Fair Value Measurements and Credit Concentration

12 Months Ended

Dec. 31, 2011

Fair Value Measurements and Credit Concentration [Abstract]

Fair Value Measurements and Credit Concentration

18. Fair Value Measurements and Credit Concentration

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

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). PPL and its subsidiaries use, as appropriate, 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) to measure the fair value of an asset or liability. 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.

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

				December 31, 2011								December 31, 2010
				Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
PPL
Assets
	Cash and cash equivalents			$	1,202	$	1,202					$	925	$	925
	Short-term investments - municipal debt
		securities											163		163
	Restricted cash and cash equivalents (a)				209		209						66		66
	Price risk management assets:
		Energy commodities			3,423		3	$	3,390	$	30		2,503			$	2,452	$	51
		Interest rate swaps			3				3				15				15
		Foreign currency exchange contracts			18				18				11				11
		Cross-currency swaps			24				20		4		44				44
	Total price risk management assets				3,468		3		3,431		34		2,573				2,522		51
	NDT funds:
		Cash and cash equivalents			12		12						10		10
		Equity securities
			U.S. large-cap		292		202		90				303		207		96
			U.S. mid/small-cap		117		87		30				119		89		30
		Debt securities
			U.S. Treasury		86		86						75		75
			U.S. government sponsored agency		10				10				7				7
			Municipality		83				83				69				69
			Investment-grade corporate		38				38				33				33
			Other		2				2				1				1
		Receivables (payables), net					(3)		3				1		(1)		2
	Total NDT funds				640		384		256				618		380		238
	Auction rate securities (b)				24						24		25						25
Total assets				$	5,543	$	1,798	$	3,687	$	58	$	4,370	$	1,534	$	2,760	$	76
Liabilities
	Price risk management liabilities:
		Energy commodities		$	2,345	$	1	$	2,327	$	17	$	1,552			$	1,498	$	54
		Interest rate swaps			63				63				53				53
		Cross-currency swaps			2				2				9				9
	Total price risk management liabilities			$	2,410	$	1	$	2,392	$	17	$	1,614			$	1,560	$	54
PPL Energy Supply
Assets
	Cash and cash equivalents			$	379	$	379					$	661	$	661
	Restricted cash and cash equivalents (a)				145		145						26		26
	Price risk management assets:
		Energy commodities			3,423		3	$	3,390	$	30		2,503			$	2,452	$	51
		Foreign currency exchange contracts											11				11
		Cross-currency swaps											44				44
	Total price risk management assets				3,423		3		3,390		30		2,558				2,507		51
	NDT funds:
		Cash and cash equivalents			12		12						10		10
		Equity securities
			U.S. large-cap		292		202		90				303		207		96
			U.S. mid/small-cap		117		87		30				119		89		30
		Debt securities
			U.S. Treasury		86		86						75		75
			U.S. government sponsored agency		10				10				7				7
			Municipality		83				83				69				69
			Investment-grade corporate		38				38				33				33
			Other		2				2				1				1
		Receivables (payables), net					(3)		3				1		(1)		2
	Total NDT funds				640		384		256				618		380		238
	Auction rate securities (b)				19						19		20						20
Total assets				$	4,606	$	911	$	3,646	$	49	$	3,883	$	1,067	$	2,745	$	71
Liabilities
	Price risk management liabilities:
		Energy commodities		$	2,345	$	1	$	2,327	$	17	$	1,541			$	1,487	$	54
		Cross-currency swaps											9				9
	Total price risk management liabilities			$	2,345	$	1	$	2,327	$	17	$	1,550			$	1,496	$	54
PPL Electric
Assets
	Cash and cash equivalents			$	320	$	320					$	204	$	204
	Restricted cash and cash equivalents (c)				13		13						14		14
Total assets				$	333	$	333					$	218	$	218

LKE
Assets
	Cash and cash equivalents		$	59	$	59			$	11	$	11
	Short-term investments - municipal debt
		securities								163		163
	Restricted cash and cash equivalents (c)			29		29				23		23
Total assets			$	88	$	88			$	197	$	197
Liabilities
	Price risk management liabilities:
		Energy commodities (d)							$	2			$	2
		Interest rate swaps (e)	$	60			$	60		34				34
	Total liabilities		$	60			$	60	$	36			$	36
LG&E
Assets
	Cash and cash equivalents		$	25	$	25			$	2	$	2
	Short-term investments - municipal debt
		securities								163		163
	Restricted cash and cash equivalents (c)			29		29				22		22
Total assets			$	54	$	54			$	187	$	187
Liabilities
	Price risk management liabilities:
		Energy commodities (d)							$	2			$	2
		Interest rate swaps (e)	$	60			$	60		34				34
	Total liabilities		$	60			$	60	$	36			$	36
KU
Assets
	Cash and cash equivalents		$	31	$	31			$	3	$	3
	Restricted cash and cash equivalents (c)									1		1
Total assets			$	31	$	31			$	4	$	4

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

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

(c)       Current portion is included in "Other current assets" on the Balance Sheets. Such amounts were insignificant at December 31, 2011 and December 31, 2010. The long-term portion is included in "Other noncurrent assets" on the Balance Sheets.

(d)       Included in "Other current liabilities" on the Balance Sheets.

(e)       Current portion is included in "Other current liabilities" on the Balance Sheets.  The long-term portion is included in "Price risk management liabilities" on the Balance Sheets.

At December 31, 2011 and 2010, KU's price risk management assets and liabilities arising from energy commodities and interest rate swaps accounted for at fair value on a recurring basis were not significant.

A reconciliation of net assets and liabilities classified as Level 3 for the years ended is as follows:
			PPL
			Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Energy		Auction		Cross-
			Commodities,		Rate		Currency
			net		Securities		Swaps		Total
December 31, 2011
Balance at beginning of period			$	(3)	$	25			$	22
	Total realized/unrealized gains (losses)
		Included in earnings		(65)						(65)
		Included in OCI (a)		(1)		(1)	$	(10)		(12)
	Purchases			1						1
	Sales			(3)						(3)
	Settlements			20						20
	Transfers into Level 3			(10)				14		4
	Transfers out of Level 3			74						74
Balance at end of period			$	13	$	24	$	4	$	41
December 31, 2010
Balance at beginning of period			$	107	$	25			$	132
	Total realized/unrealized gains (losses)
		Included in earnings		(137)						(137)
		Included in OCI (a)		11						11
	Net purchases, sales, issuances and settlements (b)			(16)						(16)
	Transfers into Level 3			(15)						(15)
	Transfers out of Level 3			47						47
Balance at end of period			$	(3)	$	25			$	22

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

(b)       Accounting guidance effective January 1, 2011 requires purchase, sale, issuance and settlement transactions within Level 3 to be presented on a gross basis. The transactions in 2010 are reported on a net basis.

A reconciliation of net assets and liabilities classified as Level 3 for the years ended is as follows:
			PPL Energy Supply
			Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Energy		Auction
			Commodities,		Rate
			net		Securities		Total
December 31, 2011
Balance at beginning of period			$	(3)	$	20	$	17
	Total realized/unrealized gains (losses)
		Included in earnings		(65)				(65)
		Included in OCI (a)		(1)		(1)		(2)
	Purchases			1				1
	Sales			(3)				(3)
	Settlements			20				20
	Transfers into Level 3			(10)				(10)
	Transfers out of Level 3			74				74
Balance at end of period			$	13	$	19	$	32
December 31, 2010
Balance at beginning of period			$	107	$	20	$	127
	Total realized/unrealized gains (losses)
		Included in earnings		(137)				(137)
		Included in OCI (a)		11				11
	Net purchases, sales, issuances and settlements (b)			(16)				(16)
	Transfers into Level 3			(15)				(15)
	Transfers out of Level 3			47				47
Balance at end of period			$	(3)	$	20	$	17

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

(b)       Accounting guidance effective January 1, 2011 requires purchase, sale, issuance and settlement transactions within Level 3 to be presented on a gross basis. The transactions in 2010 are reported on a net basis.

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended December 31 is as follows:
			Fair Value Measurements Using Significant Unobservable
			Inputs (Level 3)
			Energy Commodities, net
			Successor			Predecessor
			Year Ended	Two Months Ended		Ten Months Ended
			December 31, 2011	December 31, 2010		October 31, 2010
LKE
Balance at beginning of period				$	24	$	75
		Included in discontinued operations			(3)		3
	Settlements				(21)		(54)
Balance at end of period				$		$	24

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

		PPL and PPL Energy Supply
		Energy Commodities, net
			Unregulated Retail		Wholesale Energy		Net Energy
			Electric and Gas		Marketing		Trading Margins		Energy Purchases
December 31, 2011
Total gains (losses) included in earnings			$	32			$	(1)	$	(96)
Change in unrealized gains (losses) relating to
	positions still held at the reporting date			23	$	5		1		(2)
December 31, 2010
Total gains (losses) included in earnings				11		14				(162)
Change in unrealized gains (losses) relating to
	positions still held at the reporting date			4		6				(119)

PPL and its subsidiaries recognize transfers between levels at end-of-reporting-period values.

Price Risk Management Assets/Liabilities - Energy Commodities

Energy commodity contracts are generally valued using the income approach, except for exchange-traded derivative gas, oil and emission allowance contracts, which are valued using the market approach and are classified as Level 1. When observable inputs are used to measure all or most of the value of a contract, the contract is classified as Level 2. Over-the-counter (OTC) contracts are valued using quotes obtained from an exchange, binding and non-binding broker quotes, prices posted by ISOs or published tariff rates. Furthermore, PPL and its subsidiaries obtain independent quotes from the market to validate the forward price curves. OTC contracts include forwards, swaps, options and structured deals for electricity, gas, oil and/or emission allowances 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 instruments may be valued using models, including standard option valuation models and standard industry models. For example, the fair value of a structured deal that delivers power to an illiquid delivery point may be measured by valuing the nearest liquid trading point plus the value of the basis between the two points. The basis input may be from market quotes, FTR prices or historical prices.

When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3. 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 and probabilities of default used to calculate the credit adjustment. PPL assumes that observable market prices include sufficient adjustments for liquidity and modeling risks, but for Level 3 fair value measurements, PPL also assesses the need for additional adjustments for liquidity or modeling risks. The contracts classified as Level 3 represent contracts for which delivery is at a location where pricing is unobservable or the delivery dates are beyond the dates for which independent prices are available. To measure the fair value of these contracts, PPL uses internally developed models that project forward prices. The models use proxy locations, historical settlement prices and extrapolation of observable forward curves.

In certain instances, energy commodity contracts are transferred between Level 2 and Level 3. The primary reasons for the transfers during 2011 and 2010 were changes in the availability of market information and changes in the significance of the unobservable portion 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.

Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Exchange Contracts/Cross-Currency Swaps

To manage their interest rate risk, PPL and its subsidiaries generally use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps. To manage their foreign currency exchange risk, PPL and its subsidiaries generally useforeign currency exchange contracts such as forwards and options, as well as cross-currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts. PPL and its subsidiaries use an income approach 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 and Euro), as well as inputs that may not be observable, such as credit valuation adjustments. In certain cases, PPL and its subsidiaries cannot practicably obtain market information to value credit risk and therefore rely on their own models. These models use projected probabilities of default based on historical observances. When the credit valuation adjustment is significant to the overall valuation, the contracts are classified as Level 3. Certain cross-currency contracts were executed in 2011 and upon remeasurement of their fair value were transferred to Level 3 due to the significance of the credit adjustment driven by the long dated nature of the contracts.

Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Exchange Contracts/Cross-Currency Swaps

To manage their interest rate risk, PPL and its subsidiaries generally use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps. To manage their foreign currency exchange risk, PPL and its subsidiaries generally useforeign currency exchange contracts such as forwards and options, as well as cross-currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts. PPL and its subsidiaries use an income approach 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 and Euro), as well as inputs that may not be observable, such as credit valuation adjustments. In certain cases, PPL and its subsidiaries cannot practicably obtain market information to value credit risk and therefore rely on their own models. These models use projected probabilities of default based on historical observances. When the credit valuation adjustment is significant to the overall valuation, the contracts are classified as Level 3. Certain cross-currency contracts were executed in 2011 and upon remeasurement of their fair value were transferred to Level 3 due to the significance of the credit adjustment driven by the long dated nature of the contracts.

(PPL and PPL Energy Supply)

NDT Funds

PPL and PPL Energy Supply generally use the market approach to measure the fair value of equity securities held in theNDT funds.

The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets and are comprised of securities that are representative of the Wilshire 5000 index, which is invested in approximately 70% large-cap stocks and 30% mid/small-cap stocks.

Investments in commingled equity funds are classified as Level 2 and represent securities that track the S&P 500 index and the Wilshire 4500 index. 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.

Debt securities are generally measured using a market approach, including the use of matrix pricing. Common inputs include reported trades, 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 benchmark yields, credit valuation adjustments, reference data from market research publications, monthly payment data, collateral performance and new issue data.

The debt securities held by the NDT funds at December 31, 2011 have a weighted-average coupon of 4.40% and a weighted-average maturity of 8.46 years.

Auction Rate Securities

PPL's and PPL Energy Supply's auction rate securities include Federal Family Education Loan Program guaranteed student loan revenue bonds, as well as various municipal bond issues. At December 31, 2011, contractual maturities for these auction rate securities were a weighted average of approximately 24years. PPL and PPL Energy Supply do not have significant exposure to realize losses on these securities; however, auction rate securities are classified as Level 3 because failed auctions limit the amount of observable market data that is available for measuring the fair value of these securities.

The fair value of auction rate securities is estimated using an income approach with inputs for the underlying structure and credit quality of each security; the present value of future interest payments, estimated based on forward rates of the SIFMA Index, and principal payments discounted using interest rates for bonds with a credit rating and remaining term to maturity similar to the stated maturity of the auction rate securities; and the impact of auction failures or redemption at par.

Nonrecurring Fair Value Measurements

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

		Carrying		Fair Value Measurements Using
		Amount (a)		Level 2		Level 3		Loss (b)
Sulfur dioxide emission allowances (c):
	September 30, 2011	$	1					$	1
	March 31, 2011		1						1
	December 31, 2010		2			$	1		1
	September 30, 2010		6				2		4
	June 30, 2010		11				3		8
	March 31, 2010		13				10		3
	December 31, 2009		20				13		7
	March 31, 2009		45				15		30
RECs (c):
	September 30, 2011		1						1
	June 30, 2011		2	$	1				1
	March 31, 2011		3						3
Certain non-core generation facilities:
	September 30, 2010		473		381				96
Long Island generation business:
	December 31, 2009		132		128				5
	September 30, 2009		137		133				5
	June 30, 2009		189		138				52

(a)       Represents carrying value before fair value measurement.

(b)       Losses on sulfur dioxide emission allowances and RECs were recorded in the Supply segment and included in "Other operation and maintenance" on the Statements of Income. Losses on certain non-core generation facilities and the Long Island generation business were recorded in the Supply segment and included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income.

(c)       Current and long-term sulfur dioxide emission allowances and RECs are included in "Other intangibles" in their respective areas on the Balance Sheets.

Sulfur Dioxide Emission Allowances

Due to declines in market prices, PPL Energy Supply assessed the recoverability of sulfur dioxide emission allowances not expected to be consumed. When available, observable market prices were used to value the sulfur dioxide emission allowances. When observable market prices were not available, fair value was modeled using prices from observable transactions and appropriate discount rates. The modeled values were significant to the overall fair value measurement, resulting in the Level 3 classification.

RECs

Due to declines in forecasted full-requirement obligations in certain markets as well as declines in market prices, PPL Energy Supply assessed the recoverability of certain RECs not expected to be used. Observable market prices (Level 2) were used to value the RECs.

Certain Non-Core Generation Facilities

Certain non-core generation facilities met the held for sale criteria at September 30, 2010. As a result, net assets held for sale were written down to their estimated fair value less cost to sell. The fair value in the table above excludes $4 million of estimated costs to sell and was based on the negotiated sales price (achieved through an active auction process). See Note 9 for additional information on the completed sale.

Long Island Generation Business

The Long Island generation business met the held for sale criteria at June 30, 2009. As a result, net assets held for sale were written down to their estimated fair value less cost to sell. The fair value in the table above excludes $1 million of estimated costs to sell and was based on the negotiated sales price (achieved through an active auction process). See Note 9 for additional information on the completed sale.

Financial Instruments Not Recorded at Fair Value(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

The carrying amounts of contract adjustment payments related to the 2010 Purchase Contract component of the 2010 Equity Units, the 2011 Purchase Contract component of the 2011 Equity Units, and long-term debt on the Balance Sheets and their estimated fair values are set forth below. The fair values of these instruments were estimated using an income approach by discounting future cash flows at estimated current cost of funding rates. The effect of third-party credit enhancements is not included in the fair value measurement.

		December 31, 2011				December 31, 2010
		Carrying				Carrying
		Amount		Fair Value		Amount		Fair Value
PPL
	Contract adjustment payments (a)	$	198	$	198	$	146	$	148
	Long-term debt		17,993		19,392		12,663		12,868
PPL Energy Supply
	Long-term debt		3,024		3,397		5,589		5,919
PPL Electric
	Long-term debt		1,718		2,012		1,472		1,578

LKE
	Long-term debt	4,073	4,306	3,825	3,607
LG&E
	Long-term debt	1,112	1,164	1,112	1,069
KU
	Long-term debt	1,842	2,000	1,841	1,728

(a)       Included in "Other current liabilities" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets.

The carrying value of short-term debt (including notes between affiliates), when outstanding, represents or approximates fair value due to the variable interest rates associated with the financial instruments. The carrying value of held-to-maturity, short-term investments approximates fair value due to the liquid nature and short-term duration of these instruments.

Credit Concentration Associated with Financial Instruments

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

PPL and its subsidiaries enter into contracts with many entities for the purchase and sale of energy. Many of these contracts qualify for NPNS and as such, 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 19 for information on credit policies used by PPL and its subsidiaries to manage credit risk, including master netting arrangements and collateral requirements.

(PPL)

At December 31, 2011, PPL had credit exposure of $3.0 billion from energy trading partners, excluding the effects of netting arrangements and collateral. As a result of netting arrangements and collateral, PPL's credit exposure was reduced to $866 million. One of the counterparties accounted for 11%of the exposure, and the next highest counterparty accounted for 6% of the exposure. Ten counterparties accounted for $457 million, or 53%, of the net exposure. These counterparties had an investment grade credit rating from S&P or Moody's. The foregoing excludes a long-term supply contract with SMGT due to SMGT's filing for bankruptcy protection during the fourth quarter of 2011. The outstanding accounts receivable associated with SMGT at December 31, 2011 was $14 million, of which $11 million has been reserved. See Note 15 for more information.

(PPL Energy Supply)

At December 31, 2011, PPL Energy Supply had credit exposure of $3.0 billion from energy trading partners, excluding exposure from related parties and the effects of netting arrangements and collateral. As a result of netting arrangements and collateral, this credit exposure was reduced to $863 million. One of the counterparties accounted for 11% of the exposure, and the next highest counterparty accounted for 6% of the exposure.Ten counterparties accounted for $457 million, or 53%, of the net exposure. These counterparties had an investment grade credit rating from S&P or Moody's. The foregoing excludes a long-term supply contract with SMGT due to SMGT's filing for bankruptcy protection during the fourth quarter of 2011. The outstanding accounts receivable associated with SMGT at December 31, 2011 was $14 million, of which $11 million has been reserved. See Note 15 for more information.

(PPL Electric)

At December 31, 2011, PPL Electric had no credit exposure under energy supply contracts (including its supply contracts with PPL EnergyPlus).

(LKE, LG&E and KU)

At December 31, 2011, LKE's, LG&E's and KU's credit exposure was not significant.