PPL has a risk management policy approved by the Board of Directors to manage market risk and counterparty credit risk. The RMC, comprised of senior management and chaired by the Chief Risk Officer, 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 and market prices, verification of risk and transaction limits, VaR analyses, portfolio stress tests, gross margin at risk analyses, sensitivity analyses, and daily portfolio reporting, including open positions, determinations of fair value, and other risk management metrics.

Market risk is the potential loss that may be incurred as a result of price changes associated with a particular financial or commodity instrument. Forward contracts, futures contracts, options, swaps and structured transactions, such as tolling agreements, are utilized as part of risk management strategies to minimize unanticipated fluctuations in earnings caused by changes in commodity prices, volumes of full-requirement sales contracts, basis exposure, interest rates and/or 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 they qualify for NPNS.

The table below summarizes the market risks that affect PPL and its subsidiaries.

PPL

Energy Supply

Electric

LKE

LG&E

Commodity price risk (including basis and

volumetric risk)

Interest rate risk:

Debt issuances

Defined benefit plans

NDT securities

Equity securities price risk:

Defined benefit plans

NDT securities

Future stock transactions

Foreign currency risk - WPD investment

X = PPL and PPL Energy Supply actively mitigate market risks through their risk management programs described above.

M = The regulatory environments for PPL's regulated entities, by definition, significantly mitigate market risk.

 PPL Energy Supply is exposed to commodity price, basis and volumetric risks for energy and energy-related products associated with the sale of electricity from its generating assets and other electricity and gas marketing activities (including full-requirement sales contracts) and the purchase of fuel and fuel-related commodities for generating assets, as well as for proprietary trading activities;

 PPL Electric is exposed to market and volumetric risks from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to market risk. PPL Electric also mitigates its exposure to volumetric risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the volumetric risk associated with the PLR obligation to the energy suppliers; and

 LG&E's and KU's rates include certain mechanisms for fuel, gas supply and environmental expenses. These mechanisms generally provide for timely recovery of market price and volumetric fluctuations associated with these expenses.

 PPL and its subsidiaries are exposed to interest rate risk associated with forecasted fixed-rate and existing floating-rate debt issuances. WPD holds over-the-counter cross currency swaps to limit exposure to market fluctuations on interest and principal payments from foreign currency exchange rates. LG&E utilizes over-the-counter interest rate swaps to limit exposure to market fluctuations on floating-rate debt.

 PPL and its subsidiaries are exposed to interest rate risk associated with debt securities held by defined benefit plans. Additionally, PPL Energy Supply is exposed to interest rate risk associated with debt securities held by the NDT.

 PPL and its subsidiaries are exposed to equity securities price risk associated with equity securities held by defined benefit plans. Additionally, PPL Energy Supply is exposed to equity securities price risk in the NDT funds.

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

 PPL is exposed to foreign currency exchange risk primarily associated with its investments in U.K. affiliates.

Credit risk is the potential loss that may be incurred due to a counterparty's non-performance, including defaults on payments and energy commodity deliveries.

PPL is exposed to credit risk from interest rate and foreign currency derivatives with financial institutions, as well as additional credit risk through certain of its subsidiaries, as discussed below.

PPL Energy Supply is exposed to credit risk from commodity derivatives with its energy trading partners, which include other energy companies, fuel suppliers and financial institutions.

LKE and LG&E are exposed to credit risk from interest rate derivatives with financial institutions.

The majority of credit risk stems from commodity derivatives for multi-year contracts for energy sales and purchases. If PPL Energy Supply's counterparties fail to perform their obligations under such contracts and PPL Energy Supply could not replace the sales or purchases at the same or better prices as those under the defaulted contracts, PPL Energy Supply would incur financial losses. Those losses would be recognized immediately or through lower revenues or higher costs in future years, depending on the accounting treatment for the defaulted contracts. 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, incremental costs incurred by these entities would be recoverable from customers in future rates, thus mitigating this 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. 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 or their exposures exceed an established credit limit. See Note 13 for credit concentration associated with energy trading partners.

Net derivative positions 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's and PPL Energy Supply's obligation to return counterparty cash collateral under master netting arrangements was $160 million and $147 million at September 30, 2012 and December 31, 2011.

PPL Electric, LKE and LG&E had no obligation to return cash collateral under master netting arrangements at September 30, 2012 and December 31, 2011.

PPL, LKE and LG&E had posted cash collateral under master netting arrangements of $32 million and $29 million at September 30, 2012 and December 31, 2011.

PPL Energy Supply and PPL Electric had not posted any cash collateral under master netting arrangements at September 30, 2012 and December 31, 2011.

Commodity price risk, including basis and volumetric risk, is among PPL's and PPL Energy Supply's most significant risks due to the level of investment that PPL and PPL Energy Supply maintain in their competitive generation assets, as well as the extent of their marketing and proprietary trading activities. Several factors influence price levels and volatilities. These factors include, but are not limited to, seasonal changes in demand, weather conditions, available generating assets within regions, transportation/transmission availability and reliability within and between regions, market liquidity, and the nature and extent of current and potential federal and state regulations.

PPL and PPL Energy Supply enter into financial and physical derivative contracts, including forwards, futures, swaps and options, to hedge the price risk associated with electricity, natural gas, oil and other commodities. Certain contracts qualify for NPNS or are non-derivatives and are therefore not reflected in the financial statements until delivery. PPL and PPL Energy Supply segregate their remaining non-trading activities into two categories: cash flow hedges and economic activity, as discussed below.

Certain derivative contracts have qualified for hedge accounting so that the effective portion of a derivative's gain or loss is deferred in AOCI and reclassified into earnings when the forecasted transaction occurs. The cash flow hedges that existed at September 30, 2012 range in maturity through 2016. At September 30, 2012, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $199 million for PPL and PPL Energy Supply. 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 periods and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedge transaction is probable of not occurring. For the three and nine months ended September 30, 2012 and 2011, such reclassifications were insignificant.

For the three and nine months ended September 30, 2012, hedge ineffectiveness associated with energy derivatives was insignificant. For the three and nine months ended September 30, 2011, hedge ineffectiveness associated with energy derivatives resulted in after-tax gains (losses) of $(3) million and $(17) million.

Certain cash flow hedge positions were dedesignated during the nine months ended September 30, 2012. The fair value of the hedges at December 31, 2011 remained in AOCI because the original forecasted transaction is still expected to occur. Pre-tax gains (losses) of $40 million, representing the change in fair value of the remaining positions during the nine months ended September 30, 2012, were recorded in "Wholesale energy marketing unrealized economic activity" on the Statement of Income.

Many derivative contracts economically hedge the commodity price risk associated with electricity, natural gas, oil and other commodities but do not receive hedge accounting treatment. These derivatives hedge a portion of the economic value of PPL Energy Supply's competitive generation assets and unregulated full-requirement and retail contracts, which are subject to changes in fair value due to market price volatility and volume expectations. Additionally, economic activity includes the ineffective portion of qualifying cash flow hedges (see "Cash Flow Hedges" above). The derivative contracts in this category that existed at September 30, 2012 range in maturity through 2019.

Examples of economic activity include hedges on sales of baseload generation, dedesignations as discussed in "Cash Flow Hedges" above, certain purchase contracts used to supply full-requirement sales contracts, FTRs or basis swaps used to hedge basis risk associated with the sale of competitive generation or supplying unregulated full-requirement sales contracts, spark spreads (sale of electricity with the simultaneous purchase of fuel), retail electric and natural gas activities, and fuel oil swaps used to hedge price escalation clauses in coal transportation and other fuel-related contracts. PPL Energy Supply also uses options, which include both call and put options tied to a particular generating unit. Since the physical generating capacity is owned, price exposure is generally limited to the cost of the generating unit and does not expose PPL Energy Supply to uncovered market price risk.

Unrealized activity associated with monetizing certain full-requirement sales contracts was also included in economic activity during the three and nine months ended September 30, 2012 and 2011.

The net fair value of economic positions at September 30, 2012 and December 31, 2011 was a net asset (liability) of $491 million and $(63) million for PPL Energy Supply. The unrealized gains (losses) for economic activity for the periods ended September 30 were as follows.

		Three Months				Nine Months
		2012		2011		2012		2011
PPL Energy Supply
Operating Revenues
	Unregulated retail electric and gas	$	(13)	$	4	$	(15)	$	9
	Wholesale energy marketing		(716)		216		(322)		229
Operating Expenses
	Fuel		3		(28)		(11)		(16)
	Energy purchases		569		(176)		420		(49)

The net gains (losses) recorded in "Wholesale energy marketing" resulted primarily from hedges of baseload generation, from certain full-requirement sales contracts for which PPL Energy Supply did not elect NPNS, from hedge ineffectiveness and from dedesignations, as discussed in "Cash Flow Hedges" above, and from the monetization of certain full-requirement sales contracts in 2010. The net gains (losses) recorded in "Energy purchases" resulted primarily from certain purchase contracts to supply the full-requirement sales contracts noted above for which PPL Energy Supply did not elect hedge treatment, from hedge ineffectiveness, and from purchase contracts that no longer hedge the full-requirement sales contracts that were monetized in 2010.

PPL Energy Supply also executes energy contracts to take advantage of market opportunities. As a result, PPL Energy Supply may at times create a net open position in its portfolio that could result in significant losses if prices do not move in the manner or direction anticipated. PPL Energy Supply's trading activity is shown in "Net energy trading margins" on the Statements of Income.

PPL Energy Supply currently employs four primary strategies to maximize the value of its wholesale energy portfolio. As further discussed below, these strategies include the sales of competitive baseload generation, optimization of competitive intermediate and peaking generation, marketing activities, and proprietary trading activities. The tables within this section present the volumes of PPL Energy Supply's derivative activity, excluding those that qualify for NPNS, unless otherwise noted.

PPL Energy Supply has a formal hedging program for its competitive baseload generation fleet, which includes 7,252 MW (summer rating) of nuclear, coal and hydroelectric generating capacity. The objective of this program is to provide a reasonable level of near-term cash flow and earnings certainty while preserving upside potential of power price increases over the medium term.

PPL Energy Supply sells its expected generation output on a forward basis using both derivative and non-derivative instruments. The following table presents the expected sales, in GWh, from competitive baseload generation and power purchase agreements that are included in the baseload portfolio based on current forecasted assumptions for 2012-2014.

The following table presents the percentage of expected competitive baseload generation sales shown above that has been sold forward under fixed price contracts and the related percentage of fuel that has been purchased or committed at September 30, 2012.

(a) Excludes non-derivative contracts and contracts that qualify for NPNS. Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.

(b) Amount represents derivative (including contracts that qualify for NPNS) and non-derivative contracts. Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option. Percentages are based on fixed-price contracts only.

(c) Coal and nuclear contracts receive accrual accounting treatment, as they are not derivative contracts. Percentages are based on both fixed- and variable-priced contracts.

(e) Volumes for derivative sales contracts that deliver in future periods total 2,710 GWh and 4.0 Bcf.

In addition to the fuel purchases above, PPL Energy Supply attempts to economically hedge the fuel price risk that is within its fuel-related and coal transportation contracts, which are tied to changes in crude oil or diesel prices. PPL Energy Supply has also entered into contracts to financially hedge the physical sale of oil. The following table presents the net volumes, in thousands of barrels (bbls), of derivative (sales)/purchase contracts and contracts that qualify for NPNS used in support of these strategies at September 30, 2012.

In addition to its competitive baseload generation activities, PPL Energy Supply attempts to optimize the overall value of its competitive intermediate and peaking fleet, which includes 3,256 MW (summer rating) of natural gas and oil-fired generation. The following table presents the net volumes of derivative (sales)/purchase contracts used in support of this strategy at September 30, 2012.

(b) Volumes for derivative contracts used in support of these strategies that deliver in future periods are insignificant.

(c) Included in these volumes are non-options and exercised option contracts that converted to non-option derivative contracts. Volumes associated with option contracts are insignificant.

PPL Energy Supply's marketing portfolio is comprised of full-requirement sales contracts and their related supply contracts, retail natural gas and electricity sales contracts and other marketing activities. The obligations under the full-requirement sales contracts include supplying a bundled product of energy, capacity, RECs, and other ancillary products. The full-requirement sales contracts PPL Energy Supply is awarded do not provide for specific levels of load, and actual load could vary significantly from forecasted amounts. PPL Energy Supply uses a variety of strategies to hedge its full-requirement sales contracts, including purchasing energy at a liquid trading hub or directly at the load delivery zone, purchasing capacity and RECs in the market and supplying the energy, capacity and RECs with its generation. The following table presents the volume of (sales)/purchase contracts, excluding FTRs, RECs, basis and capacity contracts, used in support of these activities at September 30, 2012.

		Units	2012 (a)	2013	2014

Energy sales contracts (b)		GWh	(5,426)	(10,960)	(5,052)
Related energy supply contracts
	Energy purchases (b)	GWh	3,766	6,725	2,480
	Volumetric hedges (c)	GWh	161	382	72
	Generation supply (b)	GWh	840	2,986	1,857
Retail natural gas sales contracts		Bcf	(4.8)	(11.3)	(2.7)
Retail natural gas purchase contracts		Bcf	4.7	11.2	2.7

(b) Includes contracts that are not derivatives and/or contracts that are NPNS, which receive accrual accounting.

(c) PPL Energy Supply uses power and gas options, swaps and futures to hedge the volumetric risk associated with sales contracts since the demand for power varies hourly. Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.

At September 30, 2012, PPL Energy Supply's proprietary trading positions, excluding FTR, basis and capacity contract activity that are included in the tables below, were insignificant.

PPL Energy Supply buys and sells FTRs and other basis positions to mitigate the basis risk between delivery points related to the sales of its generation, the supply of its full-requirement sales contracts and retail contracts, as well as for proprietary trading purposes. The following table represents the net volumes of derivative FTR and basis (sales)/purchase contracts at September 30, 2012.

PPL Energy Supply buys and sells capacity related to the sales of its generation and the supply of its full-requirement sales contracts. PPL Energy Supply also buys and sells capacity for proprietary trading purposes. The following table presents the net volumes of derivative capacity (sales)/purchase contracts at September 30, 2012.

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.

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 may be entered into to hedge floating interest rate risk associated with both existing and anticipated debt issuances. Outstanding interest rate swap contracts range in maturity through 2024 and had a notional amount of $618 million. This amount includes £200 million (approximately $318 million based on spot rates) at WPD.

PPL holds a notional position in cross-currency interest rate swaps totaling $1.3 billion that range in maturity through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.

For the three and nine months ended September 30, 2012, hedge ineffectiveness associated with interest rate derivatives was insignificant. For the three and nine months ended September 30, 2011, hedge ineffectiveness associated with interest rate derivatives was insignificant and an after-tax gain (loss) of $(9) million, which included a gain (loss) of $(4) million attributable to certain interest rate swaps that failed hedge effectiveness testing during the second quarter of 2011.

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 probable of not occurring. PPL had no such reclassifications for the three and nine months ended September 30, 2012 and 2011.

At September 30, 2012, 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 $(13) million. Amounts are reclassified as the hedged interest payments are made.

PPL is exposed to changes in the fair value of its debt portfolios. To manage this risk, financial contracts may be entered into to hedge fluctuations in the fair value of existing debt issuances due to changes in benchmark interest rates. In July 2012, contracts ranged in maturity through 2047 and had a notional value of $99 million were canceled without penalties by the counterparties. PPL did not hold any such contracts at September 30, 2012. PPL did not recognize gains or losses resulting from the ineffective portion of fair value hedges or from a portion of the hedging instrument being excluded from the assessment of hedge effectiveness or from hedges of debt issuances that no longer qualified as fair value hedges for the three and nine months ended September 30, 2012 and 2011.

In July 2011, PPL Electric redeemed $400 million of 7.125% Senior Secured Bonds due 2013. As a result of this redemption, PPL recorded a gain (loss) of $22 million, or $14 million after-tax, for the three and nine months ended September 30, 2011 in "Other Income (Expense) - net" on the Statement of Income as a result of accelerated amortization of the fair value adjustments to the debt in connection with previously settled fair value hedges.

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 when the hedged transaction occurs. At September 30, 2012, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033. The fair values of these contracts were recorded as liabilities of $62 million and $60 million at September 30, 2012 and December 31, 2011 with equal offsetting amounts recorded as regulatory assets.

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates. PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including net investments, firm commitments, recognized assets or liabilities and anticipated transactions. In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected earnings.

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 September 30, 2012 had a notional amount of £163 million (approximately $263 million based on contracted rates). The settlement dates of these contracts range from December 2012 through November 2013. The net fair value of these contracts at September 30, 2012 was insignificant and at December 31, 2011 was an asset (liability) of $7 million.

Additionally, a PPL Global subsidiary that has a U.S. dollar functional currency entered into a GBP intercompany loan payable with a PPL WEM subsidiary that has a GBP functional currency. The loan qualifies as a net investment hedge for the PPL Global subsidiary. As such, the foreign currency gains and losses on the intercompany loan for the PPL Global subsidiary are recorded to the foreign currency translation adjustment component of AOCI. At September 30, 2012, the intercompany loan outstanding was £62 million (approximately $100 million based on spot rates).

For the three and nine months ended September 30, 2012 and 2011, PPL recognized insignificant amounts of activity in the foreign currency translation adjustment component of AOCI. At September 30, 2012, PPL included $15 million of accumulated net investment hedge gains (losses), after-tax, in the foreign currency translation adjustment component of AOCI, compared to $19 million of gains (losses), after-tax, recorded by PPL at December 31, 2011.

PPL held no foreign currency derivatives that qualified as cash flow hedges during the three and nine months ended September 30, 2012 and 2011.

PPL held no foreign currency derivatives that qualified as fair value hedges during the three and nine months ended September 30, 2012 and 2011.

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At September 30, 2012, the total exposure hedged by PPL was approximately £1.2 billion (approximately $1.9 billion based on contracted rates) and the net fair value of these positions was an asset (liability) of $(35) million. These contracts had termination dates ranging from October 2012 through November 2014. Realized and unrealized gains (losses) on these contracts are included in "Other Income (Expense) - net" on the Statements of Income and were $(47) million and $(40) million for the three and nine months ended September 30, 2012. At December 31, 2011, the total exposure hedged by PPL was £288 million and the net fair value of these positions was an asset (liability) of $11 million. Realized and unrealized gains (losses) were $11 million for the three and nine months ended September 30, 2011.

In anticipation of the repayment of a portion of the borrowings under the 2011 Bridge Facility with U.S. dollar proceeds received from PPL's April 2011 issuance of common stock and 2011 Equity Units and the issuance of senior notes by PPL WEM, PPL entered into forward contracts to purchase GBP to economically hedge the foreign currency exchange rate risk related to the repayment. These contracts were settled in April 2011. Realized and unrealized gains (losses) on these contracts are included in "Other Income (Expense) - net" on the Statement of Income. PPL recorded insignificant losses and $55 million of pre-tax, net gains (losses) for the three and nine months ended September 30, 2011.

All derivative instruments are recorded at fair value on the Balance Sheet as an asset or liability unless they qualify for NPNS. NPNS contracts for PPL and PPL Energy Supply include full-requirement sales contracts, other physical purchase and sales contracts and certain retail energy and physical capacity contracts, and for 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 currently in earnings unless specific hedge accounting criteria are met, except for the change in fair value of LG&E's interest rate swaps that are recognized as regulatory assets. See Note 6 for amounts recorded in regulatory assets at September 30, 2012 and December 31, 2011.

See Notes 1 and 19 in each Registrant's 2011 Form 10-K for additional information on accounting policies related to derivative instruments.

The following tables present the fair value and location of derivative instruments recorded on the Balance Sheets.

						September 30, 2012								December 31, 2011
						Derivatives designated as				Derivatives not designated				Derivatives designated as				Derivatives not designated
						hedging instruments				as hedging instruments (a)				hedging instruments				as hedging instruments (a)
						Assets		Liabilities		Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Current:
	Price Risk Management
		Assets/Liabilities (b):
			Interest rate swaps					$	16			$	5	$	3	$	3			$	5
			Cross-currency swaps			$	1		2								2
			Foreign currency
				contracts					1				19		7			$	11
			Commodity contracts				66		1	$	1,701		1,140		872		3		1,655		1,557
					Total current		67		20		1,701		1,164		882		8		1,666		1,562
Noncurrent:
	Price Risk Management
		Assets/Liabilities (b):
			Interest rate swaps						5				57								55
			Cross-currency swaps				23								24
			Foreign currency
				contracts									16
			Commodity contracts				30		1		807		805		42		2		854		783
					Total noncurrent		53		6		807		878		66		2		854		838
Total derivatives						$	120	$	26	$	2,508	$	2,042	$	948	$	10	$	2,520	$	2,400

(a) $479 million and $237 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at September 30, 2012 and December 31, 2011.

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $231 million and $527 million at September 30, 2012 and December 31, 2011. The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $491 million and $695 million at September 30, 2011 and December 31, 2010.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets for the periods ended September 30, 2012.

Derivatives in

Hedged Items in

Location of Gain

Gain (Loss) Recognized

Fair Value Hedging

(Loss) Recognized

in Income on Derivative

in Income on Related Item

Relationships

in Income

Three Months

Nine Months

Three Months

Nine Months

Interest rate swaps

Fixed rate debt

Interest expense

(1)

									Three Months				Nine Months
											Gain (Loss)				Gain (Loss)
											Recognized				Recognized
											in Income				in Income
											on Derivative		Gain (Loss)		on Derivative
									Gain (Loss)		(Ineffective		Reclassified		(Ineffective
									Reclassified		Portion and		from AOCI		Portion and
			Derivative Gain				Location of		from AOCI		Amount		into		Amount
			(Loss) Recognized in				Gain (Loss)		into Income		Excluded from		Income		Excluded from
Derivative			OCI (Effective Portion)				Recognized		(Effective		Effectiveness		(Effective		Effectiveness
Relationships			Three Months		Nine Months		in Income		Portion)		Testing)		Portion)		Testing)
Cash Flow Hedges:
	Interest rate swaps		$	(6)	$	(28)	Interest expense		$	(4)			$	(13)
							Other income
								(expense) - net		1				1
	Cross-currency swaps			(49)		(3)	Interest expense							(1)
							Other income
								(expense) - net		(40)				(12)
	Commodity contracts					99	Wholesale energy
								marketing		174				673	$	(1)
							Depreciation			1				2
							Energy purchases			(20)	$	1		(105)		(2)
Total			$	(55)	$	68			$	112	$	1	$	545	$	(3)

Net Investment Hedges:
		Foreign currency contracts	$	(4)	$	(5)

Derivatives Not Designated as	Location of Gain (Loss) Recognized in
Hedging Instruments:	Income on Derivatives	Three Months		Nine Months

Foreign currency contracts	Other income (expense) - net	$	(47)	$	(40)
Interest rate swaps	Interest expense		(2)		(4)
Commodity contracts	Unregulated retail electric and gas		(3)		20
	Wholesale energy marketing		(476)		900
	Net energy trading margins (a)		(10)		12
	Fuel		6
	Energy purchases		364		(717)
	Total	$	(168)	$	171

Derivatives Not Designated as	Location of Gain (Loss) Recognized as
Hedging Instruments:	Regulatory Liabilities/Assets	Three Months		Nine Months

Interest rate swaps	Regulatory assets - noncurrent	$	(9)	$	(3)

(a) Differs from the Statement of Income due to intra-month transactions that PPL defines as spot activity, which is not accounted for as a derivative.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended September 30, 2011.

Derivatives in

Hedged Items in

Location of Gain

Gain (Loss) Recognized

Fair Value Hedging

(Loss) Recognized

in Income on Derivative

in Income on Related Item

Relationships

in Income

Three Months

Nine Months

Three Months

Nine Months

Interest rate swaps

Fixed rate debt

Interest expense

Other income

(expense) - net

									Three Months				Nine Months
											Gain (Loss)				Gain (Loss)
											Recognized				Recognized
											in Income				in Income
											on Derivative		Gain (Loss)		on Derivative
									Gain (Loss)		(Ineffective		Reclassified		(Ineffective
									Reclassified		Portion and		from AOCI		Portion and
			Derivative Gain				Location of		from AOCI		Amount		into		Amount
			(Loss) Recognized in				Gain (Loss)		into Income		Excluded from		Income		Excluded from
Derivative			OCI (Effective Portion)				Recognized		(Effective		Effectiveness		(Effective		Effectiveness
Relationships			Three Months		Nine Months		in Income		Portion)		Testing)		Portion)		Testing)
Cash Flow Hedges:
	Interest rate swaps		$	(52)	$	(51)	Interest expense		$	(4)			$	(10)	$	(13)
	Cross-currency swaps			46		13	Interest expense							3
							Other income
								(expense) - net		32				49
	Commodity contracts			66		116	Wholesale energy
								marketing		163	$	(9)		530		(31)
							Fuel			1				1
							Depreciation			1				1
							Energy purchases			(42)				(159)		1
Total			$	60	$	78			$	151	$	(9)	$	415	$	(43)

Net Investment Hedges:
		Foreign currency contracts	$	5	$	4

Derivatives Not Designated as	Location of Gain (Loss) Recognized in
Hedging Instruments:	Income on Derivatives	Three Months		Nine Months

Foreign currency contracts	Other income (expense) - net	$	11	$	66
Interest rate swaps	Interest expense		(2)		(6)
Commodity contracts	Utility		1		(2)
	Unregulated retail electric and gas		6		11
	Wholesale energy marketing		193		167
	Net energy trading margins (a)		(2)		9
	Fuel		(27)		(12)
	Energy purchases		(192)		(156)
	Total	$	(12)	$	77

Derivatives Not Designated as	Location of Gain (Loss) Recognized as
Hedging Instruments:	Regulatory Liabilities/Assets	Three Months		Nine Months

Interest rate swaps	Regulatory assets	$	(22)	$	(23)

(a) Differs from the Statement of Income due to intra-month transactions that PPL defines as spot activity, which is not accounted for as a derivative.

The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.

					September 30, 2012								December 31, 2011
					Derivatives designated as				Derivatives not designated				Derivatives designated as				Derivatives not designated
					hedging instruments				as hedging instruments (a)				hedging instruments				hedging instruments (a)
					Assets		Liabilities		Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Current:
	Price Risk Management
		Assets/Liabilities (b):
			Commodity contracts		$	66	$	1	$	1,701	$	1,140	$	872	$	3	$	1,655	$	1,557
				Total current		66		1		1,701		1,140		872		3		1,655		1,557
Noncurrent:
	Price Risk Management
		Assets/Liabilities (b):
			Commodity contracts			30		1		807		805		42		2		854		783
				Total noncurrent		30		1		807		805		42		2		854		783
Total derivatives					$	96	$	2	$	2,508	$	1,945	$	914	$	5	$	2,509	$	2,340

(a) $479 million and $237 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at September 30, 2012 and December 31, 2011.

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $312 million and $605 million at September 30, 2012 and December 31, 2011. The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $539 million and $733 million at September 30, 2011 and December 31, 2010. At September 30, 2011, AOCI reflects the effect of PPL Energy Supply's January 2011 distribution of its membership interest in PPL Global to its parent, PPL Energy Funding.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the nine months ended September 30, 2012.

Three Months

Nine Months

Gain (Loss)

Recognized

in Income

on Derivative

Gain (Loss)

(Ineffective

Gain (Loss)

(Ineffective

Reclassified

Portion and

Reclassified

Portion and

Derivative Gain

Location of

from AOCI

Amount

from AOCI

Amount

(Loss) Recognized in

Gains (Losses)

into Income

Excluded from

into Income

Excluded from

Derivative

OCI (Effective Portion)

Recognized

(Effective

Effectiveness

(Effective

Effectiveness

Relationships

Three Months

Nine Months

in Income

Portion)

Testing)

Portion)

Testing)

Wholesale energy

Commodity contracts

marketing

174

673

(1)

Depreciation

Energy purchases

(20)

(105)

(2)

Total

154

569

(3)

Derivatives Not Designated as	Location of Gain (Loss) Recognized in
Hedging Instruments:	Income on Derivatives	Three Months		Nine Months

Commodity contracts	Unregulated retail electric and gas	$	(3)	$	20
	Wholesale energy marketing		(476)		900
	Net energy trading margins (a)		(10)		12
	Fuel		6
	Energy purchases		364		(717)
	Total	$	(119)	$	215

(a) Differs from the Statement of Income due to intra-month transactions that PPL Energy Supply defines as spot activity, which is not accounted for as a derivative.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended September 30, 2011.

Derivatives in

Hedged Items in

Location of Gain

Gain (Loss) Recognized

Fair Value Hedging

(Loss) Recognized

in Income on Derivative

in Income on Related Item

Relationships

in Income

Three Months

Nine Months

Three Months

Nine Months

Interest rate swaps

Fixed rate debt

Interest expense

Three Months

Nine Months

Gain (Loss)

Recognized

in Income

on Derivative

Gain (Loss)

(Ineffective

Gain (Loss)

(Ineffective

Reclassified

Portion and

Reclassified

Portion and

Derivative Gain

Location of

from AOCI

Amount

from AOCI

Amount

(Loss) Recognized in

Gains (Losses)

into Income

Excluded from

into Income

Excluded from

Derivative

OCI (Effective Portion)

Recognized

(Effective

Effectiveness

(Effective

Effectiveness

Relationships

Three Months

Nine Months

in Income

Portion)

Testing)

Portion)

Testing)

Cash Flow Hedges:

Wholesale energy

Commodity contracts

116

marketing

163

(9)

530

(31)

Fuel

Depreciation

Energy purchases

(42)

(159)

Total

116

123

(9)

373

(30)

Derivatives Not Designated as	Location of Gain (Loss) Recognized in
Hedging Instruments:	Income on Derivatives	Three Months		Nine Months

Commodity contracts	Unregulated retail electric and gas	$	6	$	11
	Wholesale energy marketing		193		167
	Net energy trading margins (a)		(2)		9
	Fuel		(27)		(12)
	Energy purchases		(192)		(156)
	Total	$	(22)	$	19

(a) Differs from the Statement of Income due to intra-month transactions that PPL Energy Supply defines as spot activity, which is not accounted for as a derivative.

The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.

September 30, 2012

December 31, 2011

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:

Other Current

Assets/Liabilities (a):

Interest rate swaps

Total current

Noncurrent:

Price Risk Management

Assets/Liabilities (a):

Interest rate swaps

Total noncurrent

Total derivatives

The following tables present the pre-tax effect of derivative instruments recognized in income or regulatory assets for the periods ended September 30, 2012.

Derivatives Not Designated as	Location of Gain (Loss) Recognized in
Hedging Instruments:	Income on Derivatives	Three Months		Nine Months

Interest rate swaps	Interest expense	$	(2)	$	(6)

Derivatives Not Designated as	Location of Gain (Loss) Recognized as
Hedging Instruments:	Regulatory Liabilities/Assets	Three Months		Nine Months

Interest rate swaps	Regulatory assets	$	1	$	(2)

The following tables present the pre-tax effect of derivative instruments recognized in income or regulatory assets for the periods ended September 30, 2011.

Derivatives Not Designated as	Location of Gain (Loss) Recognized in
Hedging Instruments:	Income on Derivatives	Three Months		Nine Months

Interest rate swaps	Interest expense	$	(2)	$	(6)
Commodity contracts	Operating revenues		1		(2)
	Total	$	(1)	$	(8)

Derivatives Not Designated as	Location of Gain (Loss) Recognized as
Hedging Instruments:	Regulatory Liabilities/Assets	Three Months		Nine Months

Interest rate swaps	Regulatory assets	$	(22)	$	(23)

Certain derivative contracts contain credit risk-related contingent provisions 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, PPL Energy Supply, LKE and LG&E, or certain of their subsidiaries. Most of these provisions 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 provisions also would allow the counterparty to require additional collateral upon each decrease in the credit rating at levels that remain above investment grade. In either case, if the applicable credit rating were to fall below investment grade (i.e., below BBB- for S&P or Fitch, or Baa3 for Moody's), and assuming no assignment to an investment grade affiliate were allowed, most of these credit contingent provisions 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 provisions that require "adequate assurance" of performance be provided if the other party has reasonable grounds for insecurity regarding the performance of PPL's obligation under the contract. 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" provisions.

At September 30, 2012, the effect of a decrease in credit ratings below investment grade on derivative contracts that contain credit contingent features and were in a net liability position is summarized as follows:

				PPL
		PPL		Energy Supply		LKE		LG&E

Aggregate fair value of derivative instruments in a net liability
	position with credit contingent provisions	$	225	$	127	$	40	$	40
Aggregate fair value of collateral posted on these derivative instruments			33		1		32		32
Aggregate fair value of additional collateral requirements in the event of
	a credit downgrade below investment grade (a)		201		134		9		9

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