Fitch Affirms PPL and Subsidiaries; Revises PPL Supply's Outlook to Negative

  Fitch Affirms PPL and Subsidiaries; Revises PPL Supply's Outlook to Negative

Business Wire

NEW YORK -- December 06, 2012

Fitch Ratings has affirmed the Issuer Default Ratings (IDR) and individual
security ratings of PPL Corp. (PPL) and each of its domestic subsidiaries.
Fitch also revised PPL Energy Supply's (PPL Supply) Outlook to Negative from
Stable. Simultaneously, Fitch affirmed the Stable Outlook for all other
domestic subsidiaries. A full list of rating actions appears at the end of
this release.

PPL:

PPL's ratings and Outlook reflect its transformation from a company heavily
reliant on commodity sensitive businesses to one that is highly regulated with
substantially less business risk. Driven by the acquisitions of Central
Networks in April 2011 and LG&E and KU Energy, LLC (LKE) in November 2010,
regulated operations are expected by Fitch to provide over 75% of consolidated
EBITDA by 2013. By comparison regulated operations accounted for approximately
30% of EBITDA prior to the two acquisitions. The proposed ratings also reflect
credit metrics that are generally consistent with the rating and lower risk
profile.

Rising capital expenditures in PPL's regulated segment pose a potential credit
risk. PPL is investing heavily in its regulated businesses and expects to grow
the regulated rate base by approximately 7.6% annually over the next five
years. The investments will require on-going rate increases in both Kentucky
and Pennsylvania and equity support from PPL. Expenditures in Kentucky are
primarily to install environmental upgrades to comply with new Environmental
Protection Agency (EPA) standards. In Pennsylvania the new investments are
largely to replace aging infrastructure and for transmission upgrades. The
risk associated with the magnitude of the capital expenditure program is
mitigated by regulatory provisions that provide near real time cost recovery
of invested capital for about two-thirds of projected expenditures, including
FERC jurisdictional transmission in Pennsylvania, environmental compliance in
Kentucky and all capital investments in the UK.

In PPL's merchant power generation segment, a weak power price environment is
the primary challenge in the next two to three years. Additionally, several
unplanned plant outages due to hardware failure adds more downward pressure
and raise concern with regard to the chronic nature of these incidents.
However, Fitch believes that the weak performance in this business segment is
manageable for PPL as the segment becomes less critical to PPL's consolidated
financial strength going forward.

Historically, PPL positions well within the rating category. Over the last
three years, on average, it produced funds from operations (FFO)/debt of 19.8%
and FFO interest coverage of 4.6x. Going forward, Fitch expects these metrics
to decline while remaining in line with its rating, with average FFO/debt in
mid-teens and FFO interest coverage of 4x. Fitch's projection has taken into
consideration the mandatorily convertible debt issued in 2010 and 2011 of
approximately $1.2 billion and $1 billion which currently receive 100% equity
credit.

PPL and its subsidiaries have ample liquidity and manageable debt maturities.
Internal cash flow is supplemented by committed bank lines at each of its
domestic operating subsidiaries aggregating $4.698 billion. PPL's UK
subsidiaries maintain separate bank credit facilities of GBP1.079 billion.
Available cash and equivalents at Sept. 30, 2012, were $942. There are $750
million and $300 million senior notes due in 2013 and 2014 at PPL Supply and
$10 million in 2014 at PPL Electric Utilities (PPLEU). Fitch believes that
with internal cash flow and available credit facilities, PPL will have
sufficient liquidity to cover all required cash needs in the next 12 to 18
months.

PPL Energy Supply, LLC (PPL Supply)

PPL Supply's Negative Outlook reflects the expected decline in credit ratios
over the next two to three years due to lower hedge prices and gross margin,
despite anticipated deleveraging and modest capital requirements. The Outlook
also reflects Fitch's concerns over plant performance and required compliance
costs at PPL Supply's nuclear generating plant Susquehana. The plant has
experienced series of outages due to hardware failure in the past two years
and is expected to receive more permanent solution starting 2013. Given the
importance of Susquehana to PPL Supply as a generation source (it represents
33% of power output in 2011), its performance is crucial to credit quality
especially during the market downturn. Albeit to a lesser degree, the Negative
Outlook also considers the uncertainty associated with safety related
compliance cost. The weak positioning of PPL Supply in its rating category
makes it vulnerable to any substantial compliance requirements.

Fitch believes that over the long term, PPL Supply is well positioned to
benefit from any power price rise associated with environmental compliance
costs. The company has invested heavily in pollution control equipment and its
generating fleet is well positioned on the dispatch curve. Earnings and cash
flow also benefit from operation of the PJM capacity market and the hedging
policy that limits earnings volatility.

PPL Supply's liquidity position is strong. The combination of relatively short
duration hedges (no more than three years) and low commodity prices have
limited collateral postings and use of credit facilities. As of Sept. 30,
2012, it has committed credit facility of $3.2 billion ($3 billion of which
expires in November 2017 and $200 expires in March 2013), of which $594
million was utilized. Additionally, it maintains an $800 million hedging
facility. Fitch believes these credit facilities should be sufficient to cover
all cash needs including debt maturities, capital spending, upstream dividend
and reasonable amount of collateral posting requirements.

PPL Electric Utilities Corp (PPLEU)

PPL Electric Utilities (PPLEU)'s ratings are supported by leverage, interest
coverage and cash flow measures that are well positioned within the 'BBB'
rating category and comparable to its peer group of electric distribution
utilities with similar risk characteristics. Over the last three years, on
average, PPLEU produced FFO to debt of 23%. For LTM Sept. 30, 2012, FFO to
debt was 21%. Going forward, we expect the metric to decline to high teens in
the next three years, as it invests in a large capital spending program.

The ratings also benefit from the absence of commodity price exposure and
incorporate our expectations that PPLEU will receive a reasonably constructive
decision on its latest distribution rate filling. On March 20, 2012, PPLEU
requested that the PAPUC approve a distribution base rate increase of $104.6
million or approximately 2.9% and an 11.25% ROE. Commission decisions are
expected in the near future. 1% change in ROE will result in reduction in
revenue of approximately $23 million. PPLEU's last rate case authorized a
$77.5 million (1.6%) rate increase, equal to about two-thirds of its $115
million rate request. The allowed return on equity (ROE) was 10.7%, which is
marginally above the industry average.

Capital expenditures are expected to rise substantially over the next five
years (2012-2016). The higher capital expenditures are primarily to replace an
aging infrastructure and to enhance the transmission network. Favorably,
approximately 55% of the expenditures are subject to the Federal Energy
Regulatory Commission's (FERC) formula rate regulation, which provides timely
recovery of invested capital and operating costs including a return on equity.

Kentucky Utilities Co. (KU) and Louisville Gas & Electric Co. (LG&E)

The ratings of the two Kentucky utility subsidiaries, Kentucky Utilities
Company (KU) and Louisville Gas and Electric Company (LG&E) reflect strong
credit metrics and constructive regulatory policies that limit cash flow
volatility and business risk. The ratings also benefit from the Kentucky
Public Service Commission's (KPSC) track record for timely rate increases.
Constructive regulatory policies include a monthly fuel adjustment clause
(FAC) and an environmental cost recovery mechanism. Regulatory statutes also
permit the inclusion of construction work in progress (CWIP) in rate base.

The ECR mechanism is particularly important given the two utilities' reliance
on coal-fired electric generation and the substantial investment that will be
required to meet the Environmental Protection Agency's (EPA) newest
regulations. The ECR provides for recovery of and a return on environment
investments required as a result of coal combustion emissions. The ECR permits
the approved environmental costs to be reflected in rates two months after
incurred. In June 2011, KU and LG&E filed an ECR plan requesting recovery of
the expected $2.5 billion of environmental compliance costs as well as
operating expenses as incurred. In December 2011, $2.3 billion of the plan was
approved.

Additionally, the utilities' results could also benefit from the recent rate
case settlement. If approved, it will allow for LG&E's electric rates to
increase by $33.7 million and gas rates to increase by $15 million and allow
for KU's electric rates to increase by $51 million with a 10.25% ROE.

Finally, the ratings of LG&E and KU Energy LLC's (LKE), an intermediate
holding company and parent of KU and LG&E reflect the predictable cash flow
and strong credit profile of its two regulated utility subsidiaries as well as
the debt level at the holding company.

What Could Trigger a Rating Action:

PPL

Positive:

--Unlikely given the large capital spending program.

Negative:

--PPL's ratings could be downgraded if capital resources are allocated
disproportionally in the relatively weak unregulated business, resulting in
increasing leverage and FFO to debt below 16% and Debt to EBITDA above 4x
beyond the heavy utility spending period;

--Any material adverse development in the regulatory framework in the states
or in U.K. that PPL's regulated utilities operate in, such as change in
commodity cost recovery provisions in Pennsylvania.

PPLEU

Positive:

--Unlikely given the large capital spending program.

Negative:

--A materially unfavorable distribution rate case decision;

--Any material adverse development in the regulatory framework in Pennsylvania
such as change in commodity cost recovery provisions or return of rate freeze
(though unlike in currently low power price environment) could pressure the
ratings.

KU and LG&E

Positive:

--Unlikely given the large capital spending program.

Negative:

--Any material adverse development in the regulatory framework in Kentucky.

PPL Supply

Positive:

--An upgrade in the next two to three years is unlikely given the Negative
Outlook.

--The Negative Outlook can be stabilized if its FFO to debt ratio reaches
approximately 25% and Debt to EBITDA at low 3x, if the magnitude of the
permanent repair at Susquehana is manageable and plant performance stabilizes.

Negative:

--If the permanent repair period becomes prolonged and costly at Susquehana;

--Fukushima compliance cost remains uncertain and could affect the ratings
negatively.

Fitch affirms the following ratings with a Stable Outlook:

PPL Corp

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2'.

PPL Capital Funding Inc.

--Long-term IDR at 'BBB';

--Senior unsecured debt at 'BBB';

--Junior subordinated notes at 'BB+';

--Short-term IDR at 'F2'.

PPL Electric Utilities Corp.

--Long-term IDR at 'BBB';

--Secured debt at 'A-';--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

LG&E and KU Energy LLC

--Long-term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Short-term IDR at 'F2'.

Kentucky Utilities Company

--Long-term IDR at 'A-';

--Secured debt at 'A+';

--Secured pollution control bonds at 'A+/F2';

--Senior unsecured debt at 'A';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Louisville Gas and Electric Company

--Long-term IDR at 'A-';

--Secured debt 'A+';

--Secured pollution control bonds at 'A+/F2';

--Senior unsecured debt at 'A';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Fitch affirms the following ratings and revises the Outlook to Negative from
Stable:

PPL Energy Supply, LLC

--Long-term IDR at 'BBB';

--Senior unsecured debt at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Fitch withdraws the following rating due to redemption:

PPL Electric Utilities

--Preferred stock at 'BBB-'.

Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Rating North American Utilities, Gas and Water Companies' (May 16, 2012);

--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693750

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

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Contact:

Fitch Ratings
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Julie Jiang, +1-212-908-0708
Director
Fitch, Inc.
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or
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or
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