Fair Value Measurements and Credit Concentration

3 Months Ended

Mar. 31, 2015

Fair Value Measurements and Credit Concentration [Abstract]

Fair Value Measurements and Credit Concentration

13. Fair Value Measurements and Credit Concentration

(All Registrants)

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of financial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values. During the three months endedMarch 31, 2015 and 2014, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 2014 Form 10-K for information on the levels in the fair value hierarchy.

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

				March 31, 2015								December 31, 2014
				Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
PPL
Assets
	Cash and cash equivalents			$	1,335	$	1,335					$	1,751	$	1,751
	Short-term investments				135		135						120		120
	Restricted cash and cash equivalents (a)				231		231						224		224
	Price risk management assets:
		Energy commodities			1,298		2	$	1,136	$	160		1,318		6	$	1,171	$	141
		Foreign currency contracts			209				209				130				130
		Cross-currency swaps			49				49				29				28		1
	Total price risk management assets				1,556		2		1,394		160		1,477		6		1,329		142
	NDT funds:
		Cash and cash equivalents			20		20						19		19
		Equity securities
			U.S. large-cap		620		461		159				611		454		157
			U.S. mid/small-cap		93		38		55				89		37		52
		Debt securities
			U.S. Treasury		97		97						99		99
			U.S. government sponsored agency		8				8				9				9
			Municipality		76				76				76				76
			Investment-grade corporate		45				45				42				42
			Other		3				3				3				3
		Receivables (payables), net			3		1		2				2				2
	Total NDT funds				965		617		348				950		609		341
	Auction rate securities (b)				10						10		10						10
Total assets				$	4,232	$	2,320	$	1,742	$	170	$	4,532	$	2,710	$	1,670	$	152
Liabilities
	Price risk management liabilities:
		Energy commodities		$	1,163	$	2	$	1,130	$	31	$	1,217	$	5	$	1,182	$	30
		Interest rate swaps			235				235				156				156
		Foreign currency contracts			6				6				2				2
		Cross-currency swaps			2				2				3				3
	Total price risk management liabilities			$	1,406	$	2	$	1,373	$	31	$	1,378	$	5	$	1,343	$	30
PPL Electric
Assets
	Cash and cash equivalents			$	35	$	35					$	214	$	214
	Restricted cash and cash equivalents (c)				2		2						3		3
Total assets				$	37	$	37					$	217	$	217

LKE
Assets
	Cash and cash equivalents		$	40	$	40			$	21	$	21
	Cash collateral posted to counterparties (d)			22		22				21		21
Total assets			$	62	$	62			$	42	$	42
Liabilities
	Price risk management liabilities:
		Interest rate swaps	$	174			$	174	$	114			$	114
Total price risk management liabilities			$	174			$	174	$	114			$	114
LG&E
Assets
	Cash and cash equivalents		$	17	$	17			$	10	$	10
	Cash collateral posted to counterparties (d)			22		22				21		21
Total assets			$	39	$	39			$	31	$	31
Liabilities
	Price risk management liabilities:
		Interest rate swaps	$	113			$	113	$	81			$	81
Total price risk management liabilities			$	113			$	113	$	81			$	81
KU
Assets
	Cash and cash equivalents		$	23	$	23			$	11	$	11
Total assets			$	23	$	23			$	11	$	11
Liabilities
	Price risk management liabilities:
		Interest rate swaps	$	61			$	61	$	33			$	33
Total price risk management liabilities			$	61			$	61	$	33			$	33

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

(d)Included in "Other noncurrent assets" on the Balance Sheets. Represents cash collateral posted to offset the exposure with counterparties related to certain interest rate swaps under master netting arrangements that are not offset.

A reconciliation of net assets and liabilities classified as Level 3 for the three months ended March 31 is as follows:
					Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
					2015								2014
					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				$	111	$	10	$	1	$	122	$	24	$	19			$	43
		Total realized/unrealized
			gains (losses)
				Included in earnings		(17)						(17)		(135)						(135)
				Included in OCI (a)						6		6					$	(1)		(1)
		Sales														(3)				(3)
		Settlements				30						30		128						128
		Transfers into Level 3				4						4
		Transfers out of Level 3				1				(7)		(6)						1		1
Balance at end of period					$	129	$	10	$		$	139	$	17	$	16	$		$	33

(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.

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

			March 31, 2015
			Fair Value, net			Range
			Asset	Valuation	Unobservable	(Weighted
			(Liability)	Technique	Input(s)	Average) (a)
PPL
Energy commodities
	Natural gas contracts (b)	$	49	Discounted cash flow	Proprietary model used to calculate forward prices	11% - 100% (43%)
	Power sales contracts (c)		1	Discounted cash flow	Proprietary model used to calculate forward prices	10% - 100% (82%)
	Heat rate options (e)		79	Discounted cash flow	Proprietary model used to calculate forward prices	22% - 44% (40%)
Auction rate securities (f)			10	Discounted cash flow	Modeled from SIFMA Index	41% - 69% (53%)

			December 31, 2014
			Fair Value, net			Range
			Asset	Valuation	Unobservable	(Weighted
			(Liability)	Technique	Input(s)	Average) (a)
PPL
Energy commodities
	Natural gas contracts (b)	$	59	Discounted cash flow	Proprietary model used to calculate forward prices	11% - 100% (52%)
	Power sales contracts (c)		(1)	Discounted cash flow	Proprietary model used to calculate forward prices	10% - 100% (59%)
	FTR purchase contracts (d)		3	Discounted cash flow	Historical settled prices used to model forward prices	100% (100%)
	Heat rate options (e)		50	Discounted cash flow	Proprietary model used to calculate forward prices	23% - 51% (45%)
Auction rate securities (f)			10	Discounted cash flow	Modeled from SIFMA Index	44% - 69% (63%)
Cross-currency swaps (g)			1	Discounted cash flow	Credit valuation adjustment	15% (15%)

(a)For energy commodities and auction rate securities, the range 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 change in fair value due to the unobservable inputs used in the model to calculate the credit valuation adjustment.

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

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

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

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

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

(g)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 three months ended are reported in the Statements of Income as follows:

		Energy Commodities, net
		Unregulated				Unregulated				Energy
		Wholesale Energy				Retail Energy				Purchases
		2015		2014		2015		2014		2015		2014
PPL
Total gains (losses) included in earnings		$	21	$	(89)	$	(40)	$	(63)	$	2	$	17
Change in unrealized gains (losses) relating
	to positions still held at the reporting date		25		(13)		(9)		(33)		1		1

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

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

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

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

Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Contracts/Cross-Currency Swaps (PPL, LKE, LG&E and KU)

To manage interest rate risk, PPL, LKE, LG&E and KU use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps. To manage foreign currency 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), 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. For PPL, the primary reason for the transfers between Level 2 and Level 3 during 2015 and 2014 was the change in the significance of the credit valuation adjustment. Cross-currency swaps are valued by PPL's Treasury department. Accounting personnel interpret analysis quarterly to classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.

(PPL)

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.

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

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

Auction Rate Securities

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

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

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

Nonrecurring Fair Value Measurements(PPL)

The following nonrecurring fair value measurement occurred during the three months ended March 31, 2014, resulting in an asset impairment:

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

(a)Represents carrying value before fair value measurement.

(b)The loss on the Kerr Dam Project was recorded in the Supply segment and included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the 2014 Statement of Income.

The significant unobservable inputs used in and the quantitative information about the nonrecurring fair value measurement of assets and liabilities classified as Level 3 are as follows:
			Fair Value, net		Significant	Range
			Asset	Valuation	Unobservable	(Weighted
			(Liability)	Technique	Input(s)	Average)(a)
Kerr Dam Project
	March 31, 2014	$	29	Discounted cash flow	Proprietary model used to calculate plant value	38% (38%)

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

Kerr Dam Project

PPL Montana previously held a joint operating license issued for the Kerr Dam Project. The license extends until 2035 and, between 2015 and 2025, the Confederated Salish and Kootenai Tribes of the Flathead Nation (the Tribes) have the option to purchase, hold and operate the Kerr Dam Project. The parties submitted the issue of the appropriate amount of the conveyance price to arbitration in February 2013. In March 2014, the arbitration panel issued its final decision holding that the conveyance price payable by the Tribes for the Kerr Dam Project is $18 million. As a result of the decision, PPL Energy Supply performed a recoverability test on the Kerr Dam Project and recorded an impairment charge. PPL Energy Supply performed an internal analysis using an income approach based on discounted cash flows (a PPL proprietary model) to assess the fair value of the Kerr Dam Project.  Assumptions used in the PPL proprietary model were the conveyance price, forward energy price curves, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the business planning process and a market participant discount rate. Through this analysis, PPL Energy Supply determined the fair value of the Kerr Dam Project to be $29 million at March 31, 2014.The Kerr Dam Project was included in the sale of the Montana Hydroelectric facilities and the assets were removed from the Balance Sheet. See Note 8 for additional information.

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

Financial Instruments Not Recorded at Fair Value(All Registrants)

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

	March 31, 2015				December 31, 2014
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
PPL	$	20,307	$	23,258	$	20,391	$	22,670
PPL Electric		2,603		3,084		2,602		2,990

LKE	4,567	5,091	4,567	4,946
LG&E	1,353	1,493	1,353	1,455
KU	2,091	2,396	2,091	2,313

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

Credit Concentration Associated with Financial Instruments

(All Registrants)

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

(PPL)

At March 31, 2015, PPL had credit exposure of $692 million from energy trading partners, excluding the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, PPL's credit exposure was reduced to $402 million. The top ten counterparties including their affiliates accounted for $220 million, or 55%, of these exposures. Eight of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 75% of the top ten exposures. The remaining counterparties are rated below investment grade, but are current on their obligations.

(PPL Electric)

PPL Electric is exposed to credit risk under energy supply contracts (including its supply contracts with PPL EnergyPlus); however, its PUC-approved recovery mechanism is anticipated to substantially mitigate this exposure.

(LKE, LG&E and KU)

At March 31, 2015, LKE's, LG&E's and KU's credit exposure was not significant.