Fair Value Measurements and Credit Concentration

6 Months Ended

12 Months Ended

Jun. 30, 2015

Dec. 31, 2014

Fair Value Measurements and Credit Concentration

13.

Fair Value Measurements and Credit Concentration

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 six months ended June 30, 2015 and 2014, there were no transfers between Level 1 and Level 2. See Note 1 to the audited consolidated financial statements of Talen Energy Supply included elsewhere in this prospectus for information on the levels in the fair value hierarchy.

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:


	June 30, 2015									December 31, 2014
	Total		Level 1			Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	352	$	352		$	—	$	—	$	352	$	352	$	—	$	—

Restricted cash and cash equivalents (a)		126		126			—		—		193		193		—		—

Price risk management assets:
Energy commodities		1,035		—			951		84		1,318		6		1,171		141

Total price risk management assets		1,035		—			951		84		1,318		6		1,171		141

NDT funds:
Cash and cash equivalents		15		15			—		—		19		19		—		—
Equity securities
U.S. large-cap		620		461			159		—		611		454		157		—
U.S. mid/small-cap		92		37			55		—		89		37		52		—
Debt securities
U.S. Treasury		87		87			—		—		99		99		—		—
U.S. government sponsored agency		8		—			8		—		9		—		9		—
Municipality		81		—			81		—		76		—		76		—
Investment-grade corporate		49		—			49		—		42		—		42		—
Other		6		—			6		—		3		—		3		—
Receivables (payables), net		—		(2	)		2		—		2		—		2		—

Total NDT funds		958		598			360		—		950		609		341		—

Auction rate securities (b)		7		—			—		7		8		—		—		8

Total assets	$	2,478	$	1,076		$	1,311	$	91	$	2,821	$	1,160	$	1,512	$	149

Liabilities
Price risk management liabilities:
Energy commodities	$	960	$	—		$	886	$	74	$	1,217	$	5	$	1,182	$	30

Total price risk management liabilities	$	960	$	—		$	886	$	74	$	1,217	$	5	$	1,182	$	30

(a)	Current portion is included in “Restricted cash and cash equivalents” and long-term portion is included in “Other noncurrent assets” on the Balance Sheets.

(b)	Included in “Other investments” on the Balance Sheets.

A reconciliation of net assets and liabilities classified as Level 3 for the period ended June 30, 2015 is as follows:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Six Months
	Energy Commodities, net			Auction Rate Securities			Total
Balance at beginning of period	$	111		$	8		$	119
Total realized/unrealized gains (losses)
Included in earnings		(141	)		—			(141	)
Purchases (a)		(39	)		—			(39	)
Sales		65			(1	)		64
Settlements		3			—			3
Transfers into Level 3		10			—			10
Transfers out of Level 3		1			—			1

Balance at end of period	$	10		$	7		$	17

(a)	Positions acquired through the acquisition of RJS Power.

A reconciliation of net assets and liabilities classified as Level 3 for the period ended June 30, 2014 is as follows:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Six Months
	Energy Commodities, net			Auction Rate Securities			Total
Balance at beginning of period	$	24		$	16		$	40
Total realized/unrealized gains (losses)
Included in earnings		(63	)		—			(63	)
Purchases		(6	)		—			(6	)
Sales		—			(3	)		(3	)
Settlements		119			—			119

Balance at end of period	$	74		$	13		$	87

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


	June 30, 2015
	Fair Value, net Asset (Liability)			Valuation Technique	Significant Unobservable Input(s)	Range (Weighted Average) (a)
Energy commodities
Natural gas contracts (b)	$	42		Discounted cash flow	Proprietary model used to calculate forward prices	11% - 100% (50%)
FTR purchase contracts (d)		(1	)	Discounted cash flow	Historical settled prices used to model forward prices	100% (100%)
Heat rate call options (e)		(28	)	Discounted cash flow	Proprietary model used to calculate forward prices	100% (100%)
CRR purchase contracts (g)		(3	)	Discounted cash flow	Proprietary model used to calculate forward prices	100% (100%)
Auction rate securities (f)		7		Discounted cash flow	Modeled from SIFMA Index	53% - 71% (59%)


	December 31, 2014
	Fair Value, net Asset (Liability)			Valuation Technique	Significant Unobservable Input(s)	Range (Weighted Average) (a)
Energy commodities
Natural gas contracts (b)	$	59		Discounted cash flow	Proprietary model used to calculate forward prices	11% - 100% (52%)
Power sales contracts (c)		(1	)	Discounted cash flow	Proprietary model used to calculate forward prices	10% - 100% (59%)
FTR purchase contracts (d)		3		Discounted cash flow	Historical settled prices used to model forward prices	100% (100%)
Heat rate call options (e)		50		Discounted cash flow	Proprietary model used to calculate forward prices	23% - 51% (45%)
Auction rate securities (f)		8		Discounted cash flow	Modeled from SIFMA Index	51% - 69% (63%)

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

(b)	As the forward price of natural gas increases/(decreases), the fair value of purchase contracts increases/(decreases). As the forward price of natural gas increases/(decreases), the fair value of sales contracts (decreases)/increases.

(c)

As forward market prices increase/(decrease), the fair value of contracts (decreases)/increases. As volumetric assumptions for contracts in a gain position increase/(decrease), the fair value of contracts increases/(decreases). As volumetric assumptions for contracts in a loss position increase/(decrease), the fair value of the contracts (decreases)/increases.

(d)	As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases).

(e)

The proprietary model used to calculate fair value incorporates market heat rates, correlations and volatilities. As the market implied heat rate increases/(decreases), the fair value of purchased calls increases/(decreases). As the market implied heat rate increases/(decreases), the fair value of sold calls (decreases)/increases.

(f)	The model used to calculate fair value incorporates an assumption that the auctions will continue to fail. As the modeled forward rates of the SIFMA Index increase/(decrease), the fair value of the securities increases/(decreases).

(g)	As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases).

Net gains and losses on assets and liabilities classified as Level 3 and included in earnings for the period ended June 30 are reported in the Statements of Income as follows:


	Six Months
	Energy Commodities, net
	Wholesale Energy						Retail Energy						Energy Purchases
	2015			2014			2015			2014			2015			2014
Total gains (losses) included in earnings	$	(110	)	$	(31	)	$	(32	)	$	(51	)	$	1		$	19
Change in unrealized gains (losses) relating to positions still held at the reporting date		(42	)		(44	)		—			(21	)		(4	)		(3	)

Price Risk Management Assets/Liabilities – Energy Commodities

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

When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3. Level 3 contracts are valued using Talen Energy’s proprietary models which may include significant unobservable inputs such as delivery at a location where pricing is unobservable, delivery dates that are beyond the dates for which independent quotes are available, volumetric assumptions, implied volatilities, implied correlations, and market implied heat rates. Forward transactions, including forward transactions classified as Level 3, are analyzed by Talen Energy’s Risk Management department. Accounting personnel interpret the analysis quarterly to appropriately classify the forward transactions in the fair value hierarchy. Valuation techniques are evaluated periodically. Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on Talen Energy’s own creditworthiness (for net liabilities) and its counterparties’ creditworthiness (for net assets). Talen Energy’s credit department assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment.

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

NDT Funds

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

•

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

•

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

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

Auction Rate Securities

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

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

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

Nonrecurring Fair Value Measurements

The following nonrecurring fair value measurement occurred during the six months ended June 30, 2014, resulting in an asset impairment:


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

(a)	Represents carrying value before fair value measurement.

(b)	The loss on the Kerr Dam Project is included in “Other operation and maintenance” on the Statement of Income.

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


	Fair Value, net Asset (Liability)		Valuation Technique	Significant Unobservable Input(s)	Range (Weighted Average) (a)
Kerr Dam Project:
March 31, 2014	$	29	Discounted cash flow	Proprietary model used to calculate plant value	38% (38%)

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

Kerr Dam Project

Talen Montana previously held a joint operating license issued for the Kerr Dam Project. The license extends until 2035 and, between 2015 and 2025, the Confederated Salish and Kootenai Tribes of the Flathead Nation (the Tribes) have the option to purchase, hold and operate the Kerr Dam Project. The parties submitted the issue of the appropriate amount of the conveyance price to arbitration in February 2013. In March 2014, the arbitration panel issued its final decision holding that the conveyance price payable by the Tribes to Talen Montana is $18 million. As a result of the decision, Talen Energy performed a recoverability test on the Kerr Dam Project and recorded an impairment charge. Talen Energy performed an internal analysis using an income approach based on discounted cash flows (a proprietary Talen Energy model) to assess the fair value of the Kerr Dam Project. Assumptions used in the Talen Energy proprietary model were the conveyance price, forward energy price curves, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the business planning process and a market participant discount rate. Through this analysis, Talen Energy determined the fair value of the Kerr Dam Project to be $29 million at March 31, 2014. The Kerr Dam Project was included in the November 2014 sale of the Talen Montana hydroelectric facilities. See Note 7 for additional information on the sale of the Talen Montana hydroelectric facilities.

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

Financial Instruments Not Recorded at Fair Value

The carrying amounts of long-term debt on the Balance Sheets and its estimated fair values are set forth below. The fair value was estimated using an income approach by discounting future cash flows at estimated current cost of funding rates, which incorporates the credit risk of Talen Energy Supply. Long-term debt is classified as Level 2.


	June 30, 2015				December 31, 2014
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	4,060	$	4,036	$	2,218	$	2,204

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

Credit Concentration Associated with Financial Instruments

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

At June 30, 2015, Talen Energy had credit exposure of $591 million from energy trading partners, excluding the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, Talen Energy’s credit exposure was reduced to $370 million. The top ten counterparties, including their affiliates, accounted for $193 million, or 52%, of these exposures. Nine of these counterparties had an investment grade credit rating from S&P or Moody’s and accounted for 93% of the top ten exposures. The remaining counterparty has not been rated by S&P or Moody’s, but is current on its obligations.

PPL Energy Supply LLC [Member]

Fair Value Measurements and Credit Concentration

12.

Fair Value Measurements and Credit Concentration

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 2014 and 2013, there were no transfers between Level 1 and Level 2. See Note 1 for information on the levels in the fair value hierarchy.

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:


	December 31, 2014								December 31, 2013
	Total		Level 1		Level 2		Level 3		Total		Level 1			Level 2		Level 3
Assets
Cash and cash equivalents	$	352	$	352					$	239	$	239

Restricted cash and cash equivalents (a)		193		193						85		85

Price risk management assets:
Energy commodities		1,318		6	$	1,171	$	141		1,188		3		$	1,123	$	62

Total price risk management assets		1,318		6		1,171		141		1,188		3			1,123		62

NDT funds:
Cash and cash equivalents		19		19						14		14
Equity securities
U.S. large-cap		611		454		157				547		409			138
U.S. mid/small-cap		89		37		52				81		33			48
Debt securities
U.S. Treasury		99		99						95		95
U.S. government sponsored agency		9				9				6					6
Municipality		76				76				77					77
Investment-grade corporate		42				42				38					38
Other		3				3				5					5
Receivables (payables), net		2				2				1		(1	)		2

Total NDT funds		950		609		341				864		550			314

Auction rate securities (b)		8						8		16							16

Total assets	$	2,821	$	1,160	$	1,512	$	149	$	2,392	$	877		$	1,437	$	78

Liabilities

Price risk management liabilities:
Energy commodities	$	1,217	$	5	$	1,182	$	30	$	1,070	$	4		$	1,028	$	38

Total price risk management liabilities	$	1,217	$	5	$	1,182	$	30	$	1,070	$	4		$	1,028	$	38

(a)	Current portion is included in “Restricted cash and cash equivalents” and long-term portion is included in “Other noncurrent assets” on the Balance Sheets.

(b)	Included in “Other investments” on the Balance Sheets.

A reconciliation of net assets and liabilities classified as Level 3 for the years ended December 31 is as follows:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Energy Commodities, net			Auction Rate Securities			Total
2014
Balance at beginning of period	$	24		$	16		$	40
Total realized/unrealized gains (losses
Included in earnings		(32	)					(32	)
Included in OCI (a)					1			1
Purchases		(6	)					(6	)
Sales		67			(9	)		58
Settlements		50						50
Transfers into Level 3		7						7
Transfers out of Level 3		1						1

Balance at end of period	$	111		$	8		$	119

2013
Balance at beginning of period	$	22		$	13		$	35
Total realized/unrealized gains (losses)
Included in earnings		(5	)					(5	)
Sales		(2	)					(2	)
Settlements		(3	)					(3	)
Transfers into Level 3		10			3			13
Transfers out of Level 3		2						2

Balance at end of period	$	24		$	16		$	40

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

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

December 31, 2014

Fair Value, net Asset
(Liability)

Valuation Technique

Significant Unobservable
Input(s)

Range (Weighted Average)
(a)

Energy commodities

Natural gas
contracts (b)

Discounted cash flow

Proprietary model used to calculate forward prices

11% – 100% (52%)

Power sales
contracts (c)

)

Discounted cash flow

Proprietary model used to calculate forward prices

9.1% – 100% (59%)

FTR purchase
contracts (d)

Discounted cash flow

Historical settled prices used to model forward prices

100% (100)

Heat Rate
Options (e)

Discounted cash flow

Proprietary model used to calculate forward prices

23% – 51% (45%)

Auction rate
securities (f)

Discounted cash flow

Modeled from SIFMA Index

51% – 69% (63%)

December 31, 2013

Fair Value, net Asset
(Liability)

Valuation Technique

Significant Unobservable

Input(s)

Range (Weighted Average)
(a)

Energy commodities

Natural gas
contracts (b)

Discounted cash flow

Proprietary model used to calculate forward prices

10% – 100% (86%)

Power sales
contracts (c)

(12

)

Discounted cash flow

Proprietary model used to calculate forward prices

100% (100%)

Auction rate
securities (f)

Discounted cash flow

Modeled from SIFMA Index

10% – 80% (63%)

(a)	For energy commodities and auction rate securities, the range and weighted average represent the percentage of fair value derived from the unobservable inputs.

(b)	As the forward price of natural gas increases/(decreases), the fair value of purchase contracts increases/ (decreases). As the forward price of natural gas increases/(decreases), the fair value of sales contracts (decreases)/increases.

(c)

(d)	As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases).

(e)	The proprietary model used to calculate fair value incorporates market heat rates, correlations and volatilities. As the market implied heat rate increases/(decreases), the fair value of the contracts increases/ (decreases).

(f)	The model used to calculate fair value incorporates an assumption that the auctions will continue to fail. As the modeled forward rates of the SIFMA Index increase/(decrease), the fair value of the securities increases/ (decreases).

Net gains and losses on assets and liabilities classified as Level 3 and included in earnings for the years ended December 31 were reported in the Statements of Income as follows:


	Energy Commodities, net
	Unregulated Wholesale Energy						Unregulated Retail Energy				Fuel			Energy Purchases
	2014			2013			2014		2013		2014	2013		2014			2013
Total gains (losses) included in earnings	$	(77	)	$	(36	)	$	23	$	25		$	3	$	22		$	3
Change in unrealized gains (losses) relating to positions still held at the reporting date		50			(23	)		37		24					(4	)		1

Price Risk Management Assets/Liabilities – Energy Commodities

When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3. Level 3 contracts are valued using PPL proprietary models which may include significant unobservable inputs such as delivery at a location where pricing is unobservable, delivery dates that are beyond the dates for which independent quotes are available, volumetric assumptions, implied volatilities, implied correlations and market implied heat rates. Forward transactions, including forward transactions classified as Level 3, are analyzed by PPL’s Risk Management department, which reports to the Chief Financial Officer (CFO). Accounting personnel, who also report to the CFO, interpret the analysis quarterly to appropriately classify the forward transactions in the fair value hierarchy. Valuation techniques are evaluated periodically. Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on PPL’s own creditworthiness (for net liabilities) and its counterparties’ creditworthiness (for net assets). PPL’s credit department assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment.

In certain instances, energy commodity contracts are transferred between Level 2 and Level 3. The primary reasons for the transfers during 2014 and 2013 were changes in the availability of market information and changes in the significance of the unobservable inputs utilized in the valuation of the contract. As the delivery period of a contract becomes closer, market information may become available. When this occurs, the model’s unobservable inputs are replaced with observable market information.

NDT Funds

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

•

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

•

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

Auction Rate Securities

Auction rate securities are valued by PPL’s treasury department, which reports to the CFO. Accounting personnel, who also report to the CFO, interpret the analysis quarterly to classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.

Nonrecurring Fair Value Measurements

The following nonrecurring fair value measurements occurred during the reporting periods, resulting in asset impairments.


	Carrying Amount (a)		Level 3 Fair Value		Loss (b)
Kerr Dam Project (c):
March 31, 2014	$	47	$	29	$	18
Corette plant and emission allowances:
December 31, 2013	$	65			$	65

(a)	Represents carrying value before fair value measurement.

(b)	The loss on the Kerr Dam Project was recorded in “Income (Loss) from Discontinued Operations (net of income taxes)” on the Statement of Income. The loss on the Corette plant and emission allowances was recorded in “Other operation and maintenance” on the Statement of Income.

(c)	The Kerr Dam Project was included in the sale of the Montana Hydroelectric facilities and the assets were removed from the Balance Sheet. See Note 4 for additional information.

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


	Fair Value, net Asset (Liability)		Valuation Technique	Significant Unobservable Input (s)	Range (Weighted Average)
Kerr Dam Project:
March 31, 2014	$	29	Discounted cash flow	Proprietary model used to calculate plant value	38%(38%)
Corette plant and emission allowances: December 31, 2013			Discounted cash flow	Long-term forward price curves and capital expenditure projections	100%(100%)

Kerr Dam Project

PPL Montana previously held a joint operating license issued for the Kerr Dam Project. The license extends until 2035 and, between 2015 and 2025, the Confederated Salish and Kootenai Tribes of the Flathead Nation (the Tribes) have the option to purchase, hold and operate the Kerr Dam Project. The parties submitted the issue of the appropriate amount of the conveyance price to arbitration in February 2013. In March 2014, the arbitration panel issued its final decision holding that the conveyance price payable by the Tribes for the Kerr Dam Project is $18 million. As a result of the decision, PPL Energy Supply performed a recoverability test on the Kerr Dam Project and recorded an impairment charge. PPL Energy Supply performed an internal analysis using an income approach based on discounted cash flows (a PPL proprietary model) to assess the fair value of the Kerr Dam Project. Assumptions used in the PPL proprietary model were the conveyance price, forward energy price curves, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the business planning process and a market participant discount rate. Through this analysis, PPL Energy Supply determined the fair value of the Kerr Dam Project to be $29 million at March 31, 2014. The Kerr Dam Project was included in the sale of the Montana Hydroelectric facilities and the assets were removed from the Balance Sheet. See Note 4 for additional information.

The assets were valued by the PPL Energy Supply Financial Department, which reports to the President of PPL Energy Supply. Accounting personnel, who report to the CFO, interpreted the analysis to appropriately classify the assets in the fair value hierarchy.

Corette Plant and Emission Allowances

During the fourth quarter 2013, PPL Montana recorded an impairment loss on the Corette plant and related emission allowances. In connection with the completion of its 2013 annual business planning process that included revised long-term power and gas price assumptions and other factors, PPL Energy Supply altered its expectations regarding the probability that the Corette plant would operate subsequent to initially placing it in long-term reserve status and determined the carrying amount for Corette was no longer recoverable. As a result, PPL Energy Supply performed an internal analysis using an income approach based on discounted cash flows to assess the fair value of the Corette asset group. Assumptions used in the fair value assessment were forward energy prices, expectations for demand for energy in Corette’s market and expected operation and maintenance and capital expenditures that were consistent with assumptions used in the business planning process and a market participant discount rate. Through this analysis, PPL Energy Supply determined the fair value of the asset group to be negligible. PPL Energy Supply now expects to retire the Corrette plant in August 2015.

Financial Instruments Not Recorded at Fair Value

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


	December 31, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	2,218	$	2,204	$	2,525	$	2,658

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

Credit Concentration Associated with Financial Instruments

Contracts are entered into with many entities for the purchase and sale of energy. When NPNS is elected, the fair value of these contracts is not reflected in the financial statements. However, the fair value of these contracts is considered when committing to new business from a credit perspective. See Note 13 for information on credit policies used to manage credit risk, including master netting arrangements and collateral requirements.

At December 31, 2014, PPL Energy Supply had credit exposure of $708 million from energy trading partners, excluding exposure from related parties and the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, PPL Energy Supply’s credit exposure was reduced to $374 million. The top ten counterparties including their affiliates accounted for $164 million, or 44%, of these exposures. Nine of these counterparties had an investment grade credit rating from S&P or Moody’s and accounted for 95% of the top ten exposures. The remaining counterparty is rated below investment grade, but is current on its obligation. See Note 10 for information regarding PPL Energy Supply’s related party credit exposure.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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