As described in Notes 1 and 8, in January 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding. Therefore, effective January 2011, PPL Energy Supply is no longer subject to interest rate and foreign currency exchange risk associated with investments in U.K. affiliates.

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. PPL completed its acquisitions of LKE in November 2010 and WPD Midlands in April 2011. During the second quarter of 2011, the RMC formally approved the inclusion of LKE's risk programs under the risk management policy. WPD Midlands adhered to the applicable risk management programs, including interest rate and foreign currency exchange programs, from the date of acquisition.

Market risk is the potential loss PPL and its subsidiaries may incur as a result of price changes associated with a particular financial or commodity instrument. PPL and its subsidiaries utilize forward contracts, futures contracts, options, swaps and structured deals such as tolling agreements 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 prices, interest rates and/or foreign currency exchange rates. All derivatives are recognized on the Balance Sheets at their fair value, unless they qualify for NPNS.

PPL is exposed to market risk from foreign currency exchange risk associated with its investments in U.K. affiliates, as well as additional market risk from certain subsidiaries, as discussed below.

 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 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;

 interest rate and price risk associated with debt used to finance operations, as well as debt and equity securities in NDT funds and defined benefit plans; and

 foreign currency exchange rate risk associated with purchases of equipment in currencies other than U.S. dollars.

PPL and PPL Electric are exposed to market and volumetric risks from PPL Electric's obligation as PLR. The PUC has approved a cost recovery mechanism that allows PPL Electric to pass through to customers the cost associated with fulfilling its PLR obligation. This cost recovery mechanism substantially eliminates PPL Electric's exposure to market risk. PPL Electric also mitigates its exposure to volumetric risk by entering into full-requirement supply agreements for its customers. These supply agreements transfer the volumetric risk associated with the PLR obligation to the energy suppliers.

By definition, the regulatory environments for PPL's other regulated entities, LKE (through its subsidiaries LG&E and KU) and WPD, significantly mitigates market risk. LG&E's and KU's rates are set to permit the recovery of prudently incurred costs, including certain mechanisms for fuel, gas supply and environmental expenses. These mechanisms provide for timely recovery of market price and volumetric fluctuations associated with these expenses. LG&E and KU primarily utilize forward financial transactions to manage price risk associated with expected economic generation capacity in excess of expected load requirements. WPD does not have supply risks as it is only in the distribution business.

LG&E also utilizes over-the-counter interest rate swaps to limit exposure to market fluctuations on interest expense. WPD utilizes over-the-counter cross currency swaps to limit exposure to market fluctuations on interest and principal payments from foreign currency exchange rates.

Credit risk is the potential loss PPL and its subsidiaries may incur 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 and PPL Energy Supply are exposed to credit risk from commodity derivatives with their energy trading partners, which include other energy companies, fuel suppliers and financial institutions.

PPL and PPL Electric are exposed to credit risk from PPL Electric's supply agreements for its PLR obligation.

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

The majority of PPL's and its subsidiaries' credit risk stems from PPL subsidiaries' 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 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.

PPL and its subsidiaries have credit policies to manage their 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 the 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 financial instruments.

PPL and its subsidiaries have elected not to offset net derivative positions in the Financial Statements. Accordingly, PPL and its subsidiaries do not offset such derivative positions 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 $64 million and $338 million at September 30, 2011 and December 31, 2010.

PPL Electric, LKE, LG&E and KU had no obligation to return cash collateral under master netting arrangements at September 30, 2011 and December 31, 2010.

PPL Energy Supply, PPL Electric and KU had not posted any cash collateral under master netting arrangements at September 30, 2011 and December 31, 2010.

PPL, LKE and LG&E had posted cash collateral under master netting arrangements of $30 million at September 30, 2011 and $19 million at December 31, 2010.

Commodity price and basis risks are 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, 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 hedge activity and economic activity. In addition, the monetization of certain full-requirements sales contracts in 2010 impacted both the cash flow hedge and economic activity, as discussed below.

In early July 2010, in order to raise additional cash for the LKE acquisition, PPL Energy Supply monetized certain full-requirement sales contracts that resulted in cash proceeds of $156 million.

The decision in late June 2010 to monetize these contracts triggered certain accounting for the second quarter of 2010:

· A portion of these sales contracts had previously been accounted for as NPNS and received accrual accounting treatment. The related purchases to supply these sales contracts were accounted for as cash flow hedges, with the effective portion of the change in fair value being recorded in AOCI and the ineffective portion recorded in "Energy purchases - Unrealized economic activity."

· The rest of the sales contracts, along with their related hedges, had previously been accounted for as economic activity by PPL Energy Supply and the change in fair value of the sales contracts was recorded in "Wholesale energy marketing - Unrealized economic activity" and the change in fair value of the purchase contracts was recorded in "Energy purchases - Unrealized economic activity" on the Statement of Income.

· At June 30, 2010, PPL Energy Supply could no longer assert that it was probable that any contracts with these counterparties would result in physical delivery. Therefore, the fair value of the NPNS contracts of $66 million was recorded on the Balance Sheet in "Price risk management assets," with a corresponding gain to "Wholesale energy marketing - Unrealized economic activity." Of this amount, $16 million was related to full-requirement sales contracts that had not been monetized. The corresponding cash flow hedges were dedesignated and all amounts previously recorded in AOCI were reclassified to earnings. This resulted in a pre-tax reclassification of $(87) million of gains (losses) from AOCI into "Energy purchases - Unrealized economic activity" on the Statement of Income. An additional charge of $(23) million was also recorded at June 30, 2010 in "Wholesale energy marketing - Unrealized economic activity" to reflect the fair value of the sales contracts previously accounted for as economic activity.

 The net result of these transactions, excluding the full-requirement sales contracts that have not been monetized, was a gain (loss) of $(60) million, or $(36) million after tax, for the second quarter of 2010.

In late July 2010, PPL Energy Supply again monetized certain full-requirement sales contracts that resulted in additional cash proceeds of $93 million. The monetization in late July triggered certain accounting that impacted the third quarter of 2010.

 These sales contracts had previously been accounted for as NPNS and received accrual accounting treatment. The related purchases to supply these sales contracts were accounted for as cash flow hedges, with the effective portion of the change in fair value being recorded in AOCI and the ineffective portion recorded in "Energy purchases - Unrealized economic activity" on the Statement of Income.

 The $93 million received from the monetization of the NPNS contracts was recorded as a gain to "Wholesale energy marketing - Realized" on the Statement of Income. The corresponding cash flow hedges were dedesignated and all amounts previously recorded in AOCI were reclassified to earnings. This resulted in a pre-tax reclassification of $(61) million of gains (losses) from AOCI into "Energy purchases - Unrealized economic activity" on the Statement of Income.

 The net result of these transactions was a gain of $32 million, or $19 million after tax, for the three months ended September 30, 2010.

The proceeds of $249 million from these monetizations are reflected in the Statement of Cash Flows as a component of "Net cash provided by operating activities."

Many 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, 2011 range in maturity through 2016. At September 30, 2011, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $309 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, 2011, such reclassifications were insignificant. For the three and nine months ended September 30, 2010, such reclassifications were after tax (losses) of $(36) million and $(89) million. The after-tax (losses) recorded in both periods in 2010 were primarily due to the monetization of certain full-requirement sales contracts, for which the associated hedges were no longer required, as discussed above.

For the three and nine months ended September 30, 2011, hedge ineffectiveness associated with energy derivatives was, after-tax, a gain (loss) of $(3) million and $(17) million. For the three and nine months ended September 30, 2010, hedge ineffectiveness associated with energy derivatives was, after-tax, a gain (loss) of $8 million and $(16) million.

In addition, when cash flow hedge positions fail hedge effectiveness testing, hedge accounting is not permitted in the quarter in which this occurs and, accordingly, the entire change in fair value for the periods that failed is recorded to the Statement of Income. Certain power and gas cash flow hedge positions failed effectiveness testing during 2008 and early 2009 which resulted in significant gains recorded to the Statement of Income. However, these positions were not dedesignated as hedges, as prospective regression analysis demonstrated that these hedges were expected to be highly effective over their term. During the first quarter of 2010, after-tax gains (losses) of $(82) million were recognized in earnings as a result of the reversals. Effective April 1, 2010, clarifying accounting guidance was issued that precludes the reversal of previously recognized gains/losses resulting from hedge failures. By the end of the first quarter of 2010, all previously recorded hedge ineffectiveness gains resulting from hedge failures had reversed; therefore, the clarifying accounting guidance did not have a significant impact on the results of operation for PPL or PPL Energy Supply.

Certain derivative contracts economically hedge the price and volumetric risk associated with electricity, gas, oil and other commodities but do not receive hedge accounting treatment. These derivatives hedge a portion of the economic value of PPL's and 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, 2011 range in maturity through 2017.

Examples of economic activity include 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 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 the sale of call options and the purchase of put options tied to a particular generating unit. Since the physical generating capacity is owned, the price exposure is limited to the cost of the particular generating unit and does not expose PPL Energy Supply to uncovered market price risk.

Activity associated with monetizing certain full-requirement sales contracts is also included in economic activity during the second quarter of 2010. All transactions that previously had been considered cash flow hedges related to these full-requirement sales contracts, but no longer qualified as cash flow hedges, were classified as economic activity at September 30, 2010.

The net fair value of economic positions at September 30, 2011 and December 31, 2010 was a net liability of $218 million and $389 million for PPL Energy Supply. The unrealized gains (losses) for economic activity for the periods ended September 30 are as follows.

		Three Months				Nine Months
		2011		2010		2011		2010

Operating Revenues
	Unregulated retail electric and gas	$	4	$	8	$	9	$	16
	Wholesale energy marketing		216		52		229		(190)
Operating Expenses
	Fuel		(28)		16		(16)		13
	Energy purchases (a)		(176)		(300)		(49)		(418)

(a) During the second quarter of 2010, PPL Energy Supply corrected an error relating to the fair value of a capacity contract (classified as economic activity) due to the use of an incorrect forward capacity curve. PPL Energy Supply's energy purchases were understated for the year ended December 31, 2009 and the first quarter of 2010 by an unrealized amount of $35 million ($20 million after tax or $0.05 per share, basic and diluted, for PPL) and $5 million ($3 million after tax or $0.01 per share, basic and diluted, for PPL). Management concluded that the impacts were not material to first quarter 2010 financial statements of PPL and PPL Energy Supply, and were not material to the financial statements for the full year 2010.

The net gains (losses) recorded in "Wholesale energy marketing" resulted primarily from certain full-requirement sales contracts for which PPL Energy Supply did not elect NPNS, from hedge ineffectiveness, including hedges that failed effectiveness testing, as discussed in "Cash Flow Hedges" above, and from the monetization of certain full-requirement sales contracts. 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, including hedges that failed effectiveness testing, and from purchase contracts that no longer hedge the full-requirement sales contracts that were monetized as discussed above in "Monetization of Certain Full-Requirement Sales Contracts."

LG&E and KU primarily utilize forward financial transactions to manage price risk associated with expected economic generation capacity in excess of expected load requirements. Hedge accounting treatment has not been elected for these transactions; therefore, realized and unrealized gains and losses are recorded in the Statements of Income. The derivative contracts in this category that existed at September 30, 2011, range in maturity through 2012.

The net fair value of economic positions for LKE, LG&E and KU at September 30, 2011 and December 31, 2010 was not significant. Unrealized gains (losses) for economic activity for LKE, LG&E and KU for the three and nine months ended September 30, 2011 and 2010 were not significant.

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 baseload generation, optimization of 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 7,357 MW 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. Both are included in the following tables.

The following table presents the expected sales, in GWh, from baseload generation and tolling arrangements that are included in the baseload portfolio based on current forecasted assumptions for 2011-2013. These expected sales could be impacted by several factors, including plant availability.

The following table presents the percentage of expected 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, 2011.

(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 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 3,050 GWh.

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) of derivative (sales)/purchase contracts used in support of these strategies at September 30, 2011.

(b) Volumes (in thousands of barrels) for derivative contracts used in support of this strategy that deliver in future periods total 120.

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 3,395 MW of 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, 2011.

(b) Volumes for derivative contracts used in support of these strategies that deliver in future periods total (1,632) GWh and 11.0 Bcf.

(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 not significant.

PPL Energy Supply's marketing portfolio is comprised of full-requirement sales contracts and their related supply contracts, retail gas and electricity sales contracts and other marketing activities. The full-requirement sales contracts and their related supply contracts make up a significant component of the marketing portfolio. 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. PPL Energy Supply does not consider RECs to be derivatives; therefore, they are excluded from the table below. The following table presents the volume of (sales)/purchase contracts, excluding FTRs, basis and capacity contracts, used in support of these activities at September 30, 2011.

		Units	2011 (a)	2012	2013

Energy sales contracts (b)		GWh	(4,319)	(13,074)	(5,325)
Related energy supply contracts (b)
	Energy purchases	GWh	2,923	7,425	645
	Volumetric hedges (c)	GWh	90	312	43
	Generation supply	GWh	1,265	5,457	4,478
Retail gas sales contracts		Bcf	(2.6)	(9.1)	(0.5)
Retail gas purchase contracts		Bcf	2.5	9.1	0.5

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

(c) PPL Energy Supply uses power and gas options, swaps and futures to hedge the volumetric risk associated with full-requirement 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, 2011, PPL Energy Supply's proprietary trading positions, excluding FTR, basis and capacity contract activity that is included in the tables below, were not significant.

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 net volume of derivative FTR and basis (sales)/purchase contracts at September 30, 2011 were:

PPL Energy Supply buys and sells capacity related to the sales of its generation and the supply of its full-requirement sales contracts. These contracts qualify for NPNS and receive accrual accounting. PPL Energy Supply also sells and purchases capacity for proprietary trading purposes. These contracts are marked to fair value through earnings. The following table presents the net volumes of derivative capacity (sales)/purchase contracts at September 30, 2011.

LKE and its subsidiaries manage the price risk of expected economic generation capacity in excess of expected load requirements using market-traded forward contracts. At September 30, 2011, the net volume of electricity based financial derivatives outstanding to hedge excess regulated generation was insignificant for LKE, LG&E and KU.

Interest rate risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financings. PPL enters into financial interest rate swap contracts to hedge these exposures. These interest rate swap contracts mature through 2022 and had a notional value of $550 million at September 30, 2011.

Through PPL, PPL WEM holds a notional position in cross-currency interest rate swaps totaling $960 million that mature through 2021 to hedge the interest payments and principal of the U.S. dollar-denominated senior notes issued by PPL WEM in April 2011. Additionally, PPL WW holds a notional position in cross-currency interest rate swaps totaling $302 million that mature through December 2028 to hedge the interest payments and principal of its U.S. dollar-denominated senior notes. In 2010, these PPL WW swaps were part of PPL Energy Supply's business. As a result of the distribution of PPL Energy Supply's membership interest in PPL Global to PPL Energy Funding effective January 2011, these swaps are no longer part of PPL Energy Supply's business.

For the three and nine months ended September 30, 2011, hedge ineffectiveness associated with interest rate derivatives was insignificant and a gain (loss) of $(13) million for PPL, of which a gain (loss) of $(5) million was attributable to certain interest rate swaps that failed hedge effectiveness testing during the second quarter of 2011. For the three and nine months ended September 30, 2010, hedge ineffectiveness associated with interest rate derivatives was insignificant for both 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 hedged transaction is probable of not occurring. PPL and PPL Energy Supply had no such reclassifications for the three and nine months ended September 30, 2011. As a result of the expected net proceeds from the then anticipated sale of certain non-core generation facilities, coupled with the monetization of certain full-requirement sales contracts, debt that had been planned to be issued by PPL Energy Supply in 2010 was no longer needed. As a result, hedge accounting associated with interest rate swaps entered into by PPL in anticipation of a debt issuance by PPL Energy Supply was discontinued. Net gains (losses) of $(29) million, or $(19) million after tax, were reclassified for the three and nine months ended September 30, 2010. PPL Energy Supply had no such reclassifications for the three and nine months ended September 30, 2010.

At September 30, 2011, 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 $(11) million for PPL. Amounts are reclassified as the hedged interest payments are made.

PPL and PPL Energy Supply are exposed to changes in the fair value of their debt portfolios. To manage this risk, PPL and PPL Energy Supply may enter into financial contracts to hedge fluctuations in the fair value of existing debt issuances due to changes in benchmark interest rates. At September 30, 2011, PPL held contracts that range in maturity through 2047 and had a notional value of $99 million. PPL Energy Supply did not hold any such contracts at September 30, 2011. PPL and PPL Energy Supply 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 for the three and nine months ended September 30, 2011 and 2010.

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. PPL had no such gains or losses for the three and nine months ended September 30, 2010. PPL Energy Supply had no such gains or losses for the three and nine months ended September 30, 2011 and 2010.

LG&E enters into interest rate swap contracts that economically hedge interest payments on variable rate debt. Beginning in the third quarter of 2010, as a result of a rate case order, realized gains and losses from the swaps are recoverable through regulated rates. Therefore, any subsequent change in fair value of these derivatives is included in regulatory assets and liabilities. Realized gains and losses are recognized in "Interest Expense" on the Statements of Income when the hedged transaction occurs. Prior to the third quarter of 2010, LG&E reclassified amounts previously recorded in AOCI to earnings in the same period during which the forecasted transaction affected earnings. The amounts recorded to regulatory assets for the three and nine months ended September 30, 2011 were $22 million and $23 million. At September 30, 2011, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033. The fair value of these contracts was a liability of $57 million and $34 million at September 30, 2011 and December 31, 2010.

The amounts recorded to regulatory assets for the three and nine months ended September 30, 2010 were $59 million.

At September 30, 2011, there were no existing foreign currency cash flow hedges associated with foreign currency-denominated debt or firm commitments (including those for the purchase of equipment) denominated in foreign currencies. Amounts previously settled and recorded in AOCI are reclassified as the hedged interest payments are made and as the related equipment is depreciated. Insignificant gains are expected to be reclassified into earnings during the next 12 months.

During the three and nine months ended September 30, 2011 and 2010, no cash flow hedges were discontinued because it was probable that the original forecasted transaction would not occur by the end of the originally specified time periods.

PPL enters into foreign currency forward contracts to hedge the exchange rates associated with firm commitments denominated in foreign currencies; however, at September 30, 2011, there were no existing contracts of this nature and no gains or losses recorded during the three and nine months ended September 30, 2011 and 2010 related to hedge ineffectiveness, or from a portion of the hedging instrument being excluded from the assessment of hedge ineffectiveness, or from hedges of firm commitments that no longer qualified as fair value 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. In 2010, these contracts were included in PPL Energy Supply's business. As a result of the distribution of PPL Energy Supply's membership interest in PPL Global to PPL Energy Funding, effective January 2011, these contracts are no longer included in PPL Energy Supply's business.

The contracts outstanding at September 30, 2011 had an aggregate notional amount of £65 million (approximately $106 million based on contracted rates). The settlement dates of these contracts range from January 2012 through June 2012. At September 30, 2011, the fair value of these contracts was $5 million. For the three and nine months ended September 30, 2011, PPL recognized insignificant amounts of activity in the foreign currency translation adjustment component of AOCI. For the three and nine months ended September 30, 2010, PPL and PPL Energy Supply recognized insignificant amounts of activity in the foreign currency translation adjustment component of AOCI. At September 30, 2011, PPL included $18 million of accumulated net investment hedge gains (losses), after tax, in the foreign currency translation adjustment component of AOCI. At December 31, 2010, PPL and PPL Energy Supply included $15 million of accumulated net investment hedge gains (losses), after-tax, in AOCI.

In anticipation of the repayment of a portion of the GBP-denominated borrowings under the 2011 Bridge Facility with U.S. dollar proceeds received from PPL's issuance of common stock and 2011 Equity Units and PPL WEM's issuance of U.S. dollar-denominated senior notes, as discussed in Note 7, PPL entered into forward contracts to purchase GBP in order to economically hedge the foreign currency exchange rate risk related to the repayment. These trades were settled in April 2011. Gains and 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.

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge anticipated earnings denominated in GBP. In 2010, these contracts were included in PPL Energy Supply's business. As a result of the distribution of PPL Energy Supply's membership interest in PPL Global to PPL Energy Funding, effective January 2011, these contracts are no longer included in PPL Energy Supply's business. At September 30, 2011, the total exposure hedged by PPL was £393 million, the net fair value of these positions was $16 million and these contracts had termination dates ranging from October 2011 through November 2012. PPL records gains (losses) on these contracts in "Other Income (Expense) - net" on the Statements of Income. Gains (losses) were $11 million for both the three and nine months ended September 30, 2011 and insignificant for 2010. PPL Energy Supply's 2010 gains (losses), both realized and unrealized, are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income and were insignificant for the three and nine months ended September 30, 2010.

All derivative instruments are recorded at fair value on the Balance Sheets as an asset or liability unless they qualify for NPNS. NPNS contracts for PPL and PPL Energy Supply include full-requirement sales contracts, power purchase agreements and certain retail energy and physical capacity contracts, and for PPL Electric include full-requirement purchase contracts and block purchase contracts. Changes in the derivatives' fair value 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 which is recognized as a regulatory asset. See Note 6 for amounts recorded in regulatory assets at September 30, 2011 and December 31, 2010.

See Notes 1 and 19 in PPL and PPL Electric's 2010 Form 10-K, Notes 1 and 15 in PPL Energy Supply's Form 8-K dated June 24, 2011 and Notes 1 and 5 in the annual financial statements included in LKE's, LG&E's and KU's 2011 Registration Statements for additional information on accounting policies related to derivative instruments.

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

						September 30, 2011								December 31, 2010
						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			$	5	$	63			$	4	$	11	$	19			$	2
			Cross-currency swaps						2						7		9
			Foreign currency
				exchange contracts			5			$	16				7			$	4
			Commodity contracts				667		2		700		734		878		19		1,011		1,095
					Total current		677		67		716		738		903		47		1,015		1,097
Noncurrent:
	Price Risk Management
		Assets/Liabilities (b):
			Interest rate swaps										53		4						32
			Cross-currency swaps				51								37
			Commodity contracts				152		16		523		439		169		7		445		431
					Total noncurrent		203		16		523		492		210		7		445		463
Total derivatives						$	880	$	83	$	1,239	$	1,230	$	1,113	$	54	$	1,460	$	1,560

(a) $261 million and $326 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at September 30, 2011 and December 31, 2010.

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 after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $921 million and $602 million at September 30, 2010 and December 31, 2009.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets 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 exchange contracts	$	5	$	4

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

Foreign exchange 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 - noncurrent	$	(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 tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended September 30, 2010.

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)

(14)

									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		$	(124)	$	(225)	Interest expense		$	(1)			$	(2)	$	(3)
							Other income
								(expense) - net		(30)				(30)
	Cross-currency swaps			(6)		40	Interest expense			1				2
							Other income
								(expense) - net		(19)				19
	Commodity contracts			360		789	Wholesale energy
								marketing		93	$	(8)		469		(173)
							Fuel			1				2
							Depreciation			1				2
							Energy purchases			(87)		20		(398)		2
Total			$	230	$	604			$	(41)	$	12	$	64	$	(174)

Net Investment Hedges:
		Foreign exchange contracts	$	(1)	$	4

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

Foreign exchange contracts	Other income (expense) - net	$	(1)	$	1
Commodity contracts	Unregulated retail electric and gas		10		22
	Wholesale energy marketing		61		384
	Net energy trading margins (a)		(11)
	Fuel		10		(2)
	Energy purchases		(378)		(873)
	Total	$	(309)	$	(468)

(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.

See Note 8 for information on PPL Energy Supply's January 2011 distribution of its membership interest in PPL Global to its parent, PPL Energy Funding. The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.

						September 30, 2011								December 31, 2010
						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):
			Cross-currency swaps											$	7	$	9
			Foreign currency
				exchange contracts											7			$	4
			Commodity contracts			$	667	$	2	$	699	$	733		878		19		1,011	$	1,084
					Total current		667		2		699		733		892		28		1,015		1,084
Noncurrent:
	Price Risk Management
		Assets/Liabilities (b):
			Cross-currency swaps												37
			Commodity contracts				152		16		523		439		169		7		445		431
					Total noncurrent		152		16		523		439		206		7		445		431
Total derivatives						$	819	$	18	$	1,222	$	1,172	$	1,098	$	35	$	1,460	$	1,515

(a) $261 million and $326 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at September 30, 2011 and December 31, 2010.

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. See Note 8 for additional information. The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $1.0 billion and $573 million at September 30, 2010 and December 31, 2009.

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 tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended September 30, 2010.

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)				Gain (Loss)
										Recognized				Recognized
										in Income				in Income
										on Derivative				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:
	Interest rate swaps					Discontinued
							operations							$	(3)
	Cross-currency swaps	$	(6)	$	40	Discontinued
							operations	$	(18)			$	21
						Wholesale energy
	Commodity contracts	$	360		789		marketing		93	$	(8)		469		(173)
						Fuel			1				2
						Depreciation							1
						Energy purchases			(87)		20		(398)		2
Total		$	354	$	829			$	(11)	$	12	$	95	$	(174)

Net Investment Hedges:
	Foreign exchange contracts	$	(1)	$	4

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

Foreign exchange contracts	Discontinued operations	$	(1)	$	1
Commodity contracts	Unregulated retail electric and gas		10		22
	Wholesale energy marketing		61		384
	Net energy trading margins (a)		(11)
	Fuel		10		(2)
	Energy purchases		(378)		(873)
	Total	$	(309)	$	(468)

(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, 2011						December 31, 2010
					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						$	4				$	2
			Commodity contracts				$	1		1					2
				Total current				1		5					4
Noncurrent:
	Price Risk Management
		Assets/Liabilities (a):
			Interest rate swaps							53					32
				Total noncurrent						53					32
Total derivatives							$	1	$	58				$	36

There were no after-tax balances of accumulated net gains (losses) in AOCI at September 30, 2011, December 31, 2010 and September 30, 2010. The after-tax balance of accumulated net gains in AOCI was $5 million at December 31, 2009.

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

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 - retail and wholesale		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)

The following tables present the pre-tax effect of derivative instruments recognized in income or regulatory assets for the periods ended September 30, 2010, for the predecessor.

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

Interest rate swaps	Other income (expense) - net	$	29	$	19
Commodity contracts	Operating revenues - retail and wholesale				3
	Total	$	29	$	22

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

Interest rate swaps	Regulatory assets	$	(59)	$	(59)

The gains and losses recognized in income on derivatives associated with commodity contracts for the three-month period ended September 30, 2010 were not significant.

During the nine months ended September 30, 2010, LG&E recorded a pre-tax gain to reverse previously recorded losses of $21 million and $9 million to reflect the reclassification of the ineffective swaps and the terminated swap to a regulatory asset.

The gain on hedging interest rate swaps recognized in OCI for the three and nine months ended September 30, 2010, was $21 million and $17 million. For the three and nine months ended September 30, 2010, the gain on derivatives reclassified from AOCI to regulatory assets was $23 million.

Prior to including the unrealized gains and losses on the effective and ineffective interest rate swaps in regulatory assets, amounts previously recorded in AOCI were reclassified into earnings in the same period during which the hedged forecasted transaction affected earnings. The amount amortized from OCI to income in the three and nine months ended September 30, 2010 was not significant.

The gains and losses recognized in income on derivatives associated with commodity contracts were not significant for the three and nine months ended September 30, 2011 and 2010.

Certain of PPL's, PPL Energy Supply's, LKE's and LG&E's derivative contracts contain credit contingent provisions which would permit the counterparties with which PPL, PPL Energy Supply, LKE or LG&E is in a net liability position to require the transfer of additional collateral upon a decrease in the credit ratings of PPL, PPL Energy Supply, LKE, LG&E, or certain of their subsidiaries. Most of these provisions would require PPL, PPL Energy Supply, LKE or LG&E to transfer 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 by PPL, PPL Energy Supply, LKE or LG&E on derivative instruments in net liability positions.

Additionally, certain of PPL's, PPL Energy Supply's, LKE's and LG&E's derivative contracts contain credit contingent provisions that require PPL, PPL Energy Supply, LKE or LG&E to provide "adequate assurance" of performance if the other party has reasonable grounds for insecurity regarding PPL's, PPL Energy Supply's, LKE's or LG&E's performance of its 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, 2011, 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	$	103	$	51	$	37	$	37
Aggregate fair value of collateral posted on these derivative instruments			45		15		30		30
Aggregate fair value of additional collateral requirements in the event of
	a credit downgrade below investment grade (a)		191		167		9		9

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