|
|
|
103
|
|
|
98
|
|
|
42
|
|
|
43
|
|
AROs
|
|
|
165
|
|
|
143
|
|
|
64
|
|
|
57
|
|
|
101
|
|
|
86
|
|
Plant retirement costs
|
|
|
6
|
|
|
6
|
|
|
|
|
|
|
|
|
6
|
|
|
6
|
|
Other
|
|
|
9
|
|
|
8
|
|
|
4
|
|
|
2
|
|
|
5
|
|
|
6
|
Total noncurrent regulatory assets
|
|
$
|
744
|
|
$
|
727
|
|
$
|
430
|
|
$
|
424
|
|
$
|
314
|
|
$
|
303
|
|
|
LKE
|
|
LG&E
|
|
KU
|
|
|
March 31
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Current Regulatory Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand side management
|
|
$
|
11
|
|
$
|
8
|
|
$
|
5
|
|
$
|
4
|
|
$
|
6
|
|
$
|
4
|
|
Gas supply clause
|
|
|
|
|
|
6
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
Fuel adjustment clause
|
|
|
16
|
|
|
14
|
|
|
3
|
|
|
2
|
|
|
13
|
|
|
12
|
|
Other
|
|
|
3
|
|
|
4
|
|
|
|
|
|
1
|
|
|
3
|
|
|
3
|
Total current regulatory liabilities
|
|
$
|
30
|
|
$
|
32
|
|
$
|
8
|
|
$
|
13
|
|
$
|
22
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Regulatory Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated cost of removal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of utility plant
|
|
$
|
693
|
|
$
|
691
|
|
$
|
303
|
|
$
|
301
|
|
$
|
390
|
|
$
|
390
|
|
Coal contracts (b)
|
|
|
14
|
|
|
17
|
|
|
6
|
|
|
7
|
|
|
8
|
|
|
10
|
|
Power purchase agreement - OVEC (b)
|
|
|
82
|
|
|
83
|
|
|
57
|
|
|
57
|
|
|
25
|
|
|
26
|
|
Net deferred tax assets
|
|
|
22
|
|
|
23
|
|
|
22
|
|
|
23
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
|
24
|
|
|
24
|
|
|
|
|
|
|
|
|
24
|
|
|
24
|
|
Interest rate swaps
|
|
|
79
|
|
|
82
|
|
|
39
|
|
|
41
|
|
|
40
|
|
|
41
|
|
Other
|
|
|
3
|
|
|
3
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
1
|
Total noncurrent regulatory liabilities
|
|
$
|
917
|
|
$
|
923
|
|
$
|
428
|
|
$
|
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 March 31, 2016 was $45 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 byproducts 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. The applications request
an authorized 10% return on equity with respect to LG&E's and KU's ECR mechanisms consistent with the 2014 Kentucky rate case
approved in June 2015. Two parties have been granted intervenor status in the proceedings.
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 and city representatives are negotiating regarding a
new franchise agreement and, in the interim, LG&E continues to provide gas service to customers in this service area at existing
rates, but without collecting the prior 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 March 2016, the PUC issued an 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. Hearings are scheduled for June 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:
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of
|
|
|
|
|
|
|
Letters of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
Expiration
|
|
|
|
|
|
|
Paper
|
|
Unused
|
|
|
|
Paper
|
|
|
|
|
|
|
|
Date
|
|
Capacity
|
|
Borrowed
|
|
Issued
|
|
Capacity
|
|
Borrowed
|
|
Issued
|
PPL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPD plc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Credit Facility
|
|
Jan. 2021
|
|
£
|
210
|
|
£
|
144
|
|
|
|
|
£
|
72
|
|
£
|
133
|
|
|
|
|
WPD (South West)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Credit Facility
|
|
July 2020
|
|
|
245
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
WPD (East Midlands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Credit Facility
|
|
July 2020
|
|
|
300
|
|
|
37
|
|
|
|
|
|
263
|
|
|
|
|
|
|
|
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
|
|
£
|
181
|
|
£
|
4
|
|
£
|
916
|
|
£
|
133
|
|
£
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Capital Funding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Credit Facility
|
|
Jan. 2021
|
|
$
|
700
|
|
|
|
|
$
|
700
|
|
|
|
|
|
|
|
$
|
151
|
|
|
Syndicated Credit Facility
|
|
Nov. 2018
|
|
|
300
|
|
|
|
|
|
73
|
|
$
|
227
|
|
|
|
|
|
300
|
|
|
Bilateral Credit Facility
|
|
Mar. 2017
|
|
|
150
|
|
|
|
|
|
17
|
|
|
133
|
|
|
|
|
|
20
|
|
|
|
Total PPL Capital Funding Credit Facilities
|
|
$
|
1,150
|
|
|
|
|
$
|
790
|
|
$
|
360
|
|
|
|
|
$
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Electric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Credit Facility
|
|
Jan. 2021
|
|
$
|
400
|
|
|
|
|
$
|
126
|
|
$
|
274
|
|
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LKE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Credit Facility (b)
|
|
Oct. 2018
|
|
$
|
75
|
|
|
|
|
|
|
|
$
|
75
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of
|
|
|
|
|
|
|
Letters of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
Expiration
|
|
|
|
|
|
|
Paper
|
|
Unused
|
|
|
|
Paper
|
|
|
|
|
|
|
|
Date
|
|
Capacity
|
|
Borrowed
|
|
Issued
|
|
Capacity
|
|
Borrowed
|
|
Issued
|
LG&E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Credit Facility
|
|
Dec. 2020
|
|
$
|
500
|
|
|
|
|
$
|
82
|
|
$
|
418
|
|
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KU
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Credit Facility
|
|
Dec. 2020
|
|
$
|
400
|
|
|
|
|
$
|
34
|
|
$
|
366
|
|
|
|
|
$
|
48
|
|
Letter of Credit Facility
|
|
Oct. 2017
|
|
|
198
|
|
|
|
|
|
198
|
|
|
|
|
|
|
|
|
198
|
|
|
|
Total KU Credit Facilities
|
|
|
|
$
|
598
|
|
|
|
|
$
|
232
|
|
$
|
366
|
|
|
|
|
$
|
246
|
(a) WPD
plc's amounts borrowed at March 31, 2016 and December 31, 2015 were USD-denominated borrowings of $200 million for both periods,
which bore interest at 1.26% and 1.83%. The unused capacity reflects the amount borrowed in GBP of £138 million as of the
date borrowed. WPD (East Midlands) amount borrowed at March 31, 2016 was a GBP-denominated borrowing which equated to $51 million
and bore interest at 0.91%. At March 31, 2016, the unused capacity under the U.K. credit facilities was approximately $1.3 billion.
|
(b)
|
LKE's interest rate on outstanding borrowings at December 31, 2015 was 1.68%.
|
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:
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
Commercial
|
|
|
|
Weighted -
|
|
Commercial
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Paper
|
|
Unused
|
|
Average
|
|
Paper
|
|
|
|
|
|
|
|
Interest Rate
|
|
Capacity
|
|
Issuances
|
|
Capacity
|
|
Interest Rate
|
|
Issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Capital Funding
|
|
0.85%
|
|
$
|
1,000
|
|
$
|
773
|
|
$
|
227
|
|
|
0.78%
|
|
$
|
451
|
|
PPL Electric
|
|
0.72%
|
|
|
400
|
|
|
125
|
|
|
275
|
|
|
|
|
|
|
|
LG&E
|
|
0.79%
|
|
|
350
|
|
|
82
|
|
|
268
|
|
|
0.71%
|
|
|
142
|
|
KU
|
|
0.64%
|
|
|
350
|
|
|
34
|
|
|
316
|
|
|
0.72%
|
|
|
48
|
|
|
|
Total
|
|
|
|
$
|
2,100
|
|
$
|
1,014
|
|
$
|
1,086
|
|
|
|
|
$
|
641
|
(LKE)
See Note 11 for discussion of intercompany borrowings.
Long-term Debt
(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 periods ended March 31, 2016 and 2015, PPL did not issue any shares under the agreements.
Distributions
In February 2016, PPL declared a quarterly common stock dividend,
payable April 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.
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 and PPL Energy Supply 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.
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
months ended March 31, 2016, the amounts PPL billed Talen Energy for these services were $10 million. 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 months ended March 31, 2016, PPL Electric's energy
purchases from Talen Energy Marketing were $54 million and are no longer considered affiliate transactions.
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 period ended March 31, 2015:
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
$
|
944
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
767
|
Other Income (Expense) - net
|
|
|
|
|
|
|
|
|
|
|
|
7
|
Interest expense (a)
|
|
|
|
|
|
|
|
|
|
|
|
38
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
146
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
51
|
Income (Loss) from Discontinued Operations (net of income taxes)
|
|
|
|
|
|
|
|
|
|
|
$
|
95
|
|
(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 $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 three month periods ended March 31:
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
|
|
U.S.
|
|
U.K.
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2016 (b)
|
|
2015
|
|
2016
|
|
2015
|
PPL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
17
|
|
$
|
30
|
|
$
|
18
|
|
$
|
20
|
|
$
|
2
|
|
$
|
4
|
Interest cost
|
|
|
43
|
|
|
57
|
|
|
62
|
|
|
79
|
|
|
6
|
|
|
7
|
Expected return on plan assets
|
|
|
(56)
|
|
|
(75)
|
|
|
(133)
|
|
|
(131)
|
|
|
(5)
|
|
|
(7)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
1
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
15
|
|
|
24
|
|
|
37
|
|
|
39
|
|
|
|
|
|
|
Net periodic defined benefit costs (credits) (a)
|
|
$
|
20
|
|
$
|
38
|
|
$
|
(16)
|
|
$
|
7
|
|
$
|
3
|
|
$
|
4
|
LKE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
6
|
|
$
|
7
|
|
|
|
|
|
|
|
$
|
1
|
|
$
|
1
|
Interest cost
|
|
|
17
|
|
|
17
|
|
|
|
|
|
|
|
|
2
|
|
|
2
|
Expected return on plan assets
|
|
|
(21)
|
|
|
(22)
|
|
|
|
|
|
|
|
|
(2)
|
|
|
(1)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
1
|
|
|
2
|
|
|
|
|
|
|
|
|
1
|
|
|
1
|
|
|
Actuarial (gain) loss
|
|
|
5
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic defined benefit costs (credits)
|
|
$
|
8
|
|
$
|
12
|
|
|
|
|
|
|
|
$
|
2
|
|
$
|
3
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
|
|
U.S.
|
|
U.K.
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2016 (b)
|
|
2015
|
|
2016
|
|
2015
|
LG&E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I
nterest
cost
|
|
$
|
3
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
|
(5)
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
2
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic defined benefit costs (credits)
|
|
$
|
1
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
For the three months ended March 31, 2015, the total net periodic defined
benefit cost includes $11 million reflected in discontinued operations related to costs allocated from PPL's plans to PPL Energy
Supply prior to the spinoff.
|
|
(b)
|
See Note 2 for a discussion of changes to the discount rate used for
the U.K. Pension Plans.
|
(PPL Electric,
LG&E and KU)
In addition to the specific plans it sponsors, LG&E is allocated
costs of defined benefit plans sponsored by LKE based on its participation in those plans, which management believes are reasonable.
PPL Electric and KU do not directly sponsor any defined benefit plans. PPL Electric is allocated costs of defined benefit plans
sponsored by PPL Services and KU is allocated costs of defined benefit plans sponsored by LKE based on their participation in those
plans, which management believes are reasonable.
For
the periods ended March 31, PPL Services allocated the following net periodic defined benefit costs to PPL Electric, and LKE allocated
the following net periodic defined benefit costs to LG&E and KU.
|
|
|
|
Three Months
|
|
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2016
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2015
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PPL Electric
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$
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6
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$
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8
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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 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. Certain discovery matters are before the District Court. 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 with discovery. Discovery proceedings are underway and the parties
have also conducted limited settlement discussions in the matter. PPL, LKE and LG&E cannot predict the outcome of this matter
or the potential impact on the operations of the Mill Creek plant, including increased capital or operating costs, if any, but
believe the plant is operating in compliance with the permits.
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.
The parties have conducted limited settlement discussions in the matter. 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 that 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 power system. The FERC oversees this process and independently
enforces the Reliability Standards.
The Reliability Standards have the force and effect of law and apply
to certain users of the bulk power electricity system, including electric utility companies, generators and marketers. Under the
Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.
PPL, LG&E, KU and PPL Electric monitor their compliance with
the Reliability Standards and continue to self-report or self-log potential violations of certain applicable reliability requirements
and submit accompanying mitigation plans, as required. The resolution of a small number of potential violations is pending. Any
Regional Reliability Entity (including RFC or SERC) determination concerning the resolution of violations of the Reliability Standards
remains subject to the approval of the NERC and the FERC.
In the course of implementing their programs to ensure compliance
with the Reliability Standards by those PPL affiliates subject to the standards, certain other instances of potential non-compliance
may be identified from time to time. The Registrants cannot predict the outcome of these matters, and cannot estimate a range of
reasonably possible losses, if any.
Environmental
Matters - Domestic
(All Registrants)
Due to the environmental issues discussed below or other environmental
matters, it may be necessary for the Registrants to modify, curtail, replace, or cease operation of certain facilities or performance
of certain operations to comply with statutes, regulations and other requirements of regulatory bodies or courts. In addition,
legal challenges to new environmental permits or rules add to the uncertainty of estimating the future cost of these permits and
rules.
LG&E and KU are entitled to recover, through the ECR mechanism,
certain costs of complying with the Clean Air Act, as amended, and those federal, state, or local environmental requirements applicable
to coal combustion wastes and by-products from facilities that generate electricity from coal in accordance with approved compliance
plans. Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery
before the companies' respective state regulatory authorities, or the FERC, if applicable. Because PPL Electric does not own any
generating plants, its exposure to related environmental compliance costs is reduced. 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.
(PPL, LKE, LG&E and KU)
Air
The Clean Air Act, which regulates air pollutants from mobile and
stationary sources, 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 regulations 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 states' non-attainment. States that are not in the ozone transport region, including
Kentucky, are working together to evaluate further nitrogen oxide reductions from fossil-fueled plants with SCRs. The nature and
timing of any additional reductions resulting from these evaluations cannot be 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 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 connection
with 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 are seeking 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 attention focused on issues related to climate
change. Most recently, 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 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. 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
which limits the measures that the Kentucky Energy and Environment Cabinet may consider in setting performance standards to comply
with the EPA's regulations governing GHG emissions from existing sources. The legislation provides that such state GHG performance
standards shall be based on emission reductions, efficiency measures, and other improvements available at each power plant, rather
than renewable energy, end-use energy efficiency, fuel switching and re-dispatch. These statutory restrictions may make it more
difficult for Kentucky to achieve the GHG reduction levels that the EPA has established for Kentucky.
Water/Waste
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 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 are pursuing 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 increases to AROs or changes to current
capital plans or to 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 many of LG&E's and KU's facilities and construction projects. 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 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 5
th
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.
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 allow certain PCB articles to remain in use. In April 2010, the EPA issued an Advanced
Notice of Proposed Rulemaking for changes to these regulations. This rulemaking could lead to a phase-out of all or some PCB-containing
equipment. The EPA has postponed the release of the revised regulations to June 2016. The Registrants cannot predict at this time
the outcome of these proposed EPA regulations and what impact, if any, they would have on their facilities, but the costs could
be significant.
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 conditions 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 matters. At March 31, 2016 and December 31, 2015, PPL Electric has a 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.
From time to time, PPL's subsidiaries undertake remedial action
in response to notices of violations, spills or other releases at various on-site and off-site locations, negotiate with the EPA
and state and local agencies regarding actions necessary for compliance with applicable requirements, negotiate with property owners
and other third parties alleging impacts from PPL's operations and undertake similar actions necessary to resolve environmental
matters that arise in the course of normal operations. Based on analyses to date, resolution of these environmental matters is
not expected to have a significant adverse impact on the operations of PPL 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.
Environmental
Matters - WPD
(PPL
)
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.
European Union Creosote Ban
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. If the U.K. were to pass an implementing
law, 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. It is not currently anticipated that the U.K. will adopt legislation to implement the creosote
ban.
Carbon Reduction Commitment
The U.K.'s Carbon Reduction Commitment is a binding law that requires
WPD to file reports regarding its carbon emissions and to purchase carbon allowances to offset emissions associated with WPD's
operations. Failure to do so subjects WPD to fines and penalties. The approximate annual cost of purchasing allowances is £400
thousand and is included in WPD's budgeted expenditures. WPD expects these costs to decrease as 18 fuel sources previously subject
to these reporting and emission allowance requirements have been exempted from these requirements. In addition, it is expected
that energy efficiency measures will continue to decrease WPD's carbon emissions.
Insulating Oil
In 2014, the U.K. Environment Agency interpreted the Waste
Framework Directive (a U.K. law) to classify electrical insulating oil as a hazardous waste. As a result, under the Hazardous
Waste Regulations 2005 all sites with electrical equipment (other than pole mounted transformers) must be individually
registered and licensed as a hazardous waste site, records must be maintained of all shipments of insulating oil to or from
those sites and appropriate personnel must be trained on the license requirements. WPD has submitted, or is in the process of
submitting, all required permit applications and is conducting training of WPD personnel as required. Compliance visits have
been undertaken by the U.K. Environment Agency with no significant findings or permit violations.
Discharge at Substation
In 2014, a leak from a cable joint at a substation resulted
in a discharge of a substance known as Linear Alkyl Benzene. The leak did not directly affect any third parties but
did reduce the use of River Rea. WPD has taken interim remedial measures and is developing an overall remedial action package
in collaboration with the U.K. Environment Agency. WPD has made a voluntary contribution of £25 thousand to a
public park under an agreement among WPD, the U.K. Environment Agency and a local wildlife trust. WPD expects to incur
additional costs to address this incident, including reimbursement of oversight costs incurred by the U.K. Environment
Agency, that are not expected to be significant.
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 March 31, 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 March 31, 2016, was
$24 million for PPL and $18 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
|
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Expiration
|
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|
March 31, 2016
|
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Date
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PPL
|
|
|
|
|
|
|
Indemnifications related to the WPD Midlands acquisition
|
|
|
|
(a)
|
|
|
WPD indemnifications for entities in liquidation and sales of assets
|
|
$
|
11
|
(b)
|
|
2019
|
WPD guarantee of pension and other obligations of unconsolidated entities
|
|
|
111
|
(c)
|
|
|
|
|
|
|
|
|
|
PPL Electric
|
|
|
|
|
|
|
Guarantee of inventory value
|
|
|
26
|
(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 March 31, 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 preliminary 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 $124 million at March
31, 2016, consisting of LG&E's share of $86 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.
PPL, on behalf of itself and certain of its subsidiaries, maintains
insurance that covers liability assumed under contract for bodily injury and property damage. The coverage provides maximum aggregate
coverage of $225 million. This insurance may be applicable to obligations under certain of these contractual arrangements.
11.
Related Party Transactions
PLR Contracts/Purchase
of Accounts Receivable
(PPL Electric)
PPL Electric holds competitive solicitations for PLR generation
supply. PPL EnergyPlus was awarded a portion of the PLR generation supply through these competitive solicitations. The purchases
from PPL EnergyPlus are included in PPL Electric's Statements of Income as "Energy purchases from affiliate" through
May 31, 2015, the period through which PPL Electric and PPL EnergyPlus were affiliated entities. 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.
Under the standard Default Service Supply Master Agreement for the
solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits.
Wholesale suppliers are required to post collateral with PPL Electric when: (a) the market price of electricity to be delivered
by the wholesale suppliers exceeds the contract price for the forecasted quantity of electricity to be delivered; and (b) this
market price exposure exceeds a contractual credit limit. In no instance is PPL Electric required to post collateral to suppliers
under these supply contracts.
PPL Electric's customers may choose an alternative supplier for
their generation supply. See Note 2 for additional information regarding PPL Electric's purchases of accounts receivable from alternative
suppliers, including Talen Energy Marketing.
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 March 31, 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
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Electric from PPL Services
|
|
|
|
|
|
|
|
$
|
37
|
|
$
|
30
|
LKE from PPL Services
|
|
|
|
|
|
|
|
|
5
|
|
|
4
|
PPL Electric from PPL EU Services
|
|
|
|
|
|
|
|
|
17
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LG&E from LKS
|
|
|
|
|
|
|
|
|
47
|
|
|
51
|
KU from LKS
|
|
|
|
|
|
|
|
|
56
|
|
|
56
|
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 March 31, 2016 and December 31,
2015, $147 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 March 31, 2016 and December 31, 2015 were 1.94% and 1.74%. Interest on the revolving line of credit was not significant
for the three months ended March 31, 2016 and 2015.
LKE has a $400 million ten-year note with a PPL affiliate with
an interest rate of 3.5%. At March 31, 2016, the note was reflected in "Long-term debt to affiliate" on the Balance
Sheet.
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 months ended
March 31, 2016 and 2015 consisted primarily of gains 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.
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 months ended March 31, 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:
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
PPL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
814
|
|
$
|
814
|
|
|
|
|
|
|
|
$
|
836
|
|
$
|
836
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents (a)
|
|
|
32
|
|
|
32
|
|
|
|
|
|
|
|
|
33
|
|
|
33
|
|
|
|
|
|
|
|
Price risk management assets (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
|
249
|
|
|
|
|
$
|
249
|
|
|
|
|
|
209
|
|
|
|
|
$
|
209
|
|
|
|
|
|
Cross-currency swaps
|
|
|
188
|
|
|
|
|
|
188
|
|
|
|
|
|
86
|
|
|
|
|
|
86
|
|
|
|
|
Total price risk management assets
|
|
|
437
|
|
|
|
|
|
437
|
|
|
|
|
|
295
|
|
|
|
|
|
295
|
|
|
|
|
Auction rate securities (c)
|
|
|
2
|
|
|
|
|
|
|
|
$
|
2
|
|
|
2
|
|
|
|
|
|
|
|
$
|
2
|
Total assets
|
|
$
|
1,285
|
|
$
|
846
|
|
$
|
437
|
|
$
|
2
|
|
$
|
1,166
|
|
$
|
869
|
|
$
|
295
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price risk management liabilities (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
95
|
|
|
|
|
$
|
95
|
|
|
|
|
$
|
71
|
|
|
|
|
$
|
71
|
|
|
|
|
|
Foreign currency contracts
|
|
|
3
|
|
|
|
|
|
3
|
|
|
|
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
Total price risk management liabilities
|
|
$
|
98
|
|
|
|
|
$
|
98
|
|
|
|
|
$
|
72
|
|
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Electric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34
|
|
$
|
34
|
|
|
|
|
|
|
|
$
|
47
|
|
$
|
47
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents (a)
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
Total assets
|
|
$
|
36
|
|
$
|
36
|
|
|
|
|
|
|
|
$
|
49
|
|
$
|
49
|
|
|
|
|
|
|
LKE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28
|
|
$
|
28
|
|
|
|
|
|
|
|
$
|
30
|
|
$
|
30
|
|
|
|
|
|
|
|
Cash collateral posted to counterparties (d)
|
|
|
8
|
|
|
8
|
|
|
|
|
|
|
|
|
9
|
|
|
9
|
|
|
|
|
|
|
Total assets
|
|
$
|
36
|
|
$
|
36
|
|
|
|
|
|
|
|
$
|
39
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price risk management liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
53
|
|
|
|
|
$
|
53
|
|
|
|
|
$
|
47
|
|
|
|
|
$
|
47
|
|
|
|
Total price risk management liabilities
|
|
$
|
53
|
|
|
|
|
$
|
53
|
|
|
|
|
$
|
47
|
|
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LG&E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11
|
|
$
|
11
|
|
|
|
|
|
|
|
$
|
19
|
|
$
|
19
|
|
|
|
|
|
|
|
Cash collateral posted to counterparties (d)
|
|
|
8
|
|
|
8
|
|
|
|
|
|
|
|
|
9
|
|
|
9
|
|
|
|
|
|
|
Total assets
|
|
$
|
19
|
|
$
|
19
|
|
|
|
|
|
|
|
$
|
28
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price risk management liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
53
|
|
|
|
|
$
|
53
|
|
|
|
|
$
|
47
|
|
|
|
|
$
|
47
|
|
|
|
Total price risk management liabilities
|
|
$
|
53
|
|
|
|
|
$
|
53
|
|
|
|
|
$
|
47
|
|
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
KU
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17
|
|
$
|
17
|
|
|
|
|
|
|
|
$
|
11
|
|
$
|
11
|
|
|
|
|
|
|
Total assets
|
|
$
|
17
|
|
$
|
17
|
|
|
|
|
|
|
|
$
|
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.
Financial
Instruments Not Recorded at Fair Value
(All Registrants)
The carrying
amounts of long-term debt on the Balance Sheets and their estimated fair values are set forth below. The fair values were estimated
using an income approach by discounting future cash flows at estimated current cost of funding rates, which incorporate the credit
risk of the Registrants. Long-term debt is classified as Level 2. The effect of third-party credit enhancements is not included
in the fair value measurement.
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
Carrying
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount (a)
|
|
Fair Value
|
|
Amount (a)
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL
|
|
$
|
18,559
|
|
$
|
21,046
|
|
$
|
19,048
|
|
$
|
21,218
|
PPL Electric
|
|
|
2,829
|
|
|
3,216
|
|
|
2,828
|
|
|
3,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LKE
|
|
|
5,088
|
|
|
5,625
|
|
|
5,088
|
|
|
5,384
|
LG&E
|
|
|
1,642
|
|
|
1,779
|
|
|
1,642
|
|
|
1,704
|
KU
|
|
|
2,326
|
|
|
2,587
|
|
|
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. LG&E utilizes over-the-counter interest rate swaps to limit exposure to market fluctuations on floating-rate debt. PPL,
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.
|
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 domestic subsidiaries as described below.
|
·
|
WPD is exposed to volumetric risk which is significantly mitigated
as a result of the method of regulation in the U.K.
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 $15 million of cash collateral under
master netting arrangements at March 31, 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 March 31, 2016 and December 31, 2015.
PPL, LKE and LG&E posted $8 million and $9 million of cash collateral
under master netting arrangements at March 31, 2016 and December 31, 2015.
KU did not post any cash collateral under master netting arrangements
at March 31, 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.
At March 31, 2016, PPL held an aggregate notional value in interest rate swap contracts of $300 million that range in maturity
through 2026.
At March 31, 2016, PPL held
an aggregate notional value in cross-currency interest rate swap contracts of $1.3 billion that range in maturity from 2016 through
2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.
For the three
months ended March 31, 2016 and 2015, PPL had no hedge 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.
For
the three months ended March 31, 2016, PPL had an insignificant amount of cash flow hedges reclassified into earnings associated
with discontinued cash flow hedges and no cash flow hedges reclassified into earnings associated with discontinued cash flow hedges
for the three months ended March 31, 2015.
At March
31, 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 March 31, 2016, LG&E held contracts
with a notional amount of $179 million that range in maturity through 2033.
Foreign
Currency Risk
(PPL)
PPL is exposed to foreign currency risk, primarily through investments
in and earnings of U.K. affiliates. PPL has adopted a foreign currency risk management program designed to hedge certain foreign
currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactions and net investments.
In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected GBP earnings.
Net Investment Hedges
PPL enters into foreign currency contracts on behalf of a subsidiary
to protect the value of a portion of its net investment in WPD. The contracts outstanding at March 31, 2016 had a notional amount
of £116 million (approximately $180 million based on contracted rates). The settlement dates of these contracts range from
April 2016 through June 2016.
At March 31, 2016, PPL had $21 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 March 31, 2016, the total exposure hedged by PPL was approximately
£2.0 billion (approximately $3.1 billion based on contracted rates). These contracts had termination dates ranging from April
2016 through November 2018.
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 March 31, 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.
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Derivatives designated as
|
|
Derivatives not designated
|
|
Derivatives designated as
|
|
Derivatives not designated
|
|
|
|
|
|
|
|
hedging instruments
|
|
as hedging instruments
|
|
hedging instruments
|
|
as hedging instruments
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Risk Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets/Liabilities (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (b)
|
|
|
|
|
$
|
42
|
|
|
|
|
$
|
6
|
|
|
|
|
$
|
24
|
|
|
|
|
$
|
5
|
|
|
|
Cross-currency swaps (b)
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts
|
|
|
12
|
|
|
|
|
$
|
100
|
|
|
3
|
|
|
10
|
|
|
|
|
$
|
94
|
|
|
1
|
|
|
|
|
|
Total current
|
|
|
83
|
|
|
42
|
|
|
100
|
|
|
9
|
|
|
45
|
|
|
24
|
|
|
94
|
|
|
6
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Risk Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets/Liabilities (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (b)
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
Cross-currency swaps (b)
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
Total noncurrent
|
|
|
117
|
|
|
|
|
|
137
|
|
|
47
|
|
|
51
|
|
|
|
|
|
105
|
|
|
42
|
Total derivatives
|
|
$
|
200
|
|
$
|
42
|
|
$
|
237
|
|
$
|
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 three months ended March 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
|
|
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Income
|
|
|
|
|
in Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on Derivative
|
|
Gain (Loss)
|
|
on Derivative
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
(Ineffective
|
|
Reclassifie
d
|
|
(Ineffective
|
|
|
|
|
|
|
|
|
Location of
|
|
Reclassifie
d
|
|
Portion and
|
|
from AOCI
|
|
Portion and
|
|
|
|
|
|
Derivative Gain
|
|
Gain (Loss)
|
|
from AOCI
|
|
Amount
|
|
into
|
|
Amount
|
|
|
|
|
|
(Loss) Recognized in
|
|
Recognized
|
|
into Income
|
|
Excluded from
|
|
Income
|
|
Excluded from
|
Derivative
|
|
OCI (Effective Portion)
|
|
|
in Income
|
(Effective
|
|
Effectivenes
s
|
|
(Effective
|
|
Effectiveness
|
Relationships
|
|
2016
|
|
2015
|
|
on Derivative
|
|
Portion)
|
|
Testing)
|
|
Portion)
|
|
Testing)
|
Cash Flow Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(18)
|
|
$
|
(19)
|
|
Interest expense
|
|
$
|
(1)
|
|
|
|
|
$
|
(4)
|
|
|
|
|
Cross-currency swaps
|
|
|
113
|
|
|
21
|
|
Interest expense
|
|
|
1
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(expense) - net
|
|
|
97
|
|
|
|
|
|
17
|
|
|
|
|
Commodity contracts
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
7
|
|
|
|
Total
|
|
$
|
95
|
|
$
|
2
|
|
|
|
|
$
|
97
|
|
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
3
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
|
|
Location of Gain (Loss) Recognized in
|
|
|
|
|
|
|
Hedging Instruments
|
|
Income on Derivative
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other income (expense) - net
|
|
$
|
60
|
|
$
|
88
|
Interest rate swaps
|
|
Interest expense
|
|
|
(2)
|
|
|
(2)
|
|
|
Total
|
|
$
|
58
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as
|
|
Location of Gain (Loss) Recognized as
|
|
|
|
|
|
|
Hedging Instruments
|
|
Regulatory Liabilities/Assets
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Regulatory assets- noncurrent
|
|
|
|
|
$
|
(56)
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
|
|
Location of Gain (Loss) Recognized as
|
|
|
|
|
|
|
Hedging Instruments
|
|
Regulatory Liabilities/Assets
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Regulatory assets - noncurrent
|
|
$
|
(6)
|
|
$
|
(4)
|
(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 March 31.
|
|
Location of Gain (Loss) Recognized in
|
|
|
|
|
|
|
Derivative Instruments
|
|
Regulatory Assets
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Regulatory assets - noncurrent
|
|
|
|
|
$
|
(56)
|
|
|
|
|
|
|
|
|
|
(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 March 31.
|
|
Location of Gain (Loss) Recognized in
|
|
|
|
|
|
|
Derivative Instruments
|
|
Regulatory Assets
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Regulatory assets - noncurrent
|
|
|
|
|
$
|
(28)
|
(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 March 31.
|
|
Location of Gain (Loss) Recognized in
|
|
|
|
|
|
|
Derivative Instruments
|
|
Regulatory Assets
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Regulatory assets - noncurrent
|
|
|
|
|
$
|
(28)
|
(LKE
and LG&E)
The following table presents the fair value and the location on
the Balance Sheets of derivatives not designated as hedging instruments.
|
|
|
|
|
|
|
March 31, 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
|
|
|
|
|
|
47
|
|
|
|
|
|
|
42
|
|
|
|
|
|
Total noncurrent
|
|
|
|
|
|
47
|
|
|
|
|
|
|
42
|
Total derivatives
|
|
|
|
|
$
|
53
|
|
|
|
|
|
$
|
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 March 31.
|
|
Location of Gain (Loss) Recognized in
|
|
|
|
|
Derivative Instruments
|
|
Income on Derivatives
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
(2)
|
|
$
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss) Recognized in
|
|
|
|
|
Derivative Instruments
|
|
Regulatory Assets
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Regulatory assets - noncurrent
|
|
$
|
(6)
|
|
$
|
(4)
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
Derivative
|
|
Collateral
|
|
|
|
|
|
|
|
Derivative
|
|
Collateral
|
|
|
|
|
|
|
Gross
|
|
Instruments
|
|
Received
|
|
Net
|
|
Gross
|
|
Instruments
|
|
Pledged
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL
|
|
$
|
437
|
|
$
|
45
|
|
$
|
15
|
|
$
|
377
|
|
$
|
98
|
|
$
|
45
|
|
$
|
8
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL
|
|
$
|
295
|
|
$
|
25
|
|
|
|
|
$
|
270
|
|
$
|
72
|
|
$
|
25
|
|
$
|
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 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
March 31, 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
|
|
$
|
30
|
|
$
|
30
|
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
|
|
|
22
|
|
|
22
|
|
(a)
|
Includes the effect of net receivables and payables already recorded
on the Balance Sheet.
|
15.
Goodwill
(PPL)
The change in the carrying amount of goodwill for the three months
ended March 31, 2016 was due to the effect of foreign currency exchange rates on the U.K. Regulated segment.
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
|
|
|
6
|
|
|
6
|
|
|
2
|
|
|
4
|
|
Effect of foreign currency exchange rates
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
Obligations settled
|
|
|
(1)
|
|
|
(1)
|
|
|
(1)
|
|
|
|
Balance at March 31, 2016
|
|
$
|
587
|
|
$
|
540
|
|
$
|
176
|
|
$
|
364
|
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.
17. Accumulated
Other Comprehensive Income (Loss)
(PPL)
The after-tax
changes in AOCI by component for the three month periods ended March 31 were as follows.
|
|
Foreign
|
|
Unrealized gains (losses)
|
|
|
|
|
Defined benefit plans
|
|
|
|
|
|
currency
|
|
Available-
|
|
|
|
|
Equity
|
|
Prior
|
|
Actuarial
|
|
|
|
|
|
translation
|
|
for-sale
|
|
Qualifying
|
|
investees'
|
|
service
|
|
gain
|
|
|
|
|
|
adjustments
|
|
securities
|
|
derivatives
|
|
AOCI
|
|
costs
|
|
(loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
$
|
(520)
|
|
|
|
|
$
|
(7)
|
|
|
|
|
$
|
(6)
|
|
$
|
(2,195)
|
|
$
|
(2,728)
|
Amounts arising during the period
|
|
(464)
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
(384)
|
Reclassifications from AOCI
|
|
|
|
|
|
|
|
(78)
|
|
|
|
|
|
|
|
|
31
|
|
|
(47)
|
Net OCI during the period
|
|
(464)
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
31
|
|
|
(431)
|
March 31, 2016
|
$
|
(984)
|
|
|
|
|
$
|
(5)
|
|
|
|
|
$
|
(6)
|
|
$
|
(2,164)
|
|
$
|
(3,159)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
$
|
(286)
|
|
$
|
201
|
|
$
|
20
|
|
$
|
1
|
|
$
|
3
|
|
$
|
(2,213)
|
|
$
|
(2,274)
|
Amounts arising during the period
|
|
(66)
|
|
|
5
|
|
|
6
|
|
|
|
|
|
|
|
|
(1)
|
|
|
(56)
|
Reclassifications from AOCI
|
|
|
|
|
(1)
|
|
|
(17)
|
|
|
(1)
|
|
|
|
|
|
38
|
|
|
19
|
Net OCI during the period
|
|
(66)
|
|
|
4
|
|
|
(11)
|
|
|
(1)
|
|
|
|
|
|
37
|
|
|
(37)
|
March 31, 2015
|
$
|
(352)
|
|
$
|
205
|
|
$
|
9
|
|
$
|
|
|
$
|
3
|
|
$
|
(2,176)
|
|
$
|
(2,311)
|
The
following table presents the gains (losses) and related income taxes for reclassifications from AOCI for the three month periods
ended March 31. The defined benefit plan components of AOCI are not reflected in their entirety in the Statement of Income during
the periods; rather, they are included in the computation of net periodic defined benefit costs (credits) and subject to capitalization.
See Note 9 for additional information.
|
|
|
Three Months
|
|
|
Affected Line Item on the
|
Details about AOCI
|
|
2016
|
|
2015
|
|
|
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
$
|
2
|
|
|
Other Income (Expense) - net
|
Total Pre-tax
|
|
|
|
|
|
2
|
|
|
|
Income Taxes
|
|
|
|
|
|
(1)
|
|
|
|
Total After-tax
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying derivatives
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(1)
|
|
|
(4)
|
|
|
Interest Expense
|
|
Cross-currency swaps
|
|
|
97
|
|
|
17
|
|
|
Other Income (Expense) - net
|
|
|
|
|
1
|
|
|
1
|
|
|
Interest Expense
|
|
Commodity contracts
|
|
|
|
|
|
7
|
|
|
Discontinued operations
|
Total Pre-tax
|
|
|
97
|
|
|
21
|
|
|
|
Income Taxes
|
|
|
(19)
|
|
|
(4)
|
|
|
|
Total After-tax
|
|
|
78
|
|
|
17
|
|
|
|
|
|
|
Three Months
|
|
|
Affected Line Item on the
|
Details about AOCI
|
|
2016
|
|
2015
|
|
|
Statements of Income
|
Equity investees' AOCI
|
|
|
|
|
|
2
|
|
|
Other Income (Expense) - net
|
Total Pre-tax
|
|
|
|
|
|
2
|
|
|
|
Income Taxes
|
|
|
|
|
|
(1)
|
|
|
|
Total After-tax
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
(40)
|
|
|
(51)
|
|
|
|
Total Pre-tax
|
|
|
(40)
|
|
|
(51)
|
|
|
|
Income Taxes
|
|
|
9
|
|
|
13
|
|
|
|
Total After-tax
|
|
|
(31)
|
|
|
(38)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications during the period
|
|
$
|
47
|
|
$
|
(19)
|
|
|
|
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 are currently assessing the impact of adopting this
guidance, as well as the transition method they will use.
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.
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, a description of key factors expected to
impact future earnings and a discussion of important financial and operational developments.
|
|
·
|
"Results of Operations" for PPL provides a detailed analysis of earnings by segment, and for
PPL
Electric, LKE, LG&E and KU,
includes a summary of earnings. For all Registrants, "Non-GAAP Financial Measures",
"Earnings from Ongoing Operations" and "Margins" provide explanations of non-GAAP measures used and reconciliations
to the most directly comparable GAAP measure. "Statement of Income Analysis" addresses significant changes in principal
line items on the Statements of Income, comparing the three months ended March 31, 2016 with the same period in 2015.
|
|
·
|
"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 and PPL Energy Supply 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*
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PPL Capital Funding
●
Provides financing for the operations of PPL and certain subsidiaries
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PPL Global
●
Engages in the regulated distribution of electricity in the U.K.
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LKE*
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PPL Electric*
●
Engages in the regulated transmission and distribution of electricity in Pennsylvania
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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
|
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U.K.
Regulated Segment
|
|
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Kentucky
Regulated Segment
|
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Pennsylvania
Regulated Segment
|
|
PPL's reportable segments' results primarily represent the results
of the Subsidiary Registrants, except that the reportable segments are also allocated certain corporate level financing and other
costs that are not included in the results of the applicable Subsidiary Registrants. The U.K. Regulated segment has no related
Subsidiary Registrant.
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 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.
Although rate base growth in the domestic utilities is expected
to result in strong earnings growth for the foreseeable future, PPL does not expect significant earnings growth from the U.K. Regulated
segment under the RIIO-ED1 price control period, which began on April 1, 2015. Although the U.K. Regulated segment also projects
strong RAV growth, earnings from this segment are expected to be relatively flat from 2015 to 2017 during the transition to RIIO-ED1.
Higher revenues resulting from the fast-track bonus are partially offset by higher levels of revenue profiling in the prior price
control period (DPCR5) and a lower return on regulatory equity. In addition, starting in 2017, the amount of incentive revenues
WPD is able to earn is expected to decline as a result of more stringent reliability and customer service targets established by
Ofgem under RIIO-ED1. 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. 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. 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 is hedged 93%, 89% and 41% for 2016, 2017 and 2018.
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.
(PPL)
Earnings generated by PPL's U.K. subsidiaries are subject to foreign
currency translation risk. The U.K. subsidiaries also have currency exposure to the U.S. dollar to the extent 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.
Financial and Operational
Developments
Earnings
(PPL)
PPL's earnings by reportable segments for the three month period
ended March 31 were as follows:
|
|
|
|
Three Months
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Regulated
|
|
|
$
|
289
|
|
$
|
375
|
|
$
|
(86)
|
Kentucky Regulated
|
|
|
|
112
|
|
|
109
|
|
|
3
|
Pennsylvania Regulated
|
|
|
|
94
|
|
|
87
|
|
|
7
|
Corporate and Other (a)
|
|
|
|
(14)
|
|
|
(19)
|
|
|
5
|
Discontinued Operations (b)
|
|
|
|
|
|
|
95
|
|
|
(95)
|
Net Income
|
|
|
$
|
481
|
|
$
|
647
|
|
$
|
(166)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
(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. See Note 8 to the Financial Statements for additional
information.
|
PPL's Earnings from Ongoing Operations by reportable segment for
the three month period ended March 31 were as follows:
|
|
|
Three Months
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Regulated
|
|
|
$
|
265
|
|
$
|
336
|
|
$
|
(71)
|
Kentucky Regulated
|
|
|
|
112
|
|
|
109
|
|
|
3
|
Pennsylvania Regulated
|
|
|
|
94
|
|
|
87
|
|
|
7
|
Corporate and Other (a)
|
|
|
|
(13)
|
|
|
(13)
|
|
|
|
Earnings from Ongoing Operations
|
|
|
$
|
458
|
|
$
|
519
|
|
$
|
(61)
|
See "Non-GAAP Financial Measures" below for PPL's definition
of Earnings from Ongoing Operations, as well as a reconciliation of this non-GAAP financial measure to Net Income.
See "Results of Operations" below for further discussion
of PPL's results of operations, details of special items by reportable segments and analysis of the consolidated results of operations.
2016 Outlook
(PPL)
Higher earnings from ongoing operations are expected in 2016 compared
with 2015. This increase is primarily attributable to increases in the Kentucky Regulated and Pennsylvania Regulated segments.
The following projections and factors underlying these projections (on an after-tax basis) are provided for PPL's segments and
the Corporate and Other category and the related Registrants.
(PPL's U.K. Regulated Segment)
Excluding special items, relatively flat earnings are projected
in 2016 compared with 2015, due to higher gross margins and lower operation and maintenance expense, including pension expense,
offset by higher financing costs, depreciation, taxes and other expenses and lower GBP to U.S. dollar exchange rates.
(PPL's Kentucky Regulated Segment and LKE, LG&E and KU)
Excluding special items, higher earnings are projected in 2016 compared
with 2015, primarily driven by electric and gas base rate increases effective July 1, 2015, and higher returns on additional environmental
capital investments, partially offset by higher depreciation and financing costs.
(PPL's Pennsylvania Regulated Segment and PPL Electric)
Excluding special items, higher earnings are projected in 2016 compared
with 2015, primarily driven by higher base electricity rates for distribution effective January 1, 2016, and higher transmission
margins, partially offset by higher depreciation, higher financing costs and a benefit received in 2015 from the release of a gross
receipts tax reserve.
(PPL's Corporate and Other Category)
Excluding special items, costs are projected to be relatively flat
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.
Other Financial
and Operational Developments
(PPL)
U.K. Membership in European Union
Significant uncertainty exists concerning the outcome of the forthcoming
June 23, 2016 referendum in the U.K. as to whether the U.K. will remain a member of the European Union and the impact that outcome
could have on the U.S. dollar to GBP foreign currency exchange rate, RPI and interest rates in the U.K. PPL is 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 is 93% hedged at an average rate of $1.54 per GBP. PPL, however, cannot predict the long-term
impact that a decision by the U.K. to leave the European Union would have on PPL's financial condition or results of operations,
although such impact could be significant.
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.
(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 March 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, together with the associated carrying cost will occur in the regulatory year beginning April 1, 2016. Under GAAP, WPD
does not record a receivable for under recovery of regulated income (which this reduction represents). As a result, earnings for
the U.K. Regulated segment were adversely affected by $15 million in 2015. PPL projects earnings in 2016 will be positively affected
by $32 million and earnings for 2017 will be positively affected by $17 million.
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 months ended March 31, 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 $0.01 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). Assuming interest rates continue to rise, the benefit is highest in the initial year and then falls
over time as the additional actuarial losses on liabilities are amortized. See "Application of Critical Accounting Policies-Defined
Benefits" in PPL's 2015 Form 10-K for additional information.
Results
of Operations
(PPL)
The discussion for PPL provides a review of results by reportable
segment. The "Non-GAAP Financial Measures" discussion provides explanations of non-GAAP financial measures and a reconciliation
of non-GAAP financial measures to the most comparable GAAP measure. The "Statement of Income Analysis" discussion addresses
significant changes in principal line items on PPL's Statements of Income, comparing the three months ended March 31, 2016 with
the same period in 2015. "Segment Earnings, Non-GAAP Financial Measures and Statement of Income Analysis" is presented
separately for PPL.
Tables analyzing changes in amounts between periods within "Segment
Earnings" and "Statement of Income Analysis" are presented on a constant U.K. foreign currency exchange rate basis,
where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained. Results computed
on a constant U.K. foreign currency exchange rate basis are calculated by translating current year results at the prior year weighted-average
U.K. foreign currency exchange rate.
(Subsidiary Registrants)
The discussion for each of PPL Electric, LKE, LG&E and KU provides
a summary of earnings. The "Margins" discussion includes a reconciliation of non-GAAP financial measures to "Operating
Income" and "Statement of Income Analysis" addresses significant changes in principal line items on the Statements
of Income comparing the three months ended March 31, 2016 with the same period in 2015. "Earnings, Margins and Statement of
Income Analysis" is presented separately for PPL Electric, LKE, LG&E and KU.
(All Registrants)
The results for interim periods can be disproportionately influenced
by numerous factors and developments and by seasonal variations. As such, the results of operations for interim periods do not
necessarily indicate results or trends for the year or future periods.
PPL Segment
Earnings, Non-GAAP Financial Measures and Statement of Income Analysis
Segment Earnings
U.K. Regulated Segment
The U.K. Regulated segment consists of PPL Global, which primarily
includes WPD's regulated electricity distribution operations, 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 60% of PPL's Net Income for the three months ended March 31, 2016 and 41% of PPL's assets at March
31, 2016.
Net Income and Earnings from Ongoing Operations for the periods
ended March 31 include the following results.
|
|
|
|
Three Months
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
$
|
595
|
|
$
|
697
|
|
$
|
(102)
|
Other operation and maintenance
|
|
|
|
97
|
|
|
110
|
|
|
(13)
|
Depreciation
|
|
|
|
60
|
|
|
59
|
|
|
1
|
Taxes, other than income
|
|
|
|
35
|
|
|
36
|
|
|
(1)
|
|
Total operating expenses
|
|
|
|
192
|
|
|
205
|
|
|
(13)
|
Other Income (Expense) - net
|
|
|
|
61
|
|
|
88
|
|
|
(27)
|
Interest Expense
|
|
|
|
106
|
|
|
100
|
|
|
6
|
Income Taxes
|
|
|
|
69
|
|
|
105
|
|
|
(36)
|
Net Income
|
|
|
|
289
|
|
|
375
|
|
|
(86)
|
Less: Special Items
|
|
|
|
24
|
|
|
39
|
|
|
(15)
|
Earnings from Ongoing Operations
|
|
|
$
|
265
|
|
$
|
336
|
|
$
|
(71)
|
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
three month period ended March 31.
|
|
|
|
Income Statement
|
|
Three Months
|
|
|
|
|
Line Item
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
Foreign currency-related economic hedges, net of tax of ($13), ($20) (a)
|
|
(Expense)-net
|
|
$
|
24
|
|
$
|
37
|
|
|
|
Other operation
|
|
|
|
|
|
|
WPD Midlands acquisition-related adjustment, net of tax of $0, ($1)
|
|
and maintenance
|
|
|
|
|
|
2
|
Total
|
|
|
|
$
|
24
|
|
$
|
39
|
|
(a)
|
Represents unrealized gains (losses) on contracts that economically hedge anticipated GBP-denominated earnings.
|
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.
|
|
|
|
Three Months
|
|
|
|
|
|
|
U.K.
|
|
|
|
|
|
Gross margins
|
|
|
$
|
(69)
|
|
Other operation and maintenance
|
|
|
|
11
|
|
Depreciation
|
|
|
|
(4)
|
|
Interest expense
|
|
|
|
(12)
|
|
Other
|
|
|
|
1
|
|
Income taxes
|
|
|
|
22
|
U.S.
|
|
|
|
|
|
Interest expense and other
|
|
|
|
(1)
|
|
Income taxes
|
|
|
|
1
|
Foreign currency exchange, after-tax
|
|
|
|
(20)
|
Earnings from Ongoing Operations
|
|
|
|
(71)
|
Special items, after-tax
|
|
|
|
(15)
|
Net Income
|
|
|
$
|
(86)
|
U.K.
·
See "Non-GAAP Financial Measures - Margins - Changes in Margins" for an explanation of U.K. Gross Margins.
|
·
|
Lower other operation and maintenance primarily due to $22 million from lower pension expense, partially offset by $8 million
from higher network maintenance expense.
|
·
Lower income taxes primarily due to lower pre-tax income.
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 23% of PPL's Net Income for the three months ended March 31, 2016 and 36% of PPL's assets at March 31, 2016.
Net Income and Earnings from Ongoing Operations for the periods
ended March 31 include the following results.
|
|
|
|
Three Months
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
$
|
826
|
|
$
|
899
|
|
$
|
(73)
|
Fuel
|
|
|
|
198
|
|
|
253
|
|
|
(55)
|
Energy purchases
|
|
|
|
66
|
|
|
92
|
|
|
(26)
|
Other operation and maintenance
|
|
|
|
202
|
|
|
209
|
|
|
(7)
|
Depreciation
|
|
|
|
99
|
|
|
95
|
|
|
4
|
Taxes, other than income
|
|
|
|
15
|
|
|
14
|
|
|
1
|
|
Total operating expenses
|
|
|
|
580
|
|
|
663
|
|
|
(83)
|
Other Income (Expense) - net
|
|
|
|
(1)
|
|
|
(1)
|
|
|
|
Interest Expense
|
|
|
|
65
|
|
|
55
|
|
|
10
|
Income Taxes
|
|
|
|
68
|
|
|
71
|
|
|
(3)
|
Net Income
|
|
|
|
112
|
|
|
109
|
|
|
3
|
Less: Special Items (a)
|
|
|
|
|
|
|
|
|
|
|
Earnings from Ongoing Operations
|
|
|
$
|
112
|
|
$
|
109
|
|
$
|
3
|
|
(a)
|
There are no items that management considers special for the periods presented.
|
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
on a separate line and not in their respective Statement of Income line items.
|
|
|
Three Months
|
|
|
|
|
|
Kentucky Gross Margins
|
|
|
$
|
3
|
Other operation and maintenance
|
|
|
|
7
|
Depreciation
|
|
|
|
1
|
Taxes, other than income
|
|
|
|
(1)
|
Interest Expense
|
|
|
|
(10)
|
Income Taxes
|
|
|
|
3
|
Net Income
|
|
|
$
|
3
|
|
·
|
See "Non-GAAP Financial Measures - Margins - Changes in Margins" for an explanation of Kentucky Gross Margins.
|
|
·
|
Higher interest expense 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.
|
|
·
|
Lower other operation and maintenance primarily due to lower coal plant operations and maintenance expense as a result of units
retired in 2015 at the Cane Run and Green River plants.
|
Pennsylvania Regulated Segment
The Pennsylvania Regulated segment includes the regulated electricity
transmission and distribution operations of PPL Electric. The Pennsylvania Regulated segment represents 20% of PPL's Net Income
for the three months ended March 31, 2016 and 23% of PPL's assets at March 31, 2016.
Net Income and Earnings from Ongoing Operations for the periods
ended March 31 include the following results.
|
|
|
|
Three Months
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
$
|
585
|
|
$
|
630
|
|
$
|
(45)
|
Energy purchases
|
|
|
|
|
|
|
|
|
|
|
|
External
|
|
|
|
167
|
|
|
227
|
|
|
(60)
|
|
Intersegment
|
|
|
|
|
|
|
9
|
|
|
(9)
|
Other operation and maintenance
|
|
|
|
150
|
|
|
133
|
|
|
17
|
Depreciation
|
|
|
|
59
|
|
|
51
|
|
|
8
|
Taxes, other than income
|
|
|
|
29
|
|
|
35
|
|
|
(6)
|
|
Total operating expenses
|
|
|
|
405
|
|
|
455
|
|
|
(50)
|
Other Income (Expense) - net
|
|
|
|
3
|
|
|
2
|
|
|
1
|
Interest Expense
|
|
|
|
33
|
|
|
31
|
|
|
2
|
Income Taxes
|
|
|
|
56
|
|
|
59
|
|
|
(3)
|
Net Income
|
|
|
|
94
|
|
|
87
|
|
|
7
|
Less: Special Items (a)
|
|
|
|
|
|
|
|
|
|
|
Earnings from Ongoing Operations
|
|
|
$
|
94
|
|
$
|
87
|
|
$
|
7
|
|
(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
|
|
|
|
|
|
Pennsylvania Gross Delivery Margins
|
|
|
$
|
30
|
Other operation and maintenance
|
|
|
|
(18)
|
Depreciation
|
|
|
|
(8)
|
Taxes, other than income
|
|
|
|
1
|
Other Income (Expense) - net
|
|
|
|
1
|
Interest Expense
|
|
|
|
(2)
|
Income Taxes
|
|
|
|
3
|
Net Income
|
|
|
$
|
7
|
|
·
|
See "Non-GAAP Financial Measures - Margins - Changes in Margins" for an explanation of Pennsylvania Gross Delivery
Margins.
|
|
·
|
Higher other operation and maintenance expense primarily due to $9 million of higher corporate service costs allocated to PPL
Electric, $4 million of higher costs for additional work done by outside vendors and $3 million of higher vegetation management
expenses.
|
|
·
|
Higher depreciation expense primarily due to transmission additions placed into service related to the ongoing efforts to improve
reliability and replace aging infrastructure, net of retirements.
|
Non-GAAP Financial Measures
Management's Discussion and Analysis includes financial information
prepared in accordance with GAAP, as well as non-GAAP financial measures including "Earnings from Ongoing Operations"
and "Gross Margins" as further described below.
Earnings from Ongoing Operations
Management utilizes "Earnings from Ongoing Operations"
as a non-GAAP financial measure and it should not be considered as an alternative to net income, which is 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. PPL's management also uses Earnings from Ongoing Operations in measuring certain corporate performance
goals. Other companies may use different measures to present financial performance.
Earnings from Ongoing Operations is adjusted for the impact of special
items. 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, not reflective of the company's ongoing operations.
Unrealized gains or losses on foreign currency-related economic
hedges include the changes in fair value of foreign currency contracts used to economically hedge GBP-denominated anticipated earnings.
The changes in fair value of these contracts each period 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.
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 three month periods ended March 31.
|
|
|
2016
|
|
|
|
U.K.
|
|
KY
|
|
PA
|
|
Corporate
|
|
Discontinued
|
|
|
|
|
|
Regulated
|
|
Regulated
|
|
Regulated
|
|
and Other
|
|
Operations
|
|
Total
|
Net Income (Loss)
|
$
|
289
|
|
$
|
112
|
|
$
|
94
|
|
$
|
(14)
|
|
|
|
|
$
|
481
|
Less: Special Items (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-related economic hedges
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
Spinoff of the Supply segment
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
(1)
|
Total Special Items
|
|
|
24
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
23
|
Earnings from Ongoing Operations
|
|
$
|
265
|
|
$
|
112
|
|
$
|
94
|
|
$
|
(13)
|
|
|
|
|
$
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
U.K.
|
|
KY
|
|
PA
|
|
Corporate
|
|
Discontinued
|
|
|
|
|
|
Regulated
|
|
Regulated
|
|
Regulated
|
|
and Other
|
|
Operations
|
|
Total
|
Net Income (Loss)
|
$
|
375
|
|
$
|
109
|
|
$
|
87
|
|
$
|
(19)
|
|
$
|
95
|
|
$
|
647
|
Less: Special Items (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency-related economic hedges
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
Spinoff of the Supply segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
|
|
|
95
|
|
Employee transitional services
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
|
|
|
(2)
|
|
Transition and transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
|
(3)
|
|
Separation benefits
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
(1)
|
WPD Midlands acquisition-related adjustment
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
Total Special Items
|
|
|
39
|
|
|
|
|
|
|
|
|
(6)
|
|
|
95
|
|
|
128
|
Earnings from Ongoing Operations
|
|
$
|
336
|
|
$
|
109
|
|
$
|
87
|
|
$
|
(13)
|
|
$
|
|
|
$
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 National Grid connection charges 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. 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.
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 March 31.
|
|
|
|
|
2016 Three Months
|
|
2015 Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K.
|
|
Kentucky
|
|
PA Gross
|
|
|
|
|
|
U.K.
|
|
Kentucky
|
|
PA Gross
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Delivery
|
|
|
|
Operating
|
|
Gross
|
|
Gross
|
|
Delivery
|
|
|
|
|
Operating
|
|
|
|
|
|
Margins
|
|
Margins
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
Margins
|
|
Margins
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
$
|
584
|
(c)
|
$
|
826
|
|
$
|
585
|
|
$
|
16
|
|
$
|
2,011
|
|
$
|
686
|
(c)
|
$
|
899
|
|
$
|
630
|
|
$
|
15
|
|
$
|
2,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
|
|
|
198
|
|
|
|
|
|
(1)
|
|
|
197
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
253
|
|
Energy purchases
|
|
|
|
|
66
|
|
|
167
|
|
|
|
|
|
233
|
|
|
|
|
|
92
|
|
|
227
|
|
|
10
|
|
|
329
|
|
Energy purchases from affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
(9)
|
|
|
|
|
Other operation and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maintenance
|
|
27
|
|
|
24
|
|
|
25
|
|
|
374
|
|
|
450
|
|
|
29
|
|
|
24
|
|
|
26
|
|
|
377
|
|
|
456
|
|
Depreciation
|
|
|
|
|
12
|
|
|
|
|
|
217
|
|
|
229
|
|
|
|
|
|
7
|
|
|
|
|
|
209
|
|
|
216
|
|
Taxes, other than income
|
|
|
|
|
1
|
|
|
28
|
|
|
50
|
|
|
79
|
|
|
|
|
|
1
|
|
|
33
|
|
|
52
|
|
|
86
|
|
|
|
Total Operating Expenses
|
|
27
|
|
|
301
|
|
|
220
|
|
|
640
|
|
|
1,188
|
|
|
29
|
|
|
377
|
|
|
295
|
|
|
639
|
|
|
1,340
|
Total
|
$
|
557
|
|
$
|
525
|
|
$
|
365
|
|
$
|
(624)
|
|
$
|
823
|
|
$
|
657
|
|
$
|
522
|
|
$
|
335
|
|
$
|
(624)
|
|
$
|
890
|
|
(a)
|
Represents amounts excluded from Margins.
|
|
(b)
|
As reported on the Statements of Income.
|
|
(c)
|
Excludes $11 million of ancillary revenues for the three months ended March 31, 2016 and 2015.
|
Changes in Margins
The following table shows Margins by PPL's reportable segment and
by component, as applicable, for the periods ended March 31 as well as the change between periods. The factors that gave rise to
the changes are described following the table.
|
|
|
Three Months
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
U.K.
|
|
|
|
|
|
|
|
|
|
|
U.K. Gross Margins
|
|
|
$
|
557
|
|
$
|
657
|
|
$
|
(100)
|
Impact of changes in foreign currency exchange rates
|
|
|
|
|
|
|
|
|
|
(31)
|
Change in U.K. Gross Margins excluding impact of foreign currency exchange rates
|
|
|
|
|
|
|
|
$
|
(69)
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky Regulated
|
|
|
|
|
|
|
|
|
|
|
Kentucky Gross Margins
|
|
|
|
|
|
|
|
|
|
|
|
LG&E
|
|
|
$
|
228
|
|
$
|
230
|
|
$
|
(2)
|
|
KU
|
|
|
|
297
|
|
|
292
|
|
|
5
|
LKE
|
|
|
$
|
525
|
|
$
|
522
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania Regulated
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania Gross Delivery Margins
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
|
$
|
258
|
|
$
|
242
|
|
$
|
16
|
|
Transmission
|
|
|
|
107
|
|
|
93
|
|
|
14
|
Total
|
|
|
$
|
365
|
|
$
|
335
|
|
$
|
30
|
U.K. Gross Margins
U.K. Gross Margins, excluding the impact of changes in foreign currency
exchange rates, decreased primarily due to $69 million from the April 1, 2015 price decrease resulting
from the commencement of RIIO-ED1 and lower volumes of $16 million due to milder weather during the first quarter of 2016 partially
offset by $16 million of other revenue adjustments.
Kentucky Gross Margins
Kentucky Gross Margins increased primarily due to higher base rates
of $36 million ($33 million at KU and $3 million at LG&E). The increase in base rates was the result of new rates approved
by the KPSC effective July 1, 2015. The increase was partially offset by a decrease in sales volumes of $29 million ($19 million
at KU and $10 million at LG&E) driven by milder weather during the first quarter of 2016.
Pennsylvania Gross Delivery Margins
Distribution
Distribution margins increased primarily due to $39 million of higher
base rates, effective January 1, 2016 as a result of the 2015 rate case, partially offset by a $23 million unfavorable impact of
milder weather in the first quarter of 2016.
Transmission
Transmission margins increased primarily due to returns on additional
capital investments focused on replacing aging infrastructure and improving reliability.
Statement of Income Analysis --
Certain Operating Revenues and Expenses Included in "Margins"
The following Statement of Income line items and their related decreases
during the period ended March 31, 2016 compared with 2015 are included above within "Margins" and are not separately
discussed.
|
|
|
|
Three Months
|
|
|
|
|
|
|
Operating Revenues
|
|
|
$
|
(219)
|
Fuel
|
|
|
|
(56)
|
Energy purchases
|
|
|
|
(96)
|
Other Operation and Maintenance
|
|
|
|
|
|
|
|
|
|
|
|
The increase (decrease) in other operation and maintenance for the period ended March 31, 2016 compared with 2015 was due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
Domestic:
|
|
|
|
|
|
LKE coal plant operations and maintenance
|
|
|
$
|
(7)
|
|
LKE pension
|
|
|
|
(4)
|
|
PPL Electric Act 129 costs incurred
|
|
|
|
(4)
|
|
PPL Electric vegetation management
|
|
|
|
3
|
|
PPL Electric payroll-related costs
|
|
|
|
(3)
|
|
PPL Electric contractor-related expenses
|
|
|
|
5
|
|
PPL Electric storm costs
|
|
|
|
3
|
|
Corporate costs previously included in discontinued operations (a)
|
|
|
|
9
|
|
Other
|
|
|
|
5
|
U.K.:
|
|
|
|
|
|
Network maintenance
|
|
|
|
8
|
|
Pension expense
|
|
|
|
(22)
|
|
Foreign currency exchange rates (b)
|
|
|
|
(5)
|
|
Other
|
|
|
|
6
|
Total
|
|
|
$
|
(6)
|
|
(a)
|
The increase in 2016 compared with 2015 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.
|
|
(b)
|
The offsetting impacts from foreign currency hedging instruments are recorded in "Other Income (Expense)- net."
|
Depreciation
Depreciation increased by $13 million for the three months ended
March 31, 2016 compared with 2015, primarily due to additional assets placed into service, primarily at the domestic utilities,
net of retirements.
Other Income (Expense) - net
Other income (expense) - net decreased by $27 million for the three
months ended March 31, 2016 compared with 2015, primarily due to changes in realized and unrealized gains on foreign currency contracts
to economically hedge GBP denominated earnings from WPD.
Interest Expense
|
|
|
|
|
|
|
|
|
|
The increase (decrease) in interest expense for the period ended March 31, 2016 compared with 2015 was due to:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Long-term debt interest expense (a)
|
|
|
$
|
23
|
Foreign currency exchange rates
|
|
|
|
(5)
|
Other
|
|
|
|
(3)
|
Total
|
|
|
$
|
15
|
|
(a)
|
The increase was primarily due to debt issuances at WPD in November 2015, PPL Electric in October 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 period ended March 31, 2016 compared with 2015 was due to:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Change in pre-tax income at current period tax rates
|
|
|
$
|
(39)
|
Impact of U.K. income tax rates
|
|
|
|
8
|
Stock-based compensation (a)
|
|
|
|
(
8
)
|
Other
|
|
|
|
1
|
Total
|
|
|
$
|
(38)
|
|
(a)
|
During the three months ended March 31, 2016, PPL recorded an $8 million tax benefit 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.
PPL Electric:
Earnings, Margins and Statement of Income Analysis
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
$
|
94
|
|
$
|
87
|
Special item, 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 distribution margins, primarily as a result of higher base rates effective January 1, 2016 and higher
transmission margins, primarily due to returns on additional capital investments, partially offset by the impact of unfavorable
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
|
|
|
|
|
|
Pennsylvania Gross Delivery Margins
|
|
|
$
|
30
|
Other operation and maintenance
|
|
|
|
(18)
|
Depreciation
|
|
|
|
(8)
|
Taxes, other than income
|
|
|
|
1
|
Other Income (Expense) - net
|
|
|
|
1
|
Interest Expense
|
|
|
|
(2)
|
Income Taxes
|
|
|
|
3
|
Net Income
|
|
|
$
|
7
|
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
- Non-GAAP Financial Measures - 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 March 31.
|
|
|
|
|
2016 Three Months
|
|
2015 Three Months
|
|
|
|
|
|
PA Gross
|
|
|
|
|
|
|
PA Gross
|
|
|
|
|
|
|
|
|
|
|
Delivery
|
|
|
|
Operating
|
|
Delivery
|
|
|
|
|
Operating
|
|
|
|
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
Operating Revenues
|
$
|
585
|
|
|
|
|
$
|
585
|
|
$
|
630
|
|
|
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy purchases
|
|
167
|
|
|
|
|
|
167
|
|
|
227
|
|
|
|
|
|
227
|
|
Energy purchases from affiliate
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
9
|
|
Other operation and maintenance
|
|
25
|
|
$
|
125
|
|
|
150
|
|
|
26
|
|
$
|
107
|
|
|
133
|
|
Depreciation
|
|
|
|
|
59
|
|
|
59
|
|
|
|
|
|
51
|
|
|
51
|
|
Taxes, other than income
|
|
28
|
|
|
1
|
|
|
29
|
|
|
33
|
|
|
2
|
|
|
35
|
|
|
|
Total Operating Expenses
|
|
220
|
|
|
185
|
|
|
405
|
|
|
295
|
|
|
160
|
|
|
455
|
Total
|
$
|
365
|
|
$
|
(185)
|
|
$
|
180
|
|
$
|
335
|
|
$
|
(160)
|
|
$
|
175
|
|
(a)
|
Represents amounts excluded from Margins.
|
|
(b)
|
As reported on the Statements of Income.
|
Statement of Income Analysis --
Certain Operating Revenues and Expenses Included in "Margins"
The following Statement of Income line items and their related decrease
during the period ended March 31, 2016 compared with 2015 are included above within "Margins" and are not separately
discussed.
|
|
|
|
Three Months
|
|
|
|
|
|
|
Operating revenues
|
|
|
$
|
(45)
|
Energy purchases
|
|
|
|
(60)
|
Energy purchases from affiliate
|
|
|
|
(9)
|
Other Operation and Maintenance
|
|
|
|
|
|
|
|
|
|
|
The increase (decrease) in other operation and maintenance for the period ended March 31, 2016 compared with 2015 was due to:
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Corporate service costs
|
|
|
$
|
9
|
Contractor-related expenses
|
|
|
|
5
|
Vegetation management
|
|
|
|
3
|
Storm costs
|
|
|
|
3
|
Payroll-related costs
|
|
|
|
(3)
|
Act 129
|
|
|
|
(4)
|
Other
|
|
|
|
4
|
Total
|
|
|
$
|
17
|
Depreciation
Depreciation increased by $8 million for the three months ended
March 31, 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 $6 million for the three months
ended March 31, 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."
Interest Expense
Interest expense increased by $2 million for the three months ended
March 31, 2016 compared with 2015, primarily due to the issuance of first mortgage bonds in October 2015.
Income Taxes
|
|
|
|
|
|
|
|
|
|
The increase (decrease) in income taxes for the period ended March 31, 2016 compared with 2015 was due to:
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Change in pre-tax income at current period tax rates
|
|
|
$
|
2
|
Stock-based compensation (a)
|
|
|
|
(5)
|
Total
|
|
|
$
|
(3)
|
|
(a)
|
During the three months ended March 31, 2016, PPL Electric recorded a $5 million tax benefit 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.
LKE: Earnings,
Margins and Statement of Income Analysis
Earnings
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
$
|
120
|
|
$
|
117
|
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 lower sales volumes, due to unfavorable weather, and higher financing costs.
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
|
|
|
|
|
|
Margins
|
|
|
$
|
3
|
Other operation and maintenance
|
|
|
|
7
|
Depreciation
|
|
|
|
1
|
Taxes, other than income
|
|
|
|
(1)
|
Interest expense
|
|
|
|
(11)
|
Income taxes
|
|
|
|
4
|
Total
|
|
|
$
|
3
|
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 - Non-GAAP Financial
Measures - 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 March 31.
|
|
|
|
|
|
2016 Three Months
|
|
|
2015 Three Months
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
826
|
|
|
|
|
$
|
826
|
|
|
$
|
899
|
|
|
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
|
198
|
|
|
|
|
|
198
|
|
|
|
253
|
|
|
|
|
|
253
|
|
Energy purchases
|
|
|
66
|
|
|
|
|
|
66
|
|
|
|
92
|
|
|
|
|
|
92
|
|
Other operation and maintenance
|
|
|
24
|
|
$
|
178
|
|
|
202
|
|
|
|
24
|
|
$
|
185
|
|
|
209
|
|
Depreciation
|
|
|
12
|
|
|
87
|
|
|
99
|
|
|
|
7
|
|
|
88
|
|
|
95
|
|
Taxes, other than income
|
|
|
1
|
|
|
14
|
|
|
15
|
|
|
|
1
|
|
|
13
|
|
|
14
|
|
|
|
Total Operating Expenses
|
|
|
301
|
|
|
279
|
|
|
580
|
|
|
|
377
|
|
|
286
|
|
|
663
|
Total
|
|
$
|
525
|
|
$
|
(279)
|
|
$
|
246
|
|
|
$
|
522
|
|
$
|
(286)
|
|
$
|
236
|
|
(a)
|
Represents amounts excluded from Margins.
|
|
(b)
|
As reported on the Statements of Income.
|
Statement of Income Analysis --
Certain Operating Revenues and Expenses included in "Margins"
The following Statement of Income line items and their related decrease
during the period ended March 31, 2016 compared with 2015 are included above within "Margins" and are not separately
discussed.
|
|
|
Three Months
|
|
|
|
|
|
Operating revenues
|
|
|
$
|
(73)
|
Fuel
|
|
|
|
(55)
|
Energy purchases
|
|
|
|
(26)
|
Other Operation and Maintenance
|
|
|
|
|
|
|
|
|
|
|
The decrease in other operation and maintenance for the period ended March 31, 2016 compared with 2015 was due to:
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Coal plant operations and maintenance
|
|
|
$
|
(7)
|
Pension
|
|
|
|
(4)
|
Other
|
|
|
|
4
|
Total
|
|
|
$
|
(7)
|
Interest Expense
Interest expense increased $11 million for the three months ended
March 31, 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.
LG&E: Earnings,
Margins and Statement of Income Analysis
Earnings
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
$
|
56
|
|
$
|
53
|
Earnings increased for the three month period in 2016 compared with
2015 primarily due to lower other operation and maintenance and lower depreciation partially offset by lower sales volumes, due
to unfavorable weather, and higher financing costs.
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
|
|
|
|
|
|
Margins
|
|
|
$
|
(2)
|
Other operation and maintenance
|
|
|
|
7
|
Depreciation
|
|
|
|
4
|
Taxes, other than income
|
|
|
|
(1)
|
Other income (expense) - net
|
|
|
|
1
|
Interest expense
|
|
|
|
(4)
|
Income taxes
|
|
|
|
(2)
|
Total
|
|
|
$
|
3
|
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 - Non-GAAP Financial
Measures - 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 March 31.
|
|
|
|
|
|
2016 Three Months
|
|
|
2015 Three Months
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
386
|
|
|
|
|
$
|
386
|
|
|
$
|
439
|
|
|
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
|
78
|
|
|
|
|
|
78
|
|
|
|
103
|
|
|
|
|
|
103
|
|
Energy purchases, including affiliate
|
|
|
64
|
|
|
|
|
|
64
|
|
|
|
91
|
|
|
|
|
|
91
|
|
Other operation and maintenance
|
|
|
9
|
|
$
|
78
|
|
|
87
|
|
|
|
11
|
|
$
|
85
|
|
|
96
|
|
Depreciation
|
|
|
6
|
|
|
35
|
|
|
41
|
|
|
|
3
|
|
|
39
|
|
|
42
|
|
Taxes, other than income
|
|
|
1
|
|
|
7
|
|
|
8
|
|
|
|
1
|
|
|
6
|
|
|
7
|
|
|
|
Total Operating Expenses
|
|
|
158
|
|
|
120
|
|
|
278
|
|
|
|
209
|
|
|
130
|
|
|
339
|
Total
|
|
$
|
228
|
|
$
|
(120)
|
|
$
|
108
|
|
|
$
|
230
|
|
$
|
(130)
|
|
$
|
100
|
|
(a)
|
Represents amounts excluded from Margins.
|
|
(b)
|
As reported on the Statements of Income.
|
Statement of Income Analysis --
Certain Operating Revenues and Expenses included in "Margins"
The following Statement of Income line items and their related decrease
during the period ended March 31, 2016 compared with 2015 are included above within "Margins" and are not separately
discussed.
|
|
|
Three Months
|
|
|
|
|
|
Retail and wholesale
|
|
|
$
|
(42)
|
Electric revenue from affiliate
|
|
|
|
(11)
|
Fuel
|
|
|
|
(25)
|
Energy purchases
|
|
|
|
(26)
|
Energy purchases from affiliate
|
|
|
|
(1)
|
Other Operation and Maintenance
|
|
|
|
|
|
|
|
|
|
|
The decrease in other operation and maintenance for the period ended March 31, 2016 compared with 2015 was due to:
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Coal plant operations and maintenance
|
|
|
$
|
(7)
|
Other
|
|
|
|
(2)
|
Total
|
|
|
$
|
(9)
|
Interest Expense
Interest expense increased $4 million for the three months ended
March 31, 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.
KU: Earnings,
Margins and Statement of Income Analysis
Earnings
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
$
|
75
|
|
$
|
78
|
Earnings decreased for the three month period in 2016 compared with
2015 primarily due to lower sales volumes, due to unfavorable weather, and higher financing costs partially offset by higher base
electricity rates effective July 1, 2015.
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
|
|
|
|
|
|
Margins
|
|
|
$
|
5
|
Depreciation
|
|
|
|
(3)
|
Other income (expense)- net
|
|
|
|
(1)
|
Interest expense
|
|
|
|
(5)
|
Income taxes
|
|
|
|
1
|
Total
|
|
|
$
|
(3)
|
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 - Non-GAAP Financial
Measures - Margins" for an explanation of why management believes this measure is useful 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 March 31.
|
|
|
|
|
|
2016 Three Months
|
|
|
2015 Three Months
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
|
Margins
|
|
Other (a)
|
|
Income (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
453
|
|
|
|
|
$
|
453
|
|
|
$
|
485
|
|
|
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
|
|
|
120
|
|
|
|
|
|
120
|
|
|
|
150
|
|
|
|
|
|
150
|
|
Energy purchases, including affiliate
|
|
|
15
|
|
|
|
|
|
15
|
|
|
|
26
|
|
|
|
|
|
26
|
|
Other operation and maintenance
|
|
|
15
|
|
$
|
91
|
|
|
106
|
|
|
|
13
|
|
$
|
91
|
|
|
104
|
|
Depreciation
|
|
|
6
|
|
|
52
|
|
|
58
|
|
|
|
4
|
|
|
49
|
|
|
53
|
|
Taxes, other than income
|
|
|
|
|
|
7
|
|
|
7
|
|
|
|
|
|
|
7
|
|
|
7
|
|
|
|
Total Operating Expenses
|
|
|
156
|
|
|
150
|
|
|
306
|
|
|
|
193
|
|
|
147
|
|
|
340
|
Total
|
|
$
|
297
|
|
$
|
(150)
|
|
$
|
147
|
|
|
$
|
292
|
|
$
|
(147)
|
|
$
|
145
|
|
(a)
|
Represents amounts excluded from Margins.
|
|
(b)
|
As reported on the Statements of Income.
|
Statement of Income Analysis --
Certain Operating Revenues and Expenses included in "Margins"
The following Statement of Income line items and their related decrease
during the period ended March 31, 2016 compared with 2015 are included above within "Margins" and are not separately
discussed.
|
|
|
Three Months
|
|
|
|
|
|
Retail and wholesale
|
|
|
$
|
(31)
|
Electric revenue from affiliate
|
|
|
|
(1)
|
Fuel
|
|
|
|
(30)
|
Energy purchases from affiliate
|
|
|
|
(11)
|
Depreciation
Depreciation increased $5 million for the three months ended March
31, 2016 compared with 2015 primarily due to additional assets placed into service, net of retirements.
Interest Expense
Interest expense increased $5 million for the three months ended
March 31, 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(All Registrants)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Registrants had the following at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL (a)
|
|
PPL Electric
|
|
LKE
|
|
LG&E
|
|
KU
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
814
|
|
$
|
34
|
|
$
|
28
|
|
$
|
11
|
|
$
|
17
|
Short-term debt
|
|
|
1,265
|
|
|
125
|
|
|
116
|
|
|
82
|
|
|
34
|
Notes payable with affiliate
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2016, $452 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 three month periods ended March 31, and the changes between periods, were as follows.
|
|
PPL
|
|
PPL Electric
|
|
LKE
|
|
LG&E
|
|
KU
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
557
|
|
$
|
124
|
|
$
|
303
|
|
$
|
157
|
|
$
|
195
|
Investing activities
|
|
|
(661)
|
|
|
(215)
|
|
|
(219)
|
|
|
(109)
|
|
|
(110)
|
Financing activities
|
|
|
115
|
|
|
78
|
|
|
(86)
|
|
|
(56)
|
|
|
(79)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
452
|
|
$
|
(45)
|
|
$
|
451
|
|
$
|
251
|
|
$
|
229
|
Investing activities
|
|
|
(860)
|
|
|
(225)
|
|
|
(317)
|
|
|
(173)
|
|
|
(144)
|
Financing activities
|
|
|
(66)
|
|
|
91
|
|
|
(115)
|
|
|
(71)
|
|
|
(73)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change - Cash Provided (Used)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
105
|
|
$
|
169
|
|
$
|
(148)
|
|
$
|
(94)
|
|
$
|
(34)
|
Investing activities
|
|
|
199
|
|
|
10
|
|
|
98
|
|
|
64
|
|
|
34
|
Financing activities
|
|
|
181
|
|
|
(13)
|
|
|
29
|
|
|
15
|
|
|
(6)
|
Operating Activities
The components of the change in cash provided by (used in) operating
activities for the three months ended March 31, 2016 compared with 2015 were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL
|
|
PPL Electric
|
|
LKE
|
|
LG&E
|
|
KU
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change - Cash Provided (Used)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(71)
|
|
$
|
7
|
|
$
|
3
|
|
$
|
3
|
|
$
|
(3)
|
|
|
Non-cash components
|
|
|
57
|
|
|
65
|
|
|
(23)
|
|
|
(10)
|
|
|
4
|
|
|
Working capital
|
|
|
78
|
|
|
76
|
|
|
(148)
|
|
|
(98)
|
|
|
(41)
|
|
|
Defined benefit plan funding
|
|
|
74
|
|
|
33
|
|
|
20
|
|
|
9
|
|
|
5
|
|
|
Other operating activities
|
|
|
(33)
|
|
|
(12)
|
|
|
|
|
|
2
|
|
|
1
|
Total
|
|
$
|
105
|
|
$
|
169
|
|
$
|
(148)
|
|
$
|
(94)
|
|
$
|
(34)
|
(PPL)
PPL's cash provided by operating activities from continuing operations
in 2016 increased $105 million in 2016 compared with 2015.
|
·
|
Income from continuing operations decreased by $71 million between the periods. This was offset by an increase of $57 million
in non-cash components. The net $14 million decrease from net income and non-cash components in 2016 compared with 2015 reflects
lower U.K. gross margins, partially offset by higher Pennsylvania gross delivery margins.
|
|
·
|
The $78 million increase in cash from changes in working capital was primarily due to lower growth in accounts receivable,
primarily due to milder winter weather in 2016.
|
|
·
|
Defined benefit plan funding was $74 million lower in 2016.
|
(PPL Electric)
PPL Electric's cash provided by operating activities in 2016 increased
$169 million compared with 2015.
|
·
|
The net increase in non-cash components of $65 million in 2016 compared with 2015 is primarily
due to an increase in deferred income taxes, primarily due to an increase related to book versus tax plant timing differences.
|
|
·
|
T
he $76 million increase in cash from changes in working capital was primarily due
to lower growth in accounts receivable and a lower decline in accounts payable, due to timing of payments.
|
|
·
|
Defined benefit plan funding was $33 million lower in 2016.
|
(LKE)
LKE's cash provided by operating activities in 2016 decreased $148
million compared with 2015.
|
·
|
The decrease in cash from working capital was driven primarily by a lower payment received from PPL for the use of prior year
excess tax depreciation deductions.
|
(LG&E)
LG&E's cash provided by operating activities in 2016 decreased
$94 million compared with 2015.
|
·
|
The decrease in cash from working capital was driven primarily by a lower payment received from LKE for the use of prior year
excess tax depreciation deductions.
|
(KU)
KU's cash provided by operating activities in 2016 decreased $34
million compared with 2015.
|
·
|
The decrease in cash from working capital was driven primarily by a lower payment received from LKE for the use of prior year
excess tax depreciation deductions.
|
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 three months ended March 31, 2016 compared with 2015 was as follows.
|
|
PPL
|
|
PPL Electric
|
|
LKE
|
|
LG&E
|
|
KU
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
|
|
$
|
177
|
|
$
|
10
|
|
$
|
102
|
|
$
|
64
|
|
$
|
38
|
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 near completion of the Northeast Pocono reliability project. The decrease in expenditures for LG&E was primarily
due to the environmental air projects at LG&E's Mill Creek plant. The decrease in expenditures for KU was related to 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 three months ended March 31, 2016 compared with 2015 was as follows.
|
|
|
PPL
|
|
PPL Electric
|
|
LKE
|
|
LG&E
|
|
KU
|
Change - Cash Provided (Used)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuances/redemptions, net
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
(5)
|
|
$
|
(1)
|
|
|
|
|
$
|
(2)
|
|
$
|
(34)
|
|
Capital contributions/distributions, net
|
|
|
|
|
|
(50)
|
|
$
|
(6)
|
|
|
30
|
|
|
|
|
Change in short-term debt, net
|
|
|
188
|
|
|
40
|
|
|
(58)
|
|
|
(12)
|
|
|
29
|
|
Notes payable with affiliate
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
Other financing activities
|
|
|
(9)
|
|
|
(2)
|
|
|
(1)
|
|
|
(1)
|
|
|
(1)
|
|
Total
|
|
$
|
181
|
|
$
|
(13)
|
|
$
|
29
|
|
$
|
15
|
|
$
|
(6)
|
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
March 31, 2016, the total committed borrowing capacity and the use
of that capacity under these credit facilities was as follows:
External
|
|
|
|
|
|
|
|
|
Letters of
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Committed
|
|
|
|
Commercial
|
|
Unused
|
|
|
|
Capacity
|
|
Borrowed
|
|
Paper Issued
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
PPL Capital Funding Credit Facilities
|
|
$
|
1,150
|
|
|
|
|
$
|
790
|
|
$
|
360
|
PPL Electric Credit Facility
|
|
|
400
|
|
|
|
|
|
126
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LKE Credit Facility
|
|
|
75
|
|
|
|
|
|
|
|
|
75
|
LG&E Credit Facility
|
|
|
500
|
|
|
|
|
|
82
|
|
|
418
|
KU Credit Facilities
|
|
|
598
|
|
|
|
|
|
232
|
|
|
366
|
Total LKE
|
|
|
1,173
|
|
|
|
|
|
314
|
|
|
859
|
|
Total U.S. Credit Facilities (a)
|
|
$
|
2,723
|
|
|
|
|
$
|
1,230
|
|
$
|
1,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.K. Credit Facilities (b)
|
|
£
|
1,055
|
|
£
|
181
|
|
|
|
|
£
|
880
|
|
(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 March 31, 2016 were a USD-denominated borrowing of $200 million and a GPB-denominated borrowing which
equated to $51 million. The unused capacity reflects the USD-denominated borrowing amount borrowed in GBP of £138 million
as of the date borrowed. At March 31, 2016, the USD equivalent of unused capacity under the U.K. committed credit facilities was
$1.2 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
|
|
|
|
Other Used
|
|
Unused
|
|
|
Capacity
|
|
Borrowed
|
|
Capacity
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LKE Credit Facility
|
|
$
|
225
|
|
$
|
147
|
|
|
|
|
$
|
78
|
LG&E Money Pool (a)
|
|
|
500
|
|
|
|
|
$
|
82
|
|
|
418
|
KU Money Pool (a)
|
|
|
500
|
|
|
|
|
|
34
|
|
|
466
|
|
(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 March 31, 2016:
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Paper
|
|
Unused
|
|
|
|
Capacity
|
|
Issuances
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
PPL Capital Funding
|
|
$
|
1,000
|
|
$
|
773
|
|
$
|
227
|
PPL Electric
|
|
|
400
|
|
|
125
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
LG&E
|
|
|
350
|
|
|
82
|
|
|
268
|
KU
|
|
|
|
350
|
|
|
34
|
|
|
316
|
Total LKE
|
|
|
700
|
|
|
116
|
|
|
584
|
|
Total PPL
|
|
$
|
2,100
|
|
$
|
1,014
|
|
$
|
1,086
|
Long-term Debt
(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 periods ended March 31, 2016 and 2015, PPL did not issue
any shares under the program.
Common Stock Dividends
In February 2016, PPL declared a quarterly common stock dividend,
payable April 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 be dependent upon future earnings, cash flows, financial and legal requirements and other factors.
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.
(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 March 31, 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.
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 March 31,
2016.
|
|
|
|
|
|
|
|
|
Effect of a
|
|
|
|
|
|
|
|
|
Fair Value,
|
|
10% Adverse
|
|
Maturities
|
|
|
|
Exposure
|
|
Net - Asset
|
|
Movement
|
|
Ranging
|
|
|
|
Hedged
|
|
(Liability) (a)
|
|
in Rates (b)
|
|
Through
|
PPL
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (c)
|
|
$
|
300
|
|
$
|
(42)
|
|
$
|
(5)
|
|
2026
|
|
Cross-currency swaps (d)
|
|
|
1,262
|
|
|
189
|
|
|
(141)
|
|
2028
|
Economic hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (e)
|
|
|
179
|
|
|
(54)
|
|
|
(2)
|
|
2033
|
LKE
|
|
|
|
|
|
|
|
|
|
|
|
Economic hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (e)
|
|
|
179
|
|
|
(54)
|
|
|
(2)
|
|
2033
|
LG&E
|
|
|
|
|
|
|
|
|
|
|
|
Economic hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (e)
|
|
|
179
|
|
|
(54)
|
|
|
(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)
|
Changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or regulatory liabilities,
if recoverable through regulated rates, and reclassified into earnings in the same period during which the item being hedged affects
earnings.
|
|
(d)
|
Cross-currency swaps are utilized to hedge the principal and interest payments of WPD's U.S. dollar-denominated senior notes.
Changes in the fair value of these instruments are recorded in equity and reclassified into earnings in the same period during
which the item being hedged affects earnings.
|
|
(e)
|
Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes
in 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 March 31, 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 March 31, 2016 is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Adverse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement
|
|
|
|
|
|
|
|
|
|
|
|
in Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
669
|
|
PPL Electric
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
LKE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185
|
|
LG&E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
KU
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
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 March
31, 2016.
|
|
|
|
|
|
|
Effect of a
|
|
|
|
|
|
|
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
Adverse
|
|
|
|
|
|
|
|
|
|
Movement
|
|
|
|
|
|
|
|
|
|
in Foreign
|
|
|
|
|
|
|
|
Fair Value,
|
|
Currency
|
|
Maturities
|
|
|
|
Exposure
|
|
Net - Asset
|
|
Exchange
|
|
Ranging
|
|
|
|
Hedged
|
|
(Liability)
|
|
Rates (a)
|
|
Through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedges (b)
|
|
£
|
116
|
|
$
|
12
|
|
$
|
(17)
|
|
2016
|
Economic hedges (c)
|
|
|
1,961
|
|
|
234
|
|
|
(266)
|
|
2018
|
|
(a)
|
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming
a liability.
|
|
(b)
|
To protect the value of a portion of its net investment in WPD, PPL executes forward contracts to sell GBP.
|
|
(c)
|
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 domestic subsidiaries as described below.
|
·
|
WPD is exposed to volumetric risk which is significantly mitigated
as a result of the method of regulation in the U.K.
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.
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 $466 million for the three months
ended March 31, 2016, which primarily reflected a $909 million decrease to PP&E and $214 million decrease to goodwill partially
offset by a decrease of $657 million to net liabilities. Changes in this exchange rate resulted in a foreign currency translation
loss of $77 million for the three months ended March 31, 2015, which primarily reflected a $158 million decrease to PP&E and
$41 million decrease to goodwill partially offset by a decrease of $122 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:
|
·
|
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 Analysis of Financial Condition and Results of Operations" in the Registrants' 2015 Form
10-K for a discussion of each critical accounting policy.
|
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PPL
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|
|
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|
|
|
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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
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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