Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

14. Derivative Instruments and Hedging Activities

Risk Management Objectives

(All Registrants)

PPL has a risk management policy approved by the Board of Directors to manage market risk associated with commodities, interest rates on debt issuances and foreign exchange (including price, liquidity and volumetric risk) and credit risk (including non-performance risk and payment default 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, verification of risk and transaction limits, and VaR analyses.

Market Risk

Market risk includes the potential loss that may be incurred as a result of price changes associated with a particular financial or commodity instrument as well as market liquidity and volumetric risks. Forward contracts, futures contracts, options, swaps and structured transactionsare 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 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 NPNS is elected.

The following summarizes the market risks that affect PPL and its Subsidiary Registrants.

Commodity pricerisk

 PPL is exposed to commodity price risk through its domestic subsidiaries as described below. WPD is exposed to volumetric risk which is significantly mitigated as a result of the method of regulation in the U.K.

 PPL Electric is exposed to commodity price risk from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to this 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.

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

Interest rate risk

 PPL and its subsidiaries are exposed to interest rate risk associated with forecasted fixed-rate and existing floating-rate debt issuances. PPL and WPD hold over-the-counter cross currency swaps to limit exposure to market fluctuations on interest and principal payments from changes in foreign currency exchange rates and interest rates. LG&E utilizes over-the-counter interest rate swaps to limit exposure to market fluctuations on floating-rate debt. PPL, LG&E and KU utilize forward starting interest rate swaps to hedge changes in benchmark interest rates, when appropriate, in connection with future debt issuances.

 PPL and its subsidiaries are exposed to interest rate risk associated with debt securities held by defined benefit plans. This risk is significantly mitigated to the extent that the plans are sponsored at, or sponsored on behalf of, the regulated domestic utilities and for certain plans at WPD due to the recovery mechanisms in place.

Equity securities price risk

 PPL and its subsidiaries are exposed to equity securities price risk associated with defined benefit plans. This risk is significantly mitigated at the regulated domestic utilities and for certain plans at WPD due to the recovery mechanisms in place.

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

Foreign currency risk

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

Credit Risk

Credit risk is the potential loss that may be incurred due to a counterparty's non-performance.

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

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, subject to regulatory review or other processes, appropriate incremental costs incurred by these entities would be recoverable from customers through applicable rate mechanisms, thus mitigating the financial 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 or provisions. 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, their tangible net worth falls below specified percentages or their exposures exceed an established credit limit.

Master Netting Arrangements

Net derivative positions on the balance sheets 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, LKE, LG&E and KU had no obligation to return cash collateral under master netting arrangements at June 30, 2015 and December 31, 2014.

PPL, LKE and LG&E posted $9 million and $21 million of cash collateral under master netting arrangements at June 30, 2015 and December 31, 2014.

KU did not post any cash collateral under master netting arrangements at June 30, 2015 and December 31, 2014.

See "Offsetting Derivative Instruments" below for a summary of derivative positions presented in the balance sheets where a right of setoff exists under these arrangements.

Interest Rate Risk

(PPL, LKE, LG&E and KU)

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.

Cash Flow Hedges

(PPL)

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 that qualify as cash flow hedges may be entered into to hedge floating interest rate risk associated with both existing and anticipated debt issuances. At June 30, 2015, PPL held an aggregate notional value in interest rate swap contracts of $1.3 billion that range in maturity through 2045. The amount outstanding includes swaps entered into by PPL on behalf of LG&E and KU. Realized gains and losses on the LG&E and KU swaps are probable of recovery through regulated rates; as such, any gains and losses on these derivatives are included in regulatory assets or liabilities and will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt at the time the underlying hedged interest expense is recorded.

At June 30, 2015, PPL held an aggregate notional value in cross-currency interest rate swap contracts of $1.3 billion that range in maturity from 2016 through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.

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.

As a result of the June 1, 2015 spinoff of PPL Energy Supply, all PPL cash flow hedges associated with PPL Energy Supply were ineffective and discontinued and therefore, reclassified into earnings and reflected in discontinued operations for the three and six months ended June 30, 2015. See Note 8 for additional information.There were no such reclassifications for the three months ended June 30, 2014. For the six months ended June 30, 2014, PPL had an insignificant amount reclassified into earningsassociated with discontinued cash flow hedges.

At June 30, 2015, 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 $(29) million.Amounts are reclassified as the hedged interest expense is recorded.

(LKE, LG&E and KU)

Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL that have terms identical to forward-starting swaps entered into by PPL with third parties. Realized gains and losses on all of these swaps are probable of recovery through regulated rates; as such, any gains and losses on these derivatives are included in regulatory assets or liabilities and will be recognized in “Interest Expense” on the Statements of Income over the life of the underlying debt at the time the underlying hedged interest expense is recorded. At June 30, 2015, the total notional amount of forward starting interest rate swaps outstanding was $1 billion (LG&E and KU each held contracts of $500 million). The swaps range in maturity through 2045.

Economic Activity(PPL, LKE and LG&E)

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 at the time the underlying hedged interest expense is recorded. At June 30, 2015, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033.

Foreign Currency Risk

(PPL)

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

Net Investment Hedges

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 June 30, 2015 had a notional amount of £134 million (approximately $221 million based on contracted rates). The settlement dates of these contracts range from November 2015 through June 2016.

At June 30, 2015, PPL had $13million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI, compared to$14millionat December 31, 2014.

Economic Activity

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At June 30, 2015, the total exposure hedged by PPL was approximately £1.6 billion (approximately $2.5 billion based on contracted rates). These contracts had termination dates ranging from July 2015 through December 2017.

Accounting and Reporting

(All Registrants)

All derivative instruments are recorded at fair value on the Balance Sheet as an asset or liability unless NPNS is elected. NPNS contracts for PPL and 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 and designated as such, except for the changes in fair values of LG&E's and KU's interest rate swaps that are recognized as regulatory assets or regulatory liabilities. See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at June 30, 2015 and December 31, 2014.

See Notes 1 and 17 in each Registrant's 2014 Form 10-Kfor additional information on accounting policies related to derivative instruments.

(PPL)

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

						June 30, 2015								December 31, 2014
						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:
	Price Risk Management
		Assets/Liabilities (a):
			Interest rate swaps (b)					$	59			$	5			$	94			$	5
			Cross-currency swaps (b)			$	28										3
			Foreign currency
				contracts			12			$	42		17	$	12			$	67
					Total current		40		59		42		22		12		97		67		5
Noncurrent:
	Price Risk Management
		Assets/Liabilities (a):
			Interest rate swaps (b)										40				14				43
			Cross-currency swaps (b)				35								29
			Foreign currency
				contracts							39		3		5				46		2
					Total noncurrent		35				39		43		34		14		46		45
Total derivatives						$	75	$	59	$	81	$	65	$	46	$	111	$	113	$	50

(a)Included in "Other current assets", "Other current liabilities", "Other noncurrent assets" and "Other deferred credits and noncurrent liabilities"on theBalance Sheets.

(b)Excludes accrued interest, if applicable.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the periods ended June 30, 2015.

Three Months

Six Months

Gain (Loss)

Gain (Loss)

Recognized

Recognized

in Income

in Income

on Derivative

Gain (Loss)

on Derivative

Gain (Loss)

(Ineffective

Reclassified

(Ineffective

Location of

Reclassified

Portion and

from AOCI

Portion and

Derivative Gain

Gain (Loss)

from AOCI

Amount

into

Amount

(Loss) Recognized in

Recognized

into Income

Excluded from

Income

Excluded from

Derivative

OCI (Effective Portion)

in Income

(Effective

Effectiveness

(Effective

Effectiveness

Relationships

Three Months

Six Months

on Derivative

Portion)

Testing)

Portion)

Testing)

Cash Flow Hedges:

Interest rate swaps

$

17

$

(2)

Interest expense

$

(3)

$

(7)

Discontinued

operations

$

(77)

$

(77)

Cross-currency swaps

15

36

Interest expense

1

2

Other income

(expense) - net

15

32

Commodity contracts

Discontinued

operations

6

7

13

7

Total

$

32

$

34

$

19

$

(70)

$

40

$

(70)

Net Investment Hedges:

Foreign currency contracts

$

(17)

$

(1)

Derivatives Not Designated as	Location of Gain (Loss) Recognized in
Hedging Instruments	Income on Derivative	Three Months		Six Months
Foreign currency contracts	Other income (expense) - net	$	(102)	$	(14)
Interest rate swaps	Interest expense		(2)		(4)
	Total	$	(104)	$	(18)
Derivatives Not Designated as	Location of Gain (Loss) Recognized as
Hedging Instruments	Regulatory Liabilities/Assets	Three Months		Six Months
Interest rate swaps	Regulatory assets - noncurrent	$	7	$	3
Hedging Instruments	Regulatory Liabilities/Assets	Three Months		Six Months
Interest rate swaps	Regulatory assets - noncurrent	$	76	$	20

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI, or regulatory assets and regulatory liabilities for the periods ended June 30, 2014.

Three Months

Six Months

Gain (Loss)

Gain (Loss)

Recognized

Recognized

in Income

in Income

on Derivative

Gain (Loss)

on Derivative

Gain (Loss)

(Ineffective

Reclassified

(Ineffective

Location of

Reclassified

Portion and

from AOCI

Portion and

Derivative Gain

Gain (Loss)

from AOCI

Amount

into

Amount

(Loss) Recognized in

Recognized

into Income

Excluded from

Income

Excluded from

Derivative

OCI (Effective Portion)

in Income

(Effective

Effectiveness

(Effective

Effectiveness

Relationships

Three Months

Six Months

on Derivative

Portion)

Testing)

Portion)

Testing)

Cash Flow Hedges:

Interest rate swaps

$

(14)

$

(60)

Interest expense

$

(4)

$

(9)

$

2

Cross-currency swaps

9

(16)

Interest expense

1

1

Other income

(expense) - net

(29)

Commodity contracts

Discontinued

operations

13

22

Total

$

(5)

$

(76)

$

10

$

(15)

$

2

Net Investment Hedges:

Foreign currency contracts

$

(14)

$

(18)

Derivatives Not Designated as	Location of Gain (Loss) Recognized in
Hedging Instruments	Income on Derivative	Three Months		Six Months
Foreign currency contracts	Other income (expense) - net	$	(72)	$	(96)
Interest rate swaps	Interest expense		(2)		(4)
	Total	$	(74)	$	(100)
Derivatives Not Designated as	Location of Gain (Loss) Recognized as
Hedging Instruments	Regulatory Liabilities/Assets	Three Months		Six Months
Interest rate swaps	Regulatory assets - noncurrent	$	(2)	$	(6)

(LKE)

The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.

				June 30, 2015			December 31, 2014
				Assets	Liabilities		Assets	Liabilities
Current:
	Price Risk Management
		Assets/Liabilities (a):
			Interest rate swaps		$	46		$	66

(a)Represents the location on the Balance Sheets.

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended June 30, 2015.

Derivative Instruments	Location of Gain (Loss)	Three Months		Six Months
Interest rate swaps	Regulatory assets - noncurrent	$	76	$	20

(LG&E)

The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.

				June 30, 2015			December 31, 2014
				Assets	Liabilities		Assets	Liabilities
Current:
	Price Risk Management
		Assets/Liabilities (a):
			Interest rate swaps		$	23		$	33

(a)Represents the location on the Balance Sheets.

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended June 30, 2015.

Derivative Instruments	Location of Gain (Loss)	Three Months		Six Months
Interest rate swaps	Regulatory assets - noncurrent	$	38	$	10

(KU)

The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.

				June 30, 2015			December 31, 2014
				Assets	Liabilities		Assets	Liabilities
Current:
	Price Risk Management
		Assets/Liabilities (a):
			Interest rate swaps		$	23		$	33

(a)Represents the location on the Balance Sheets.

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended June 30, 2015.

Derivative Instruments	Location of Gain (Loss)	Three Months		Six Months
Interest rate swaps	Regulatory assets - noncurrent	$	38	$	10

(LKE and LG&E)

The following table presents the fair value and the location on the Balance Sheets of derivatives not designated as hedging instruments.

					June 30, 2015			December 31, 2014
					Assets	Liabilities			Assets	Liabilities
Current:
	Price Risk Management
		Assets/Liabilities (a):
			Interest rate swaps			$	5			$	5
				Total current			5				5
Noncurrent:
	Price Risk Management
		Assets/Liabilities (a):
			Interest rate swaps				40				43
				Total noncurrent			40				43
Total derivatives						$	45			$	48

(a)Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets for the periods ended June 30, 2015.

	Location of Gain (Loss) Recognized in
Derivative Instruments	Income on Derivatives	Three Months		Six Months
Interest rate swaps	Interest expense	$	(2)	$	(4)
	Location of Gain (Loss) Recognized in
Derivative Instruments	Regulatory Assets	Three Months		Six Months
Interest rate swaps	Regulatory assets - noncurrent	$	7	$	3

The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that arerecognized in income or regulatory assetsfor the periods ended June 30, 2014.

	Location of Gain (Loss) Recognized in
Derivative Instruments	Income on Derivatives	Three Months		Six Months
Interest rate swaps	Interest expense	$	(2)	$	(4)
	Location of Gain (Loss) Recognized in
Derivative Instruments	Regulatory Assets	Three Months		Six Months
Interest rate swaps	Regulatory assets - noncurrent	$	(2)	$	(6)

(PPL, LKE, LG&E and KU)

Offsetting Derivative Instruments

PPL, LKE, LG&E and KU or certain of their subsidiaries have master netting arrangements in place and also enter into agreements pursuant to which they trade certain energy and other products. Under the agreements, upon termination of the agreement as a result of a default or other termination event, the non-defaulting party typically would have a right to set off amounts owed under the agreement against any other obligations arising between the two parties (whether under the agreement or not), whether matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation.

PPL,LKE, LG&E and KU have elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivatives agreements. The table below summarizes the derivative positions presented in the balance sheets where a right of setoff exists under these arrangements and related cash collateral received or pledged.

		Assets							Liabilities
				Eligible for Offset							Eligible for Offset
						Cash							Cash
				Derivative		Collateral					Derivative		Collateral
		Gross		Instruments		Received	Net		Gross		Instruments		Pledged		Net
June 30, 2015
Treasury Derivatives
	PPL	$	156	$	64		$	92	$	124	$	64	$	9	$	51

LKE	91	9	82
LG&E	68	9	59
KU	23		23

December 31, 2014
Treasury Derivatives
	PPL	$	159	$	65	$	94	$	161	$	65	$	21	$	75

LKE	114	20	94
LG&E	81	20	61
KU	33		33

Credit Risk-Related Contingent Features

Certain derivative contracts contain credit risk-related contingent features 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, LKE, LG&E and KU or certain of their subsidiaries. Most of these features 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 features also would allow the counterparty to require additional collateral upon each downgrade in credit rating at levels that remain above investment grade. In either case, if the applicable credit rating were to fall below investment grade, and assuming no assignment to an investment grade affiliate were allowed, most of these credit contingent features 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 features that require adequate assurance of performance be provided if the other party has reasonable concerns regarding the performance of PPL's, LKE’s, LG&E’s, and KU’s obligations under the contracts. 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" features.

(PPL, LKE and LG&E)

At June 30, 2015, derivative contracts in a net liability position that contain credit risk-related contingent features, collateral posted on those positions and the relatedeffect of a decrease in credit ratings below investment grade are summarized as follows:

		PPL		LKE		LG&E
Aggregate fair value of derivative instruments in a net liability position with credit risk-related
	contingent features	$	42	$	28	$	28
Aggregate fair value of collateral posted on these derivative instruments			9		9		9
Aggregate fair value of additional collateral requirements in the event of
	a credit downgrade below investment grade (a)		33		19		19

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