Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2016March 31, 2017
OR
[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________
Commission File
Number
Registrant; State of Incorporation;
Address and Telephone Number
IRS Employer
Identification No.
   
1-11459
PPL Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-2758192
   
1-905
PPL Electric Utilities Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-0959590
   
333-173665
LG&E and KU Energy LLC
(Exact name of Registrant as specified in its charter)
(Kentucky)
220 West Main Street
Louisville, KY 40202-1377
(502) 627-2000
20-0523163
   
1-2893
Louisville Gas and Electric Company
(Exact name of Registrant as specified in its charter)
(Kentucky)
220 West Main Street
Louisville, KY 40202-1377
(502) 627-2000
61-0264150
   
1-3464
Kentucky Utilities Company
(Exact name of Registrant as specified in its charter)
(Kentucky and Virginia)
One Quality Street
Lexington, KY 40507-1462
(502) 627-2000
61-0247570

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. 
 PPL Corporation
Yes  X   
No        
 
 PPL Electric Utilities Corporation
Yes  X   
No        
 
 LG&E and KU Energy LLC
Yes  X   
No        
 
 Louisville Gas and Electric Company
Yes  X  
No        
 
 Kentucky Utilities Company
Yes  X   
No        
 
 
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). 
 PPL Corporation
Yes  X   
No        
 
 PPL Electric Utilities Corporation
Yes  X   
No        
 
 LG&E and KU Energy LLC
Yes  X   
No        
 
 Louisville Gas and Electric Company
Yes  X   
No        
 
 Kentucky Utilities Company
Yes  X   
No        
 
 
Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or a smaller reporting company.companies or emerging growth companies. See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company" and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
  
Large accelerated
filer
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
Emerging growth company
 PPL Corporation[ X ][     ][     ][     ][     ]
 PPL Electric Utilities Corporation[     ][     ][ X ][     ][     ]
 LG&E and KU Energy LLC[     ][     ][ X ][     ][     ]
 Louisville Gas and Electric Company[     ][     ][ X ][     ][     ]
 Kentucky Utilities Company[     ][     ][ X ][     ][     ]

If emerging growth companies, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
PPL Corporation[     ]
PPL Electric Utilities Corporation[     ]
LG&E and KU Energy LLC[     ]
Louisville Gas and Electric Company[     ]
Kentucky Utilities Company[     ]
 
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
 PPL Corporation
Yes        
No  X   
 
 PPL Electric Utilities Corporation
Yes        
No  X   
 
 LG&E and KU Energy LLC
Yes        
No  X   
 
 Louisville Gas and Electric Company
Yes        
No  X   
 
 Kentucky Utilities Company
Yes        
No  X   
 
 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 PPL CorporationCommon stock, $0.01 par value, 679,627,323683,174,778 shares outstanding at October 26, 2016.April 27, 2017.
   
 PPL Electric Utilities CorporationCommon stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at October 26, 2016.April 27, 2017.
   
 LG&E and KU Energy LLCPPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
   
 Louisville Gas and Electric CompanyCommon stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at October 26, 2016.April 27, 2017.
   
 Kentucky Utilities CompanyCommon stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at October 26, 2016.April 27, 2017.

This document is available free of charge at the Investors section of PPL Corporation's website at www.pplweb.com. However, information on this website does not constitute a part of this Form 10-Q.

PPL CORPORATION
PPL ELECTRIC UTILITIES CORPORATION
LG&E AND KU ENERGY LLC
LOUISVILLE GAS AND ELECTRIC COMPANY
KENTUCKY UTILITIES COMPANY
 
FORM 10-Q
FOR THE QUARTER ENDED September 30, 2016MARCH 31, 2017
 
Table of Contents
 
This combined Form 10-Q is separately filed by the following Registrants in their individual capacity: PPL Corporation, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant, except that information under "Forward-Looking Information" relating to subsidiaries of PPL Corporation is also attributed to PPL Corporation and information relating to the subsidiaries of LG&E and KU Energy LLC is also attributed to LG&E and KU Energy LLC.
 
Unless otherwise specified, references in this Report, individually, to PPL Corporation, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company are references to such entities directly or to one or more of their subsidiaries, as the case may be, the financial results of which subsidiaries are consolidated into such Registrants in accordance with GAAP. This presentation has been applied where identification of particular subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis.
  Page
GLOSSARY OF TERMS AND ABBREVIATIONS
i
FORWARD-LOOKING INFORMATION
1
PART I.  FINANCIAL INFORMATION 
 Item 1.  Financial Statements 
  PPL Corporation and Subsidiaries 
   
Condensed Consolidated Statements of Income
3
   
Condensed Consolidated Statements of Comprehensive Income (Loss)
4
   
Condensed Consolidated Statements of Cash Flows
5
   
Condensed Consolidated Balance Sheets
6
   
Condensed Consolidated Statements of Equity
8
  PPL Electric Utilities Corporation and Subsidiaries 
   
Condensed Consolidated Statements of Income
10
   
Condensed Consolidated Statements of Cash Flows
11
   
Condensed Consolidated Balance Sheets
12
   
Condensed Consolidated Statements of Equity
14
  LG&E and KU Energy LLC and Subsidiaries 
   
Condensed Consolidated Statements of Income
15
Condensed Consolidated Statements of Comprehensive Income
16
   
Condensed Consolidated Statements of Cash Flows
17
   
Condensed Consolidated Balance Sheets
18
   
Condensed Consolidated Statements of Equity
20
  Louisville Gas and Electric Company 
   
Condensed Statements of Income
22
   
Condensed Statements of Cash Flows
23
   
Condensed Balance Sheets
24
   
Condensed Statements of Equity
26
  Kentucky Utilities Company 
   
Condensed Statements of Income
28
   
Condensed Statements of Cash Flows
29
   
Condensed Balance Sheets
30
   
Condensed Statements of Equity
32

 Combined Notes to Condensed Financial Statements (Unaudited) 
  
1.   Interim Financial Statements
33
  
2.   Summary of Significant Accounting Policies
33
  
3.   Segment and Related Information
3534
  
4.   Earnings Per Share
3534
  
5.   Income Taxes
3736
  
6.   Utility Rate Regulation
3837
  
7.   Financing Activities
4240
  
8.   Acquisitions, DevelopmentDefined Benefits
42
9. Commitments and DivestituresContingencies
44
  
9.   Defined Benefits10. Related Party Transactions
47
10. Commitments and Contingencies
4952
  
11. Related Party TransactionsOther Income (Expense) - net
5853
  
12. Other Income (Expense) - netFair Value Measurements
5853
  
13. Fair Value MeasurementsDerivative Instruments and Hedging Activities
5955
  
14. Derivative InstrumentsGoodwill and Hedging ActivitiesOther Intangible Assets
6163
  
15. Goodwill and Other Intangible AssetsAsset Retirement Obligations
6963
  
16. Asset Retirement ObligationsAccumulated Other Comprehensive Income (Loss)
6963
  
17. Accumulated Other Comprehensive Income (Loss)
70
18. New Accounting Guidance Pending Adoption
7264
 Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 
  
Overview
7466
   
Introduction
7466
   
Business Strategy
7668
   
Financial and Operational Developments
7769
  
Results of Operations
7970
   
PPL Corporation and Subsidiaries - Statement of Income Analysis, Segment Earnings and Margins
8071
   
PPL Electric Utilities Corporation and Subsidiaries - Statement of Income Analysis, Earnings and Margins
9380
   
LG&E and KU Energy LLC and Subsidiaries - Statement of Income Analysis, Earnings and Margins
9683
   
Louisville Gas and Electric Company - Statement of Income Analysis, Earnings and Margins
9985
   
Kentucky Utilities Company - Statement of Income Analysis, Earnings and Margins
10287
  
Financial Condition
10489
   
Liquidity and Capital Resources
10489
   
Risk Management
11194
   
Foreign Currency Translation
11396
   
Related Party Transactions
11396
   
Acquisitions, Development and Divestitures
11496
   
Environmental Matters
11496
  
New Accounting Guidance
11497
  
Application of Critical Accounting Policies
11497
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
11698
 
Item 4.  Controls and Procedures
11698
PART II.  OTHER INFORMATION 
 
Item 1. Legal Proceedings
11698
 
Item 1A. Risk Factors
11698
 
Item 4. Mine Safety Disclosures
11798
 
Item 6. Exhibits
11799
SIGNATURES
119100
COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES 
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 


GLOSSARY OF TERMS AND ABBREVIATIONS
 
PPL Corporation and its subsidiaries
 
KU - Kentucky Utilities Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky.
 
LG&E - Louisville Gas and Electric Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas in Kentucky.
 
LKE - LG&E and KU Energy LLC, a subsidiary of PPL and the parent of LG&E, KU and other subsidiaries.
 
LKS - LG&E and KU Services Company, a subsidiary of LKE that provides administrative, management, and support services primarily to LKE and its subsidiaries.
 
PPL - PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding, PPL Capital Funding, LKE and other subsidiaries.
 
PPL Capital Funding - PPL Capital Funding, Inc., a financing subsidiary of PPL that provides financing for the operations of PPL and certain subsidiaries. Debt issued by PPL Capital Funding is guaranteed as to payment by PPL.
 
PPL Electric - PPL Electric Utilities Corporation, a public utility subsidiary of PPL engaged in the regulated transmission and distribution of electricity in its Pennsylvania service area and that provides electricity supply to its retail customers in this area as a PLR.
 
PPL Energy Funding - PPL Energy Funding Corporation, a subsidiary of PPL and the parent holding company of PPL Global and other subsidiaries.
 
PPL EU Services - PPL EU Services Corporation, a subsidiary of PPL that provides support servicesadministrative, management and corporate functions such as financial, supply chain, human resources and facilities managementsupport services primarily to PPL Electric and its affiliates.Electric.
 
PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Funding that, primarily through its subsidiaries, owns and operates WPD, PPL's regulated electricity distribution businesses in the U.K.
 
PPL Services - PPL Services Corporation, a subsidiary of PPL that provides administrative, management and support services to PPL and its subsidiaries.
 
PPL WPD Limited - an indirect U.K. subsidiary of PPL Global, which carries a liability for a closed defined benefit pension plan and a receivable from WPD plc. Following a reorganization in October 2015, PPL WPD Limited is now parent to WPD plc.plc having previously been a sister company.
 
WPD - refers to PPL WPD Limited and its subsidiaries.
 
WPD (East Midlands) - Western Power Distribution (East Midlands) plc, a British regional electricity distribution utility company.
 
WPD plc - Western Power Distribution plc, a direct U.K. subsidiary of PPL WPD Limited. Its principal indirectly owned subsidiaries are WPD (East Midlands), WPD (South Wales), WPD (South West) and WPD (West Midlands).
 
WPD Midlands - refers to WPD (East Midlands) and WPD (West Midlands), collectively.
 
WPD (South Wales) - Western Power Distribution (South Wales) plc, a British regional electricity distribution utility company.
 
WPD (South West) - Western Power Distribution (South West) plc, a British regional electricity distribution utility company.
 
WPD (West Midlands) - Western Power Distribution (West Midlands) plc, a British regional electricity distribution utility company.
 

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WKE - Western Kentucky Energy Corp., a subsidiary of LKE that leased certain non-utility generating plants in western Kentucky until July 2009.
 
 

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Other terms and abbreviations
 
£ - British pound sterling.
 
20152016 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2015.
2001 Mortgage Indenture - PPL Electric's Indenture, dated as of August 1, 2001, to the Bank of New York Mellon (as successor to JPMorgan Chase Bank), as trustee, as supplemented.2016.
 
Act 11 - Act 11 of 2012 that became effective on April 16, 2012. The Pennsylvania legislation authorizes the PUC to approve two specific ratemaking mechanisms: the use of a fully projected future test year in base rate proceedings and, subject to certain conditions, a DSIC.
 
Act 129 - Act 129 of 2008 that became effective in October 2008. The law amendsamended the Pennsylvania Public Utility Code and createscreated an energy efficiency and conservation program and smart metering technology requirements, adoptsadopted new PLR electricity supply procurement rules, providesprovided remedies for market misconduct and changes tochanged the Alternative Energy Portfolio Standard (AEPS).Standard.
 
Advanced Metering System - meters and meter reading systems that provide two-way communication capabilities, which communicate usage and other relevant data to LG&E and KU at regular intervals, butand are also are able to receive information from LG&E and KU, such as software upgrades and requests to provide meter readings in real time.

AOCI - accumulated other comprehensive income or loss.
Article 50 of the Lisbon Treaty - The Treaty of Lisbon is an international agreement which amends the two treaties which form the constitutional basis of the European Union, and came into force on December 1, 2009. Under Article 50 of this treaty, any member state of the European Union may decide to withdraw from the Union in accordance with its own constitutional requirements.

ARO - asset retirement obligation.
 
ATM Program - At-the-Market stock offering program.
 
BSER - Best System of Emission Reduction. The degree of emission reduction thatthe EPA determines has been adequately demonstrated when taking into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirements. 

CCR(s) - Coal Combustion Residual(s). CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.
 
Clean Air Act - federal legislation enacted to address certain environmental issues related to air emissions, including acid rain, ozone and toxic air emissions.
 
Clean Water Act - federal legislation enacted to address certain environmental issues relating to water quality including effluent discharges, cooling water intake, and dredge and fill activities.

CPCN - Certificate of Public Convenience and Necessity. Authority granted by the KPSC pursuant to Kentucky Revised Statute 278.020 to provide utility service to or for the public or the construction of certain plant, equipment, property or facility for furnishing of utility service to the public.
 
Customer Choice Act - the Pennsylvania Electricity Generation Customer Choice and Competition Act, legislation enacted to restructure the state's electric utility industry to create retail access to a competitive market for generation of electricity.

Depreciation not normalized - the flow-through income tax impact related to the state regulatory treatment of depreciation-related timing differences.

Distribution Automation - advanced grid intelligence enabling LG&E and KU to perform remote monitoring and control, circuit segmentation and self-healing"self-healing" of select distribution system circuits, improving grid reliability and efficiency.

DNO - Distribution Network Operator in the U.K.
 
DPCR4 - Distribution Price Control Review 4, the U.K. five-year rate review period applicable to WPD that commenced April 1, 2005.

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DPCR5 - Distribution Price Control Review 5, the U.K. five-year rate review period applicable to WPD that commenced April 1, 2010.
 
DRIP - PPL Amended and Restated Dividend Reinvestment and Direct Stock Purchase Plan.

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DSIC - the Distribution System Improvement Charge authorized under Act 11, which is an alternative ratemaking mechanism providing more-timely cost recovery of qualifying distribution system capital expenditures.
 
DSM - Demand Side Management. Pursuant to Kentucky Revised Statute 278.285, the KPSC may determine the reasonableness of DSM plansprograms proposed by any utility under its jurisdiction. Proposed DSM mechanisms may seek full recovery of costs and revenues lost by implementing DSM programs and/or incentives designedconsist of energy efficiency programs intended to reduce peak demand and delay the investment in additional power plant construction, provide financial rewards to the utility for implementing cost-effective DSM programs. The cost of such programs shall be assigned only to the class or classes of customers which benefit from the programs.with tools and information regarding their energy usage and support energy efficiency.
 
Earnings from Ongoing Operations - A non-GAAP financial measure of earnings adjusted for the impact of special items and used in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A).

ECR - Environmental Cost Recovery. Pursuant to Kentucky Revised Statute 278.183, Kentucky electric utilities are entitled to the current recovery of costs of complying with the Clean Air Act, as amended, and those federal, state or local environmental requirements that apply to coal combustion wastes and by-productsbyproducts from the production of energy from coal.

ELG(s) - Effluent Limitation Guidelines, regulations promulgated by the EPA.
 
EPA - Environmental Protection Agency, a U.S. government agency.

EPS - Earnings per share.
 
FERC - Federal Energy Regulatory Commission, the U.S. federal agency that regulates, among other things, interstate transmission and wholesale sales of electricity, hydroelectric power projects and related matters.
 
GAAP - Generally Accepted Accounting Principles in the U.S.
 
GBP - British pound sterling.

GHG -greenhouse gas(es).
 
GLT - Gas Line Tracker. The KPSC approved mechanism for LG&E's recovery of costs associated with gas service lines, gas risers, leak mitigation, and gas main replacements.

IBEW - International Brotherhood of Electrical Workers.

IRS - Internal Revenue Service, a U.S. government agency.
 
KPSC - Kentucky Public Service Commission, the state agency that has jurisdiction over the regulation of rates and service of utilities in Kentucky.
LCIDA - Lehigh County Industrial Development Authority.

LIBOR - London Interbank Offered Rate.

Margins - A non-GAAP financial measure of performance used in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A).

MATS - Mercury and Air Toxics Standards, regulations promulgated by the EPA.
 
Moody's - Moody's Investors Service, Inc., a credit rating agency.
 
MW - megawatt, one thousand kilowatts.
 
NAAQS - National Ambient Air Quality Standards periodically adopted pursuant to the Clean Air Act.
 
NERC - North American Electric Reliability Corporation.
 
NGCC - Natural gas-fired combined-cycle generating plant.
 

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NPNS - the normal purchases and normal sales exception as permitted by derivative accounting rules. Derivatives that qualify for this exception may receive accrual accounting treatment.

NSR - The new source review provisions of the Clean Air Act that impose stringent emission control requirements on new and modified sources of air emissions that result in emission increases beyond thresholds allowed by the Clean Air Act.
 
OCI - other comprehensive income or loss.
 
Ofgem - Office of Gas and Electricity Markets, the British agency that regulates transmission, distribution and wholesale sales of electricity and related matters.
 
OVEC - Ohio Valley Electric Corporation, located in Piketon, Ohio, an entity in which LKE indirectly owns an 8.13% interest (consists of LG&E's 5.63% and KU's 2.50% interests), which is accounted for as a cost-method investment. OVEC owns and operates two coal-fired power plants, the Kyger Creek plant in Ohio and the Clifty Creek plant in Indiana, with combined summer rating capacities of 2,120 MW.
 
PLR - Provider of Last Resort, the role of PPL Electric in providing default electricity supply within its delivery area to retail customers who have not chosen to select an alternative electricity supplier under the Customer Choice Act.
 
PP&E - property, plant and equipment.
 
PPL EnergyPlus - prior to the June 1, 2015 spinoff of PPL Energy Supply, PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply that marketed and traded wholesale and retail electricity and gas, and supplied energy and energy services in competitive markets.
PPL Energy Supply - prior to the June 1, 2015 spinoff, PPL Energy Supply, LLC, a subsidiary of PPL Energy Funding and the parent company of PPL EnergyPlus and other subsidiaries.
PUC - Pennsylvania Public Utility Commission, the state agency that regulates certain ratemaking, services, accounting and operations of Pennsylvania utilities.
 
RAV - regulatory asset value. This term, used within the U.K. regulatory environment, is also commonly known as RAB or regulatory asset base. RAV is based on historical investment costs at time of privatization, plus subsequent allowed additions less annual regulatory depreciation, and represents the value on which DNOs earn a return in accordance with the regulatory cost of capital. RAV is indexed to Retail Price Index (RPI) in order to allow for the effects of inflation. Since the beginning of DPCR5 in April 2010, RAV additions have been based on a percentage of annual total expenditures, which have continued from April 2015 under RIIO-ED1. RAV is intended to represent expenditures that have a long-term benefit to WPD (similar to capital projects for the U.S. regulated businesses that are generally included in rate base).
 
RCRA - Resource Conservation and Recovery Act of 1976.

RECs - Renewable Energy Credits.

Registrant(s) - refers to the Registrants named on the cover of this Report (each a "Registrant" and collectively, the "Registrants").
 
Regulation S-X - SEC regulation governing the form and content of and requirements for financial statements required to be filed pursuant to the federal securities laws.
 
RFC - ReliabilityFirst Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the reliability of the bulk power systems throughout North America.
 
RIIO-ED1 - RIIO represents "Revenues = Incentive + Innovation + Outputs." RIIO-ED1 refers to the initial eight-year rate review period applicable to WPD which commenced April 1, 2015.
Riverstone - Riverstone Holdings LLC, a Delaware limited liability company and ultimate parent company of the entities that own the competitive power generation business contributed to Talen Energy other than the competitive power generation business contributed by virtue of the spinoff of a newly formed parent of PPL Energy Supply.

RPI - Retail Price Index, is a measure of inflation in the United Kingdom published monthly by the Office for National Statistics.
 

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SCRs - selective catalytic reduction, a pollution control process for the removal of nitrogen oxide from exhaust gas.

S&P - Standard & Poor's Ratings Services, a credit rating agency.
 
Sarbanes-Oxley- Sarbanes-Oxley Act of 2002, which sets requirements for management's assessment of internal controls for financial reporting. It also requires an independent auditor to make its own assessment.
 
Scrubber - an air pollution control device that can remove particulates and/or gases (primarily sulfur dioxide) from exhaust gases.

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SEC - the U.S. Securities and Exchange Commission, a U.S. government agency primarily responsible to protect investors and maintain the integrity of the securities markets.
 
SERC - SERC Reliability Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the reliability of the bulk power systems throughout North America.
 
Smart meter - an electric meter that utilizes smart metering technology.
 
Smart metering technology - technology that can measure, among other things, time of electricity consumption to permit offering rate incentives for usage during lower cost or demand intervals. The use of this technology also has the potential to strengthen network reliability.
 
Superfund - federal environmental statute that addresses remediation of contaminated sites; states also have similar statutes.
 
Talen Energy - Talen Energy Corporation, the Delaware corporation formed to be the publicly traded company and owner of the competitive generation assets of PPL Energy Supply and certain affiliates of Riverstone.
Talen Energy Marketing - Talen Energy Marketing, LLC, the new name of PPL EnergyPlus subsequent to the spinoff of PPL Energy Supply.
Treasury Stock Method - Aa method applied to calculate diluted EPS that assumes any proceeds that could be obtained upon exercise of options and warrants (and their equivalents) would be used to purchase common stock at the average market price during the relevant period.

VSCC - Virginia State Corporation Commission, the state agency that has jurisdiction over the regulation of Virginia corporations, including utilities.

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Forward-looking Information
 
Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical fact are "forward-looking statements" within the meaning of the federal securities laws. Although the Registrants believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct. Forward-looking statements are subject to many risks and uncertainties, and actual results may differ materially from the results discussed in forward-looking statements. In addition to the specific factors discussed in each Registrant's 20152016 Form 10-K and in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements.
 
challenges by intervenors to the return on equity grantedoutcome of rate cases or other cost recovery or revenue filings;
changes in existing rate structures;U.S. or U.K. tax laws or regulations;
fuel supply and cost;effects of cyber-based intrusions or natural disasters, threatened or actual terrorism, war or other hostilities;
continuing ability to recover fuel costs and environmental expendituressignificant decreases in a timely manner at LG&E and KU, and natural gas supply costs at LG&E;
weather conditions affecting transmission and distribution operations, and customer energy use;
availability and operating costs of existing generation facilities;
demand for electricity in the duration of and cost associated with outages at our generating facilities;
generation, transmission and distribution system conditions, and operating costs;U.S.;
expansion of alternative and distributed sources of electricity generation and storage;
collective labor bargaining negotiations;
laws or regulations to reduce emissions of "greenhouse" gases or physical effects of climate change;changes in foreign currency exchange rates for British pound sterling and the related impact on unrealized gains and losses on PPL's foreign currency economic hedges;
the outcomeeffectiveness of litigation against the Registrantsour risk management programs, including foreign currency and their subsidiaries;interest rate hedging;
potential effectsnon-achievement by WPD of threatened or actual terrorism, war or other hostilities, cyber-based intrusions or natural disasters;
the commitments and liabilities of the Registrants and their subsidiaries;performance targets set by Ofgem;
the effect of changes in RPI on WPD's revenues and index linked debt;
the effectiveness of our risk management programs, including foreign currency and interest rate hedging;
March 29, 2017 notification by the effectU.K. to the European Council of the June 23, 2016 referendum inEuropean Union of the U.K.'s intent to withdraw from the European Union;Union and any actions in response thereto;
our ability to attract and retain qualified employees;
volatility in demanddefaults by counterparties or suppliers for electricity;
market prices of commodity inputs for ongoing capital expendituresenergy, capacity, coal, natural gas or key operational needs;commodities, goods or services;
capital market conditions, including the availability of capital or credit, changes in interest rates and certain economic indices, and decisions regarding capital structure;
stock price performancea material decline in the market value of PPL;PPL's equity;
defaults by counterparties or suppliers for energy, capacity, coal, natural gas or key commodities, goods or services;
volatilitysignificant decreases in the fair value of debt and equity securities and its impact on the value of assets in defined benefit plans, and the potential cash funding requirements if fair value declines;
interest rates and their effect on pension and retiree medical liabilities, ARO liabilities and interest payable on certain debt securities;
volatility in or the impact of other changes in financial markets and economic conditions;
the potential impact of any unrecorded commitments and liabilities of the Registrants and their subsidiaries;
new accounting requirements or new interpretations or applications of existing requirements;
changes in securities and credit ratings;
changesany requirement to record impairment charges pursuant to GAAP with respect to any of our significant investments;
laws or regulations to reduce emissions of "greenhouse" gases or the physical effects of climate change;
continuing ability to recover fuel costs and environmental expenditures in foreign currency exchange ratesa timely manner at LG&E and KU, and natural gas supply costs at LG&E;
fuel supply for British pound sterling;LG&E and KU;
current and future environmental conditions, regulationsweather and other requirementsconditions affecting generation, transmission and the related costs of compliance, including environmental capital expenditures, emission allowancedistribution operations, operating costs and other expenses;customer energy use;
changes in political, regulatory or economic conditions in states, regions or countries where the Registrants or their subsidiaries conduct business;
receipt of necessary governmental permits approvals and rate relief;approvals;
new state, federal or foreign legislation or regulatory developments;
the outcome of any rate cases or other cost recovery or revenue filings by PPL Electric, LG&E, KU or WPD;
the achievement of performance targets set by Ofgem;
the impact of any state, federal or foreign investigations applicable to the Registrants and their subsidiaries and the energy industry;
our ability to attract and retain qualified employees;
the effect of any business or industry restructuring;
development of new projects, markets and technologies;
performance of new ventures; and
business dispositions or acquisitions and our ability to realize expected benefits from such business transactions.transactions;
collective labor bargaining negotiations; and
the outcome of litigation against the Registrants and their subsidiaries.



Any such forward-looking statements should be considered in light of such important factors and in conjunction with other documents of the Registrants on file with the SEC.

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for the Registrants to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and the Registrants undertake no obligation to update the information contained in such statement to reflect subsequent developments or information.



PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, except share data)

 Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
Operating Revenues$1,889
 $1,878
 $5,685
 $5,889
        
Operating Expenses       
Operation       
Fuel227
 228
 607
 695
Energy purchases151
 177
 531
 676
Other operation and maintenance417
 482
 1,292
 1,405
Depreciation232
 226
 692
 658
Taxes, other than income76
 79
 229
 241
Total Operating Expenses1,103
 1,192
 3,351
 3,675
        
Operating Income786
 686
 2,334
 2,214
        
Other Income (Expense) - net49
 75
 284
 61
        
Interest Expense223
 221
 671
 645
        
Income from Continuing Operations Before Income Taxes612
 540
 1,947
 1,630
        
Income Taxes139
 144
 510
 432
        
Income from Continuing Operations After Income Taxes473
 396
 1,437
 1,198
        
Income (Loss) from Discontinued Operations (net of income taxes) (Note 8)—

(3) —
 (915)
        
Net Income$473
 $393
 $1,437
 $283
        
Earnings Per Share of Common Stock:       
Income from Continuing Operations After Income Taxes: 
Basic$0.70
 $0.59
 $2.12
 $1.78
Diluted$0.69
 $0.59
 $2.11
 $1.78
Net Income:       
Basic$0.70
 $0.58
 $2.12
 $0.42
Diluted$0.69
 $0.58
 $2.11
 $0.42
        
Dividends Declared Per Share of Common Stock$0.38
 $0.3775
 $1.14
 $1.1225
        
Weighted-Average Shares of Common Stock Outstanding (in thousands)       
Basic678,114
 670,763
 676,905
 668,731
Diluted680,348
 673,702
 679,969
 671,254
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

 Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
Net income$473
 $393
 $1,437
 $283
        
Other comprehensive income (loss): 
  
    
Amounts arising during the period - gains (losses), net of tax (expense) benefit: 
  
    
Foreign currency translation adjustments, net of tax of ($2), ($3), ($4), ($2)(641) 52
 (837) (97)
Available-for-sale securities, net of tax of $0, $0, $0, ($9)—
 —
 —
 7
Qualifying derivatives, net of tax of ($16), $11, ($9), $462
 (19) 57
 8
Defined benefit plans: 
 

    
Prior service costs, net of tax of $0, $0, $0, $4—
 —
 —
 (6)
Net actuarial gain (loss), net of tax of $4, $0, $3, ($36)(6) —
 (4) 52
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): 
  
    
Available-for-sale securities, net of tax of $0, $0, $0, $2—
 —
 —
 (2)
Qualifying derivatives, net of tax of $17, ($3), $15, ($23)(69) 10
 (62) 20
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $1—
 —
 (1) (1)
Defined benefit plans: 
  
    
Prior service costs, net of tax of ($1), $0, ($1), $0—
 —
 1
 —
Net actuarial loss, net of tax of ($10), ($10), ($27), ($35)31
 35
 94
 111
Total other comprehensive income (loss)(623) 78
 (752) 92
        
Comprehensive income (loss)$(150) $471
 $685
 $375
 Three Months Ended March 31,
 2017 2016
Operating Revenues$1,951
 $2,011
    
Operating Expenses   
Operation   
Fuel191
 197
Energy purchases215
 233
Other operation and maintenance432
 450
Depreciation242
 229
Taxes, other than income75
 79
Total Operating Expenses1,155
 1,188
    
Operating Income796
 823
    
Other Income (Expense) - net(47) 61
    
Interest Expense217
 224
    
Income Before Income Taxes532
 660
    
Income Taxes129
 179
    
Net Income$403
 $481
    
Earnings Per Share of Common Stock: 
Net Income Available to PPL Common Shareowners:   
Basic$0.59
 $0.71
Diluted$0.59
 $0.71
    
Dividends Declared Per Share of Common Stock$0.3950
 $0.38
    
Weighted-Average Shares of Common Stock Outstanding (in thousands)   
Basic680,882
 675,441
Diluted683,084
 678,817
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

 Three Months Ended March 31,
 2017 2016
Net income$403
 $481
    
Other comprehensive income (loss):   
Amounts arising during the period - gains (losses), net of tax (expense) benefit:   
Foreign currency translation adjustments, net of tax of ($1), ($2)(24) (464)
Qualifying derivatives, net of tax of $2, ($15)(6) 80
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):   
Qualifying derivatives, net of tax of $0, $19(1) (78)
Defined benefit plans:   
Net actuarial (gain) loss, net of tax of ($9), ($9)32
 31
Total other comprehensive income (loss)1
 (431)
    
Comprehensive income$404
 $50
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
Nine Months Ended September 30,Three Months Ended March 31,
2016 20152017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$1,437
 $283
$403
 $481
(Income) Loss from discontinued operations (net of income taxes)—
 915
Income from continuing operations (net of income taxes)1,437
 1,198
Adjustments to reconcile Income from continuing operations (net of taxes) to net cash provided by operating activities - continuing operations 
  
Adjustments to reconcile net income to net cash provided by operating activities 
  
Depreciation692
 658
242
 229
Amortization54
 46
23
 18
Defined benefit plans - expense (income)(29) 44
(19) (13)
Deferred income taxes and investment tax credits436
 359
161
 162
Unrealized (gains) losses on derivatives, and other hedging activities107
 (17)35
 (34)
Stock-based compensation expense23
 26
19
 13
Other(12) 9
(1) (5)
Change in current assets and current liabilities 
  
 
  
Accounts receivable(29) (5)(43) (62)
Accounts payable(40) (180)(84) (43)
Unbilled revenues32
 91
52
 18
Fuel, materials and supplies8
 60
44
 25
Prepayments(34) (43)(110) (86)
Taxes payable40
 (142)(21) 15
Regulatory assets and liabilities, net(32) 46
Other current liabilities(60) (66)
Other(21) (5)5
 18
Other operating activities      
Defined benefit plans - funding(345) (396)(520) (123)
Settlement of interest rate swaps—
 (88)
Other assets18
 (42)5
 (5)
Other liabilities(75) 69
4
 15
Net cash provided by operating activities - continuing operations2,230
 1,688
Net cash provided by operating activities - discontinued operations—
 343
Net cash provided by operating activities2,230
 2,031
135
 557
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(2,073) (2,560)(677) (656)
Expenditures for intangible assets(23) (32)(3) (6)
Proceeds from the sale of other investments2
 136
Net (increase) decrease in restricted cash and cash equivalents2
 —
Other investing activities28
 (7)1
 1
Net cash provided by (used in) investing activities - continuing operations(2,066) (2,463)
Net cash provided by (used in) investing activities - discontinued operations—
 (149)
Net cash provided by (used in) investing activities(2,066) (2,612)
Net cash used in investing activities(677) (661)
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt1,241
 1,137
64
 224
Retirement of long-term debt(905) —
—
 (224)
Settlement of cross-currency swaps46
 —
Issuance of common stock133
 145
73
 42
Payment of common stock dividends(772) (750)(258) (255)
Net increase (decrease) in short-term debt(268) (271)744
 351
Other financing activities(33) (30)(16) (23)
Net cash provided by (used in) financing activities - continuing operations(558) 231
Net cash provided by (used in) financing activities - discontinued operations—
 (546)
Net cash distributions to parent from discontinued operations—
 132
Net cash provided by (used in) financing activities(558) (183)607
 115
Effect of Exchange Rates on Cash and Cash Equivalents(26) (6)3
 (33)
Net (Increase) Decrease in Cash and Cash Equivalents included in Discontinued Operations—
 352
Net Increase (Decrease) in Cash and Cash Equivalents(420) (418)68
 (22)
Cash and Cash Equivalents at Beginning of Period836
 1,399
341
 836
Cash and Cash Equivalents at End of Period$416
 $981
$409
 $814
   
Supplemental Disclosures of Cash Flow Information   
Significant non-cash transactions:   
Accrued expenditures for property, plant and equipment at March 31,$236
 $279
Accrued expenditures for intangible assets at March 31,$62
 $64

 The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$416
 $836
$409
 $341
Accounts receivable (less reserve: 2016, $48; 2015, $41) 
  
Accounts receivable (less reserve: 2017, $53; 2016, $54) 
  
Customer687
 673
702
 666
Other45
 59
58
 46
Unbilled revenues393
 453
427
 480
Fuel, materials and supplies346
 357
312
 356
Prepayments97
 66
173
 63
Price risk management assets78
 139
95
 63
Other current assets37
 63
51
 52
Total Current Assets2,099
 2,646
2,227
 2,067
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant34,427
 34,399
35,229
 34,674
Less: accumulated depreciation - regulated utility plant5,938
 5,683
6,197
 6,013
Regulated utility plant, net28,489
 28,716
29,032
 28,661
Non-regulated property, plant and equipment451
 516
413
 413
Less: accumulated depreciation - non-regulated property, plant and equipment155
 165
137
 134
Non-regulated property, plant and equipment, net296
 351
276
 279
Construction work in progress1,184
 1,315
1,099
 1,134
Property, Plant and Equipment, net29,969
 30,382
30,407
 30,074
      
Other Noncurrent Assets 
  
 
  
Regulatory assets1,765
 1,733
1,908
 1,918
Goodwill3,175
 3,550
3,050
 3,060
Other intangibles693
 679
644
 700
Pension benefit asset363
 9
Price risk management assets185
 156
284
 336
Other noncurrent assets152
 155
151
 151
Total Other Noncurrent Assets5,970
 6,273
6,400
 6,174
      
Total Assets$38,038
 $39,301
$39,034
 $38,315
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$636
 $916
$1,666
 $923
Long-term debt due within one year443
 485
417
 518
Accounts payable741
 812
700
 820
Taxes117
 85
80
 101
Interest315
 303
299
 270
Dividends259
 255
270
 259
Customer deposits302
 326
277
 276
Regulatory liabilities120
 145
82
 101
Other current liabilities479
 549
465
 569
Total Current Liabilities3,412
 3,876
4,256
 3,837
      
Long-term Debt18,069
 18,563
17,958
 17,808
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes3,810
 3,440
4,055
 3,889
Investment tax credits133
 128
132
 132
Accrued pension obligations878
 1,405
776
 1,001
Asset retirement obligations413
 536
429
 428
Regulatory liabilities911
 945
897
 899
Other deferred credits and noncurrent liabilities437
 489
422
 422
Total Deferred Credits and Other Noncurrent Liabilities6,582
 6,943
6,711
 6,771
      
Commitments and Contingent Liabilities (Notes 6 and 10)

 

Commitments and Contingent Liabilities (Notes 6 and 9)

 

      
Equity 
  
 
  
Common stock - $0.01 par value (a)7
 7
7
 7
Additional paid-in capital9,824
 9,687
9,917
 9,841
Earnings reinvested3,624
 2,953
3,962
 3,829
Accumulated other comprehensive loss(3,480) (2,728)(3,777) (3,778)
Total Equity9,975
 9,919
10,109
 9,899
      
Total Liabilities and Equity$38,038
 $39,301
$39,034
 $38,315
 
(a)1,560,000 shares authorized; 679,268682,427 and 679,731 shares issued and outstanding at September 30, 2016; 780,000 shares authorized; 673,857 shares issuedMarch 31, 2017 and outstanding at December 31, 2015.2016.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)  

Common
stock
shares
outstanding (a)		 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 
Accumulated
other
comprehensive
loss
 Total
December 31, 2016679,731
 $7
 $9,841
 $3,829
 $(3,778) $9,899
Common stock issued2,696
 

 97
     97
Stock-based compensation    (21)     (21)
Net income      403
   403
Dividends and dividend equivalents      (270)   (270)
Other comprehensive income (loss)        1
 1
March 31, 2017682,427
 $7
 $9,917
 $3,962
 $(3,777) $10,109
Common
stock
shares
outstanding (a)		 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 
Accumulated
other
comprehensive
loss
 Total           
December 31, 2015673,857
 $7
 $9,687
 $2,953
 $(2,728) $9,919
673,857
 $7
 $9,687
 $2,953
 $(2,728) $9,919
Common stock issued5,411
 

 168
     168
2,527
  
 70
  
  
 70
Stock-based compensation    (31)     (31) 
  
 (28)  
  
 (28)
Net income      1,437
   1,437
 
  
  
 481
  
 481
Dividends and dividend equivalents      (773)   (773) 
  
  
 (256)  
 (256)
Other comprehensive income (loss)        (752) (752) 
  
  
  
 (431) (431)
Adoption of stock-based compensation guidance cumulative effect adjustment (Note 2)      7
   7
September 30, 2016679,268
 $7
 $9,824
 $3,624
 $(3,480) $9,975
Adoption of stock-based compensation guidance cumulative effect adjustment      7
   7
March 31, 2016676,384
 $7
 $9,729
 $3,185
 $(3,159) $9,762
                      
December 31, 2014665,849
 $7
 $9,433
 $6,462
 $(2,274) $13,628
Common stock issued5,943
  
 183
  
  
 183
Stock-based compensation 
  
 14
  
  
 14
Net income 
  
  
 283
  
 283
Dividends and dividend equivalents 
  
  
 (754)  
 (754)
Distribution of PPL Energy Supply (Note 8)      (3,200) (24) (3,224)
Other comprehensive income (loss) 
  
  
  
 92
 92
September 30, 2015671,792
 $7
 $9,630
 $2,791
 $(2,206) $10,222
(a)Shares in thousands. Each share entitles the holder to one vote on any question presented at any shareowners' meeting.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



(THIS PAGE INTENTIONALLY LEFT BLANK INTENTIONALLY.)BLANK.


CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Operating Revenues$539
 $519
 $1,619
 $1,625
$573
 $585
          
Operating Expenses 
  
       
Operation 
  
       
Energy purchases129
 154
 414
 519
146
 167
Energy purchases from affiliate—
 —
 —
 14
Other operation and maintenance144
 162
 431
 435
164
 150
Depreciation64
 55
 185
 158
75
 59
Taxes, other than income26
 27
 79
 87
29
 29
Total Operating Expenses363
 398
 1,109
 1,213
414
 405
          
Operating Income176
 121
 510
 412
159
 180
          
Other Income (Expense) - net4
 1
 12
 5
1
 3
          
Interest Expense32
 32
 97
 96
33
 33
          
Income Before Income Taxes148
 90
 425
 321
127
 150
          
Income Taxes58
 35
 162
 130
48
 56
          
Net Income (a)$90
 $55
 $263
 $191
$79
 $94
 
(a)Net income equals comprehensive income.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
 Nine Months Ended September 30,
 2016 2015
Cash Flows from Operating Activities 
  
Net income$263
 $191
Adjustments to reconcile net income to net cash provided by operating activities 
  
Depreciation185
 158
Amortization19
 19
Defined benefit plans - expense9
 13
Deferred income taxes and investment tax credits151
 127
Other(14) (9)
Change in current assets and current liabilities 
  
Accounts receivable(6) 18
Accounts payable(1) (140)
Unbilled revenue10
 28
Prepayments29
 (17)
Regulatory assets and liabilities(41) 46
Taxes payable(6) (50)
Other(13) 13
Other operating activities 
  
Defined benefit plans - funding—
 (33)
Other assets15
 (6)
Other liabilities(5) 15
Net cash provided by operating activities595
 373
    
Cash Flows from Investing Activities 
  
Expenditures for property, plant and equipment(739) (758)
Expenditures for intangible assets—
 (9)
Other investing activities(1) 3
Net cash provided by (used in) investing activities(740) (764)
    
Cash Flows from Financing Activities 
  
Issuance of long-term debt224
 —
Retirement of long-term debt(224) —
Contributions from parent200
 275
Payment of common stock dividends to parent(193) (140)
Net increase (decrease) in short-term debt130
 68
Other financing activities(3) —
Net cash provided by (used in) financing activities134
 203
    
Net Increase (Decrease) in Cash and Cash Equivalents(11) (188)
Cash and Cash Equivalents at Beginning of Period47
 214
Cash and Cash Equivalents at End of Period$36
 $26
 Three Months Ended March 31,
 2017 2016
Cash Flows from Operating Activities 
  
Net income$79
 $94
Adjustments to reconcile net income to net cash provided by operating activities 
  
Depreciation75
 59
Amortization8
 7
Defined benefit plans - expense5
 2
Deferred income taxes and investment tax credits41
 65
Other—
 (5)
Change in current assets and current liabilities 
  
Accounts receivable(27) (43)
Accounts payable(18) (2)
Unbilled revenue12
 5
Prepayments(75) (21)
Regulatory assets and liabilities(11) (21)
Taxes payable—
 (8)
Other(14) (12)
Other operating activities 
  
Defined benefit plans - funding(24) —
Other assets5
 3
Other liabilities(1) 1
Net cash provided by operating activities55
 124
    
Cash Flows from Investing Activities 
  
Expenditures for property, plant and equipment(274) (214)
Expenditures for intangible assets(2) (1)
Net cash used in investing activities(276) (215)
    
Cash Flows from Financing Activities 
  
Issuance of long-term debt—
 224
Retirement of long-term debt—
 (224)
Contributions from parent100
 —
Payment of common stock dividends to parent(76) (45)
Net increase (decrease) in short-term debt204
 125
Other financing activities—
 (2)
Net cash provided by (used in) financing activities228
 78
    
Net Increase (Decrease) in Cash and Cash Equivalents7
 (13)
Cash and Cash Equivalents at Beginning of Period13
 47
Cash and Cash Equivalents at End of Period$20
 $34
    
Supplemental Disclosure of Cash Flow Information   
Significant non-cash transactions:   
Accrued expenditures for property, plant and equipment at March 31,$122
 $115

 The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$36
 $47
$20
 $13
Accounts receivable (less reserve: 2016, $22; 2015, $16) 
  
Accounts receivable (less reserve: 2017, $27; 2016, $28) 
  
Customer290
 286
304
 272
Other12
 10
16
 21
Unbilled revenues81
 91
102
 114
Materials and supplies28
 34
31
 32
Prepayments37
 66
84
 9
Regulatory assets13
 19
Other current assets15
 21
6
 8
Total Current Assets499
 555
576
 488
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant9,360
 8,734
9,987
 9,654
Less: accumulated depreciation - regulated utility plant2,698
 2,573
2,767
 2,714
Regulated utility plant, net6,662
 6,161
7,220
 6,940
Construction work in progress657
 530
557
 641
Property, Plant and Equipment, net7,319
 6,691
7,777
 7,581
      
Other Noncurrent Assets 
  
 
  
Regulatory assets991
 1,006
1,080
 1,094
Intangibles247
 244
252
 251
Other noncurrent assets14
 15
14
 12
Total Other Noncurrent Assets1,252
 1,265
1,346
 1,357
      
Total Assets$9,070
 $8,511
$9,699
 $9,426
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$130
 $—
$499
 $295
Long-term debt due within one year224
 —
224
 224
Accounts payable357
 288
329
 367
Accounts payable to affiliates33
 35
58
 42
Taxes18
 24
12
 12
Interest31
 37
31
 34
Regulatory liabilities94
 113
66
 83
Customer deposits22
 31
Other current liabilities69
 77
88
 101
Total Current Liabilities978
 605
1,307
 1,158
      
Long-term Debt2,607
 2,828
2,608
 2,607
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,823
 1,663
1,942
 1,899
Accrued pension obligations185
 183
258
 281
Regulatory liabilities—
 22
Other deferred credits and noncurrent liabilities88
 91
90
 90
Total Deferred Credits and Other Noncurrent Liabilities2,096
 1,959
2,290
 2,270
      
Commitments and Contingent Liabilities (Notes 6 and 10)

 

Commitments and Contingent Liabilities (Notes 6 and 9)

 

      
Equity 
  
 
  
Common stock - no par value (a)364
 364
364
 364
Additional paid-in capital2,134
 1,934
2,254
 2,154
Earnings reinvested891
 821
876
 873
Total Equity3,389
 3,119
3,494
 3,391
      
Total Liabilities and Equity$9,070
 $8,511
$9,699
 $9,426
 
(a)170,000 shares authorized; 66,368 shares issued and outstanding at September 30, 2016March 31, 2017 and December 31, 2015.2016.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

Common
stock
shares
outstanding
(a)
 
Common
stock
 
Additional
paid-in
capital
 
Earnings
reinvested
 Total
Common
stock
shares
outstanding
(a)
 
Common
stock
 
Additional
paid-in
capital
 
Earnings
reinvested
 Total
December 31, 201566,368
 $364
 $1,934
 $821
 $3,119
December 31, 201666,368
 $364
 $2,154
 $873
 $3,391
Net income

 

 

 263
 263


 

 

 79
 79
Capital contributions from PPL

 

 200
 

 200


 

 100
 

 100
Dividends declared on common stock

 

 

 (193) (193)

 

 

 (76) (76)
September 30, 201666,368
 $364
 $2,134
 $891
 $3,389
March 31, 201766,368
 $364
 $2,254
 $876
 $3,494
                  
December 31, 201466,368
 $364
 $1,603
 $750
 $2,717
December 31, 201566,368
 $364
 $1,934
 $821
 $3,119
Net income

 

 

 191
 191


 

 

 94
 94
Capital contributions from PPL (b)

 

 322
 

 322
Dividends declared on common stock

 

 

 (140) (140)

 

 

 (45) (45)
September 30, 201566,368
 $364
 $1,925
 $801
 $3,090
March 31, 201666,368
 $364
 $1,934
 $870
 $3,168
 
(a)Shares in thousands. All common shares of PPL Electric stock are owned by PPL.
(b)Includes non-cash contributions of $47 million.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.















THIS PAGE INTENTIONALLY LEFT BLANK.



CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Operating Revenues$835
 $801
 $2,382
 $2,414
$809
 $826
          
Operating Expenses 
  
  
  
 
  
Operation 
  
  
  
 
  
Fuel227
 228
 607
 695
191
 198
Energy purchases24
 23
 118
 143
69
 66
Other operation and maintenance197
 202
 603
 625
207
 202
Depreciation102
 97
 301
 286
105
 99
Taxes, other than income16
 14
 46
 43
16
 15
Total Operating Expenses566
 564
 1,675
 1,792
588
 580
          
Operating Income269
 237
 707
 622
221
 246
          
Other Income (Expense) - net(3) (1) (9) (3)(2) (1)
          
Interest Expense50
 43
 147
 127
49
 49
          
Interest Expense with Affiliate4
 —
 12
 1
4
 4
          
Income Before Income Taxes212
 193
 539
 491
166
 192
          
Income Taxes79
 73
 202
 194
63
 72
          
Net Income(a)$133
 $120
 $337
 $297
$103
 $120
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)


Three Months Ended September 30, Nine Months Ended September 30,
 2016 2015 2016 2015
Net income$133
 $120
 $337
 $297
        
Other comprehensive income (loss):       
Amounts arising during the period - gains (losses), net of tax (expense) benefit:       
Defined benefit plans:       
Net actuarial gain (loss), net of tax of $0, $0, ($1), $5—
 —
 1
 (8)
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):       
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $1—
 —
 (1) (1)
Defined benefit plans:       
Prior service costs, net of tax of ($1), $0, ($1), $0—
 —
 1
 1
Net actuarial loss, net of tax of $0, $0, ($1), ($1)1
 1
 3
 2
Total other comprehensive income (loss)1
 1
 4
 (6)
        
Comprehensive income (loss)$134
 $121
 $341
 $291
(a)Net income approximates comprehensive income.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

Nine Months Ended September 30,Three Months Ended March 31,
2016 20152017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$337
 $297
$103
 $120
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation301
 286
105
 99
Amortization21
 18
7
 7
Defined benefit plans - expense20
 29
8
 7
Deferred income taxes and investment tax credits212
 199
48
 68
Other—
 29
Change in current assets and current liabilities 
  
 
  
Accounts receivable(43) (1)21
 (15)
Accounts payable7
 (34)(28) 25
Accounts payable to affiliates4
 (7)7
 5
Unbilled revenues6
 19
22
 8
Fuel, materials and supplies7
 43
41
 21
Income tax receivable—
 132
Taxes payable(2) (25)
Accrued interest42
 37
42
 42
Other(4) (2)(38) (24)
Other operating activities 
  
 
  
Defined benefit plans - funding(82) (66)(22) (33)
Expenditures for asset retirement obligations(15) (5)(6) (2)
Settlement of interest rate swaps—
 (88)
Other assets1
 (4)1
 —
Other liabilities2
 13
3
 —
Net cash provided by operating activities816
 895
312
 303
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(600) (928)(184) (219)
Other investing activities1
 7
Net cash provided by (used in) investing activities(599) (921)(184) (219)
Cash Flows from Financing Activities 
  
 
  
Net increase (decrease) in notes payable with affiliate84
 21
(81) 93
Issuance of long-term debt221
 1,050
Retirement of long-term debt(221) —
Net increase (decrease) in short-term debt(130) (500)58
 (149)
Debt issuance and credit facility costs(3) (9)(1) (1)
Distributions to member(224) (157)(102) (29)
Contributions from member37
 55
Net cash provided by (used in) financing activities(236) 460
(126) (86)
Net Increase (Decrease) in Cash and Cash Equivalents(19) 434
2
 (2)
Cash and Cash Equivalents at Beginning of Period30
 21
13
 30
Cash and Cash Equivalents at End of Period$11
 $455
$15
 $28
   
Supplemental Disclosure of Cash Flow Information   
Significant non-cash transactions:   
Accrued expenditures for property, plant and equipment at March 31,$75
 $117

 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$11
 $30
$15
 $13
Accounts receivable (less reserve: 2016, $24; 2015, $23) 
  
Accounts receivable (less reserve: 2017, $24; 2016, $24) 
  
Customer250
 209
215
 235
Other13
 17
24
 17
Unbilled revenues141
 147
148
 170
Fuel, materials and supplies292
 298
256
 297
Prepayments31
 23
25
 24
Regulatory assets18
 35
23
 20
Other current assets1
 6
7
 4
Total Current Assets757
 765
713
 780
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant12,510
 11,906
12,810
 12,746
Less: accumulated depreciation - regulated utility plant1,382
 1,163
1,550
 1,465
Regulated utility plant, net11,128
 10,743
11,260
 11,281
Construction work in progress349
 660
376
 317
Property, Plant and Equipment, net11,477
 11,403
11,636
 11,598
      
Other Noncurrent Assets 
  
 
  
Regulatory assets774
 727
828
 824
Goodwill996
 996
996
 996
Other intangibles103
 123
93
 95
Other noncurrent assets80
 76
78
 78
Total Other Noncurrent Assets1,953
 1,922
1,995
 1,993
      
Total Assets$14,187
 $14,090
$14,344
 $14,371
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$135
 $265
$243
 $185
Long-term debt due within one year219
 25
94
 194
Notes payable with affiliate138
 54
82
 163
Accounts payable216
 266
204
 251
Accounts payable to affiliates9
 5
13
 6
Customer deposits55
 52
56
 56
Taxes49
 46
37
 39
Price risk management liabilities6
 5
4
 4
Regulatory liabilities26
 32
16
 18
Interest74
 32
74
 32
Asset retirement obligations54
 50
58
 60
Other current liabilities111
 135
88
 119
Total Current Liabilities1,092
 967
969
 1,127
      
Long-term Debt      
      
Long-term debt4,470
 4,663
4,572
 4,471
Long-term debt to affiliate400
 400
400
 400
Total Long-term Debt4,870
 5,063
4,972
 4,871
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,673
 1,463
1,786
 1,735
Investment tax credits132
 128
131
 132
Accrued pension obligations242
 296
332
 350
Asset retirement obligations368
 485
374
 373
Regulatory liabilities911
 923
897
 899
Price risk management liabilities48
 42
25
 27
Other deferred credits and noncurrent liabilities180
 206
188
 190
Total Deferred Credits and Other Noncurrent Liabilities3,554
 3,543
3,733
 3,706
      
Commitments and Contingent Liabilities (Notes 6 and 10)

 

Commitments and Contingent Liabilities (Notes 6 and 9)

 

      
Member's equity4,671
 4,517
Member's Equity4,670
 4,667
      
Total Liabilities and Equity$14,187
 $14,090
$14,344
 $14,371
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

 
Member's
Equity
December 31, 2015$4,517
Net income337
Contributions from member37
Distributions to member(224)
Other comprehensive income (loss)4
September 30, 2016$4,671
  
December 31, 2014$4,248
Net income297
Contributions from member55
Distributions to member(157)
Other comprehensive income (loss)(6)
September 30, 2015$4,437
 
Member's
Equity
December 31, 2016$4,667
Net income103
Distributions to member(102)
Other comprehensive income2
March 31, 2017$4,670
  
December 31, 2015$4,517
Net income120
Distributions to member(29)
Other comprehensive income1
March 31, 2016$4,609
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


(
THIS PAGE INTENTIONALLY LEFT BLANK INTENTIONALLY.)
BLANK.


CONDENSED STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)

Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Operating Revenues          
Retail and wholesale$366
 $349
 $1,058
 $1,089
$374
 $375
Electric revenue from affiliate2
 2
 19
 32
17
 11
Total Operating Revenues368
 351
 1,077
 1,121
391
 386
          
Operating Expenses          
Operation          
Fuel86
 82
 233
 267
80
 78
Energy purchases19
 18
 104
 129
64
 62
Energy purchases from affiliate5
 9
 10
 17
2
 2
Other operation and maintenance85
 87
 264
 286
87
 87
Depreciation43
 40
 126
 122
44
 41
Taxes, other than income9
 7
 24
 21
8
 8
Total Operating Expenses247
 243
 761
 842
285
 278
          
Operating Income121
 108
 316
 279
106
 108
          
Other Income (Expense) - net(1) (1) (6) (3)(2) —
          
Interest Expense18
 13
 53
 39
17
 17
          
Income Before Income Taxes102
 94
 257
 237
87
 91
          
Income Taxes39
 36
 98
 91
33
 35
          
Net Income (a)$63
 $58
 $159
 $146
$54
 $56
 
(a)Net income equals comprehensive income.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)

Nine Months Ended September 30,Three Months Ended March 31,
2016 20152017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$159
 $146
$54
 $56
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation126
 122
44
 41
Amortization10
 9
3
 3
Defined benefit plans - expense6
 10
2
 3
Deferred income taxes and investment tax credits117
 93
31
 37
Other—
 25
Change in current assets and current liabilities 
  
 
  
Accounts receivable(19) 10
13
 (5)
Accounts receivable from affiliates(11) 4
1
 (4)
Accounts payable24
 (14)(12) 5
Accounts payable to affiliates(6) (1)(4) —
Unbilled revenues10
 13
9
 7
Fuel, materials and supplies11
 21
33
 31
Income tax receivable2
 74
Taxes payable(28) (9)
Accrued interest13
 9
13
 13
Other1
 8
(11) (9)
Other operating activities 
  
 
  
Defined benefit plans - funding(45) (25)(1) (13)
Expenditures for asset retirement obligations(11) (4)(4) (1)
Settlement of interest rate swaps—
 (44)
Other assets(3) 10
2
 —
Other liabilities(1) 3
(3) 2
Net cash provided by operating activities383
 469
142
 157
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(343) (519)(94) (109)
Net cash provided by (used in) investing activities(343) (519)(94) (109)
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt125
 550
Retirement of long-term debt(125) —
Net increase (decrease) in short-term debt(14) (264)38
 (60)
Debt issuance and credit facility costs(1) (5)—
 (1)
Payment of common stock dividends to parent(87) (81)(87) (25)
Contributions from parent47
 20
—
 30
Net cash provided by (used in) financing activities(55) 220
(49) (56)
Net Increase (Decrease) in Cash and Cash Equivalents(15) 170
(1) (8)
Cash and Cash Equivalents at Beginning of Period19
 10
5
 19
Cash and Cash Equivalents at End of Period$4
 $180
$4
 $11
   
Supplemental Disclosure of Cash Flow Information   
Significant non-cash transactions:   
Accrued expenditures for property, plant and equipment at March 31,$34
 $77
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$4
 $19
$4
 $5
Accounts receivable (less reserve: 2016, $1; 2015, $1) 
  
Accounts receivable (less reserve: 2017, $2; 2016, $2) 
  
Customer109
 92
97
 109
Other11
 11
10
 11
Accounts receivable from affiliates23
 12
27
 28
Unbilled revenues57
 67
66
 75
Fuel, materials and supplies140
 151
110
 143
Prepayments14
 5
12
 12
Regulatory assets6
 16
12
 9
Other current assets—
 2
2
 1
Total Current Assets364
 375
340
 393
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant5,234
 4,804
5,396
 5,357
Less: accumulated depreciation - regulated utility plant468
 404
534
 498
Regulated utility plant, net4,766
 4,400
4,862
 4,859
Construction work in progress155
 390
156
 133
Property, Plant and Equipment, net4,921
 4,790
5,018
 4,992
      
Other Noncurrent Assets 
  
 
  
Regulatory assets437
 424
448
 450
Goodwill389
 389
389
 389
Other intangibles63
 73
57
 59
Other noncurrent assets21
 17
16
 17
Total Other Noncurrent Assets910
 903
910
 915
      
Total Assets$6,195
 $6,068
$6,268
 $6,300
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$128
 $142
$207
 $169
Long-term debt due within one year219
 25
94
 194
Accounts payable133
 157
115
 148
Accounts payable to affiliates19
 25
22
 26
Customer deposits26
 26
27
 27
Taxes23
 20
12
 40
Price risk management liabilities6
 5
4
 4
Regulatory liabilities7
 13
5
 5
Interest24
 11
24
 11
Asset retirement obligations39
 25
29
 41
Other current liabilities36
 39
27
 36
Total Current Liabilities660
 488
566
 701
      
Long-term Debt1,423
 1,617
1,524
 1,423
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes944
 829
1,006
 974
Investment tax credits37
 35
36
 36
Accrued pension obligations18
 56
50
 53
Asset retirement obligations107
 149
114
 104
Regulatory liabilities424
 431
419
 419
Price risk management liabilities48
 42
25
 27
Other deferred credits and noncurrent liabilities85
 91
85
 87
Total Deferred Credits and Other Noncurrent Liabilities1,663
 1,633
1,735
 1,700
      
Commitments and Contingent Liabilities (Notes 6 and 10)

 

Commitments and Contingent Liabilities (Notes 6 and 9)

 

      
Stockholder's Equity 
  
 
  
Common stock - no par value (a)424
 424
424
 424
Additional paid-in capital1,658
 1,611
1,682
 1,682
Earnings reinvested367
 295
337
 370
Total Equity2,449
 2,330
2,443
 2,476
      
Total Liabilities and Equity$6,195
 $6,068
$6,268
 $6,300
 
(a)75,000 shares authorized; 21,294 shares issued and outstanding at September 30, 2016March 31, 2017 and December 31, 2015.2016.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED STATEMENTS OF EQUITY
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)

Common
stock
shares
outstanding
(a)
 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 Total
December 31, 201621,294
 $424
 $1,682
 $370
 $2,476
Net income

 

 

 54
 54
Cash dividends declared on common stock

 

 

 (87) (87)
March 31, 201721,294
 $424
 $1,682
 $337
 $2,443
Common
stock
shares
outstanding
(a)
 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 Total         
December 31, 201521,294
 $424
 $1,611
 $295
 $2,330
21,294
 $424
 $1,611
 $295
 $2,330
Net income

 

 

 159
 159


 

 

 56
 56
Capital contributions from LKE

 

 47
 

 47


 

 30
 

 30
Cash dividends declared on common stock

 

 

 (87) (87)

 

 

 (25) (25)
September 30, 201621,294
 $424
 $1,658
 $367
 $2,449
         
December 31, 201421,294
 $424
 $1,521
 $229
 $2,174
Net income

 

 

 146
 146
Capital contributions from LKE

 

 20
 

 20
Cash dividends declared on common stock

 

 

 (81) (81)
September 30, 201521,294
 $424
 $1,541
 $294
 $2,259
March 31, 201621,294
 $424
 $1,641
 $326
 $2,391
 
(a)Shares in thousands. All common shares of LG&E stock are owned by LKE.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



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CONDENSED STATEMENTS OF INCOME
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)

Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Operating Revenues          
Retail and wholesale$469
 $452
 $1,324
 $1,325
$435
 $451
Electric revenue from affiliate5
 9
 10
 17
2
 2
Total Operating Revenues474
 461
 1,334
 1,342
437
 453
          
Operating Expenses          
Operation          
Fuel141
 146
 374
 428
111
 120
Energy purchases5
 5
 14
 14
5
 4
Energy purchases from affiliate2
 2
 19
 32
17
 11
Other operation and maintenance107
 108
 320
 321
109
 106
Depreciation59
 57
 175
 164
60
 58
Taxes, other than income7
 7
 22
 22
8
 7
Total Operating Expenses321
 325
 924
 981
310
 306
          
Operating Income153
 136
 410
 361
127
 147
          
Other Income (Expense) - net(3) —
 (4) 1
(1) (2)
          
Interest Expense24
 20
 71
 58
24
 24
          
Income Before Income Taxes126
 116
 335
 304
102
 121
          
Income Taxes48
 44
 128
 115
39
 46
          
Net Income (a)$78
 $72
 $207
 $189
$63
 $75
 
(a)Net income approximates comprehensive income.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)

Nine Months Ended September 30,Three Months Ended March 31,
2016 20152017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$207
 $189
$63
 $75
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation175
 164
60
 58
Amortization10
 8
4
 4
Defined benefit plans - expense4
 9
2
 2
Deferred income taxes and investment tax credits122
 132
37
 44
Other(1) 4
Change in current assets and current liabilities 
  
 
  
Accounts receivable(24) (11)8
 (8)
Accounts payable(11) (18)(4) 23
Accounts payable to affiliates2
 (7)(7) 2
Unbilled revenues(4) 6
13
 1
Fuel, materials and supplies(4) 22
8
 (10)
Income tax receivable—
 60
Taxes payable(34) (8)
Accrued interest22
 19
22
 22
Other2
 6
(12) 1
Other operating activities 
  
 
  
Defined benefit plans - funding(19) (20)(19) (10)
Expenditures for asset retirement obligations(4) (1)(2) (1)
Settlement of interest rate swaps—
 (44)
Other assets(4) (9)(1) —
Other liabilities(4) 1
1
 —
Net cash provided by operating activities469
 510
139
 195
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(255) (407)(89) (110)
Other investing activities1
 7
Net cash provided by (used in) investing activities(254) (400)(89) (110)
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt96
 500
Retirement of long-term debt(96) —
Net increase (decrease) in short-term debt(41) (236)20
 (14)
Debt issuance and credit facility costs(1) (4)—
 (1)
Payment of common stock dividends to parent(197) (106)(70) (64)
Contributions from parent20
 —
Net cash provided by (used in) financing activities(219) 154
(50) (79)
Net Increase (Decrease) in Cash and Cash Equivalents(4) 264
—
 6
Cash and Cash Equivalents at Beginning of Period11
 11
7
 11
Cash and Cash Equivalents at End of Period$7
 $275
$7
 $17
   
Supplemental Disclosure of Cash Flow Information   
Significant non-cash transactions:   
Accrued expenditures for property, plant and equipment at March 31,$41
 $40
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$7
 $11
$7
 $7
Accounts receivable (less reserve: 2016, $2; 2015, $2) 
  
Accounts receivable (less reserve: 2017, $1; 2016, $2) 
  
Customer141
 117
118
 126
Other3
 9
13
 5
Accounts receivable from affiliates1
 1
Unbilled revenues84
 80
82
 95
Fuel, materials and supplies152
 147
146
 154
Prepayments16
 8
12
 12
Regulatory assets12
 19
11
 11
Other current assets1
 4
5
 3
Total Current Assets417
 396
394
 413
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant7,270
 7,099
7,405
 7,382
Less: accumulated depreciation - regulated utility plant913
 759
1,014
 965
Regulated utility plant, net6,357
 6,340
6,391
 6,417
Construction work in progress192
 267
219
 181
Property, Plant and Equipment, net6,549
 6,607
6,610
 6,598
      
Other Noncurrent Assets 
  
 
  
Regulatory assets337
 303
380
 374
Goodwill607
 607
607
 607
Other intangibles40
 50
36
 36
Other noncurrent assets56
 48
59
 57
Total Other Noncurrent Assets1,040
 1,008
1,082
 1,074
      
Total Assets$8,006
 $8,011
$8,086
 $8,085
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)

September 30,
2016		 December 31,
2015		March 31,
2017		 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$7
 $48
$36
 $16
Accounts payable67
 88
76
 78
Accounts payable to affiliates42
 39
50
 56
Customer deposits29
 26
29
 29
Taxes23
 20
11
 45
Regulatory liabilities19
 19
11
 13
Interest38
 16
38
 16
Asset retirement obligations15
 25
29
 19
Other current liabilities35
 44
27
 36
Total Current Liabilities275
 325
307
 308
      
Long-term Debt2,327
 2,326
2,327
 2,327
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,166
 1,046
1,208
 1,170
Investment tax credits95
 93
95
 96
Accrued pension obligations33
 46
44
 62
Asset retirement obligations261
 336
260
 269
Regulatory liabilities487
 492
478
 480
Other deferred credits and noncurrent liabilities46
 60
50
 50
Total Deferred Credits and Other Noncurrent Liabilities2,088
 2,073
2,135
 2,127
      
Commitments and Contingent Liabilities (Notes 6 and 10)

 

Commitments and Contingent Liabilities (Notes 6 and 9)

 

      
Stockholder's Equity 
  
 
  
Common stock - no par value (a)308
 308
308
 308
Additional paid-in capital2,616
 2,596
2,616
 2,616
Accumulated other comprehensive loss(1) —
—
 (1)
Earnings reinvested393
 383
393
 400
Total Equity3,316
 3,287
3,317
 3,323
      
Total Liabilities and Equity$8,006
 $8,011
$8,086
 $8,085
 
(a)80,000 shares authorized; 37,818 shares issued and outstanding at September 30, 2016March 31, 2017 and December 31, 2015.2016.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



CONDENSED STATEMENTS OF EQUITY
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)

 Common
stock
shares
outstanding
(a)		 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 
Accumulated
other
comprehensive
loss
 Total
December 31, 201537,818
 $308
 $2,596
 $383
 $—
 $3,287
Capital contributions from LKE

 

 20
 

 

 20
Net income

 

 

 207
 

 207
Cash dividends declared on common stock

 

 

 (197) 

 (197)
Other comprehensive income (loss)

 

 

 

 (1) (1)
September 30, 201637,818
 $308
 $2,616
 $393
 $(1) $3,316
            
December 31, 201437,818
 $308
 $2,596
 $302
 $—
 $3,206
Net income

 

 

 189
 

 189
Cash dividends declared on common stock

 

 

 (106) 

 (106)
Other comprehensive income (loss)

 

 

 

 (1) (1)
September 30, 201537,818
 $308
 $2,596
 $385
 $(1) $3,288
 Common
stock
shares
outstanding
(a)		 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 
Accumulated
other
comprehensive
loss
 Total
December 31, 201637,818
 $308
 $2,616
 $400
 $(1) $3,323
Net income

 

 

 63
 

 63
Cash dividends declared on common stock

 

 

 (70) 

 (70)
Other comprehensive income

 

 

 

 1
 1
March 31, 201737,818
 $308
 $2,616
 $393
 $—
 $3,317
            
December 31, 201537,818
 $308
 $2,596
 $383
 $—
 $3,287
Net income

 

 

 75
 

 75
Cash dividends declared on common stock

 

 

 (64) 

 (64)
March 31, 201637,818
 $308
 $2,596
 $394
 $—
 $3,298
 
(a)Shares in thousands. All common shares of KU stock are owned by LKE.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 


Combined Notes to Condensed Financial Statements (Unaudited)
 
1. Interim Financial Statements
 
(All Registrants)
 
Capitalized terms and abbreviations appearing in the unaudited combined notes to condensed financial statements are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted. The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure.disclosure for each Registrants' related activities and disclosures. Within combined disclosures, amounts are disclosed for any Registrant when significant.
 
The accompanying unaudited condensed financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation in accordance with GAAP are reflected in the condensed financial statements. All adjustments are of a normal recurring nature, except as otherwise disclosed. Each Registrant's Balance Sheet at December 31, 20152016 is derived from that Registrant's 20152016 audited Balance Sheet. The financial statements and notes thereto should be read in conjunction with the financial statements and notes contained in each Registrant's 20152016 Form 10-K. The results of operations for the three and nine months ended September 30, 2016March 31, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 20162017 or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.
 
The classification of certain prior period amounts has been changed to conform to the presentation in the September 30, 2016March 31, 2017 financial statements.
 
(PPL)
"Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income includes the activities of PPL Energy Supply, substantially representing PPL's former Supply segment, which was spun off and distributed to PPL shareowners on June 1, 2015. In addition, the Statement of Cash Flows for the nine months ended September 30, 2015 separately reports the cash flows of the discontinued operations. See Note 8 for additional information.
2. Summary of Significant Accounting Policies
 
(All Registrants)
 
The following accounting policy disclosures represent updates to Note 1 toin each indicated Registrant's 20152016 Form 10-K and should be read in conjunction with those disclosures.
 
Accounts Receivable (PPL and PPL Electric)
 
In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative electricity suppliers at a discount, which reflects a provision for uncollectible accounts. The alternative electricity suppliers have no continuing involvement or interest in the purchased accounts receivable. The purchased accountsAccounts receivable that are acquired are initially recorded at fair value using a market approach based on the purchase price paid and are classified as Level 2 in the fair value hierarchy.date of acquisition. During the three and nine months ended September 30,March 31, 2017 and 2016, PPL Electric purchased $365$356 million and $1.0 billion of accounts receivable from unaffiliated third parties. During the three and nine months ended September 30, 2015, PPL Electric purchased $361 million and $968$382 million of accounts receivable from unaffiliated third parties. PPL Electric's purchases from PPL EnergyPlus for the nine months ended September 30, 2015 were $146 million. As a result of the June 1, 2015 spinoff of PPL Energy Supply and creation of Talen Energy, PPL EnergyPlus (renamed Talen Energy Marketing) is no longer an affiliate of PPL Electric. PPL Electric's purchases from Talen Energy Marketing subsequent to May 31, 2015 are included as purchases from an unaffiliated third party.

Discount Rate Change for U.K. Pension Plans(PPL)
In selecting the discount rate for its U.K. pension plans, WPD historically used a single weighted-average discount rate in the calculation of net periodic defined benefit cost. WPD began using individual spot rates to measure service cost and interest cost for the calculation of net periodic defined benefit cost in 2016. For the three and nine months ended September 30, 2016, this


change in discount rate resulted in lower net periodic defined benefit costs recognized on PPL's Statements of Income of $10 million ($8 million after-tax or $0.01 per share) and $31 million ($25 million after-tax or $0.04 per share).

Foreign Currency Translation and Transactions (PPL)

WPD's functional currency is the GBP, which is the local currency in the U.K. As such, assets and liabilities are translated to U.S. dollars at the exchange rates on the date of consolidation and related revenues and expenses are generally translated at average exchange rates prevailing during the period included in PPL's results of operations. Adjustments resulting from foreign currency translation are recorded in AOCI.
Certain financial information provided for future periods in PPL’s 2015 Form 10-K is impacted by the decrease in the GBP to U.S. dollar exchange rate that occurred subsequent to the U.K.'s vote on June 23, 2016 to withdraw from the European Union.

New Accounting Guidance Adopted(All Registrants)
Accounting for Stock-Based Compensation
Effective January 1, 2016, the Registrants adopted accounting guidance to simplify the accounting for share-based payment transactions. The guidance requires excess tax benefits and tax deficiencies to be recorded as income tax benefit or expense on the statement of income, eliminates the requirement that excess tax benefits be realized before companies can recognize them and changes the threshold for statutory income tax withholding requirements to qualify for equity classification to the maximum statutory tax rates in the applicable jurisdictions. This guidance also changes the classification of excess tax benefits to an operating activity and employee taxes paid when shares are withheld to satisfy the employer's statutory income tax withholding obligation to a financing activity on the statement of cash flows and allows entities to make a policy election to either estimate forfeitures or recognize them when they occur. The adoption of this guidance had the following impacts:
Using the required prospective method of transition, for the three and nine months ended September 30, 2016, PPL recorded tax benefits of $1 million and $12 million ($0.02 per share), and for the nine months ended September 30, 2016, PPL Electric recorded tax benefits of $7 million, related to excess tax benefits for awards that were exercised and vested for the periods ending September 30, 2016. These amounts were recorded to Income taxes on the Statements of Income and Deferred income taxes on the Balance Sheets. The impact on LKE was not significant.

PPL elected to use the prospective method of transition for classifying excess tax benefits as an Operating activity on the Statement of Cash Flows. The amounts classified as Financing activities in the prior periods were not significant.

Upon adoption, using the required modified retrospective method of transition, PPL recorded a cumulative effect adjustment of $7 million to increase Earnings reinvested and decrease Deferred income taxes on the Balance Sheet related to prior period unrecognized excess tax benefits.

PPL has historically presented employee taxes paid for net settled awards as a Financing activity on the Statement of Cash Flows. Therefore, there is no transition impact for this requirement.

PPL has elected to recognize forfeitures when they occur. Due to past experience of insignificant forfeitures, there is no transition impact of this policy election.alternative electricity suppliers.



3. Segment and Related Information
 
(PPL)
 
See Note 2 in PPL's 20152016 Form 10-K for a discussion of reportable segments and related information.

FinancialIncome Statement data for the segments and reconciliation to PPL's consolidated results for the periods ended September 30 are:
March 31 are as follows:
Three Months Nine MonthsThree Months
2016 2015 2016 20152017 2016
Income Statement Data          
Revenues from external customers          
U.K. Regulated$515
 $552
 $1,673
 $1,836
$568
 $595
Kentucky Regulated835
 801
 2,382
 2,414
809
 826
Pennsylvania Regulated539
 519
 1,619
 1,625
573
 585
Corporate and Other—
 6
 11
 14
1
 5
Total$1,889
 $1,878
 $5,685
 $5,889
$1,951
 $2,011
          
Net Income 
  
  
  
 
  
U.K. Regulated (a)$281
 $249
 $915
 $814
$286
 $289
Kentucky Regulated126
 111
 314
 267
95
 112
Pennsylvania Regulated91
 55
 263
 191
79
 94
Corporate and Other (b)(25) (19) (55) (74)(57) (14)
Discontinued Operations (c)—
 (3) —
 (915)
Total$473
 $393
 $1,437
 $283
$403
 $481
 September 30,
2016		 December 31,
2015
Balance Sheet Data 
  
Assets 
  
U.K. Regulated (d)$15,014
 $16,669
Kentucky Regulated13,853
 13,756
Pennsylvania Regulated9,070
 8,511
Corporate and Other (e)101
 365
Total assets$38,038
 $39,301

(a)Includes unrealized gains and losses from hedging foreign-currency related economic activity. See Note 1413 for additional information.

Balance Sheet data for the segments and reconciliation to PPL's consolidated results as of:
 March 31,
2017		 December 31,
2016
Balance Sheet Data 
  
Assets 
  
U.K. Regulated (a)$15,039
 $14,537
Kentucky Regulated14,010
 14,037
Pennsylvania Regulated9,699
 9,426
Corporate and Other (b)286
 315
Total$39,034
 $38,315
(b)The nine months ended September 30, 2015 includes transition costs to prepare the Talen Energy organization for the June 1, 2015 spinoff and reconfigure the remaining PPL Services functions. See Note 8 for additional information.
(c)See Note 8 for additional information.
(d)(a)Includes $11.1$10.9 billion and $12.2$10.8 billion of net PP&E as of September 30, 2016March 31, 2017 and December 31, 2015.2016. WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.
(e)(b)Primarily consists of unallocated items, including cash, PP&E and the elimination of inter-segment transactions.

(PPL Electric, LKE, LG&E and KU)
PPL Electric has two operating segments that are aggregated into a single reportable segment. LKE, LG&E and KU are individually single operating and reportable segments.

4. Earnings Per Share
 
(PPL)
 
Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the applicable period. Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding, increased by incremental shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares as calculated using the Treasury Stock Method. Incremental non-participating securities that have a dilutive impact are detailed in the table below.

 
Reconciliations of the amounts of income and shares of PPL common stock (in thousands) for the periods ended September 30March 31 used in the EPS calculation are:


Three Months Nine MonthsThree Months
2016 2015 2016 20152017 2016
Income (Numerator) 
  
  
  
 
  
Income from continuing operations after income taxes$473
 $396
 $1,437
 $1,198
Less amounts allocated to participating securities1
 2
 4
 5
Income from continuing operations after income taxes available to PPL common shareowners - Basic and Diluted$472
 $394
 $1,433
 $1,193
       
Income (loss) from discontinued operations (net of income taxes) available to PPL common shareowners - Basic and Diluted$—
 $(3) $—
 $(915)
       
Net income$473
 $393
 $1,437
 $283
$403
 $481
Less amounts allocated to participating securities1
 2
 4
 1
1
 2
Net income available to PPL common shareowners - Basic and Diluted$472
 $391
 $1,433
 $282
$402
 $479
          
Shares of Common Stock (Denominator) 
  
  
  
 
  
Weighted-average shares - Basic EPS678,114
 670,763
 676,905
 668,731
680,882
 675,441
Add incremental non-participating securities: 
  
  
  
 
  
Share-based payment awards2,234
 2,939
 3,064
 2,523
2,202
 3,376
Weighted-average shares - Diluted EPS680,348
 673,702
 679,969
 671,254
683,084
 678,817
          
Basic EPS 
  
  
  
 
  
Available to PPL common shareowners: 
  
  
  
Income from continuing operations after income taxes$0.70
 $0.59
 $2.12
 $1.78
Income (loss) from discontinued operations (net of income taxes)—
 (0.01) —
 (1.36)
Net Income$0.70
 $0.58
 $2.12
 $0.42
Net Income available to PPL common shareowners$0.59
 $0.71
          
Diluted EPS 
  
  
  
 
  
Available to PPL common shareowners: 
  
  
  
Income from continuing operations after income taxes$0.69
 $0.59
 $2.11
 $1.78
Income (loss) from discontinued operations (net of income taxes)—
 (0.01) —
 (1.36)
Net Income$0.69
 $0.58
 $2.11
 $0.42
Net Income available to PPL common shareowners$0.59
 $0.71
 
For the periods ended September 30,March 31, PPL issued common stock related to stock-based compensation plans and the DRIP as follows (in thousands):
Three Months Nine MonthsThree Months
2016 2015 2016 20152017 2016
Stock-based compensation plans (a)248
 1,368
 3,168
 3,805
887
 2,125
DRIP761
 475
 1,533
 1,318
445
 402
 
(a)Includes stock options exercised, vesting of performance units, vesting of restricted stock and restricted stock units and conversion of stock units granted to directors.

See Note 7 for additional information on common stock issued under the ATM Program.

For the periods ended September 30,March 31, the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would have been antidilutive.
 Three Months Nine Months
 2016 2015 2016 2015
Stock options696
 1,484
 696
 1,218
Performance units316
 —
 210
 49
 Three Months
 2017 2016
Stock options696
 696
 


5. Income Taxes
 
Reconciliations of income taxes for the periods ended September 30March 31 are as follows.
(PPL)
 Three Months
 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$186
 $231
Increase (decrease) due to: 
  
State income taxes, net of federal income tax benefit13
 13
Valuation allowance adjustments5
 6
Impact of lower U.K. income tax rates(48) (54)
U.S. income tax on foreign earnings - net of foreign tax credit(9) (2)
Impact of the U.K. Finance Acts(3) —
Depreciation not normalized(3) (1)
Interest benefit on U.K. financing entities(4) (5)
Stock-based compensation(3) (8)
Other(5) (1)
Total increase (decrease)(57) (52)
Total income taxes$129
 $179
(PPL)
 Three Months Nine Months
 2016 2015 2016 2015
Federal income tax on Income from Continuing Operations Before
Income Taxes at statutory tax rate - 35%
$214
 $189
 $681
 $571
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit13
 15
 37
 44
Valuation allowance adjustments4
 —
 13
 8
Impact of lower U.K. income tax rates(37) (40) (136) (138)
Federal and state tax reserve adjustments (a)—
 (9) —
 (21)
Enactment of the U.K. Finance Act 2016 (b)(42) —
 (42) —
Depreciation not normalized—
 —
 (6) (4)
Interest benefit on U.K. financing entities(4) (4) (13) (15)
Stock-based compensation (c)(1) —
 (12) —
Other(8) (7) (12) (13)
Total increase (decrease)(75) (45) (171) (139)
Total income taxes$139
 $144
 $510
 $432
(a)During the three and nine months ended September 30, 2015, PPL recorded a $9 million tax benefit related to a planned amendment of a prior period tax return.

During the nine months ended September 30, 2015, PPL recorded a $12 million tax benefit to adjust the settled refund amount approved by the Joint Committee on Taxation for the open audit years 1998 - 2011.
(b)The U.K. Finance Act 2016, enacted in September 2016, reduces the U.K. statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during the three and nine months ended September 30, 2016.
(c)During the three and nine months ended September 30, 2016, PPL recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 for additional information.

(PPL Electric)   
 Three Months
 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$44
 $53
Increase (decrease) due to: 
  
State income taxes, net of federal income tax benefit8
 9
Depreciation not normalized(2) (1)
Stock-based compensation(2) (5)
Total increase (decrease)4
 3
Total income taxes$48
 $56
(PPL Electric)       
(LKE)    
Three Months Nine MonthsThree Months
2016 2015 2016 20152017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$52
 $32
 $149
 $112
$58
 $67
Increase (decrease) due to: 
  
  
  
 
  
State income taxes, net of federal income tax benefit9
 7
 27
 21
6
 7
Depreciation not normalized(2) (1) (5) (3)
Stock-based compensation (a)—
 —
 (7) —
Other(1) (3) (2) —
(1) (2)
Total increase (decrease)6
 3
 13
 18
5
 5
Total income taxes$58
 $35
 $162
 $130
$63
 $72
(a)During the nine months ended September 30, 2016, PPL Electric recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 for additional information.


(LG&E)   
 Three Months
 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$30
 $32
Increase (decrease) due to: 
  
State income taxes, net of federal income tax benefit3
 3
Total increase (decrease)3
 3
Total income taxes$33
 $35

(LKE)         
 Three Months Nine Months
 2016 2015 2016 2015
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$74
 $68
 $189
 $172
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit8
 7
 20
 18
Amortization of investment tax credit(1) (1) (2) (2)
Valuation allowance adjustments (a)—
 —
 —
 8
Stock-based compensation(1) —
 (2) —
Other(1) (1) (3) (2)
Total increase (decrease)5
 5
 13
 22
Total income taxes$79
 $73
 $202
 $194
(a)Represents a valuation allowance against tax credits expiring in 2016 and 2017 that are more likely than not to expire before being utilized.
(LG&E)       
 Three Months Nine Months
 2016 2015 2016 2015
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$36
 $33
 $90
 $83
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit4
 4
 10
 9
Other(1) (1) (2) (1)
Total increase (decrease)3
 3
 8
 8
Total income taxes$39
 $36
 $98
 $91
(KU)       
 Three Months Nine Months
 2016 2015 2016 2015
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$44
 $41
 $117
 $106
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit5
 4
 12
 11
Other(1) (1) (1) (2)
Total increase (decrease)4
 3
 11
 9
Total income taxes$48
 $44
 $128
 $115

Other (PPL)

In February 2015, PPL and the IRS Appeals Division reached a settlement on the amount of PPL's refund from its open audits for the years 1998 - 2011. In April 2015, PPL was notified that the Joint Committee on Taxation approved PPL's settlement. For the nine months ended September 30, 2015, PPL recorded a tax benefit of $24 million. Of this amount, $12 million was reflected in continuing operations. PPL finalized the settlement of interest in the second quarter of 2016 and recorded an additional $3 million tax benefit.
(KU)   
 Three Months
 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$36
 $42
Increase (decrease) due to: 
  
State income taxes, net of federal income tax benefit4
 4
Other(1) —
Total increase (decrease)3
 4
Total income taxes$39
 $46

6. Utility Rate Regulation
 
(All Registrants)
 
The following table provides information about the regulatory assets and liabilities of cost-based rate-regulated utility operations.

 PPL PPL Electric
 March 31,
2017		 December 31,
2016		 March 31,
2017		 December 31,
2016
Current Regulatory Assets:       
Environmental cost recovery$6
 $6
 $—
 $—
      Generation formula rate11
 11
 —
 —
Transmission service charge—
 7
 —
 7
Smart meter rider8
 6
 8
 6
Storm costs4
 5
 4
 5
Other7
 4
 1
 1
Total current regulatory assets (a)$36
 $39
 $13
 $19
        
Noncurrent Regulatory Assets:       
Defined benefit plans$936
 $947
 $543
 $549
Taxes recoverable through future rates343
 340
 343
 340
Storm costs44
 57
 —
 9
Unamortized loss on debt58
 61
 34
 36
Interest rate swaps126
 129
 —
 —
Accumulated cost of removal of utility plant160
 159
 160
 159
AROs228
 211
 —
 —
Other13
 14
 —
 1
Total noncurrent regulatory assets$1,908
 $1,918
 $1,080
 $1,094
Current Regulatory Liabilities:       
Generation supply charge$19
 $23
 $19
 $23
Transmission service charge5
 —
 5
 —
Demand side management2
 3
 —
 —
Universal service rider14
 14
 14
 14
Transmission formula rate6
 15
 6
 15
Fuel adjustment clause13
 11
 —
 —
Act 129 compliance rider16
 17
 16
 17
Storm damage expense5
 13
 5
 13
Other2
 5
 1
 1
Total current regulatory liabilities$82
 $101
 $66
 $83
        

 PPL PPL Electric
 September 30,
2016		 December 31,
2015		 September 30,
2016		 December 31,
2015
Current Regulatory Assets:       
Environmental cost recovery$4
 $24
 $—
 $—
      Generation formula rate12
 7
 —
 —
Transmission service charge8
 10
 8
 10
Other6
 7
 4
 3
Total current regulatory assets (a)$30
 $48
 $12
 $13
        
Noncurrent Regulatory Assets:       
Defined benefit plans$791
 $809
 $456
 $469
Taxes recoverable through future rates333
 326
 333
 326
Storm costs71
 93
 19
 30
Unamortized loss on debt62
 68
 39
 42
Interest rate swaps143
 141
 —
 —
Accumulated cost of removal of utility plant143
 137
 143
 137
AROs208
 143
 —
 —
Other14
 16
 1
 2
Total noncurrent regulatory assets$1,765
 $1,733
 $991
 $1,006
 PPL PPL Electric
 March 31,
2017		 December 31,
2016		 March 31,
2017		 December 31,
2016
Noncurrent Regulatory Liabilities:       
Accumulated cost of removal of utility plant$701
 $700
 $—
 $—
Power purchase agreement - OVEC (b)74
 75
 —
 —
Net deferred tax assets22
 23
 —
 —
Defined benefit plans23
 23
 —
 —
Interest rate swaps76
 78
 —
 —
Other1
 —
 —
 —
Total noncurrent regulatory liabilities$897
 $899
 $—
 $—
Current Regulatory Liabilities:       
Generation supply charge$22
 $41
 $22
 $41
Demand side management6
 8
 —
 —
Gas supply clause—
 6
 —
 —
Universal service rider10
 5
 10
 5
Transmission formula rate25
 48
 25
 48
Fuel adjustment clause14
 14
 —
 —
Act 129 compliance rider22
 —
 22
 —
Storm damage expense13
 16
 13
 16
Other8
 7
 2
 3
Total current regulatory liabilities$120
 $145
 $94
 $113
        
Noncurrent Regulatory Liabilities:       
Accumulated cost of removal of utility plant$698
 $691
 $—
 $—
Coal contracts (b)3
 17
 —
 —
Power purchase agreement - OVEC (b)77
 83
 —
 —
Net deferred tax assets23
 23
 —
 —
Act 129 compliance rider—
 22
 —
 22
Defined benefit plans27
 24
 —
 —
Interest rate swaps80
 82
 —
 —
Other3
 3
 —
 —
Total noncurrent regulatory liabilities$911
 $945
 $—
 $22



 LKE LG&E KU
 March 31,
2017		 December 31,
2016		 March 31,
2017		 December 31,
2016		 March 31,
2017		 December 31,
2016
Current Regulatory Assets:           
Environmental cost recovery$6
 $6
 $6
 $6
 $—
 $—
      Generation formula rate11
 11
 —
 —
 11
 11
Other6
 3
 6
 3
 —
 —
Total current regulatory assets$23
 $20
 $12
 $9
 $11
 $11
            
Noncurrent Regulatory Assets:           
Defined benefit plans$393
 $398
 $242
 $246
 $151
 $152
Storm costs44
 48
 24
 26
 20
 22
Unamortized loss on debt24
 25
 15
 16
 9
 9
Interest rate swaps126
 129
 86
 88
 40
 41
AROs228
 211
 77
 70
 151
 141
Plant retirement costs3
 4
 —
 —
 3
 4
Other10
 9
 4
 4
 6
 5
Total noncurrent regulatory assets$828
 $824
 $448
 $450
 $380
 $374
 LKE LG&E KU
 September 30,
2016		 December 31,
2015		 September 30,
2016		 December 31,
2015		 September 30,
2016		 December 31,
2015
Current Regulatory Assets:           
Environmental cost recovery$4
 $24
 $4
 $13
 $—
 $11
      Generation formula rate12
 7
 —
 —
 12
 7
Other2
 4
 2
 3
 —
 1
Total current regulatory assets$18
 $35
 $6
 $16
 $12
 $19
            
Noncurrent Regulatory Assets:           
Defined benefit plans$335
 $340
 $211
 $215
 $124
 $125
Storm costs52
 63
 29
 35
 23
 28
Unamortized loss on debt23
 26
 16
 17
 7
 9
Interest rate swaps143
 141
 102
 98
 41
 43
AROs208
 143
 77
 57
 131
 86
Plant retirement costs4
 6
 —
 —
 4
 6
Other9
 8
 2
 2
 7
 6
Total noncurrent regulatory assets$774
 $727
 $437
 $424
 $337
 $303
Current Regulatory Liabilities:                      
Demand side management$6
 $8
 $4
 $4
 $2
 $4
$2
 $3
 $1
 $2
 $1
 $1
Gas supply clause—
 6
 —
 6
 —
 —
Fuel adjustment clause14
 14
 2
 2
 12
 12
13
 11
 4
 2
 9
 9
Other6
 4
 1
 1
 5
 3
1
 4
 —
 1
 1
 3
Total current regulatory liabilities$26
 $32
 $7
 $13
 $19
 $19
$16
 $18
 $5
 $5
 $11
 $13
                      
Noncurrent Regulatory Liabilities:                      
Accumulated cost of removal
of utility plant
$698
 $691
 $306
 $301
 $392
 $390
$701
 $700
 $308
 $305
 $393
 $395
Coal contracts (b)3
 17
 1
 7
 2
 10
Power purchase agreement - OVEC (b)77
 83
 53
 57
 24
 26
74
 75
 51
 52
 23
 23
Net deferred tax assets23
 23
 23
 23
 —
 —
22
 23
 22
 23
 —
 —
Defined benefit plans27
 24
 —
 —
 27
 24
23
 23
 —
 —
 23
 23
Interest rate swaps80
 82
 40
 41
 40
 41
76
 78
 38
 39
 38
 39
Other3
 3
 1
 2
 2
 1
1
 —
 —
 —
 1
 —
Total noncurrent regulatory liabilities$911
 $923
 $424
 $431
 $487
 $492
$897
 $899
 $419
 $419
 $478
 $480
  
(a)TheseFor PPL, these amounts are included in "Other current assets" on the Balance Sheets.
(b)These liabilities wereThis liability was recorded as offsetsan offset to certainan intangible assetsasset that werewas recorded at fair value upon the acquisition of LKE by PPL.


Regulatory Matters
 
U.K. Activities(PPL)
Ofgem Review of Line Loss Calculation
In 2014, Ofgem issued its final decision on the DPCR4 line loss incentives and penalties mechanism. WPD began refunding its liability for over-recovery of line losses to customers on April 1, 2015, which will continue through March 31, 2019. The liability at September 30, 2016 was $31 million.
Kentucky Activities
 
Rate Case Proceedings (PPL, LKE, LG&E and KU)



On November 1,23, 2016, LG&E and KU announced that on November 23, 2016, they anticipate filingfiled requests with the KPSC for increases in annual base electricity rates of approximately $103 million at KU and an increase in annual base electricity and gas rates of approximately $94 million and $14 million at LG&E. The proposed base rate increases to be requested arewould result in an electricity rate increase of 6.4% at KU and electricity and gas rate increases of 8.5% and 4.2% at LG&E and would become effective in July 2017.&E. LG&E's and KU's applications include requests for CPCNs for implementing an Advanced Metering System program and a Distribution Automation program. The applications are to be based on a forecasted test year of July 1, 2017 through June 30, 2018 and a requested return-on-equityreturn on equity of 10.23%.

On April 19, 2017 and May 1, 2017, LG&E and KU, along with all intervening parties to the proceeding, filed with the KPSC, stipulation and recommendation agreements (stipulations) resolving all issues with the parties. Among other things, the proposed stipulations provide for increases in annual revenue requirements associated with KU base electricity rates of $55 million, LG&E base electricity rates of $59 million and LG&E base gas rates of $8 million, reflecting a return on equity of 9.75%, and the withdrawal of LG&E's and KU's request for a CPCN for the Advanced Metering System. The proposed stipulations would result in a base electricity rate increase of 3.4% at KU and base electricity and gas rate increases of 5.4% and 2.3% at LG&E. The proposed stipulations remain subject to KPSC approval. If approved, new rates and all elements of the stipulations would be effective July 1, 2017. A public hearing on the applications is scheduled to commence on May 9, 2017. LG&E and KU cannot predict the outcome of these proceedings.

CPCN and ECR Filings(PPL, LKE, LG&E and KU)
On August 8, 2016, the KPSC issued an order approving CPCNs and ECR rate treatment regarding environmental construction projects relating to the EPA's regulations addressing the handling of coal combustion by-products and MATS. The construction projects began in 2016 and are expected to continue through 2023. The KPSC order established a 9.8% authorized return on equity for these projects. Recovery of costs has commenced with bills rendered on and after August 31, 2016.

Gas Franchise (LKE and LG&E)
 
LG&E’s existing gas franchise agreement for the Louisville/Jefferson County service area expired onin March 31, 2016. LG&E submitted a proposed bid for a new franchise agreement on June 9, 2016. OnIn August 30, 2016, LG&E and Louisville/Jefferson County entered into a revised franchise agreement with a 5-year term (with renewal options). The franchise fee may be modified at Louisville/Jefferson County's election upon 60 days' notice. However, any franchise fee is capped at 3% of gross receipts for natural gas service within the franchise area. The agreement further provides that if the KPSC determines that the franchise fee should be recovered from LG&E's customers, the franchise fee shall revert to zero. OnIn August 30, 2016, LG&E filed an application in a KPSC proceeding to review and rule upon the recoverability of the franchise fee.

In August 2016, Louisville/Jefferson County submitted a motion to dismiss the proceeding filed by LG&E, and, furtherin November 2016 filed a KPSCan amended complaint against LG&E relating to these issues. On October 19, 2016,LG&E submitted KPSC filings to respond to, request dismissal of and consolidate certain claims or aspects of the proceedings. In January 2017, the KPSC issued an order rejectingdenying Louisville/Jefferson County's complaintmotion to dismiss, consolidating the matter with LG&E's filed application and provided Louisville/Jefferson County 20 days to file an amended complaint.establishing a procedural schedule for the case. Until the KPSC issues ordersa final order in these proceedings,this proceeding, LG&E cannot predict the ultimate outcome of this matter but does not anticipate that it will have a material effect on its financial condition or results of operation. LG&E continues to provide gas service to customers in this franchise area at existing rates, but without collecting or remitting a franchise fee.

Pennsylvania Activities (PPL and PPL Electric)
 
Act 129
 
Act 129 requires Pennsylvania Electric Distribution Companies (EDCs) to meet, by specified dates, specified goals for reduction in customer electricity usage and peak demand. EDCs not meeting the requirements of Act 129 are subject to significant penalties. In November 2015, PPL Electric filed with the PUC its Act 129 Phase III Energy Efficiency and Conservation Plan for the period June 1, 2016 through May 31, 2021. In January 2016, PPL Electric and the other parties to the case reached a settlement of all major issues and filed that settlement with the Administrative Law Judge. In June 2016, the PUC issued a final order approving PPL Electric's Phase III Plan as modified by the settlement, allowing PPL Electric to recover, through the Act 129 compliance rider, a maximum $313 million in program cost over the five-year period June 1, 2016 through May 31, 2021.     
 
Act 129 also requires Default Service Providers (DSP) to provide electricity generation supply service to customers pursuant to a PUC-approved default service procurement plan through auctions, requests for proposal and bilateral contracts at the sole discretion of the DSP. Act 129 requires a mix of spot market purchases, short-term contracts and long-term contracts (4 to 20

years), with long-term contracts limited to 25% of load unless otherwise approved by the PUC. A DSP is able to recover the costs associated with its default service procurement plan.
 
PPL Electric has received PUC approval of its biannual DSP procurement plans for all prior periods required under Act 129. In January 2016, PPL Electric filed a Petition for Approval of a new DSP procurement plan with the PUC for the period June 1, 2017 through May 31, 2021. The parties to the proceeding reached a settlement on all but one issue and a partial settlement agreement and briefs on the open issue were submitted to the Administrative Law Judge (ALJ) in July 2016. In August 2016, the ALJ issued an initial decision, and certain parties filed exceptions and reply exceptions. In October 2016, the PUC issued an order approving the partial settlement agreement and adopting the initial decision with minor modifications.


In November 2016, Retail Electric Supply Association (RESA) filed a Petition for Reconsideration of the portion of the October 2016 order that approved the Customer Assistance Program Standard Offer Referral Program (CAP-SOP). In January 2017, the PUC issued an order denying RESA's Petition for Reconsideration and closing the record. In February 2017, RESA filed a Petition for Review with the Commonwealth Court of Pennsylvania regarding the CAP-SOP. This matter remains pending before the court.

7. Financing Activities
 
Credit Arrangements and Short-term Debt
 
(All Registrants)
 
The Registrants maintain credit facilities to enhance liquidity, provide credit support and provide a backstop to commercial paper programs. For reporting purposes, on a consolidated basis, the credit facilities and commercial paper programs of PPL Electric, LKE, LG&E and KU also apply to PPL and the credit facilities and commercial paper programs of LG&E and KU also apply to LKE. The amounts borrowed below are recorded as "Short-term debt" on the Balance Sheets. The following credit facilities were in place at: 
September 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
Expiration
Date
 Capacity Borrowed 
Letters of
Credit
and
Commercial
Paper
Issued
 
Unused
Capacity
 Borrowed 
Letters of
Credit
and
Commercial
Paper
Issued
Expiration
Date
 Capacity Borrowed 
Letters of
Credit
and
Commercial
Paper
Issued
 
Unused
Capacity
 Borrowed 
Letters of
Credit
and
Commercial
Paper
Issued
PPL   
  
  
  
  
  
   
  
  
  
  
  
U.K.   
  
  
  
  
  
   
  
  
  
  
  
WPD plc   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit FacilityJan 2021 £210
 £153
 £—
 £57
 £133
 £—
Syndicated Credit Facility (a)Jan. 2022 £210
 £161
 £—
 £49
 £160
 £—
Term Loan Facility (b)Dec. 2017 230
 230
 —
 —
 —
 —
WPD (South West)   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit FacilityJuly 2021 245
 100
 —
 145
 —
 —
Syndicated Credit Facility (c)July 2021 245
 72
 —
 173
 110
 —
WPD (East Midlands)   
  
  
  
  
  
  
  
  
  
  
  
Syndicated Credit FacilityJuly 2021 300
 31
 —
 269
 —
 —
Syndicated Credit Facility (d)July 2021 300
 128
 —
 172
 9
 —
WPD (West Midlands)   
  
  
  
  
  
  
  
  
  
  
  
Syndicated Credit FacilityJuly 2021 300
 —
 —
 300
 —
 —
July 2021 300
 —
 —
 300
 —
 —
Uncommitted Credit Facilities  40
 —
 4
 36
 —
 4
Total U.K. Credit Facilities (a)  £1,095
 £284
 £4
 £807
 £133
 £4
Uncommitted Credit Facilities (e)  90
 —
 4
 86
 60
 4
Total U.K. Credit Facilities (f)  £1,375
 £591
 £4
 £780
 £339
 £4
U.S.                          
PPL Capital Funding                          
Syndicated Credit FacilityJan 2021 $700
 $—
 $—
 $700
 $—
 $151
Jan. 2022 $950
 $—
 $189
 $761
 $—
 $20
Syndicated Credit FacilityNov 2018 300
 —
 —
 300
 —
 300
Nov. 2018 300
 —
 —
 300
 —
 —
Bilateral Credit FacilityMar 2017 150
 —
 17
 133
 —
 20
Mar. 2018 150
 —
 17
 133
 —
 17
Total PPL Capital Funding Credit Facilities $1,150
 $—
 $17
 $1,133
 $—
 $471
 $1,400
 $—
 $206
 $1,194
 $—
 $37
                        
PPL Electric   
  
  
  
  
  
Syndicated Credit FacilityJan 2021 $400
 $—
 $131
 $269
 $—
 $1
            
LKE   
  
  
  
  
  
Syndicated Credit Facility (b)Oct 2018 $75
 $—
 $—
 $75
 $75
 $—
            
LG&E   
  
  
  
  
  
Syndicated Credit FacilityDec 2020 $500
 $—
 $128
 $372
 $—
 $142
            
KU   
  
  
  
  
  
Syndicated Credit FacilityDec 2020 $400
 $—
 $7
 $393
 $—
 $48
Letter of Credit FacilityOct 2017 198
 —
 198
 —
 —
 198
Total KU Credit Facilities  $598
 $—
 $205
 $393
 $—
 $246


 March 31, 2017 December 31, 2016
 
Expiration
Date
 Capacity Borrowed 
Letters of
Credit
and
Commercial
Paper
Issued
 
Unused
Capacity
 Borrowed 
Letters of
Credit
and
Commercial
Paper
Issued
PPL Electric   
  
  
  
  
  
Syndicated Credit FacilityJan. 2022 $650
 $—
 $500
 $150
 $—
 $296
              
LKE   
  
  
  
  
  
Syndicated Credit FacilityOct. 2018 $75
 $—
 $—
 $75
 $—
 $—
              
LG&E   
  
  
  
  
  
Syndicated Credit FacilityJan. 2022 $500
 $—
 $207
 $293
 $—
 $169
              
KU   
  
  
  
  
  
Syndicated Credit FacilityJan. 2022 $400
 $—
 $36
 $364
 $—
 $16
Letter of Credit FacilityOct. 2017 198
 —
 198
 —
 —
 198
Total KU Credit Facilities  $598
 $—
 $234
 $364
 $—
 $214
(a)WPD plc'sThe amounts borrowed at September 30, 2016March 31, 2017 and December 31, 20152016 were USD-denominated borrowings of $200 million for both periods, which bore interest at 1.35%1.61% and 1.83%1.43%. The unused capacity reflects the amount borrowed in GBP of £153£161 million as of the date borrowed. WPD (South West)
(b)The amount borrowed at September 30,March 31, 2017 was a GBP-denominated borrowing which equated to $286 million and bore interest at 1.51%.
(c)The amounts borrowed at March 31, 2017 and December 31, 2016 were GBP-denominated borrowings which equated to $90 million and $137 million and bore interest at 0.66% for both periods.
(d)
The amounts borrowed at March 31, 2017 and December 31, 2016 were GBP-denominated borrowings which equated to $159 millionand $11 million and bore interest at 0.66% for both periods.
(e)The amount borrowed at December 31, 2016 was a GBP-denominated borrowing which equated to $131$75 million and bore interest at 0.68%1.26%. WPD (East Midlands) amount borrowed at September 30, 2016 was a GBP-denominated borrowing which equated to $40 million and bore interest at 0.66%.
(f)At September 30, 2016,March 31, 2017, the unused capacity under the U.K. credit facilities was approximately $1.1 billion.
(b)LKE's interest rate on outstanding borrowings at December 31, 2015 was 1.68%.$972 million.

PPL, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as necessary. Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's Syndicated Credit Facility. The following commercial paper programs were in place at: 
September 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
Weighted -
Average
Interest Rate
 Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
 
Weighted -
Average
Interest Rate
 
Commercial
Paper
Issuances
Weighted -
Average
Interest Rate
 Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
 
Weighted -
Average
Interest Rate
 
Commercial
Paper
Issuances
PPL Capital Funding
 $1,000
 $—
 $1,000
 0.78% $451
1.25% $1,000
 $189
 $811
 1.10% $20
PPL Electric0.74% 400
 130
 270
 
 —
1.26% 650
 499
 151
 1.05% 295
LG&E0.73% 350
 128
 222
 0.71% 142
1.19% 350
 207
 143
 0.94% 169
KU0.66% 350
 7
 343
 0.72% 48
1.18% 350
 36
 314
 0.87% 16
Total  $2,100
 $265
 $1,835
   $641
  $2,350
 $931
 $1,419
   $500
 
(LKE)
 
See Note 1110 for discussion of intercompany borrowings.

Long-term Debt

(PPL)

In May 2016, PPL Capital FundingMarch 2017, WPD (South Wales) issued $650£50 million of 3.10% Senior Notes due 2026. PPL Capital Funding received proceeds of $645 million, net of a discount and underwriting fees, which will be used to invest in or make loans to subsidiaries of PPL, to repay short-term debt and for general corporate purposes.

In May 2016, WPD (East Midlands) borrowed £100 million at 0.4975% under a new ten-year index linked term loan agreement, which will be used for general corporate purposes.

In May 2016, WPD plc repaid the entire $460 million principal amount of its 3.90% Senior Notes upon maturity.

In October 2016, WPD (East Midlands) issued an additional £40 million of its 2.671%0.01% Index-linked Senior Notes due 2043.2029. WPD (East Midlands)(South Wales) received proceeds of £83£53 million, which equated to $101$64 million at the time of issuance, net of fees and including a premium. The principal amount of the notes is adjusted based on changes in a specified index, as detailed in the terms of the related indentures.indenture. The proceeds will be used for general corporate purposes.

(PPL and PPL Electric)
In March 2016, the LCIDA issued $116 million of Pollution Control Revenue Refunding Bonds, Series 2016A due 2029 and $108 million of Pollution Control Revenue Refunding Bonds, Series 2016B due 2027 on behalf of PPL Electric. The bonds were issued bearing interest at an initial term rate of 0.90% through their mandatory purchase dates of September 1, 2017 and August 15, 2017. Thereafter, the method of determining the interest rate on the bonds may be converted from time to time at PPL Electric's option. The proceeds of the bonds were used to redeem $116 million of 4.70% Pollution Control Revenue Refunding Bonds, 2005 Series A due 2029 and $108 million of 4.75% Pollution Control Revenue Refunding Bonds, 2005 Series B due 2027 previously issued by the LCIDA on behalf of PPL Electric.
In connection with the issuance of each of these new series of LCIDA bonds, PPL Electric entered into a loan agreement with the LCIDA pursuant to which the LCIDA has loaned to PPL Electric the proceeds of the LCIDA bonds on payment terms that correspond to the LCIDA bonds. In order to secure its obligations under the loan agreement, PPL Electric issued $224 million of First Mortgage Bonds under its 2001 Mortgage Indenture, which also have payment terms that correspond to the LCIDA bonds.



(PPL, LKE and LG&E)

In September 2016,April 2017, the Louisville/Jefferson County Metro Government of Trimble, Kentucky issued $125remarketed $128 million of Pollution Control Revenue Refunding Bonds, 20162003 Series A (Louisville Gas and Electric Company Project) due 20442033 on behalf of LG&E. The bonds were issued withremarketed at a floating interestlong term rate that initiallyand will reset weekly. The method of determining the interest rate on the bonds may be converted from time to time at LG&E’s option. The proceeds of the bonds were used to redeem $83 million of Pollution Control Revenue Refunding Bonds, 2000 Series A (Louisville Gas and Electric Company Project) due 2030 and $42 million of Pollution Control Revenue Refunding Bonds, 2002 Series A (Louisville Gas and Electric Company Project) due 2032 previously issued by the County of Trimble, Kentucky on behalf of LG&E.

(PPL, LKE and KU) 

In August 2016, the County of Carroll, Kentucky issued $96 million of Pollution Control Revenue Refunding Bonds, 2016 Series A (Kentucky Utilities Company Project) due 2042 on behalf of KU. The bonds were issued bearingbear interest at an initial term rate of 1.05%1.50% through their mandatory purchase date of SeptemberApril 1, 2019. Thereafter, the method of determining the interest rate on the bonds may be converted from time to time at KU’s option. The proceeds of the bonds were used to redeem $96 million of Pollution Control Revenue Refunding Bonds, 2002 Series C (Kentucky Utilities Company Project) due 2032 previously issued by the County of Carroll, Kentucky on behalf of KU.

(PPL)
 
ATM Program
 
In February 2015, PPL filed a registration statement with the SEC and entered into two separate equity distribution agreements, pursuant to which PPL may sell, from time to time, up to an aggregate of $500 million of its common stock. For the periods ended September 30,March 31, PPL issued the following:
Three Months Nine MonthsThree Months
2016 2015 2016 20152017 2016
Number of shares (in thousands)710
 436
 710
 858
1,364
 —
Average share price$35.23
 $32.95
 $35.23
 $33.33
$36.66
 $—
Net Proceeds$25
 $14
 $25
 $28
$50
 $—
 
Distributions
 
In August 2016,February 2017, PPL declared a quarterly common stock dividend, payable OctoberApril 3, 2016,2017, of 3839.5 cents per share (equivalent to $1.52$1.58 per annum). Future dividends, declared at the discretion of the Board of Directors, will depend upon future earnings, cash flows, financial and legal requirements and other factors.

8. Acquisitions, Development and Divestitures
(All Registrants)
The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with, modify or terminate the projects. Any resulting transactions may impact future financial results. See Note 8 in the Registrants' 2015 Form 10-K for additional information.
(PPL)
Discontinued Operations
Spinoff of PPL Energy Supply
In June 2015, PPL completed the spinoff of PPL Energy Supply, which combined its competitive power generation businesses with those of Riverstone to form a new, stand-alone, publicly traded company named Talen Energy.


Following completion of the spinoff, PPL shareowners owned 65% of Talen Energy and affiliates of Riverstone owned 35%. The spinoff had no effect on the number of PPL common shares owned by PPL shareowners or the number of shares of PPL common stock outstanding. The transaction is intended to be tax-free to PPL and its shareowners for U.S. federal income tax purposes.
PPL has no continuing ownership interest in or control of Talen Energy and Talen Energy Supply (formerly PPL Energy Supply). See Note 8 in PPL's 2015 Form 10-K for additional information.

Loss on Spinoff
In June 2015, in conjunction with the accounting for the spinoff, PPL evaluated whether the fair value of the Supply segment's net assets was less than the carrying value as of the June 1, 2015 spinoff date.

PPL considered several valuation methodologies to derive a fair value estimate of its Supply segment at the spinoff date. These methodologies included considering the closing "when-issued" Talen Energy market value on June 1, 2015 (the spinoff date), adjusted for the proportional share of the equity value attributable to the Supply segment, as well as, the valuation methods consistently used in PPL's goodwill impairment assessments - an income approach using a discounted cash flow analysis of the Supply segment and an alternative market approach considering market multiples of comparable companies.

Although the Talen Energy market value approach utilized the most observable inputs of the three approaches, PPL considered certain limitations of the "when-issued" trading market for the spinoff transaction including the short trading duration, lack of liquidity in the market and anticipated initial Talen stock ownership base selling pressure, among other factors, and concluded that these factors limited this input being solely determinative of the fair value of the Supply segment. As such, PPL also considered the other valuation approaches in estimating the overall fair value, but ultimately assigned the highest weighting to the Talen Energy market value approach.

The following table summarizes PPL's fair value analysis:

Approach Weighting 
Weighted
Fair Value
(in billions)
Talen Energy Market Value 50% $1.4
Income/Discounted Cash Flow 30% 1.1
Alternative Market (Comparable Company) 20% 0.7
Estimated Fair Value   $3.2

A key assumption included in the fair value estimate is the application of a control premium of 25% in the two market approaches. PPL concluded it was appropriate to apply a control premium in these approaches as the goodwill impairment testing guidance was followed in determining the estimated fair value of the Supply segment which had historically been a reporting unit for PPL. This guidance provides that the market price of an individual security (and thus the market capitalization of a reporting unit with publicly traded equity securities) may not be representative of the fair value of the reporting unit. This guidance also indicates that substantial value may arise to a controlling shareholder from the ability to take advantage of synergies and other benefits that arise from control over another entity, and that the market price of a company's individual share of stock does not reflect this additional value to a controlling shareholder. Therefore, the quoted market price need not be the sole measurement basis for determining the fair value, and including a control premium is appropriate in measuring the fair value of a reporting unit.

In determining the control premium, PPL reviewed premiums received during the prior five years in market sales transactions obtained from observable independent power producer and hybrid utility transactions greater than $1 billion. Premiums for these transactions ranged from 5% to 42% with a median of approximately 25%. Given these metrics, PPL concluded a control premium of 25% to be reasonable for both of the market valuation approaches used.

Assumptions used in the discounted cash flow analysis included forward energy prices, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the Energy Supply portion of the Talen Energy business planning process at that time and a market participant discount rate.



Using these methodologies and weightings, PPL determined the estimated fair value of the Supply segment (classified as Level 3) was below its carrying value of $4.1 billion and recorded a loss on the spinoff of $879 million in the second quarter of 2015, which is reflected in discontinued operations and is nondeductible for tax purposes. This amount served to reduce the basis of the net assets accounted for as a dividend at the June 1, 2015 spinoff date.

Costs of Spinoff

Employee-related costs incurred in the nine months ended September 30, 2015 primarily included accelerated stock-based compensation and pro-rated performance-based cash incentive and stock-based compensation awards, primarily for PPL Energy Supply employees and for PPL Services employees who became PPL Energy Supply employees in connection with the transaction. PPL Energy Supply recognized $24 million of these costs at the spinoff closing date, which are reflected in discontinued operations.

PPL also recorded $44 million of third-party costs related to this transaction during the nine months ended September 30, 2015. Of these costs, $31 million were primarily for bank advisory, legal and accounting fees to facilitate the transaction, and are reflected in discontinued operations. An additional $13 million of consulting and other costs were incurred to prepare the new Talen Energy organization for the spinoff and reconfigure the remaining PPL service functions. These costs are primarily recorded in "Other operation and maintenance" on the Statement of Income.

At the close of the transaction, $72 million ($42 million after-tax) of cash flow hedges, primarily unamortized losses on PPL interest rate swaps recorded in AOCI and designated as cash flow hedges of PPL Energy Supply's future interest payments, were reclassified into earnings and are reflected in discontinued operations for the nine months ended September 30, 2015.

Continuing Involvement(PPL and PPL Electric)
As a result of the spinoff, PPL and PPL Energy Supply entered into a Transition Services Agreement (TSA) that terminates no later than two years after the spinoff. Pursuant to the TSA, PPL is providing Talen Energy certain information technology, financial and accounting, human resource and other specified services. For the three and nine months ended September 30, 2016, the amounts PPL billed Talen Energy for these services were $9 million and $29 million. For the three and nine months ended September 30, 2015, the amounts PPL billed Talen Energy for these services were $11 million and $14 million. In general, the fees for the transition services allow the provider to recover its cost of the services, including overheads, but without margin or profit.
Additionally, prior to the spinoff, through the annual competitive solicitation process, PPL EnergyPlus was awarded supply contracts for a portion of the PLR generation supply for PPL Electric, which were retained by Talen Energy Marketing as part of the spinoff. PPL Electric's supply contracts with Talen Energy Marketing extend through November 2016. Energy purchases from PPL EnergyPlus were previously included in PPL Electric's Statements of Income as "Energy purchases from affiliate" but were eliminated in PPL's Consolidated Statements of Income.
For the three and nine months ended September 30, 2016, PPL Electric's energy purchases from Talen Energy Marketing were $15 million and $98 million. For the three and nine months ended September 30, 2015, PPL Electric's energy purchases from Talen Energy Marketing were not significant. These energy purchases are no longer considered affiliate transactions.

Summarized Results of Discontinued Operations(PPL)
The operations of the Supply segment prior to the spinoff on June 1, 2015 are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income. Following are the components of Discontinued Operations in the Statement of Income for the periods ended September 30, 2015:


 Three Months Nine Months
Operating revenues$—
 $1,427
Operating expenses—
 1,328
Other Income (Expense) - net—
 (22)
Interest expense (a)—
 150
Income (loss) before income taxes—
 (73)
Income tax expense (benefit)3
 (37)
Loss on spinoff—
 (879)
Income (Loss) from Discontinued Operations (net of income taxes)$(3) $(915)
(a)Includes interest associated with the Supply segment with no additional allocation as the Supply segment was sufficiently capitalized.

Development
Regional Transmission Line Expansion Plan(PPL and PPL Electric)
Northeast/Pocono
In October 2012, the FERC issued an order in response to PPL Electric's December 2011 request for ratemaking incentives for the Northeast/Pocono Reliability project (a new 58-mile, 230 kV transmission line that includes three new substations and upgrades to adjacent facilities). The FERC granted the incentive for inclusion in rate base of all prudently incurred construction work in progress costs but denied the requested incentive for a 100 basis point adder to the return on equity.
In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project. In January 2014, the PUC issued a final order approving the application. The line was energized in April 2016, completing the approximately $350 million project which includes additional substation security enhancements. Costs related to the project are included on the Balance Sheets, primarily in "Regulated utility plant."
9. Defined Benefits
 
(PPL, LKE and LG&E)
 
Certain net periodic defined benefit costs are applied to accounts that are further distributed among capital, expense and regulatory assets, including certain costs allocated to applicable subsidiaries for plans sponsored by PPL Services and LKE. Following are the net periodic defined benefit costs (credits) of the plans sponsored by PPL and its subsidiaries, LKE and its subsidiaries and LG&E for the periods ended September 30:March 31:
 Pension Benefits
 Three Months Nine Months
 U.S. U.K. U.S. U.K.
 2016 2015 2016 (a) 2015 2016 2015 2016 (a) 2015
PPL               
Service cost$16
 $20
 $17
 $21
 $49
 $76
 $53
 $60
Interest cost44
 42
 58
 80
 131
 152
 182
 236
Expected return on plan assets(57) (56) (124) (133) (171) (201) (389) (393)
Amortization of:               
Prior service cost2
 1
 —
 —
 6
 5
 —
 —
Actuarial loss12
 18
 34
 39
 37
 65
 107
 118
Net periodic defined benefit costs (credits) before settlements17
 25
 (15) 7
 52
 97
 (47) 21
Settlements3
 —
 —
 —
 3
 —
 —
 —
Net periodic defined benefit costs (credits) (b)$20
 $25
 $(15) $7
 $55
 $97
 $(47) $21
                


Pension BenefitsPension Benefits
Three Months Nine MonthsThree Months
U.S. U.K. U.S. U.K.U.S. U.K.
2016 2015 2016 (a) 2015 2016 2015 2016 (a) 20152017 2016 2017 2016
LKE               
PPL       
Service cost$6
 $7
     $18
 $20
    $17
 $17
 $19
 $18
Interest cost18
 17
     53
 51
    42
 43
 43
 62
Expected return on plan assets(23) (22)     (68) (66)    (57) (56) (125) (133)
Amortization of:                      
Prior service cost2
 1
     6
 5
    2
 1
 —
 —
Actuarial loss5
 9
     15
 26
    20
 15
 35
 37
Net periodic defined benefit costs$8
 $12
     $24
 $36
    
               
LG&E               
Service cost$—
 $—
     $1
 $1
    
Interest cost4
 3
     11
 10
    
Expected return on plan assets(5) (5)     (15) (15)    
Amortization of:               
Prior service cost1
 1
     3
 2
    
Actuarial loss2
 3
     5
 9
    
Net periodic defined benefit costs$2
 $2
     $5
 $7
    
Net periodic defined benefit costs (credits) before special termination benefits24
 20
 (28) (16)
Special termination benefits (a)2
 —
 —
 —
Net periodic defined benefit costs (credits)$26
 $20
 $(28) $(16)

(a)See Note 2 forEnhanced pension benefits offered to certain PPL Electric bargaining unit employees under a discussionone-time voluntary retirement window offered as part of changes to the discount rate used for the U.K. Pension Plans.
(b)For the nine months ended September 30, 2015, the total net periodic defined benefit cost includes $18 million reflectednew five year IBEW contract ratified in discontinued operations related to costs allocated from PPL's plans to PPL Energy Supply prior to the spinoff.March 2017.

Other Postretirement BenefitsPension Benefits
Three Months Nine MonthsThree Months
2016 2015 2016 20152017 2016
PPL       
Service cost$2
 $2
 $6
 $9
Interest cost6
 6
 19
 20
Expected return on plan assets(6) (6) (17) (20)
Amortization of actuarial loss1
 —
 1
 —
Net periodic defined benefit costs$3
 $2
 $9
 $9
       
LKE          
Service cost$1
 $1
 $3
 $4
$7
 $6
Interest cost2
 2
 7
 7
16
 17
Expected return on plan assets(2) (1) (5) (4)(22) (21)
Amortization of prior service cost1
 1
 2
 2
Amortization of:   
Prior service cost2
 1
Actuarial loss11
 5
Net periodic defined benefit costs$2
 $3
 $7
 $9
$14
 $8
   
LG&E   
Interest cost$3
 $3
Expected return on plan assets(5) (5)
Amortization of:   
Prior service cost1
 1
Actuarial loss3
 2
Net periodic defined benefit costs$2
 $1
 Other Postretirement Benefits
 Three Months
 2017 2016
PPL   
Service cost$2
 $2
Interest cost6
 6
Expected return on plan assets(6) (5)
Net periodic defined benefit costs$2
 $3
    
LKE   
Service cost$1
 $1
Interest cost2
 2
Expected return on plan assets(1) (2)
Amortization of prior service cost—
 1
Net periodic defined benefit costs$2
 $2
   
(PPL Electric, LG&E and KU)
 
In addition to the specific plans it sponsors, LG&E is allocated costs of defined benefit plans sponsored by LKE. PPL Electric and KU do not directly sponsor any defined benefit plans. PPL Electric is allocated costs of defined benefit plans sponsored by PPL Services and KU is allocated costs of defined benefit plans sponsored by LKE. These allocations are based on participation in those plans, which management believes are reasonable. For the periods ended September 30,March 31, PPL Services allocated the following net periodic defined benefit costs to PPL Electric, and LKE allocated the following net periodic defined benefit costs to LG&E and KU:

 Three Months
 2017 2016
PPL Electric$8
 $6
LG&E3
 2
KU4
 3

 Three Months Nine Months
 2016 2015 2016 2015
PPL Electric$6
 $8
 $17
 $24
LG&E2
 3
 7
 10
KU2
 4
 8
 13

Expected Cash Flows - U.S.U.K. Pension Plans

(PPL & LKE)(PPL)

DuringFor the ninethree months ended September 30, 2016, LKEMarch 31, 2017, WPD contributed $66$462 million to its U.K. pension plans. LKEWPD made additional contributions in the second quarter of 2017 of $23 million. These accelerated contributions fund all 2017 required contributions and a portion of 2018 required contributions. WPD does not anticipate making any additional significant contributionsexpect to these plans in 2016.

(PPL, LKE and LG&E)

During the nine months ended September 30, 2016, LG&E contributed $35 million to its pension plan. LG&E does not anticipate making anymake additional contributions to the plan in 2016.2017.

10.9. Commitments and Contingencies
 
Legal Matters
 
(All Registrants)
 
PPL and its subsidiaries are involved in legal proceedings, claims and litigation in the ordinary course of business. PPL and its subsidiaries cannot predict the outcome of such matters, or whether such matters may result in material liabilities, unless otherwise noted.
 
WKE Indemnification (PPL and LKE)
 
See footnote (e) to the table in "Guarantees and Other Assurances" below for information on an LKE indemnity relating to its former WKE lease, including related legal proceedings.
 
Cane Run Environmental Claims (PPL, LKE and LG&E)
 
In December 2013, six residents, on behalf of themselves and others similarly situated, filed a class action complaint against LG&E and PPL in the U.S. District Court for the Western District of Kentucky alleging violations of the Clean Air Act and RCRA. In addition, these plaintiffs assert common law claims of nuisance, trespass and negligence. These plaintiffs seek injunctive relief and civil penalties, plus costs and attorney fees, for the alleged statutory violations. Under the common law claims, these plaintiffs seek monetary compensation and punitive damages for property damage and diminished property values for a class consisting of residents within four miles of the Cane Run plant. In their individual capacities, these plaintiffs seeksought compensation for alleged adverse health effects. In response to a motion to dismiss filed by PPL and LG&E, in July 2014, the court dismissed the plaintiffs' RCRA claims and all but one Clean Air Act claim, but declined to dismiss theirthe common law tort claims. Upon motion of LG&EIn November 2016, plaintiffs filed an amended complaint removing the personal injury claims and PPL,removing certain previously named plaintiffs. In February 2017, the district court certified for appellate review the issue of whether the state common law claims are preempted by federal statute. In December 2014, the U.S.District Court of Appeals for the Sixth Circuit issued an order granting appellate review regardingdismissing PPL as a defendant and dismissing the above matter. Oral argument before the Sixth Circuit was held in August 2015. In November 2015, the Sixth Circuit issued an opinion affirming the District Court's ruling that plaintiffs' state law claims are not preempted byfinal federal claim against LG&E under the Clean Air Act, and remandingdirected the matterparties to submit briefs regarding whether the court should continue to exercise supplemental jurisdiction regarding the remaining state law-only claims. On April 13, 2017, the District Court for further proceedings. The District Court has issued an order setting a discovery schedule throughdeclining to exercise supplemental jurisdiction and dismissing the second quartercase in its entirety, subject to certain federal appeals or state court re-filing rights of 2017.the parties. PPL, LKE and LG&E cannot predict the outcome of this matter. LG&E retired one coal-fired unit at the Cane Run plant in March 2015 and the remaining two coal-fired units at the plant in June 2015.
Mill Creek Environmental Claims(PPL, LKE and LG&E)
In May 2014, the Sierra Club filed a citizen suit against LG&E in the U.S. District Court for the Western District of Kentucky for alleged violations of the Clean Water Act. The Sierra Club alleged that various discharges at the Mill Creek plant constituted violations of the plant's water discharge permit. The Sierra Club sought civil penalties, injunctive relief, costs and attorney's fees. The parties reached a proposed settlement in the matter on September 27, 2016, which has been submitted to


the court. LG&E has agreed to limited alterations to outfall facilities and discharge practices and to fund $1 million in environmental enhancement projects focused on tree planting and water quality in Kentucky. The settlement includes no finding or agreement of any violation of law by LG&E and does not involve fines or civil penalties. The U.S. Department of Justice has 45 days to review the settlement before the court can approve. PPL, LKE and LG&E cannot predict the ultimate outcome of this matter, but do not presently expect the matter to have a material effect on plant operation, capital expenditures or operating costs, or to result in significant charges beyond the amounts previously recorded.
 
E.W. Brown Environmental Claims (PPL, LKE and KU)
 
In October 2015, KU received a notice of intent from Earthjustice and the Sierra Club informing certain federal and state agencies of the Sierra Club's intent to file a citizen suit, following expiration of the mandatory 60-day notification period, for alleged violations of the Clean Water Act. The claimants allege discharges at the E.W. Brown plant in violation of applicable rules and the plant's water discharge permit. The claimants assert that, unless the alleged discharges are promptly brought into compliance, it intends to seek civil penalties, injunctive relief and attorney's fees. In November 2015, the claimants submitted an amended notice of intent to add the Kentucky Waterways Alliance as a claimant. OnIn October 26, 2016, the claimants submitted an additional notice of intent alleging management of waste in a manner that may present an imminent and substantial endangerment under the RCRA. PPL, LKE and KU cannot predict the outcome of this matter or the potential impact on the operations of the E. W.E.W. Brown plant, including increased capital or operating costs, if any.

Trimble County Water Discharge Permit(PPL, LKE, LG&E and KU)
Trimble County Unit 2 Air Permit
The Sierra Club and other environmental groups petitioned the Kentucky Environmental and Public Protection Cabinet to overturn the air permit issued for the Trimble County Unit 2 baseload coal-fired generating unit, but the agency upheld the permit in an order issued in September 2007. In response to subsequent petitions by environmental groups, the EPA ordered certain non-material changes to the permit which, in January 2010, were incorporated into a final revised permit issued by the Kentucky Division for Air Quality. In March 2010, the environmental groups petitioned the EPA to object to the revised state permit. Until the EPA issues a final ruling on the pending petition and all available appeals are exhausted, PPL, LKE, LG&E and KU cannot predict the outcome of this matter or the potential impact on the operations of the Trimble County plant, including increased capital or operating costs, if any.
Trimble County Water Discharge Permit
 
In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet (KEEC) challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010,

which covers water discharges from the Trimble County plant. In November 2010, the KEEC issued a final order upholding the permit, which was subsequently appealed by the environmental groups. In September 2013, the Franklin Circuit Court reversed the KEEC order upholding the permit and remanded the permit to the agency for further proceedings. LG&E and the KEEC appealed the order to the Kentucky Court of Appeals. In July 2015, the Court of Appeals upheld the lower court ruling. OnLG&E and the KEEC moved for discretionary review by the Kentucky Supreme Court. In February 10, 2016, the Kentucky Supreme Court issued an order granting discretionary review and oral arguments were held onin September 14, 2016. On April 27, 2017, the Kentucky Supreme Court issued an order reversing the decision of the appellate court and upholding the permit issued to LG&E by the KEEC. PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or the potential impact on the operations of the Trimble County plant, including increased capital or operating costs, if any.any, but do not expect such costs to be material.
 
Regulatory Issues (All Registrants)
 
See Note 6 for information on regulatory matters related to utility rate regulation.

Electricity - Reliability Standards
 
The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk electric system in North America. The FERC oversees this process and independently enforces the Reliability Standards.
 
The Reliability Standards have the force and effect of law and apply to certain users of the bulk electric system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties for certain violations.
 


PPL Electric, LG&E KU and PPL ElectricKU monitor their compliance with the Reliability Standards and self-report or self-log potential violations of applicable reliability requirements whenever identified, and submit accompanying mitigation plans, as required. The resolution of a small number of potential violations is pending. Penalties incurred to date have not been significant. Any Regional Reliability Entity (including RFC or SERC) determination concerning the resolution of violations of the Reliability Standards remains subject to the approval of the NERC and the FERC.
 
In the course of implementing their programs to ensure compliance with the Reliability Standards by those PPL affiliates subject to the standards, certain other instances of potential non-compliance may be identified from time to time. The Registrants cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.
 
Environmental Matters
 
(All Registrants)
 
Due to the environmental issues discussed below or other environmental matters, it may be necessary for the Registrants to modify, curtail, replace or cease operation of certain facilities or performance of certain operations to comply with statutes, regulations and other requirements of regulatory bodies or courts. In addition, legal challenges to new environmental permits or rules add to the uncertainty of estimating the future cost of these permits and rules. Finally, the regulatory reviews specified in the President's March 2017 Executive Order (the March 2017 Executive Order) promoting energy independence and economic growth could result in future regulatory changes and additional uncertainty.

WPD's distribution businesses are subject to certain statutory and regulatory environmental requirements. In connection with the matters discussed below, itIt may be necessary for WPD to incur significant compliance costs, which costs may be recoverable through rates subject to the approval of Ofgem. PPL believes that WPD has taken and continues to take measures to comply with all applicable environmental laws and regulations.
 
LG&E and KU are entitled to recover, through the ECR mechanism, certain costs of complying with the Clean Air Act, as amended, and those federal, state or local environmental requirements applicable to coal combustion wastes and by-products from facilities that generate electricity from coal in accordance with approved compliance plans. Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before the companies' respective state regulatory authorities, or the FERC, if applicable. Because neither WPD nor PPL Electric owns any generating plants, their exposure to related environmental compliance costs is reduced. PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.


Air

(PPL, LKE, LG&E and KU)
 
The Clean Air Act, which regulates air pollutants from mobile and stationary sources in the United States, has a significant impact on the operation of fossil fuel plants. The Clean Air Act requires the EPA periodically to review and establish concentration levels in the ambient air for six criteria pollutants to protect public health and welfare. These concentration levels are known as NAAQS. The six criteria pollutants are carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter and sulfur dioxide.
 
Federal environmental regulationregulations of these criteria pollutants require states to adopt implementation plans, known as state implementation plans, for certain pollutants, which detail how the state will attain the standards that are mandated by the relevant law or regulation. Each state identifies the areas within its boundaries that meet the NAAQS (attainment areas) and those that do not (non-attainment areas), and must develop a state implementation plan both to bring non-attainment areas into compliance with the NAAQS and to maintain good air quality in attainment areas. In addition, for attainment of ozone and fine particulates standards, states in the eastern portion of the country, including Kentucky, are subject to a regional program developed by the EPA known as the Cross-State Air Pollution Rule. The NAAQS, future revisions to the NAAQS and state implementation plans, or future revisions to regional programs, may require installation of additional pollution controls, the costs of which PPL, LKE, LG&E and KU believe are subject to cost recovery.

Although PPL, LKE, LG&E and KU do not anticipate significant costs to comply with these programs, changes in market or operating conditions could result in different costs than anticipated.
 
National Ambient Air Quality Standards (NAAQS)
 
Under the Clean Air Act, the EPA is required to reassess the NAAQS for certain air pollutants on a five-year schedule. In 2008, the EPA revised the NAAQS for ozone and proposed to further strengthen the standard in November 2014. The EPA released a


new ozone standard on October 1, 2015. The states and the EPA will determine attainment with the new ozone standard through review of relevant ambient air monitoring data, with attainment or nonattainment designations scheduled no later than October 2017. States are also obligated to address interstate transport issues associated with new ozone standards through the establishment of "good neighbor" state implementation plans for those states that are found to contribute significantly to another state's non-attainment. States that are not in the ozone transport region, including Kentucky, are workingworked together to evaluate the need for further nitrogen oxide reductions from fossil-fueled plants with SCRs. The natureBased on regulatory developments to date, PPL, LKE, LG&E and timing of any additionalKU do not anticipate requirements for nitrogen oxide reductions resulting from these evaluations cannot be predicted at this time.beyond those currently required under the Cross State Air Pollution Rule.
 
In 2010, the EPA finalized revised NAAQS for sulfur dioxide and required states to identify areas that meet those standards and areas that are in "non-attainment". In July 2013, the EPA finalized non-attainment designations for parts of the country, including part of Jefferson County in Kentucky. Attainment must be achieved by 2018. Based on regulatory developments to date, PPL, LKE, LG&E and KU anticipateexpect that certain previously required compliance measures, such as upgraded or new sulfur dioxide Scrubbers and additional sulfur dioxide limits at certain plants and the retirement of coal-fired generating units at LG&E's Cane Run plant and KU's Green River plant, will helpare sufficient to achieve compliance with the new sulfur dioxide and ozone standards. If additional reductions are required, the costs could be significant.
 
Mercury and Air Toxics Standards (MATS)
 
In February 2012, the EPA finalized the MATS rule requiring reductions of mercury and other hazardous air pollutants from fossil-fuel fired power plants, with an effective date of April 16, 2012. The MATS rule was challenged by industry groups and states and was upheld byIn a subsequent judicial challenge, the U.S. Court of Appeals for the D. C. Circuit Court (D.C. Circuit Court) in April 2014. A group of states subsequently petitioned the U.S. Supreme Court (Supreme Court) to review this decision and, in June 2015, the Supreme Court held that the EPA failed to properly consider costs when deciding to regulate hazardous air emissions from power plants under MATS. The U.S. Supreme Court remanded the matter to the D.C. Circuit Court which, in December 2015, remanded the rule to the EPA without vacating it. The EPA has proposed a supplemental finding regarding costs of the rule and has announced that it intends to make a final determination in 2016.rule. The EPA's MATS rule remains in effect during the pendency of the ongoing proceedings.
 
LG&E and KU have installed significant controls in response to the MATS rule and in conjunction with compliance with other environmental requirements, including fabric-filter baghouses, upgraded Scrubbers or chemical additive systems for which appropriate KPSC authorization and/or ECR treatment has been received. LG&E and KU have received KPSC approval for a compliance plan providing for installation of additional MATS-related controls; however, the estimated cost of these controls is not expected to be significant for either LG&E or KU. PPL, LKE, LG&E and KU cannot predict the outcome of the MATS rule or its potential impact, if any, on plant operations, rate treatment or future capital or operating needs. See Note 6 for additional information.

 
New Source Review (NSR)
 
The NSR litigation brought by the EPA, states and environmental groups against coal-fired generating plants in past years continues to proceed through the courts. Although none of this litigation directly involves PPL, LKE, LG&E or KU, it can influence the permitting of large capital projects at LG&E's and KU's power plants, the costs of which cannot presently be determined but could be significant.
 
Climate Change
 
There is continuing world-wide attention focused on issues related to climate change. In June 2016, the President announced that the United States, Canada and Mexico have established the North American Climate, Clean Energy, and Environment Partnership Plan, which specifies actions to promote clean energy, address climate change and protect the environment. The plan includes a goal to provide 50% of the energy used in North America from clean energy sources by 2025. The plan does not impose any nation-specific requirements.

In December 2015, 195 nations, including the U.S., signed the Paris Agreement on Climate, which establishes a comprehensive framework for the reduction of greenhouse gas (GHG) emissions from both developed and developing nations. Although the agreement does not establish binding reduction requirements, it requires each nation to prepare, communicate, and maintain GHG reduction commitments. Reductions can be achieved in a variety of ways, including energy conservation, power plant efficiency improvements, reduced utilization of coal-fired generation or replacing coal-fired generation with natural gas or renewable generation. Based on the EPA's Clean Power Plan described below, the U.S. has committed to an initial reduction target of 26% to 28% below 2005 levels by 2025.


The March 2017 Executive Order directed the EPA to review proposed and final rules relating to greenhouse gas reductions for consistency with certain policy directives and suspend, revise, or rescind those rules as appropriate. Additionally, the March 2017 Executive Order directs rescission of specified guidance, directives, and prior Presidential actions regarding climate change. PPL, LKE, LG&E and KU cannot predict the outcome of such regulatory actions or the impact, if any, on plant operations, rate treatment or future capital or operating needs.

The U.K. has enacted binding carbon reduction requirements that are applicable to WPD. Under the U.K. law, WPD must purchase carbon allowances to offset emissions associated with WPD’sWPD's operations. The cost of these allowances is included in WPD’sWPD's current operating expenses. WPD expects these expenses to decrease as a result of energy efficiency measures and the removal of 18 fuel sources previously included in the allowance requirements.
 
The EPA's Rules under Section 111 of the Clean Air Act
 
As further described below, the EPA finalized rules imposing GHG emission standards for both new and existing power plants in the United States.plants. The EPA has also issued a proposed federal implementation plan that would apply to any states that fail to submit an acceptable state implementation plan under these rules. The EPA's authority to promulgate these regulations under Section 111 of the Clean Air Act has been challenged in the D.C. Circuit Court by several states and industry groups. On February 9, 2016, the U.S. Supreme Court stayed the rule for existing plants (the Clean Power Plan) pending the D.C. Circuit Court's review and subsequent review by the U.S. Supreme Court if a writ of certiorari is filed and granted.
 
The EPA's rule for new power plants imposes separate emission standards for coal and natural gas units based on the application of different technologies. The coal standard is based on the application of partial carbon capture and sequestration technology, but because this technology is not presently commercially viable, the rule effectively precludes the construction of new coal-fired plants. The standard for NGCC power plants is the same as what the EPA proposed in 2012 and is not continuously achievable. The preclusion of new coal-fired plants and the compliance difficulties posed for new natural gas-fired plants could have a significant industry-wide impact.

The President's March 2017 Executive Order requires the EPA to review the rules for new and existing power plants and suspend, revise or rescind them as appropriate.
 
The EPA's Clean Power Plan
 
The EPA's rule for existing power plants, referred to as the Clean Power Plan, was published in the Federal Register in October 2015. The Clean Power Plan contains state-specific rate-based and mass-based reduction goals and guidelines for the development, submission and implementation of state implementation plans to achieve the state goals. State-specific goals were calculated from 2012 data by applying the EPA's broad interpretation and definition of the BSER, resulting in the most stringent targets to be met in 2030, with interim targets to be met beginning in 2022. The EPA believes it has offered some flexibility to

the states as to how their compliance plans can be crafted, including the option to use a rate-based approach (limit emissions per megawatt hour) or a mass-based approach (limit total tons of emissions per year), and the option to demonstrate compliance through emissions trading and multi-state collaborations. Under the rate-based approach, Kentucky would need to make a 41% reduction from its 2012 emissions rate and under a mass-based approach it would need to make a 36% reduction. These reductions are significantly greater than initially proposed and present significant challenges to the state. If the Clean Power Plan is ultimately upheld and Kentucky fails to develop an approvable implementation plan by the applicable deadline, the EPA wouldmay impose a federal implementation plan that could be more stringent than what the state plan might provide. Depending on the provisions of the Kentucky implementation plan, LG&E and KU may need to modify their current portfolio of generating assets during the next decade and/or participate in an allowance trading program.
 
LG&E and KU are participating in the ongoing regulatory processesmonitoring developments at the state and federal level. Various states, industry groups and individual companies including LKE have filed petitions for reconsideration with EPA and petitions for review with the D.C. Circuit Court challenging the Clean Power Plan. In February 2016, the U.S. Supreme Court stayed the rule pending the D.C. Circuit Court's review. A ruling fromIn light of the D.C. Circuit Court may occurPresident's March 2017 Executive Order the next steps in late 2016this litigation are unclear. Additionally, the EPA has commenced review of the Clean Power Plan and related actions, as directed by the President's March 2017 Executive Order, to determine whether various rules should be suspended, revised or in early 2017.rescinded. PPL, LKE, LG&E and KU cannot predict the outcome of this matterthe pending litigation, any changes in regulations, interpretations, or litigation positions that may be implemented by the U.S. presidential administration or the potential impact, if any, on plant operations, or future capital or operating costs. PPL, LKE, LG&E and KU believe that the costs, which could be significant, would be subject to ratecost recovery.
 
In April 2014, the Kentucky General Assembly passed legislation limiting the measures that the Kentucky Energy and Environment Cabinet may consider in setting performance standards to comply with the EPA's regulations governing GHG emissions from existing sources.sources, if enacted. The legislation provides that such state GHG performance standards shall be based on emission reductions, efficiency measures and other improvements available at each power plant, rather than renewable energy, end-use energy efficiency, fuel switching and re-dispatch. These statutory restrictions may make it more difficult for Kentucky to achieve the GHG reduction levels that the EPA has established for Kentucky.Kentucky, if enacted.

Sulfuric Acid Mist Emissions (PPL, LKE and LG&E)

In June 2016, the EPA issued a notice of violation under the Clean Air Act alleging that LG&E violated applicable rules relating to sulfuric acid mist emissions at its Mill Creek plant. The notice alleges failure to install proper controls, failure to operate the facility consistent with good air pollution control practice, and causing emissions exceeding applicable requirements or constituting a nuisance or endangerment. LG&E believes it has complied with applicable regulations during the relevant time period. Discussions between the EPA and LG&E are ongoing. PPL, LKE and LG&E are unable to predict the outcome of this


matter or the potential impact on operations of the Mill Creek plant, including increased capital or operating costs, and potential civil penalties or remedial measures, if any.

Water/Waste

(PPL, LKE, LG&E and KU)
 
Coal Combustion Residuals (CCRs)
 
In April 2015, the EPA published its final rule regulating CCRs. CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes. The rule became effective in October 2015. It imposes extensive new requirements, including location restrictions, design and operating standards, groundwater monitoring and corrective action requirements, and closure and post-closure care requirements on CCR impoundments and landfills that are located on active power plants in the United States and not closed. Under the rule, the EPA will regulate CCRs are regulated as non-hazardous under Subtitle D of RCRA and allow beneficial use of CCRs is allowed, with some restrictions. The rule's requirements for covered CCR impoundments and landfills include implementation of groundwater monitoring and commencement or completion of closure activities generally between three and ten years from certain triggering events. This self-implementingThe rule requires posting of compliance documentation on a publicly accessible website and is enforceable solely through citizen suits. LG&E and KU are also subject to state rules applicable to CCR management which may potentially be modified to reflect some or all requirements of the federal rule.website. Industry groups, environmental groups, individual companies and others have filed legal challenges to the final rule, which are pending before the D.C. Circuit Court of Appeals.

Recently enacted federal legislation has authorized the EPA to approve equally protective state programs that would operate in lieu of the CCR Rule. Kentucky is close to finalizing a state rule aimed at reflecting the requirements of the federal rule.

LG&E and KU have received KPSC approval for a compliance plan providing for construction of additional landfill capacity at the E.W. Brown Station,station, closure of impoundments at the Mill Creek, Trimble County, E.W. Brown, and Ghent stations, and construction of process water management facilities at those plants. In addition to the foregoing measures required for compliance with federal CCR rule requirements, LG&E and KU also received KPSC approval for their plans to close impoundments at the retired Green River, Pineville and Tyrone plants to comply with applicable state law requirements. See Note 6 for additional information.
 
In connection with the final CCR rule, LG&E and KU recorded adjustments to existing AROs during 2015 and 2016. See Note 1619 in the Registrants' 2016 Form 10-K for additional information. Further changes to AROs, current capital plans or operating costs may be required as estimates are refined based on closure developments, groundwater monitoring results, and regulatory or legal proceedings. Costs relating to this rule are subject to rate recovery.
 
Clean Water Act
 
Regulations under the federal Clean Water Act dictate permitting and mitigation requirements for facilities and construction projects in the United States. Many of those requirements relate to power plant operations, including requirements related to the treatment of pollutants in effluents prior to discharge, the temperature of effluent discharges and the location, design and construction of cooling water intake structures at generating facilities, standards intended to protect aquatic organisms by reducing capture in the screens attached tothat become trapped at or pulled through cooling water intake structures (impingement) at generating facilities and the water volume brought into the facilities (entrainment).facilities. The requirements could impose significant costs for LG&E and KU, which are subject to rate recovery.
 
Effluent Limitations Guidelines (ELGs)
 
In September 2015, the EPA released its final effluent limitations guidelinesELGs for wastewater discharge permits for new and existing steam electricityelectric generating facilities. The rule provides strict technology-based discharge limitations for control of pollutants in scrubber wastewater, fly ash and bottom ash transport water, mercury control wastewater, gasification wastewater and combustion residual leachate. The new guidelines require deployment of additional control technologies providing physical, chemical and biological treatment of wastewaters. The guidelines also mandate operational changes including "no discharge" requirements for fly ash and bottom ash transport waters and mercury control wastewaters. The implementation date for individual generating stations will be determined by the states on a case-by-case basis according to criteria provided by the EPA, but the requirements of the rule must be fully implemented no later than 2023. It has not been decided how Kentucky intends to integrate the ELGs into its routine permit renewal process. Industry groups, environmental groups, individual companies and others have filed legal challenges to the final rule, which have been consolidated before the United States Fifth CircuitU.S. Court of Appeals.Appeals for the Fifth Circuit. LG&E and KU are developing compliance strategies and schedules. PPL, LKE, LG&E and KU are unable to fully estimate compliance costs or timing at this time, although certain preliminary estimates are included in current


capital forecasts for applicable periods. Costs to comply with ELGs or other discharge limits, which are expected to be significant, are subject to rate recovery.

Clean Water Act Section 316(b)Seepages and Groundwater Infiltration

The EPA's final 316(b) rule for existing facilities became effective in October 2014,Seepages or groundwater infiltration have been detected at active and regulates cooling water intake structuresretired wastewater basins and their impact on aquatic organisms. States are allowed broad discretion to make site-specific determinations under the rule. The rule requires existing facilities to choose between several options to reduce the impact to aquatic organisms that become trapped against water intake screens (impingement) and to determine the intake structure's impact on aquatic organisms pulled through a plant's cooling water system (entrainment). Plants equipped with closed-cycle cooling, an acceptable option, would likely not incur substantial costs. Once-through systems would likely require additional technology to comply with the rule. Based on studies conducted bylandfills at various LG&E and KU to date, all plants will incur only insignificant operational costs. In addition, LG&E's Mill Creek Unit 1 is expected to incur capital costs. PPL, LKE,plants. LG&E and KU have completed, or are evaluating compliance strategies but do not presently expectcompleting, assessments of seepages or groundwater infiltration at various facilities and have completed, or are working with agencies to implement, further testing, monitoring or abatement measures, where applicable. A range of reasonable possible losses cannot currently be estimated. Depending on the compliancecircumstances in each case, certain costs, which aremay be subject to rate recovery, tocould be significant.

(All Registrants)
 
Waters of the United States (WOTUS)
 
The U.S. Court of Appeals for the Sixth Circuit has issued a stay of the EPA's rule on the definition of WOTUS pending the court's review of the rule. The effect of the stay is that the WOTUS rule is not in effect anywhereanywhere. On February 28, 2017, the President issued an Executive Order directing the EPA and the U.S. Army Corps of Engineers to review the rule for consistency with certain policy directives and rescind or revise it as appropriate. Additionally, the Executive Order directs the agencies to interpret certain jurisdictional provisions in the United States.a manner consistent with specified U.S. Supreme Court precedent. The ultimate outcome of the court's reviewpending judicial and regulatory reviews of the rule remains uncertain. Because of the strict permitting programs already in place in Kentucky and Pennsylvania, the Registrants do not expect the rule to have a significant impact on their operations.
 

Other Issues
 
The EPA is reassessing its polychlorinated biphenyls (PCB) regulations underOn June 22, 2016, the "Frank Lautenberg Chemical Safety Act" took effect as an amendment to the Toxic Substance Control Act which was significantly updated in June 2016. In(TSCA). The Act made no changes to the pre-existing TSCA rules as it pertains to polychlorinated biphenyls (PCB). The EPA continues to reassess its PCB regulations as part of the 2010 the EPA issued an Advanced Notice of Proposed Rulemaking (ANPRM). The EPA's ANPRM rulemaking is to occur in two phases. Only the second part of the rule, currently scheduled for changesNovember 2017, is applicable to these regulations. ThePPL operations. This part of the rule relates to the use of PCBs in electrical equipment and natural gas pipelines, as well as continued use of PCB-contaminated porous surfaces. Although the first rulemaking will not directly affect the Registrants' operations, it may indicate certain approaches or principles to occur in the later rulemaking which could lead to a phase-outmay affect Registrants' facilities in the United States, including phase-out of allsome or someall equipment containing PCBs, is not likelyPCBs. Should such a phase-out be required, the costs, which are subject to be affected by the revisions to the Toxic Substances Control Act. The EPA has postponed the release of revisions to its proposed rulemaking. The Registrants cannot predict at this time the outcome of the proposed EPA rulemaking and what impact, if any, it would have on their facilities, but the costsrate recovery, could be significant.
 
Superfund and Other Remediation (All Registrants)
 
PPL Electric is potentially responsible for a share of the costs at several sites listed by the EPA under the federal Superfund program, including the Columbia Gas Plant site and the Brodhead site. Clean-up actions have been or are being undertaken at all of these sites, the costs of which have not been, and are not expected to be, significant to PPL Electric. Should the EPA require different or additional measures in the future, however, or should PPL Electric's share of costs at multi-party sites increase substantially more than expected, the costs could be significant.
 
PPL Electric, LG&E and KU are investigating, responding to agency inquiries, remediating, or have completed the remediation of, several sites that were not addressed under a regulatory program such as Superfund, but for which PPL Electric, LG&E and KU may be liable for remediation. These include a number of former coal gas manufacturing plants in Pennsylvania and Kentucky previously owned or operated or currently owned by predecessors or affiliates of PPL Electric, LG&E and KU. To date, the costs of these sites have not been significant.
 
There are additional sites, formerly owned or operated by PPL Electric, LG&E and KU predecessors or affiliates. PPL Electric, LG&E and KU lack information on the condition of such additional sites and are therefore unable to estimate any potential liability they may have or a range of reasonably possible losses, if any, related to these sites. matters.

At September 30, 2016March 31, 2017 and December 31, 2015,2016, PPL Electric had a recorded liability of $10 million representing its best estimate of the probable loss incurred to remediate additionalthe sites previously owned or operated by PPL Electric predecessors or affiliates.noted above. Depending on the outcome of investigations at sites where investigations have not begun or been completed, or developments at sites for which information is incomplete, theadditional costs of remediation and other liabilities could be significant and mayincurred; however, such costs are not expected to be as much as approximately $30 million.significant.
 
The EPA is evaluating the risks associated with polycyclic aromatic hydrocarbons and naphthalene, chemical by-products of coal gas manufacturing. As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil cleanup. This could require several PPL subsidiaries to take more extensive assessment and remedial actions at former


coal gas manufacturing plants. PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.
 
From time to time, PPL's subsidiaries in the United States undertake testing, monitoring or remedial action in response to notices of violations, spills or other releases at various on-site and off-site locations, negotiate with the EPA and state and local agencies regarding actions necessary for compliance with applicable requirements, negotiate with property owners and other third parties alleging impacts from PPL's operations and undertake similar actions necessary to resolve environmental matters that arise in the course of normal operations. Based on analyses to date, resolution of these environmental matters is not expected to have a significant adverse impact on the operations of PPL Electric, LG&E and KU.
 
Future cleanup or remediation work at sites under review, or at sites not yet identified, may result in significant additional costs for PPL, PPL Electric, LKE, LG&E and KU. Insurance policies maintained by LKE, LG&E and KU may be applicable to certain of the costs or other obligations related to these matters but the amount of insurance coverage or reimbursement cannot be estimated or assured.
European Union Creosote Ban(PPL)
In 2011, the European Commission amended the European Union Biocides Directive to ban the use of creosote in contact with soil. Creosote is a wood preservative used to extend the life of wooden poles that support power lines. Although European Union member countries were required to pass implementing laws by 2012, the U.K. has not passed an implementing law and there are no legal penalties for failing to do so. The recent U.K. referendum in favor of the U.K.'s withdrawal from the European Union further reduces the likelihood that the U.K. will implement the European Union directive. In the unlikely event that the U.K. were to ban the use of creosote, WPD's creosote-treated wood poles would need to be replaced with an acceptable alternative at the time of routine replacement. Although the aggregate cost to replace poles could be significant, it would be incurred as poles are replaced in the ordinary course and would be subject to rate recovery. WPD has 1.4 million wood poles in its system. There are currently no alternative wood preservatives available that are acceptable to the industry and/or regulators.

Other

Labor Union Agreements

(PPL and PPL Electric)

In March 2017, members of the IBEW ratified a new five-year labor agreement with PPL. The contract covers nearly 1,400 employees and is effective May 22, 2017. The terms of the new labor agreement are not expected to have a significant impact on the financial results of PPL or PPL Electric.

Guarantees and Other Assurances
 
(All Registrants)

In the normal course of business, the Registrants enter into agreements that provide financial performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of credit issued by financial institutions and surety bonds issued by insurance companies. These agreements are entered into primarily to support or enhance the creditworthiness attributed to a subsidiary on a stand-alone basis or to facilitate the commercial activities in which these subsidiaries engage.
 
(PPL)
 
PPL fully and unconditionally guarantees all of the debt securities of PPL Capital Funding.
 
(All Registrants)
 
The table below details guarantees provided as of September 30, 2016.March 31, 2017. "Exposure" represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee. The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures." The total recorded liability at September 30,March 31, 2017 and December 31, 2016 was $22 million for PPL and $17 million for LKE. The total recorded liability at December 31, 2015, was $25 million for PPL and $18 million for LKE. For reporting purposes, on a consolidated basis, all guarantees of PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.


Exposure at
September 30, 2016		 Expiration
Date		Exposure at
March 31, 2017		 Expiration
Date
PPL        
Indemnifications related to the WPD Midlands acquisition (a)   (a)  
WPD indemnifications for entities in liquidation and sales of assets$10
(b) 2019$10
(b) 2019
WPD guarantee of pension and other obligations of unconsolidated entities109
(c)  105
(c)  
    
PPL Electric        
Guarantee of inventory value15
(d) 201817
(d) 2018
    
LKE        
Indemnification of lease termination and other divestitures301
(e) 2021 - 2023301
(e) 2021 - 2023
    
LG&E and KU        
LG&E and KU guarantee of shortfall related to OVEC (f)   (f)  

(a)Indemnifications related to certain liabilities, including a specific unresolved tax issue and those relating to properties and assets owned by the seller that were transferred to WPD Midlands in connection with the acquisition. A cross indemnity has been received from the seller on the tax issue. The maximum exposure and expiration of these indemnifications cannot be estimated because the maximum potential liability is not capped and the expiration date is not specified in the transaction documents.
(b)Indemnification to the liquidators and certain others for existing liabilities or expenses or liabilities arising during the liquidation process. The indemnifications are limited to distributions made from the subsidiary to its parent either prior or subsequent to liquidation or are not explicitly stated in the agreements. The indemnifications generally expire two to seven years subsequent to the date of dissolution of the entities. The exposure noted only includes those cases where the agreements provide for specific limits.

In connection with their sales of various businesses, WPD and its affiliates have provided the purchasers with indemnifications that are standard for such transactions, including indemnifications for certain pre-existing liabilities and environmental and tax matters or have agreed to continue their obligations under existing third-party guarantees, either for a set period of time following the transactions or upon the condition that the purchasers make reasonable efforts to terminate the guarantees. Additionally, WPD and its affiliates remain secondarily responsible for lease payments under certain leases that they have assigned to third parties.
(c)Relates to certain obligations of discontinued or modified electric associations that were guaranteed at the time of privatization by the participating members. Costs are allocated to the members and can be reallocated if an existing member becomes insolvent. At September 30, 2016,March 31, 2017, WPD has recorded an estimated discounted liability for which the expected payment/performance is probable. Neither the expiration date nor the maximum amount of potential payments for certain obligations is explicitly stated in the related agreements, and as a result, the exposure has been estimated.
(d)A third party logistics firm provides inventory procurement and fulfillment services. The logistics firm has title to the inventory, however, upon termination of the contracts, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold.
(e)LKE provides certain indemnifications covering the due and punctual payment, performance and discharge by each party of its respective obligations. The most comprehensive of these guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under a 2009 Transaction Termination Agreement. This guarantee has a term of 12 years ending July 2021, and a maximum exposure of $200 million, exclusive of certain items such as government fines and penalties that fall outsidemay exceed the cap.maximum. Another WKE-related LKE guarantee covers other indemnifications related to the purchase price of excess power, has a term expiring in 2023, and a maximum exposure of $100 million. In May 2012, LKE's indemnitee received an unfavorable arbitration panel's decision interpreting this matter. In October 2014, LKE's indemnitee filed a motion for discretionary review with the Kentucky Supreme Court seeking to overturn the arbitration decision, and such motion was denied by the court in September 2015. In September 2015, athe counterparty issued a demand letter to LKE's indemnitee. In February 2016, the counterparty filed a complaint in Henderson, Kentucky Circuit Court, seeking an award of damages in the matter. The proceeding is currently in the discovery phase. LKE does not believe appropriate contractual, legal or commercial grounds exist for the claim made and has disputed the demands.made. LKE believes its indemnification obligations in the WKE matter remain subject to various uncertainties, including additional legal and contractual developments, as well as future prices, availability and demand for the subject excess power. Although the parties have also conducted certain settlement discussions, the ultimate outcomes of the WKE termination-related indemnifications cannot be predicted at this time. Additionally, LKE has indemnified various third parties related to historical obligations for other divested subsidiaries and affiliates. The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum, andmaximum. LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party. LKE cannot predict the ultimate outcomes of the various indemnification scenarios, but does not expect such outcomes to result in significant losses above the amounts recorded.
(f)Pursuant to the OVEC power purchase contract, LG&E and KU are obligated to pay for their share of OVEC's excess debt service, post-retirement and decommissioning costs, as well as any shortfall from amounts included within a demand charge designed and expected to cover these costs over the term of the contract. LKE's proportionate share of OVEC's outstanding debt was $124$120 million at September 30, 2016,March 31, 2017, consisting of LG&E's share of $86$83 million and KU's share of $38$37 million. The maximum exposure and the expiration date of these potential obligations are not presently determinable. See "Energy Purchase Commitments" and "Guarantees and Other Assurances" in Note 13 in PPL's, LKE's, LG&E's and KU's 20152016 Form 10-K for additional information on the OVEC power purchase contract. In connection with recent credit market related developments at OVEC or certain of its sponsors, such parties, including LG&E and KU, are analyzing certain potential additional credit support actions to preserve OVEC's access to credit markets or mitigate risks or adverse impacts relating thereto, including increased interest costs and accelerated maturities of OVEC's existing short and long-term debt. The ultimate outcome of these matters, including any potential impact on LG&E's and KU's obligations relating to OVEC debt under the power purchase contract cannot be predicted.

The Registrants provide other miscellaneous guarantees through contracts entered into in the normal course of business. These guarantees are primarily in the form of indemnification or warranties related to services or equipment and vary in duration. The amounts of these guarantees often are not explicitly stated, and the overall maximum amount of the obligation under such guarantees cannot be reasonably estimated. Historically, no significant payments have been made with respect to these types of guarantees and the probability of payment/performance under these guarantees is remote.
 


PPL, on behalf of itself and certain of its subsidiaries, maintains insurance that covers liability assumed under contract for bodily injury and property damage. The coverage provides maximum aggregate coverage of $225 million. This insurance may be applicable to obligations under certain of these contractual arrangements.
 
11.10. Related Party Transactions
 
Support Costs (PPL Electric, LKE, LG&E and KU)
 
PPL Services, PPL EU Services and LKS provide PPL, PPL Electric, LKE, their respective PPLsubsidiaries, including LG&E and LKE subsidiariesKU, and each other, as applicable, with administrative, management and support services. PPL EU Services provides the majority of financial, supply chain, human resources and facilities management services primarily to PPL Electric. PPL Services provides certain corporate functions to PPL Electric. For all service companies, the costs of these services are charged to the respective recipients as direct support costs. General costs that cannot be directly attributed to a specific entity are allocated and charged to the respective recipients as indirect support costs. PPL Services and PPL EU Services use a three-factor methodology that includes the applicable recipients' invested capital, operation and maintenance expenses and number of employees to allocate indirect costs. LKS bases its indirect allocations on the subsidiaries' number of employees, total assets, revenues, number of customers and/or other statistical information. PPL Services, PPL EU Services and LKS charged the following amounts for the periods ended September 30,March 31, including amounts applied to accounts that are further distributed between capital and expense on the books of the recipients, based on methods that are believed to be reasonable.

Three Months Nine MonthsThree Months
2016 2015 2016 20152017 2016
PPL Electric from PPL Services$33
 $35
 $98
 $90
$51
 $37
LKE from PPL Services4
 4
 13
 12
6
 5
PPL Electric from PPL EU Services17
 12
 50
 44
18
 17
LG&E from LKS40
 36
 128
 107
44
 47
KU from LKS46
 43
 151
 127
44
 56

In addition to the charges for services noted above, LKS makes payments on behalf of LG&E and KU for fuel purchases and other costs for products or services provided by third parties. LG&E and KU also provide services to each other and to LKS. Billings between LG&E and KU relate to labor and overheads associated with union and hourly employees performing work for the other company, charges related to jointly-ownedjointly owned generating units and other miscellaneous charges. Tax settlements between LKE and LG&E and LKE and KU are reimbursed through LKS.
 
Intercompany Borrowings (LKE)
 
LKE maintains a $225 million revolving line of credit with a PPL Energy Funding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates. The interest rates on borrowings are equal to one-month LIBOR plus a spread. At September 30, 2016March 31, 2017 and December 31, 2015, $1382016, $82 million and $54$163 million were outstanding and were reflected in "Notes payable with affiliate" on the Balance Sheets. The interest rate on borrowings is equal to one-month LIBOR plus a spread. The interest rates on the outstanding borrowing at September 30, 2016March 31, 2017 and December 31, 20152016 were 2.02%2.29% and 1.74%2.12%.
 
In November 2015, LKE hasentered into a $400 million ten-year note with a PPL affiliate with an interest rate of 3.5%. At September 30, 2016March 31, 2017 and December 31, 2015,2016, the note was reflected in "Long-term debt to affiliate" on the Balance Sheets. Interest expense on this note was not significant at March 31, 2017 and 2016.

Other (PPL Electric, LG&E and KU)
 
See Note 98 for discussions regarding intercompany allocations associated with defined benefits.
 
12.11. Other Income (Expense) - net
 
(PPL)
 
"Other Income (Expense) - net" for the three and nine months ended September 30,March 31, 2017 and 2016 and 2015 consisted primarily of gains (losses) on foreign currency contracts to economically hedge PPL's translation risk related to its GBP denominated earnings in the U.K. See Note 1413 for additional information on these derivatives.



13.12. Fair Value Measurements
 
(All Registrants)
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models) and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of financial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values. During the three and nine months ended September 30,March 31, 2017 and 2016, and 2015, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 20152016 Form 10-K for information on the levels in the fair value hierarchy.
 
Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

September 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Assets                              
Cash and cash equivalents$416
 $416
 $—
 $—
 $836
 $836
 $—
 $—
$409
 $409
 $—
 $—
 $341
 $341
 $—
 $—
Restricted cash and cash equivalents (a)29
 29
 —
 —
 33
 33
 —
 —
25
 25
 —
 —
 26
 26
 —
 —
Price risk management assets (b): 
  
 

 

  
  
  
  
 
  
 

 

  
  
  
  
Foreign currency contracts110
 —
 110
 —
 209
 —
 209
 —
200
 —
 200
 —
 211
 —
 211
 —
Cross-currency swaps153
 —
 153
 —
 86
 —
 86
 —
179
 —
 179
 —
 188
 —
 188
 —
Total price risk management assets263
 —
 263
 —
 295
 —
 295
 —
379
 —
 379
 —
 399
 —
 399
 —
Auction rate securities (c)—
 —
 —
 —
 2
 —
 —
 2
Total assets$708
 $445
 $263
 $—
 $1,166
 $869
 $295
 $2
$813
 $434
 $379
 $—
 $766
 $367
 $399
 $—
                              
Liabilities 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Price risk management liabilities (b): 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Interest rate swaps$54
 $—
 $54
 $—
 $71
 $—
 $71
 $—
$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
Foreign currency contracts14
 —
 14
 —
 1
 —
 1
 —
50
 —
 50
 —
 27
 —
 27
 —
Total price risk management liabilities$68
 $—
 $68
 $—
 $72
 $—
 $72
 $—
$79
 $—
 $79
 $—
 $58
 $—
 $58
 $—
                              
PPL Electric 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Assets 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Cash and cash equivalents$36
 $36
 $—
 $—
 $47
 $47
 $—
 $—
$20
 $20
 $—
 $—
 $13
 $13
 $—
 $—
Restricted cash and cash equivalents (a)2
 2
 —
 —
 2
 2
 —
 —
2
 2
 —
 —
 2
 2
 —
 —
Total assets$38
 $38
 $—
 $—
 $49
 $49
 $—
 $—
$22
 $22
 $—
 $—
 $15
 $15
 $—
 $—
                              
LKE 
  
  
  
  
  
     
  
  
  
  
  
    
Assets                              
Cash and cash equivalents $11
 $11
 $—
 $—
 $30
 $30
 $—
 $—
$15
 $15
 $—
 $—
 $13
 $13
 $—
 $—
Cash collateral posted to counterparties (d)8
 8
 —
 —
 9
 9
 —
 —
Cash collateral posted to counterparties (c)2
 2
 —
 —
 3
 3
 —
 —
Total assets$19
 $19
 $—
 $—
 $39
 $39
 $—
 $—
$17
 $17
 $—
 $—
 $16
 $16
 $—
 $—
                              
Liabilities 
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
    
Interest rate swaps$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
Total price risk management liabilities$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
               
LG&E 
  
  
  
  
  
    
Assets 
  
  
  
  
  
    
Cash and cash equivalents$4
 $4
 $—
 $—
 $5
 $5
 $—
 $—
Cash collateral posted to counterparties (c)2
 2
 —
 —
 3
 3
 —
 —
Total assets$6
 $6
 $—
 $—
 $8
 $8
 $—
 $—
               
Liabilities 
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
    
Interest rate swaps$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
Total price risk management liabilities$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
               

 September 30, 2016 December 31, 2015
 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Liabilities 
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
    
Interest rate swaps$54
 $—
 $54
 $—
 $47
 $—
 $47
 $—
Total price risk management liabilities$54
 $—
 $54
 $—
 $47
 $—
 $47
 $—
                
LG&E 
  
  
  
  
  
    
Assets 
  
  
  
  
  
    
Cash and cash equivalents$4
 $4
 $—
 $—
 $19
 $19
 $—
 $—
Cash collateral posted to counterparties (d)8
 8
 —
 —
 9
 9
 —
 —
Total assets$12
 $12
 $—
 $—
 $28
 $28
 $—
 $—
                
Liabilities 
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
    
Interest rate swaps$54
 $—
 $54
 $—
 $47
 $—
 $47
 $—
Total price risk management liabilities$54
 $—
 $54
 $—
 $47
 $—
 $47
 $—
                
KU               
Assets               
Cash and cash equivalents$7
 $7
 $—
 $—
 $11
 $11
 $—
 $—
Total assets$7
 $7
 $—
 $—
 $11
 $11
 $—
 $—
 March 31, 2017 December 31, 2016
 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
KU               
Assets               
Cash and cash equivalents$7
 $7
 $—
 $—
 $7
 $7
 $—
 $—
Total assets$7
 $7
 $—
 $—
 $7
 $7
 $—
 $—

(a)Current portion is included in "Other current assets" and long-term portion is included in "Other noncurrent assets" on the Balance Sheets.
(b)Current portion is included in "Price risk management assets" and "Other current liabilities" and noncurrent portion is included in "Price risk management assets" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets.
(c)Included in "Other noncurrent assets" on the Balance Sheets.
(d)Included in "Other noncurrent assets" on the Balance Sheets. Represents cash collateral posted to offset the exposure with counterparties related to certain interest rate swaps under master netting arrangements that are not offset.

Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Contracts/Cross-Currency Swaps (PPL, LKE, LG&E and KU)
 
To manage interest rate risk, PPL, LKE, LG&E and KU use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps. To manage foreign currency risk, PPL uses foreign currency contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency contracts. An income approach is used to measure the fair value of these contracts, utilizing readily observable inputs, such as forward interest rates (e.g., LIBOR and government security rates) and forward foreign currency exchange rates (e.g., GBP), as well as inputs that may not be observable, such as credit valuation adjustments. In certain cases, market information cannot practicably be obtained to value credit risk and therefore internal models are relied upon. These models use projected probabilities of default and estimated recovery rates based on historical observances. When the credit valuation adjustment is significant to the overall valuation, the contracts are classified as Level 3.

Nonrecurring Fair Value Measurements (PPL)
See Note 8 for information regarding the estimated fair value of the Supply segment's net assets as of the June 1, 2015 spinoff date.

Financial Instruments Not Recorded at Fair Value (All Registrants)
 
The carrying amounts of long-term debt on the Balance Sheets and their estimated fair values are set forth below. The fair values were estimated using an income approach by discounting future cash flows at estimated current cost of funding rates, which incorporate the credit risk of the Registrants. Long-term debt is classified as Level 2. The effect of third-party credit enhancements is not included in the fair value measurement.


September 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
Carrying
Amount (a)
 Fair Value 
Carrying
Amount (a)
 Fair Value
Carrying
Amount (a)
 Fair Value 
Carrying
Amount (a)
 Fair Value
PPL$18,512
 $23,180
 $19,048
 $21,218
$18,375
 $21,646
 $18,326
 $21,355
PPL Electric2,831
 3,372
 2,828
 3,088
2,832
 3,141
 2,831
 3,148
LKE5,089
 5,832
 5,088
 5,384
5,066
 5,472
 5,065
 5,439
LG&E1,642
 1,852
 1,642
 1,704
1,618
 1,720
 1,617
 1,710
KU2,327
 2,701
 2,326
 2,467
2,327
 2,532
 2,327
 2,514
 
(a)Amounts are net of debt issuance costs.

The carrying valueamounts of other current financial instruments (except for long-term debt due within one year) approximate their fair values because of their short-term debt (including notes between affiliates), when outstanding, approximates fair value due to the variable interest rates associated with the short-term debt and is classified as Level 2.nature.
 
14.13. Derivative Instruments and Hedging Activities
 
Risk Management Objectives
 
(All Registrants)
 
PPL has a risk management policy approved by the Board of Directors to manage market risk associated with commodities, interest rates on debt issuances and foreign exchange (including price, liquidity and volumetric risk) and credit risk (including non-performance risk and payment default risk). The Risk Management Committee, comprised of senior management and chaired by the Senior Director-Risk Management, 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, interest rates and foreign currency exchange rates. Many of the contracts meet the definition of a derivative. All derivatives are recognized on the Balance Sheets at their fair value, unless NPNS is elected.
 
The following summarizes the market risks that affect PPL and its 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 WPD hold over-the-counter cross currency swaps to limit exposure to market fluctuations on interest and principal payments from changes in foreign currency exchange rates and interest rates. PPL, LKE and LG&E utilize over-the-counter interest rate swaps to limit exposure to market fluctuations on floating-rate debt. PPL, LKE, LG&E and KU utilize forward starting interest rate swaps to hedge changes in benchmark interest rates, when appropriate, in connection with future debt issuances.
PPL and its subsidiaries are exposed to interest rate risk associated with debt securities 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 domestic utilities and for certain plans at WPD due to the recovery mechanisms in place.

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



Commodity price risk
 
PPL is exposed to commodity price risk through its domestic subsidiaries as described below.
 
PPL Electric is exposed to commodity price risk from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to this risk. PPL Electric also mitigates its exposure to commodity price risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the commodity price risk associated with the PLR obligation to the energy suppliers.
LG&E's and KU's rates include certain mechanisms for fuel and fuel-related expenses. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.

Volumetric risk
 
PPL is exposed to volumetric risk through its subsidiaries as described below.
 
WPD is exposed to volumetric risk which is significantly mitigated as a result of the method of regulation in the U.K. Under the RIIO - ED1RIIO-ED1 price control period, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 20152016 Form 10-K for additional information on revenue recognition under RIIO - ED1.RIIO-ED1.
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.

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

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

Credit Risk
 
Credit risk is the potential loss that may be incurred due to a counterparty's non-performance.
 
PPL is exposed to credit risk from "in-the-money" interest rate and foreign currency derivatives with financial institutions, as well as additional credit risk through certain of its subsidiaries, as discussed below.
 
In the event a supplier of LKE (through its subsidiaries LG&E, and KU)KU or PPL Electric defaults on its obligation, those entities would be required to seek replacement power or replacement fuel in the market. In general, subject to regulatory review or other processes, appropriate incremental costs incurred by these entities would be recoverable from customers through applicable rate mechanisms, thus mitigating the financial risk for these entities.
 
PPL and its subsidiaries have credit policies in place to manage credit risk, including the use of an established credit approval process, daily monitoring of counterparty positions and the use of master netting agreements or provisions. These agreements generally include credit mitigation provisions, such as margin, prepayment or collateral requirements. PPL and its subsidiaries may request additional credit assurance, in certain circumstances, in the event that the counterparties' credit ratings fall below investment grade, their tangible net worth falls below specified percentages or their exposures exceed an established credit limit.
 
Master Netting Arrangements
 
Net derivative positions on the balance sheets are not offset against the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.

PPL had a $13 million obligation to return cash collateral under master netting arrangements at March 31, 2017 and a $19 million obligation to return cash collateral under master netting arrangements at December 31, 2016.

LKE and LG&E and KU had no obligation to return cash collateral under master netting arrangements at September 30, 2016March 31, 2017 and December 31, 2015.2016.
 
PPL, LKE and LG&E posted $8$2 million of cash collateral under master netting arrangements at September 30, 2016March 31, 2017 and $9$3 million of cash collateral under master netting arrangements at December 31, 2015.


KU did not post any cash collateral under master netting arrangements at September 30, 2016 and December 31, 2015.2016.
 
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. Various financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolio, adjust the duration of the debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under PPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolio due to changes in benchmark interest rates. 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 held no such contracts at September 30, 2016.March 31, 2017.


For the three months ended September 30,March 31, 2017 and 2016, PPL had no hedge ineffectiveness associated with interest rate derivatives and an insignificant amount of hedge ineffectiveness for the three months ended September 30, 2015. For the nine months ended September 30, 2016 and 2015, PPL had an insignificant amount of ineffectiveness associated with interest rate derivatives.

At September 30, 2016,March 31, 2017, PPL held an aggregate notional value in cross-currency interest rate swap contracts of $802 million that range in maturity from 2017 through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes. In May

For the three months ended March 31, 2017 and 2016, $460 million of WPD's U.S. dollar-denominated senior notes were repaid upon maturity and $460 million notional value ofPPL had no hedge ineffectiveness associated with cross-currency interest rate swap contracts matured. PPL recorded a $46 million gain upon settlement of the cross-currency interest rate swap contracts, which largely offset a loss recorded on the revaluation of U.S. dollar-denominated senior notes.derivatives.

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 months ended March 31, 2017 and 2016, PPL had noan insignificant amount of cash flow hedges reclassified into earnings associated with discontinued cash flow hedges for the three and nine months ended September 30, 2016. As a result of the June 1, 2015 spinoff of PPL Energy Supply, all PPL cash flow hedges associated with PPL Energy Supply were ineffective and discontinued and therefore, reclassified into earnings during the second quarter 2015 and reflected in discontinued operations for the nine months ended September 30, 2015. See Note 8 for additional information.hedges.
 
At September 30, 2016,March 31, 2017, the amount of accumulated net unrecognized after-tax gains (losses) on qualifying derivatives that are expected to be reclassified into earnings during the next 12 months wereis insignificant. Amounts are reclassified as the hedged interest expense is recorded.
 
Economic Activity (PPL, LKE and LG&E)
 
LG&E enters into interest rate swap contracts that economically hedge interest payments on variable rate debt. Because realized gains and losses from the swaps, including a terminated swap contract, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense. Realized gains and losses are recognized in "Interest Expense" on the Statements of Income at the time the underlying hedged interest expense is recorded. At September 30, 2016,March 31, 2017, LG&E held contracts with a notional amount of $179$147 million that range in maturity through 2033.
 


Foreign Currency Risk
 
(PPL)
 
PPL is exposed to foreign currency risk, primarily through investments in and earnings of U.K. affiliates. PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactions and net investments. In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected GBP earnings.
 
Net Investment Hedges
 
PPL enters into foreign currency contracts on behalf of a subsidiary to protect the value of a portion of its net investment in WPD. There were no such contracts outstanding at September 30, 2016.March 31, 2017.
 
At September 30,March 31, 2017 and December 31, 2016, PPL had $22$21 million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI, compared to $19 million at December 31, 2015.AOCI.
 
Economic Activity
 
PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At September 30, 2016,March 31, 2017, the total exposure hedged by PPL was approximately £1.8£2.8 billion (approximately $2.4$3.8 billion based on contracted rates). These contracts had termination dates ranging from October 2016April 2017 through December 2018.

In the third quarter of 2016, PPL settled foreign currency hedges related to 2017 and 2018 anticipated earnings, resulting in receipt of approximately $310 million of cash, and entered into new hedges at current market rates. The notional amount of the settled hedges was approximately £1.3 billion (approximately $2.0 billion based on contracted rates) with termination dates from January 2017 through November 2018. The settlement did not have a significant impact on net income as the hedge values were previously marked to fair value and recognized in "Other Income (Expense) - net" on the Statement of Income.2019.
 
Accounting and Reporting
 
(All Registrants)
 
All derivative instruments are recorded at fair value on the Balance Sheet as an asset or liability unless NPNS is elected. NPNS contracts for PPL and PPL Electric include certain full-requirement purchase contracts and other physical purchase contracts.

Changes in the fair value of derivatives not designated as NPNS are recognized in earnings unless specific hedge accounting criteria are met and designated as such, except for the changes in fair values of LG&E's and KU's interest rate swaps that are recognized as regulatory assets or regulatory liabilities. See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at September 30, 2016March 31, 2017 and December 31, 2015.2016.
 
See Notes 1 and 17 in each Registrant's 20152016 Form 10-K for additional information on accounting policies related to derivative instruments.
 
(PPL)
 
The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.


September 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
Derivatives designated as
hedging instruments
 
Derivatives not designated
as hedging instruments
 
Derivatives designated as
hedging instruments
 
Derivatives not designated
as hedging instruments
Derivatives designated as
hedging instruments
 
Derivatives not designated
as hedging instruments
 
Derivatives designated as
hedging instruments
 
Derivatives not designated
as hedging instruments
Assets Liabilities Assets Liabilities Assets Liabilities Assets LiabilitiesAssets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current: 
  
  
  
      
  
 
  
  
  
      
  
Price Risk Management 
  
  
  
  
  
  
  
 
  
  
  
 ��
  
  
  
Assets/Liabilities (a): 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Interest rate swaps (b)$—
 $—
 $—
 $6
 $—
 $24
 $—
 $5
$—
 $—
 $—
 $4
 $—
 $—
 $—
 $4
Cross-currency swaps (b)6
 —
 —
 —
 35
 —
 —
 —
32
 —
 —
 —
 32
 —
 —
 —
Foreign currency contracts—
 —
 72
 2
 10
 —
 94
 1
—
 —
 63
 43
 —
 —
 31
 21
Total current6
 —
 72
 8
 45
 24
 94
 6
32
 —
 63
 47
 32
 —
 31
 25
Noncurrent: 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Price Risk Management 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Assets/Liabilities (a): 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Interest rate swaps (b)—
 —
 —
 48
 —
 —
 —
 42
—
 —
 —
 25
 —
 —
 —
 27
Cross-currency swaps (b)147
 —
 —
 —
 51
 —
 —
 —
147
 —
 —
 —
 156
 —
 —
 —
Foreign currency contracts—
 —
 38
 12
 —
 —
 105
 —
—
 —
 137
 7
 —
 —
 180
 6
Total noncurrent147
 —
 38
 60
 51
 —
 105
 42
147
 —
 137
 32
 156
 —
 180
 33
Total derivatives$153
 $—
 $110
 $68
 $96
 $24
 $199
 $48
$179
 $—
 $200
 $79
 $188
 $—
 $211
 $58
 
(a)Current portion is included in "Price risk management assets" and "Other current liabilities" and noncurrent portion is included in "Price risk management assets" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets.
(b)Excludes accrued interest, if applicable.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the periods ended September 30, 2016.March 31, 2017.

        Three Months Nine Months
Derivative
Relationships		 
Derivative Gain
(Loss) Recognized in
OCI (Effective Portion)
 Location of
Gain (Loss)
Recognized
in Income
on Derivative		 Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)		 Gain (Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 Three Months Nine Months     
Cash Flow Hedges:              
Interest rate swaps $—
 $(21) Interest expense $(2) $—
 $(5) $—
Cross-currency swaps 78
 87
 Interest expense 2
 —
 2
 —
      Other income (expense) - net 86
 —
 80
 —
Total $78
 $66
   $86
 $—
 $77
 $—
Net Investment Hedges:              
    Foreign currency contracts $—
 $4
          


      Three Months
Derivative
Relationships		 
Derivative Gain
(Loss) Recognized in
OCI (Effective Portion)
 Location of
Gain (Loss)
Recognized
in Income
on Derivative		 Gain (Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 Three Months   
Cash Flow Hedges:        
Interest rate swaps $—
 Interest expense $(2) $(1)
Cross-currency swaps (8) Interest expense 1
 —
    Other income (expense) - net 3
 —
Total $(8)   $2
 $(1)
Net Investment Hedges:        
    Foreign currency contracts $—
      
Derivatives Not Designated as Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in  
Hedging Instruments Income on Derivative Three Months Nine Months Income on Derivative Three Months
Foreign currency contracts Other income (expense) - net $49
 $280
 Other income (expense) - net $(43)
Interest rate swaps Interest expense (2) (6) Interest expense (2)
 Total $47
 $274
 Total $(45)
Derivatives Not Designated as Location of Gain (Loss) Recognized as     Location of Gain (Loss) Recognized as  
Hedging Instruments Regulatory Liabilities/Assets Three Months Nine Months Regulatory Liabilities/Assets Three Months
Interest rate swaps Regulatory assets - noncurrent $2
 $(7) Regulatory assets - noncurrent $2
 
The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the periods ended September 30, 2015.

March 31, 2016.
       Three Months Nine Months     Three Months
Derivative
Relationships		 
Derivative Gain
(Loss) Recognized in
OCI (Effective Portion)
 Location of
Gain (Loss)
Recognized
in Income
on Derivative		 Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)		 Gain (Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)		 
Derivative Gain
(Loss) Recognized in
OCI (Effective Portion)
 Location of
Gain (Loss)
Recognized
in Income
on Derivative		 Gain (Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
Three Months Nine Months  Three Months 
Cash Flow Hedges:                      
Interest rate swaps $(27) $(29) Interest expense $(2) $—
 $(9) $—
 $(18) Interest expense $(1) $—
     Discontinued operations —
 —
 —
 (77)
Cross-currency swaps (3) 33
 Interest expense (1) —
 1
 —
 113
 Interest expense 1
 —
     Other income (expense) - net (10) —
 22
 —
   Other income (expense) - net 97
 —
Commodity contracts —
 —
 Discontinued operations —
 —
 13
 7
Total $(30) $4
   $(13) $—
 $27
 $(70) $95
   $97
 $—
Net Investment Hedges:                      
Foreign currency contracts $7
 $6
           $3
      
Derivatives Not Designated as Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in  
Hedging Instruments Income on Derivative Three Months Nine Months Income on Derivative Three Months
Foreign currency contracts Other income (expense) - net $78
 $64
 Other income (expense) - net $60
Interest rate swaps Interest expense (2) (6) Interest expense (2)
 Total $76
 $58
 Total $58
Derivatives Designated as Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $(42) $(22)
Derivatives Not Designated as Location of Gain (Loss) Recognized as     Location of Gain (Loss) Recognized as  
Hedging Instruments Regulatory Liabilities/Assets Three Months Nine Months Regulatory Liabilities/Assets Three Months
Interest rate swaps Regulatory assets - noncurrent $(5) $(2) Regulatory assets - noncurrent $(6)

(LKE)
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended September 30, 2015. All derivative instruments designated as cash flow hedges were terminated in 2015 and there is no activity in the current period.


  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $(42) $(22)
(LG&E)
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended September 30, 2015. All derivative instruments designated as cash flow hedges were terminated in 2015 and there is no activity in the current period.
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $(21) $(11)

(KU)
The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory assets for the periods ended September 30, 2015. All derivative instruments designated as cash flow hedges were terminated in 2015 and there is no activity in the current period.
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $(21) $(11)
(LKE and LG&E)
 
The following table presents the fair value and the location on the Balance Sheets of derivatives not designated as hedging instruments.
September 30, 2016December 31, 2015March 31, 2017December 31, 2016
Assets Liabilities Assets LiabilitiesAssets Liabilities Assets Liabilities
Current:       
       
Price Risk Management       
       
Assets/Liabilities:       
       
Interest rate swaps$—
 $6
 $—
 $5
$—
 $4
 $—
 $4
Total current—
 6
 —
 5
—
 4
 —
 4
Noncurrent:     
  
     
  
Price Risk Management     
  
     
  
Assets/Liabilities:     
  
     
  
Interest rate swaps—
 48
 —
 42
—
 25
 —
 27
Total noncurrent—
 48
 —
 42
—
 25
 —
 27
Total derivatives$—
 $54
 $—
 $47
$—
 $29
 $—
 $31
 
The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets for the periods ended September 30, 2016.


March 31, 2017.
 Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in  
Derivative Instruments Income on Derivatives Three Months Nine Months Income on Derivatives Three Months
Interest rate swaps Interest expense $(2) $(6) Interest expense $(2)
 Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in  
Derivative Instruments Regulatory Assets Three Months Nine Months Regulatory Assets Three Months
Interest rate swaps Regulatory assets - noncurrent $2
 $(7) Regulatory assets - noncurrent $2

The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets for the periods ended September 30, 2015.
March 31, 2016. 
 Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in  
Derivative Instruments Income on Derivatives Three Months Nine Months Income on Derivatives Three Months
Interest rate swaps Interest expense $(2) $(6) Interest expense $(2)
 Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in  
Derivative Instruments Regulatory Assets Three Months Nine Months Regulatory Assets Three Months
Interest rate swaps Regulatory assets - noncurrent $(5) $(2) Regulatory assets - noncurrent $(6)
 
(PPL, LKE, LG&E and KU)
 
Offsetting Derivative Instruments
 
PPL, LKE, LG&E and KU or certain of their subsidiaries have master netting arrangements in place and also enter into agreements pursuant to which they 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, LKE, LG&E and KU have elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivatives agreements. The table below summarizes the derivative positions presented in the balance sheets where a right of setoff exists under these arrangements and related cash collateral received or pledged.

Assets LiabilitiesAssets Liabilities
  Eligible for Offset     Eligible for Offset    Eligible for Offset     Eligible for Offset  
Gross 
Derivative
Instruments
 
Cash
Collateral
Received
 Net Gross 
Derivative
Instruments
 
Cash
Collateral
Pledged
 NetGross 
Derivative
Instruments
 
Cash
Collateral
Received
 Net Gross 
Derivative
Instruments
 
Cash
Collateral
Pledged
 Net
September 30, 2016               
March 31, 2017               
Treasury Derivatives                              
PPL$263
 $14
 $—
 $249
 $68
 $14
 $8
 $46
$379
 $49
 $13
 $317
 $79
 $49
 $2
 $28
LKE—
 —
 —
 —
 54
 —
 8
 46
—
 —
 —
 —
 29
 —
 2
 27
LG&E—
 —
 —
 —
 54
 —
 8
 46
—
 —
 —
 —
 29
 —
 2
 27
December 31, 2015               
December 31, 2016               
Treasury Derivatives                              
PPL$295
 $25
 $—
 $270
 $72
 $25
 $9
 $38
$399
 $27
 $19
 $353
 $58
 $27
 $3
 $28
LKE—
 —
 —
 —
 47
 —
 9
 38
—
 —
 —
 —
 31
 —
 3
 28
LG&E—
 —
 —
 —
 47
 —
 9
 38
—
 —
 —
 —
 31
 —
 3
 28
 
Credit Risk-Related Contingent Features
 
Certain derivative contracts contain credit risk-related contingent features which, when in a net liability position, would permit the counterparties to require the transfer of additional collateral upon a decrease in the credit ratings of PPL, LKE, LG&E and


KU or certain of their subsidiaries. Most of these features would require the transfer of additional collateral or permit the counterparty to terminate the contract if the applicable credit rating were to fall below investment grade. Some of these features also would allow the counterparty to require additional collateral upon each downgrade in credit rating at levels that remain above investment grade. In either case, if the applicable credit rating were to fall below investment grade, and assuming no assignment to an investment grade affiliate were allowed, most of these credit contingent features require either immediate payment of the net liability as a termination payment or immediate and ongoing full collateralization on derivative instruments in net liability positions.
 
Additionally, certain derivative contracts contain credit risk-related contingent features that require adequate assurance of performance be provided if the other party has reasonable concerns regarding the performance of PPL's, LKE's, LG&E's and KU's obligations under the contracts. A counterparty demanding adequate assurance could require a transfer of additional collateral or other security, including letters of credit, cash and guarantees from a creditworthy entity. This would typically involve negotiations among the parties. However, amounts disclosed below represent assumed immediate payment or immediate and ongoing full collateralization for derivative instruments in net liability positions with "adequate assurance" features.
 
(PPL, LKE and LG&E)

At September 30, 2016,March 31, 2017, derivative contracts in a net liability position that contain credit risk-related contingent features, collateral posted on those positions and the related effect of a decrease in credit ratings below investment grade are summarized as follows:
PPL LKE LG&EPPL LKE LG&E
Aggregate fair value of derivative instruments in a net liability position with credit risk-related contingent features$29
 $29
 $29
$12
 $12
 $12
Aggregate fair value of collateral posted on these derivative instruments7
 7
 7
2
 2
 2
Aggregate fair value of additional collateral requirements in the event of
a credit downgrade below investment grade (a)
22
 22
 22
10
 10
 10
 
(a)Includes the effect of net receivables and payables already recorded on the Balance Sheet.


15.14. Goodwill and Other Intangible Assets
 
(PPL)
 
The change in the carrying amount of goodwill for the ninethree months ended September 30, 2016March 31, 2017 was due to the effect of foreign currency exchange rates on the U.K. Regulated segment.

The change in the carrying amount of other intangible assets for the ninethree months ended September 30, 2016March 31, 2017 was primarily due to an increasea change in WPD’s approach in acquiring rights-of-way relating to WPD equipment impacting landowners' property. A shorter term agreement at a lower cost is now being offered which has also reduced the gross carrying amount of indefinite lived intangibles at WPD attributable to new easements of $73 million, partially offset by the effect of foreign currency exchange rates.estimated liability for claims not yet settled.

16.15. Asset Retirement Obligations

(PPL, LKE, LG&E and KU)

The changes in the carrying amounts of AROs were as follows.

 PPL LKE LG&E KU
Balance at December 31, 2015$586
 $535
 $175
 $360
Accretion20
 18
 6
 12
Effect of foreign currency exchange rates(7) —
 —
 —
Changes in estimated timing or cost(116) (116) (24) (92)
Obligations settled(15) (15) (11) (4)
Balance at September 30, 2016$468
 $422
 $146
 $276
 PPL LKE LG&E KU
Balance at December 31, 2016$488
 $433
 $145
 $288
Accretion5
 5
 2
 3
Obligations settled(6) (6) (4) (2)
Balance at March 31, 2017$487
 $432
 $143
 $289
 


LG&E and KU recorded decreases to existing ARO balances of $118 million ($24 million at LG&E and $94 million at KU) during the three and nine months ended September 30, 2016 due to revisions in the amounts and timing of future expected costs related to the closure of CCR impoundments. These revisions are the result of changes in closure plans related to expected costs and timing of closure. Further changes to AROs, capital plans or operating costs may be required as estimates of future cash flows are refined based on closure developments and regulatory or legal proceedings.

PPL's, LKE's, LG&E's and KU's ARO liabilities are primarily related to CCR closure costs. See Note 109 for information on the final CCR rulerule. For LKE, LG&E and Note 6 for information on the rate recovery applications with the KPSC. LG&E's and KU'sKU, all ARO accretion and ARO-related depreciation expenseexpenses are recordedreclassified as a regulatory asset. ARO regulatory assets associated with approved ECR projects for CCRs are amortized to expense over a period of 10 to 25 years based on retirement expenditures made related to the obligation. For other AROs, at the time of retirement, the related ARO regulatory asset such that there is no net earnings impact.offset against the associated cost of removal regulatory liability, PP&E and ARO liability.

17.16. Accumulated Other Comprehensive Income (Loss)
 
(PPL and LKE)(PPL)
 
The after-tax changes in AOCI by component for the periods ended September 30March 31 were as follows.
 
Foreign
currency
translation
adjustments
 Unrealized gains (losses)   Defined benefit plans  
  
Available-
for-sale
securities
 
Qualifying
derivatives
 
Equity
investees'
AOCI
 
Prior
service
costs
 
Actuarial
gain
(loss)
 Total
PPL             
June 30, 2016$(716) $—
 $(5) $(1) $(5) $(2,130) $(2,857)
Amounts arising during the period(641) —
 62
 —
 —
 (6) (585)
Reclassifications from AOCI—
 —
 (69) —
 —
 31
 (38)
Net OCI during the period(641) —
 (7) —
 —
 25
 (623)
September 30, 2016$(1,357) $—
 $(12) $(1) $(5) $(2,105) $(3,480)
              
December 31, 2015$(520) $—
 $(7) $—
 $(6) $(2,195) $(2,728)
Amounts arising during the period(837) —
 57
 —
 —
 (4) (784)
Reclassifications from AOCI—
 —
 (62) (1) 1
 94
 32
Net OCI during the period(837) —
 (5) (1) 1
 90
 (752)
September 30, 2016$(1,357) $—
 $(12) $(1) $(5) $(2,105) $(3,480)
              
June 30, 2015$(435) $—
 $2
 $—
 $(3) $(1,848) $(2,284)
Amounts arising during the period52
 —
 (19) —
 —
 —
 33
Reclassifications from AOCI—
 —
 10
 —
 —
 35
 45
Net OCI during the period52
 —
 (9) —
 —
 35
 78
September 30, 2015$(383) $—
 $(7) $—
 $(3) $(1,813) $(2,206)
              
December 31, 2014$(286) $202
 $20
 $1
 $3
 $(2,214) $(2,274)
Amounts arising during the period(97) 7
 8
 —
 (6) 52
 (36)
Reclassifications from AOCI—
 (2) 20
 (1) —
 111
 128
Net OCI during the period(97) 5
 28
 (1) (6) 163
 92
Distribution of PPL Energy Supply (Note 8)—
 (207) (55) —
 —
 238
 (24)
September 30, 2015$(383) $—
 $(7) $—
 $(3) $(1,813) $(2,206)
              
LKE             
June 30, 2016      $(1) $(9) $(33) $(43)
Amounts arising during the period      —
 —
 —
 —
Reclassifications from AOCI      —
 —
 1
 1
Net OCI during the period      —
 —
 1
 1
September 30, 2016      $(1) $(9) $(32) $(42)
              


Foreign
currency
translation
adjustments
 Unrealized gains (losses)   Defined benefit plans  
Foreign
currency
translation
adjustments
 
Unrealized gains (losses)
 on qualifying
derivatives
   Defined benefit plans  
 
Equity
investees'
AOCI
 
Prior
service
costs
 
Actuarial
gain
(loss)
 Total
PPL           
December 31, 2016$(1,627) $(7) $(1) $(8) $(2,135) $(3,778)
Amounts arising during the period(24) (6) —
 —
 —
 (30)
Reclassifications from AOCI—
 (1) —
 —
 32
 31
Net OCI during the period(24) (7) —
 —
 32
 1
March 31, 2017$(1,651) $(14) $(1) $(8) $(2,103) $(3,777)
Foreign
currency
translation
adjustments
 
Available-
for-sale
securities
 
Qualifying
derivatives
 
Equity
investees'
AOCI
 
Prior
service
costs
 
Actuarial
gain
(loss)
 Total           
December 31, 2015     $—
 $(10) $(36) $(46)$(520) $(7) $—
 $(6) $(2,195) $(2,728)
Amounts arising during the period      —
 —
 1
 1
(464) 80
 —
 —
 —
 (384)
Reclassifications from AOCI      (1) 1
 3
 3
—
 (78) —
 —
 31
 (47)
Net OCI during the period      (1) 1
 4
 4
(464) 2
 —
 —
 31
 (431)
September 30, 2016      $(1) $(9) $(32) $(42)
             
June 30, 2015      $(1) $(7) $(44) $(52)
Amounts arising during the period      —
 —
 —
 —
Reclassifications from AOCI      —
 —
 1
 1
Net OCI during the period      —
 —
 1
 1
September 30, 2015      $(1) $(7) $(43) $(51)
             
December 31, 2014      $—
 $(8) $(37) $(45)
Amounts arising during the period      —
 —
 (8) (8)
Reclassifications from AOCI      (1) 1
 2
 2
Net OCI during the period      (1) 1
 (6) (6)
September 30, 2015      $(1) $(7) $(43) $(51)
March 31, 2016$(984) $(5) $—
 $(6) $(2,164) $(3,159)
 
(PPL)
 
The following table presents the gains (losses) and related income taxes for reclassifications from AOCI for the periods ended September 30.March 31. The defined benefit plan components of AOCI are not reflected in their entirety in the Statement of Income during

the periods; rather, they are included in the computation of net periodic defined benefit costs (credits) and subject to capitalization. See Note 98 for additional information.
  Three Months Nine Months Affected Line Item on the
Details about AOCI 2016 2015 2016 2015 Statements of Income
Available-for-sale securities $—
 $—
 $—
 $4
 Other Income (Expense) - net
Total Pre-tax —
 —
 —
 4
  
Income Taxes —
 —
 —
 (2)  
Total After-tax —
 —
 —
 2
  
           
Qualifying derivatives          
Interest rate swaps (2) (2) (5) (9) Interest Expense
  —
 —
 —
 (77) Discontinued operations
Cross-currency swaps 86
 (10) 80
 22
 Other Income (Expense) - net
  2
 (1) 2
 1
 Interest Expense
Commodity contracts —
 —
 —
 20
 Discontinued operations
Total Pre-tax 86
 (13) 77
 (43)  
Income Taxes (17) 3
 (15) 23
  
Total After-tax 69
 (10) 62
 (20)  
           


 Three Months Nine Months Affected Line Item on the Three Months Affected Line Item on the
Details about AOCI 2016 2015 2016 2015 Statements of Income 2017 2016 Statements of Income
Equity investees' AOCI —
 —
 1
 2
 Other Income (Expense) - net
Qualifying derivatives      
Interest rate swaps $(3) $(1) Interest Expense
Cross-currency swaps 3
 97
 Other Income (Expense) - net
 1
 1
 Interest Expense
Total Pre-tax —
 —
 1
 2
  1
 97
 
Income Taxes —
 —
 —
 (1)  —
 (19)  
Total After-tax —
 —
 1
 1
  1
 78
  
              
Defined benefit plans              
Prior service costs (1) —
 (2) —
 
Net actuarial loss (41) (45) (121) (146)  (41) (40) 
Total Pre-tax (42) (45) (123) (146)  (41) (40) 
Income Taxes 11
 10
 28
 35
  9
 9
 
Total After-tax (31) (35) (95) (111)  (32) (31) 
              
Total reclassifications during the period $38
 $(45) $(32) $(128)  $(31) $47
 

18.17. New Accounting Guidance Pending Adoption
 
(All Registrants)
 
Accounting for Revenue from Contracts with Customers
 
In May 2014, the Financial Accounting Standards Board (FASB) issued accounting guidance that establishes a comprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
 
For public business entities, this guidance can be applied using either a full retrospective or modified retrospective transition method, beginning in annual reporting periods after December 15, 2017 and interim periods within those years. Public business entities may early adopt this guidance in annual reporting periods beginning after December 15, 2016. The Registrants expect towill adopt this guidance effective January 1, 2018.
 
The Registrants have performed an assessment of a significant portion of their revenue under this new guidance to determine its effect on their current revenue recognition policies, and at this time they do not believe it will have a material impact. However, the Registrants will continue to assess the impact of adopting this guidance, as well as the transition method they will use, and are monitoringmonitor the development of industry specific application guidance which could have an impact thoseon their assessments. The Registrants are currently assessing the disclosure requirements included in the standard, which will result in increased information being provided to enable the users of the financial statements to understand the nature, amount, timing and uncertainty of revenue arising from contracts with customers. The Registrants will determine the transition method they will apply after the industry specific application guidance is final and the implications of using either the full retrospective or modified retrospective transition methods are known.

Accounting for Leases
 
In February 2016, the FASB issued accounting guidance for leases. This new guidance requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). For income statement purposes, the FASB retained a dual model for lessees, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines.
 
Lessor accounting under the new guidance is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Similar to current practice, lessors will classify leases as operating, direct financing, or sales-type.
 

The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.
 
The Registrants are currently assessing the impact of adopting this guidance.


guidance and the period they will adopt it.

Accounting for Financial Instrument Credit Losses
 
In June 2016, the FASB issued accounting guidance that requires the use of a current expected credit loss (CECL) model for the measurement of credit losses on financial instruments within the scope of this guidance, which includes accounts receivable. The CECL model requires an entity to measure credit losses using historical information, current information and reasonable and supportable forecasts of future events, rather than the incurred loss impairment model required under current GAAP.

For public business entities, this guidance will be applied using a modified retrospective approach and is effective for fiscal years beginning after December 15, 2019, and interim periods within those years. All entities may early adopt this guidance in annual reporting periods beginning after December 15, 2018, including interim periods within those years.

The Registrants are currently assessing the impact of adopting this guidance and the period that they will adopt this guidance.it.

Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued accounting guidance that changes the income statement presentation of net periodic benefit cost. This new guidance requires the service cost component to be disaggregated from other components of net benefit cost and presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefits will be presented separately from the line items that include the service cost and outside of any subtotal of operating income. Only the service cost component is eligible for capitalization.

For public business entities, the guidance on the presentation of the components of net periodic benefit costs will be applied retrospectively. The guidance that limits the capitalization to the service cost component of net periodic benefit costs will be applied prospectively. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years.

The Registrants are currently assessing the impact of adopting this guidance and will adopt this guidance effective January 1, 2018.

(PPL, LKE, LG&E and KU)

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued accounting guidance that simplifies the test for goodwill impairment by eliminating the second step of the quantitative test. The second step of the quantitative test requires a calculation of the implied fair value of goodwill, which is determined in the same manner as the amount of goodwill in a business combination. Under this new guidance, an entity will now compare the estimated fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount the carrying amount exceeds the fair value of the reporting unit.

For public business entities, this guidance will be applied prospectively and is effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019. All entities may early adopt this guidance for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

The Registrants are currently assessing the impact of adopting this guidance and the period they will adopt it.


Item 2. Combined Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
(All Registrants)
 
This "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL, PPL Electric, LKE, LG&E and KU. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant. The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures. Within combined disclosures, amounts are disclosed for individual Registrants when significant.
 
The following should be read in conjunction with the Registrants' Condensed Consolidated Financial Statements and the accompanying Notes and with the Registrants' 20152016 Form 10-K. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted.
 
"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:
 
"Overview" provides a description of each Registrant's business strategy and a discussion of important financial and operational developments.

"Results of Operations" for all Registrants includes a "Statement of Income Analysis" which discusses significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 2016March 31, 2017 with the same periodsperiod in 2015.2016. For PPL, it"Results of Operations" also providesincludes "Segment Earnings" and "Margins" which provide a detailed analysis of earnings by segment and a description of key factors expected to impact future earnings. The segment earnings discussion includes financial information prepared in accordance with GAAP as well asreportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "Margins". This discussion provides and provide explanations of the non-GAAP financial measures and a reconciliation of the non-GAAP financial measures to the most comparable GAAP measure. The "2017 Outlook" discussion identifies key factors expected to impact 2017 earnings. For PPL Electric, LKE, LG&E and KU, a summary of earnings and margins is also provided.

"Financial Condition - Liquidity and Capital Resources" provides an analysis of the Registrants' liquidity positions and credit profiles. This section also includes a discussion of rating agency actions.

"Financial Condition - Risk Management" provides an explanation of the Registrants' risk management programs relating to market and credit risk.

Overview
 
Introduction
 
(PPL)
 
PPL, headquartered in Allentown, Pennsylvania, is a utility holding company. PPL, through its regulated utility subsidiaries, delivers electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia and Tennessee; delivers natural gas to customers in Kentucky; and generates electricity from power plants in Kentucky. In June 2015, PPL completed the spinoff of PPL Energy Supply which combined its competitive power generation businesses with those of Riverstone to form a new, stand-alone, publicly traded company named Talen Energy. See Note 8 in PPL's 2015 Form 10-K for additional information.

PPL's principal subsidiaries are shown below (* denotes SEC registrant)a Registrant).
 


       PPL Corporation*       
              
                  
           
PPL Capital Funding
● Provides financing for the operations of PPL and certain subsidiaries
  
             
                  
                  
 
PPL Global
● Engages in the regulated distribution of electricity in the U.K.
  
LKE*
 
  
PPL Electric*
● Engages in the regulated transmission and distribution of electricity in Pennsylvania
 
                  
                  
    
LG&E*
● Engages in the regulated generation, transmission, distribution and sale of electricity and distribution and sale of natural gas in Kentucky
  
KU*
● Engages in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky
    
                
 
U.K.
Regulated Segment
  
Kentucky
Regulated Segment
  
Pennsylvania
Regulated Segment
 
 
PPL's reportable segments' results primarily represent the results of PPL Global, LKE and PPL Electric, except that the reportable segments are also allocated certain corporate level financing and other costs that are not included in the results of PPL Global, LKE and PPL Electric. Although PPL Global is not a registrant, however PPL Global'sRegistrant, unaudited annual consolidated financial statements for the U.K. Regulated Segment are furnished on a Form 8-K with the SEC.
 
In addition to PPL, the other Registrants included in this filing are as follows.
 
(PPL Electric)
 
PPL Electric, headquartered in Allentown, Pennsylvania, is a direct wholly owned subsidiary of PPL and a regulated public utility that is an electricity transmission and distribution service provider in eastern and central Pennsylvania. PPL Electric is subject to regulation as a public utility by the PUC, and certain of its transmission activities are subject to the jurisdiction of the FERC under the Federal Power Act. PPL Electric delivers electricity in its Pennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.
 
(LKE)
 
LKE, headquartered in Louisville, Kentucky, is a wholly owned subsidiary of PPL and a holding company that owns regulated utility operations through its subsidiaries, LG&E and KU, which constitute substantially all of LKE's assets. LG&E and KU are engaged in the generation, transmission, distribution and sale of electricity. LG&E also engages in the distribution and sale of natural gas. LG&E and KU maintain separate corporate identities and serve customers in Kentucky under their respective names. KU also serves customers in Virginia under the Old Dominion Power name and in Tennessee under the KU name.
 
(LG&E)
 
LG&E, headquartered in Louisville, Kentucky, is a wholly owned subsidiary of LKE and a regulated utility engaged in the generation, transmission, distribution and sale of electricity and distribution and sale of natural gas in Kentucky. LG&E is subject to regulation as a public utility by the KPSC, and certain of its transmission activities are subject to the jurisdiction of the FERC under the Federal Power Act.
 
(KU)
 
KU, headquartered in Lexington, Kentucky, is a wholly owned subsidiary of LKE and a regulated utility engaged in the generation, transmission, distribution and sale of electricity in Kentucky, Virginia and Tennessee. KU is subject to regulation as


a public utility by the KPSC, the VSCC and the Tennessee Regulatory Authority, and certain of its transmission and wholesale power activities are subject to the jurisdiction of the FERC under the Federal Power Act. KU serves its Virginia customers under the Old Dominion Power name and its Kentucky and Tennessee customers under the KU name.
 
Business Strategy
 
(All Registrants)
 
Following the June 1, 2015 spinoff of PPL Energy Supply, PPL completed its strategic transformation tois a fully regulated business model consisting of seven diverse, high-performing utilities. These utilities are located in the U.K., Pennsylvania and Kentucky and each jurisdiction has different regulatory structures and customer classes. The Company believes this diverse portfolio provides strong earnings and dividend growth potential that will create significant value for its shareowners and positions PPL well for continued growth and success.
 
PPL's businesses of WPD, PPL Electric, LG&E and KU plan to achieve growth by providing efficient, reliable and safe operations and strong customer service, maintaining constructive regulatory relationships and achieving timely recovery of costs. These businesses are expected to achieve strong, long-term growth in rate base and RAV, as applicable, driven by planned significant capital expenditures to maintain existing assets and improve system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to coal-fired electricity generation facilities. Additionally, significant transmission rate base growth is expected through at least 2020 at PPL Electric.
 
For the U.S. businesses, our strategy is to recover capital project costs efficiently through various rate-making mechanisms, including periodic base rate case proceedings using forward test years, annual FERC formula rate mechanisms and other regulatory agency-approved recovery mechanisms designed to limit regulatory lag. In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on construction work in progress)work-in-progress) that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. In addition, the KPSC requires a utility to obtain a CPCN prior to constructing a facility, unless the construction is an ordinary extension of existing facilities in the usual course of business or does not involve sufficient capital outlay to materially affect the utility's financial condition. Although such KPSC proceedings do not directly address cost recovery issues, the KPSC, in awarding a CPCN, concludes that the public convenience and necessity require the construction of the facility on the basis that the facility is the lowest reasonable cost alternative to address the need. In Pennsylvania, the FERC transmission formula rate, DSIC mechanism, Smart Meter Rider and other recovery mechanisms are in place to reduce regulatory lag and provide for timely recovery of and a return on prudently incurred costs.
 
Rate base growth in the domestic utilities is expected to result in strong earnings growth for the foreseeable future. Net incomeIn 2017, earnings from the U.K. Regulated segment is expected to be relatively flat through 2016. In 2017, earnings are expected to decline for the U.K. Regulated segment mainly due to the unfavorable impact of lower GBP to U.S. dollar exchange rates. RAV growth is expected in the U.K. Regulated segment through the RIIO-ED1 price control period which ends on March 31, 2023 and to result in earnings are expected to growgrowth after 2017 commensurate with RAV growth.2017. See "Item 1. Business - Segment Information - U.K. Regulated Segment" of PPL's 20152016 Form 10-K for additional information on RIIO-ED1.
 
To manage financing costs and access to credit markets, and to fund capital expenditures, a key objective of the Registrants is to maintain their investment grade credit ratings and adequate liquidity positions. In addition, the Registrants have financial and operational risk management programs that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility, as applicable, related to changes in interest rates, foreign currency exchange rates and counterparty credit quality. To manage these risks, PPL generally uses contracts such as forwards, options and swaps. See "Financial Condition - Risk Management" below for further information.

Earnings generated by PPL's U.K. subsidiaries are subject to foreign currency translation risk. Due to theBecause WPD's earnings represent such a significant portion of PPL's consolidated earnings, contributed from WPD, PPL enters into foreign currency contracts to economically hedge the value of the GBP versus the U.S. dollar. See "Financial and Operational Developments - U.K. Membership in European Union" for a discussion of the U.K. earnings hedging activity in the third and fourth quarters of 2016.These hedges do not receive hedge accounting treatment under GAAP.

The U.K. subsidiaries also have currency exposure to the U.S. dollar to the extent of their U.S. dollar denominated debt. To manage these risks, PPL generally uses contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts.
 


As discussed above, a key component of this strategy is to maintain constructive relationships with regulators in all jurisdictions in which we operate (U.K., U.S. federal and state). This is supported by our strong culture of integrity and delivering on commitments to customers, regulators and shareowners, and a commitment to continue to improve our customer service, reliability and efficiency of operations.

Financial and Operational Developments
(PPL)
U.S. Tax Reform (All Registrants)

Tax reform has been discussed as a high priority of the U.S. presidential administration. Significant uncertainty exists as to the ultimate changes that may be made, the timing of those changes and the related impact to the Registrants' financial condition or results of operations. The Registrants are working with industry groups and carefully monitoring related developments in an effort both to have input to the legislative process where possible and plan effectively to respond to any forthcoming changes in a manner that will optimize value for ratepayers and shareowners.

U.K. Membership in European Union(PPL)

Significant uncertainty exists concerning the effects of the June 23, 2016 referendum in favor ofOn March 29, 2017, the U.K. withdrawal fromformally notified the European Council of the European Union (EU). In October 2016, the U.K. Prime Minister, Theresa May, announced her of its intent to invokewithdraw from the EU, thereby commencing the negotiation of the terms of that withdrawal under Article 50 of the Lisbon Treaty (Article 50) by March 31, 2017.Treaty. Article 50 specifies that if a member state decides to withdraw from the EU, it shouldmust notify the European Council of its intention to leave the EU, negotiate the terms of withdrawal and establish the legal grounds for its future relationship with the EU. Article 50 provides two years from the date of the Article 50 notification to conclude negotiations. Failure to complete negotiations within two years, unless negotiations are extended, would result in the treaties governing the EU no longer being applicable to the U.K. with there being no agreement in place governing the U.K.'s relationship with the EU. Under the terms of Article 50, negotiations can only be extended beyond two years if all of the 27 remaining EU states agree to an extension. Any withdrawal agreement will need to be approved by both the European Council and the European Parliament. There remains significant uncertainty as to whether the events referred to in the Prime Minister's announcement will occur within the times suggested as well as the ultimate outcome of the withdrawal negotiations and the related impact on the U.K. economy and the GBP to U.S. dollar exchange rate.

In response to the decrease in the GBP to U.S. dollar exchange rate that occurred subsequent to the U.K.'s vote to withdraw from the EU, PPL has executed additional hedges to mitigate the foreign currency exposureexchange risk to the Company's U.K. earnings. In the third quarter of 2016, PPL settled existing hedges related to 2017 and 2018 anticipated earnings, resulting in receipt of approximately $310 million of cash, and entered into new hedges at current market rates. The notional amount of the settled hedges was approximately £1.3 billion (approximately $2.0 billion based on contracted rates) with termination dates from January 2017 through November 2018. The settlement did not have a significant impact on net income as the hedge values were previously marked to fair value and recognized in "Other Income (Expense) - net" on the Statement of Income.

Additionally, in the third and fourth quarters of 2016, PPL restructured existing hedges related to 2016 and 2017 anticipated earnings and entered into additional hedges using forward contracts for 2018. This restructuring did not have a significant impact on 2016 expected net income as the hedge values continue to be marked to fair value. As of October 31, 2016,April 20, 2017, PPL's foreign currencyexchange exposure related to budgeted earnings is 91%100% hedged for the remainder of 2016 at an average rate of $1.29 per GBP, 94% hedged for 2017 at an average rate of $1.25$1.21 per GBP and 93%99% hedged for 2018 and 2019 at an average rate of $1.42$1.41 and $1.32 per GBP.

PPL cannot predict either the short-term or long-term impact to foreign exchange rates or long-term impact on PPL's financial condition that may be experienced as a result of anythe actions that may be taken by the U.K. government to withdraw from the EU, although such impacts could be significant.

Regulatory Requirements

(All Registrants)
 
The Registrants cannot predict the impact that future regulatory requirements may have on their financial condition or results of operations.
 
(PPL, LKE, LG&E and KU)
 
The businesses of LKE, LG&E and KU are subject to extensive federal, state and local environmental laws, rules and regulations, including those pertaining to CCRs, GHGs, ELGs, MATS and the Clean Power Plan.MATS. See Note 6, Note 10 and Note 169 to the Financial Statements for a discussion of the other significant environmental matters.


(PPL)
Discontinued Operations
The operations of PPL's Supply segment prior to its June 1, 2015, spinoff are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the September 2015 Statements of Income.

See Note 8 to the Financial Statements for additional information related to the spinoff of PPL Energy Supply, including the components of Discontinued Operations.
U.K. Distribution Revenue Reduction
In December 2013, WPD and other U.K. DNOs announced agreements with the U.K. Department of Energy and Climate Change and Ofgem to a reduction of £5 per residential customer of electricity distribution revenues that otherwise would have been collected in the regulatory year beginning April 1, 2014. Full recovery of the revenue reduction in GBP, together with the associated carrying cost will occur in the regulatory year which began April 1, 2016. Under GAAP, WPD does not record a receivable for under-recovery of regulated income (which this reduction represents). As a result, revenues for the U.K. Regulated segment were adversely affected by $19 million ($15 million after-tax or $0.02 per share) in 2015 and $40 million ($31 million after-tax or $0.05 per share) in 2014. Revenues for the U.K. Regulated segment were positively affected by $14 million ($11 million after-tax or $0.02 per share) and $24 million ($19 million after-tax or $0.03 per share) for the three and nine months ended September 30, 2016. PPL projects revenues in 2016 will be positively affected by $37 million ($29 million after-tax or $0.04 per share) and revenues for 2017 will be positively affected by $17 million ($14 million after-tax or $0.02 per share).
U.K. Tax Rate Change

The U.K. Finance Act 2016, enacted in September 2016, reduces the U.K. statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result of this change, PPL reduced its net deferred tax liabilities and recognized an income tax benefit of $42 million in the third quarter of 2016. Of this amount, $37 million relates to deferred taxes recorded in prior years and is treated as a special item.

Discount Rate Change for U.K. Pension Plans
In selecting the discount rate for its U.K. pension plans, WPD historically used a single weighted-average discount rate in the calculation of net periodic defined benefit cost. WPD began using individual spot rates to measure service cost and interest cost for the calculation of net periodic defined benefit cost in 2016. For the three and nine months ended September 30, 2016, this change in discount rate resulted in lower net periodic defined benefit costs recognized on PPL's Statement of Income of $10 million ($8 million after-tax or $0.01 per share) and $31 million ($25 million after-tax or $0.04 per share). Based on current estimates, PPL expects this change to reduce net periodic defined benefit costs recognized on PPL's Statement of Income by $40 million ($32 million after-tax or $0.05 per share) in 2016. See "Application of Critical Accounting Policies-Defined Benefits" in PPL's 2015 Form 10-K for additional information.

Rate Case Proceedings

(PPL, LKE, LG&E and KU)

On November 1,23, 2016, LG&E and KU announced that on November 23, 2016, they anticipate filingfiled requests with the KPSC for increases in annual base electricity rates of approximately $103 million at KU and an increase in annual base electricity and gas rates of approximately $94 million and $14 million at LG&E. The proposed base rate increases to be requested arewould result in an electricity rate increase of 6.4% at KU and electricity and gas rate increases of 8.5% and 4.2% at LG&E and would become effective in July 2017.&E. LG&E's and KU's applications include requests for CPCNs for implementing an Advanced Metering System program and a Distribution Automation program. The applications are to be based on a forecasted test year of July 1, 2017 through June 30, 2018 and a requested return-on-equityreturn on equity of 10.23%.


On April 19, 2017 and May 1, 2017, LG&E and KU, along with all intervening parties to the proceeding, filed with the KPSC, stipulation and recommendation agreements (stipulations) resolving all issues with the parties. Among other things, the proposed stipulations provide for increases in annual revenue requirements associated with KU base electricity rates of $55 million, LG&E base electricity rates of $59 million and LG&E base gas rates of $8 million, reflecting a return on equity of 9.75%, and the withdrawal of LG&E's and KU's request for a CPCN for the Advanced Metering System. The proposed stipulations would result in a base electricity rate increase of 3.4% at KU and base electricity and gas rate increases of 5.4% and 2.3% at LG&E. The proposed stipulations remain subject to KPSC approval. If approved, new rates and all elements of the stipulations would be effective July 1, 2017. A public hearing on the applications is scheduled to commence on May 9, 2017. LG&E and KU cannot predict the outcome of these proceedings.

(PPL, LKE and KU)
 


On October 31, 2016, KU filed a request with the FERC to modify its formula rates to provide for the recovery of CCR impoundment closure costs from its departing municipal customers. The filing was made in accordance withOn December 30, 2016, the FERC Order No. 631 whereby aaccepted the revised rate filing is required to includeschedules providing recovery of the costs of ARO'seffective December 31, 2016, subject to refund, and established limited hearing and settlement judge procedures relating to determining the applicable amortization period. In March 2017, the parties reached a settlement in rates. If approved, KU will begin including the closure costs in its annual true-up filing for 2016 for new rates effective July 1, 2017. The filing is not expected to haveprinciple regarding a material impact on KU.suitable amortization period.

Results of Operations
 
(PPL)
 
The "Statement of Income Analysis" discussion addressesbelow describes significant changes in principal line items on PPL's Statements of Income, comparing the three and nine months ended September 30, 2016March 31, 2017 with the same periodsperiod in 2015.2016. The discussion"Segment Earnings" and "Margins" discussions for PPL providesprovide a review of results by reportable segment. The "Segment Earnings" discussion includes financial information prepared in accordance with GAAP as well asThese discussions include non-GAAP financial measures, including “Earnings"Earnings from Ongoing Operations”Operations" and “Margins”. This discussion provides"Margins," and provide explanations of the non-GAAP financial measures and a reconciliation of those measures to the most comparable GAAP measure. The "2017 Outlook" discussion identifies key factors expected to impact 2017 earnings.

Tables analyzing changes in amounts between periods within "Statement of Income Analysis"Analysis," "Segment Earnings" and "Segment Earnings""Margins" are presented on a constant U.K. foreign currencyGBP to U.S. dollar exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained. Results computed on a constant U.K. foreign currencyGBP to U.S. dollar exchange rate basis are calculated by translating current year results at the prior year weighted-average U.K. foreign currencyGBP to U.S. dollar exchange rate.

(PPL Electric, LKE, LG&E and KU)
 
A "Statement of Income Analysis, Earnings and Margins" is presented separately for PPL Electric, LKE, LG&E and KU.
The "Statement of Income Analysis" addressesdiscussion below describes significant changes in principal line items on the Statements of Income comparing the three and nine months ended September 30, 2016March 31, 2017 with the same periodsperiod in 2015 and2016. The "Earnings" discussion provides a summary of earnings. The "Margins" discussion includes a reconciliation of non-GAAP financial measures to "Operating Income."
 
(All Registrants)
 
The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations. As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.



PPLPPL: Statement of Income Analysis, Segment Earnings and Margins

Statement of Income Analysis
 
Net income for the periods ended September 30March 31 includes the following results.

Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
Operating Revenues$1,889
 $1,878
 $11
 $5,685
 $5,889
 $(204)$1,951
 $2,011
 $(60)
Operating Expenses                
Operation                
Fuel227
 228
 (1) 607
 695
 (88)191
 197
 (6)
Energy purchases151
 177
 (26) 531
 676
 (145)215
 233
 (18)
Other operation and maintenance417
 482
 (65) 1,292
 1,405
 (113)432
 450
 (18)
Depreciation232
 226
 6
 692
 658
 34
242
 229
 13
Taxes, other than income76
 79
 (3) 229
 241
 (12)75
 79
 (4)
Total Operating Expenses1,103
 1,192
 (89) 3,351
 3,675
 (324)1,155
 1,188
 (33)
Other Income (Expense) - net49
 75
 (26) 284
 61
 223
(47) 61
 (108)
Interest Expense223
 221
 2
 671
 645
 26
217
 224
 (7)
Income Taxes139
 144
 (5) 510
 432
 78
129
 179
 (50)
Income from Continuing Operations After Income Taxes473
 396
 77
 1,437
 1,198
 239
Income (Loss) from Discontinued Operations (net of income taxes)—
 (3) 3
 —
 (915) 915
Net Income$473
 $393
 $80
 $1,437
 $283
 $1,154
$403
 $481
 $(78)

Operating Revenues
 
The increase (decrease) in operating revenues for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

Three Months Nine MonthsThree Months
Domestic:    
PPL Electric Distribution price (a)$23
 $97
$12
PPL Electric Distribution volume11
 (23)(3)
PPL Electric PLR Revenue (b)(21) (125)(21)
PPL Electric Transmission Formula Rate12
 47
1
LKE Base rates—
 68
LKE Volumes32
 (38)(37)
LKE Fuel and other energy prices (b)(11) (85)
LKE ECR8
 30
LKE Fuel and other energy prices (c)11
LKE DSM5
Other(6) (12)(1)
Total Domestic48
 (41)(33)
U.K.:    
Price59
 29
58
Volume(16) (37)9
Foreign currency exchange rates(77) (139)(96)
Other(3) (16)2
Total U.K.(37) (163)(27)
Total$11
 $(204)$(60)

(a)Distribution rate case effective January 1, 2016,rider prices resulted in increases of $41 million and $121$12 million for the three and nine months ended September 30, 2016.March 31, 2017.


(b)DecreasesDecreased primarily due to lower energy purchase prices at PPL Electric.
(c)Increased due to higher recoveries of fuel and energy purchases due to lowerprimarily as a result of higher commodity costs at LKE and lower recoveries of energy purchases at PPL Electric.LKE.

Fuel

Fuel decreased $88 million for the nine months ended September 30, 2016 compared with 2015, primarily due to a decrease in market prices for coal and natural gas.

Energy Purchases

Energy purchases decreased by $26$18 million for the three months ended September 30, 2016March 31, 2017 compared with 2015,2016, primarily due to a $37$23 million decrease in PLR prices, partially offset by a $14$3 million increase in PLR volumes at PPL Electric.

Energy purchases decreased by $145 million for the nine months ended September 30, 2016 compared with 2015, primarily due to a $90 million decrease in PLR prices and a $23 million decrease in PLR volumes at PPL Electric, a $14 million decrease in natural gas volumes and a $13 million decrease in natural gas prices at LKE.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

Three Months Nine MonthsThree Months
Domestic:    
LKE coal plant operations and maintenance (a)$2
 $(12)
LKE pension expense (b)(2) (10)
PPL Electric Act 129 costs incurred(7) (14)
PPL Electric vegetation management(5) 1
PPL Electric Act 129$5
PPL Electric payroll-related costs(7) (19)2
PPL Electric storm costs1
 7
PPL Electric bad debts(5) (6)(3)
Corporate costs previously included in discontinued operations (c)1
 10
Stock compensation expense6
Other(3) 5
5
U.K.:    
Network maintenance(2) 13
(7)
Foreign currency exchange rates(10) (19)(8)
Pension (d)(21) (64)
Pension (a)(17)
Other(7) (5)(1)
Total$(65) $(113)$(18)

(a)The decrease for the nine month period was primarily due to a reduction of costs associated with the 2015 retirement of units at the Cane Run and Green River plants, partially offset by Cane Run 7 operations.
(b)The decrease for the nine month period was primarily due to higher discount rates and deferred amortization of actuarial losses.
(c)The increase for the nine month period was due to corporate costs allocated to PPL Energy Supply (and included in discontinued operations) prior to the June 2015 spinoff. As a result of the spinoff on June 1, 2015, these corporate costs now remain in continuing operations.
(d)The decreases were primarily due to an increase in estimatedexpected returns on higher asset balances and lower interest costs due to a change in thelower discount rate methodology.rate.

Depreciation
 
Depreciation increased by $6 million and $34$13 million for the three and nine months ended September 30, 2016March 31, 2017 compared with 2015,2016, primarily due to additional assets placed into service, net of retirements, partially offset by the impact of foreign currency exchange rates at WPD, net of retirements.WPD.
 


Other Income (Expense) - net
 
Other income (expense) - net decreased by $26 million and increased by $223$108 million for the three and nine months ended September 30, 2016March 31, 2017 compared with 2015,2016, primarily due to changes in realized and unrealized gains (losses) on foreign currency contracts to economically hedge GBP denominated earnings from WPD.
 
Interest Expense

The increase (decrease) in interest expense for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

Three Months Nine MonthsThree Months
Long-term debt interest expense (a)$17
 $58
$4
Foreign currency exchange rates(14) (25)(15)
Other(1) (7)4
Total$2
 $26
$(7)
 
(a)The increase in both periods was primarily due to debt issuances at WPD in November 2015, LG&E and KU in September 2015 and PPL Capital Funding in May 2016 as well as higher interest rates on bonds refinanced in September 2015 at LG&E and KU.

Income Taxes 

The increase (decrease) in income taxes for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

 Three Months Nine Months
Change in pre-tax income at current period tax rates$23
 $103
Valuation allowances adjustments4
 5
Impact of U.K. income tax rates3
 2
Federal and state tax reserve adjustments (a)9
 21
U.K. Finance Act 2016 adjustment (b)(42) (42)
Stock-based compensation (c)(1) (12)
Other(1) 1
Total$(5) $78
(a)During the three and nine months ended September 30, 2015, PPL recorded a $9 million tax benefit related to a planned amendment of a prior period tax return.

During the nine months ended September 30, 2015, PPL recorded a tax benefit to adjust the settled refund amount approved by the Joint Committee on Taxation for the open audit years 1998-2011.
(b)The U.K. Finance Act 2016, enacted in September 2016, reduces the U.K. statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during the three and nine months ended September 30, 2016.
(c)During the three and nine months ended September 30, 2016, PPL recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 to the Financial Statements for additional information.

See Note 5 to the Financial Statements for additional information.
Income (Loss) from Discontinued Operations (net of income taxes)
Income (Loss) from Discontinued Operations (net of income taxes) includes the results of operations of PPL Energy Supply, which was spun off from PPL on June 1, 2015 and substantially represents PPL's former Supply segment. See "Discontinued Operations" in Note 8 to the Financial Statements for additional information.
 Three Months
Change in pre-tax income at current period tax rates$(39)
U.S. income tax on foreign earnings - net of foreign tax credit(7)
Impact of U.K. Finance Acts(3)
Depreciation not normalized(2)
Stock-based compensation5
Other(4)
Total$(50)
 


Segment Earnings
 
PPL's net income by reportable segments for the periods ended September 30March 31 were as follows:
Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
U.K. Regulated$281
 $249
 $32
 $915
 $814
 $101
$286
 $289
 $(3)
Kentucky Regulated126
 111
 15
 314
 267
 47
95
 112
 (17)
Pennsylvania Regulated91
 55
 36
 263
 191
 72
79
 94
 (15)
Corporate and Other (a)(25) (19) (6) (55) (74) 19
(57) (14) (43)
Discontinued Operations (b)—
 (3) 3
 —
 (915) 915
Net Income$473
 $393
 $80
 $1,437
 $283
 $1,154
$403
 $481
 $(78)
 
(a)Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results. The nine months ended September 30, 2015 also includes certain costs relatedchange in 2017 compared with 2016 is primarily due to the spinoffutilization of PPL Energy Supply. See Note 8an estimated annual effective tax rate, which requires the tax benefits realized in the current period to be recognized over the Financial Statements for additional information.
(b)As a resultannual period. This impact is expected to reverse through the remainder of the spinoff of PPL Energy Supply, substantially representing PPL's former Supply segment, the earnings of the Supply segment prior to the spinoff are included in Discontinued Operations. The nine months ended September 30, 2015 includes an $879 million charge reflecting the difference between PPL's recorded value for the Supply segment and its estimated fair value as of the spinoff date, determined in accordance with applicable accounting rules under GAAP. See Note 8 to the Financial Statements for additional information.year.

Earnings from Ongoing Operations
 
Management utilizes "Earnings from Ongoing Operations" as a non-GAAP financial measure that should not be considered as an alternative to net income, an indicator of operating performance determined in accordance with GAAP. PPL believes that Earnings from Ongoing Operations is useful and meaningful to investors because it provides management's view of PPL's earnings performance as another criterion in making investment decisions. In addition, PPL's management uses Earnings from Ongoing Operations in measuring achievement of certain corporate performance goals, including targets for certain executive incentive compensation. Other companies may use different measures to present financial performance. 
 
Earnings from Ongoing Operations is adjusted for the impact of special items. Special items are presented in the financial tables on an after-tax basis with the related income taxes on special items separately disclosed. Income taxes on special items, when applicable, are calculated based on the effective tax rate of the entity where the activity is recorded. Special items include:

• Unrealized gains or losses on foreign currency-related economic hedges (as discussed below).
• Supply segment discontinued operations.
• Gains and losses on sales of assets not in the ordinary course of business.
• Impairment charges. 
• WorkforceSignificant workforce reduction and other restructuring effects.
• Acquisition and divestiture-related adjustments.
• Other charges or credits that are, in management's view, non-recurring or otherwise not reflective of the company's ongoing operations.
 
Unrealized gains or losses on foreign currency economic hedges include the changes in fair value of foreign currency contracts used to hedge GBP-denominated anticipated earnings. The changes in fair value of these contracts are recognized immediately within GAAP earnings. Management believes that excluding these amounts from Earnings from Ongoing Operations until settlement of the contracts provides a better matching of the financial impacts of those contracts with the economic value of PPL's underlying hedged earnings. See Note 1413 to the Financial Statements and "Risk Management" below for additional information on foreign currency-related economic activity.

PPL's Earnings from Ongoing Operations by reportable segment for the periods ended September 30March 31 were as follows:


Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
U.K. Regulated$235
 $195
 $40
 $741
 $774
 $(33)$307
 $265
 $42
Kentucky Regulated126
 112
 14
 314
 280
 34
96
 112
 (16)
Pennsylvania Regulated91
 55
 36
 263
 191
 72
79
 94
 (15)
Corporate and Other(25) (15) (10) (53) (50) (3)(57) (13) (44)
Earnings from Ongoing Operations$427
 $347
 $80
 $1,265
 $1,195
 $70
$425
 $458
 $(33)

See "Reconciliation of Earnings from Ongoing Operations" below for a reconciliation of this non-GAAP financial measure to Net Income.
 

U.K. Regulated Segment
 
The U.K. Regulated segment consists of PPL Global, which primarily includes WPD's regulated electricity distribution operations, the results of hedging the translation of WPD's earnings from GBP into U.S. dollars, and certain costs, such as U.S. income taxes, administrative costs and allocatedcertain acquisition-related financing costs. The U.K. Regulated segment represents 64%71% of PPL's Net Income for the ninethree months ended September 30, 2016March 31, 2017 and 39% of PPL's assets at September 30, 2016.March 31, 2017.
 
Net Income and Earnings from Ongoing Operations for the periods ended September 30March 31 include the following results.
Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
Operating revenues$515
 $552
 $(37) $1,673

$1,836
 $(163)$568

$595
 $(27)
Other operation and maintenance78
 118
 (40) 260
 332
 (72)64
 97
 (33)
Depreciation58
 63
 (5) 178
 181
 (3)55
 60
 (5)
Taxes, other than income34
 38
 (4) 104
 111
 (7)31
 35
 (4)
Total operating expenses170
 219
 (49) 542
 624
 (82)150
 192
 (42)
Other Income (Expense) - net50
 77
 (27) 283
 65
 218
(43) 61
 (104)
Interest Expense100
 109
 (9) 310
 312
 (2)94
 106
 (12)
Income Taxes14
 52
 (38) 189
 151
 38
(5) 69
 (74)
Net Income281

249
 32
 915

814
 101
286

289
 (3)
Less: Special Items46
 54
 (8) 174
 40
 134
(21) 24
 (45)
Earnings from Ongoing Operations$235
 $195
 $40
 $741
 $774
 $(33)$307
 $265
 $42
 
The following after-tax gains (losses), which management considers special items, impacted the U.K. Regulated segment's results and are excluded from Earnings from Ongoing Operations during the periods ended September 30.
March 31.
 Income Statement Line Item Three Months Nine Months
  2016 2015 2016 2015
Foreign currency-related economic hedges, net of tax of $103, ($29), $34, ($10) (a)Other Income (Expense) - net $(193) $54
 $(65) $20
Settlement of foreign currency contracts, net of tax of ($108), $0, ($108), $0 (b)Other Income (Expense) - net 202
 —
 202
 —
Change in U.K. tax rate (c)Income Taxes 37
 —
 37
 —
WPD Midlands acquisition-related adjustment, net of tax of $0, $0, $0, ($1)Other operation and maintenance —
 —
 —
 2
Settlement of certain income tax positions (d)Income Taxes —
 —
 —
 18
Total special items  $46
 $54
 $174
 $40
 Income Statement Line Item Three Months
  2017 2016
Foreign currency-related economic hedges, net of tax of $12, ($13) (a)Other Income (Expense) - net $(21) $24
Total Special Items  $(21) $24
 
(a)Represents unrealized gains (losses) on contracts that economically hedge anticipated GBP-denominated earnings. The three and nine months ended September 30, 2016 include the reversal of $310 million ($202 million after-tax) of unrealized gains related to the settlement of 2017 and 2018 contracts.


(b)In the third quarter of 2016, PPL settled 2017 and 2018 foreign currency contracts, resulting in $310 million of cash received ($202 million after-tax). The settlement did not have a material impact on net income as the contracts were previously marked to fair value and recognized in "Other Income (Expense)-net" on the Statement of Income.
(c)The U.K. Finance Act 2016, enacted in September 2016, reduces the U.K. statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result of this change, PPL reduced its net deferred tax liabilities and recognized an income tax benefit of $42 million in the third quarter of 2016. Of this amount, $37 million relates to deferred taxes recorded in prior years and was treated as a special item.
(d)Relates to the April 2015 settlement of the IRS audit for the tax years 1998-2011. See Note 5 to the Financial Statements for additional information.

The changes in the components of the U.K. Regulated segment's results between these periods are due to the factors set forth below, which reflect amounts classified as U.K. Gross Margins, the items that management considers special and the effects of movements in foreign currency exchange, including the effects of foreign currency hedge contracts, on separate lines and not in their respective Statement of Income line items.
Three Months Nine MonthsThree Months
U.K. 
   
Gross margins$45
 $(11)$70
Other operation and maintenance26
 49
24
Depreciation(3) (12)(5)
Interest expense(5) (23)(2)
Other(1) (3)(2)
Income taxes(5) 13
(5)
U.S.    
Interest expense and other2
 (3)(1)
Income taxes(10) (5)34
Foreign currency exchange, after-tax(9) (38)(71)
Earnings from Ongoing Operations40
 (33)42
Special items, after-tax(8) 134
(45)
Net Income$32
 $101
$(3)


U.K.
 
See "Margins - Changes in Margins" for an explanation of U.K. Gross Margins.

Lower other operation and maintenance expense for the three month period primarily due to $21$17 million from lower pension expense due to an increase in estimatedexpected returns on higher asset balances and lower interest costs due to a change in thelower discount rate methodology and $2$7 million from lower network maintenance expense.

Lower other operation and maintenance expense for the nine month periodHigher income taxes primarily due to $64 million from lower pension expense due to an increase in estimated returns onof $17 million from higher asset balances and lower interest costs due to a change in the discount rate methodology,pre-tax income partially offset by $13a decrease of $10 million from higher network maintenance expense.primarily related to accelerated tax deductions.

U.S.

Lower income taxes primarily due to the tax benefit on accelerated pension contributions made in the first quarter of 2017.

Kentucky Regulated Segment
 
The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations of LG&E and KU, as well as LG&E's regulated distribution and sale of natural gas. In addition, certain acquisition-related financing costs are allocated to the Kentucky Regulated segment. The Kentucky Regulated segment represents 22%24% of PPL's Net Income for the ninethree months ended September 30, 2016March 31, 2017 and 36% of PPL's assets at September 30, 2016.March 31, 2017.
 
Net Income and Earnings from Ongoing Operations for the periods ended September 30March 31 include the following results.


Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
Operating revenues$835
 $801
 $34
 $2,382
 $2,414
 $(32)$809
 $826
 $(17)
Fuel 227
 228
 (1) 607
 695
 (88)191
 198
 (7)
Energy purchases24
 23
 1
 118
 143
 (25)69
 66
 3
Other operation and maintenance197
 202
 (5) 603
 625
 (22)207
 202
 5
Depreciation102
 97
 5
 301
 286
 15
105
 99
 6
Taxes, other than income16
 14
 2
 46
 43
 3
16
 15
 1
Total operating expenses566
 564
 2
 1,675
 1,792
 (117)588
 580
 8
Other Income (Expense) - net(3) (2) (1) (9) (8) (1)(2) (1) (1)
Interest Expense65
 56
 9
 194
 167
 27
65
 65
 —
Income Taxes75
 68
 7
 190
 180
 10
59
 68
 (9)
Net Income126
 111
 15
 314
 267
 47
95
 112
 (17)
Less: Special Items—
 (1) 1
 —
 (13) 13
(1) —
 (1)
Earnings from Ongoing Operations$126
 $112
 $14
 $314
 $280
 $34
$96
 $112
 $(16)

The following after-tax gains (losses), which management considers special items, impacted the Kentucky Regulated segment's results and are excluded from Earnings from Ongoing Operations during the periods ended September 30.

March 31.
 Income Statement Line Item Three Months Nine Months
  2016 2015 2016 2015
LKE acquisition-related adjustment, net of tax of $0, $0, $0, $0 (a)Other Income (Expense) - net $—
 $(1) $—
 $(5)
Certain valuation allowances, net of tax of $0, $0, $0, $0 (b)Income Taxes —
 —
 —
 (8)
Total Special Items  $—
 $(1) $—
 $(13)
 Income Statement Line Item Three Months
  2017 2016
Adjustment to investment, net of tax of $0, $0 (a)Other Income (Expense) - net $(1) $—
Total Special Items  $(1) $—

(a)Recorded at PPL and allocated to the Kentucky Regulated segment. The amount representsKU recorded a settlement between E.ON AG (a German corporation and the indirect parentwrite-off of E.ON US Investments Corp., the former parent of LKE) and PPL for a tax matter.
(b)Recorded at LKE and represents a valuation allowance against tax credits expiring in 2016 and 2017 that are more likely than not to expire before being utilized.an equity method investment.

The changes in the components of the Kentucky Regulated segment's results between these periods are due to the factors set forth below, which reflect amounts classified as Kentucky Gross Margins and the items that management considers special on separate lines and not in their respective Statement of Income line items.

Three Months Nine MonthsThree Months
Kentucky Gross Margins$27
 $63
$(18)
Other operation and maintenance10
 26
(3)
Depreciation(2) (1)(2)
Taxes, other than income(3) (3)(2)
Other Income (Expense) - net(2) (6)
Interest Expense(9) (27)
Income Taxes(7) (18)9
Earnings from Ongoing Operations(16)
Special items, after-tax1
 13
(1)
Net Income$15
 $47
$(17)
 
See "Margins - Changes in Margins" for an explanation of Kentucky Gross Margins.

Lower other operation and maintenance expense for the nine month periodincome taxes primarily due to $12 million of lower coal plant operations and maintenance expense as a result of units retired in 2015 at the Cane Run and Green River plants and $10 million of lower pension expense mainly due to higher discount rates and deferred amortization of actuarial losses.

Higher interest expense for the three and nine month periods primarily due to the September 2015 issuance of $550 million of incremental First Mortgage Bonds by LG&E and KU, higher interest rates on the September 2015 issuance of $500


million of First Mortgage Bonds by LG&E and KU used to retire the same amount of First Mortgage Bonds in November 2015 and $400 million of notes refinanced by LKE in November 2015.pre-tax income.
 
Pennsylvania Regulated Segment
 
The Pennsylvania Regulated segment includes the regulated electricity transmission and distribution operations of PPL Electric. In addition, certain costs are allocated to the Pennsylvania Regulated segment. The Pennsylvania Regulated segment represents 18%20% of PPL's Net Income for the ninethree months ended September 30, 2016March 31, 2017 and 24%25% of PPL's assets at September 30, 2016.March 31, 2017.

Net Income and Earnings from Ongoing Operations for the periods ended September 30March 31 include the following results.
Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
Operating revenues$539
 $519
 $20
 $1,619
 $1,625
 $(6)$573
 $585
 $(12)
Energy purchases     
      
146
 167
 (21)
External129
 154
 (25) 414
 519
 (105)
Intersegment—
 —
 —
 —
 14
 (14)
Other operation and maintenance143
 162
 (19) 431
 435
 (4)164
 150
 14
Depreciation64
 55
 9
 185
 158
 27
75
 59
 16
Taxes, other than income26
 27
 (1) 79
 87
 (8)29
 29
 —
Total operating expenses362
 398
 (36) 1,109
 1,213
 (104)414
 405
 9
Other Income (Expense) - net4
 1
 3
 12
 5
 7
1
 3
 (2)
Interest Expense32
 32
 —
 97
 96
 1
33
 33
 —
Income Taxes58
 35
 23
 162
 130
 32
48
 56
 (8)
Net Income91
 55
 36
 263
 191
 72
79
 94
 (15)
Less: Special Items (a)—

—
 —
 —

—
 —
—

—
 —
Earnings from Ongoing Operations$91
 $55
 $36
 $263
 $191
 $72
$79
 $94
 $(15)
 
(a)There are no items that management considers special for the periods presented.

The changes in the components of the Pennsylvania Regulated segment's results between these periods wereare due to the factors set forth below, which reflect amounts classified as Pennsylvania Gross Delivery Margins on a separate line and not in their respective Statement of Income line items.
Three Months Nine MonthsThree Months
Pennsylvania Gross Delivery Margins$52
 $126
Pennsylvania Gross Margins$1
Other operation and maintenance12
 (3)(10)
Depreciation(9) (27)(12)
Taxes, other than income1
 2
Other Income (Expense) - net3
 7
(2)
Interest Expense—
 (1)
Income Taxes(23) (32)8
Net Income$36
 $72
$(15)
 
See "Margins - Changes in Margins" for an explanation of Pennsylvania Gross Delivery Margins.

Lower other operation and maintenance expense for the three month period primarily due to $6 million of lower payroll related costs and $6 million of lower bad debt expenses.

Higher other operation and maintenance expense for the nine month period primarily due to $10$8 million of higher corporate service costs allocated to PPL Electric and $9 million of higher costs for additional work done by outside vendors, offset by $19 million of lower payroll related costs.Electric.


Higher depreciation expense for the three and nine month periods primarily due to transmission and distribution additions placed into service related to the ongoing efforts to improve reliability and replace aging infrastructure, net of retirements.


HigherLower income taxes for the three and nine month periods primarily due to higherlower pre-tax income.

Reconciliation of Earnings from Ongoing Operations
 
The following tables contain after-tax gains (losses), in total, which management considers special items, that are excluded from Earnings from Ongoing Operations and a reconciliation to PPL's "Net Income" for the periods ended September 30.

March 31.
2016 Three Months2017 Three Months
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 
Discontinued
Operations
 Total
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$281
 $126
 $91
 $(25) $—
 $473
$286
 $95
 $79
 $(57) $403
Less: Special Items (expense) benefit:                    
Foreign currency-related economic hedges, net of tax of $103(193) —
 —
 —
 —
 (193)
Other:           
Settlement of foreign currency contracts, net of tax of ($108)202
 —
 —
 —
 —
 202
Change in U.K. tax rate37
 —
 —
 —
 —
 37
Foreign currency-related economic hedges, net of tax of $12(21) —
 —
 —
 (21)
Adjustment to investment, net of tax of $0—
 (1) —
 —
 (1)
Total Special Items46
 —
 —
 —
 —
 46
(21) (1) —
 —
 (22)
Earnings from Ongoing Operations$235
 $126
 $91
 $(25) $—
 $427
$307
 $96
 $79
 $(57) $425
 2015 Three Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 
Discontinued
Operations
 Total
Net Income$249
 $111
 $55
 $(18) $(4) $393
Less: Special Items (expense) benefit:           
Foreign currency-related economic hedges, net of tax of ($29)54
 —
 —
 —
 —
 54
Spinoff of the Supply segment:           
Discontinued operations, net of tax of ($3)—
 —
 —
 —
 (4) (4)
Transition and transaction costs, net of tax of $1—
 —
 —
 (1) —
 (1)
Employee transitional services, net of tax of $1—
 —
 —
 (1) —
 (1)
Separation benefits, net of tax of $0—
 —
 —
 (1) —
 (1)
Other:           
LKE acquisition-related adjustment, net of tax of $0—
 (1) —
 —
 —
 (1)
Total Special Items54
 (1) —
 (3) (4) 46
Earnings from Ongoing Operations$195
 $112
 $55
 $(15) $—
 $347
 2016 Nine Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 
Discontinued
Operations
 Total
Net Income$915
 $314
 $263
 $(55) $—
 $1,437
Less: Special Items (expense) benefit:           
Foreign currency-related economic hedges, net of tax of $34(65) —
 —
 —
 —
 (65)
Spinoff of the Supply segment, net of tax of $2—
 —
 —
 (2) —
 (2)
Other:           
Settlement of foreign currency contracts, net of tax of ($108)202
 —
 —
 —
 —
 202
Change in U.K. tax rate37
 —
 —
 —
 —
 37
Total Special Items174
 —
 —
 (2) —
 172
Earnings from Ongoing Operations$741
 $314
 $263
 $(53) $—
 $1,265


 2015 Nine Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 
Discontinued
Operations
 Total
Net Income$814
 $267
 $191
 $(73) $(916) $283
Less: Special Items (expense) benefit:           
Foreign currency-related economic hedges, net of tax of ($10)20
 —
 —
 —
 —
 20
Spinoff of the Supply segment:           
Discontinued operations, net of tax of $37—
 —
 —
 —
 (916) (916)
Transition and transaction costs, net of tax of $0—
 —
 —
 (16) —
 (16)
Employee transitional services, net of tax of $2—
 —
 —
 (4) —
 (4)
Separation benefits, net of tax of $1—
 —
 —
 (3) —
 (3)
Other:           
WPD Midlands acquisition-related adjustment, net of tax of ($1)2
 —
 —
 —
 —
 2
Settlement of certain income tax positions18
 —
 —
 —
 —
 18
Certain valuation allowances, net of tax of $0—
 (8) —
 —
 —
 (8)
LKE acquisition-related adjustment, net of tax of $0—
 (5) —
 —
 —
 (5)
Total Special Items40
 (13) —
 (23) (916) (912)
Earnings from Ongoing Operations$774
 $280
 $191
 $(50) $—
 $1,195
 2016 Three Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$289
 $112
 $94
 $(14) $481
Less: Special Items (expense) benefit:         
Foreign currency-related economic hedges, net of tax of ($13)24
 —
 —
 —
 24
Spinoff of the Supply segment, net of tax of $1—
 —
 —
 (1) (1)
Total Special Items24
 —
 —
 (1) 23
Earnings from Ongoing Operations$265
 $112
 $94
 $(13) $458

Margins
 
Management also utilizes the following non-GAAP financial measures as indicators of performance for its businesses:
 
"U.K. Gross Margins" is a single financial performance measure of the electricity distribution operations of the U.K. Regulated segment. In calculating this measure, direct costs such as connection charges from National Grid, which owns and manages the electricity transmission network in England and Wales, and Ofgem license fees (recorded in "Other operation and maintenance" on the Statements of Income) are deducted from operating revenues, as they are costs passed through to customers. As a result, this measure represents the net revenues from the delivery of electricity across WPD's distribution network in the U.K. and directly related activities.
 
"Kentucky Gross Margins" is a single financial performance measure of the electricity generation, transmission and distribution operations of the Kentucky Regulated segment, LKE, LG&E and KU, as well as the Kentucky Regulated segment's, LKE's and LG&E's distribution and sale of natural gas. In calculating this measure, fuel, energy purchases and certain variable costs of production (recorded in "Other operation and maintenance" on the Statements of Income) are deducted from operating revenues. In addition, certain other expenses, recorded in "Other operation and maintenance", "Depreciation" and "Taxes, other than income" on the Statements of Income, associated with approved cost recovery mechanisms are offset against the recovery of those expenses, which are included in revenues. These mechanisms allow for direct recovery of these expenses and, in some cases, returns on capital investments and performance incentives. As a result, this measure represents the net revenues from electricity and gas operations.

"Pennsylvania Gross Delivery Margins" is a single financial performance measure of the electricity transmission and distribution delivery operations of the Pennsylvania Regulated segment and PPL Electric. In calculating this measure, utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, are offset with minimal impact on earnings. Costs associated with these mechanisms are recorded in "Energy purchases," "Other operation and maintenance," (which are primarily Act 129 and Universal Service program costs), "Depreciation" (which is primarily

related to the Smart Meter program) and "Taxes, other than income," which(which is primarily gross receipts tax. This performance measure includes PLR energy purchases by PPL Electric from PPL EnergyPlus, which are reflected in "Energy purchases from affiliate" intax) on the reconciliation tables. As a resultStatements of the June 2015 spinoff of PPL Energy Supply and the formation of Talen Energy, PPL EnergyPlus (renamed Talen Energy Marketing) is no longer an affiliate of PPL Electric. PPL Electric's purchases from Talen Energy Marketing subsequent to May 31, 2015 are reflected in "Energy Purchases" in the reconciliation tables.Income. This measure represents the net revenues from the Pennsylvania Regulated segment's and PPL Electric's electricity delivery operations.

These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and report their results of operations.


Management believes these measures provide additional useful criteria to make investment decisions. These performance measures are used, in conjunction with other information, by senior management and PPL's Board of Directors to manage operations and analyze actual results compared with budget.
 
Changes in Margins
 
The following table shows Margins by PPL's reportable segment and by component, as applicable, for the periods ended September 30March 31 as well as the change between periods. The factors that gave rise to the changes are described following the table.
Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
U.K. 
  
  
  
  
  
U.K. Regulated 
  
  
U.K. Gross Margins$476
 $505
 $(29) $1,566
 $1,709
 $(143)$536
 $557
 $(21)
Impact of changes in foreign currency exchange rates    (74)     (132)    (91)
Change in U.K. Gross Margins excluding impact of foreign currency exchange rates    $45
     $(11)
U.K. Gross Margins excluding impact of foreign currency exchange rates    $70
                
Kentucky Regulated                
Kentucky Gross Margins                
LG&E$237
 $225
 $12
 $676
 $661
 $15
$226
 $228
 $(2)
KU300
 285
 15
 857
 809
 48
281
 297
 (16)
LKE$537
 $510
 $27
 $1,533
 $1,470
 $63
Total Kentucky Gross Margins$507
 $525
 $(18)
                
Pennsylvania Regulated                
Pennsylvania Gross Delivery Margins           
Pennsylvania Gross Margins     
Distribution$246
 $207
 $39
 $721
 $642
 $79
$258
 $258
 $—
Transmission115
 102
 13
 332
 285
 47
108
 107
 1
Total$361
 $309
 $52
 $1,053
 $927
 $126
Total Pennsylvania Gross Margins$366
 $365
 $1

U.K. Gross Margins
 
U.K. Gross Margins, excluding the impact of changes in foreign currency exchange rates, increased for the three months ended September 30, 2016 compared with 2015 primarily due to $59$58 million from the April 1, 2016 price increase, which includes $14 million of the recovery of prior customer rebates, partially offset by $16and $9 million of lowerhigher volumes.

U.K. Gross Margins, excluding the impact of changes in foreign currency exchange rates, decreased for the nine months ended September 30, 2016 compared with 2015 primarily due to $89 million from the April 1, 2015 price decrease resulting from the commencement of RIIO-ED1 and lower volumes of $37 million, partially offset by $97 million from the April 1, 2016 price increase, which includes $24 million of the recovery of prior customer rebates, and $21 million of other revenue adjustments in 2016.
Kentucky Gross Margins
 
Kentucky Gross Margins increased for the three months ended September 30, 2016 compared with 2015decreased primarily due to $22 million of increasedlower electricity sales volumes ($9 million at LG&E and $13 million at KU) driven by warmer weather.

Kentucky Gross Margins increased for the nine months ended September 30, 2016 compared with 2015 primarily due to higher base rates of $68 million ($4 million at LG&E and $64 million at KU) and returns on additional environmental capital investments of $11 million at LG&E. The increase in base rates was the result of new rates approved by the KPSC effective July 1, 2015. These increases were partially offset by lower sales volumes of $10 million ($2 million at LG&E and $8 million at KU) driven by milder weather in the first quarter of 2016.

2017 ($5 million at LG&E and $17 million at KU).

Pennsylvania Gross Delivery Margins
 
Distribution
Distribution marginsPennsylvania Gross Margins increased for the three months ended September 30, 2016 compared with 2015 primarily due to $30an increase of $11 million of higher base rates, effective January 1, 2016 as a result of the 2015 rate case combined with a $12 million favorable impact of warmer summer weather.

Distribution margins increased for the nine months ended September 30, 2016 compared with 2015 primarily due to $93 million of higher base rates, effective January 1, 2016, partially offset by a $13 million unfavorable impact of milder winter weather.
Transmission
Transmission margins increased for the three and nine month periods ended September 30, 2016 compared with 2015 primarily due tofrom returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability.reliability, partially offset by a $10 million decrease as a result of a lower peak transmission system load in 2016 which negatively affected transmission revenue for the first quarter of 2017.


Reconciliation of Margins
 
The following table containstables contain the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the periods ended September 30.March 31.
 2017 Three Months
 
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$559
(c)$809
 $573
 $10
 $1,951
Operating Expenses         
Fuel—
 191
 —
 —
 191
Energy purchases—
 69
 146
 —
 215
Other operation and maintenance23
 26
 29
 354
 432
Depreciation—
 16
 4
 222
 242
Taxes, other than income—
 —
 28
 47
 75
Total Operating Expenses23
 302
 207
 623
 1,155
Total   $536
 $507
 $366
 $(613) $796
2016 Three Months 2015 Three Months2016 Three Months
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
 
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$504
(c)$835
 $539
 $11
 $1,889
 $540
(c)$801
 $519
 $18
 $1,878
$584
(c)$826
 $585
 $16
 $2,011
Operating Expenses                            
Fuel—
 227
 —
 —
 227
 —
 228
 —
 —
 228
—
 198
 —
 (1) 197
Energy purchases—
 24
 129
 (2) 151
 —
 23
 154
 —
 177
—
 66
 167
 —
 233
Other operation and maintenance28
 33
 24
 332
 417
 35
 28
 31
 388
 482
27
 24
 25
 374
 450
Depreciation—
 14
 —
 218
 232
 —
 11
 —
 215
 226
—
 12
 —
 217
 229
Taxes, other than income—
 —
 25
 51
 76
 —
 1
 25
 53
 79
—
 1
 28
 50
 79
Total Operating Expenses28
 298
 178
 599
 1,103
 35
 291
 210
 656
 1,192
27
 301
 220
 640
 1,188
Total $476
 $537
 $361
 $(588) $786
 $505
 $510
 $309
 $(638) $686
$557
 $525
 $365
 $(624) $823
                   
2016 Nine Months 2015 Nine Months
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
 
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$1,641
(c)$2,382
 $1,619
 $43
 $5,685
 $1,801
(c)$2,414
 $1,625
 $49
 $5,889
Operating Expenses                   
Fuel—
 607
 —
 —
 607
 —
 695
 —
 —
 695
Energy purchases—
 118
 414
 (1) 531
 —
 143
 519
 14
 676
Energy purchases from affiliate—
 —
 —
 —
 —
 —
 —
 14
 (14) —
Other operation and maintenance75
 81
 77
 1,059
 1,292
 92
 77
 84
 1,152
 1,405
Depreciation—
 40
 —
 652
 692
 —
 26
 —
 632
 658
Taxes, other than income—
 3
 75
 151
 229
 —
 3
 81
 157
 241
Total Operating Expenses75
 849
 566
 1,861
 3,351
 92
 944
 698
 1,941
 3,675
Total $1,566
 $1,533
 $1,053
 $(1,818) $2,334
 $1,709
 $1,470
 $927
 $(1,892) $2,214
 
(a)Represents amounts excluded from Margins.


(b)As reported on the Statements of Income.
(c)Excludes ancillary revenues of $11$9 million and $32$11 million for the three and nine months ended September 30, 2016March 31, 2017 and $12 million and $35 million for the three and nine months ended September 30, 2015.2016.

20162017 Outlook
 
(PPL)
 
Higher net income is expected in 2016 compared with 2015, primarily attributable to the results of the 2015 spinoff of the Supply segment. Higher Earnings from Ongoing Operations are expected in 2016 compared with 2015, primarily attributable to increases in the Pennsylvania Regulated and Kentucky Regulated segments. The following projections and factors underlying these projections (on an after-tax basis) are provided for PPL's segments and the Corporate and Other category and the related Registrants.

(PPL's U.K. Regulated Segment)
 
NetLower net income is expected to be relatively flatprojected in 20162017 compared with 2015. Lower Earnings from Ongoing Operations are projected in 2016 compared with 2015 due to the unfavorable impact ofa lower assumed GBP exchange rates,rate in 2017, lower incentive revenues, higher interest expense and higher depreciation expense, partially offset by higher revenues and lower operation and maintenance expense, including pension expense.expense, and higher revenues from the April 1, 2017 price increase.

(PPL's Kentucky Regulated Segment and LKE, LG&E and KU)
 
HigherRelatively flat net income and Earnings from Ongoing Operations areis projected in 20162017 compared with 2015,2016 primarily driven by electricelectricity and gas base rate increases, effective July 1, 2015,offset by higher returns on additional environmental capital investments, and lower operation and maintenance expense partially offset byand higher depreciation and higher interest expense.


(PPL's Pennsylvania Regulated Segment and PPL Electric)
 
HigherRelatively flat net income and Earnings from Ongoing Operations areis projected in 20162017 compared with 2015,2016 primarily driven by higher base electricity rates for distribution effective January 1, 2016, and higher transmission earnings from additional capital investments, partiallyand lower operation and maintenance expense, offset by higher depreciation expense, higher interest expense and a benefit received in 2015 from the release of a gross receipts tax reserve.higher income taxes.
 
(PPL's Corporate and Other Category)
 
Relatively flat costs are projected in 20162017 compared with 2015.2016.
 
(All Registrants)
 
Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, Notes 6 and 109 to the Financial Statements and "Item 1A. Risk Factors" in this Form 10-Q (as applicable) and "Item 1. Business" and "Item 1A. Risk Factors" in the Registrants' 20152016 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.
 


PPL Electric: Statement of Income Analysis, Earnings and Margins

Statement of Income Analysis

Net income for the periods ended September 30March 31 includes the following results.
Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
Operating Revenues$539
 $519
 $20
 $1,619
 $1,625
 $(6)$573
 $585
 $(12)
Operating Expenses                
Operation                
Energy purchases129
 154
 (25) 414
 519
 (105)146
 167
 (21)
Energy purchases from affiliate—
 —
 —
 —
 14
 (14)
Other operation and maintenance144
 162
 (18) 431
 435
 (4)164
 150
 14
Depreciation64
 55
 9
 185
 158
 27
75
 59
 16
Taxes, other than income26
 27
 (1) 79
 87
 (8)29
 29
 —
Total Operating Expenses363
 398
 (35) 1,109
 1,213
 (104)414
 405
 9
Other Income (Expense) - net4
 1
 3
 12
 5
 7
1
 3
 (2)
Interest Expense32
 32
 —
 97
 96
 1
33
 33
 —
Income Taxes58
 35
 23
 162
 130
 32
48
 56
 (8)
Net Income$90
 $55
 $35
 $263
 $191
 $72
$79
 $94
 $(15)

Operating Revenues
 
The increase (decrease) in operating revenues for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

Three Months Nine MonthsThree Months
Distribution Price (a)$23
 $97
$12
Distribution volume11
 (23)(3)
PLR (b)(21) (125)(21)
Transmission Formula Rate12
 47
1
Other(5) (2)(1)
Total$20
 $(6)$(12)

(a)Distribution rate case effective January 1, 2016,rider prices resulted in increases of $41 million and $121$12 million for the three and nine months ended September 30, 2016.March 31, 2017.
(b)DecreasesDecrease primarily due to lower recoveries of energy purchasesprices as described below.


Energy Purchases

Energy purchases decreased by $25$21 million for the three months ended September 30, 2016March 31, 2017 compared with 20152016 due to lower PLR prices of $37$23 million, partially offset by higher PLR volumes of $14$3 million.

Energy purchases decreased by $105 million for the nine months ended September 30, 2016 compared with 2015 due to lower PLR prices of $90 million, lower PLR volumes of $11 million and lower capacity volumes of $4 million.

Energy Purchases from Affiliate

Energy purchases from affiliate decreased by $14 million for the nine months ended September 30, 2016 compared with 2015 as a result of the June 1, 2015 PPL Energy Supply spinoff.



Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

Three Months Nine MonthsThree Months
Corporate service costs$1
 $10
$8
Contractor-related expenses6
 12
2
Vegetation management(5) 1
Storm costs1
 7
Payroll-related costs(7) (19)2
Act 129(7) (14)5
Universal service programs—
 3
Bad Debts(5) (6)
Other(2) 2
Bad debts(3)
Total$(18) $(4)$14
 
Depreciation
 
Depreciation increased by $9 million and $27$16 million for the three and nine months ended September 30, 2016March 31, 2017 compared with 2015,2016, primarily due to additional assets placed into service, related to the ongoing efforts to ensure the reliability of the delivery system and the replacement of aging infrastructure, net of retirements.
 
Income Taxes

The increase (decrease) in income taxes for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

 Three Months Nine Months
Change in pre-tax income at current period tax rates$22
 $43
Stock-based compensation (a)—
 (7)
Other1
 (4)
Total$23
 $32
(a)During the nine months ended September 30, 2016, PPL Electric recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 to the Financial Statements for additional information.

See Note 5to the Financial Statements for additional information.
 Three Months
Change in pre-tax income at current period tax rates$(10)
Depreciation not normalized(1)
Stock-based compensation3
Total$(8)

Earnings

Three Months Ended Nine Months EndedThree Months Ended
September 30, September 30,March 31,
2016 2015 2016 20152017 2016
Net Income$90
 $55
 $263
 $191
$79
 $94
Special item, gains (losses), after-tax (a)—
 —
 —
 —
Special items, gains (losses), after-tax (a)—
 —
 
(a)There are no items management considers special for the periods presented.

Earnings increaseddecreased for the three month period in 20162017 compared with 20152016 primarily due to higher base electricity rates for distribution effective January 1, 2016, a favorable impact of weather, higher transmission margins from additional capital investments, and lower other operation and maintenance expense, partially offset by higher depreciation.

Earnings increased for the nine month period in 2016 compared with 2015 primarily due to higher base electricity rates for distribution effective January 1, 2016,corporate service costs, and higher depreciation expense, primarily due to transmission and distribution additions placed into service related to the ongoing efforts to improve reliability and replace aging infrastructure, net of retirements. Higher transmission margins partiallydue to additional capital investments were offset by higher depreciation.


lower peak transmission demand.
 
The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Pennsylvania Gross Delivery Margins on a separate line and not in their respective Statement of Income line items.

Three Months Nine MonthsThree Months
Pennsylvania Gross Delivery Margins$52
 $126
Pennsylvania Gross Margins$1
Other operation and maintenance11
 (3)(10)
Depreciation(9) (27)(12)
Taxes, other than income1
 2
Other Income (Expense) - net3
 7
(2)
Interest Expense—
 (1)
Income Taxes(23) (32)8
Net Income$35
 $72
$(15)
 
Margins
 
"Pennsylvania Gross Delivery Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.March 31. 
2016 Three Months 2015 Three Months2017 Three Months 2016 Three Months
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
 
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
 
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$539
 $—
 $539
 $519
 $—
 $519
$573
 $—
 $573
 $585
 $—
 $585
Operating Expenses                      
Energy purchases129
 —
 129
 154
 —
 154
146
 —
 146
 167
 —
 167
Other operation and maintenance24
 120
 144
 31
 131
 162
29
 135
 164
 25
 125
 150
Depreciation—
 64
 64
 —
 55
 55
4
 71
 75
 —
 59
 59
Taxes, other than income25
 1
 26
 25
 2
 27
28
 1
 29
 28
 1
 29
Total Operating Expenses178
 185
 363
 210
 188
 398
207
 207
 414
 220
 185
 405
Total $361
 $(185) $176
 $309
 $(188) $121
$366
 $(207) $159
 $365
 $(185) $180
           
2016 Nine Months 2015 Nine Months
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
 
PA Gross
Delivery
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$1,619
 $—
 $1,619
 $1,625
 $—
 $1,625
Operating Expenses           
Energy purchases414
 —
 414
 519
 —
 519
Energy purchases from affiliate—
 —
 —
 14
 —
 14
Other operation and maintenance77
 354
 431
 84
 351
 435
Depreciation—
 185
 185
 —
 158
 158
Taxes, other than income75
 4
 79
 81
 6
 87
Total Operating Expenses566
 543
 1,109
 698
 515
 1,213
Total $1,053
 $(543) $510
 $927
 $(515) $412

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
 


LKE: Statement of Income Analysis, Earnings and Margins
 
Statement of Income Analysis
 
Net income for the periods ended September 30March 31 includes the following results.

Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
Operating Revenues$835
 $801
 $34
 $2,382
 $2,414
 $(32)$809
 $826
 $(17)
Operating Expenses                
Operation                
Fuel227
 228
 (1) 607
 695
 (88)191
 198
 (7)
Energy purchases24
 23
 1
 118
 143
 (25)69
 66
 3
Other operation and maintenance197
 202
 (5) 603
 625
 (22)207
 202
 5
Depreciation102
 97
 5
 301
 286
 15
105
 99
 6
Taxes, other than income16
 14
 2
 46
 43
 3
16
 15
 1
Total Operating Expenses566
 564
 2
 1,675
 1,792
 (117)588
 580
 8
Other Income (Expense) - net(3) (1) (2) (9) (3) (6)(2) (1) (1)
Interest Expense50
 43
 7
 147
 127
 20
49
 49
 —
Interest Expense with Affiliate4
 —
 4
 12
 1
 11
4
 4
 —
Income Taxes79
 73
 6
 202
 194
 8
63
 72
 (9)
Net Income$133
 $120
 $13
 $337
 $297
 $40
$103
 $120
 $(17)

Operating Revenues

The increase (decrease) in operating revenues for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

Three Months Nine MonthsThree Months
Base rates$—
 $68
Volumes32
 (38)$(37)
Fuel and other energy prices (a)(11) (85)11
ECR8
 30
DSM5
Other5
 (7)4
Total$34
 $(32)$(17)

(a)The decrease for the nine month period wasIncrease due to lowerhigher recoveries of fuel and energy purchases due to lowerhigher commodity costs as described below.costs.

Fuel

Fuel decreased $88$7 million for the ninethree months ended September 30, 2016March 31, 2017 compared with 2015,2016 primarily due to a decrease in market prices for coal and natural gas.

Energy Purchases

Energy purchases decreased $25 million for the nine months ended September 30, 2016 compared with 2015 primarily due to a $14$12 million decrease in natural gas volumes, driven by milder weather, partially offset by a $5 million increase in the first quarter of 2016, and $13 million of lower natural gasfuel prices.



Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended September 30, 2016 compared with 2015 was due to:

 Three Months Nine Months
Coal plant operations and maintenance (a)$2
 $(12)
Pension (b)(2) (10)
Other(5) —
Total$(5) $(22)

(a)The decrease for the nine month period was primarily due to a reduction of costs associated with the 2015 retirement of units at the Cane Run and Green River plants, partially offset by Cane Run 7 operations.
(b)The decrease for the nine month period was primarily due to higher discount rates and deferred amortization of actuarial losses.

Depreciation
Depreciation increased $15 million for the nine months ended September 30, 2016 compared with 2015 primarily due to additional assets placed into service, net of retirements.

Interest Expense
Interest expense increased $11 million and $31 million for the three and nine months ended September 30, 2016 compared with 2015 primarily due to the September 2015 issuance of $550 million of incremental First Mortgage Bonds by LG&E and KU, higher interest rates on the September 2015 issuance of $500 million of First Mortgage Bonds by LG&E and KU used to retire the same amount of First Mortgage Bonds in November 2015 and $400 million of notes refinanced in November 2015.

Income Taxes

The increase (decrease) in incomeIncome taxes decreased $9 million for the periodsthree months ended September 30, 2016March 31, 2017 compared with 2015 was2016 primarily due to:to lower pre-tax income.

 Three Months Nine Months
Change in pre-tax income at current period tax rates$7
 $19
Certain valuation allowances (a)—
 (8)
Other(1) (3)
Total$6
 $8

(a)The decrease for the nine month period represents a valuation allowance, established in 2015, against tax credits expiring in 2016 and 2017 that are more likely than not to expire before being utilized.

Earnings

Three Months Ended Nine Months EndedThree Months Ended
September 30, September 30,March 31,
2016 2015 2016 20152017 2016
Net Income$133
 $120
 $337
 $297
$103
 $120
Special items, gains (losses), after-tax—
 —
 —
 (8)(1) —

Earnings increaseddecreased for the three month period in 20162017 compared with 20152016 primarily due to higher sales volumes, driven by warmer weather, and lower other operation and maintenance expense, partially offset by higher interest expense.

Excluding special items, earnings increased for the nine month period in 2016 compared with 2015 primarily due to higher base electricity rates effective July 1, 2015, lower other operation and maintenance expense and higher returns on additional environmental capital investments, partially offset by higher interest expense and lower sales volumes driven by milder weather in the first quarter of 2016.weather.


The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins and an item that management considers special on separate lines and not in their respective Statement of Income line items.  

Three Months Nine MonthsThree Months
Margins$27
 $63
$(18)
Other operation and maintenance10
 26
(3)
Depreciation(2) (1)(2)
Taxes, other than income(3) (3)(2)
Other Income (Expense) - net(2) (6)
Interest Expense(11) (31)
Income Taxes(6) (16)9
Special items, gains (losses), after-tax—
 8
Special items, gains (losses), after-tax (a)(1)
Net Income$13
 $40
$(17)

(a)See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated Segment" for details of the special item.

Margins
 
"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the factors underlying changes between periods. Within PPL's discussion, LKE's Margins are referred to as "Kentucky Gross Margins."
 
The following tables containtable contains the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

March 31.
 2016 Three Months 2015 Three Months
 Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)
Operating Revenues$835
 $—
 $835
 $801
 $—
 $801
Operating Expenses           
Fuel227
 —
 227
 228
 —
 228
Energy purchases24
 —
 24
 23
 —
 23
Other operation and maintenance33
 164
 197
 28
 174
 202
Depreciation14
 88
 102
 11
 86
 97
Taxes, other than income—
 16
 16
 1
 13
 14
Total Operating Expenses298
 268
 566
 291
 273
 564
Total$537
 $(268) $269
 $510
 $(273) $237
            
            
 2016 Nine Months 2015 Nine Months
 Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)
Operating Revenues$2,382
 $—
 $2,382
 $2,414
 $—
 $2,414
Operating Expenses           
Fuel607
 —
 607
 695
 —
 695
Energy purchases118
 —
 118
 143
 —
 143
Other operation and maintenance81
 522
 603
 77
 548
 625
Depreciation40
 261
 301
 26
 260
 286
Taxes, other than income3
 43
 46
 3
 40
 43
Total Operating Expenses849
 826
 1,675
 944
 848
 1,792
Total$1,533
 $(826) $707
 $1,470
 $(848) $622


 2017 Three Months 2016 Three Months
 Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)
Operating Revenues$809
 $—
 $809
 $826
 $—
 $826
Operating Expenses           
Fuel191
 —
 191
 198
 —
 198
Energy purchases69
 —
 69
 66
 —
 66
Other operation and maintenance26
 181
 207
 24
 178
 202
Depreciation16
 89
 105
 12
 87
 99
Taxes, other than income—
 16
 16
 1
 14
 15
Total Operating Expenses302
 286
 588
 301
 279
 580
Total$507
 $(286) $221
 $525
 $(279) $246

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.


LG&E: Statement of Income Analysis, Earnings and Margins
 
Statement of Income Analysis

Net income for the periods ended September 30March 31 includes the following results.

Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
Operating Revenues    

     

    

Retail and wholesale$366
 $349
 $17
 $1,058
 $1,089
 $(31)$374
 $375
 $(1)
Electric revenue from affiliate2
 2
 —
 19
 32
 (13)17
 11
 6
Total Operating Revenues368
 351
 17
 1,077
 1,121
 (44)391
 386
 5
Operating Expenses    

     

    

Operation                
Fuel86
 82
 4
 233
 267
 (34)80
 78
 2
Energy purchases19
 18
 1
 104
 129
 (25)64
 62
 2
Energy purchases from affiliate5
 9
 (4) 10
 17
 (7)2
 2
 —
Other operation and maintenance85
 87
 (2) 264
 286
 (22)87
 87
 —
Depreciation43
 40
 3
 126
 122
 4
44
 41
 3
Taxes, other than income9
 7
 2
 24
 21
 3
8
 8
 —
Total Operating Expenses247
 243
 4
 761
 842
 (81)285
 278
 7
Other Income (Expense) - net(1) (1) —
 (6) (3) (3)(2) —
 (2)
Interest Expense18
 13
 5
 53
 39
 14
17
 17
 —
Income Taxes39
 36
 3
 98
 91
 7
33
 35
 (2)
Net Income$63
 $58
 $5
 $159
 $146
 $13
$54
 $56
 $(2)
 
Operating Revenues

The increase (decrease) in operating revenues for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:

 Three Months Nine Months
Base rates$—
 $4
Volumes15
 (30)
Fuel and other energy prices (a)(4) (36)
ECR5
 21
Other1
 (3)
Total$17
 $(44)

(a)The decrease for the three and nine month periods was due to lower recoveries of fuel and energy purchases due to lower commodity costs, as described below.

Fuel

Fuel increased $4 million for the three months ended September 30, 2016 compared with 2015, due to an $11 million increase in volumes, driven by warmer weather, partially offset by a $7 million decrease in commodity costs, as a result of a decrease in market prices for coal and natural gas.



Fuel decreased $34 million for the nine months ended September 30, 2016 compared with 2015, due to a $25 million decrease in commodity costs, as a result of a decrease in market prices for coal and natural gas, and a $9 million decrease in volumes, driven by milder weather in the first quarter of 2016.

Energy purchases

Energy purchases decreased $25 million for the nine months ended September 30, 2016 compared with 2015 primarily due to a $14 million decrease in natural gas volumes, driven by milder weather during the first quarter of 2016, and $13 million of lower natural gas prices.

Energy purchases from affiliate

Energy purchases from affiliate decreased $4 million for the three months ended September 30, 2016 compared with 2015 primarily due to decreased generation available from KU.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended September 30, 2016 compared with 2015 was due to:

 Three Months Nine Months
Coal plant operations and maintenance (a)$(1) $(13)
Pension (b)—
 (6)
Other(1) (3)
Total$(2) $(22)

(a)The decrease for the nine month period was primarily due to a reduction of costs associated with the 2015 retirement of units at the Cane Run plant, partially offset by Cane Run 7 operations.
(b)The decrease for the nine month period was primarily due to higher discount rates and deferred amortization of actuarial losses.

Interest Expense
Interest expense increased $5 million and $14 million for the three and nine months ended September 30, 2016 compared with 2015 primarily due to the September 2015 issuance of $300 million of incremental First Mortgage Bonds and higher interest rates on the September 2015 issuance of $250 million of First Mortgage Bonds used to retire the same amount of First Mortgage Bonds in November 2015.
 Three Months
Volumes$(5)
Fuel and other energy prices4
DSM3
Other3
Total$5

Earnings

Three Months Ended Nine Months EndedThree Months Ended
September 30, September 30,March 31,
2016 2015 2016 20152017 2016
Net Income$63
 $58
 $159
 $146
$54
 $56
Special items, gains (losses), after-tax (a)—
 —
 —
 —
—
 —

(a)There are no items management considers special for the periods presented.
 
Earnings increaseddecreased for the three month period in 20162017 compared with 20152016 primarily due to higher sales volumes, driven by warmer weather,depreciation expense, fuel costs and lower other operation and maintenance expense,energy purchases, partially offset by higher interest expense.

Earnings increased for the nine month period in 2016 compared with 2015 primarilynative load sales to KU due to higher returns on additional environmental capital investments and lower other operation and maintenance expense, partially offset by higher interest expense.timing of plant outages.

The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins on a separate line and not in their respective Statement of Income line items.


Three Months Nine MonthsThree Months
Margins$12
 $15
$(2)
Other operation and maintenance4
 21
1
Depreciation—
 4
Taxes, other than income(3) (3)(1)
Other Income (Expense) - net—
 (3)(2)
Interest Expense(5) (14)
Income Taxes(3) (7)2
Net Income$5
 $13
$(2)
 
Margins
 
"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the factors underlying changes between periods. Within PPL's discussion, LG&E's Margins are included in "Kentucky Gross Margins."
 
The following tables containtable contains the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.
March 31.
2016 Three Months 2015 Three Months2017 Three Months 2016 Three Months
Margins Other (a) Operating Income (b) Margins Other (a) Operating Income (b)Margins Other (a) Operating Income (b) Margins Other (a) Operating Income (b)
Operating Revenues$368
 $—
 $368
 $351
 $—
 $351
$391
 $—
 $391
 $386
 $—
 $386
Operating Expenses                      
Fuel86
 —
 86
 82
 —
 82
80
 —
 80
 78
 —
 78
Energy purchases, including affiliate24
 —
 24
 27
 —
 27
66
 —
 66
 64
 —
 64
Other operation and maintenance13
 72
 85
 11
 76
 87
10
 77
 87
 9
 78
 87
Depreciation8
 35
 43
 5
 35
 40
9
 35
 44
 6
 35
 41
Taxes, other than income—
 9
 9
 1
 6
 7
—
 8
 8
 1
 7
 8
Total Operating Expenses131
 116
 247
 126
 117
 243
165
 120
 285
 158
 120
 278
Total $237
 $(116) $121
 $225
 $(117) $108
$226
 $(120) $106
 $228
 $(120) $108
           
2016 Nine Months 2015 Nine Months
Margins Other (a) Operating Income (b) Margins Other (a) Operating Income (b)
Operating Revenues1,077
 $—
 $1,077
 $1,121
 $—
 $1,121
Operating Expenses           
Fuel233
 —
 233
 267
 —
 267
Energy purchases, including affiliate114
 —
 114
 146
 —
 146
Other operation and maintenance32
 232
 264
 33
 253
 286
Depreciation20
 106
 126
 12
 110
 122
Taxes, other than income2
 22
 24
 2
 19
 21
Total Operating Expenses401
 360
 761
 460
 382
 842
Total 676
 $(360) $316
 $661
 $(382) $279
 
(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.



KU: Statement of Income Analysis, Earnings and Margins

Statement of Income Analysis
 
Net income for the periods ended September 30March 31 includes the following results.
Three Months Nine MonthsThree Months
2016 2015 $ Change 2016 2015 $ Change2017 2016 $ Change
Operating Revenues                
Retail and wholesale$469
 $452
 $17
 $1,324
 $1,325
 $(1)$435
 $451
 $(16)
Electric revenue from affiliate5
 9
 (4) 10
 17
 (7)2
 2
 —
Total Operating Revenues474
 461
 13
 1,334
 1,342
 (8)437
 453
 (16)
Operating Expenses                
Operation                
Fuel141
 146
 (5) 374
 428
 (54)111
 120
 (9)
Energy purchases5
 5
 —
 14
 14
 —
5
 4
 1
Energy purchases from affiliate2
 2
 —
 19
 32
 (13)17
 11
 6
Other operation and maintenance107
 108
 (1) 320
 321
 (1)109
 106
 3
Depreciation59
 57
 2
 175
 164
 11
60
 58
 2
Taxes, other than income7
 7
 —
 22
 22
 —
8
 7
 1
Total Operating Expenses321
 325
 (4) 924
 981
 (57)310
 306
 4
Other Income (Expense) - net(3) —
 (3) (4) 1
 (5)(1) (2) 1
Interest Expense24
 20
 4
 71
 58
 13
24
 24
 —
Income Taxes48
 44
 4
 128
 115
 13
39
 46
 (7)
Net Income$78
 $72
 $6
 $207
 $189
 $18
$63
 $75
 $(12)

Operating Revenue
 
The increase (decrease) in operating revenue for the periodsperiod ended September 30, 2016March 31, 2017 compared with 20152016 was due to:
Three Months Nine MonthsThree Months
Base rates$—
 $64
Volumes13
 (27)$(24)
Fuel and other energy prices (a)(6) (50)6
ECR3
 8
Other3
 (3)
DSM2
Total$13
 $(8)$(16)

(a)The decrease for the three and nine month periods wasIncrease due to lowerhigher recoveries of fuel and energy purchases due to lowerhigher commodity costs as described below.costs.

Fuel
 
Fuel decreased $5$9 million for the three months ended September 30, 2016March 31, 2017 compared with 2015,2016 primarily due to a decrease in market prices for coal and natural gas.

Fuel decreased $54 million for the nine months ended September 30, 2016 compared with 2015, due to a $49 million decrease in commodity costs, as a result of a decrease in market prices for coal and natural gas, and a $5$16 million decrease in volumes, driven by milder weather, during the first quarter of 2016.partially offset by a $7 million increase in fuel prices.

Energy purchases from affiliate

Energy purchases from affiliate increased $6 million for the three months ended March 31, 2017 compared with 2016 primarily due to higher native load purchases from LG&E due to timing of plant outages.

Income Taxes

Income taxes decreased $7 million for the three months ended March 31, 2017 compared with 2016 primarily due to lower pre-tax income.


Earnings
Three Months Ended Nine Months EndedThree Months Ended
September 30, September 30,March 31,
2016 2015 2016 20152017 2016
Net Income$78
 $72
 $207
 $189
$63
 $75
Special items, gains (losses), after-tax (a)—
 —
 —
 —
(1) —

(a)There are no items management considers special for the periods presented.
Earnings increaseddecreased for the three month period in 20162017 compared with 20152016 primarily due to higher sales volumes, driven by warmer weather, and lower other operation and maintenance expense, partially offset by higher interest expense.
Earnings increased for the nine month period in 2016 compared with 2015 primarily due to higher base electricity rates, effective July 1, 2015 and lower other operation and maintenance expense, partially offset by higher interest expense and lower sales volumes driven by milder weather during the first quarter of 2016.and higher energy purchases from affiliate, partially offset by lower fuel expense and lower income taxes.

The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins on a separate line and not in their respective Statement of Income line items.
Three Months Nine MonthsThree Months
Margins$15
 $48
$(16)
Other operation and maintenance4
 6
(2)
Depreciation(2) (5)(1)
Taxes, other than income(1)
Other Income (Expense) - net(3) (5)2
Interest Expense(4) (13)
Income Taxes(4) (13)7
Special items, gains (losses), after-tax (a)(1)
Net Income$6
 $18
$(12)

(a)See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated Segment" for details of the special item.
 
Margins
 
"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the factors underlying changes between periods. Within PPL's discussion, KU's Margins are included in "Kentucky Gross Margins."
 
The following tables containtable contains the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.


March 31.
2016 Three Months 2015 Three Months2017 Three Months 2016 Three Months
Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)		Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)
Operating Revenues$474
 $—
 $474
 $461
 $—
 $461
$437
 $—
 $437
 $453
 $—
 $453
Operating Expenses                      
Fuel141
 —
 141
 146
 —
 146
111
 —
 111
 120
 —
 120
Energy purchases, including affiliate7
 —
 7
 7
 —
 7
22
 —
 22
 15
 —
 15
Other operation and maintenance20
 87
 107
 17
 91
 108
16
 93
 109
 15
 91
 106
Depreciation6
 53
 59
 6
 51
 57
7
 53
 60
 6
 52
 58
Taxes, other than income—
 7
 7
 —
 7
 7
—
 8
 8
 —
 7
 7
Total Operating Expenses174
 147
 321
 176
 149
 325
156
 154
 310
 156
 150
 306
Total$300
 $(147) $153
 $285
 $(149) $136
$281
 $(154) $127
 $297
 $(150) $147
           
2016 Nine Months 2015 Nine Months
Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)
Operating Revenues$1,334
 $—
 $1,334
 $1,342
 $—
 $1,342
Operating Expenses           
Fuel374
 —
 374
 428
 —
 428
Energy purchases, including affiliate33
 —
 33
 46
 —
 46
Other operation and maintenance49
 271
 320
 44
 277
 321
Depreciation20
 155
 175
 14
 150
 164
Taxes, other than income1
 21
 22
 1
 21
 22
Total Operating Expenses477
 447
 924
 533
 448
 981
Total$857
 $(447) $410
 $809
 $(448) $361

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.



Financial Condition

The remainder of this Item 2 in this Form 10-Q is presented on a combined basis, providing information, as applicable, for all Registrants.

Liquidity and Capital Resources

(All Registrants)

The Registrants had the following at:

PPL (a) PPL Electric LKE LG&E KUPPL (a) PPL Electric LKE LG&E KU
September 30, 2016         
March 31, 2017         
Cash and cash equivalents$416
 $36
 $11
 $4
 $7
$409
 $20
 $15
 $4
 $7
Short-term debt636
 130
 135
 128
 7
1,666
 499
 243
 207
 36
Notes payable with affiliate  —
 138
 —
 —
  —
 82
 —
 —
December 31, 2015         
December 31, 2016         
Cash and cash equivalents$836
 $47
 $30
 $19
 $11
$341
 $13
 $13
 $5
 $7
Short-term debt916
 —
 265
 142
 48
923
 295
 185
 169
 16
Notes payable with affiliate  —
 54
 —
 —
  —
 163
 —
 —
 
(a)At September 30, 2016, $8March 31, 2017, $51 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL would not anticipate a material incremental U.S. tax cost. Historically, dividends paid by foreign subsidiaries have been limited to distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 20152016 Form 10-K for additional information on undistributed earnings of WPD.



(PPL)
The Statements of Cash Flows separately report the cash flows of the discontinued operations in 2015. The "Operating Activities", "Investing Activities" and "Financing Activities" sections below included only the cash flows of continuing operations.
 
(All Registrants)
 
Net cash provided by (used in) operating, investing and financing activities for the ninethree month period ended September 30,March 31, and the changes between periods, were as follows.

PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
2016         
2017         
Operating activities$2,230
 $595
 $816
 $383
 $469
$135
 $55
 $312
 $142
 $139
Investing activities(2,066) (740) (599) (343) (254)(677) (276) (184) (94) (89)
Financing activities(558) 134
 (236) (55) (219)607
 228
 (126) (49) (50)
2015         
2016         
Operating activities$1,688
 $373
 $895
 $469
 $510
$557
 $124
 $303
 $157
 $195
Investing activities(2,463) (764) (921) (519) (400)(661) (215) (219) (109) (110)
Financing activities231
 203
 460
 220
 154
115
 78
 (86) (56) (79)
Change - Cash Provided (Used)                  
Operating activities$542
 $222
 $(79) $(86) $(41)$(422) $(69) $9
 $(15) $(56)
Investing activities397
 24
 322
 176
 146
(16) (61) 35
 15
 21
Financing activities(789) (69) (696) (275) (373)492
 150
 (40) 7
 29
 
Operating Activities
 
The components of the change in cash provided by (used in) operating activities for the ninethree months ended September 30, 2016March 31, 2017 compared with 20152016 were as follows.

PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)                  
Net income$239
 $72
 $40
 $13
 $18
$(78) $(15) $(17) $(2) $(12)
Non-cash components146
 42
 (7) —
 (7)90
 1
 (13) (4) (5)
Working capital102
 74
 (168) (99) (94)(36) (31) 28
 (15) (29)
Defined benefit plan funding51
 33
 (16) (20) 1
(397) (24) 11
 12
 (9)
Other operating activities4
 1
 72
 20
 41
(1) —
 —
 (6) (1)
Total$542
 $222
 $(79) $(86) $(41)$(422) $(69) $9
 $(15) $(56)
 
(PPL)

PPL's cash provided by operating activities from continuing operations in 2016 increased $5422017 decreased $422 million in 2016 compared with 2015.2016.
Income from continuing operations increased by $239The $90 million between the periods. This included an additional $146 million ofincrease in net non-cash charges, including $124 million of lower unrealized gains on hedging activitiescomponents was primarily due to the settlement of hedges in the third quarter of 2016 and an increase in deferred income taxes, partially offset by defined benefit plan income (primarily due to an increase in estimated returnsunrealized losses on higher asset balances and lower interest costs due to a change in the discount rate for the U.K. pension plans).derivatives.

The $102$36 million increasedecrease in cash from changes in working capital was primarily due to an increasea decrease in accounts payable (primarily due to timing of payments), a decrease in taxes payable (primarily due to an increase in current income tax expensebenefit in 2016)2017) and an increase in accounts payable (dueprepayments (primarily due to timing ofhigher tax payments), partially offset by an increasea decrease in unbilled revenues (duerevenue and accounts receivable (primarily due to lower volumes as a result of unfavorableless favorable weather asin 2017 compared to 2015)2016) and a net increasedecrease in current regulatory assetsfuel, materials and regulatory liabilities (duesupplies (primarily due to the timing of rate recovery mechanisms)a decrease in volumes due to less favorable weather in 2017 compared to 2016).



Defined benefit plan funding was $51$397 million lowerhigher in 2016.2017. The increase was primarily due to the acceleration of WPD's contributions to its U.K. pension plans. See Note 8 to the Financial Statements for additional information.

(PPL Electric)
 
PPL Electric's cash provided by operating activities in 2016 increased $2222017 decreased $69 million in 2016 compared with 2015.2016.
The increase in non-cash components of $42$31 million in 2016 compared with 2015 was primarily due to an increase in depreciation and deferred income tax expense.

The $74 million increasedecrease in cash from changes in working capital was primarily due to an increase in prepayments (primarily due to higher tax payments) and a decrease in accounts payable (primarily due to timing of payments) and a decrease in prepayments (primarily due to higher tax prepayments in 2015) partially offset by a decrease in accounts receivable (primarily due to unfavorable weather in 2017), a net increasedecrease in current regulatory assets and regulatory liabilities (due to the timing of rate recovery mechanisms) and an increase in taxes payable (primarily due to a decrease in income tax expense in 2017).

Defined benefit plan funding was $33$24 million lowerhigher in 2016.2017.

(LKE)
 
LKE's cash provided by operating activities in 2016 decreased $792017 increased $9 million compared with 2015.2016.
The decreaseincrease in cash from changes in working capital was primarily driven primarily by lower tax payments received from PPL for the use of prior year excess tax depreciation deductions. Other decreases in cash were related to accounts receivable and unbilled revenues due to lowerless favorable weather volatility during the measurement periods in 2017 compared to 2016 and coal and natural gas inventoriesan increase in taxes payable due to milder weather in the first quartertiming of 2016,payments, partially offset by lower payments ona decrease in accounts payable due to lowertiming of fuel purchases.

The increase in cash from other operating activities was driven primarily by a decrease in cash outflows for the settlement of interest rate swaps. LG&Epurchases and KU settled interest rate swaps in the third quarter of 2015 which did not occur in 2016.payments.

(LG&E)
 
LG&E's cash provided by operating activities in 20162017 decreased $86$15 million compared with 2015.2016.
The decrease in cash from changes in working capital was primarily driven primarily by lower tax payments received from LKE for the use of prior year excess tax depreciation deductions. Other decreases in cash were relatedtaxes payable due to timing of payments and accounts payable due to timing of fuel purchases and payments, partially offset by decreases in accounts receivable and unbilled revenues due to lower weather volatility during the measurement periods in 2016, coal and natural gas inventories due to milderless favorable weather in the first quarter of 2016, and accounts receivable from affiliates due2017 compared to lower intercompany settlements associated with capital expenditures, partially offset by lower payments on accounts payable due to lower fuel purchases.

The increase in cash from other operating activities was driven primarily by a decrease in cash outflows for the settlement of interest rate swaps. LG&E settled interest rate swaps in the third quarter of 2015 which did not occur in 2016.

(KU)
 
KU's cash provided by operating activities in 20162017 decreased $41$56 million compared with 2015.2016.
The decrease in cash from changes in working capital was primarily driven primarily by lower tax payments received from LKE for the use of prior year excess tax depreciation deductions. Other decreases in cash were relatedtaxes payable due to timing of payments, accounts payable due to timing of fuel purchases and payments and accounts payable to affiliates due to higher intercompany settlements associated with operational expenses and inventory, partially offset by decreases in accounts receivable and unbilled revenues due to lower weather volatility during the measurement periods in 2016, and coal inventory due to milderless favorable weather in the first quarter of 2016, partially offset by accounts payable2017 compared to affiliates due to lower intercompany settlements associated with capital expenditures and lower payments on accounts payable due to lower fuel purchases.

The increase in cash from other operating activities was driven primarily by a decrease in cash outflows for the settlement of interest rate swaps. KU settled interest rate swaps in the third quarter of 2015 which did not occur in 2016.



Investing Activities
 
(All Registrants)
 
Expenditures for Property, Plant and Equipment
 
Investment in PP&E is the primary investing activity of the registrants.Registrants. The change in cash used in expenditures for PP&E for the ninethree months ended September 30, 2016March 31, 2017 compared with 20152016 was as follows.
 
 PPL PPL Electric LKE LG&E KU
Decrease$487
 $19
 $328
 $176
 $152
 PPL PPL Electric LKE LG&E KU
Decrease (Increase)$(21) $(60) $35
 $15
 $21

For PPL, the decreaseincrease in expenditures was due to higher project expenditures at WPD and PPL Electric partially offset by lower project expenditures at WPD, PPL Electric Utilities, LG&E and KU.KU and a decrease in foreign currency exchange rates. The decreaseincrease in project expenditures for WPD was primarily due to a decreasean increase in expenditures to enhance system reliability associated with the end of the DPCR5 price control period and changes in foreign currency exchange rates.reliability. The decreaseincrease in expenditures for PPL Electric was primarily due to the completion of the Susquehanna-Roseland transmissionsmart meter implementation project and the completion of the Northeast Poconovarious enhancement reliability project.projects. The decrease in expenditures for LG&E was primarily driven by the completion of thedue to reduced spending for environmental air projects at LG&E's Mill Creek plant. The decrease in expenditures for KU was primarily driven by the completion of thedue to reduced spending for environmental air projects at KU's Ghent plant and the CCR project at KU's E.W. Brown plant.
 
Financing Activities
 
(All Registrants)
 
The components of the change in cash provided by (used in) financing activities for the ninethree months ended September 30, 2016March 31, 2017 compared with 2015 was2016 were as follows.
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)                  
Debt issuance/retirement, net$(801) $—
 $(1,050) $(550) $(500)$64
 $—
 $—
 $—
 $—
Settlement of cross-currency swaps46
 —
 —
 —
 —
Stock issuances/redemptions, net(12) —
 —
 —
 —
31
 —
 —
 —
 —
Dividends(22) (53) —
 (6) (91)(3) (31) —
 (62) (6)
Capital contributions/distributions, net—
 (75) (85) 27
 20
—
 100
 (73) (30) —
Change in short-term debt, net3
 62
 370
 250
 195
393
 79
 207
 98
 34
Notes payable with affiliate—
 —
 63
 —
 —
—
 —
 (174) —
 —
Other financing activities(3) (3) 6
 4
 3
7
 2
 —
 1
 1
Total$(789) $(69) $(696) $(275) $(373)$492
 $150
 $(40) $7
 $29
 
See Note 7 to the Financial Statements in this Form 10-Q for information on 20162017 short and long-term debt activity, equity transactions and PPL dividends. See the Registrants' 20152016 Form 10-K for information on 20152016 activity.
 
Credit Facilities
 
The Registrants maintain credit facilities to enhance liquidity, provide credit support and provide a backstop to commercial paper programs. Amounts borrowed under these credit facilities are reflected in "Short-term debt" on the Balance Sheets. At September 30, 2016,March 31, 2017, the total committed borrowing capacity and the use of that capacity under these credit facilities was as follows:
 


External 
Committed
Capacity
 Borrowed 
Letters of
Credit
and
Commercial
Paper Issued
 
Unused
Capacity
Committed
Capacity
 Borrowed 
Letters of
Credit
and
Commercial
Paper Issued
 
Unused
Capacity
PPL Capital Funding Credit Facilities$1,150
 $—
 $17
 $1,133
$1,400
 $—
 $206
 $1,194
PPL Electric Credit Facility400
 —
 131
 269
650
 —
 500
 150
              
LKE Credit Facility75
 —
 —
 75
75
 —
 —
 75
LG&E Credit Facility500
 —
 128
 372
500
 —
 207
 293
KU Credit Facilities598
 —
 205
 393
598
 —
 234
 364
Total LKE1,173
 —
 333
 840
1,173
 —
 441
 732
Total U.S. Credit Facilities (a)$2,723
 $—
 $481
 $2,242
$3,223
 $—
 $1,147
 $2,076
Total U.K. Credit Facilities (b)£1,055
 £284
 £—
 £771
£1,285
 £591
 £—
 £694
 
(a)The commitments under the U.S. credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than the following percentages of the total committed capacity: PPL - 11%10%, PPL Electric - 7%, LKE - 21%, LG&E - 7% and KU - 37%.
(b)The amounts borrowed at September 30, 2016March 31, 2017 were a USD-denominated borrowing of $200 million and GBP-denominated borrowings which equated to $171$535 million. The unused capacity reflects the USD-denominated borrowing amount borrowed in GBP of £153 million as of the date borrowed. At September 30, 2016,March 31, 2017, the USD equivalent of unused capacity under the U.K. committed credit facilities was $1 billion.$864 million.

The commitments under the U.K. credit facilities are provided by a diverse bank group, with no one bank providing more than 13%20% of the total committed capacity.
 
See Note 7 to the Financial Statements for further discussion of the Registrants' credit facilities.

Intercompany (LKE, LG&E and KU)
Committed
Capacity
 Borrowed 
Other Used
Capacity
 
Unused
Capacity
Committed
Capacity
 Borrowed 
Other Used
Capacity
 
Unused
Capacity
LKE Credit Facility$225
 $138
 $—
 $87
$225
 $82
 $—
 $143
LG&E Money Pool (a)500
 —
 128
 372
500
 —
 207
 293
KU Money Pool (a)500
 —
 7
 493
500
 —
 36
 464

(a)LG&E and KU participate in an intercompany money pool agreement whereby LKE, LG&E and/or KU make available funds up to $500 million at an interest rate based on a market index of commercial paper issues. However, the FERC has issued a maximum aggregate short-term debt limit for each utility at $500 million from any source.all covered sources.

See Note 1110 to the Financial Statements for further discussion of intercompany credit facilities.
 
Commercial Paper (All Registrants)
 
PPL, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as necessary. Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's Syndicated Credit Facility. The following commercial paper programs were in place at September 30, 2016:March 31, 2017:
Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
PPL Capital Funding$1,000
 $—
 $1,000
$1,000
 $189
 $811
PPL Electric400
 130
 270
650
 499
 151
          
LG&E350
 128
 222
350
 207
 143
KU350
 7
 343
350
 36
 314
Total LKE700
 135
 565
700
 243
 457
Total PPL$2,100
 $265
 $1,835
$2,350
 $931
 $1,419


Long-term Debt

(PPL)

In May 2016, PPL Capital FundingMarch 2017, WPD (South Wales) issued $650£50 million of 3.10% Senior Notes due 2026. PPL Capital Funding received proceeds of $645 million, net of a discount and underwriting fees, which will be used to invest in or make loans to subsidiaries of PPL, to repay short-term debt and for general corporate purposes.

In May 2016, WPD (East Midlands) borrowed £100 million at 0.4975% under a new ten-year index linked term loan agreement, which will be used for general corporate purposes.

In May 2016, WPD plc repaid the entire $460 million principal amount of its 3.90% Senior Notes upon maturity.

In October 2016, WPD (East Midlands) issued an additional £40 million of its 2.671%0.01% Index-linked Senior Notes due 2043.2029. WPD (East Midlands)(South Wales) received proceeds of £83£53 million, which equated to $101$64 million at the time of issuance, net of fees and including a premium. The principal amount of the notes is adjusted based on changes in a specified index, as detailed in the terms of the related indentures.indenture. The proceeds will be used for general corporate purposes.

(PPL, LKE and PPL Electric)LG&E)

In March 2016,April 2017, the LCIDA issued $116Louisville/Jefferson County Metro Government of Kentucky remarketed $128 million of Pollution Control Revenue Refunding Bonds, Series 2016A due 2029 and $108 million of Pollution Control Revenue Refunding Bonds, Series 2016B due 2027 on behalf of PPL Electric. The bonds were issued bearing interest at an initial term rate of 0.90% through their mandatory purchase dates of September 1, 2017 and August 15, 2017. Thereafter, the method of determining the interest rate on the bonds may be converted from time to time at PPL Electric's option. The proceeds of the bonds were used to redeem $116 million of 4.70% Pollution Control Revenue Refunding Bonds, 2005 Series A due 2029 and $108 million of 4.75% Pollution Control Revenue Refunding Bonds, 2005 Series B due 2027 previously issued by the LCIDA on behalf of PPL Electric.
In connection with the issuance of each of these new series of LCIDA bonds, PPL Electric entered into a loan agreement with the LCIDA pursuant to which the LCIDA has loaned to PPL Electric the proceeds of the LCIDA bonds on payment terms that correspond to the LCIDA bonds. In order to secure its obligations under the loan agreement, PPL Electric issued $224 million of First Mortgage Bonds under its 2001 Mortgage Indenture, which also have payment terms that correspond to the LCIDA bonds.

(PPL, LKE and LG&E) 

In September 2016, the County of Trimble, Kentucky issued $125 million of Pollution Control Revenue Refunding Bonds, 20162003 Series A (Louisville Gas and Electric Company Project) due 20442033 on behalf of LG&E. The bonds were issued withremarketed at a floating interestlong term rate that initiallyand will reset weekly. The method of determining the interest rate on the bonds may be converted from time to time at LG&E’s option. The proceeds of the bonds were used to redeem $83 million of Pollution Control Revenue Refunding Bonds, 2000 Series A (Louisville Gas and Electric Company Project) due 2030 and $42 million of Pollution Control Revenue Refunding Bonds, 2002 Series A (Louisville Gas and Electric Company Project) due 2032 previously issued by the County of Trimble, Kentucky on behalf of LG&E.

(PPL, LKE and KU) 

In August 2016, the County of Carroll, Kentucky issued $96 million of Pollution Control Revenue Refunding Bonds, 2016 Series A (Kentucky Utilities Company Project) due 2042 on behalf of KU. The bonds were issued bearingbear interest at an initial term rate of 1.05%1.50% through their mandatory purchase date of SeptemberApril 1, 2019. Thereafter, the method of determining the interest rate on the bonds may be converted from time to time at KU’s option. The proceeds of the bonds were used to redeem $96 million of Pollution Control Revenue Refunding Bonds, 2002 Series C (Kentucky Utilities Company Project) due 2032 previously issued by the County of Carroll, Kentucky on behalf of KU.

(PPL)
 
ATM Program
 
For the periodsperiod ended September 30,March 31, 2017, PPL issued the following:

Number of shares (in thousands)1,364
Average share price$36.66
Net Proceeds$50

 Three Months Nine Months
 2016 2015 2016 2015
Number of shares (in thousands)710
 436
 710
 858
Average share price$35.23
 $32.95
 $35.23
 $33.33
Net Proceeds$25
 $14
 $25
 $28
See Note 7 to the Financial Statements for further discussion of the ATM program.

Common Stock Dividends
 
In August 2016,February 2017, PPL declared a quarterly common stock dividend, payable OctoberApril 3, 2016,2017, of 3839.5 cents per share (equivalent to $1.52$1.58 per annum). Future dividends, declared at the discretion of the Board of Directors, will depend upon future earnings, cash flows, financial and legal requirements and other factors.

Capital Expenditures

Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions. In the second quarter of 2016, PPL decreased its projected capital spending for the period 2016 through 2020 related to distribution facilities by approximately $1.1 billion from the $9.5 billion projection previously disclosed in PPL's 2015 Form 10‑K. The decreased projected capital spending results from a change in the forecasted GBP to U.S. dollar exchange rate from $1.60 to $1.30 for WPD expenditures that decreased each yearly estimate by approximately $220 million.

Contractual Obligations

In 2016, PPL decreased its estimated contractual cash obligations by approximately $2.0 billion from the $39.1 billion estimate previously disclosed in PPL's 2015 Form 10-K. The decrease was primarily a result of the change in the GBP to U.S. dollar exchange rate from $1.50 to $1.30 as of September 30, 2016 for WPD's obligations. The decreases in PPL's estimated contractual cash obligations by year were as follows.

  Total 2016 2017 - 2018 2019 - 2020 After 2020
Total Change in Contractual Cash Obligations $(2,003) $(36) $(100) $(121) $(1,746)

Rating Agency Actions
 
(All Registrants)
 
Moody's and S&P have periodically reviewed the credit ratings of the debt of the Registrants and their subsidiaries. Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.
 
A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues. The credit ratings of the Registrants and their subsidiaries are based on information provided by the Registrants and other sources. The ratings of Moody's and S&P are not a recommendation to buy, sell or hold any securities of the Registrants or their subsidiaries. Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities. The credit ratings of the Registrants and their subsidiaries affect their liquidity, access to capital markets and cost of borrowing under their credit facilities. A downgrade in the Registrants' or their subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets. The Registrants and their subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.
 
The rating agencies have taken the following actions related to the Registrants and their subsidiaries during 2016:

(PPL)
In February 2016, Moody's and S&P affirmed their commercial paper ratings for PPL Capital Funding's $1.0 billion commercial paper program.

In May 2016, Moody's and S&P assigned ratings of Baa2 and BBB+ to PPL Capital Funding's $650 million 3.10% Senior Notes due 2026.



In June 2016, S&P assigned a long-term issuer rating of A- and a short-term issuer rating of A-2 to PPL Capital Funding.2017:

(PPL Electric)

In February 2016,January 2017, Moody's and S&P affirmed their commercial paper ratings for PPL Electric's $400$650 million commercial paper program.
In February 2016, Moody's and S&P assigned ratings of A1 and A to LCIDA's $116 million 0.90% Pollution Control Revenue Refunding Bonds due 2029 and $108 million 0.90% Pollution Control Revenue Refunding Bonds due 2027, issued on behalf of PPL Electric.

(LG&E)

In September 2016,March 2017, Moody's and S&P assignedconfirmed ratings of A1 and A to LG&E's Trimble Country 20162003 Series A $125 million Pollution Control Revenue Refunding Bonds due 2044.Bonds.

(KU)

In August 2016, Moody's and S&P assigned ratings of A1 and A to KU's Carroll County 2016 Series A $96 million Pollution Control Revenue Refunding Bonds due 2042.
Ratings Triggers
 
(PPL, LKE, LG&E and KU)
 
Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, interest rate and foreign currency instruments (for PPL), contain provisions that require the posting of additional collateral or permit the counterparty to terminate the contract, if PPL's, LKE's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade. See Note 1413 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral requirements for PPL, LKE and LG&E for derivative contracts in a net liability position at September 30, 2016.March 31, 2017.
 
(All Registrants)
 
For additional information on the Registrants' liquidity and capital resources, see "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Registrants' 20152016 Form 10-K.

Risk Management
 
Market Risk
 
(All Registrants)
 
See Notes 1312 and 1413 to the Financial Statements for information about the Registrants' risk management objectives, valuation techniques and accounting designations.
 
The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions. Actual future results may differ materially from those presented. These are not precise indicators of expected future losses, but are rather only indicators of possible losses under normal market conditions at a given confidence level.
 
Interest Rate Risk
 
The Registrants and their subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. The Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of their debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolios due to changes in the absolute level of 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.


The following interest rate hedges were outstanding at September 30, 2016.
March 31, 2017.
Exposure
Hedged
 
Fair Value,
Net - Asset
(Liability) (a)
 
Effect of a
10% Adverse
Movement
in Rates (b)
 
Maturities
Ranging
Through
Exposure
Hedged
 
Fair Value,
Net - Asset
(Liability) (a)
 
Effect of a
10% Adverse
Movement
in Rates (b)
 
Maturities
Ranging
Through
PPL 
  
  
   
  
  
  
Cash flow hedges              
Cross-currency swaps (c)$802
 $155
 $(96) 2028$802
 $182
 $(90) 2028
Economic hedges              
Interest rate swaps (d)179
 (54) (2) 2033147
 (30) (2) 2033
LKE              
Economic hedges 
  
  
   
  
  
  
Interest rate swaps (d)179
 (54) (2) 2033147
 (30) (2) 2033
LG&E 
  
  
   
  
  
  
Economic hedges 
  
  
   
  
  
  
Interest rate swaps (d)179
 (54) (2) 2033147
 (30) (2) 2033
 
(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes a 10% adverse movement in foreign currency exchange rates.
(c)Cross-currency swaps are utilized to hedge the principal and interest payments of WPD's U.S. dollar-denominated senior notes. Changes in the fair value of these instruments are recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.
(d)Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in the fair value of these derivatives are included in regulatory assets or regulatory liabilities.

The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios. The estimated impact of a 10% adverse movement in interest rates on interest expense at September 30, 2016March 31, 2017 was insignificant for PPL, PPL Electric, LKE, LG&E and KU. The estimated impact of a 10% adverse movement in interest rates on the fair value of debt at September 30, 2016March 31, 2017 is shown below.
10% Adverse
Movement
in Rates
10% Adverse
Movement
in Rates
PPL$543
$563
PPL Electric136
137
LKE175
180
LG&E65
66
KU98
99
 
Foreign Currency Risk (PPL)
 
PPL is exposed to foreign currency risk primarily through investments in U.K. affiliates. Under its risk management program, PPL may enter into financial instruments to hedge certain foreign currency exposures, including translation risk of expected earnings, firm commitments, recognized assets or liabilities, anticipated transactions and net investments.
 
The following foreign currency hedges were outstanding at September 30, 2016.


March 31, 2017.
 
Exposure
Hedged
 
Fair Value,
Net - Asset
(Liability)
 
Effect of a
10%
Adverse
Movement
in Foreign
Currency
Exchange
Rates (a)
 
Maturities
Ranging
Through
Economic hedges (b)£1,791
 $96
 $(214) 2018
 
Exposure
Hedged
 
Fair Value,
Net - Asset
(Liability)
 
Effect of a
10%
Adverse
Movement
in Foreign
Currency
Exchange
Rates (a)
 
Maturities
Ranging
Through
Economic hedges (b)£2,840
 $150
 $(333) 2019
 
(a)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(b)To economically hedge the translation risk of expected earnings denominated in GBP.


(All Registrants)
 
Commodity Price Risk
 
PPL is exposed to commodity price risk through its domestic subsidiaries as described below.

PPL Electric is exposed to commodity price risk from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to this risk. PPL Electric also mitigates its exposure to commodity price risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the commodity price risk associated with the PLR obligation to the energy suppliers.
LG&E's and KU's rates include certain mechanisms for fuel and fuel-related expenses. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.

Volumetric Risk
 
PPL is exposed to volumetric risk through its subsidiaries as described below.
 
WPD is exposed to volumetric risk which is significantly mitigated as a result of the method of regulation in the U.K. Under the RIIO - ED1RIIO-ED1 price control period, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 20152016 Form 10-K for additional information on revenue recognition under RIIO - ED1.RIIO-ED1.
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.

Credit Risk (All Registrants)
 
See Notes 1312 and 1413 to the Financial Statements in this Form 10-Q and "Risk"Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Risk Management - Credit Risk" in the Registrants' 20152016 Form 10-K for additional information.
 
Foreign Currency Translation (PPL)
 
The value of the British pound sterling fluctuates in relation to the U.S. dollar. Changes in this exchange rate resulted in a foreign currency translation loss of $840$24 million for the ninethree months ended September 30, 2016,March 31, 2017, which primarily reflected a $1.6 billion$46 million decrease to PP&E and $375a $10 million decrease to goodwill partially offset by a $995$28 million decrease to long-term debt and a $160$4 million decrease to other net liabilities. Changes in this exchange rate resulted in a foreign currency translation loss of $101$466 million for the ninethree months ended September 30, 2015,March 31, 2016, which primarily reflected a $209$909 million decrease to PP&E and $54a $214 million decrease to goodwill partially offset by a $131$557 million decrease to long-term debt and a $31$100 million decrease to other net liabilities. The impact of foreign currency translation is recorded in AOCI.
 
Related Party Transactions (All Registrants)
 
The Registrants are not aware of any material ownership interests or operating responsibility by senior management in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with the Registrants. See Note 1110 to the Financial Statements for additional information on related party transactions for PPL Electric, LKE, LG&E and KU.
 


Acquisitions, Development and Divestitures (All Registrants)
 
The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with, modify or terminate the projects. Any resulting transactions may impact future financial results. See Note 8 to the Financial Statements in the Registrants' 2016 Form 10-K for information on the more significant activities.

Environmental Matters (All Registrants)
 
Extensive federal, state and local environmental laws and regulations are applicable to PPL's, PPL Electric's, LKE's, LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of the

Registrants' businesses. The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be significant. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed. Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions. In addition, the regulatory reviews specified in the President's March 2017 Executive Order promoting energy independence and economic growth could result in future regulatory changes and additional uncertainty. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the cost for their products or their demand for the Registrants' services. Increased capital and operating costs are subject to rate recovery. PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.
 
See Note 109 to the Financial Statements for a discussion of the more significant environmental matters including:
Legal Matters,
Climate Change,
Coal Combustion Residuals,
Effluent Limitations Guidelines,
Mercury and Air Toxics Standards,
National Ambient Air Quality Standards, and
Superfund and Other Remediation.Standards.

Additionally, see "Item 1. Business - Environmental Matters" in the Registrants' 20152016 Form 10-K for additional information on environmental matters.
 
New Accounting Guidance (All Registrants)
 
See Notes 2 and 18Note 17 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.
 
Application of Critical Accounting Policies (All Registrants)
 
Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following table summarizes the accounting policies by Registrant that are particularly important to an understanding of the reported financial condition or results of operations, and require management to make estimates or other judgments of matters that are inherently uncertain. See "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrants' 20152016 Form 10-K for a discussion of each critical accounting policy.


    PPL         
 PPL Electric LKE LG&E KU
               
Defined BenefitsXXXXX
Loss AccrualsX X X X X
Income TaxesX X X X X
Goodwill ImpairmentX   X X X
AROsX   X X X
Price Risk ManagementX        
Regulatory Assets and LiabilitiesX X X X X
Revenue Recognition - Unbilled Revenue   X X X X



PPL Corporation
PPL Electric Utilities Corporation
LG&E and KU Energy LLC
Louisville Gas and Electric Company
Kentucky Utilities Company

Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Reference is made to "Risk Management" in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations."
 
Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures.
 
The Registrants' principal executive officers and principal financial officers, based on their evaluation of the Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of September 30, 2016,March 31, 2017, the Registrants' disclosure controls and procedures are effective to ensure that material information relating to the Registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared. The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.
 
(b) Change in internal controls over financial reporting.
 
The Registrants' principal executive officers and principal financial officers have concluded that there were no changes in the Registrants' internal control over financial reporting during the Registrants' thirdfirst fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrants' internal control over financial reporting.
  
PART II. OTHER INFORMATION

Item 1. Legal Proceedings
 
For information regarding pending administrative and judicial proceedings involving regulatory, environmental and other matters, which information is incorporated by reference into this Part II, see:
 
"Item 3. Legal Proceedings" in each Registrant's 20152016 Form 10-K; and
Notes 6 and 109 to the Financial Statements.

Item 1A. Risk Factors
 
There have been no material changes in the Registrants' risk factors from those disclosed in "Item 1A. Risk Factors" of the Registrants' 20152016 Form 10-K and Form 10-Q for the period ending June 30, 2016 except the following:

(PPL)

Risks related to our U.K. segment

PPL’s earnings may be adversely affected as a result of the June 23, 2016 referendum in the U.K. to withdraw from the European Union.

Significant uncertainty exists concerning the effects of the June 23, 2016 referendum in favor of the U.K. withdrawal from the European Union, including whether formal withdrawal will occur and the nature and duration of negotiations between the U.K. and European Union as to the terms of any withdrawal. PPL cannot predict the impact, either short-term or long-term, on foreign exchange rates or PPL’s long-term financial condition that may be experienced as a result of any actions that may be taken by the U.K. government to withdraw from the European Union, although such impacts could be significant.


10-K.

Item 4. Mine Safety Disclosures
 
Not applicable.
 

Item 6. Exhibits

The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith. The balance of the Exhibits has heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference. Exhibits indicated by a [_] are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.
4(a)
*10(a)
-LoanThird Amendment to Revolving Credit Agreement, dated as of August 1, 2016March 17, 2017, to the Existing Credit Agreement, dated as of March 26, 2014, between Kentucky Utilities CompanyPPL Capital Funding, Inc., the Borrower, PPL Corporation, the Guarantor, The Bank of Nova Scotia, as the Administrative Agent, Sole Lead Arranger and the County of Carroll, KentuckySole Bookrunner, and each Lender
10(b)
-£230,000,000 Term Loan Agreement, dated March 28, 2017, between Western Power Distribution plc and HSBC Bank, PLC and Mizuho Bank, Ltd., as Mandated Lead Arrangers, and Mizuho Bank, Ltd., as Facility Agent (Exhibit 4(a)10.1 to Kentucky Utilities CompanyPPL Corporation Form 8-K Report (File No. 1-3464)1-11459) dated August 26, 2016)
4(b)-Supplemental Indenture No.April 5, dated as of August 1, 2016, of Kentucky Utilities Company to The Bank of New York Mellon, as Trustee (Exhibit 4(b) to Kentucky Utilities Company Form 8-K Report (File No. 1-3464) dated August 26, 2016)
4(c)-Loan Agreement dated as of September 1, 2016 between Louisville Gas and Electric Company and the County of Trimble, Kentucky (Exhibit 4(a) to Louisville Gas and Electric Company Form 8-K Report (File No. 1-2893) dated September 15, 2016)
4(d)-Supplemental Indenture No. 5, dated as of September 1, 2016, of Louisville Gas and Electric Company to The Bank of New York Mellon, as Trustee (Exhibit 4(b) to Louisville Gas and Electric Company Form 8-K Report (File No. 1-2893) dated September 15, 2016)
*10(a)
-
£50,000,000 Facility Letter entered into between Western Power Distribution (South West) plc
and Svenska Handelsbanken AB dated as of October 11, 2016
2017)
*12(a)
-PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(b)
-PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(c)
-LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
*12(d)
-Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
*12(e)
-Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
   
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended September 30, 2016,March 31, 2017, filed by the following officers for the following companies:
   
*31(a)
-PPL Corporation's principal executive officer
*31(b)
-PPL Corporation's principal financial officer
*31(c)
-PPL Electric Utilities Corporation's principal executive officer
*31(d)
-PPL Electric Utilities Corporation's principal financial officer
*31(e)
-LG&E and KU Energy LLC's principal executive officer
*31(f)
-LG&E and KU Energy LLC's principal financial officer
*31(g)
-Louisville Gas and Electric Company's principal executive officer
*31(h)
-Louisville Gas and Electric Company's principal financial officer
*31(i)
-Kentucky Utilities Company's principal executive officer
*31(j)
-Kentucky Utilities Company's principal financial officer


 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended September 30, 2016,March 31, 2017, furnished by the following officers for the following companies:
   
*32(a)
-PPL Corporation's principal executive officer and principal financial officer
*32(b)
-PPL Electric Utilities Corporation's principal executive officer and principal financial officer
*32(c)
-LG&E and KU Energy LLC's principal executive officer and principal financial officer
*32(d)
-Louisville Gas and Electric Company's principal executive officer and principal financial officer
*32(e)
-Kentucky Utilities Company's principal executive officer and principal financial officer
   
101.INS-XBRL Instance Document
101.SCH-XBRL Taxonomy Extension Schema
101.CAL-XBRL Taxonomy Extension Calculation Linkbase
101.DEF-XBRL Taxonomy Extension Definition Linkbase
101.LAB-XBRL Taxonomy Extension Label Linkbase
101.PRE-XBRL Taxonomy Extension Presentation Linkbase



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.
 
  PPL Corporation
  (Registrant) 
    
    
    
Date:November 1, 2016May 4, 2017/s/  Stephen K. Breininger 
  
Stephen K. Breininger
Vice President and Controller
 
  (Principal Accounting Officer) 
    
    
    
  PPL Electric Utilities Corporation
  (Registrant) 
    
    
    
Date:November 1, 2016May 4, 2017/s/  Marlene C. Beers 
  
Marlene C. Beers
Controller
 
  (Principal Financial Officer and Principal Accounting Officer) 
 

  LG&E and KU Energy LLC
  (Registrant) 
    
  Louisville Gas and Electric Company
  (Registrant) 
    
  Kentucky Utilities Company
  (Registrant) 
    
    
    
Date:November 1, 2016May 4, 2017/s/  Kent W. Blake 
  
Kent W. Blake
Chief Financial Officer
 
  (Principal Financial Officer and Principal Accounting Officer) 

119100