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Derivative Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | 14. Derivative Instruments and Hedging Activities (All Registrants) Risk Management Objectives PPL has a risk management policy approved by the Board of Directors to manage market risk associated with commodities, interest rates on debt issuances (including price, liquidity and volumetric risk) and credit risk (including non-performance risk and payment default risk). The Risk Management Committee, comprised of senior management and chaired by the Vice President-Financial Strategy and 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, value-at-risk analyses (VaR, a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level) and the coordination and reporting of the Enterprise Risk Management program. 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 transactions are utilized as part of risk management strategies to minimize unanticipated fluctuations in earnings caused by changes in commodity prices and interest rates. Many of these 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 subsidiaries. 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 LG&E utilize 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 issuance. •PPL and its subsidiaries are exposed to interest rate risk associated with debt securities and derivatives 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 utilities due to the recovery methods in place. Commodity Price Risk PPL is exposed to commodity price risk through its subsidiaries as described below. •PPL Electric is required to purchase electricity to fulfill its obligation as a PLR. Potential commodity price risk is mitigated through its PAPUC-approved cost recovery mechanism and full-requirement supply agreements to serve its PLR customers which transfer the risk to energy suppliers. •LG&E's and KU's rates include certain mechanisms for fuel, fuel-related expenses and energy purchases. In addition, LG&E's rates include a mechanism for natural gas supply costs. These mechanisms generally provide for timely recovery of market price fluctuations associated with these costs. •RIE utilizes derivative instruments pursuant to its RIPUC-approved plan to manage commodity price risk associated with its natural gas purchases. RIE's commodity price risk management strategy is to reduce fluctuations in firm gas sales prices to its customers. RIE's costs associated with derivatives instruments are recoverable through its RIPUC-approved cost recovery mechanisms. RIE is required to purchase electricity to fulfill its obligation to provide Last Resort Service (LRS). Potential commodity price risk is mitigated through its RIPUC-approved cost recovery mechanisms and full requirements service agreements to serve LRS customers, which transfer the risk to energy suppliers. RIE is required to contract through long-term agreements for clean energy supply under the Rhode Island Renewable Energy Growth program and Long-term Clean Energy Standard. Potential commodity price risk is mitigated through its RIPUC-approved cost recovery mechanisms, which true-up cost differences between contract prices and market prices. Volumetric Risk Volumetric risk is the risk related to the changes in volume of retail sales due to weather, economic conditions or other factors. PPL is exposed to volumetric risk through its subsidiaries as described below: •PPL Electric, LG&E and KU are exposed to volumetric risk on retail sales, mainly due to weather and other economic conditions for which there is limited mitigation between rate cases. •RIE is exposed to volumetric risk, which is significantly mitigated by regulatory mechanisms. RIE's electric and gas distribution rates both have a revenue decoupling mechanism, which allows for annual adjustments to RIE's delivery rates. Equity Securities Price Risk •PPL and its subsidiaries are exposed to equity securities price risk associated with the fair value of the defined benefit plans' assets. This risk is significantly mitigated due to the recovery methods in place. •PPL is exposed to equity securities price risk from future stock sales and/or purchases. 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" transactions with counterparties as well as additional credit risk through certain of its subsidiaries, as discussed below. In the event a supplier of PPL, PPL Electric, LG&E or KU defaults on its contractual obligation, those Registrants 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, thereby 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, if a counterparty's credit ratings fall below investment grade, their tangible net worth falls below specified percentages or its exposures exceed an established credit limit. Master Netting Arrangements (PPL, LG&E and KU) 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, LG&E and KU had no obligation to return or post cash collateral under master netting arrangements at September 30, 2024 and December 31, 2023. 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 (All Registrants) PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. A variety of financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of the debt portfolios 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. In addition, the interest rate risk of certain subsidiaries is potentially mitigated as a result of the existing regulatory framework or the timing of rate cases. 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. PPL had no such contracts at September 30, 2024. 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 not probable of occurring. For the three and nine months ended September 30, 2024 and 2023, PPL had no cash flow hedges reclassified into earnings associated with discontinued cash flow hedges. At September 30, 2024, the amount of accumulated net unrecognized after-tax gains (losses) on qualifying derivatives expected to be reclassified into earnings during the next 12 months is insignificant. Amounts are reclassified as the hedged interest expense is recorded. Economic Activity (PPL and LG&E) LG&E enters into interest rate swap contracts that economically hedge interest payments. Because realized gains and losses from the swaps, including terminated swap contracts, 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 September 30, 2024, LG&E held contracts with a notional amount of $64 million that mature in 2033. Commodity Price Risk (PPL) Economic Activity RIE enters into derivative contracts that economically hedge natural gas purchases. Realized gains and losses from the derivatives are recoverable through regulated rates, therefore subsequent changes in fair value are included in regulatory assets or liabilities until they are realized as purchased gas. Realized gains and losses are recognized in "Energy Purchases" on the Statements of Income upon settlement of the contracts. At September 30, 2024, RIE held contracts with notional volumes of 55 Bcf that range in maturity from 2024 through 2029. 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 include certain full requirement purchase contracts and other physical purchase contracts. Changes in the fair value of derivatives not designated as NPNS are recognized in earnings unless specific hedge accounting criteria are met and designated as such, except for the changes in fair values of LG&E's interest rate swaps and certain RIE commodity gas contracts that are recognized as regulatory assets or regulatory liabilities. See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at September 30, 2024 and December 31, 2023. See Note 1 in each Registrant's 2023 Form 10-K for additional information on accounting policies related to derivative instruments. (PPL) The following table presents the fair value and the location on the Balance Sheets of derivatives not designated as hedging instruments.
|  |  |  |  | September 30, 2024 |  |  |  |  |  | December 31, 2023
|  |  |  |  | Assets |  | Liabilities |  |  |  |  |  | Assets |  | Liabilities
Current: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Price Risk Management Assets/Liabilities (a): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  |  |  | $ | — |  |  | $ | 1 |  |  |  |  |  |  | $ | — |  |  | $ | 1 |
Gas contracts |  |  |  |  | 2 |  |  | 22 |  |  |  |  |  |  | 1 |  |  | 51 |
Total current |  |  |  |  | 2 |  |  | 23 |  |  |  |  |  |  | 1 |  |  | 52 |
Noncurrent: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Price Risk Management Assets/Liabilities (a): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  |  |  | — |  |  | 6 |  |  |  |  |  |  | — |  |  | 6 |
Gas contracts |  |  |  |  | — |  |  | 5 |  |  |  |  |  |  | — |  |  | 9 |
Total noncurrent |  |  |  |  | — |  |  | 11 |  |  |  |  |  |  | — |  |  | 15 |
Total derivatives |  |  |  |  | $ | 2 |  |  | $ | 34 |  |  |  |  |  |  | $ | 1 |  |  | $ | 67 |
(a)Current portion is included in "Other current assets" and "Other current liabilities" and noncurrent portion is included in "Other noncurrent assets" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets. 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 period ended September 30, 2024.
|  | Three Months |  | Nine Months |  |  |  | Three Months |  | Nine Months
Derivative Relationships |  | Derivative Gain (Loss) Recognized in OCI |  | Derivative Gain (Loss) Recognized in OCI |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Gain (Loss) Reclassified from AOCI into Income |  | Gain (Loss) Reclassified from AOCI into Income
Cash Flow Hedges: |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | — |  |  | Interest expense |  | $ | (1) |  |  | $ | (3) |
Derivatives Not Designated as Hedging Instruments |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Three Months |  | Nine Months
Gas contracts |  | Energy purchases |  | $ | (6) |  |  | $ | (31) |
|  | Total |  | $ | (6) |  |  | $ | (31) |
Derivatives Not Designated as Hedging Instruments |  | Location of Gain (Loss) Recognized as Regulatory Liabilities/Assets |  | Three Months |  | Nine Months
Interest rate swaps |  | Regulatory assets - noncurrent |  | $ | (3) |  |  | $ | — |
Gas contracts |  | Regulatory assets - current |  | (2) |  |  | 31 |
|  | Regulatory assets - noncurrent |  | (3) |  |  | 3 |
|  | Total |  | $ | (8) |  |  | $ | 34 |
The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the period ended September 30, 2023.
|  | Three Months |  | Nine Months |  |  |  | Three Months |  | Nine Months
Derivative Relationships |  | Derivative Gain (Loss) Recognized in OCI |  | Derivative Gain (Loss) Recognized in OCI |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Gain (Loss) Reclassified from AOCI into Income |  | Gain (Loss) Reclassified from AOCI into Income
Cash Flow Hedges: |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | — |  |  | $ | — |  |  | Interest expense |  | $ | (1) |  |  | $ | (3) |
Derivatives Not Designated as Hedging Instruments |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Three Months |  | Nine Months
Gas contracts |  | Energy purchases |  | $ | (4) |  |  | $ | (11) |
|  | Other income (expense) - net |  | (1) |  |  | (1) |
|  | Total |  | $ | (5) |  |  | $ | (12) |
Derivatives Not Designated as Hedging Instruments |  | Location of Gain (Loss) Recognized as Regulatory Liabilities/Assets |  | Three Months |  | Nine Months
Interest rate swaps |  | Regulatory assets - noncurrent |  | $ | 4 |  |  | $ | 4 |
Gas contracts |  | Regulatory assets - current |  | (14) |  |  | 12 |
|  | Regulatory assets - noncurrent |  | 2 |  |  | (5) |
|  | Total |  | $ | (8) |  |  | $ | 11 |
The following table presents the effect of cash flow hedge activity on the Statement of Income for the period ended September 30, 2024.
| Location and Amount of Gain (Loss) Recognized in Income on Hedging Relationships |
| Three Months |  | Nine Months |
| Interest Expense |  |  |  | Interest Expense |  |  |  |
Total income and expense line items presented in the income statement in which the effect of cash flow hedges are recorded | $ | 188 |  |  |  |  | $ | 549 |  |  |  |  |
The effects of cash flow hedges: |  |  |  |  |  |  |  |  |
Gain (Loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |
Interest rate swaps: |  |  |  |  |  |  |  |  |
Amount of gain (loss) reclassified from AOCI to income | (1) |  |  |  |  | (3) |  |  |  |  |
The following table presents the effect of cash flow hedge activity on the Statement of Income for the period ended September 30, 2023.
| Location and Amount of Gain (Loss) Recognized in Income on Hedging Relationships |
| Three Months |  | Nine Months |
| Interest Expense |  |  |  | Interest Expense |  |  |  |
Total income and expense line items presented in the income statement in which the effect of cash flow hedges are recorded | $ | 165 |  |  |  |  | $ | 494 |  |  |  |  |
The effects of cash flow hedges: |  |  |  |  |  |  |  |  |
Gain (Loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |  |
Interest rate swaps: |  |  |  |  |  |  |  |  |
Amount of gain (loss) reclassified from AOCI to income | (1) |  |  |  |  | (3) |  |  |  |  |
(LG&E) The following table presents the fair value and the location on the Balance Sheets of derivatives not designated as hedging instruments.
| September 30, 2024 |  | December 31, 2023
| Assets |  | Liabilities |  | Assets |  | Liabilities
Current: |  |  |  |  |  |  |
Price Risk Management Assets/Liabilities: |  |  |  |  |  |  |
Interest rate swaps | $ | — |  |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |
Total current | — |  |  | 1 |  |  | — |  |  | 1 |
Noncurrent: |  |  |  |  |  |  |
Price Risk Management Assets/Liabilities: |  |  |  |  |  |  |
Interest rate swaps | — |  |  | 6 |  |  | — |  |  | 6 |
Total noncurrent | — |  |  | 6 |  |  | — |  |  | 6 |
Total derivatives | $ | — |  |  | $ | 7 |  |  | $ | — |  |  | $ | 7 |
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 period ended September 30, 2024.
|  | Location of Gain (Loss) Recognized in |  |  |  |
Derivative Instruments |  | Income on Derivatives |  | Three Months |  | Nine Months
Interest rate swaps |  | Interest expense |  | $ | — |  |  | $ | — |
|  | Location of Gain (Loss) Recognized in |  |  |  |
Derivative Instruments |  | Regulatory Assets |  | Three Months |  | Nine Months
Interest rate swaps |  | Regulatory assets - noncurrent |  | $ | (3) |  |  | $ | — |
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 period ended September 30, 2023.
|  | Location of Gain (Loss) Recognized in |  |  |  |
Derivative Instruments |  | Income on Derivatives |  | Three Months |  | Nine Months
Interest rate swaps |  | Interest expense |  | $ | — |  |  | $ | — |
|  | Location of Gain (Loss) Recognized in |  |  |  |
Derivative Instruments |  | Regulatory Assets |  | Three Months |  | Nine Months
Interest rate swaps |  | Regulatory assets - noncurrent |  | $ | 4 |  |  | $ | 4 |
(PPL, LG&E and KU) Offsetting Derivative Instruments PPL, LG&E and KU or certain of their subsidiaries have master netting arrangements in place and also enter into agreements pursuant to which they purchase or sell 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, 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 |  |
| Gross |  | Derivative Instruments |  | Cash Collateral Received |  | Net |  | Gross |  | Derivative Instruments |  | Cash Collateral Pledged |  | Net
September 30, 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
PPL | $ | 2 |  |  | $ | 2 |  |  | $ | — |  |  | $ | — |  |  | $ | 34 |  |  | $ | 2 |  |  | $ | — |  |  | $ | 32 |
LG&E | — |  |  | — |  |  | — |  |  | — |  |  | 7 |  |  | — |  |  | — |  |  | 7 |
| Assets |  | Liabilities
|  |  | Eligible for Offset |  |  |  |  |  | Eligible for Offset |  |
| Gross |  | Derivative Instruments |  | Cash Collateral Received |  | Net |  | Gross |  | Derivative Instruments |  | Cash Collateral Pledged |  | Net
December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
PPL | $ | 1 |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |  |  | $ | 67 |  |  | $ | — |  |  | $ | — |  |  | $ | 67 |
LG&E | — |  |  | — |  |  | — |  |  | — |  |  | 7 |  |  | — |  |  | — |  |  | 7 |
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, 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, 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, such amounts would represent assumed immediate payment or immediate and ongoing full collateralization for derivative instruments in net liability positions with "adequate assurance" features. (PPL) At September 30, 2024, derivative contracts in a net liability position that contain credit risk-related contingent features was $18 million. At September 30, 2024, the aggregate fair value of additional collateral requirements in the event of a credit downgrade below investment grade was $19 million.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/815/tableOfContent + Details
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