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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 March 31,September 30, 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



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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, smaller reporting companies or emerging growth companies. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "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   
 
 



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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, 683,174,778688,464,316 shares outstanding at April 27,October 25, 2017.
   
 PPL Electric Utilities CorporationCommon stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at April 27,October 25, 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 April 27,October 25, 2017.
   
 Kentucky Utilities CompanyCommon stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at April 27,October 25, 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.



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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 MARCH 31,SEPTEMBER 30, 2017
 
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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
PART I.  FINANCIAL INFORMATION 
 Item 1.  Financial Statements 
  PPL Corporation and Subsidiaries 
   
   
   
   
   
  PPL Electric Utilities Corporation and Subsidiaries 
   
   
   
   
  LG&E and KU Energy LLC and Subsidiaries 
   
   
   
   
  Louisville Gas and Electric Company 
   
   
   
   
  Kentucky Utilities Company 
   
   
   
   



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 Combined Notes to Condensed Financial Statements (Unaudited) 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 
  
   
   
   
  
   
   
   
   
   
  
   
   
   
   
   
   
  
  
 
 
PART II.  OTHER INFORMATION 
 
 
 
 
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
 



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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 administrative, management and support services primarily to PPL 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 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.
 
 
Other terms and abbreviations
 
£ - British pound sterling.
 
2016 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 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 amended the Pennsylvania Public Utility Code and created an energy efficiency and conservation program and smart metering technology requirements, adopted new PLR electricity supply procurement rules, provided remedies for market misconduct and changed the Alternative Energy Portfolio Standard.

Act 129 Smart Meter program - PPL Electric's system wide meter replacement program that installs wireless digital meters that provide secure communication between PPL Electric and the meter as well as all related infrastructure.
 
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, and are also 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.

ARO - asset retirement obligation.
 
ATM Program - At-the-MarketPPL's at-the-market common stock offering program.
 
BSER - Best System of Emission Reduction. The degree of emission reduction the 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" of select distribution system circuits, improving grid reliability and efficiency.

DNO - Distribution Network Operator in the U.K.
 
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 programs proposed by any utility under its jurisdiction. DSM programs consist of energy efficiency programs intended to reduce peak demand and delay the investment in additional power plant construction, provide customers 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 byproducts 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.

GHGGHG(s) - greenhouse gas(es).
 
GLT - Gas Line Tracker. The KPSC approved mechanism for LG&E's recovery of costs associated with gas transmission lines, 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.

Performance Unit - A stock-based compensation award that represents a variable number of shares of PPL common stock that a recipient may receive based on PPL's attainment of total shareowner return over a three-year performance period as compared to companies in the Philadelphia Stock Exchange Utility Index.

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.
 
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 beenare 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-ED1RIIO - RIIO representsOfgem's framework for setting U.K. regulated gas and electric utility price controls which stands for "Revenues = Incentive + Innovation + Outputs." RIIO-1 refers to the first generation of price controls under the RIIO framework. RIIO-ED1 refers to the initial eight-year rate review periodRIIO regulatory price control applicable to WPDthe operators of U.K. electricity distribution networks, the duration of which commencedis April 1, 2015.2015 through March 2023. RIIO-2 refers to the second generation of price controls under the RIIO framework. RIIO-ED2 refers to the second regulatory price control applicable to the operators of U.K. electricity distribution networks, which will begin in April 2023.

RPI - Retail Price Index, is a measure of inflation in the United Kingdom published monthly by the Office for National Statistics.
 
SCRs - selective catalytic reduction, a pollution control process for the removal of nitrogen oxide from exhaust gas.

S&P - Standard & Poor'sS&P Global 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.
 

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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.
 
Treasury Stock Method - a 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.

U.K. Finance Acts - refers to U.K. Finance Act of 2015 and 2016, enacted in November 2015 and September 2016 respectively, which collectively reduced the U.K. statutory corporate income tax rate from 20% to 19%, effective April 1, 2017 and from 19% to 17%, effective April 1, 2020.

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 2016 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.statements:
 
the outcome of rate cases or other cost recovery or revenue filings;
changes in U.S. or U.K. tax laws or regulations;
effects of cyber-based intrusions or natural disasters, threatened or actual terrorism, war or other hostilities;
significant decreases in demand for electricity in the U.S.;
expansion of alternative and distributed sources of electricity generation and storage;
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 effectiveness of our risk management programs, including foreign currency and interest rate hedging;
non-achievement by WPD of performance targets set by Ofgem;
the effect of changes in RPI on WPD's revenues and index linked debt;
the March 29, 2017 notification by the U.K. to the European Council of the European Union of the U.K.'s intent to withdraw from the European Union and any actions in response thereto;
defaults by counterparties or suppliers for energy, capacity, coal, natural gas or key 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;
a material decline in the market value of PPL's equity;
significant 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, if any, of the Registrants and their subsidiaries;
new accounting requirements or new interpretations or applications of existing requirements;
changes in securities and credit ratings;
any requirement to record impairment charges pursuant to GAAP with respect to any of our significant investments;
laws or regulations to reduce emissions of "greenhouse" gasesGHGs or the physical effects of climate change;
continuing ability to access fuel supply for LG&E and KU, as well as the ability to recover fuel costs and environmental expenditures in a timely manner at LG&E and KU and natural gas supply costs at LG&E;
fuel supply for LG&E and KU;
weather and other conditions affecting generation, transmission and distribution operations, operating costs and 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 and approvals;
new state, federal or foreign legislation or regulatory developments;
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;
business dispositions or acquisitions and our ability to realize expected benefits from such business 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.

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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.


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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 March 31,Three Months Ended September 30, Nine Months Ended September 30,
2017 20162017 2016 2017 2016
Operating Revenues$1,951
 $2,011
$1,845
 $1,889
 $5,521
 $5,685
          
Operating Expenses          
Operation          
Fuel191
 197
202
 227
 576
 607
Energy purchases215
 233
143
 151
 494
 531
Other operation and maintenance432
 450
397
 417
 1,217
 1,292
Depreciation242
 229
257
 232
 745
 692
Taxes, other than income75
 79
69
 76
 214
 229
Total Operating Expenses1,155
 1,188
1,068
 1,103
 3,246
 3,351
          
Operating Income796
 823
777
 786
 2,275
 2,334
          
Other Income (Expense) - net(47) 61
(76) 49
 (235) 284
          
Interest Expense217
 224
230
 223
 669
 671
          
Income Before Income Taxes532
 660
471
 612
 1,371
 1,947
          
Income Taxes129
 179
116
 139
 321
 510
          
Net Income$403
 $481
$355
 $473
 $1,050
 $1,437
          
Earnings Per Share of Common Stock:  
Net Income Available to PPL Common Shareowners:          
Basic$0.59
 $0.71
$0.52
 $0.70
 $1.53
 $2.12
Diluted$0.59
 $0.71
$0.51
 $0.69
 $1.53
 $2.11
          
Dividends Declared Per Share of Common Stock$0.3950
 $0.38
$0.3950
 $0.38
 $1.185
 $1.14
          
Weighted-Average Shares of Common Stock Outstanding (in thousands)          
Basic680,882
 675,441
686,563
 678,114
 683,783
 676,905
Diluted683,084
 678,817
688,746
 680,348
 686,081
 679,969
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

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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,
 2017 2016 2017 2016
Net income$355
 $473
 $1,050
 $1,437
        
Other comprehensive income (loss): 
  
    
Amounts arising during the period - gains (losses), net of tax (expense) benefit: 
  
    
Foreign currency translation adjustments, net of tax of $0, ($2), ($1), ($4)(12) (641) 195
 (837)
Qualifying derivatives, net of tax of $0, ($16), $7, ($9)1
 62
 (29) 57
Defined benefit plans: 
 

    
Net actuarial gain (loss), net of tax of $2, $4, $9, $3(3) (6) (14) (4)
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): 
  
    
Qualifying derivatives, net of tax of $1, $17, ($6), $15
 (69) 24
 (62)
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $0
 
 1
 (1)
Defined benefit plans: 
  
    
Prior service costs, net of tax of ($1), ($1), ($1), ($1)
 
 1
 1
Net actuarial (gain) loss, net of tax of ($10), ($10), ($28), ($27)34
 31
 97
 94
Total other comprehensive income (loss)20
 (623) 275
 (752)
        
Comprehensive income (loss)$375
 $(150) $1,325
 $685
 
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 partTable of the financial statements.Contents


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
Three Months Ended March 31,Nine Months Ended September 30,
2017 20162017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$403
 $481
$1,050
 $1,437
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation242
 229
745
 692
Amortization23
 18
72
 54
Defined benefit plans - expense (income)(19) (13)(69) (29)
Deferred income taxes and investment tax credits161
 162
284
 436
Unrealized (gains) losses on derivatives, and other hedging activities35
 (34)194
 107
Stock-based compensation expense19
 13
30
 23
Other(1) (5)(8) (12)
Change in current assets and current liabilities 
  
 
  
Accounts receivable(43) (62)25
 (29)
Accounts payable(84) (43)(93) (40)
Unbilled revenues52
 18
81
 32
Fuel, materials and supplies44
 25
35
 8
Prepayments(110) (86)(37) (34)
Taxes payable(21) 15
6
 40
Regulatory assets and liabilities, net(3) (32)
Accrued interest49
 32
Other current liabilities(60) (66)(53) (48)
Other5
 18
5
 (5)
Other operating activities      
Defined benefit plans - funding(520) (123)(558) (345)
Other assets5
 (5)4
 18
Other liabilities4
 15
(5) (75)
Net cash provided by operating activities135
 557
1,754
 2,230
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(677) (656)(2,152) (2,073)
Expenditures for intangible assets(3) (6)(25) (23)
Net (increase) decrease in restricted cash and cash equivalents2
 
Other investing activities1
 1
13
 30
Net cash used in investing activities(677) (661)(2,164) (2,066)
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt64
 224
1,088
 1,241
Retirement of long-term debt
 (224)(60) (905)
Settlement of cross-currency swaps
 46
Issuance of common stock73
 42
275
 133
Payment of common stock dividends(258) (255)(800) (772)
Net increase (decrease) in short-term debt744
 351
269
 (268)
Other financing activities(16) (23)(34) (33)
Net cash provided by (used in) financing activities607
 115
738
 (558)
Effect of Exchange Rates on Cash and Cash Equivalents3
 (33)7
 (26)
Net Increase (Decrease) in Cash and Cash Equivalents68
 (22)335
 (420)
Cash and Cash Equivalents at Beginning of Period341
 836
341
 836
Cash and Cash Equivalents at End of Period$409
 $814
$676
 $416
      
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
Accrued expenditures for property, plant and equipment at September 30,$373
 $293
Accrued expenditures for intangible assets at September 30,$60
 $104

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

Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$409
 $341
$676
 $341
Accounts receivable (less reserve: 2017, $53; 2016, $54) 
  
Accounts receivable (less reserve: 2017, $52; 2016, $54) 
  
Customer702
 666
617
 666
Other58
 46
96
 46
Unbilled revenues427
 480
405
 480
Fuel, materials and supplies312
 356
323
 356
Prepayments173
 63
101
 63
Price risk management assets95
 63
57
 63
Other current assets51
 52
56
 52
Total Current Assets2,227
 2,067
2,331
 2,067
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant35,229
 34,674
36,678
 34,674
Less: accumulated depreciation - regulated utility plant6,197
 6,013
6,624
 6,013
Regulated utility plant, net29,032
 28,661
30,054
 28,661
Non-regulated property, plant and equipment413
 413
422
 413
Less: accumulated depreciation - non-regulated property, plant and equipment137
 134
154
 134
Non-regulated property, plant and equipment, net276
 279
268
 279
Construction work in progress1,099
 1,134
1,494
 1,134
Property, Plant and Equipment, net30,407
 30,074
31,816
 30,074
      
Other Noncurrent Assets 
  
 
  
Regulatory assets1,908
 1,918
1,869
 1,918
Goodwill3,050
 3,060
3,134
 3,060
Other intangibles644
 700
666
 700
Pension benefit asset363
 9
532
 9
Price risk management assets284
 336
267
 336
Other noncurrent assets151
 151
143
 151
Total Other Noncurrent Assets6,400
 6,174
6,611
 6,174
      
Total Assets$39,034
 $38,315
$40,758
 $38,315
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$1,666
 $923
$1,211
 $923
Long-term debt due within one year417
 518
448
 518
Accounts payable700
 820
838
 820
Taxes80
 101
110
 101
Interest299
 270
322
 270
Dividends270
 259
272
 259
Customer deposits277
 276
291
 276
Regulatory liabilities82
 101
87
 101
Other current liabilities465
 569
570
 569
Total Current Liabilities4,256
 3,837
4,149
 3,837
      
Long-term Debt17,958
 17,808
19,110
 17,808
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes4,055
 3,889
4,224
 3,889
Investment tax credits132
 132
130
 132
Accrued pension obligations776
 1,001
796
 1,001
Asset retirement obligations429
 428
312
 428
Regulatory liabilities897
 899
873
 899
Other deferred credits and noncurrent liabilities422
 422
472
 422
Total Deferred Credits and Other Noncurrent Liabilities6,711
 6,771
6,807
 6,771
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 



 

      
Equity 
  
 
  
Common stock - $0.01 par value (a)7
 7
7
 7
Additional paid-in capital9,917
 9,841
10,122
 9,841
Earnings reinvested3,962
 3,829
4,066
 3,829
Accumulated other comprehensive loss(3,777) (3,778)(3,503) (3,778)
Total Equity10,109
 9,899
10,692
 9,899
      
Total Liabilities and Equity$39,034
 $38,315
$40,758
 $38,315
 
(a)1,560,000 shares authorized; 682,427688,133 and 679,731 shares issued and outstanding at March 31,September 30, 2017 and December 31, 2016.

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


Table of Contents

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
 TotalCommon
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
679,731
 $7
 $9,841
 $3,829
 $(3,778) $9,899
Common stock issued2,696
 

 97
     97
8,402
 

 303
     303
Stock-based compensation    (21)     (21)    (22)     (22)
Net income      403
   403
      1,050
   1,050
Dividends and dividend equivalents      (270)   (270)      (813)   (813)
Other comprehensive income (loss)        1
 1
        275
 275
March 31, 2017682,427
 $7
 $9,917
 $3,962
 $(3,777) $10,109
September 30, 2017688,133
 $7
 $10,122
 $4,066
 $(3,503) $10,692
                      
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 issued2,527
  
 70
  
  
 70
5,411
  
 168
  
  
 168
Stock-based compensation 
  
 (28)  
  
 (28) 
  
 (31)  
  
 (31)
Net income 
  
  
 481
  
 481
 
  
  
 1,437
  
 1,437
Dividends and dividend equivalents 
  
  
 (256)  
 (256) 
  
  
 (773)  
 (773)
Other comprehensive income (loss) 
  
  
  
 (431) (431) 
  
  
  
 (752) (752)
Adoption of stock-based compensation guidance cumulative effect adjustment      7
   7
      7
   7
March 31, 2016676,384
 $7
 $9,729
 $3,185
 $(3,159) $9,762
September 30, 2016679,268
 $7
 $9,824
 $3,624
 $(3,480) $9,975
                      
(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.


Table of Contents

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Table of Contents

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

Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
2017 20162017 2016 2017 2016
Operating Revenues$573
 $585
$547
 $539
 $1,620
 $1,619
          
Operating Expenses    
  
    
Operation    
  
    
Energy purchases146
 167
121
 129
 374
 414
Other operation and maintenance164
 150
133
 144
 435
 431
Depreciation75
 59
77
 64
 228
 185
Taxes, other than income29
 29
27
 26
 79
 79
Total Operating Expenses414
 405
358
 363
 1,116
 1,109
          
Operating Income159
 180
189
 176
 504
 510
          
Other Income (Expense) - net1
 3
4
 4
 8
 12
          
Interest Income from Affiliate2
 
 3
 
       
Interest Expense33
 33
36
 32
 105
 97
          
Income Before Income Taxes127
 150
159
 148
 410
 425
          
Income Taxes48
 56
64
 58
 159
 162
          
Net Income (a)$79
 $94
$95
 $90
 $251
 $263
 
(a)Net income equals comprehensive income.

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


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
Three Months Ended March 31,Nine Months Ended September 30,
2017 20162017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$79
 $94
$251
 $263
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation75
 59
228
 185
Amortization8
 7
25
 19
Defined benefit plans - expense5
 2
10
 9
Deferred income taxes and investment tax credits41
 65
129
 151
Other
 (5)(8) (14)
Change in current assets and current liabilities 
  
 
  
Accounts receivable(27) (43)7
 (6)
Accounts payable(18) (2)(38) (1)
Unbilled revenue12
 5
Unbilled revenues30
 10
Prepayments(75) (21)(31) 29
Regulatory assets and liabilities(11) (21)
Regulatory assets and liabilities, net
 (41)
Taxes payable
 (8)10
 (6)
Other(14) (12)(9) (13)
Other operating activities 
  
 
  
Defined benefit plans - funding(24) 
(24) 
Other assets5
 3
(2) 15
Other liabilities(1) 1
(3) (5)
Net cash provided by operating activities55
 124
575
 595
      
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(274) (214)(851) (739)
Expenditures for intangible assets(2) (1)(7) (3)
Net increase in notes receivable from affiliate(2) 
Other investing activities2
 2
Net cash used in investing activities(276) (215)(858) (740)
      
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt
 224
470
 224
Retirement of long-term debt
 (224)
 (224)
Contributions from parent100
 
575
 200
Payment of common stock dividends to parent(76) (45)(231) (193)
Net increase (decrease) in short-term debt204
 125
(295) 130
Other financing activities
 (2)(6) (3)
Net cash provided by (used in) financing activities228
 78
Net cash provided by financing activities513
 134
      
Net Increase (Decrease) in Cash and Cash Equivalents7
 (13)230
 (11)
Cash and Cash Equivalents at Beginning of Period13
 47
13
 47
Cash and Cash Equivalents at End of Period$20
 $34
$243
 $36
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at March 31,$122
 $115
Accrued expenditures for property, plant and equipment at September 30,$190
 $166

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

Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$20
 $13
$243
 $13
Accounts receivable (less reserve: 2017, $27; 2016, $28) 
  
Accounts receivable (less reserve: 2017, $25; 2016, $28) 
  
Customer304
 272
275
 272
Other16
 21
10
 21
Accounts receivable from affiliates1
 
Notes receivable from affiliate2
 
Unbilled revenues102
 114
84
 114
Materials and supplies31
 32
31
 32
Prepayments84
 9
40
 9
Regulatory assets13
 19
14
 19
Other current assets6
 8
11
 8
Total Current Assets576
 488
711
 488
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant9,987
 9,654
10,449
 9,654
Less: accumulated depreciation - regulated utility plant2,767
 2,714
2,880
 2,714
Regulated utility plant, net7,220
 6,940
7,569
 6,940
Construction work in progress557
 641
699
 641
Property, Plant and Equipment, net7,777
 7,581
8,268
 7,581
      
Other Noncurrent Assets 
  
 
  
Regulatory assets1,080
 1,094
1,073
 1,094
Intangibles252
 251
256
 251
Other noncurrent assets14
 12
15
 12
Total Other Noncurrent Assets1,346
 1,357
1,344
 1,357
      
Total Assets$9,699
 $9,426
$10,323
 $9,426
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$499
 $295
$
 $295
Long-term debt due within one year224
 224

 224
Accounts payable329
 367
397
 367
Accounts payable to affiliates58
 42
38
 42
Taxes12
 12
22
 12
Interest31
 34
38
 34
Regulatory liabilities66
 83
72
 83
Other current liabilities88
 101
90
 101
Total Current Liabilities1,307
 1,158
657
 1,158
      
Long-term Debt2,608
 2,607
3,298
 2,607
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,942
 1,899
2,036
 1,899
Accrued pension obligations258
 281
257
 281
Other deferred credits and noncurrent liabilities90
 90
89
 90
Total Deferred Credits and Other Noncurrent Liabilities2,290
 2,270
2,382
 2,270
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 



 

      
Equity 
  
 
  
Common stock - no par value (a)364
 364
364
 364
Additional paid-in capital2,254
 2,154
2,729
 2,154
Earnings reinvested876
 873
893
 873
Total Equity3,494
 3,391
3,986
 3,391
      
Total Liabilities and Equity$9,699
 $9,426
$10,323
 $9,426
 
(a)170,000 shares authorized; 66,368 shares issued and outstanding at March 31,September 30, 2017 and December 31, 2016.

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


Table of Contents

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, 201666,368
 $364
 $2,154
 $873
 $3,391
66,368
 $364
 $2,154
 $873
 $3,391
Net income

 

 

 79
 79


 

 

 251
 251
Capital contributions from PPL

 

 100
 

 100


 

 575
 

 575
Dividends declared on common stock

 

 

 (76) (76)

 

 

 (231) (231)
March 31, 201766,368
 $364
 $2,254
 $876
 $3,494
September 30, 201766,368
 $364
 $2,729
 $893
 $3,986
                  
December 31, 201566,368
 $364
 $1,934
 $821
 $3,119
66,368
 $364
 $1,934
 $821
 $3,119
Net income

 

 

 94
 94


 

 

 263
 263
Capital contributions from PPL

 

 200
 

 200
Dividends declared on common stock

 

 

 (45) (45)

 

 

 (193) (193)
March 31, 201666,368
 $364
 $1,934
 $870
 $3,168
September 30, 201666,368
 $364
 $2,134
 $891
 $3,389
 
(a)Shares in thousands. All common shares of PPL Electric stock are owned by PPL.

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















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

Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
2017 20162017 2016 2017 2016
Operating Revenues$809
 $826
$818
 $835
 $2,350
 $2,382
          
Operating Expenses 
  
 
  
  
  
Operation 
  
 
  
  
  
Fuel191
 198
202
 227
 576
 607
Energy purchases69
 66
22
 24
 120
 118
Other operation and maintenance207
 202
199
 197
 598
 603
Depreciation105
 99
114
 102
 324
 301
Taxes, other than income16
 15
17
 16
 49
 46
Total Operating Expenses588
 580
554
 566
 1,667
 1,675
          
Operating Income221
 246
264
 269
 683
 707
          
Other Income (Expense) - net(2) (1)1
 (3) (5) (9)
          
Interest Expense49
 49
49
 50
 148
 147
          
Interest Expense with Affiliate4
 4
5
 4
 13
 12
          
Income Before Income Taxes166
 192
211
 212
 517
 539
          
Income Taxes63
 72
79
 79
 195
 202
          
Net Income (a)$103
 $120
$132
 $133
 $322
 $337
 
(a)Net income approximates comprehensive income.
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


Table of Contents

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,
 2017 2016 2017 2016
Net income$132
 $133
 $322
 $337
        
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, $7, ($1)(1) 
 (12) 1
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):       
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $0
 
 1
 (1)
Defined benefit plans:       
Prior service costs, net of tax of ($1), ($1), ($1), ($1)
 
 1
 1
Net actuarial loss, net of tax of $0, $0, ($2), ($1)1
 1
 3
 3
Total other comprehensive income (loss)
 1
 (7) 4
        
Comprehensive income$132
 $134
 $315
 $341

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


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
Three Months Ended March 31,Nine Months Ended September 30,
2017 20162017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$103
 $120
$322
 $337
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation105
 99
324
 301
Amortization7
 7
19
 21
Defined benefit plans - expense8
 7
19
 20
Deferred income taxes and investment tax credits48
 68
173
 212
Other1
 
Change in current assets and current liabilities 
  
 
  
Accounts receivable21
 (15)18
 (43)
Accounts payable(28) 25
(30) 7
Accounts payable to affiliates7
 5
3
 4
Unbilled revenues22
 8
19
 6
Fuel, materials and supplies41
 21
34
 7
Taxes payable(2) (25)13
 
Accrued interest42
 42
41
 42
Other(38) (24)(1) (4)
Other operating activities 
  
 
  
Defined benefit plans - funding(22) (33)(32) (82)
Expenditures for asset retirement obligations(6) (2)(22) (15)
Other assets1
 
5
 1
Other liabilities3
 
14
 2
Net cash provided by operating activities312
 303
920
 816
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(184) (219)(579) (600)
Net cash provided by (used in) investing activities(184) (219)
Other investing activities4
 1
Net cash used in investing activities(575) (599)
Cash Flows from Financing Activities 
  
 
  
Net increase (decrease) in notes payable with affiliate(81) 93
(4) 84
Issuance of long-term debt60
 221
Retirement of long-term debt(60) (221)
Net increase (decrease) in short-term debt58
 (149)5
 (130)
Debt issuance and credit facility costs(1) (1)(3) (3)
Distributions to member(102) (29)(316) (224)
Net cash provided by (used in) financing activities(126) (86)
Contributions from member
 37
Net cash used in financing activities(318) (236)
Net Increase (Decrease) in Cash and Cash Equivalents2
 (2)27
 (19)
Cash and Cash Equivalents at Beginning of Period13
 30
13
 30
Cash and Cash Equivalents at End of Period$15
 $28
$40
 $11
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at March 31,$75
 $117
Accrued expenditures for property, plant and equipment at September 30,$142
 $86

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

Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$15
 $13
$40
 $13
Accounts receivable (less reserve: 2017, $24; 2016, $24) 
  
Accounts receivable (less reserve: 2017, $25; 2016, $24) 
  
Customer215
 235
215
 235
Other24
 17
43
 17
Accounts receivable from affiliates1
 
Unbilled revenues148
 170
151
 170
Fuel, materials and supplies256
 297
264
 297
Prepayments25
 24
27
 24
Regulatory assets23
 20
20
 20
Other current assets7
 4
8
 4
Total Current Assets713
 780
769
 780
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant12,810
 12,746
12,906
 12,746
Less: accumulated depreciation - regulated utility plant1,550
 1,465
1,685
 1,465
Regulated utility plant, net11,260
 11,281
11,221
 11,281
Construction work in progress376
 317
574
 317
Property, Plant and Equipment, net11,636
 11,598
11,795
 11,598
      
Other Noncurrent Assets 
  
 
  
Regulatory assets828
 824
796
 824
Goodwill996
 996
996
 996
Other intangibles93
 95
88
 95
Other noncurrent assets78
 78
71
 78
Total Other Noncurrent Assets1,995
 1,993
1,951
 1,993
      
Total Assets$14,344
 $14,371
$14,515
 $14,371
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

Table of Contents

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$243
 $185
$190
 $185
Long-term debt due within one year94
 194
98
 194
Notes payable with affiliate82
 163
159
 163
Accounts payable204
 251
283
 251
Accounts payable to affiliates13
 6
8
 6
Customer deposits56
 56
57
 56
Taxes37
 39
52
 39
Price risk management liabilities4
 4
5
 4
Regulatory liabilities16
 18
15
 18
Interest74
 32
73
 32
Asset retirement obligations58
 60
94
 60
Other current liabilities88
 119
125
 119
Total Current Liabilities969
 1,127
1,159
 1,127
      
Long-term Debt      
      
Long-term debt4,572
 4,471
4,570
 4,471
Long-term debt to affiliate400
 400
400
 400
Total Long-term Debt4,972
 4,871
4,970
 4,871
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,786
 1,735
1,909
 1,735
Investment tax credits131
 132
130
 132
Accrued pension obligations332
 350
345
 350
Asset retirement obligations374
 373
261
 373
Regulatory liabilities897
 899
873
 899
Price risk management liabilities25
 27
24
 27
Other deferred credits and noncurrent liabilities188
 190
178
 190
Total Deferred Credits and Other Noncurrent Liabilities3,733
 3,706
3,720
 3,706
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 



 

      
Member's Equity4,670
 4,667
4,666
 4,667
      
Total Liabilities and Equity$14,344
 $14,371
$14,515
 $14,371
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


Table of Contents

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

Member's
Equity
Member's
Equity
December 31, 2016$4,667
$4,667
Net income103
322
Distributions to member(102)(316)
Other comprehensive income2
(7)
March 31, 2017$4,670
September 30, 2017$4,666
  
December 31, 2015$4,517
$4,517
Net income120
337
Contributions from member37
Distributions to member(29)(224)
Other comprehensive income1
4
March 31, 2016$4,609
September 30, 2016$4,671
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

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Table of Contents

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

Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
2017 20162017 2016 2017 2016
Operating Revenues          
Retail and wholesale$374
 $375
$361
 $366
 $1,055
 $1,058
Electric revenue from affiliate17
 11
2
 2
 23
 19
Total Operating Revenues391
 386
363
 368
 1,078
 1,077
          
Operating Expenses          
Operation          
Fuel80
 78
76
 86
 225
 233
Energy purchases64
 62
18
 19
 107
 104
Energy purchases from affiliate2
 2
3
 5
 8
 10
Other operation and maintenance87
 87
89
 85
 262
 264
Depreciation44
 41
47
 43
 136
 126
Taxes, other than income8
 8
8
 9
 25
 24
Total Operating Expenses285
 278
241
 247
 763
 761
          
Operating Income106
 108
122
 121
 315
 316
          
Other Income (Expense) - net(2) 
(1) (1) (2) (6)
          
Interest Expense17
 17
17
 18
 53
 53
          
Income Before Income Taxes87
 91
104
 102
 260
 257
          
Income Taxes33
 35
39
 39
 99
 98
          
Net Income (a)$54
 $56
$65
 $63
 $161
 $159
 
(a)Net income equals comprehensive income.

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


Table of Contents

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

Three Months Ended March 31,Nine Months Ended September 30,
2017 20162017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$54
 $56
$161
 $159
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation44
 41
136
 126
Amortization3
 3
11
 10
Defined benefit plans - expense2
 3
5
 6
Deferred income taxes and investment tax credits31
 37
96
 117
Change in current assets and current liabilities 
  
 
  
Accounts receivable13
 (5)12
 (17)
Accounts receivable from affiliates1
 (4)6
 (11)
Accounts payable(12) 5
(12) 24
Accounts payable to affiliates(4) 
(10) (6)
Unbilled revenues9
 7
11
 10
Fuel, materials and supplies33
 31
6
 11
Taxes payable(28) (9)(15) 
Accrued interest13
 13
12
 13
Other(11) (9)6
 1
Other operating activities 
  
 
  
Defined benefit plans - funding(1) (13)(3) (45)
Expenditures for asset retirement obligations(4) (1)(13) (11)
Other assets2
 
5
 (3)
Other liabilities(3) 2
4
 (1)
Net cash provided by operating activities142
 157
418
 383
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(94) (109)(293) (343)
Net cash provided by (used in) investing activities(94) (109)
Net cash used in investing activities(293) (343)
Cash Flows from Financing Activities 
  
 
  
Net increase in notes payable with affiliates10
 
Issuance of long-term debt60
 125
Retirement of long-term debt(60) (125)
Net increase (decrease) in short-term debt38
 (60)21
 (14)
Debt issuance and credit facility costs
 (1)(2) (1)
Payment of common stock dividends to parent(87) (25)(150) (87)
Contributions from parent
 30

 47
Net cash provided by (used in) financing activities(49) (56)
Net cash used in financing activities(121) (55)
Net Increase (Decrease) in Cash and Cash Equivalents(1) (8)4
 (15)
Cash and Cash Equivalents at Beginning of Period5
 19
5
 19
Cash and Cash Equivalents at End of Period$4
 $11
$9
 $4
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at March 31,$34
 $77
Accrued expenditures for property, plant and equipment at September 30,$83
 $46
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$4
 $5
$9
 $5
Accounts receivable (less reserve: 2017, $2; 2016, $2) 
  
Accounts receivable (less reserve: 2017, $1; 2016, $2) 
  
Customer97
 109
96
 109
Other10
 11
14
 11
Accounts receivable from affiliates27
 28
22
 28
Unbilled revenues66
 75
64
 75
Fuel, materials and supplies110
 143
137
 143
Prepayments12
 12
15
 12
Regulatory assets12
 9
11
 9
Other current assets2
 1
2
 1
Total Current Assets340
 393
370
 393
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant5,396
 5,357
5,447
 5,357
Less: accumulated depreciation - regulated utility plant534
 498
575
 498
Regulated utility plant, net4,862
 4,859
4,872
 4,859
Construction work in progress156
 133
279
 133
Property, Plant and Equipment, net5,018
 4,992
5,151
 4,992
      
Other Noncurrent Assets 
  
 
  
Regulatory assets448
 450
413
 450
Goodwill389
 389
389
 389
Other intangibles57
 59
54
 59
Other noncurrent assets16
 17
13
 17
Total Other Noncurrent Assets910
 915
869
 915
      
Total Assets$6,268
 $6,300
$6,390
 $6,300
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$207
 $169
$190
 $169
Long-term debt due within one year94
 194
98
 194
Notes payable with affiliate10
 
Accounts payable115
 148
166
 148
Accounts payable to affiliates22
 26
17
 26
Customer deposits27
 27
27
 27
Taxes12
 40
25
 40
Price risk management liabilities4
 4
5
 4
Regulatory liabilities5
 5
5
 5
Interest24
 11
23
 11
Asset retirement obligations29
 41
33
 41
Other current liabilities27
 36
46
 36
Total Current Liabilities566
 701
645
 701
      
Long-term Debt1,524
 1,423
1,521
 1,423
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,006
 974
1,073
 974
Investment tax credits36
 36
36
 36
Accrued pension obligations50
 53
47
 53
Asset retirement obligations114
 104
85
 104
Regulatory liabilities419
 419
388
 419
Price risk management liabilities25
 27
24
 27
Other deferred credits and noncurrent liabilities85
 87
84
 87
Total Deferred Credits and Other Noncurrent Liabilities1,735
 1,700
1,737
 1,700
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 



 

      
Stockholder's Equity 
  
 
  
Common stock - no par value (a)424
 424
424
 424
Additional paid-in capital1,682
 1,682
1,682
 1,682
Earnings reinvested337
 370
381
 370
Total Equity2,443
 2,476
2,487
 2,476
      
Total Liabilities and Equity$6,268
 $6,300
$6,390
 $6,300
 
(a)75,000 shares authorized; 21,294 shares issued and outstanding at March 31,September 30, 2017 and December 31, 2016.

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


Table of Contents

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
Common
stock
shares
outstanding
(a)
 
Common
stock
 Additional
paid-in
capital
 Earnings
reinvested
 Total
December 31, 201621,294
 $424
 $1,682
 $370
 $2,476
21,294
 $424
 $1,682
 $370
 $2,476
Net income

 

 

 54
 54


 

 

 161
 161
Cash dividends declared on common stock

 

 

 (87) (87)

 

 

 (150) (150)
March 31, 201721,294
 $424
 $1,682
 $337
 $2,443
September 30, 201721,294
 $424
 $1,682
 $381
 $2,487
                  
December 31, 201521,294
 $424
 $1,611
 $295
 $2,330
21,294
 $424
 $1,611
 $295
 $2,330
Net income

 

 

 56
 56


 

 

 159
 159
Capital contributions from LKE

 

 30
 

 30


 

 47
 

 47
Cash dividends declared on common stock

 

 

 (25) (25)

 

 

 (87) (87)
March 31, 201621,294
 $424
 $1,641
 $326
 $2,391
September 30, 201621,294
 $424
 $1,658
 $367
 $2,449
 
(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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Table of Contents

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

Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
2017 20162017 2016 2017 2016
Operating Revenues          
Retail and wholesale$435
 $451
$457
 $469
 $1,295
 $1,324
Electric revenue from affiliate2
 2
3
 5
 8
 10
Total Operating Revenues437
 453
460
 474
 1,303
 1,334
          
Operating Expenses          
Operation          
Fuel111
 120
126
 141
 351
 374
Energy purchases5
 4
4
 5
 13
 14
Energy purchases from affiliate17
 11
2
 2
 23
 19
Other operation and maintenance109
 106
104
 107
 313
 320
Depreciation60
 58
67
 59
 188
 175
Taxes, other than income8
 7
9
 7
 24
 22
Total Operating Expenses310
 306
312
 321
 912
 924
          
Operating Income127
 147
148
 153
 391
 410
          
Other Income (Expense) - net(1) (2)
 (3) (3) (4)
          
Interest Expense24
 24
24
 24
 72
 71
          
Income Before Income Taxes102
 121
124
 126
 316
 335
          
Income Taxes39
 46
47
 48
 120
 128
          
Net Income (a)$63
 $75
$77
 $78
 $196
 $207
 
(a)Net income approximates comprehensive income.

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


Table of Contents

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

Three Months Ended March 31,Nine Months Ended September 30,
2017 20162017 2016
Cash Flows from Operating Activities 
  
 
  
Net income$63
 $75
$196
 $207
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation60
 58
188
 175
Amortization4
 4
7
 10
Defined benefit plans - expense2
 2
3
 4
Deferred income taxes and investment tax credits37
 44
116
 122
Other
 (1)
Change in current assets and current liabilities 
  
 
  
Accounts receivable8
 (8)6
 (24)
Accounts receivable from affiliates(1) 
Accounts payable(4) 23
(6) (11)
Accounts payable to affiliates(7) 2
(16) 2
Unbilled revenues13
 1
8
 (4)
Fuel, materials and supplies8
 (10)28
 (4)
Taxes payable(34) (8)(21) 
Accrued interest22
 22
22
 22
Other(12) 1
(6) 2
Other operating activities 
  
 
  
Defined benefit plans - funding(19) (10)(22) (19)
Expenditures for asset retirement obligations(2) (1)(9) (4)
Other assets(1) 

 (4)
Other liabilities1
 
8
 (4)
Net cash provided by operating activities139
 195
501
 469
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(89) (110)(283) (255)
Net cash provided by (used in) investing activities(89) (110)
Net increase in notes receivable with affiliates(10) 
Other investing activities4
 1
Net cash used in investing activities(289) (254)
Cash Flows from Financing Activities 
  
 
  
Net increase (decrease) in short-term debt20
 (14)
Issuance of long-term debt
 96
Retirement of long-term debt
 (96)
Net decrease in short-term debt(16) (41)
Debt issuance and credit facility costs
 (1)(1) (1)
Payment of common stock dividends to parent(70) (64)(171) (197)
Net cash provided by (used in) financing activities(50) (79)
Contributions from parent
 20
Net cash used in financing activities(188) (219)
Net Increase (Decrease) in Cash and Cash Equivalents
 6
24
 (4)
Cash and Cash Equivalents at Beginning of Period7
 11
7
 11
Cash and Cash Equivalents at End of Period$7
 $17
$31
 $7
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at March 31,$41
 $40
Accrued expenditures for property, plant and equipment at September 30,$58
 $40
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$7
 $7
$31
 $7
Accounts receivable (less reserve: 2017, $1; 2016, $2) 
  
 
  
Customer118
 126
119
 126
Other13
 5
28
 5
Accounts receivable from affiliates1
 
Notes receivable from affiliate10
 
Unbilled revenues82
 95
87
 95
Fuel, materials and supplies146
 154
127
 154
Prepayments12
 12
14
 12
Regulatory assets11
 11
9
 11
Other current assets5
 3
6
 3
Total Current Assets394
 413
432
 413
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant7,405
 7,382
7,452
 7,382
Less: accumulated depreciation - regulated utility plant1,014
 965
1,110
 965
Regulated utility plant, net6,391
 6,417
6,342
 6,417
Construction work in progress219
 181
293
 181
Property, Plant and Equipment, net6,610
 6,598
6,635
 6,598
      
Other Noncurrent Assets 
  
 
  
Regulatory assets380
 374
383
 374
Goodwill607
 607
607
 607
Other intangibles36
 36
34
 36
Other noncurrent assets59
 57
55
 57
Total Other Noncurrent Assets1,082
 1,074
1,079
 1,074
      
Total Assets$8,086
 $8,085
$8,146
 $8,085
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

Table of Contents

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

March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$36
 $16
$
 $16
Accounts payable76
 78
105
 78
Accounts payable to affiliates50
 56
42
 56
Customer deposits29
 29
30
 29
Taxes11
 45
24
 45
Regulatory liabilities11
 13
10
 13
Interest38
 16
38
 16
Asset retirement obligations29
 19
61
 19
Other current liabilities27
 36
35
 36
Total Current Liabilities307
 308
345
 308
      
Long-term Debt2,327
 2,327
2,328
 2,327
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,208
 1,170
1,289
 1,170
Investment tax credits95
 96
94
 96
Accrued pension obligations44
 62
37
 62
Asset retirement obligations260
 269
176
 269
Regulatory liabilities478
 480
485
 480
Other deferred credits and noncurrent liabilities50
 50
43
 50
Total Deferred Credits and Other Noncurrent Liabilities2,135
 2,127
2,124
 2,127
      
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
 2,616
2,616
 2,616
Accumulated other comprehensive loss
 (1)
 (1)
Earnings reinvested393
 400
425
 400
Total Equity3,317
 3,323
3,349
 3,323
      
Total Liabilities and Equity$8,086
 $8,085
$8,146
 $8,085
 
(a)80,000 shares authorized; 37,818 shares issued and outstanding at March 31,September 30, 2017 and December 31, 2016.

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


Table of Contents

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
 TotalCommon
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
37,818
 $308
 $2,616
 $400
 $(1) $3,323
Net income

 

 

 63
 

 63


 

 

 196
 

 196
Cash dividends declared on common stock

 

 

 (70) 

 (70)

 

 

 (171) 

 (171)
Other comprehensive income

 

 

 

 1
 1


 

 

 

 1
 1
March 31, 201737,818
 $308
 $2,616
 $393
 $
 $3,317
September 30, 201737,818
 $308
 $2,616
 $425
 $
 $3,349
                      
December 31, 201537,818
 $308
 $2,596
 $383
 $
 $3,287
37,818
 $308
 $2,596
 $383
 $
 $3,287
Capital contributions from LKE

   20
 

 

 20
Net income

 

 

 75
 

 75


 

 

 207
 

 207
Cash dividends declared on common stock

 

 

 (64) 

 (64)

 

 

 (197) 

 (197)
March 31, 201637,818
 $308
 $2,596
 $394
 $
 $3,298
Other comprehensive income (loss)

 

 

 

 (1) (1)
September 30, 201637,818
 $308
 $2,616
 $393
 $(1) $3,316
 
(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.

 

Table of Contents

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 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, 2016 is derived from that Registrant's 2016 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 2016 Form 10-K. The results of operations for the three and nine months ended March 31,September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017 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 March 31, 2017 financial statements.

2. Summary of Significant Accounting Policies
 
(All Registrants)PPL and PPL Electric)
 
The following accounting policy disclosures represent updates to Note 1 in each indicated Registrant's 2016 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. Accounts receivable that are acquired are initially recorded at fair value on the date of acquisition. During the three and nine months ended March 31,September 30, 2017, PPL Electric purchased $324 million and $968 million of accounts receivable from alternative energy suppliers. During the three and nine months ended September 30, 2016, PPL Electric purchased $356$365 million and $382 million$1.0 billion of accounts receivable from alternative electricity suppliers.


Table of Contents

3. Segment and Related Information
 
(PPL)
 
See Note 2 in PPL's 2016 Form 10-K for a discussion of reportable segments and related information.

Income Statement data for the segments and reconciliation to PPL's consolidated results for the periods ended March 31September 30 are as follows:
Three MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
Income Statement Data          
Revenues from external customers          
U.K. Regulated$568
 $595
$477
 $515
 $1,547
 $1,673
Kentucky Regulated809
 826
818
 835
 2,350
 2,382
Pennsylvania Regulated573
 585
547
 539
 1,620
 1,619
Corporate and Other1
 5
3
 
 4
 11
Total$1,951
 $2,011
$1,845
 $1,889
 $5,521
 $5,685
          
Net Income 
  
 
  
  
  
U.K. Regulated (a)$286
 $289
$126
 $281
 $560
 $915
Kentucky Regulated95
 112
125
 126
 299
 314
Pennsylvania Regulated79
 94
95
 91
 251
 263
Corporate and Other(57) (14)9
 (25) (60) (55)
Total$403
 $481
$355
 $473
 $1,050
 $1,437

(a)Includes unrealized gains and losses from hedging foreign-currency related economic activity. See Note 13 for additional information.

The following provides Balance Sheet data for the segments and reconciliation to PPL's consolidated results as of:
March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
Balance Sheet Data 
  
 
  
Assets 
  
 
  
U.K. Regulated (a)$15,039
 $14,537
$16,052
 $14,537
Kentucky Regulated14,010
 14,037
14,181
 14,037
Pennsylvania Regulated9,699
 9,426
10,323
 9,426
Corporate and Other (b)286
 315
202
 315
Total$39,034
 $38,315
$40,758
 $38,315
 
(a)Includes $10.9$11.7 billion and $10.8 billion of net PP&E as of March 31,September 30, 2017 and December 31, 2016. WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.
(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.

Table of Contents

 
Reconciliations of the amounts of income and shares of PPL common stock (in thousands) for the periods ended March 31September 30 used in the EPS calculation are:
Three MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
Income (Numerator) 
  
 
  
  
  
Net income$403
 $481
$355
 $473
 $1,050
 $1,437
Less amounts allocated to participating securities1
 2
1
 1
 2
 4
Net income available to PPL common shareowners - Basic and Diluted$402
 $479
$354
 $472
 $1,048
 $1,433
          
Shares of Common Stock (Denominator) 
  
 
  
  
  
Weighted-average shares - Basic EPS680,882
 675,441
686,563
 678,114
 683,783
 676,905
Add incremental non-participating securities: 
  
 
  
  
  
Share-based payment awards2,202
 3,376
2,183
 2,234
 2,298
 3,064
Weighted-average shares - Diluted EPS683,084
 678,817
688,746
 680,348
 686,081
 679,969
          
Basic EPS 
  
 
  
  
  
Net Income available to PPL common shareowners$0.59
 $0.71
$0.52
 $0.70
 $1.53
 $2.12
          
Diluted EPS 
  
 
  
  
  
Net Income available to PPL common shareowners$0.59
 $0.71
$0.51
 $0.69
 $1.53
 $2.11
 
For the periods ended March 31,September 30, PPL issued common stock related to stock-based compensation plans and the DRIP as follows (in thousands):
Three MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
Stock-based compensation plans (a)887
 2,125
256
 248
 1,707
 3,168
DRIP445
 402
355
 761
 1,169
 1,533
 
(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 March 31,September 30, the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would have been antidilutive.
 Three Months
 2017 2016
Stock options696
 696
 Three Months Nine Months
 2017 2016 2017 2016
Stock options696
 696
 696
 696
Performance units
 316
 
 210
 

Table of Contents

5. Income Taxes
 
Reconciliations of income taxes for the periods ended March 31September 30 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 Electric)   
(PPL)(PPL)
Three MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$44
 $53
$165
 $214
 $480
 $681
Increase (decrease) due to: 
  
 
  
  
  
State income taxes, net of federal income tax benefit8
 9
14
 13
 37
 37
Valuation allowance adjustments4
 4
 9
 13
Impact of lower U.K. income tax rates(45) (37) (133) (136)
U.S. income tax on foreign earnings - net of foreign tax credit (a)(8) (1) (24) (3)
Impact of the U.K. Finance Acts (b)(3) (42) (12) (42)
Depreciation not normalized(2) (1)(2) 
 (7) (6)
Interest benefit on U.K. financing entities(4) (4) (12) (13)
Stock-based compensation(2) (5)
 (1) (7) (12)
Other(5) (7) (10) (9)
Total increase (decrease)4
 3
(49) (75) (159) (171)
Total income taxes$48
 $56
$116
 $139
 $321
 $510

(a)Lower income taxes primarily due to the tax benefit of accelerated pension contributions made in the first quarter of 2017. The related tax benefit is recognized over the annual period as a result of utilizing an estimated annual effective tax rate.
(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.
(PPL Electric)       
 Three Months Nine Months
 2017 2016 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$56
 $52
 $144
 $149
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit9
 9
 26
 27
Depreciation not normalized(1) (2) (5) (5)
Stock-based compensation
 
 (5) (7)
Other
 (1) (1) (2)
Total increase (decrease)8
 6
 15
 13
Total income taxes$64
 $58
 $159
 $162
(LKE)           
Three MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$58
 $67
$74
 $74
 $181
 $189
Increase (decrease) due to: 
  
 
  
  
  
State income taxes, net of federal income tax benefit6
 7
8
 8
 19
 20
Amortization of investment tax credit(1) (1) (2) (2)
Stock-based compensation
 (1) (1) (2)
Other(1) (2)(2) (1) (2) (3)
Total increase (decrease)5
 5
5
 5
 14
 13
Total income taxes$63
 $72
$79
 $79
 $195
 $202

(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
Table of Contents

(LG&E)       
 Three Months Nine Months
 2017 2016 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$36
 $36
 $91
 $90
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit4
 4
 10
 10
Other(1) (1) (2) (2)
Total increase (decrease)3
 3
 8
 8
Total income taxes$39
 $39
 $99
 $98
(KU)          
Three MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$36
 $42
$43
 $44
 $111
 $117
Increase (decrease) due to: 
  
 
  
  
  
State income taxes, net of federal income tax benefit4
 4
5
 5
 11
 12
Other(1) 
(1) (1) (2) (1)
Total increase (decrease)3
 4
4
 4
 9
 11
Total income taxes$39
 $46
$47
 $48
 $120
 $128

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 ElectricPPL PPL Electric
March 31,
2017
 December 31,
2016
 March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
 September 30,
2017
 December 31,
2016
Current Regulatory Assets:              
Environmental cost recovery$6
 $6
 $
 $
$4
 $6
 $
 $
Generation formula rate11
 11
 
 
8
 11
 
 
Transmission service charge
 7
 
 7

 7
 
 7
Gas supply clause6
 3
 
 
Smart meter rider8
 6
 8
 6
12
 6
 12
 6
Storm costs4
 5
 4
 5
1
 5
 1
 5
Other7
 4
 1
 1
3
 1
 1
 1
Total current regulatory assets (a)$36
 $39
 $13
 $19
$34
 $39
 $14
 $19
              
Noncurrent Regulatory Assets:              
Defined benefit plans$936
 $947
 $543
 $549
$908
 $947
 $530
 $549
Taxes recoverable through future rates343
 340
 343
 340
347
 340
 347
 340
Storm costs44
 57
 
 9
37
 57
 
 9
Unamortized loss on debt58
 61
 34
 36
55
 61
 30
 36
Interest rate swaps126
 129
 
 
29
 31
 
 
Terminated interest rate swaps93
 98
 
 
Accumulated cost of removal of utility plant160
 159
 160
 159
166
 159
 166
 159
AROs228
 211
 
 
224
 211
 
 
Other13
 14
 
 1
10
 14
 
 1
Total noncurrent regulatory assets$1,908
 $1,918
 $1,080
 $1,094
$1,869
 $1,918
 $1,073
 $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
        
Table of Contents

PPL PPL ElectricPPL PPL Electric
September 30,
2017
 December 31,
2016
 September 30,
2017
 December 31,
2016
Current Regulatory Liabilities:       
Generation supply charge$29
 $23
 $29
 $23
Transmission service charge6
 
 6
 
Universal service rider19
 14
 19
 14
Transmission formula rate4
 15
 4
 15
Fuel adjustment clause11
 11
 
 
Act 129 compliance rider7
 17
 7
 17
Storm damage expense7
 13
 7
 13
Other4
 8
 
 1
Total current regulatory liabilities$87
 $101
 $72
 $83
March 31,
2017
 December 31,
2016
 March 31,
2017
 December 31,
2016
       
Noncurrent Regulatory Liabilities:              
Accumulated cost of removal of utility plant$701
 $700
 $
 $
$678
 $700
 $
 $
Power purchase agreement - OVEC (b)74
 75
 
 
69
 75
 
 
Net deferred tax assets22
 23
 
 
21
 23
 
 
Defined benefit plans23
 23
 
 
27
 23
 
 
Interest rate swaps76
 78
 
 
Terminated interest rate swaps74
 78
 
 
Other1
 
 
 
4
 
 
 
Total noncurrent regulatory liabilities$897
 $899
 $
 $
$873
 $899
 $
 $
LKE LG&E KULKE LG&E KU
March 31,
2017
 December 31,
2016
 March 31,
2017
 December 31,
2016
 March 31,
2017
 December 31,
2016
September 30,
2017
 December 31,
2016
 September 30,
2017
 December 31,
2016
 September 30,
2017
 December 31,
2016
Current Regulatory Assets:                      
Environmental cost recovery$6
 $6
 $6
 $6
 $
 $
$4
 $6
 $4
 $6
 $
 $
Generation formula rate11
 11
 
 
 11
 11
8
 11
 
 
 8
 11
Gas supply clause6
 3
 6
 3
 
 
Other6
 3
 6
 3
 
 
2
 
 1
 
 1
 
Total current regulatory assets$23
 $20
 $12
 $9
 $11
 $11
$20
 $20
 $11
 $9
 $9
 $11
                      
Noncurrent Regulatory Assets:                      
Defined benefit plans$393
 $398
 $242
 $246
 $151
 $152
$378
 $398
 $235
 $246
 $143
 $152
Storm costs44
 48
 24
 26
 20
 22
37
 48
 20
 26
 17
 22
Unamortized loss on debt24
 25
 15
 16
 9
 9
25
 25
 16
 16
 9
 9
Interest rate swaps126
 129
 86
 88
 40
 41
29
 31
 29
 31
 
 
Terminated interest rate swaps93
 98
 54
 57
 39
 41
AROs228
 211
 77
 70
 151
 141
224
 211
 57
 70
 167
 141
Plant retirement costs3
 4
 
 
 3
 4
2
 4
 
 
 2
 4
Other10
 9
 4
 4
 6
 5
8
 9
 2
 4
 6
 5
Total noncurrent regulatory assets$828
 $824
 $448
 $450
 $380
 $374
$796
 $824
 $413
 $450
 $383
 $374

Table of Contents

LKE LG&E KU
September 30,
2017
 December 31,
2016
 September 30,
2017
 December 31,
2016
 September 30,
2017
 December 31,
2016
Current Regulatory Liabilities:                      
Demand side management$2
 $3
 $1
 $2
 $1
 $1
$
 $3
 $
 $2
 $
 $1
Fuel adjustment clause13
 11
 4
 2
 9
 9
11
 11
 3
 2
 8
 9
Other1
 4
 
 1
 1
 3
4
 4
 2
 1
 2
 3
Total current regulatory liabilities$16
 $18
 $5
 $5
 $11
 $13
$15
 $18
 $5
 $5
 $10
 $13
                      
Noncurrent Regulatory Liabilities:                      
Accumulated cost of removal
of utility plant
$701
 $700
 $308
 $305
 $393
 $395
$678
 $700
 $281
 $305
 $397
 $395
Power purchase agreement - OVEC (b)74
 75
 51
 52
 23
 23
69
 75
 48
 52
 21
 23
Net deferred tax assets22
 23
 22
 23
 
 
21
 23
 21
 23
 
 
Defined benefit plans23
 23
 
 
 23
 23
27
 23
 
 
 27
 23
Interest rate swaps76
 78
 38
 39
 38
 39
Terminated interest rate swaps74
 78
 37
 39
 37
 39
Other1
 
 
 
 1
 
4
 
 1
 
 3
 
Total noncurrent regulatory liabilities$897
 $899
 $419
 $419
 $478
 $480
$873
 $899
 $388
 $419
 $485
 $480
  
(a)For PPL, these amounts are included in "Other current assets" on the Balance Sheets.
(b)This liability was recorded as an offset to an intangible asset that was recorded at fair value upon the acquisition of LKE by PPL.


Regulatory Matters
 
Kentucky Activities
 
Rate Case Proceedings (PPL, LKE, LG&E and KU)

OnRate Case Proceedings

In November 23, 2016, LG&E and KU filed 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 would 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.rates. LG&E's and KU's applications includeincluded requests for CPCNs for implementing an Advanced Metering System program and a Distribution Automation program. The applications are based on a forecasted test year of July 1, 2017 through June 30, 2018 and a requested return 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 provideprovided 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. TheSystem and other changes to the revenue requirements, which dealt primarily with the timing of cost recovery, including depreciation rates.

On June 22, 2017, the KPSC issued orders approving, with certain modifications, the proposed stipulations wouldfiled in April and May 2017. On June 29, 2017, the KPSC issued further orders correcting certain revenue requirement and rate calculations and making other technical corrections to the June 22, 2017 orders. The combined KPSC orders modified the stipulations to provide for increases in annual revenue requirements associated with KU base electricity rates of $52 million, LG&E base electricity rates of $57 million and LG&E base gas rates of $7 million, and incorporate an authorized return on equity of 9.7%. Consistent with the stipulations, the orders approved LG&E's and KU's request for implementing a Distribution Automation program and withdrawal of a request for a CPCN for the Advanced Metering System program. The orders also approved new depreciation rates for LG&E and KU that will result in higher depreciation of approximately $15 million ($4 million for LG&E and $11 million for KU) in 2017, exclusive of net additions to PP&E. The orders result in a base electricity rate increase of 3.4%3.2% at KU and base electricity and gas rate increases of 5.4%5.2% and 2.3%2.1% at LG&E. The proposed stipulations remain subject to KPSC approval. If approved, new base rates and all elements of the stipulations would beorders became effective July 1, 2017. A public hearingOn June 23, 2017, the KPSC also issued orders establishing an authorized return on equity of 9.7% for all of LG&E's and KU's existing approved ECR plans and projects, replacing the applicationsprior authorized return on equity levels of 9.8% for CCR projects and 10% for all other ECR approved projects, effective with bills issued in August 2017. The impact of the new authorized return for ECR projects is schedulednot expected to commence on May 9,be significant in 2017. LG&E and KU cannot predict the outcome

Table of these proceedings.Contents

Gas Franchise (LKE and LG&E)
 
LG&E’s gas franchise agreement for the Louisville/Jefferson County service area expired in March 2016. In August 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 shallwill revert to zero. In August 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, in November 2016, filed an amended complaint against LG&E relating to these issues. 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 denying Louisville/Jefferson County's motion to dismiss, consolidating the matter with LG&E's filed application and establishing a procedural schedule for the case. On September 28, 2017, oral arguments were heard by the KPSC and a final order is expected in 2017. Until the KPSC issues a final order in 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:
March 31, 2017 December 31, 2016September 30, 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 Facility (a)Jan. 2022 £210
 £161
 £
 £49
 £160
 £
Jan. 2022 £210
 £155
 £
 £54
 £160
 £
Term Loan Facility (b)Dec. 2017 230
 230
 
 
 
 
Dec. 2017 230
 230
 
 
 
 
WPD (South West)   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit Facility (c)July 2021 245
 72
 
 173
 110
 
July 2021 245
 
 
 245
 110
 
WPD (East Midlands)  
  
  
  
  
  
  
  
  
  
  
  
Syndicated Credit Facility (d)July 2021 300
 128
 
 172
 9
 
July 2021 300
 116
 
 184
 9
 
WPD (West Midlands)  
  
  
  
  
  
  
  
  
  
  
  
Syndicated Credit FacilityJuly 2021 300
 
 
 300
 
 
July 2021 300
 
 
 300
 
 
Uncommitted Credit Facilities (e)  90
 
 4
 86
 60
 4
  100
 70
 4
 26
 60
 4
Total U.K. Credit Facilities (f)  £1,375
 £591
 £4
 £780
 £339
 £4
  £1,385
 £571
 £4
 £809
 £339
 £4
U.S.             
PPL Capital Funding             
Syndicated Credit FacilityJan. 2022 $950
 $
 $189
 $761
 $
 $20
Syndicated Credit FacilityNov. 2018 300
 
 
 300
 
 
Bilateral Credit FacilityMar. 2018 150
 
 17
 133
 
 17
Total PPL Capital Funding Credit Facilities $1,400
 $
 $206
 $1,194
 $
 $37
            

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March 31, 2017 December 31, 2016September 30, 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
U.S.             
PPL Capital Funding             
Syndicated Credit FacilityJan. 2022 $950
 $
 $285
 $665
 $
 $20
Syndicated Credit FacilityNov. 2018 300
 
 
 300
 
 
Bilateral Credit FacilityMar. 2018 150
 
 18
 132
 
 17
Total PPL Capital Funding Credit Facilities $1,400
 $
 $303
 $1,097
 $
 $37
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
Jan. 2022 $650
 $
 $1
 $649
 $
 $296
                        
LKE   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit FacilityOct. 2018 $75
 $
 $
 $75
 $
 $
Oct. 2018 $75
 $
 $
 $75
 $
 $
                        
LG&E   
  
  
  
  
     
  
  
  
  
  
Syndicated Credit FacilityJan. 2022 $500
 $
 $207
 $293
 $
 $169
Jan. 2022 $500
 $
 $190
 $310
 $
 $169
                        
KU   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit FacilityJan. 2022 $400
 $
 $36
 $364
 $
 $16
Jan. 2022 $400
 $
 $
 $400
 $
 $16
Letter of Credit FacilityOct. 2017 198
 
 198
 
 
 198
Oct. 2020 198
 
 198
 
 
 198
Total KU Credit Facilities  $598
 $
 $234
 $364
 $
 $214
  $598
 $
 $198
 $400
 $
 $214
 
(a)The amounts borrowed at March 31,September 30, 2017 and December 31, 2016 were USD-denominated borrowings of $200 million for both periods, which bore interest at 1.61%2.06% and 1.43%. The unused capacity reflects the amount borrowed in GBP of £161£156 million as of the date borrowed.
(b)The amount borrowed at March 31,September 30, 2017 was a GBP-denominated borrowing which equated to $286$296 million and bore interest at 1.51%1.50%.
(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 $137 million and bore interest at 0.66%.
(d)
The amounts borrowed at September 30, 2017 and December 31, 2016 were GBP-denominated borrowings which equated to $150 millionand $11 million and bore interest at 0.65% and 0.66%.
(e)The amounts borrowed at September 30, 2017 and December 31, 2016 were GBP-denominated borrowings which equated to $90 million and $75 million and bore interest at 1.29% and 1.26%.
(f)At March 31,September 30, 2017, the unused capacity under the U.K. credit facilities was $972 million.$1.0 billion.

(PPL, LKE and LG&E)

In October 2017, LG&E entered into a $200 million term loan credit facility expiring in 2019. On October 26, 2017, LG&E borrowed $100 million under this facility bearing interest of 1.74%. The proceeds will be used to repay short-term debt and for general corporate purposes.

(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:

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March 31, 2017 December 31, 2016September 30, 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 Funding1.25% $1,000
 $189
 $811
 1.10% $20
1.41% $1,000
 $285
 $715
 1.10% $20
PPL Electric1.26% 650
 499
 151
 1.05% 295

 650
 
 650
 1.05% 295
LG&E1.19% 350
 207
 143
 0.94% 169
1.38% 350
 190
 160
 0.94% 169
KU1.18% 350
 36
 314
 0.87% 16

 350
 
 350
 0.87% 16
Total  $2,350
 $931
 $1,419
   $500
  $2,350
 $475
 $1,875
   $500

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

See Note 10 for discussion of intercompany borrowings.

Long-term Debt

(PPL)

In March 2017, WPD (South Wales) issued £50 million of 0.01% Index-linked Senior Notes due 2029. WPD (South Wales) received proceeds of £53 million, which equated to $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 indenture. The proceeds will bewere used for general corporate purposes.

In September 2017, PPL Capital Funding issued $500 million of 4.00% Senior Notes due 2047. PPL Capital Funding received proceeds of $490 million, net of a discount and underwriting fees, which were used to repay short-term debt obligations and for general corporate purposes.

(PPL and PPL Electric)

In May 2017, PPL Electric issued $475 million of 3.95% First Mortgage Bonds due 2047. PPL Electric received proceeds of $466 million, net of a discount and underwriting fees, which were used to repay short-term debt incurred primarily for capital expenditures.

In August 2017, the LCIDA remarketed $108 million of Pollution Control Revenue Refunding Bonds (PPL Electric Utilities Corporation Project), Series 2016B due 2027 previously issued on behalf of PPL Electric. The bonds were remarketed at a long-term rate and will bear interest at 1.80% through their mandatory purchase date of August 15, 2022.

In September 2017, the LCIDA remarketed $116 million of Pollution Control Revenue Refunding Bonds (PPL Electric Utilities Corporation Project), Series 2016A due 2029 previously issued on behalf of PPL Electric. The bonds were remarketed at a long-term rate and will bear interest at 1.80% through their mandatory purchase date of September 1, 2022.

(PPL, LKE and LG&E)

In April 2017, the Louisville/Jefferson County Metro Government of Kentucky remarketed $128 million of Pollution Control Revenue Bonds, 2003 Series A (Louisville Gas and Electric Company Project) due 2033 previously issued on behalf of LG&E. The bonds were remarketed at a long termlong-term rate and will bear interest at 1.50% through their mandatory purchase date of April 1, 2019.

In June 2017, the County of Trimble, Kentucky issued $60 million of Environmental Facilities Revenue Refunding Bonds, 2017 Series A (Louisville Gas and Electric Company Project) due 2033 on behalf of LG&E. The bonds were issued bearing interest at a rate of 3.75% through their maturity and are subject to an optional redemption on or after June 1, 2027. The proceeds of the bonds were used to redeem $60 million of Environmental Facilities Revenue Refunding Bonds, 2007 Series A (Louisville Gas and Electric Company Project) due 2033 previously issued by the County of Trimble, Kentucky on behalf of LG&E.

In June 2017, the Louisville/Jefferson County Metro Government of Kentucky remarketed $31 million of Environmental Facilities Revenue Refunding Bonds, 2007 Series A (Louisville Gas and Electric Company Project) due 2033 previously issued

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on behalf of LG&E. The bonds were remarketed at a long-term rate and will bear interest at 1.25% through their mandatory purchase date of June 3, 2019.

In June 2017, the Louisville/Jefferson County Metro Government of Kentucky remarketed $35 million of Environmental Facilities Revenue Refunding Bonds, 2007 Series B (Louisville Gas and Electric Company Project) due 2033 previously issued on behalf of LG&E. The bonds were remarketed at a long-term rate and will bear interest at 1.25% through their mandatory purchase date of June 3, 2019.

(PPL)

ATM Program

In February 2015, PPL 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 March 31,September 30, PPL issued the following:
Three MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
Number of shares (in thousands)1,364
 
2,049
 710
 5,526
 710
Average share price$36.66
 $
$39.04
 $35.23
 $38.49
 $35.23
Net Proceeds$50
 $
$79
 $25
 $211
 $25

Distributions

In FebruaryAugust 2017, PPL declared a quarterly common stock dividend, payable April 3,October 2, 2017, of 39.5 cents per share (equivalent to $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. 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 March 31:September 30:
Pension BenefitsPension Benefits
Three MonthsThree Months Nine Months
U.S. U.K.U.S. U.K. U.S. U.K.
2017 2016 2017 20162017 2016 2017 2016 2017 2016 2017 2016
PPL                      
Service cost$17
 $17
 $19
 $18
$17
 $16
 $20
 $17
 $49
 $49
 $57
 $53
Interest cost42
 43
 43
 62
42
 44
 45
 58
 126
 131
 132
 182
Expected return on plan assets(57) (56) (125) (133)(58) (57) (130) (124) (173) (171) (382) (389)
Amortization of:                      
Prior service cost2
 1
 
 
2
 2
 
 
 7
 6
 
 
Actuarial loss20
 15
 35
 37
18
 12
 36
 34
 52
 37
 107
 107
Net periodic defined benefit costs (credits) before special termination benefits24
 20
 (28) (16)
Special termination benefits (a)2
 
 
 
Net periodic defined benefit costs (credits) before settlements and special termination benefits21
 17
 (29) (15) 61
 52
 (86) (47)
Settlements (a)7
 3
 
 
 7
 3
 
 
Special termination benefits (b)
 
 
 
 1
 
 
 
Net periodic defined benefit costs (credits)$26
 $20
 $(28) $(16)$28
 $20
 $(29) $(15) $69
 $55
 $(86) $(47)


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(a)2017 includes settlement charges of $5 million from the LG&E qualified pension plan and $2 million from the PPL non-qualified pension plan and 2016 includes a settlement charge of $3 million from the PPL non-qualified pension plan. These settlements resulted from lump sum payments that exceeded service cost and interest cost components of net periodic pension cost for the year.
(b)Enhanced pension benefits offered to certain PPL Electric bargaining unit employees under a one-time voluntary retirement window offered as part of the new five year IBEW contract ratified in March 2017.
 Pension Benefits
 Three Months Nine Months
 2017 2016 2017 2016
LKE       
Service cost$6
 $6
 $18
 $18
Interest cost17
 18
 51
 53
Expected return on plan assets(23) (23) (69) (68)
Amortization of:       
Prior service cost2
 2
 6
 6
Actuarial loss (a)8
 5
 23
 15
Net periodic defined benefit costs before settlements10
 8
 29
 24
Settlements (b)5
 
 5
 
Net periodic defined benefit costs$15
 $8
 $34
 $24
        
LG&E       
Service cost$
 $
 $1
 $1
Interest cost3
 4
 9
 11
Expected return on plan assets(5) (5) (16) (15)
Amortization of:       
Prior service cost1
 1
 3
 3
Actuarial loss (a)3
 2
 7
 5
Net periodic defined benefit costs before settlements2
 2
 4
 5
Settlements (b)5
 
 5
 
Net periodic defined benefit costs$7
 $2
 $9
 $5

(a)
As a result of treatment approved by the KPSC, the difference between actuarial loss calculated in accordance with LKE's accounting policy and actuarial loss calculated using a 15-year amortization period was $3 million and $8 million for the three and nine months ended September 30, 2017 and $4 million for the nine months ended September 30, 2016. The difference between actuarial loss calculated in accordance with LG&E's accounting policy and actuarial loss calculated using a 15-year amortization period was $1 million and $3 million for the three and nine months ended September 30, 2017 and $1 million for the three months ended September 30, 2016. These differences are recorded as regulatory assets.
(b)Due to the amount of lump sum payment distributions from the LG&E qualified pension plan, a settlement charge of $5 million was incurred. In accordance with existing regulatory accounting treatment, LG&E has maintained the settlement charge in regulatory assets. The amount will be amortized in accordance with existing regulatory practice.
 Other Postretirement Benefits
 Three Months Nine Months
 2017 2016 2017 2016
PPL       
Service cost$2
 $2
 $6
 $6
Interest cost5
 6
 17
 19
Expected return on plan assets(6) (6) (17) (17)
Amortization of prior service cost
 
 (1) 
Amortization of actuarial loss1
 1
 1
 1
Net periodic defined benefit costs$2
 $3
 $6
 $9
        

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Pension BenefitsOther Postretirement Benefits
Three MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
LKE          
Service cost$7
 $6
$1
 $1
 $3
 $3
Interest cost16
 17
2
 2
 6
 7
Expected return on plan assets(22) (21)(2) (2) (5) (5)
Amortization of:   
Prior service cost2
 1
Actuarial loss11
 5
Amortization of prior service cost1
 1
 1
 2
Net periodic defined benefit costs$14
 $8
$2
 $2
 $5
 $7
   
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 plansplan 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. LG&E and KU are also allocated costs of defined benefit plans from LKS for defined benefit plans sponsored by LKE. See Note 10 for more information on costs allocated to LG&E and KU from LKS. These allocations are based on participation in those plans, which management believes are reasonable. For the periods ended March 31,September 30, 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 MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
PPL Electric$8
 $6
$6
 $6
 $19
 $17
LG&E3
 2
3
 2
 8
 7
KU4
 3
2
 2
 7
 8

Expected Cash Flows - U.K. Pension Plans

(PPL)

For the threenine months ended March 31,September 30, 2017, WPD contributed $462$485 million to its U.K. pension plans. WPD made additional contributions in the second quarter of 2017 of $23 million. These accelerated contributions fund all of 2017 required contributions and a portion of 2018 required contributions. WPD does not expect to make additional contributions in 2017.

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

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for a class consisting of residents within four miles of the Cane Run plant. In their individual capacities, these plaintiffs sought 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 the common law tort claims. In November 2016, plaintiffs filed an amended complaint removing the personal injury claims and removing certain previously named plaintiffs. In February 2017, the District Court issued an order dismissing PPL as a defendant and dismissing the final federal claim against LG&E under the Clean Air Act, and directed the parties 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 issued an order declining to exercise supplemental jurisdiction and dismissing the case in its entirety, subject to certain federal appeals or state court re-filing rights of the parties. On June 16, 2017, the plaintiffs filed a class action complaint in Jefferson Circuit Court, Kentucky, against LG&E regarding the state law nuisance, negligence and trespass tort claims. The plaintiffs seek compensatory and punitive damages for alleged property damage due to purported plant emissions on behalf of a class of residents within one to three miles of the plant.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.
 
E.W. Brown Environmental Claims (PPL, LKE and KU)
 
In October 2015, KU received a notice of intent from EarthjusticeOn July 12, 2017, the Kentucky Waterways Alliance and the Sierra Club informing certain federal and state agencies of the Sierra Club's intent to filefiled a citizen suit following expirationcomplaint against KU in the U.S. District Court for the Eastern District of the mandatory 60-day notification period, for alleged violations of the Clean Water Act. The claimants allegeKentucky alleging discharges at the E.W. Brown plant in violation of applicable rulesthe Clean Water Act and the plant'splant’s water discharge permit. The claimants assert that, unless the alleged discharges are promptly brought into compliance, it intends to seek civil penalties, injunctive reliefpermit and attorney's fees. In November 2015, the claimants submitted an amended notice of intent to add the Kentucky Waterways Alliance as a claimant. In October 2016, the claimants submitted an additional notice of intent alleging management of waste in a mannercontamination that may present an imminent and substantial endangerment underin violation of the RCRA. The plaintiffs’ suit relates to prior notices of intent to file a citizen suit submitted in October and November 2015 and October 2016. These plaintiffs seek injunctive relief ordering KU to take all actions necessary to comply with the Clean Water Act violations, including ceasing the discharges in question, abating effects associated with prior discharges and eliminating the alleged imminent and substantial endangerment. These plaintiffs also seek assessment of civil penalties and an award of litigation costs and attorney fees. PPL, LKE and KU cannot predict the outcome of this matter or the potential impact on the operations of the E.W. Brown plant, including increased capital or operating costs, if any.

(PPL, LKE, LG&E and KU)

Trimble County Water Discharge Permit(PPL, LKE, LG&E and KU)
 
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. LG&E and the KEEC moved for discretionary review by the Kentucky Supreme Court. In February 2016, the Kentucky Supreme Court issued an order granting discretionary review and oral arguments were held in September 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.

Trimble County Landfill

Various state and federal permits and regulatory approvals are required in order to construct a landfill at the Trimble County plant to be used for disposal of CCRs. In October 2016, the Kentucky Division of Water issued a water quality certification and in February 2017, the Kentucky Division of Waste Management issued a “special waste” landfill permit. In March 2017, the Sierra Club and a resident adjacent to the plant filed administrative challenges to the landfill permit which were subsequently dismissed by agreed order entered in August 2017. In June 2017, the U.S. Army Corps of Engineers issued a dredge and fill permit, the final approval required for construction of the landfill. PPL, LKE, LG&E and KU are unable to predictbelieve that all permits and regulatory approvals issued for 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, but do not expect such costs to be material.project comply with applicable state and federal laws.
 
Regulatory Issues (All Registrants)
 
See Note 6 for information on regulatory matters related to utility rate regulation.


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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 and KU 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. It 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)

NAAQS
 
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. TheAmong other things, 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 (contributed to by nitrogen oxide emissions), particulate matter and sulfur dioxide. The established concentration levels for these six pollutants are known as NAAQS. Under the Clean Air Act, the EPA is required to reassess the NAAQS on a five-year schedule.
 
Federal environmental regulations of these criteriasix 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.

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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)Ozone
 
The EPA issued the current ozone standard in October 2015. 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 willare required to determine attainment with the new ozone standard through review of relevant(based on ambient air monitoring data, withdata) those areas that meet the standard and those that are in non-attainment. The EPA was scheduled to designate areas as being in attainment or nonattainment designations scheduledof the current ozone standard by no later than October 2017. 2017 which was to be followed by further regulatory proceedings identifying compliance measures and deadlines. However, the current implementation and compliance schedule is uncertain because the EPA failed to make nonattainment demonstrations by the applicable deadline. In addition, some industry groups have requested the EPA to defer implementation of the 2015 ozone standard, but the EPA has not yet acted on this request. While implementation of the 2015 ozone standard could potentially require the addition of SCRs at some LG&E and KU generating units, PPL, LKE, LG&E and KU are currently unable to determine what the compliance measures and deadlines may ultimately be with respect to the new standard.

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 inAs a result of a partial consent decree addressing claims regarding federal implementation, the ozone transport region,EPA and several states, including Kentucky, worked together to evaluateare evaluating the need for further nitrogen oxide reductions from fossil-fueled plants with SCRs. Based on regulatory developments to date,address interstate impacts. While PPL, LKE, LG&E and KU do not anticipateare unable to predict the outcome of ongoing and future evaluations by the EPA and the states, such evaluations could potentially result in requirements for nitrogen oxide reductions beyond those currently required under the Cross State Air Pollution Rule.

Sulfur Dioxide
 
In 2010, the EPA finalized revisedissued the current 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 developmentsAs a result of scrubber replacements completed by LG&E at the Mill Creek plant in 2016, all Jefferson County monitors now indicate compliance with the sulfur dioxide standards. Additionally, LG&E accepted a new sulfur dioxide emission limit to date,ensure continuing compliance with the NAAQS. PPL, LKE, LG&E and KU expect that certain previously required compliancedo not anticipate any further 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, are sufficient to achieve compliance with the new sulfur dioxide and ozone standards.
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. In a subsequent judicial challenge, the U.S. 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. 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.

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 Obama 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)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. TheHowever, on June 1, 2017, President Trump announced a plan to withdraw from the Paris Agreement and undertake negotiations to reenter the current agreement or enter a new agreement on terms more favorable to the U.S. Under the terms of the Paris Agreement, any U.S. withdrawal would not be complete until November 2020.

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Additionally, in March 2017, the President issued an Executive Order (the March 2017 Executive Order directedOrder) directing the EPA to review proposed and final rules relating to greenhouse gasGHG reductions for consistency with certain policy directives and suspend, revise, or rescind those rules as appropriate. Additionally, theThe March 2017 Executive Order also 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's operations. The cost of these allowances is not significant and is included in WPD's current operating expenses.
 
The EPA's Rules under Section 111 of the Clean Air Act, including the EPA's Clean Power Plan
 
As further described below, in 2015 the EPA finalized rules imposing GHG emission standards for both new and existing power 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 future of these rules is uncertain. 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, industry groups and industry groups. Onindividual companies, including LKE. The D.C. Circuit has temporarily held the litigation in abeyance in light of the EPA's ongoing review of the Clean Power Plan. In 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. In addition, the President's March 2017 Executive Order requires the EPA to review the rules for new plants and existing power plants and suspend, revise or rescind them as appropriate. In October 2017, the EPA proposed to rescind the rule and may seek comment on a possible replacement rule.
 
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.achievable under all operating modes, such as frequent start-ups and shutdowns. 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 upheldremains in place in its current form, and Kentucky fails to develop an approvable implementation plan by the applicable deadline, the EPA may 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 monitoring 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. In light of the President's March 2017 Executive Order the next steps in this 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 rescinded. PPL, LKE, LG&E and KU cannot predict the outcome of the 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 cost 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, if enacted. The legislation provides that such state GHG performance standards shallwill 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, if enacted.

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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)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, CCRs are regulated as non-hazardous under Subtitle D of RCRA and 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. The rule requires posting of compliance documentation on a publicly accessible 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. In January 2017, Kentucky is close to finalizingissued a state rule, effective May 2017, aimed at reflecting the requirements of the federal rule. In May 2017, a resident adjacent to LG&E's and KU's Trimble County plant filed a lawsuit in state court against the Kentucky Energy and Environmental Cabinet and LG&E seeking to invalidate the new rule. PPL, LKE, LG&E and KU cannot predict the outcome of the litigation, but anticipate continued operation under the former program in the event that the new rule is struck down.
 

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, 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 theirits plans to close impoundments at the retired Green River, Pineville and Tyrone plants to comply with applicable state law requirements. See Note 6 in the Registrants' 2016 Form 10-K for additional information.
 
In connection with the final CCR rule, LG&E and KU recorded adjustments to existing AROs during 2015, 2016 and 2016.2017. See Note 15 below and Note 19 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 that become trapped at or pulled through cooling water intake structures at generating facilities. The requirements could impose significant costs for LG&E and KU, which are subject to rate recovery.
 
Effluent Limitations Guidelines (ELGs)

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ELGs
 
In September 2015, the EPA released its final ELGs for wastewater discharge permits for new and existing steam electric 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.EPA. Industry groups, environmental groups, individual companies and others have filed legal challenges to the final rule, which have been consolidated before the U.S. Court of Appeals for the Fifth Circuit. In April 2017, the EPA announced that it would grant petitions for reconsideration of the rule. In September 2017, the EPA published in the Federal Register a proposed rule that would postpone the compliance date for requirements relating to bottom ash transport waters and scrubber wastewaters discharge limits. The EPA expects to complete its reconsideration of best available technology standards by the fall of 2020. Upon completion of the ongoing regulatory proceedings, the rule will be implemented by the states in the course of their normal permitting activities. LG&E and KU are developing compliance strategies and schedules. PPL, LKE, LG&E and KU are unable to predict the outcome of the EPA's pending reconsideration of the rule or fully estimate compliance costs or timing at this time, althoughtiming. Additionally, certain preliminaryaspects of these compliance plans and estimates relate to developments in state water quality standards, which are included in current capital forecasts for applicable periods.separate from the ELG rule or its implementation. Costs to comply with ELGs or other discharge limits, which are expected to be significant, are subject to rate recovery.

Seepages and Groundwater Infiltration

Seepages or groundwater infiltration have been detected at active and retired wastewater basins and landfills at various LG&E and KU plants. LG&E and KU have completed, or are completing, 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 reasonablereasonably possible lossescosts cannot currently be estimated. Depending on the circumstances in each case, certain costs, which may be subject to rate recovery, could 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 anywhere. 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 a manner consistent with specified U.S. Supreme Court precedent. The ultimate outcome of the pending 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
 
OnIn June 22, 2016, the "Frank Lautenberg Chemical Safety Act" took effect as an amendment to the Toxic Substance Control Act (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 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 November 2017, is applicable to PPL 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 may affect Registrants' facilities in the United States, including phase-out of some or all equipment containing PCBs. Should such a phase-out be required, the costs, which are subject to rate 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.
 
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 sufficient 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 matters.

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At March 31,September 30, 2017 and December 31, 2016, PPL Electric had a recorded liability of $10 million representing its best estimate of the probable loss incurred to remediate the sites 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, additional costs of remediation could be incurred; however, such costs are not expected to be 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.


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 iswas 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.

(LKE and KU)

In August 2017, KU and the United Steelworkers of America ratified a three-year labor agreement through August 2020. The agreement covers approximately 53 employees. The terms of the new labor agreement are not expected to have a significant impact on the financial results of LKE or KU.

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.
 

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(All Registrants)
 
The table below details guarantees provided as of March 31,September 30, 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 March 31,September 30, 2017 was $21 million for PPL and $16 million for LKE. The total recorded liability at December 31, 2016 was $22 million for PPL and $17 million for LKE. See footnote (e) below for information regarding a settlement in principle for certain LKE indemnifications. 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
March 31, 2017
 Expiration
Date
Exposure at
September 30, 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 entities105
(c)  95
(c)  
    
PPL Electric        
Guarantee of inventory value17
(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 March 31,September 30, 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 may exceed the 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, the 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. LKE believes its indemnification obligationsindemnifications 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 and reached a settlement in principle to resolve all claims for an aggregate amount within LKE's recorded liability, 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. 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.

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(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 $120$118 million at March 31,September 30, 2017, consisting of LG&E's share of $83$82 million and KU's share of $37$36 million. The maximum exposure and the expiration date of these potential obligations are not presently determinable. See "Energy Purchase Commitments" in Note 13 in PPL's, LKE's, LG&E's and KU's 2016 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.costs. 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.
 
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 subsidiaries, including LG&E and KU, and each other, as applicable, with administrative, management and support services. 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 March 31,September 30, 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 MonthsThree Months Nine Months
2017 20162017 2016 2017 2016
PPL Electric from PPL Services$51
 $37
$43
 $33
 $138
 $98
LKE from PPL Services6
 5
4
 4
 15
 13
PPL Electric from PPL EU Services18
 17
15
 17
 48
 50
LG&E from LKS44
 47
38
 40
 120
 128
KU from LKS44
 56
43
 46
 134
 151

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 overheadsoverhead costs associated with union and hourly employees performing work for the other company, charges related to jointly owned generating units and other miscellaneous charges. Tax settlements between LKE and LG&E and KU are reimbursed through LKS.

Intercompany Borrowings(LKE)

(PPL Electric)

PPL Energy Funding maintains a $400 million revolving line of credit with a PPL Electric subsidiary. At September 30, 2017, $2 million was outstanding and reflected in "Notes receivable from affiliate" on the Balance Sheet. No balance was outstanding at December 31, 2016. The interest rates on borrowings are equal to one-month LIBOR plus a spread. The interest rate on the outstanding borrowing at September 30, 2017 was 2.98%.


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(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 March 31,September 30, 2017 and December 31, 2016, $82$159 million and $163 million were outstanding and reflected in "Notes payable with affiliate" on the Balance Sheets. The interest rates on the outstanding borrowing at March 31,September 30, 2017 and December 31, 2016 were 2.29%2.73% and 2.12%.

In November 2015, LKE entered intomaintains a $400 million ten-year note with a PPL affiliate with an interest rate of 3.5%. At March 31,September 30, 2017 and December 31, 2016, the note was reflected in "Long-term debt to affiliate" on the Balance Sheets.

(LG&E)

LG&E participates in an intercompany money pool agreement whereby LKE and/or KU make available to LG&E funds up to $500 million at an interest rate based on a market index of commercial paper issues. At September 30, 2017, $10 million was outstanding and was reflected in "Notes payable with affiliate" on the Balance Sheet. No balances were outstanding at December 31, 2016. The interest rate on the outstanding borrowings at September 30, 2017 was 1.46%. Interest expense incurred on this notethe money pool agreement with KU was not significant for the three and nine months ended September 30, 2017.

(KU)

KU participates in an intercompany money pool agreement whereby LKE and/or LG&E make available to KU funds up to $500 million at Marchan interest rate based on a market index of commercial paper issues. At September 30, 2017, KU had no payable balance outstanding, but had a $10 million receivable balance outstanding, which was reflected in "Notes receivable from affiliate" on the Balance Sheet. No balances were outstanding at December 31, 2016. The interest rate on the outstanding receivable at September, 30, 2017 was 1.46%. Interest income incurred on the money pool agreement with LG&E was not significant for the three and 2016.nine months ended September 30, 2017.

Other (PPL Electric, LG&E and KU)

See Note 8 for discussions regarding intercompany allocations associated with defined benefits.

11. Other Income (Expense) - net
 
(PPL)
 
"Other Income (Expense) - net" for the three and nine months ended March 31,September 30, 2017 and 2016 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 13 for additional information on these derivatives.

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 March 31,September 30, 2017 and 2016, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 2016 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:

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

 

  
  
  
  
Foreign currency contracts200
 
 200
 
 211
 
 211
 
Cross-currency swaps179
 
 179
 
 188
 
 188
 
Total price risk management assets379
 
 379
 
 399
 
 399
 
Total assets$813
 $434
 $379
 $
 $766
 $367
 $399
 $
                
Liabilities 
  
  
  
  
  
  
  
Price risk management liabilities (b): 
  
  
  
  
  
  
  
Interest rate swaps$29
 $
 $29
 $
 $31
 $
 $31
 $
Foreign currency contracts50
 
 50
 
 27
 
 27
 
Total price risk management liabilities$79
 $
 $79
 $
 $58
 $
 $58
 $
                
PPL Electric 
  
  
  
  
  
  
  
Assets 
  
  
  
  
  
  
  
Cash and cash equivalents$20
 $20
 $
 $
 $13
 $13
 $
 $
Restricted cash and cash equivalents (a)2
 2
 
 
 2
 2
 
 
Total assets$22
 $22
 $
 $
 $15
 $15
 $
 $
                
LKE 
  
  
  
  
  
    
Assets               
Cash and cash equivalents       $15
 $15
 $
 $
 $13
 $13
 $
 $
Cash collateral posted to counterparties (c)2
 2
 
 
 3
 3
 
 
Total assets$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
 $
                

March 31, 2017 December 31, 2016September 30, 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
KU               
PPL 
  
  
  
  
  
  
  
Assets                              
Cash and cash equivalents$7
 $7
 $
 $
 $7
 $7
 $
 $
$676
 $676
 $
 $
 $341
 $341
 $
 $
Restricted cash and cash equivalents (a)24
 24
 
 
 26
 26
 
 
Price risk management assets (b): 
  
 

 

  
  
  
  
Foreign currency contracts164
 
 164
 
 211
 
 211
 
Cross-currency swaps160
 
 160
 
 188
 
 188
 
Total price risk management assets324
 
 324
 
 399
 
 399
 
Total assets$7
 $7
 $
 $
 $7
 $7
 $
 $
$1,024
 $700
 $324
 $
 $766
 $367
 $399
 $
               
Liabilities 
  
  
  
  
  
  
  
Price risk management liabilities (b): 
  
  
  
  
  
  
  
Interest rate swaps$31
 $
 $31
 $
 $31
 $
 $31
 $
Foreign currency contracts167
 
 167
 
 27
 
 27
 
Total price risk management liabilities$198
 $
 $198
 $
 $58
 $
 $58
 $
               
PPL Electric 
  
  
  
  
  
  
  
Assets 
  
  
  
  
  
  
  
Cash and cash equivalents$243
 $243
 $
 $
 $13
 $13
 $
 $
Restricted cash and cash equivalents (a)2
 2
 
 
 2
 2
 
 
Total assets$245
 $245
 $
 $
 $15
 $15
 $
 $
               
LKE 
  
  
  
  
  
    
Assets               
Cash and cash equivalents $40
 $40
 $
 $
 $13
 $13
 $
 $
Cash collateral posted to counterparties (c)1
 1
 
 
 3
 3
 
 
Total assets$41
 $41
 $
 $
 $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$9
 $9
 $
 $
 $5
 $5
 $
 $
Cash collateral posted to counterparties (c)1
 1
 
 
 3
 3
 
 
Total assets$10
 $10
 $
 $
 $8
 $8
 $
 $
               
Liabilities 
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
    
Interest rate swaps$29
 $
 $29
 $
 $31
 $
 $31
 $
Total price risk management liabilities$29
 $
 $29
 $
 $31
 $
 $31
 $
               

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 September 30, 2017 December 31, 2016
 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
KU               
Assets               
Cash and cash equivalents$31
 $31
 $
 $
 $7
 $7
 $
 $
Total assets$31
 $31
 $
 $
 $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. 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.

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.
March 31, 2017 December 31, 2016September 30, 2017 December 31, 2016
Carrying
Amount (a)
 Fair Value 
Carrying
Amount (a)
 Fair ValueCarrying
Amount (a)
 Fair Value Carrying
Amount (a)
 Fair Value
PPL$18,375
 $21,646
 $18,326
 $21,355
$19,558
 $23,357
 $18,326
 $21,355
PPL Electric2,832
 3,141
 2,831
 3,148
3,298
 3,724
 2,831
 3,148
LKE5,066
 5,472
 5,065
 5,439
5,068
 5,592
 5,065
 5,439
LG&E1,618
 1,720
 1,617
 1,710
1,619
 1,768
 1,617
 1,710
KU2,327
 2,532
 2,327
 2,514
2,328
 2,602
 2,327
 2,514
 
(a)Amounts are net of debt issuance costs.

The carrying amounts of other current financial instruments (except for long-term debt due within one year) approximate their fair values because of their short-term nature.
 
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

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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 thethese 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 riskRate 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 mechanismsmethods in place.

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

(All Registrants)

Commodity price riskPrice 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 riskRisk
 
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-ED1 price control period, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2016 Form 10-K for additional information on revenue recognition under 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.


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Equity securities price riskSecurities Price Risk
 
PPL and its subsidiaries are exposed to equity securities price risk associated with the fair value of the defined benefit plans.plans' assets. This risk is significantly mitigated at the regulated domestic utilities and for certain plans at WPD due to the recovery mechanismsmethods 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 PPL Electric, LG&E KU or PPL ElectricKU defaults on its obligation, those entitiesRegistrants 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, thusthereby 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(PPL, LKE and LG&E)
 
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$17 million obligation to return cash collateral under master netting arrangements at March 31,September 30, 2017 and a $19 million obligation to return cash collateral under master netting arrangements at December 31, 2016.

LKE and LG&E had no obligation to return cash collateral under master netting arrangements at March 31,September 30, 2017 and December 31, 2016.
 
PPL, LKE and LG&E posted $2$1 million of cash collateral under master netting arrangements at March 31, 2017 and $3 million of cash collateral under master netting arrangements at September 30, 2017 and December 31, 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. VariousA variety of 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. At September 30, 2017, PPL held no suchan

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aggregate notional value in interest rate swap contracts at March 31,of £188 million (approximately $242 million based on spot rates) that mature in 2027 to hedge the interest payments of anticipated WPD debt issuances. These swaps require a mandatory early redemption on or before November 30, 2017.


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

At March 31,September 30, 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.

For the three and nine months ended March 31,September 30, 2017 and 2016, PPL had no hedge ineffectiveness associated with cross-currency interest rate swap 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 and nine months ended March 31,September 30, 2017, and 2016, PPL had an 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, PPL had no cash flow hedges reclassified into earnings associated with discontinued cash flow hedges.
 
At March 31,September 30, 2017, the amount of accumulated net unrecognized after-tax gains (losses) on qualifying derivatives expected to be reclassified into earnings during the next 12 months is insignificant. Amounts are reclassified as the hedged interest expense is recorded.
 
Economic Activity (PPL, 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,contracts, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense. Realized gains and losses are recognized in "Interest Expense" on the Statements of Income at the time the underlying hedged interest expense is recorded. At March 31,September 30, 2017, LG&E held contracts with a notional amount of $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 suchThe contracts outstanding at March 31,September 30, 2017 had a notional amount of £92 million (approximately $125 million based on contracted rates). These contracts mature in December 2017.
 
At March 31,September 30, 2017 and December 31, 2016, PPL had $22 million and $21 million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI.
 

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Economic Activity
 
PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At March 31,September 30, 2017, the total exposure hedged by PPL was approximately £2.8£2.7 billion (approximately $3.8$3.7 billion based on contracted rates). These contracts had termination dates ranging from AprilOctober 2017 through December 2019.April 2020.
 
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 March 31,September 30, 2017 and December 31, 2016.
 
See NotesNote 1 and 17 in each Registrant's 2016 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.
March 31, 2017 December 31, 2016September 30, 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)$
 $
 $
 $4
 $
 $
 $
 $4
$
 $2
 $
 $5
 $
 $
 $
 $4
Cross-currency swaps (b)32
 
 
 
 32
 
 
 
28
 
 
 
 32
 
 
 
Foreign currency contracts
 
 63
 43
 
 
 31
 21
1
 
 28
 86
 
 
 31
 21
Total current32
 
 63
 47
 32
 
 31
 25
29
 2
 28
 91
 32
 
 31
 25
Noncurrent: 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Price Risk Management 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Assets/Liabilities (a): 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Interest rate swaps (b)
 
 
 25
 
 
 
 27

 
 
 24
 
 
 
 27
Cross-currency swaps (b)147
 
 
 
 156
 
 
 
132
 
 
 
 156
 
 
 
Foreign currency contracts
 
 137
 7
 
 
 180
 6

 
 135
 81
 
 
 180
 6
Total noncurrent147
 
 137
 32
 156
 
 180
 33
132
 
 135
 105
 156
 
 180
 33
Total derivatives$179
 $
 $200
 $79
 $188
 $
 $211
 $58
$161
 $2
 $163
 $196
 $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 March 31,September 30, 2017.

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     Three Months       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)
 
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  Three Months Nine Months 
Cash Flow Hedges:                      
Interest rate swaps $
 Interest expense $(2) $(1) $
 $(2) Interest expense $(2) $
 $(6) $(1)
Cross-currency swaps (8) Interest expense 1
 
 1
 (34) Interest expense 1
 
 1
 
   Other income (expense) - net 3
 
     Other income (expense) - net 2
 
 (24) 
Total $(8)   $2
 $(1) $1
 $(36)   $1
 $
 $(29) $(1)
Net Investment Hedges:                      
Foreign currency contracts $
       $1
 $1
          
Derivatives Not Designated as Location of Gain (Loss) Recognized in   Location of Gain (Loss) Recognized in    
Hedging Instruments Income on Derivative Three Months Income on Derivative Three Months Nine Months
Foreign currency contracts Other income (expense) - net $(43) Other income (expense) - net $(81) $(237)
Interest rate swaps Interest expense (2) Interest expense (1) (4)
 Total $(45) Total $(82) $(241)
Derivatives Not Designated as Location of Gain (Loss) Recognized as   Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Regulatory Liabilities/Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $2
 Regulatory assets - noncurrent $1
 $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 March 31,September 30, 2016.
     Three Months       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)
 
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  Three Months Nine Months 
Cash Flow Hedges:                      
Interest rate swaps $(18) Interest expense $(1) $
 $
 $(21) Interest expense $(2) $
 $(5) $
Cross-currency swaps 113
 Interest expense 1
 
 78
 87
 Interest expense 2
 
 2
 
   Other income (expense) - net 97
 
     Other income (expense) - net 86
 
 80
 
Total $95
   $97
 $
 $78
 $66
   $86
 $
 $77
 $
Net Investment Hedges:                      
Foreign currency contracts $3
       $
 $4
          

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Derivatives Not Designated as Location of Gain (Loss) Recognized in   Location of Gain (Loss) Recognized in    
Hedging Instruments Income on Derivative Three Months Income on Derivative Three Months Nine Months
Foreign currency contracts Other income (expense) - net $60
 Other income (expense) - net $49
 $280
Interest rate swaps Interest expense (2) Interest expense (2) (6)
 Total $58
 Total $47
 $274
Derivatives Not Designated as Location of Gain (Loss) Recognized as   Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Regulatory Liabilities/Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $(6) Regulatory assets - noncurrent $2
 $(7)

(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.
March 31, 2017December 31, 2016September 30, 2017 December 31, 2016
Assets Liabilities Assets LiabilitiesAssets Liabilities Assets Liabilities
Current:       
       
Price Risk Management       
       
Assets/Liabilities:       
       
Interest rate swaps$
 $4
 $
 $4
$
 $5
 $
 $4
Total current
 4
 
 4

 5
 
 4
Noncurrent:     
  
     
  
Price Risk Management     
  
     
  
Assets/Liabilities:     
  
     
  
Interest rate swaps
 25
 
 27

 24
 
 27
Total noncurrent
 25
 
 27

 24
 
 27
Total derivatives$
 $29
 $
 $31
$
 $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 March 31,September 30, 2017.
 Location of Gain (Loss) Recognized in   Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Income on Derivatives Three Months Nine Months
Interest rate swaps Interest expense $(2) Interest expense $(1) $(4)
 Location of Gain (Loss) Recognized in   Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Regulatory Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $2
 Regulatory assets - noncurrent $1
 $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 March 31,September 30, 2016. 
 Location of Gain (Loss) Recognized in   Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Income on Derivatives Three Months Nine Months
Interest rate swaps Interest expense $(2) Interest expense $(2) $(6)
 Location of Gain (Loss) Recognized in   Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Regulatory Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $(6) Regulatory assets - noncurrent $2
 $(7)
 

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(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
March 31, 2017               
September 30, 2017               
Treasury Derivatives                              
PPL$379
 $49
 $13
 $317
 $79
 $49
 $2
 $28
$324
 $138
 $17
 $169
 $198
 $138
 $1
 $59
LKE
 
 
 
 29
 
 2
 27

 
 
 
 29
 
 1
 28
LG&E
 
 
 
 29
 
 2
 27

 
 
 
 29
 
 1
 28
December 31, 2016               
Treasury Derivatives               
PPL$399
 $27
 $19
 $353
 $58
 $27
 $3
 $28
LKE
 
 
 
 31
 
 3
 28
LG&E
 
 
 
 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 March 31,September 30, 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:

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 PPL LKE LG&E
Aggregate fair value of derivative instruments in a net liability position with credit risk-related contingent features$12
 $12
 $12
Aggregate fair value of collateral posted on these derivative instruments2
 2
 2
Aggregate fair value of additional collateral requirements in the event of a credit downgrade below investment grade (a)10
 10
 10

 PPL LKE LG&E
Aggregate fair value of derivative instruments in a net liability position with credit risk-related contingent features$43
 $11
 $11
Aggregate fair value of collateral posted on these derivative instruments1
 1
 1
Aggregate fair value of additional collateral requirements in the event of a credit downgrade below investment grade (a)42
 10
 10
 
(a)Includes the effect of net receivables and payables already recorded on the Balance Sheet.


14. Goodwill and Other Intangible Assets
 
(PPL)
 
The change in the carrying amount of goodwill for the threenine months ended March 31,September 30, 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 threenine months ended March 31,September 30, 2017 was primarily due to a 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 estimated liability for claims not yet settled.

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 KUPPL LKE LG&E KU
Balance at December 31, 2016$488
 $433
 $145
 $288
$488
 $433
 $145
 $288
Accretion5
 5
 2
 3
16
 15
 5
 10
Effect of foreign exchange rates2
 
 
 
Changes in estimated timing or cost(70) (63) (12) (51)
Obligations settled(6) (6) (4) (2)(30) (30) (20) (10)
Balance at March 31, 2017$487
 $432
 $143
 $289
Balance at September 30, 2017$406
 $355
 $118
 $237
 
PPL's, LKE's, LG&E's and KU's ARO liabilities are primarily related to CCR closure costs. See Note 9 for information on the final CCR rule. For LKE, LG&E and KU, all ARO accretion and depreciation expenses are reclassified 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 is offset against the associated cost of removal regulatory liability, PP&E and ARO liability.

LKE recorded decreases of $66 million ($56 million at KU and $10 million at LG&E) to the existing AROs during the nine months ended September 30, 2017 related to the closure of CCR impoundments. These revisions are the result of changes in closure plans related to expected costs and timing of closures. 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.


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16. Accumulated Other Comprehensive Income (Loss)
 
(PPL)(PPL and LKE)
 
The after-tax changes in AOCI by component for the periods ended March 31September 30 were as follows.
Foreign
currency
translation
adjustments
 
Unrealized gains (losses)
 on qualifying
derivatives
   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 
Equity
investees'
AOCI
 
Prior
service
costs
 
Actuarial
gain
(loss)
 Total
PPL                      
June 30, 2017$(1,420) $(13) $
 $(7) $(2,083) $(3,523)
Amounts arising during the period(12) 1
 
 
 (3) (14)
Reclassifications from AOCI
 
 
 
 34
 34
Net OCI during the period(12) 1
 
 
 31
 20
September 30, 2017$(1,432) $(12) $
 $(7) $(2,052) $(3,503)
           
December 31, 2016$(1,627) $(7) $(1) $(8) $(2,135) $(3,778)$(1,627) $(7) $(1) $(8) $(2,135) $(3,778)
Amounts arising during the period(24) (6) 
 
 
 (30)195
 (29) 
 
 (14) 152
Reclassifications from AOCI
 (1) 
 
 32
 31

 24
 1
 1
 97
 123
Net OCI during the period(24) (7) 
 
 32
 1
195
 (5) 1
 1
 83
 275
March 31, 2017$(1,651) $(14) $(1) $(8) $(2,103) $(3,777)
September 30, 2017$(1,432) $(12) $
 $(7) $(2,052) $(3,503)
           
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) $(2,728)$(520) $(7) $
 $(6) $(2,195) $(2,728)
Amounts arising during the period(464) 80
 
 
 
 (384)(837) 57
 
 
 (4) (784)
Reclassifications from AOCI
 (78) 
 
 31
 (47)
 (62) (1) 1
 94
 32
Net OCI during the period(464) 2
 
 
 31
 (431)(837) (5) (1) 1
 90
 (752)
March 31, 2016$(984) $(5) $
 $(6) $(2,164) $(3,159)
September 30, 2016$(1,357) $(12) $(1) $(5) $(2,105) $(3,480)
           
LKE           
June 30, 2017    $
 $(7) $(70) $(77)
Amounts arising during the period    
 
 (1) (1)
Reclassifications from AOCI    
 
 1
 1
Net OCI during the period    
 
 
 
September 30, 2017    $
 $(7) $(70) $(77)
           
December 31, 2016    $(1) $(8) $(61) $(70)
Amounts arising during the period    
 
 (12) (12)
Reclassifications from AOCI    1
 1
 3
 5
Net OCI during the period    1
 1
 (9) (7)
September 30, 2017    $
 $(7) $(70) $(77)
           
June 30, 2016    $(1) $(9) $(33) $(43)
Reclassifications from AOCI    
 
 1
 1
Net OCI during the period    
 
 1
 1
September 30, 2016    $(1) $(9) $(32) $(42)
           

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Foreign
currency
translation
adjustments
 
Unrealized gains (losses)
 on qualifying
derivatives
   Defined benefit plans  
   
Equity
investees'
AOCI
 
Prior
service
costs
 
Actuarial
gain
(loss)
 Total
December 31, 2015    $
 $(10) $(36) $(46)
Amounts arising during the period    
 
 1
 1
Reclassifications from AOCI    (1) 1
 3
 3
Net OCI during the period    (1) 1
 4
 4
September 30, 2016    $(1) $(9) $(32) $(42)
 
(PPL)
 
The following table presents the gains (losses) and related income taxes for reclassifications from AOCI for the periods ended March 31.September 30. 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 8 for additional information.
 Three Months Affected Line Item on the Three Months Nine Months Affected Line Item on the
Details about AOCI 2017 2016 Statements of Income 2017 2016 2017 2016 Statements of Income
Qualifying derivatives                
Interest rate swaps $(3) $(1) Interest Expense $(2) $(2) $(7) $(5) Interest Expense
Cross-currency swaps 3
 97
 Other Income (Expense) - net 2
 86
 (24) 80
 Other Income (Expense) - net
 1
 1
 Interest Expense 1
 2
 1
 2
 Interest Expense
Total Pre-tax 1
 97
  1
 86
 (30) 77
 
Income Taxes 
 (19)   (1) (17) 6
 (15)  
Total After-tax 1
 78
   
 69
 (24) 62
  
              
Equity investees' AOCI 
 
 (1) 1
 Other Income (Expense) - net
Total Pre-tax 
 
 (1) 1
 
Income Taxes 
 
 
 
 
Total After-tax 
 
 (1) 1
 
         
Defined benefit plans              
Prior service costs (1) (1) (2) (2) 
Net actuarial loss (41) (40)  (44) (41) (125) (121) 
Total Pre-tax (41) (40)  (45) (42) (127) (123) 
Income Taxes 9
 9
  11
 11
 29
 28
 
Total After-tax (32) (31)  (34) (31) (98) (95) 
              
Total reclassifications during the period $(31) $47
  $(34) $38
 $(123) $(32) 

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.
 
The Registrants have completed an assessment of substantially all of their revenue under this new guidance and, for those assessments that have been completed, have determined it will not have a material impact on their current revenue recognition policies. The Registrants' operating revenues are derived primarily from tariff-based sales that result from providing electricity and natural gas to customers with no defined contractual term. Tariff-based sales are within the scope of the new guidance, and operating revenues under the new guidance will be equivalent to the electricity and natural gas delivered and billed in that

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period (including estimated billings), which is consistent with current practice. Management is still assessing the impact of the new standard on certain revenues in the U.K. Regulated segment and does not expect there to be a material impact to current practice, however, the assessment is still ongoing.
The disclosure requirements included in the standard 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. These disclosures will include disaggregation of revenues by geographic location, customer class or type of service, as applicable for each Registrant. Some revenue arrangements, including alternative revenue programs and lease income, are excluded from the scope of the new guidance and will be accounted for and disclosed separately from revenues from contracts with customers. The Registrants will also be required to disclose the opening and closing balances of accounts receivable and any contract assets or contract liabilities resulting from contracts with customers.

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. The Registrants will 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,2018 and at this time they do not believe it will have a material impact. However, the Registrants will continue to monitor the development of industry specific application guidance which could have an impact on 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 finalonce they have completed their assessments 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.line tests.
 
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 companiesbusiness entities 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 and the period theyguidance. The Registrants will adopt it.this guidance effective January 1, 2019.

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 they will adopt 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

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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 will adopt this guidance effective January 1, 2018.

For PPL’s, LKE’s and LG&E’s U.S. defined benefit pension and PPL's and LKE's other postretirement benefit plans, the adoption of this new guidance is not expected to have a material impact on either the presentation on the income statements or the amounts capitalized and related impact to expense, as the difference between the service cost and the non-service cost components of net periodic benefit costs has not historically been and is not expected to be material in 2018.

For PPL’s U.K. defined benefit pension plans, the non-service cost components of net periodic benefit cost has been in a net-credit position for the current reporting periods and is expected to continue to be in a net-credit position for 2018. Therefore, the estimated impact of adopting this new guidance related to the non-service cost component credits to be reclassified from “Other operation and maintenance” to “Other Income (Expense)-net” on the Statements of Income is approximately $130 million and $90 million for the nine months ended 2017 and 2016.

The Registrants are continuing to assess the expected 2018 impacts of adopting the guidance as the amounts will be affected by market conditions and assumptions selected at December 31, 2017.
Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued accounting guidance that reduces complexity when applying hedge accounting as well as improves transparency about an entity's risk management activities. This guidance eliminates recognizing hedge ineffectiveness for cash flow and net investment hedges and provides for the ability to perform subsequent effectiveness assessments qualitatively. The guidance also makes certain changes to allowable methodologies such as allowing entities to apply the short-cut method to partial-term fair value hedges of interest rate risk as well as expands the ability to apply the critical terms match method to cash flow hedges of groups of forecasted transactions. The guidance also updates certain recognition and presentation requirements as well as disclosure requirements.

For public business entities, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. This standard must be adopted using a modified retrospective approach and provides for certain transition elections that must be made prior to the first effectiveness testing date after adoption.

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

(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.


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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' 2016 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 March 31,September 30, 2017 with the same periodperiods in 2016. For PPL, "Results of Operations" also includes "Segment Earnings" and "Margins" which provide a detailed analysis of earnings by reportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "Margins" 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.

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

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       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, unaudited annual consolidated financial statements for the U.K. Regulated Segmentsegment 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

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a public utility by the KPSC, the VSCC and the Tennessee Regulatory Authority,Public Utility Commission, 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)
 
PPL is a fully regulated business 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) 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, as appropriate, prudently incurred costs.
 
Rate base growth in the domestic utilities is expected to result in earnings growth for the foreseeable future. In 2017, earnings from the U.K. Regulated segment are expected to decline 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 growth after 2017.2017 through at least 2020 at WPD. See "Item 1. Business - Segment Information - U.K. Regulated Segment" of PPL's 2016 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. Because WPD's earnings represent such a significant portion of PPL's consolidated earnings, PPL enters into foreign currency contracts to economically hedge the value of the GBP versus the U.S. dollar. 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.

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Financial and Operational Developments
   
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)

On March 29, 2017, the U.K. formally notified the European Council of the European Union (EU) of its intent to withdraw from the EU, thereby commencing the two-year negotiation ofperiod to establish the terms of that withdrawal under Article 50 of the Lisbon Treaty. Article 50 specifies that if a member state decides to withdraw from the EU, it must 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 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.

PPL has executed hedges to mitigate the foreign exchange risk to the Company's U.K. earnings. As of April 20,October 18, 2017, PPL's foreign exchange exposure related to budgeted earnings is 100% hedged for the remainder of 2017 at an average rate of $1.21$1.22 per GBP, and 99% hedged for 2018 andat an average rate of $1.32 per GBP, 100% hedged for 2019 at an average rate of $1.41$1.39 per GBP and $1.3215% hedged for 2020 at an average rate of $1.47 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 the actions 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)

In July 2017, Ofgem published an open letter commencing its RIIO-2 framework review, which covers all U.K. gas and electricity, transmission and distribution price controls. The purpose of this framework review is to build on lessons learned from the current price controls and to develop a framework that will be adaptable to meeting the needs of an evolving U.K. energy sector.

The letter sets out the context for the development of the next price controls, RIIO-2, and seeks views from stakeholders on the RIIO-2 framework. Responses to the open letter were published in September 2017 and will be used to guide the full RIIO-2 framework consultation which is expected to be published in the first quarter of 2018. The promulgation of sector specific price controls will begin with the gas and electricity transmission networks, with electricity distribution price control work scheduled to begin in 2020, at which time Ofgem plans to publish its RIIO-ED2 strategy consultation document.

The current electricity distribution price control, RIIO-ED1, continues through March 31, 2023 and will not be impacted by this RIIO-2 consultation process. PPL cannot predict the outcome of this process or the long-term impact it or the final RIIO-ED2 regulations will have on its financial condition or results of operations. 

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(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, and MATS.ELGs. See Note 9 to the Financial Statements for a discussion of the other significant environmental matters.

Rate Case Proceedings

(PPL, LKE LG&E and KU)

On November 23, 2016, LG&E andSeptember 29, 2017, KU filed requests witha request seeking approval from the KPSC for increases inVSCC to increase annual Virginia base electricity rates of approximately $103revenue by $7 million, at KU andrepresenting an increase in annual base electricity and gas rates of approximately $94 million and $14 million at LG&E. The proposed base rate increases would 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. LG&E's and10.4%. KU's applications include requests for CPCNs for implementing an Advanced Metering System program and a Distribution Automation program. The applications arerequest is based on a forecasted test year of July 1, 2017 through June 30, 2018 and a requestedan authorized 10.42% return on equity of 10.23%.


On April 19, 2017equity. Subject to regulatory review 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,approval, new rates and all elements of the stipulations would bebecome 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.2018.

(PPL, LKE and KU)

OnIn 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. OnIn December 30, 2016, the FERC accepted the revised rate schedules providing recovery of the costs effective 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 principle regarding a suitable amortization period. In June 2017, a FERC judge issued an order implementing the settlement's rates on an interim basis, effective July 1, 2017. In August 2017, the FERC issued a final order approving the settlement.

Results of Operations
 
(PPL)
 
The "Statement of Income Analysis" discussion below describes significant changes in principal line items on PPL's Statements of Income, comparing the three and nine months ended March 31,September 30, 2017 with the same periodperiods in 2016. The "Segment Earnings" and "Margins" discussions for PPL provide a review of results by reportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "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," "Segment Earnings" and "Margins" are presented on a constant GBP 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 GBP to U.S. dollar exchange rate basis are calculated by translating current year results at the prior year weighted-average GBP 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" discussion below describes significant changes in principal line items on the Statements of Income comparing the three and nine months ended March 31,September 30, 2017 with the same periodperiods in 2016. 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.


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PPL: Statement of Income Analysis, Segment Earnings and Margins

Statement of Income Analysis
 
Net income for the periods ended March 31September 30 includes the following results.
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
Operating Revenues$1,951
 $2,011
 $(60)$1,845
 $1,889
 $(44) $5,521
 $5,685
 $(164)
Operating Expenses                
Operation                
Fuel191
 197
 (6)202
 227
 (25) 576
 607
 (31)
Energy purchases215
 233
 (18)143
 151
 (8) 494
 531
 (37)
Other operation and maintenance432
 450
 (18)397
 417
 (20) 1,217
 1,292
 (75)
Depreciation242
 229
 13
257
 232
 25
 745
 692
 53
Taxes, other than income75
 79
 (4)69
 76
 (7) 214
 229
 (15)
Total Operating Expenses1,155
 1,188
 (33)1,068
 1,103
 (35) 3,246
 3,351
 (105)
Other Income (Expense) - net(47) 61
 (108)(76) 49
 (125) (235) 284
 (519)
Interest Expense217
 224
 (7)230
 223
 7
 669
 671
 (2)
Income Taxes129
 179
 (50)116
 139
 (23) 321
 510
 (189)
Net Income$403
 $481
 $(78)$355
 $473
 $(118) $1,050
 $1,437
 $(387)

Operating Revenues
 
The increase (decrease) in operating revenues for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Domestic:    
PPL Electric Distribution price (a)$12
$16
 $46
PPL Electric Distribution volume(3)(20) (30)
PPL Electric PLR Revenue (b)(21)(1) (32)
PPL Electric Transmission Formula Rate1
20
 25
LKE Base rates31
 31
LKE Volumes(37)(41) (86)
LKE Fuel and other energy prices (c)11
LKE DSM5
LKE Fuel and other energy prices(8) 10
Other(1)(3) (2)
Total Domestic(33)(6) (38)
U.K.:    
Price58
(3) 74
Volume9
(12) (24)
Foreign currency exchange rates(96)(21) (183)
Other2
(2) 7
Total U.K.(27)(38) (126)
Total$(60)$(44) $(164)

(a)Distribution rider prices resulted in increases of $12$16 million and $40 million for the three and nine months ended March 31,September 30, 2017.
(b)DecreasedDecrease for the nine months ended September 30, 2017 compared with 2016, primarily due to lower energy purchase prices at PPL Electric.
(c)Increased due to higher recoveries of fuel and energy purchases primarily as a result of higher commodity costs at LKE.

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Fuel

Fuel decreased $25 million for the three months ended September 30, 2017 compared with 2016, primarily due to a $16 million decrease in volumes driven by milder weather in the third quarter of 2017 and a $9 million decrease in market prices for coal.

Fuel decreased $31 million for the nine months endedSeptember 30, 2017 compared with 2016, primarily due to a $28 million decrease in volumes driven by milder weather in 2017 and a $4 million decrease in market prices for coal.

Energy Purchases

Energy purchases decreased $18$8 million for the three months ended March 31,September 30, 2017 compared with 2016, primarily due to a $23$12 million decrease in PLR volumes, partially offset by a $6 million increase in PLR prices at PPL Electric.

Energy purchases decreased $37 million for the nine months ended September 30, 2017 compared with 2016, primarily due to a $24 million decrease in PLR prices partially offset by a $3and an $11 million increasedecrease in PLR volumes at PPL Electric.


Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Domestic:    
PPL Electric Act 129$5
$3
 $11
PPL Electric payroll-related costs2
(5) (6)
PPL Electric vegetation management(4) (7)
PPL Electric bad debts(3)(4) (10)
Stock compensation expense6
Other5
(1) 1
U.K.:    
Pension (a)(17) (52)
Foreign currency exchange rates(2) (18)
Network maintenance(7)4
 (4)
Foreign currency exchange rates(8)
Pension (a)(17)
Third-party engineering(1) 5
Other(1)7
 5
Total$(18)$(20) $(75)

(a)The decrease wasdecreases were primarily due to an increaseincreases in expected returns on higher asset balances and lower interest costs due to a lower discount rate.

Depreciation
 
Depreciation increased $13$25 million and $53 million for the three and nine months ended March 31,September 30, 2017 compared with 2016, primarily due to additional assets placed into service, net of retirements, and higher depreciation rates effective July 1, 2017 at LG&E and KU, partially offset by the impact of foreign currency exchange rates at WPD.
 
Other Income (Expense) - net
 
Other income (expense) - net decreased $108$125 million and $519 million for the three and nine months ended March 31,September 30, 2017 compared with 2016, primarily due to changes in realized and unrealized gains (losses) on foreign currency contracts to economically hedge GBP denominated earnings from WPD.
 

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Interest Expense

The increase (decrease) in interest expense for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Long-term debt interest expense$4
$9
 $22
Short-term debt interest expense2
 6
Foreign currency exchange rates(15)(4) (31)
Other4

 1
Total$(7)$7
 $(2)
 
Income Taxes 

The increase (decrease) in income taxes for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Change in pre-tax income at current period tax rates$(39)$(56) $(198)
U.S. income tax on foreign earnings - net of foreign tax credit(7)
Impact of U.K. Finance Acts(3)
Depreciation not normalized(2)
Valuation allowances adjustments
 (4)
U.S. income tax on foreign earnings - net of foreign tax credit (a)(7) (21)
Impact of U.K. Finance Acts (b)39
 30
Stock-based compensation5
1
 5
Other(4)
 (1)
Total$(50)$(23) $(189)
 
(a)Lower income taxes primarily due to the tax benefit of accelerated pension contributions made in the first quarter of 2017. The related tax benefit is recognized over the annual period as a result of utilizing an estimated annual effective tax rate.
(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.

Segment Earnings
 
PPL's net income by reportable segments for the periods ended March 31September 30 were as follows:
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
U.K. Regulated$286
 $289
 $(3)$126
 $281
 $(155) $560
 $915
 $(355)
Kentucky Regulated95
 112
 (17)125
 126
 (1) 299
 314
 (15)
Pennsylvania Regulated79
 94
 (15)95
 91
 4
 251
 263
 (12)
Corporate and Other (a)(57) (14) (43)9
 (25) 34
 (60) (55) (5)
Net Income$403
 $481
 $(78)$355
 $473
 $(118) $1,050
 $1,437
 $(387)
 
(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 changechanges in 2017 compared with 2016 isare primarily due to the utilizationtiming impact of anrecording annual estimated annual effective tax rate, which requires the tax benefits realized in the current period to be recognized over the annual period.taxes. This impact is expected to continue to reverse through the remainder of the 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:


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• Unrealized gains or losses on foreign currency-relatedcurrency economic hedges (as discussed below).
• Gains and losses on sales of assets not in the ordinary course of business.
• Impairment charges. 
• Significant 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 13 to the Financial Statements and "Risk Management" below for additional information on foreign currency-relatedcurrency economic activity.

PPL's Earnings from Ongoing Operations by reportable segment for the periods ended March 31September 30 were as follows:
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
U.K. Regulated$307
 $265
 $42
$163
 $235
 $(72) $682
 $741
 $(59)
Kentucky Regulated96
 112
 (16)125
 126
 (1) 300
 314
 (14)
Pennsylvania Regulated79
 94
 (15)95
 91
 4
 251
 263
 (12)
Corporate and Other(57) (13) (44)5
 (25) 30
 (64) (53) (11)
Earnings from Ongoing Operations$425
 $458
 $(33)$388
 $427
 $(39) $1,169
 $1,265
 $(96)

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 certain acquisition-related financing costs. The U.K. Regulated segment represents 71%53% of PPL's Net Income for the threenine months ended March 31,September 30, 2017 and 39% of PPL's assets at March 31,September 30, 2017.
 
Net Income and Earnings from Ongoing Operations for the periods ended March 31September 30 include the following results.
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
Operating revenues$568

$595
 $(27)$477
 $515
 $(38) $1,547

$1,673
 $(126)
Other operation and maintenance64
 97
 (33)69
 78
 (9) 195
 260
 (65)
Depreciation55
 60
 (5)58
 58
 
 170
 178
 (8)
Taxes, other than income31
 35
 (4)33
 34
 (1) 94
 104
 (10)
Total operating expenses150
 192
 (42)160
 170
 (10) 459
 542
 (83)
Other Income (Expense) - net(43) 61
 (104)(80) 50
 (130) (236) 283
 (519)
Interest Expense94
 106
 (12)103
 100
 3
 294
 310
 (16)
Income Taxes(5) 69
 (74)8
 14
 (6) (2) 189
 (191)
Net Income286

289
 (3)126

281
 (155) 560

915
 (355)
Less: Special Items(21) 24
 (45)(37) 46
 (83) (122) 174
 (296)
Earnings from Ongoing Operations$307
 $265
 $42
$163
 $235
 $(72) $682
 $741
 $(59)
 
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 March 31.September 30.

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Income Statement Line Item Three MonthsIncome Statement Line Item Three Months Nine Months
 2017 2016 2017 2016 2017 2016
Foreign currency-related economic hedges, net of tax of $12, ($13) (a)Other Income (Expense) - net $(21) $24
Foreign currency economic hedges, net of tax of $20, $103, $66, $34 (a)Other Income (Expense) - net $(37) $(193) $(122) $(65)
Settlement of foreign currency contracts, net of tax of $0, ($108), $0, ($108) (b)Other Income (Expense) - net 
 202
 
 202
Change in U.K. tax rate (c)Income Taxes 
 37
 
 37
Total Special Items  $(21) $24
  $(37) $46
 $(122) $174
 
(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 Statements of Income.
(c)The U.K. Finance Act 2016, enacted in September 2016, reduced the U.K.'s statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result, PPL reduced its net deferred tax liability 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.

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 MonthsThree Months Nine Months
U.K.  
  
Gross margins$70
$(17) $52
Other operation and maintenance24
7
 50
Depreciation(5)(3) (12)
Interest expense(2)(7) (15)
Other(2)(2) (4)
Income taxes(5)(2) 2
U.S.    
Interest expense and other(1)1
 3
Income taxes34
(3) 28
Foreign currency exchange, after-tax(71)(46) (163)
Earnings from Ongoing Operations42
(72) (59)
Special items, after-tax(45)(83) (296)
Net Income$(3)$(155) $(355)

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 $17 million from lower pension expense due to an increase in expected returns on higher asset balances and lower interest costs due to a lower discount rate, and $7partially offset by $4 million from lowerhigher network maintenance expense.

Higher income taxesLower other operation and maintenance expense for the nine month period primarily due to $52 million from lower pension expense due to an increase of $17in expected returns on higher asset balances and lower interest costs due to a lower discount rate.

Higher interest expense for the three and nine month periods primarily due to higher interest expense on indexed linked bonds.

Higher income taxes for the three month period primarily due to $9 million from higher pre-tax incomerelated to tax rate changes to deferred taxes, partially offset by a decrease of $4 million from lower pre-tax income.


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Lower income taxes for the nine month period primarily due to decreases of $10 million primarily related to accelerated tax deductions.deductions and $6 million from 2016 expense related to the finalization of U.K. tax returns, partially offset by increases of $14 million from higher pre-tax income.

U.S.

Lower income taxes for the nine month period 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 24%28% of PPL's Net Income for the threenine months ended March 31,September 30, 2017 and 36%35% of PPL's assets at March 31,September 30, 2017.
 
Net Income and Earnings from Ongoing Operations for the periods ended March 31September 30 include the following results.
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
Operating revenues$809
 $826
 $(17)$818
 $835
 $(17) $2,350
 $2,382
 $(32)
Fuel 191
 198
 (7)202
 227
 (25) 576
 607
 (31)
Energy purchases69
 66
 3
22
 24
 (2) 120
 118
 2
Other operation and maintenance207
 202
 5
199
 197
 2
 598
 603
 (5)
Depreciation105
 99
 6
114
 102
 12
 324
 301
 23
Taxes, other than income16
 15
 1
17
 16
 1
 49
 46
 3
Total operating expenses588
 580
 8
554
 566
 (12) 1,667
 1,675
 (8)
Other Income (Expense) - net(2) (1) (1)1
 (3) 4
 (5) (9) 4
Interest Expense65
 65
 
65
 65
 
 196
 194
 2
Income Taxes59
 68
 (9)75
 75
 
 183
 190
 (7)
Net Income95
 112
 (17)125
 126
 (1) 299
 314
 (15)
Less: Special Items(1) 
 (1)
 
 
 (1) 
 (1)
Earnings from Ongoing Operations$96
 $112
 $(16)$125
 $126
 $(1) $300
 $314
 $(14)

The following after-tax gains (losses)gain (loss), which management considers a special items,item, impacted the Kentucky Regulated segment's results and areis excluded from Earnings from Ongoing Operations during the periods ended March 31.September 30.
Income Statement Line Item Three MonthsIncome Statement Line Item Three Months Nine Months
 2017 2016 2017 2016 2017 2016
Adjustment to investment, net of tax of $0, $0 (a)Other Income (Expense) - net $(1) $
Adjustment to investment, net of tax of $0, $0, $0, $0 (a)Other Income (Expense) - net $
 $
 $(1) $
Total Special Items $(1) $
 $
 $
 $(1) $

(a)KU recorded a write-off of 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 itemsitem that management considers special on separate lines and not in their respective Statement of Income line items.

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Three MonthsThree Months Nine Months
Kentucky Gross Margins$(18)$10
 $(13)
Other operation and maintenance(3)(5) 6
Depreciation(2)(10) (15)
Taxes, other than income(2)
 (2)
Other Income (Expense) - net4
 5
Interest Expense
 (2)
Income Taxes9

 7
Earnings from Ongoing Operations(16)(1) (14)
Special items, after-tax(1)
 (1)
Net Income$(17)$(1) $(15)
 
See "Margins - Changes in Margins" for an explanation of Kentucky Gross Margins.

Lower income taxesHigher depreciation expense for the three and nine month periods primarily due to lower pre-tax income.higher depreciation rates effective July 1, 2017, and additions to PP&E, net of retirements.
 
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 20%24% of PPL's Net Income for the threenine months ended March 31,September 30, 2017 and 25% of PPL's assets at March 31,September 30, 2017.

Net Income and Earnings from Ongoing Operations for the periods ended March 31September 30 include the following results.
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
Operating revenues$573
 $585
 $(12)$547
 $539
 $8
 $1,620
 $1,619
 $1
Energy purchases146
 167
 (21)121
 129
 (8) 374
 414
 (40)
Other operation and maintenance164
 150
 14
132
 143
 (11) 435
 431
 4
Depreciation75
 59
 16
77
 64
 13
 228
 185
 43
Taxes, other than income29
 29
 
27
 26
 1
 79
 79
 
Total operating expenses414
 405
 9
357
 362
 (5) 1,116
 1,109
 7
Other Income (Expense) - net1
 3
 (2)5
 4
 1
 11
 12
 (1)
Interest Expense33
 33
 
36
 32
 4
 105
 97
 8
Income Taxes48
 56
 (8)64
 58
 6
 159
 162
 (3)
Net Income79
 94
 (15)95
 91
 4
 251
 263
 (12)
Less: Special Items (a)


 



 
 


 
Earnings from Ongoing Operations$79
 $94
 $(15)$95
 $91
 $4
 $251
 $263
 $(12)
 
(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 are due to the factors set forth below, which reflect amounts classified as Pennsylvania Gross Margins on a separate line and not in their respective Statement of Income line items.
Three MonthsThree Months Nine Months
Pennsylvania Gross Margins$1
$6
 $14
Other operation and maintenance(10)16
 8
Depreciation(12)(8) (29)
Taxes, other than income(1) 1
Other Income (Expense) - net(2)1
 (1)
Interest Expense(4) (8)
Income Taxes8
(6) 3
Net Income$(15)$4
 $(12)

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

HigherLower other operation and maintenance expense for the three month period primarily due to $8$5 million of lower payroll related expenses, $4 million of lower bad debt expense and $4 million of lower vegetation management expenses.

Lower other operation and maintenance expense for the nine month period primarily due to $10 million of lower bad debt expenses, $7 million of lower vegetation management expenses and $7 million of lower payroll related expenses, partially offset by $17 million of higher corporate service costs allocated to PPL 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.

Lower income taxesHigher interest expense for the nine month period primarily due to lower pre-tax income.the issuance of $475 million of 3.950% First Mortgage Bonds in May 2017.

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 March 31.September 30.
2017 Three Months2017 Three Months
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$286
 $95
 $79
 $(57) $403
$126
 $125
 $95
 $9
 $355
Less: Special Items (expense) benefit:                  
Foreign currency-related economic hedges, net of tax of $12(21) 
 
 
 (21)
Adjustment to investment, net of tax of $0
 (1) 
 
 (1)
Foreign currency economic hedges, net of tax of $20(37) 
 
 
 (37)
Spinoff of the Supply segment, net of tax of ($2) (a)
 
 
 4
 4
Total Special Items(21) (1) 
 
 (22)(37) 
 
 4
 (33)
Earnings from Ongoing Operations$307
 $96
 $79
 $(57) $425
$163
 $125
 $95
 $5
 $388
2016 Three Months2016 Three Months
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$289
 $112
 $94
 $(14) $481
$281
 $126
 $91
 $(25) $473
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)
Foreign currency 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
Total Special Items24
 
 
 (1) 23
46
 
 
 
 46
Earnings from Ongoing Operations$265
 $112
 $94
 $(13) $458
$235
 $126
 $91
 $(25) $427
 2017 Nine Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$560
 $299
 $251
 $(60) $1,050
Less: Special Items (expense) benefit:         
Foreign currency economic hedges, net of tax of $66(122) 
 
 
 (122)
Spinoff of the Supply segment, net of tax of ($2) (a)
 
 
 4
 4
Adjustment to investment, net of tax of $0
 (1) 
 
 (1)
Total Special Items(122) (1) 
 4
 (119)
Earnings from Ongoing Operations$682
 $300
 $251
 $(64) $1,169

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 2016 Nine Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$915
 $314
 $263
 $(55) $1,437
Less: Special Items (expense) benefit:         
Foreign currency 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

(a)Represents a tax settlement associated with the former Supply segment. Included in "Taxes, other than income" on the Statements of Income.

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 Margins" is a single financial performance measure of the electricity transmission and distribution 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 Act 129 Smart Meter program) and "Taxes, other than income," (which is primarily gross receipts tax) on the Statements of 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 March 31September 30 as well as the change between periods. The factors that gave rise to the changes are described following the table.

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 Three Months
 2017 2016 $ Change
U.K. Regulated 
  
  
U.K. Gross Margins$536
 $557
 $(21)
Impact of changes in foreign currency exchange rates    (91)
U.K. Gross Margins excluding impact of foreign currency exchange rates    $70
      
Kentucky Regulated     
Kentucky Gross Margins     
LG&E$226
 $228
 $(2)
KU281
 297
 (16)
Total Kentucky Gross Margins$507
 $525
 $(18)
      
Pennsylvania Regulated     
Pennsylvania Gross Margins     
Distribution$258
 $258
 $
Transmission108
 107
 1
Total Pennsylvania Gross Margins$366
 $365
 $1

 Three Months Nine Months
 2017 2016 $ Change 2017 2016 $ Change
U.K. Regulated 
  
  
  
  
  
U.K. Gross Margins$441
 $476
 $(35) $1,446
 $1,566
 $(120)
Impact of changes in foreign currency exchange rates    (18)     (172)
U.K. Gross Margins excluding impact of foreign currency exchange rates    $(17)     $52
            
Kentucky Regulated           
Kentucky Gross Margins           
LG&E$245
 $237
 $8
 $678
 $676
 $2
KU302
 300
 2
 842
 857
 (15)
Total Kentucky Gross Margins$547
 $537
 $10
 $1,520
 $1,533
 $(13)
            
Pennsylvania Regulated           
Pennsylvania Gross Margins           
Distribution$233
 $246
 $(13) $710
 $721
 $(11)
Transmission134
 115
 19
 357
 332
 25
Total Pennsylvania Gross Margins$367
 $361
 $6
 $1,067
 $1,053
 $14

U.K. Gross Margins
 
U.K. Gross Margins, excluding the impact of changes in foreign currency exchange rates, increaseddecreased for the three months ended September 30, 2017 compared with 2016, primarily due to $58$12 million of lower volumes and $3 million from the April 1, 2017 price decrease, which includes lower true-up mechanisms partially offset by higher base demand revenue.

U.K. Gross Margins, excluding the impact of changes in foreign currency exchange rates, increased for the nine months ended September 30, 2017 compared with 2016, primarily due to $83 million from the April 1, 2016 price increase which includes $14partially offset by $24 million of the recovery of prior customer rebates,lower volumes and $9 million offrom the April 1, 2017 price decrease, which includes lower true-up mechanisms partially offset by higher volumes.base demand revenue.

Kentucky Gross Margins
 
Kentucky Gross Margins decreasedincreased for the three months ended September 30, 2017 compared with 2016, primarily due to $22higher base rates of $31 million ($18 million at LG&E and $13 million at KU) as new base rates were approved by the KPSC effective July 1, 2017, partially offset by $20 million of lower sales volumes due to milder weather in 2017 ($8 million at LG&E and $12 million at KU).

Kentucky Gross Margins decreased for the nine months ended September 30, 2017 compared with 2016, primarily due to $51 million of lower sales volumes due to milder weather in 2017 ($17 million at LG&E and $34 million at KU), partially offset by higher base rates of $31 million ($18 million at LG&E and $13 million at KU) as new base rates were approved by the KPSC effective July 1, 2017.

Pennsylvania Gross Margins

Distribution

Distribution margins decreased for the three and nine month periods ended September 30, 2017 compared with 2016, primarily due to $11 million and $16 million of lower electricity sales volumes driven bydue to milder weather in the first quarter of 2017 ($5 million at LG&E and $17 million at KU).2017.

Pennsylvania Gross MarginsTransmission

Pennsylvania Gross MarginsTransmission margins increased for the three months ended September 30, 2017 compared with 2016, primarily due to an increase of $11$20 million from returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability.

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Transmission margins increased for the nine months ended September 30, 2017 compared with 2016, primarily due to an increase of $42 million primarily from returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability, partially offset by a $10$17 million decrease as a result of a lower PPL zonal peak transmission system load in 2016billing factor which negatively affected transmission revenue forin the first quarterfive months of 2017.


Reconciliation of Margins
 
The following tables 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 March 31.
September 30.
2017 Three Months2017 Three Months
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Margins
 Other (a) 
Operating
Income (b)
U.K.
Gross
Margins
 Kentucky
Gross
Margins
 PA Gross
Margins
 Other (a) Operating
Income (b)
Operating Revenues$559
(c)$809
 $573
 $10
 $1,951
$467
(c)$818
 $547
 $13
 $1,845
Operating Expenses                  
Fuel
 191
 
 
 191

 202
 
 
 202
Energy purchases
 69
 146
 
 215

 22
 121
 
 143
Other operation and maintenance23
 26
 29
 354
 432
26
 30
 29
 312
 397
Depreciation
 16
 4
 222
 242

 16
 5
 236
 257
Taxes, other than income
 
 28
 47
 75

 1
 25
 43
 69
Total Operating Expenses23
 302
 207
 623
 1,155
26
 271
 180
 591
 1,068
Total $536
 $507
 $366
 $(613) $796
$441
 $547
 $367
 $(578) $777
 2016 Three Months
 U.K.
Gross
Margins
 Kentucky
Gross
Margins
 PA Gross
Margins
 Other (a) Operating
Income (b)
Operating Revenues$504
(c)$835
 $539
 $11
 $1,889
Operating Expenses         
Fuel
 227
 
 
 227
Energy purchases
 24
 129
 (2) 151
Other operation and maintenance28
 33
 24
 332
 417
Depreciation
 14
 
 218
 232
Taxes, other than income
 
 25
 51
 76
Total Operating Expenses28
 298
 178
 599
 1,103
Total   $476
 $537
 $361
 $(588) $786
2016 Three Months2017 Nine Months
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Margins
 Other (a) 
Operating
Income (b)
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$584
(c)$826
 $585
 $16
 $2,011
$1,517
(c)$2,350
 $1,620
 $34
 $5,521
Operating Expenses                  
Fuel
 198
 
 (1) 197

 576
 
 
 576
Energy purchases
 66
 167
 
 233

 120
 374
 
 494
Other operation and maintenance27
 24
 25
 374
 450
71
 82
 89
 975
 1,217
Depreciation
 12
 
 217
 229

 48
 14
 683
 745
Taxes, other than income
 1
 28
 50
 79

 4
 76
 134
 214
Total Operating Expenses27
 301
 220
 640
 1,188
71
 830
 553
 1,792
 3,246
Total $557
 $525
 $365
 $(624) $823
$1,446
 $1,520
 $1,067
 $(1,758) $2,275

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 2016 Nine Months
 
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$1,641
(c)$2,382
 $1,619
 $43
 $5,685
Operating Expenses         
Fuel
 607
 
 
 607
Energy purchases
 118
 414
 (1) 531
Other operation and maintenance75
 81
 77
 1,059
 1,292
Depreciation
 40
 
 652
 692
Taxes, other than income
 3
 75
 151
 229
Total Operating Expenses75
 849
 566
 1,861
 3,351
Total   $1,566
 $1,533
 $1,053
 $(1,818) $2,334
 
(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(c)Excludes ancillary revenues of $9$11 million and $11$30 million for the three and nine months ended March 31,September 30, 2017 and $11 million and $32 million for the three and nine months ended September 30, 2016.

2017 Outlook

(PPL)
 
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)
 
Lower net income is projected in 2017 compared with 2016, due toprimarily driven by a lower assumed GBP exchange rate in 2017, lower true-up mechanisms, lower incentive revenues, higher interest expense and higher depreciation expense, partially offset by lower operation and maintenance expense, including pension expense, and higher revenuesbase revenue from the April 1, 2017 price increase.reset.

(PPL's Kentucky Regulated Segment and LKE, LG&E and KU)
 
Relatively flatLower net income is projected in 2017 compared with 2016, primarily driven by lower electricity sales volumes due to unfavorable weather in 2017 and higher depreciation expense, partially offset by electricity and gas base rate increases, offset by higher operation and maintenance expense and higher depreciation expense.

increases.

(PPL's Pennsylvania Regulated Segment and PPL Electric)
 
Relatively flat net income is projected in 2017 compared with 2016, primarily driven by higher transmission earnings and lower operation and maintenance expense, offset by higher depreciation expense and higher interest expense and higher income taxes.expense.
 
(PPL's Corporate and Other Category)
 
Relatively flat costs are projected in 2017 compared with 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 9 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' 2016 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.
 

Table of Contents

PPL Electric: Statement of Income Analysis, Earnings and Margins

Statement of Income Analysis

Net income for the periods ended March 31September 30 includes the following results.
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
Operating Revenues$573
 $585
 $(12)$547
 $539
 $8
 $1,620
 $1,619
 $1
Operating Expenses                
Operation                
Energy purchases146
 167
 (21)121
 129
 (8) 374
 414
 (40)
Other operation and maintenance164
 150
 14
133
 144
 (11) 435
 431
 4
Depreciation75
 59
 16
77
 64
 13
 228
 185
 43
Taxes, other than income29
 29
 
27
 26
 1
 79
 79
 
Total Operating Expenses414
 405
 9
358
 363
 (5) 1,116
 1,109
 7
Other Income (Expense) - net1
 3
 (2)4
 4
 
 8
 12
 (4)
Interest Income from Affiliate2
 
 2
 3
 
 3
Interest Expense33
 33
 
36
 32
 4
 105
 97
 8
Income Taxes48
 56
 (8)64
 58
 6
 159
 162
 (3)
Net Income$79
 $94
 $(15)$95
 $90
 $5
 $251
 $263
 $(12)

Operating Revenues
 
The increase (decrease) in operating revenues for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Distribution Price (a)$12
$16
 $46
Distribution volume(3)(20) (30)
PLR (b)(21)(1) (32)
Transmission Formula Rate1
20
 25
Other(1)(7) (8)
Total$(12)$8
 $1

(a)Distribution rider prices resulted in increases of $12$16 million and $40 million for the three and nine months ended March 31,September 30, 2017.
(b)DecreaseThe decrease for the nine month period was primarily due to lower energy prices as described below.


Energy Purchases

Energy purchases decreased by $21$8 million for the three months ended March 31,September 30, 2017 compared with 2016, primarily due to lower PLR volumes of $12 million partially offset by higher PLR prices of $6 million.

Energy purchases decreased $40 million for the nine months ended September 30, 2017 compared with 2016, primarily due to lower PLR prices of $23$24 million partially offset by higherand lower PLR volumes of $3$11 million.

Other Operation and Maintenance

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

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 Three Months
Corporate service costs$8
Contractor-related expenses2
Payroll-related costs2
Act 1295
Bad debts(3)
Total$14

 Three Months Nine Months
Corporate service costs$
 $17
Vegetation management(4) (7)
Payroll-related costs(5) (6)
Act 1293
 11
Bad debts(4) (10)
Other(1) (1)
Total$(11) $4
 
Depreciation
 
Depreciation increased $16$13 million and $43 million for the three and nine months ended March 31,September 30, 2017 compared with 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 as well as the roll-out of the Act 129 Smart Meter program, net of retirements.
 
Interest Expense

Interest expense increased $4 million and $8 million for the three and nine months ended September 30, 2017 compared with 2016, primarily due to the May 2017 issuance of $475 million of 3.950% First Mortgage Bonds due 2047.

Income Taxes

The increase (decrease) in income taxes for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Change in pre-tax income at current period tax rates$(10)$3
 $(7)
Depreciation not normalized(1)
Stock-based compensation3

 2
Other3
 2
Total$(8)$6
 $(3)

Earnings
Three Months EndedThree Months Ended Nine Months Ended
March 31,September 30, September 30,
2017 20162017 2016 2017 2016
Net Income$79
 $94
$95
 $90
 $251
 $263
Special items, gains (losses), after-tax (a)
 

 
 
 
 
(a)There are no items that management considers special for the periods presented.

Earnings decreasedincreased for the three month period in 2017 compared with 2016 primarily due toas higher transmission margins from additional capital investments and lower other operation and maintenance expense were offset by lower sales volumes due to unfavorable weather and higher depreciation expense.

Earnings decreased for the nine month period in 2017 compared with 2016, primarily due to higher 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.retirements, higher interest expense, and lower distribution margins primarily due to lower sales volumes due to unfavorable weather in 2017. Higher transmission margins due tofrom additional capital investments were partially offset by a lower PPL zonal peak transmission demand.load billing factor.

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

Table of Contents

Three MonthsThree Months Nine Months
Pennsylvania Gross Margins$1
$6
 $14
Other operation and maintenance(10)16
 8
Depreciation(12)(8) (29)
Taxes, other than income(1) 1
Other Income (Expense) - net(2)2
 (1)
Interest Expense(4) (8)
Income Taxes8
(6) 3
Net Income$(15)$5
 $(12)
 
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 March 31.September 30. 
2017 Three Months 2016 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
Margins
 Other (a) 
Operating
Income (b)
 PA Gross
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$573
 $
 $573
 $585
 $
 $585
$547
 $
 $547
 $539
 $
 $539
Operating Expenses                      
Energy purchases146
 
 146
 167
 
 167
121
 
 121
 129
 
 129
Other operation and maintenance29
 135
 164
 25
 125
 150
29
 104
 133
 24
 120
 144
Depreciation4
 71
 75
 
 59
 59
5
 72
 77
 
 64
 64
Taxes, other than income28
 1
 29
 28
 1
 29
25
 2
 27
 25
 1
 26
Total Operating Expenses207
 207
 414
 220
 185
 405
180
 178
 358
 178
 185
 363
Total $366
 $(207) $159
 $365
 $(185) $180
$367
 $(178) $189
 $361
 $(185) $176
           
2017 Nine Months 2016 Nine Months
PA Gross
Margins
 Other (a) 
Operating
Income (b)
 PA Gross
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$1,620
 $
 $1,620
 $1,619
 $
 $1,619
Operating Expenses           
Energy purchases374
 
 374
 414
 
 414
Other operation and maintenance89
 346
 435
 77
 354
 431
Depreciation14
 214
 228
 
 185
 185
Taxes, other than income76
 3
 79
 75
 4
 79
Total Operating Expenses553
 563
 1,116
 566
 543
 1,109
Total $1,067
 $(563) $504
 $1,053
 $(543) $510

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

Table of Contents

LKE: Statement of Income Analysis, Earnings and Margins
 
Statement of Income Analysis
 
Net income for the periods ended March 31September 30 includes the following results.
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
Operating Revenues$809
 $826
 $(17)$818
 $835
 $(17) $2,350
 $2,382
 $(32)
Operating Expenses                
Operation                
Fuel191
 198
 (7)202
 227
 (25) 576
 607
 (31)
Energy purchases69
 66
 3
22
 24
 (2) 120
 118
 2
Other operation and maintenance207
 202
 5
199
 197
 2
 598
 603
 (5)
Depreciation105
 99
 6
114
 102
 12
 324
 301
 23
Taxes, other than income16
 15
 1
17
 16
 1
 49
 46
 3
Total Operating Expenses588
 580
 8
554
 566
 (12) 1,667
 1,675
 (8)
Other Income (Expense) - net(2) (1) (1)1
 (3) 4
 (5) (9) 4
Interest Expense49
 49
 
49
 50
 (1) 148
 147
 1
Interest Expense with Affiliate4
 4
 
5
 4
 1
 13
 12
 1
Income Taxes63
 72
 (9)79
 79
 
 195
 202
 (7)
Net Income$103
 $120
 $(17)$132
 $133
 $(1) $322
 $337
 $(15)

Operating Revenues

The increase (decrease) in operating revenues for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Base rates$31
 $31
Volumes$(37)(41) (86)
Fuel and other energy prices (a)11
DSM5
Fuel and other energy prices(8) 10
Other4
1
 13
Total$(17)$(17) $(32)

(a)Increase due to higher recoveries of fuel and energy purchases due to higher commodity costs.

Fuel

Fuel decreased $7$25 million for the three months ended March 31,September 30, 2017 compared with 2016, primarily due to a $12$16 million decrease in volumes driven by milder weather partially offset byin the third quarter of 2017 and a $5$9 million increasedecrease in fuel prices.market prices for coal.

Income TaxesFuel decreased $31 million for the nine months endedSeptember 30, 2017 compared with 2016, primarily due to a $28 million decrease in volumes driven by milder weather in 2017 and a $4 million decrease in market prices for coal.

Income taxes decreased $9Depreciation

Depreciation increased $12 million for the three months ended March 31,September 30, 2017 compared with 2016 primarily due to lower pre-tax income.a $7 million increase related to higher depreciation rates effective July 1, 2017 and a $5 million increase related to additions to PP&E, net of retirements.

Depreciation increased $23 million for the nine months endedSeptember 30, 2017 compared with 2016 due to a $16 million increase related to additions to PP&E, net of retirements, and a $7 million increase related to higher depreciation rates effective July 1, 2017.


Table of Contents

Earnings
Three Months EndedThree Months Ended Nine Months Ended
March 31,September 30, September 30,
2017 20162017 2016 2017 2016
Net Income$103
 $120
$132
 $133
 $322
 $337
Special items, gains (losses), after-tax(1) 

 
 (1) 

Earnings decreased for the three and nine month periodperiods in 2017 compared with 2016, primarily due to lower electricity sales volumes driven by milder weather.weather and higher depreciation expense, partially offset by higher base rates effective July 1, 2017.

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 MonthsThree Months Nine Months
Margins$(18)$10
 $(13)
Other operation and maintenance(3)(5) 6
Depreciation(2)(10) (15)
Taxes, other than income(2)
 (2)
Other Income (Expense) - net4
 5
Interest Expense
 (2)
Income Taxes9

 7
Special items, gains (losses), after-tax (a)(1)
 (1)
Net Income$(17)$(1) $(15)

(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 table containstables 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 March 31.September 30.
2017 Three Months 2016 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$809
 $
 $809
 $826
 $
 $826
$818
 $
 $818
 $835
 $
 $835
Operating Expenses                      
Fuel191
 
 191
 198
 
 198
202
 
 202
 227
 
 227
Energy purchases69
 
 69
 66
 
 66
22
 
 22
 24
 
 24
Other operation and maintenance26
 181
 207
 24
 178
 202
30
 169
 199
 33
 164
 197
Depreciation16
 89
 105
 12
 87
 99
16
 98
 114
 14
 88
 102
Taxes, other than income
 16
 16
 1
 14
 15
1
 16
 17
 
 16
 16
Total Operating Expenses302
 286
 588
 301
 279
 580
271
 283
 554
 298
 268
 566
Total$507
 $(286) $221
 $525
 $(279) $246
$547
 $(283) $264
 $537
 $(268) $269
           

Table of Contents

 2017 Nine Months 2016 Nine Months
 Margins Other (a) Operating
Income (b)
 Margins Other (a) Operating
Income (b)
Operating Revenues$2,350
 $
 $2,350
 $2,382
 $
 $2,382
Operating Expenses           
Fuel576
 
 576
 607
 
 607
Energy purchases120
 
 120
 118
 
 118
Other operation and maintenance82
 516
 598
 81
 522
 603
Depreciation48
 276
 324
 40
 261
 301
Taxes, other than income4
 45
 49
 3
 43
 46
Total Operating Expenses830
 837
 1,667
 849
 826
 1,675
Total$1,520
 $(837) $683
 $1,533
 $(826) $707

(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 March 31September 30 includes the following results.
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
Operating Revenues    

    

     

Retail and wholesale$374
 $375
 $(1)$361
 $366
 $(5) $1,055
 $1,058
 $(3)
Electric revenue from affiliate17
 11
 6
2
 2
 
 23
 19
 4
Total Operating Revenues391
 386
 5
363
 368
 (5) 1,078
 1,077
 1
Operating Expenses    

    

     

Operation                
Fuel80
 78
 2
76
 86
 (10) 225
 233
 (8)
Energy purchases64
 62
 2
18
 19
 (1) 107
 104
 3
Energy purchases from affiliate2
 2
 
3
 5
 (2) 8
 10
 (2)
Other operation and maintenance87
 87
 
89
 85
 4
 262
 264
 (2)
Depreciation44
 41
 3
47
 43
 4
 136
 126
 10
Taxes, other than income8
 8
 
8
 9
 (1) 25
 24
 1
Total Operating Expenses285
 278
 7
241
 247
 (6) 763
 761
 2
Other Income (Expense) - net(2) 
 (2)(1) (1) 
 (2) (6) 4
Interest Expense17
 17
 
17
 18
 (1) 53
 53
 
Income Taxes33
 35
 (2)39
 39
 
 99
 98
 1
Net Income$54
 $56
 $(2)$65
 $63
 $2
 $161
 $159
 $2
 

Table of Contents

Operating Revenues

The increase (decrease) in operating revenues for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Base rates$18
 $18
Volumes$(5)(16) (26)
Fuel and other energy prices4
(4) 4
DSM3
Other3
(3) 5
Total$5
$(5) $1

Fuel

Fuel decreased $10 million for the three months ended September 30, 2017 compared with 2016, primarily due to a $6 million decrease in market prices for coal and a $5 million decrease in volumes driven by milder weather in the third quarter of 2017.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended September 30, 2017 compared with 2016 was due to:
 Three Months Nine Months
Plant operations and maintenance$1
 $(1)
Pension expense1
 1
Timing and scope of generation maintenance outages
 (1)
Storm costs
 (1)
Other2
 
Total$4
 $(2)

Depreciation

Depreciation increased $4 million for the three months ended September 30, 2017 compared with 2016 due to a $2 million increase related to higher depreciation rates effective July 1, 2017 and a $2 million increase related to additions to PP&E, net of retirements.

Earnings
Three Months EndedThree Months Ended Nine Months Ended
March 31,September 30, September 30,
2017 20162017 2016 2017 2016
Net Income$54
 $56
$65
 $63
 $161
 $159
Special items, gains (losses), after-tax (a)
 

 
 
 

(a)There are no items management considers special for the periods presented.
 
Earnings decreasedincreased for the three month period in 2017 compared with 2016, primarily due to higher depreciation expense, fuel costs and energy purchases,base rates effective July 1, 2017, partially offset by higher native loadlower sales to KUvolumes driven by milder weather.

Earnings increased for the nine month period in 2017 compared with 2016, primarily due to timing of plant outages.higher base rates effective July 1, 2017 and lower other operation and maintenance expense, partially offset by lower sales volumes driven by milder weather.

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.

Table of Contents

Three MonthsThree Months Nine Months
Margins$(2)$8
 $2
Other operation and maintenance1
(4) 3
Depreciation(5) (6)
Taxes, other than income(1)2
 
Other Income (Expense) - net(2)
 4
Interest Expense1
 
Income Taxes2

 (1)
Net Income$(2)$2
 $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 table containstables 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 March 31.September 30.
2017 Three Months 2016 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$391
 $
 $391
 $386
 $
 $386
$363
 $
 $363
 $368
 $
 $368
Operating Expenses                      
Fuel80
 
 80
 78
 
 78
76
 
 76
 86
 
 86
Energy purchases, including affiliate66
 
 66
 64
 
 64
21
 
 21
 24
 
 24
Other operation and maintenance10
 77
 87
 9
 78
 87
13
 76
 89
 13
 72
 85
Depreciation9
 35
 44
 6
 35
 41
7
 40
 47
 8
 35
 43
Taxes, other than income
 8
 8
 1
 7
 8
1
 7
 8
 
 9
 9
Total Operating Expenses165
 120
 285
 158
 120
 278
118
 123
 241
 131
 116
 247
Total $226
 $(120) $106
 $228
 $(120) $108
$245
 $(123) $122
 $237
 $(116) $121
           
2017 Nine Months 2016 Nine Months
Margins Other (a) Operating Income (b) Margins Other (a) Operating Income (b)
Operating Revenues$1,078
 $
 $1,078
 $1,077
 $
 $1,077
Operating Expenses           
Fuel225
 
 225
 233
 
 233
Energy purchases, including affiliate115
 
 115
 114
 
 114
Other operation and maintenance33
 229
 262
 32
 232
 264
Depreciation24
 112
 136
 20
 106
 126
Taxes, other than income3
 22
 25
 2
 22
 24
Total Operating Expenses400
 363
 763
 401
 360
 761
Total $678
 $(363) $315
 $676
 $(360) $316
 
(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.

Table of Contents

KU: Statement of Income Analysis, Earnings and Margins

Statement of Income Analysis
 
Net income for the periods ended March 31September 30 includes the following results.
Three MonthsThree Months Nine Months
2017 2016 $ Change2017 2016 $ Change 2017 2016 $ Change
Operating Revenues                
Retail and wholesale$435
 $451
 $(16)$457
 $469
 $(12) $1,295
 $1,324
 $(29)
Electric revenue from affiliate2
 2
 
3
 5
 (2) 8
 10
 (2)
Total Operating Revenues437
 453
 (16)460
 474
 (14) 1,303
 1,334
 (31)
Operating Expenses                
Operation                
Fuel111
 120
 (9)126
 141
 (15) 351
 374
 (23)
Energy purchases5
 4
 1
4
 5
 (1) 13
 14
 (1)
Energy purchases from affiliate17
 11
 6
2
 2
 
 23
 19
 4
Other operation and maintenance109
 106
 3
104
 107
 (3) 313
 320
 (7)
Depreciation60
 58
 2
67
 59
 8
 188
 175
 13
Taxes, other than income8
 7
 1
9
 7
 2
 24
 22
 2
Total Operating Expenses310
 306
 4
312
 321
 (9) 912
 924
 (12)
Other Income (Expense) - net(1) (2) 1

 (3) 3
 (3) (4) 1
Interest Expense24
 24
 
24
 24
 
 72
 71
 1
Income Taxes39
 46
 (7)47
 48
 (1) 120
 128
 (8)
Net Income$63
 $75
 $(12)$77
 $78
 $(1) $196
 $207
 $(11)

Operating Revenue
 
The increase (decrease) in operating revenue for the periodperiods ended March 31,September 30, 2017 compared with 2016 was due to:
Three MonthsThree Months Nine Months
Base rates$13
 $13
Volumes$(24)(27) (57)
Fuel and other energy prices (a)6
DSM2
Fuel and other energy prices(3) 5
Other3
 8
Total$(16)$(14) $(31)

(a)Increase due to higher recoveries of fuel due to higher commodity costs.

Fuel

Fuel decreased $9$15 million for the three months ended March 31,September 30, 2017 compared with 2016, primarily due to an $11 million decrease in volumes driven by milder weather in the third quarter of 2017 and a $3 million decrease in market prices for coal.

Fuel decreased $23 million for the nine months ended September 30, 2017 compared with 2016, primarily due to a $16$29 million decrease in volumes driven by milder weather partially offset by a $7 million increase in fuel prices.2017.

Energy purchases from affiliate

Table of Contents

Energy purchases from affiliateDepreciation

Depreciation increased $6$8 million for the three months ended March 31,September 30, 2017 compared with 2016 primarily due to a $5 million increase related to higher native load purchases from LGdepreciation rates effective July 1, 2017 and a $3 million increase related to additions to PP&E, due to timingnet of plant outages.retirements.

Income Taxes

Income taxes decreased $7Depreciation increased $13 million for the threenine months ended March 31, September 30, 2017 compared with 2016 primarily due to lower pre-tax income.

an $8 million increase related to additions to PP&E, net of retirements, and a $5 million increase related to higher depreciation rates effective July 1, 2017.

Earnings
Three Months EndedThree Months Ended Nine Months Ended
March 31,September 30, September 30,
2017 20162017 2016 2017 2016
Net Income$63
 $75
$77
 $78
 $196
 $207
Special items, gains (losses), after-tax(1) 

 
 (1) 

Earnings decreased for the three month period in 2017 compared with 2016, primarily due to lower electricity sales volumes driven by milder weather and higher energy purchases from affiliate,depreciation expense, partially offset by higher base rates effective July 1, 2017.

Earnings decreased for the nine month period in 2017 compared with 2016, primarily due to lower fuelelectricity sales volumes driven by milder weather and higher depreciation expense, partially offset by higher base rates effective July 1, 2017 and lower income taxes.other operation and maintenance expense.

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 MonthsThree Months Nine Months
Margins$(16)$2
 $(15)
Other operation and maintenance(2)
 7
Depreciation(1)(5) (9)
Taxes, other than income(1)(2) (2)
Other Income (Expense) - net2
3
 2
Interest Expense
 (1)
Income Taxes7
1
 8
Special items, gains (losses), after-tax (a)(1)
 (1)
Net Income$(12)$(1) $(11)

(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 table containstables 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 March 31.September 30.

Table of Contents

2017 Three Months 2016 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$437
 $
 $437
 $453
 $
 $453
$460
 $
 $460
 $474
 $
 $474
Operating Expenses                      
Fuel111
 
 111
 120
 
 120
126
 
 126
 141
 
 141
Energy purchases, including affiliate22
 
 22
 15
 
 15
6
 
 6
 7
 
 7
Other operation and maintenance16
 93
 109
 15
 91
 106
17
 87
 104
 20
 87
 107
Depreciation7
 53
 60
 6
 52
 58
9
 58
 67
 6
 53
 59
Taxes, other than income
 8
 8
 
 7
 7

 9
 9
 
 7
 7
Total Operating Expenses156
 154
 310
 156
 150
 306
158
 154
 312
 174
 147
 321
Total$281
 $(154) $127
 $297
 $(150) $147
$302
 $(154) $148
 $300
 $(147) $153
           
2017 Nine Months 2016 Nine Months
Margins Other (a) Operating
Income (b)
 Margins Other (a) Operating
Income (b)
Operating Revenues$1,303
 $
 $1,303
 $1,334
 $
 $1,334
Operating Expenses           
Fuel351
 
 351
 374
 
 374
Energy purchases, including affiliate36
 
 36
 33
 
 33
Other operation and maintenance49
 264
 313
 49
 271
 320
Depreciation24
 164
 188
 20
 155
 175
Taxes, other than income1
 23
 24
 1
 21
 22
Total Operating Expenses461
 451
 912
 477
 447
 924
Total$842
 $(451) $391
 $857
 $(447) $410

(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
March 31, 2017         
September 30, 2017         
Cash and cash equivalents$409
 $20
 $15
 $4
 $7
$676
 $243
 $40
 $9
 $31
Notes receivable from affiliate  2
 
 
 10
Short-term debt1,666
 499
 243
 207
 36
1,211
 
 190
 190
 
Notes payable with affiliate  
 82
 
 
  
 159
 10
 
         
December 31, 2016                  
Cash and cash equivalents$341
 $13
 $13
 $5
 $7
$341
 $13
 $13
 $5
 $7
Short-term debt923
 295
 185
 169
 16
923
 295
 185
 169
 16
Notes payable with affiliate  
 163
 
 
  
 163
 
 
 
(a)At March 31,September 30, 2017, $51$86 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 2016 Form 10-K for additional information on undistributed earnings of WPD.
 
(All Registrants)

Table of Contents

Net cash provided by (used in) operating, investing and financing activities for the threenine month periodperiods ended March 31,September 30, and the changes between periods, were as follows.
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
2017                  
Operating activities$135
 $55
 $312
 $142
 $139
$1,754
 $575
 $920
 $418
 $501
Investing activities(677) (276) (184) (94) (89)(2,164) (858) (575) (293) (289)
Financing activities607
 228
 (126) (49) (50)738
 513
 (318) (121) (188)
2016                  
Operating activities$557
 $124
 $303
 $157
 $195
$2,230
 $595
 $816
 $383
 $469
Investing activities(661) (215) (219) (109) (110)(2,066) (740) (599) (343) (254)
Financing activities115
 78
 (86) (56) (79)(558) 134
 (236) (55) (219)
Change - Cash Provided (Used)                  
Operating activities$(422) $(69) $9
 $(15) $(56)$(476) $(20) $104
 $35
 $32
Investing activities(16) (61) 35
 15
 21
(98) (118) 24
 50
 (35)
Financing activities492
 150
 (40) 7
 29
1,296
 379
 (82) (66) 31
 
Operating Activities
 
The components of the change in cash provided by (used in) operating activities for the threenine months ended March 31,September 30, 2017 compared with 2016 were as follows.

PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)                  
Net income$(78) $(15) $(17) $(2) $(12)$(387) $(12) $(15) $2
 $(11)
Non-cash components90
 1
 (13) (4) (5)(23) 34
 (18) (11) 4
Working capital(36) (31) 28
 (15) (29)91
 (3) 78
 (9) 31
Defined benefit plan funding(397) (24) 11
 12
 (9)(213) (24) 50
 42
 (3)
Other operating activities(1) 
 
 (6) (1)56
 (15) 9
 11
 11
Total$(422) $(69) $9
 $(15) $(56)$(476) $(20) $104
 $35
 $32
 
(PPL)

PPL's cash provided by operating activities in 2017 decreased $422$476 million compared with 2016.
The $90$27 million increasedecrease in net non-cash components was primarily due to a decrease in deferred income tax expense (primarily due to lower income taxes from tax benefits related to accelerated pension contributions to the U.K. pension plans) and an increase in the U.K. net periodic defined benefit credits (primarily due to a decrease in the U.K. pension plan discount rates used to calculate the interest cost component of the net periodic defined benefit costs), partially offset by an increase in unrealized losses on derivatives.hedging activities and an increase in depreciation expense (primarily due to additional assets placed into service, net of retirements, and higher depreciation rates effective July 1, 2017, partially offset by the impact of foreign currency exchange rates at WPD).

The $36$91 million decreaseincrease in cash from changes in working capital was primarily due to a decrease in accounts receivable and unbilled revenue (primarily due to a decrease in volumes due to milder weather in 2017 compared to 2016), a decrease in net regulatory assets and liabilities (due to timing of rate recovery mechanisms), a decrease in fuel, material and supplies (primarily due to a decrease in fuel purchases due to milder weather in 2017 compared to 2016), and an increase in accrued interest, partially offset by a decrease in accounts payable (primarily due to an increase in accrued expenditures for property, plant and equipment and timing of payments), and a decrease in taxes payable (primarily due to an increase in current income tax benefit in 2017) and an increase in prepayments (primarily due to higher tax payments) partially offset by a decrease in unbilled revenue and accounts receivable (primarily due to less favorable weather in 2017 compared to 2016) and a decrease in fuel, materials and supplies (primarily due to a decrease in volumes due to less favorable weather in 2017 compared to 2016).

Defined benefit plan funding was $397$213 million higher in 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 2017 decreased $69$20 million compared with 2016.

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The $31$34 million increase in non-cash components was primarily due to an increase in depreciation expense (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 as well as the roll-out of the Act 129 Smart Meter program, net of retirements), partially offset by a decrease in deferred income taxes (primarily due to book versus tax plant timing differences).

The $3 million decrease in cash from changes in working capital was primarily due to an increase in prepayments (primarily due to higheran increase in the 2017 gross receipts tax payments)prepayment compared to 2016) and a decrease in accounts payable (primarily due to timing of payments), partially offset by a decrease in accounts receivable (primarily due to unfavorable weather in 2017), a net decrease in current regulatory assets and regulatory liabilities (due to the timing of rate recovery mechanisms) and, a decrease in unbilled revenue (primarily due to lower volumes due to milder weather in 2017 compared to 2016), an increase in taxes payable (primarily due to a decrease in the current income tax expensebenefit) and a decrease in 2017)accounts receivable (primarily due to a decrease in volumes due to milder weather in 2017 and income tax refunds received).

Defined benefit plan funding was $24 million higher in 2017.

(LKE)
 
LKE's cash provided by operating activities in 2017 increased $9$104 million compared with 2016.
The increase in cash from changes in working capital was primarily driven by decreases in accounts receivable from customers and unbilled revenues due to less favorablemilder weather in 2017 compared to 2016, a decrease in fuel purchases due to lower generation driven by weather in 2017 compared to 2016, and an increase in taxes payable due to timing of payments, partially offset by a decrease in accounts payable due to the timing of fuel purchases and payments.

Defined benefit plan funding was $50 million lower in 2017.

(LG&E)
 
LG&E's cash provided by operating activities in 2017 decreased $15increased $35 million compared with 2016.
The decrease in cash from changes in working capital was primarily driven by decreases in accounts payable due to fuel purchases from lower generation and timing of payments and taxes payable due to timing of payments and accounts payable due to timing of fuel purchases and payments, partially offset by decreases in accounts receivable from customers and unbilled revenues due to less favorablemilder weather in 2017 compared to 2016.2016 and accounts receivable from affiliates due to timing of intercompany settlements associated with inventory and energy sales to KU.

Defined benefit plan funding was $42 million lower in 2017.

(KU)
 
KU's cash provided by operating activities in 2017 decreased $56increased $32 million compared with 2016.
The decreaseincrease in cash from changes in working capital was primarily driven by decreasesa decrease in accounts receivable from customers and unbilled revenues due to milder weather in 2017 compared to 2016, a decrease in fuel purchases due to lower generation driven by weather in 2017 compared to 2016, and an increase in accounts payable due to the timing of fuel purchases and payments, partially offset by a decrease in taxes payable due to timing of payments accounts payable due to timing of fuel purchases and payments and accounts payable to affiliates due to highertiming of intercompany settlements associated with operational expensesinventory and inventory, partially offset by decreases in accounts receivable and unbilled revenues due to less favorable weather in 2017 compared to 2016.energy purchases from LG&E.

Investing Activities
 
(All Registrants)
 
Expenditures for Property, Plant and Equipment
 
Investment in PP&E is the primary investing activity of the Registrants. The change in cash used in expenditures for PP&E for the threenine months ended March 31,September 30, 2017 compared with 2016 was as follows. 
 PPL PPL Electric LKE LG&E KU
Decrease (Increase)$(21) $(60) $35
 $15
 $21
 PPL PPL Electric LKE LG&E KU
Decrease (Increase)$(79) $(112) $21
 $50
 $(28)

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For PPL, the increase in expenditures was due to higher project expenditures at WPDPPL Electric and PPL ElectricKU partially offset by lower project expenditures at LG&EWPD and KU and a decrease in foreign currency exchange rates. The increase in project expenditures for WPD was primarily due to an increase in expenditures to enhance system reliability.LG&E. The increase in expenditures for PPL Electric was primarily due to an increase in capital spending related to the smart meter implementation projectongoing efforts to improve reliability and various enhancement reliability projects.replace aging infrastructure, as well as the roll-out of the Act 129 Smart Meter program. The decrease in expenditures for WPD was primarily due to a decrease in foreign currency exchange rates partially offset by an increase in expenditures to enhance system reliability. The decrease in expenditures for LG&E was primarily due to reduced spending for environmental air projects at LG&E's Mill Creek plant, partially offset by increased spending for environmental water projects at LG&E’s Mill Creek plant. The decreaseincrease in expenditures for KU was primarily due to reducedincreased spending for environmental airwater projects at KU'sKU’s Ghent plant.
 
Financing Activities
 
(All Registrants)
 
The components of the change in cash provided by (used in) financing activities for the threenine months ended March 31,September 30, 2017 compared with 2016 were as follows.
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)                  
Debt issuance/retirement, net$64
 $
 $
 $
 $
$692
 $470
 $
 $
 $
Settlement of cross-currency swaps(46) 
 
 
 
Stock issuances/redemptions, net31
 
 
 
 
142
 
 
 
 
Dividends(3) (31) 
 (62) (6)(28) (38) 
 (63) 26
Capital contributions/distributions, net
 100
 (73) (30) 

 375
 (129) (47) (20)
Change in short-term debt, net393
 79
 207
 98
 34
537
 (425) 135
 35
 25
Notes payable with affiliate
 
 (174) 
 

 
 (88) 10
 
Other financing activities7
 2
 
 1
 1
(1) (3) 
 (1) 
Total$492
 $150
 $(40) $7
 $29
$1,296
 $379
 $(82) $(66) $31
 
See Note 7 to the Financial Statements in this Form 10-Q for information on 2017 shortshort-term and long-term debt activity, equity transactions and PPL dividends. See the Registrants' 2016 Form 10-K for information on 2016 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 March 31,September 30, 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$1,400
 $
 $206
 $1,194
$1,400
 $
 $303
 $1,097
PPL Electric Credit Facility650
 
 500
 150
650
 
 1
 649
              
LKE Credit Facility75
 
 
 75
75
 
 
 75
LG&E Credit Facility500
 
 207
 293
500
 
 190
 310
KU Credit Facilities598
 
 234
 364
598
 
 198
 400
Total LKE1,173
 
 441
 732
1,173
 
 388
 785
Total U.S. Credit Facilities (a)$3,223
 $
 $1,147
 $2,076
$3,223
 $
 $692
 $2,531
Total U.K. Credit Facilities (b)£1,285
 £591
 £
 £694
£1,285
 £501
 £
 £783
 

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(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 - 10%, PPL Electric - 7%, LKE - 21%, LG&E - 7% and KU - 37%.
(b)The amounts borrowed at March 31,September 30, 2017 were a USD-denominated borrowing of $200 million and GBP-denominated borrowings which equated to $535$446 million. The unused capacity reflects the USD-denominated borrowing amount borrowed in GBP of £156 million as of the date borrowed. At March 31,September 30, 2017, the USD equivalent of unused capacity under the U.K. committed credit facilities was $864 million.$1.0 billion.

The commitments under the U.K. credit facilities are provided by a diverse bank group, with no one bank providing more than 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
 $82
 $
 $143
$225
 $159
 $
 $66
LG&E Money Pool (a)500
 
 207
 293
500
 10
 190
 300
KU Money Pool (a)500
 
 36
 464
500
 
 
 500

(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 all covered sources.

See Note 10 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 March 31,September 30, 2017:
Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
PPL Capital Funding$1,000
 $189
 $811
$1,000
 $285
 $715
PPL Electric650
 499
 151
650
 
 650
          
LG&E350
 207
 143
350
 190
 160
KU350
 36
 314
350
 
 350
Total LKE700
 243
 457
700
 190
 510
Total PPL$2,350
 $931
 $1,419
$2,350
 $475
 $1,875


Long-term Debt (All Registrants)

(PPL)

In March 2017, WPD (South Wales) issued £50 million of 0.01% Index-linked Senior Notes due 2029. WPD (South Wales) received proceeds of £53 million, which equatedSee Note 7 to $64 million at the time of issuance, net of fees and including a premium. The principal amount ofFinancial Statements for information regarding the notes is adjusted based on changes in a specified index, as detailed in the terms of the related indenture. The proceeds will be used for general corporate purposes.

(PPL, LKE and LG&E)

In April 2017, the Louisville/Jefferson County Metro Government of Kentucky remarketed $128 million of Pollution Control Revenue Bonds, 2003 Series A (Louisville Gas and Electric Company Project) due 2033 on behalf of LG&E. The bonds were remarketed at a long term rate and will bear interest at 1.50% through their mandatory purchase date of April 1, 2019.Registrants’ long-term debt activities.

(PPL)
 
ATM Program
 
For the periodperiods ended March 31,September 30, 2017, PPL issued the following:
Three Months Nine Months
Number of shares (in thousands)1,364
2,049
 5,526
Average share price$36.66
$39.04
 $38.49
Net Proceeds$50
$79
 $211


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See Note 7 to the Financial Statements for further discussion of the ATM program.

Common Stock Dividends
 
In FebruaryAugust 2017, PPL declared a quarterly common stock dividend, payable April 3,October 2, 2017, of 39.5 cents per share (equivalent to $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.

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 2017:

(PPL)

In March 2017, Moody's and S&P assigned ratings of Baa1 and A- to WPD (South Wales)’s £50 million 0.01% Index-linked Senior Notes due 2029.

In September 2017, Moody's and S&P assigned ratings of Baa2 and BBB+ to PPL Capital Funding’s $500 million 4.00% Senior Notes due 2047.

(PPL and PPL Electric)

In January 2017, Moody's and S&P affirmed their commercial paper ratings for PPL Electric's $650 million commercial paper program.

In May 2017, Moody's and S&P assigned ratings of A1 and A to PPL Electric's $475 million 3.95% First Mortgage Bonds due 2047.

(LGIn August 2017, Moody's assigned a rating of A1 and S&P confirmed its rating of A for LCIDA's $116 million 1.80% Pollution Control Revenue Refunding Bonds (PPL Electric Utilities Corporation Project) Series 2016A due 2029 and LCIDA's $108 million 1.80% Pollution Control Revenue Refunding Bonds (PPL Electric Utilities Corporation Project) Series 2016B due 2027, each previously issued on behalf of PPL Electric.

(PPL, LKE and LG&E)

In March 2017, Moody'sMoody’s assigned a rating of A1 and S&P confirmed its rating of A for the Louisville/Jefferson Metro Government of Kentucky's $128 million 1.5% Pollution Control Revenue Bonds, 2003 Series A (Louisville Gas and Electric Company Project) due 2033, previously issued on behalf of LG&E.

In May 2017, Moody’s and S&P assigned ratings of A1 and A to LG&E's 2003the County of Trimble, Kentucky's $60 million 3.75% Environmental Facilities Revenue Bonds, 2017 Series A Pollution Control(Louisville Gas and Electric Company Project) due 2033, issued on behalf of LG&E.


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In May 2017, Moody’s assigned a rating of A1 and in June 2017, S&P confirmed its rating of A for the Louisville/Jefferson Metro Government of Kentucky's $31 million 1.25% Environmental Facilities Revenue Bonds.Refunding Bonds, 2007 Series A (Louisville Gas and Electric Company Project) due 2033, previously issued on behalf of LG&E.

In May 2017, Moody’s assigned a rating of A1 and in June 2017, S&P confirmed its rating of A for the Louisville/Jefferson Metro Government of Kentucky's $35 million 1.25% Environmental Facilities Revenue Refunding Bonds, 2007 Series B (Louisville Gas and Electric Company Project) due 2033, previously issued on behalf of LG&E.

(PPL, LKE and KU)

In July 2017, Moody’s affirmed its rating of Aa2 and in August 2017, S&P confirmed its rating of AA for the County of Mercer, Kentucky's $13 million Solid Waste Disposal Facility Revenue Bonds, 2000 Series A (Kentucky Utilities Company Project) due 2023, the County of Carroll, Kentucky's $50 million Environmental Facilities Revenue Bonds, 2004 Series A (Kentucky Utilities Company Project) due 2034, the County of Carroll, Kentucky's $78 million Environmental Facilities Revenue Bonds, 2008 Series A (Kentucky Utilities Company Project) due 2032 and the County of Carroll, Kentucky's $54 million Environmental Facilities Revenue Refunding Bonds, 2006 Series B (Kentucky Utilities Company Project) due 2034, each previously issued on behalf of KU.

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 13 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 March 31,September 30, 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' 2016 Form 10-K.

Risk Management
 
Market Risk
 
(All Registrants)
 
See Notes 12 and 13 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.


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The following interest rate hedges were outstanding at March 31,September 30, 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              
Interest rate swaps (c)$242
 $(2) $(3) 2027
Cross-currency swaps (c)$802
 $182
 $(90) 2028802
 162
 (90) 2028
Economic hedges              
Interest rate swaps (d)147
 (30) (2) 2033147
 (29) (1) 2033
LKE              
Economic hedges 
  
  
   
  
  
  
Interest rate swaps (d)147
 (30) (2) 2033147
 (29) (1) 2033
LG&E 
  
  
   
  
  
  
Economic hedges 
  
  
   
  
  
  
Interest rate swaps (d)147
 (30) (2) 2033147
 (29) (1) 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 March 31,September 30, 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 March 31,September 30, 2017 is shown below.
10% Adverse
Movement
in Rates
10% Adverse
Movement
in Rates
PPL$563
$600
PPL Electric137
165
LKE180
172
LG&E66
63
KU99
95
 
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 March 31,September 30, 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)£2,840
 $150
 $(333) 2019
 
Exposure
Hedged
 
Fair Value,
Net - Asset
(Liability)
 
Effect of a
10%
Adverse
Movement
in Foreign
Currency
Exchange
Rates (a)
 
Maturities
Ranging
Through
Net investment hedges (b)£92
 $1
 $(12) 2017
Economic hedges (c)2,728
 (4) (340) 2020
 
(a)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.

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(b)To protect the value of a portion of its net investment in WPD, PPL executes forward contracts to sell GBP.
(c)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-ED1 price control period, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2016 Form 10-K for additional information on revenue recognition under 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 12 and 13 to the Financial Statements in this Form 10-Q and "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Risk Management - Credit Risk" in the Registrants' 2016 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 lossgain of $24$194 million for the threenine months ended March 31,September 30, 2017, which primarily reflected a $46$345 million decreaseincrease to PP&E and a $10$75 million decreaseincrease to goodwill partially offset by a $28$203 million decreaseincrease to long-term debt and a $4$23 million decreaseincrease to other net liabilities. Changes in this exchange rate resulted in a foreign currency translation loss of $466$840 million for the threenine months ended March 31,September 30, 2016, which primarily reflected a $909 million$1.6 billion decrease to PP&E and a $214$375 million decrease to goodwill partially offset by a $557$995 million decrease to long-term debt and a $100$160 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 10 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.


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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 9 to the Financial Statements for a discussion of the more significant environmental matters including:
Legal Matters,
Climate Change,
Coal Combustion Residuals,CCRs,
Effluent Limitations Guidelines,ELGs, and
National Ambient Air Quality Standards.NAAQS.

Additionally, see "Item 1. Business - Environmental Matters" in the Registrants' 2016 Form 10-K for additional information on environmental matters.
 
New Accounting Guidance (All Registrants)
 
See Note 17 to the Financial Statements for a discussion of new accounting guidance 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' 2016 Form 10-K for a discussion of each critical accounting policy.
    PPL         
 PPL Electric LKE LG&E KU
               
Defined BenefitsX 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


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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 March 31,September 30, 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' firstthird 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 2016 Form 10-K; and
Notes 6 and 9 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' 2016 Form 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.

Table of Contents

-Third Amendment to Revolving Credit Agreement,Supplemental Indenture No. 16, dated as of March 17,September 8, 2017, to the Existing Credit Agreement, dated as of March 26, 2014, betweenamong PPL Capital Funding, Inc., the Borrower, PPL Corporation the Guarantor,and The Bank of Nova Scotia,New York Mellon (as successor to JPMorgan Chase Bank, N.A. (formerly known as the Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and each Lender
-£230,000,000 Term Loan Agreement, dated March 28, 2017, between Western Power Distribution plc and HSBC Bank, PLC and Mizuho Bank, Ltd.The Chase Manhattan Bank)), as Mandated Lead Arrangers, and Mizuho Bank, Ltd., as Facility AgentTrustee (Exhibit 10.14(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 5,September 6, 2017)
-£3,000,000,000 Euro Medium Term Note Programme entered into by Western Power Distribution (East Midlands) plc, Western Power Distribution (South Wales) plc, Western Power Distribution (South West) plc and Western Power Distribution (West Midlands) plc, dated as of September 15, 2017
-Amendment No. 1 to PPL Employee Stock Ownership Plan, dated October 2, 2017
-£20,000,000 Uncommitted Facility Letter entered into between Western Power Distribution (South West) plc, Western Power Distribution (South Wales) plc, Western Power Distribution (West Midlands) plc, Western Power Distribution (East Midlands) plc and BNP Paribas, dated as of January 23, 2014
-Amendment to said Uncommitted Facility Letter, dated as of July 28, 2017
-$200,000,000 Term Loan Credit Agreement, dated as of October 26, 2017, among Louisville Gas and Electric Company, as the Borrower, the Lenders from time to time party hereto and U.S. Bank National Association, as Administrative Agent
-PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
-PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
-LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
-Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
-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 March 31,September 30, 2017, filed by the following officers for the following companies:
   
-PPL Corporation's principal executive officer
-PPL Corporation's principal financial officer
-PPL Electric Utilities Corporation's principal executive officer
-PPL Electric Utilities Corporation's principal financial officer
-LG&E and KU Energy LLC's principal executive officer
-LG&E and KU Energy LLC's principal financial officer
-Louisville Gas and Electric Company's principal executive officer
-Louisville Gas and Electric Company's principal financial officer
-Kentucky Utilities Company's principal executive officer
-Kentucky Utilities Company's principal financial officer
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended March 31,September 30, 2017, furnished by the following officers for the following companies:
   
-PPL Corporation's principal executive officer and principal financial officer
-PPL Electric Utilities Corporation's principal executive officer and principal financial officer
-LG&E and KU Energy LLC's principal executive officer and principal financial officer
-Louisville Gas and Electric Company's principal executive officer and principal financial officer
-Kentucky Utilities Company's principal executive officer and principal financial officer

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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

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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:May 4,November 1, 2017/s/  Stephen K. Breininger 
  
Stephen K. Breininger
Vice President and Controller
 
  (Principal Accounting Officer) 
    
    
    
  PPL Electric Utilities Corporation
  (Registrant) 
    
    
    
Date:May 4,November 1, 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:May 4,November 1, 2017/s/  Kent W. Blake 
  
Kent W. Blake
Chief Financial Officer
 
  (Principal Financial Officer and Principal Accounting Officer) 


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