Fair Value Measurements and Credit Concentration

6 Months Ended

Jun. 30, 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 and six months ended June 30, 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, excluding assets and liabilities of discontinued operations at December 31, 2014, were:

			June 30, 2015								December 31, 2014
			Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
PPL
Assets
	Cash and cash equivalents		$	846	$	846					$	1,399	$	1,399
	Short-term investments											120		120
	Restricted cash and cash equivalents (a)			32		32						31		31
	Price risk management assets (b):
		Foreign currency contracts		93			$	93				130			$	130
		Cross-currency swaps		63				63				29				28	$	1
	Total price risk management assets			156				156				159				158		1
	Auction rate securities (c)			2					$	2		2						2
Total assets			$	1,036	$	878	$	156	$	2	$	1,711	$	1,550	$	158	$	3

Liabilities
	Price risk management liabilities (b):
		Interest rate swaps	$	104			$	104			$	156			$	156
		Foreign currency contracts		20				20				2				2
		Cross-currency swaps										3				3
	Total price risk management liabilities		$	124			$	124			$	161			$	161

PPL Electric
Assets
	Cash and cash equivalents		$	28	$	28					$	214	$	214
	Restricted cash and cash equivalents (a)			2		2						3		3
Total assets			$	30	$	30					$	217	$	217

LKE
Assets
	Cash and cash equivalents		$	13	$	13			$	21	$	21
	Cash collateral posted to counterparties (d)			9		9				21		21
Total assets			$	22	$	22			$	42	$	42

Liabilities
	Price risk management liabilities:
		Interest rate swaps	$	91			$	91	$	114			$	114
Total price risk management liabilities			$	91			$	91	$	114			$	114

LG&E
Assets
	Cash and cash equivalents		$	7	$	7			$	10	$	10
	Cash collateral posted to counterparties (d)			9		9				21		21
Total assets			$	16	$	16			$	31	$	31

Liabilities
	Price risk management liabilities:
		Interest rate swaps	$	68			$	68	$	81			$	81
Total price risk management liabilities			$	68			$	68	$	81			$	81

KU
Assets
	Cash and cash equivalents		$	6	$	6			$	11	$	11
Total assets			$	6	$	6			$	11	$	11

Liabilities
	Price risk management liabilities:
		Interest rate swaps	$	23			$	23	$	33			$	33
Total price risk management liabilities			$	23			$	23	$	33			$	33

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

(b) Included in “Other current assets”, “Other current liabilities”, “Other noncurrent assets” and “Other deferred credits and noncurrent liabilities” 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.

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. Cross-currency swaps are valued by PPL's Treasury department, which reports to the Chief Financial Officer (CFO). Accounting personnel, who also report to the CFO, interpret analysis quarterly to classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.

Nonrecurring Fair Value Measurements

See Note 8 for information regarding the estimated fair value of the Supply segment’s net assets as of the June 1, 2015 spinoff date.

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, excluding long-term debt of discontinued operations at December 31, 2014. 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.

	June 30, 2015				December 31, 2014
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value

PPL	$	18,103	$	20,211	$	18,173	$	20,466
PPL Electric		2,603		2,855		2,602		2,990


LKE	4,567	4,810	4,567	4,946
LG&E	1,353	1,408	1,353	1,455
KU	2,091	2,222	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.

- Definition

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

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