Fair Value Measurements and Credit Concentration

6 Months Ended

Jun. 30, 2012

Fair Value Measurements and Credit Concentration [Abstract]

Fair Value Measurements and Credit Concentration

13. 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). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of financial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values. During the three and six months ended June 30, 2012, there were no transfers between Level 1 and Level 2.

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

				June 30, 2012								December 31, 2011
				Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
PPL
Assets
	Cash and cash equivalents			$	981	$	981					$	1,202	$	1,202
	Restricted cash and cash equivalents (a)				176		176						209		209
	Price risk management assets:
		Energy commodities			3,506		3	$	3,459	$	44		3,423		3	$	3,390	$	30
		Interest rate swaps											3				3
		Foreign currency contracts			19				19				18				18
		Cross-currency swaps			70				60		10		24				20		4
	Total price risk management assets				3,595		3		3,538		54		3,468		3		3,431		34
	NDT funds:
		Cash and cash equivalents			14		14						12		12
		Equity securities
			U.S. large-cap		317		219		98				292		202		90
			U.S. mid/small-cap		127		94		33				117		87		30
		Debt securities
			U.S. Treasury		96		96						86		86
			U.S. government sponsored agency		10				10				10				10
			Municipality		81				81				83				83
			Investment-grade corporate		35				35				38				38
			Other		2				2				2				2
		Receivables (payables), net			(1)		(4)		3						(3)		3
	Total NDT funds				681		419		262				640		384		256
	Auction rate securities (b)				18				3		15		24						24
Total assets				$	5,451	$	1,579	$	3,803	$	69	$	5,543	$	1,798	$	3,687	$	58
Liabilities
	Price risk management liabilities:
		Energy commodities		$	2,528	$	3	$	2,515	$	10	$	2,345	$	1	$	2,327	$	17
		Interest rate swaps			77				77				63				63
		Foreign currency contracts			4				4
		Cross-currency swaps			2				2				2				2
	Total price risk management liabilities			$	2,611	$	3	$	2,598	$	10	$	2,410	$	1	$	2,392	$	17
PPL Energy Supply
Assets
	Cash and cash equivalents			$	446	$	446					$	379	$	379
	Restricted cash and cash equivalents (a)				110		110						145		145
	Price risk management assets:
		Energy commodities			3,506		3	$	3,459	$	44		3,423		3	$	3,390	$	30
	Total price risk management assets				3,506		3		3,459		44		3,423		3		3,390		30
	NDT funds:
		Cash and cash equivalents			14		14						12		12
		Equity securities
			U.S. large-cap		317		219		98				292		202		90
			U.S. mid/small-cap		127		94		33				117		87		30
		Debt securities
			U.S. Treasury		96		96						86		86
			U.S. government sponsored agency		10				10				10				10
			Municipality		81				81				83				83
			Investment-grade corporate		35				35				38				38
			Other		2				2				2				2
		Receivables (payables), net			(1)		(4)		3						(3)		3
	Total NDT funds				681		419		262				640		384		256
	Auction rate securities (b)				15				3		12		19						19
Total assets				$	4,758	$	978	$	3,724	$	56	$	4,606	$	911	$	3,646	$	49
Liabilities
	Price risk management liabilities:
		Energy commodities		$	2,528	$	3	$	2,515	$	10	$	2,345	$	1	$	2,327	$	17
	Total price risk management liabilities			$	2,528	$	3	$	2,515	$	10	$	2,345	$	1	$	2,327	$	17
PPL Electric
Assets
	Cash and cash equivalents			$	45	$	45					$	320	$	320
	Restricted cash and cash equivalents (c)				13		13						13		13
Total assets				$	58	$	58					$	333	$	333

LKE
Assets
	Cash and cash equivalents		$	29	$	29			$	59	$	59
	Restricted cash and cash equivalents (c)			31		31				29		29
Total assets			$	60	$	60			$	88	$	88
Liabilities
	Price risk management liabilities:
		Interest rate swaps (d)	$	62			$	62	$	60			$	60
Total liabilities			$	62			$	62	$	60			$	60
LG&E
Assets
	Cash and cash equivalents		$	25	$	25			$	25	$	25
	Restricted cash and cash equivalents (c)			31		31				29		29
Total assets			$	56	$	56			$	54	$	54
Liabilities
	Price risk management liabilities:
		Interest rate swaps (d)	$	62			$	62	$	60			$	60
Total liabilities			$	62			$	62	$	60			$	60
KU
Assets
	Cash and cash equivalents		$	3	$	3			$	31	$	31
Total assets			$	3	$	3			$	31	$	31

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

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

(c)       Current portion is included in "Other current assets"and the long-term portion is included in "Other noncurrent assets" on the Balance Sheets.

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

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended June 30, 2012 is as follows:
					Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
					Three Months								Six Months
					Energy		Auction		Cross-				Energy		Auction		Cross-
					Commodities,		Rate		Currency				Commodities,		Rate		Currency
					net		Securities		Swaps		Total		net		Securities		Swaps		Total
PPL
Balance at beginning of
	period				$	19	$	24	$	3	$	46	$	13	$	24	$	4	$	41
		Total realized/unrealized
			gains (losses)
				Included in earnings		(2)				(1)		(3)		16				(1)		15
				Included in OCI (a)		(1)		(1)		8		6		1		(1)		10		10
		Sales						(5)				(5)				(5)				(5)
		Settlements				(5)						(5)		(11)						(11)
		Transfers into Level 3				14						14		14						14
		Transfers out of Level 3				9		(3)				6		1		(3)		(3)		(5)
Balance at end of period					$	34	$	15	$	10	$	59	$	34	$	15	$	10	$	59
PPL Energy Supply
Balance at beginning of
	period				$	19	$	19			$	38	$	13	$	19			$	32
		Total realized/unrealized
			gains (losses)
				Included in earnings		(2)						(2)		16						16
				Included in OCI (a)		(1)		(1)				(2)		1		(1)
		Sales						(3)				(3)				(3)				(3)
		Settlements				(5)						(5)		(11)						(11)
		Transfers into Level 3				14						14		14						14
		Transfers out of Level 3				9		(3)				6		1		(3)				(2)
Balance at end of period					$	34	$	12			$	46	$	34	$	12			$	46

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

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended June 30, 2011 is as follows:
			Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Three Months						Six Months
			Energy		Auction				Energy		Auction
			Commodities,		Rate				Commodities,		Rate
			net		Securities		Total		net		Securities		Total
PPL
Balance at beginning of period			$	32	$	25	$	57	$	(3)	$	25	$	22
	Total realized/unrealized gains (losses)
		Included in earnings		(5)				(5)		(4)				(4)
		Included in OCI (a)		3				3		4				4
	Purchases									2				2
	Sales			(1)				(1)		(4)				(4)
	Settlements			3				3		25				25
	Transfers out of Level 3			(6)				(6)		6				6
Balance at end of period			$	26	$	25	$	51	$	26	$	25	$	51
PPL Energy Supply
Balance at beginning of period			$	32	$	20	$	52	$	(3)	$	20	$	17
	Total realized/unrealized gains (losses)
		Included in earnings		(5)				(5)		(4)				(4)
		Included in OCI (a)		3				3		4				4
	Purchases									2				2
	Sales			(1)				(1)		(4)				(4)
	Settlements			3				3		25				25
	Transfers out of Level 3			(6)				(6)		6				6
Balance at end of period			$	26	$	20	$	46	$	26	$	20	$	46

(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 the fair value measurement of assets and liabilities classified as Level 3 at June 30, 2012are as follows:

		Quantitative Information about Level 3 Fair Value Measurements
		Fair Value, net			Range
		Asset	Valuation	Unobservable	(Weighted
		(Liability)	Technique	Input(s)	Average) (a)
PPL
Energy commodities
	Retail natural gas sales contracts (b)	30	Discounted cash flow	Observable wholesale prices used as proxy for retail delivery points	20% - 100% (69%)
	Power sales contracts (c)	(7)	Discounted cash flow	Basis price between delivery points	24% - 61% (25%)
	Full-requirement sales contracts (d)	11	Discounted cash flow	Customer migration	13% - 80% (34%)
Auction rate securities (e)		15	Discounted cash flow	Modeled from SIFMA Index	54% - 80% (65%)
Cross-currency swaps (f)		10	Discounted cash flow	Credit valuation adjustment	25% - 37% (32%)
PPL Energy Supply
Energy commodities
	Retail natural gas sales contracts (b)	30	Discounted cash flow	Observable wholesale prices used as proxy for retail delivery points	20% - 100% (69%)
	Power sales contracts (c)	(7)	Discounted cash flow	Basis price between delivery points	24% - 61% (25%)
	Full-requirement sales contracts (d)	11	Discounted cash flow	Customer migration	13% - 80% (34%)
Auction rate securities (e)		12	Discounted cash flow	Modeled from SIFMA Index	61% - 80% (66%)

(a)       For energy commodities and auction rate securities, therange and weighted average represent the percentage of fair value derived from the unobservable inputs. For cross-currency swaps, the range and weighted average represent the percentage decrease in fair value due to the unobservable inputs used in the model to calculate the credit valuation adjustment.

(b)       Retail natural gassales contracts extend through 2017. $14 million of the fair value is scheduled to deliver within the next 12 months. As the forward price of natural gas increases/(decreases), the fair value of the contracts (decreases)/increases.

(c)       Powersales contracts extend through 2017. $(4) million of the fair value is scheduled to deliver within the next 12 months. As the forward price of basis increases/(decreases), the fair value of the contracts (decreases)/increases.

(d)       Full-requirement sales contracts extend through 2013. $11 million of the fair value is scheduled to deliver within the next 12 months. As customer migration increases/(decreases), the fair value of the contracts decreases/(increases).

(e)       Auction rate securities have a weighted average contractual maturity of 26 years. The model used to calculate fair value incorporates an assumptionthat 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).

(f)       Cross-currency swaps extend through 2021. The credit valuation adjustment incorporates projected probabilities of default and estimated recovery rates. As the credit valuation adjustment increases/(decreases), the fair value of the swaps (decreases)/increases.

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

		Three Months
																		Cross-Currency
		Energy Commodities, net																			Swaps
		Unregulated Retail				Wholesale Energy				Net Energy				Energy
		Electric and Gas				Marketing				Trading Margins				Purchases				Interest Expense
		2012		2011		2012		2011		2012		2011		2012		2011		2012		2011
PPL
Total gains (losses) included in earnings		$	2	$	4	$	(6)	$	(5)	$	1	$	2	$	1	$	(6)	$	(1)
Change in unrealized gains (losses) relating
	to positions still held at the reporting date		49		4		(12)		(7)		1				1		(2)
PPL Energy Supply
Total gains (losses) included in earnings		$	2	$	4	$	(6)	$	(5)	$	1	$	2	$	1	$	(6)
Change in unrealized gains (losses) relating
	to positions still held at the reporting date		49		4		(12)		(7)		1				1		(2)

		Six Months
																		Cross-Currency
		Energy Commodities, net																			Swaps
		Unregulated Retail				Wholesale Energy				Net Energy				Energy
		Electric and Gas				Marketing				Trading Margins				Purchases				Interest Expense
		2012		2011		2012		2011		2012		2011		2012		2011		2012		2011
PPL
Total gains (losses) included in earnings		$	18	$	5	$	(2)	$	(4)			$	(3)			$	(2)	$	(1)
Change in unrealized gains (losses) relating
	to positions still held at the reporting date		39		5		(13)		(6)	$	1			$	1		17
PPL Energy Supply
Total gains (losses) included in earnings		$	18	$	5	$	(2)	$	(4)			$	(3)			$	(2)
Change in unrealized gains (losses) relating
	to positions still held at the reporting date		39		5		(13)		(6)	$	1			$	1		17

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

Energy commodity contracts are generally valued using the income approach, except for exchange-traded derivative gas and oil 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. Level 2 contracts are valued using 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. These 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 contracts may be valued using models, including standard option valuation models and standard industry models. For example, the fair value of a full-requirement sales contract 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. The fair value of contracts classified as Level 3 has been calculated using PPL proprietary models which include significant unobservable inputs such as delivery at a location where pricing is unobservable, assumptions for customer migration or delivery dates that are beyond the dates for which independent quotes are available. 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 personnelto 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 2012 and 2011 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 Contracts/Cross-Currency Swaps(PPL, LKE and LG&E)

To manage interest rate risk, PPL, LKE and LG&E use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps. To manage foreign currency exchange risk, PPL uses foreign currency contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency contracts. An income approach is used to measure the fair value of these contracts, utilizing readily observable inputs, such as forward interest rates (e.g., LIBOR and government security rates) and forward foreign currency exchange rates (e.g., GBP and Euro), 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. The primary reason for the transfers out of Level 3 for 2012 was the change in the significance of the credit valuation adjustment. Cross-currency swaps classified as Level 3 are valued by PPL's Corporate Finance department, which reports to the CFO. Accounting personnel, who also report to the CFO, interpret the analysis quarterly to appropriately classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.

(PPL and PPL Energy Supply)

NDT Funds

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

The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets 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 June 30, 2012 have a weighted-average coupon of 4.22% and a weighted-average maturity of 8.3 years.

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 exposure to realize 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. The primary reason for the transfer out of Level 3 in 2012 was the change in the significance of the present value of future interest payments as maturity dates approach.

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 appropriately classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.

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 thePurchase Contract component of the 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, which incorporate the credit risk of the Registrants. These instruments are classified as Level 2. The effect of third-party credit enhancements is not included in the fair value measurement.

		June 30, 2012				December 31, 2011
		Carrying				Carrying
		Amount		Fair Value		Amount		Fair Value
PPL
	Contract adjustment payments (a)	$	152	$	154	$	198	$	198
	Long-term debt		18,710		20,402		17,993		19,392
PPL Energy Supply
	Long-term debt		3,279		3,663		3,024		3,397
PPL Electric
	Long-term debt		1,718		2,020		1,718		2,012

LKE
	Long-term debt	4,074	4,333	4,073	4,306
LG&E
	Long-term debt	1,112	1,166	1,112	1,164
KU
	Long-term debt	1,842	2,004	1,842	2,000

(a)       Reflectedin "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 and is classified as Level 2. The carrying value of held-to-maturity, short-term investments at December 31, 2011 approximated 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)

Contracts are entered into 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 14 for information on credit policies used to manage credit risk, including master netting arrangements and collateral requirements.

(PPL)

At June 30, 2012, PPL had credit exposure of $2.9 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 $843 million. The top ten counterparties accounted for $429 million, or 51%, of the net exposure and all had investment grade credit ratings from S&P or Moody's.

(PPL Energy Supply)

At June 30, 2012, PPL Energy Supply had credit exposure of $2.9 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 $842 million. The top ten counterparties accounted for $429 million, or 51%, of the net exposure and all had investment grade credit ratings from S&P or Moody's. See Note 11 for information regarding the related party credit exposure.

(PPL Electric)

At June 30, 2012, PPL Electric had no credit exposure under energy supply contracts (including its supply contracts with PPL EnergyPlus).

(LKE, LG&E and KU)

At June 30, 2012, LKE's, LG&E's and KU's credit exposure was not significant.