0000922224 ppl:LouisvilleGasAndElectricCoMember ppl:KentuckyPublicServiceCommissionMember 2019-03-01 2019-03-01


Table of Contents




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM10-Q
 
[X]☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended September
June 30, 20172019
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
23-2758192
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Pennsylvania
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-2758192
Allentown,PA18101-1179
(610)774-5151
   
1-905
PPL Electric Utilities Corporation
23-0959590
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Pennsylvania
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-0959590
Allentown,PA18101-1179
(610)774-5151
   
333-173665
LG&E and KU Energy LLC
20-0523163
(Exact name of Registrant as specified in its charter)
(Kentucky)
Kentucky
220 West Main Street
Louisville, KY 40202-1377
(502) 627-2000
20-0523163
Louisville,KY40202-1377
(502)627-2000
   
1-2893
Louisville Gas and Electric Company
61-0264150
(Exact name of Registrant as specified in its charter)
(Kentucky)
Kentucky
220 West Main Street
Louisville, KY 40202-1377
(502) 627-2000
61-0264150
Louisville,KY40202-1377
(502)627-2000
   
1-3464
Kentucky Utilities Company
61-0247570
(Exact name of Registrant as specified in its charter)
(
Kentucky and Virginia)
Virginia
One Quality Street
Lexington, KY 40507-1462
(502) 627-2000
61-0247570
Lexington,KY40507-1462
(502)627-2000




Table of Contents




Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol:Name of each exchange on which registered
Common Stock of PPL CorporationPPLNew York Stock Exchange
Junior Subordinated Notes of PPL Capital Funding, Inc.
2007 Series A due 2067PPL/67New York Stock Exchange
2013 Series B due 2073PPXNew York Stock Exchange

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   ☒ 
 




Table of Contents




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, 688,464,316722,247,303 shares outstanding at October 25, 2017.July 31, 2019.
PPL Electric Utilities CorporationCommon stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at October 25, 2017.July 31, 2019.
LG&E and KU Energy LLCPPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
Louisville Gas and Electric CompanyCommon stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at October 25, 2017.July 31, 2019.
Kentucky Utilities CompanyCommon stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KUKY Energy LLC at October 25, 2017.July 31, 2019.



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.




Table of Contents




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 SEPTEMBERJUNE 30, 20172019
 
Table of Contents
 
This combined Form 10-Q is separately filed by the following Registrants in their individual capacity: PPL Corporation, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant, except that information under "Forward-Looking Information" relating to subsidiaries of PPL Corporation is also attributed to PPL Corporation and information relating to the subsidiaries of LG&E and KU Energy LLC is also attributed to LG&E and KU Energy LLC.
 
Unless otherwise specified, references in this Report, individually, to PPL Corporation, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company are references to such entities directly or to one or more of their subsidiaries, as the case may be, the financial results of which subsidiaries are consolidated into such RegistrantsRegistrants' financial statements in accordance with GAAP. This presentation has been applied where identification of particular subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis.
  Page
GLOSSARY OF TERMS AND ABBREVIATIONS
i
FORWARD-LOOKING INFORMATION
1
PART I.  FINANCIAL INFORMATION 
 Item 1.  Financial Statements 
  PPL Corporation and Subsidiaries 
   
Condensed Consolidated Statements of Income
3
   
Condensed Consolidated Statements of Comprehensive Income (Loss)
4
   
Condensed Consolidated Statements of Cash Flows
5
   
Condensed Consolidated Balance Sheets
6
   
Condensed Consolidated Statements of Equity
8
  PPL Electric Utilities Corporation and Subsidiaries 
   
Condensed Consolidated Statements of Income
10
   
Condensed Consolidated Statements of Cash Flows
11
   
Condensed Consolidated Balance Sheets
12
   
Condensed Consolidated Statements of Equity
14
  LG&E and KU Energy LLC and Subsidiaries 
   
Condensed Consolidated Statements of Income
15
Condensed Consolidated Statements of Comprehensive Income
16
   
Condensed Consolidated Statements of Cash Flows
17
   
Condensed Consolidated Balance Sheets
18
   
Condensed Consolidated Statements of Equity
20
  Louisville Gas and Electric Company 
   
Condensed Statements of Income
22
   
Condensed Statements of Cash Flows
23
   
Condensed Balance Sheets
24
   
Condensed Statements of Equity
26
  Kentucky Utilities Company 
   
Condensed Statements of Income
28
   
Condensed Statements of Cash Flows
29
   
Condensed Balance Sheets
30
   
Condensed Statements of Equity
32




Table of Contents




 Combined Notes to Condensed Financial Statements (Unaudited) 
  
1.   InterimIndex to Combined Notes to Condensed Financial Statements
33
  
2.   Summary of Significant Accounting Policies1.   Interim Financial Statements
33
  
3.   Segment and Related Information2.   Summary of Significant Accounting Policies
34
  
4.   Earnings Per Share3.   Segment and Related Information
3435
  
5.   Income Taxes4.   Revenue from Contracts with Customers
36
  
6.   Utility Rate Regulation5.   Earnings Per Share
3739
  
7.   Financing Activities6.   Income Taxes
40
  
8.   Defined Benefits7.   Utility Rate Regulation
4342
  
9. Commitments and Contingencies8.   Financing Activities
4546
  
10. Related Party Transactions9. Leases
5448
  
11. Other Income (Expense) - net10. Defined Benefits
5551
  
12. Fair Value Measurements11. Commitments and Contingencies
5553
  
13. Derivative Instruments and Hedging Activities12. Related Party Transactions
5762
  
14. Goodwill and13. Other Intangible AssetsIncome (Expense) - net
6564
  
15. Asset Retirement Obligations14. Fair Value Measurements
6564
  
16. Accumulated Other Comprehensive Income (Loss)15. Derivative Instruments and Hedging Activities
66
  
16. Asset Retirement Obligations
74
17. Accumulated Other Comprehensive Income (Loss)
74
18. New Accounting Guidance Pending Adoption
6775
 Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 
  
Overview
7077
   
Introduction
7077
   
Business Strategy
7279
   
Financial and Operational Developments
7380
  
Results of Operations
7484
   
PPL Corporation and Subsidiaries - Statement of Income Analysis, Segment Earnings and Adjusted Gross Margins
7584
   
PPL Electric Utilities Corporation and Subsidiaries - Statement of Income Analysis, Earnings and Adjusted Gross Margins
8796
   
LG&E and KU Energy LLC and Subsidiaries - Statement of Income Analysis, Earnings and Adjusted Gross Margins
9099
   
Louisville Gas and Electric Company - Statement of Income Analysis, Earnings and Adjusted Gross Margins
92102
   
Kentucky Utilities Company - Statement of Income Analysis, Earnings and Adjusted Gross Margins
95
Financial Condition
97
Liquidity and Capital Resources
97
Risk Management
103
Foreign Currency Translation
105
  
Related Party TransactionsFinancial Condition
105108
   
Acquisitions, DevelopmentLiquidity and DivestituresCapital Resources
105108
   
Environmental MattersRisk Management
106114
Foreign Currency Translation
116
Related Party Transactions
116
Acquisitions, Development and Divestitures
116
Environmental Matters
116
  
New Accounting Guidance
106117
  
Application of Critical Accounting Policies
106117
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
107118
 
Item 4.  Controls and Procedures
107118
PART II.  OTHER INFORMATION 
 
Item 1. Legal Proceedings
107118
 
Item 1A. Risk Factors
107118
 
Item 4. Mine Safety Disclosures
107118
 
Item 6. Exhibits
107119
SIGNATURES
110120
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
 




Table of Contents



THIS PAGE INTENTIONALLY LEFT BLANK.



Table of Contents


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.Global. Following a reorganizationreorganizations in October 2015 and October 2017, PPL WPD Limited is nowan indirect parent to WPD plc having previously been a sister company.

Safari Energy - Safari Energy, LLC, an indirect subsidiary of PPL, acquired in June 2018, that provides solar energy solutions for commercial customers in the U.S.

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 directan indirect 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.
 

i

Table of Contents



WPD (West Midlands) - Western Power Distribution (West Midlands) plc, a British regional electricity distribution utility company.
 

i

Table of Contents

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

Other terms and abbreviations

£ - British pound sterling.

20162018 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2016.2018.
 
Act 11 - Act 11 of 2012 that became effective on April 16, 2012. The Pennsylvania legislation authorizesauthorized 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.Standard (AEPS).


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 SystemAdjusted Gross Margins - metersa non-GAAP financial measure of performance used in "Item 2. Combined Management's Discussion and meter reading systems that provide two-way communication capabilities,Analysis of Financial Condition and Results of Operations" (MD&A).

AFUDC - allowance for funds used during construction. The cost of equity and debt funds used to finance construction projects of regulated businesses, 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, suchis capitalized as software upgrades and requests to provide meter readings in real time.part of construction costs.


AOCI - accumulated other comprehensive income or loss.


ARO - asset retirement obligation.

ATM Program - PPL's at-the-market common stock offering program.

BSERCCR(s) - 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)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.

DRIP - PPL Amended and Restated Dividend Reinvestment and Direct Stock Purchase Plan.


ii

Table of Contents


DSIC - the Distribution System Improvement Charge authorizedCharge. Authorized under Act 11, which is an alternative ratemaking mechanism providing more-timely cost recovery of qualifying distribution system capital expenditures.


ii

Table of Contents



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- Aa 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 - Earningsearnings per share.

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


GHG(s) -greenhouse gas(es).

GLT - Gas Line Tracker.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.


IBEWHB 487 - International Brotherhood of Electrical Workers.House Bill 487. Comprehensive Kentucky state tax legislation enacted in April 2018.


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.


LCIDAkWh - Lehigh County Industrial Development Authority.kilowatt hour, basic unit of electrical energy.


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).

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.

New Source Review - a Clean Air Act program that requires industrial facilities to install updated pollution control equipment when they are built or when making a modification that increases emissions beyond certain allowable thresholds.
 
NGCC - Natural gas-fired combined-cycle generating plant.

iii

Table of Contents

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.


OCI - other comprehensive income or loss.
 

iii

Table of Contents



Ofgem - Office of Gas and Electricity Markets, the British agency that regulates transmission, distribution and wholesale sales of electricity and gas 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.recorded at cost. 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 Unitunit - 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 (i) relative total shareowner return (TSR) over a three-year performance period as compared to companies in the Philadelphia Stock Exchange Utility Index.Index; or (ii) corporate return on equity (ROE) based on the average of the annual ROE for each year of the three-year performance period.


PLR - Provider of Last Resort, the role of PPL Electric in providing default electricity supply within its delivery area to retail customers who have not chosen to select an alternative electricity supplier under the Customer Choice Act.
 
PP&E - property, plant and equipment.

PPL EnergyPlus - prior to the June 1, 2015 spinoff, PPL Energy Supply, LLC, PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply that marketed and traded wholesale and retail electricity and gas, and supplied energy and energy services in competitive markets.

PPL Energy Supply - prior to the June 1, 2015 spinoff, PPL Energy Supply, LLC, a subsidiary of PPL Energy Funding and the indirect parent company of PPL Montana, LLC.

PPL Montana - prior to the June 1, 2015 spinoff of PPL Energy Supply, PPL Montana, LLC, an indirect subsidiary of PPL Energy Supply that generated electricity for wholesale sales in Montana and the Pacific Northwest.

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. RAV additions arehave been and continue to be based on a percentage of annual total 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.


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 - Ofgem'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 RIIO regulatory price control applicable to the operators of U.K. electricity distribution networks, the duration of which is April 2015 through March 2023. RIIO-2 refers to the second generation of price controls under the RIIO framework. RIIO-ED2 refers to the second generation of the RIIO regulatory price control applicable to the operators of U.K. electricity distribution networks, which will begin in April 2023.


RPIRiverstone - Retail Price Index,Riverstone Holdings LLC, a Delaware limited liability company and, as of December 6, 2016, ultimate parent company of the entities that own the competitive power generation business contributed to Talen Energy.


iv

Table of Contents



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 - S&P Global Ratings, 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.
 

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


Table of Contents

Scrubber - an air pollution control device that can remove particulates and/or gases (primarily sulfur dioxide) from exhaust gases.
 
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.

S&P - S&P Global Ratings, a credit rating agency.
 
Superfund - federal environmental statute that addresses remediation of contaminated sites; states also have similar statutes.
 
Talen Energy- Talen Energy Corporation, the Delaware corporation formed to be the publicly traded company and owner of the competitive generation assets of PPL Energy Supply and certain affiliates of Riverstone, which as of December 6, 2016, became wholly owned by Riverstone.

Talen EnergyMarketing- Talen Energy Marketing, LLC, the new name of PPL EnergyPlus subsequent to the spinoff of PPL Energy Supply.

TCJA - Tax Cuts and Jobs Act. Comprehensive U.S. federal tax legislation enacted on December 22, 2017.

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 VEBA- refersVoluntary Employee Beneficiary Association. A tax-exempt trust under the Internal Revenue Code Section 501(c)(9) used by employers to U.K. Finance Act of 2015fund and 2016, enacted in November 2015pay eligible medical, life 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.similar benefits.


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


v


Table of Contents



THIS PAGE INTENTIONALLY LEFT BLANK.

vi

Table of Contents


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 20162018 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 and adversely from the forward-looking statements:
 
the outcome of rate cases or other cost recovery or revenue filings;proceedings;
changes in U.S. state or federal or U.K. tax laws or regulations;
the direct or indirect effects on PPL or its subsidiaries or business systems of cyber-based intrusionsintrusion or natural disasters, threatened or actual terrorism, war or other hostilities;the threat of cyberattacks;
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.developments related to the European Council of the European Union ofongoing negotiations regarding the U.K.'s intent to withdraw from the European Union and any actions in response thereto;
the amount of WPD's pension deficit funding recovered in revenues after March 31, 2021, following the next triennial pension review that began in March 2019;
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 the corporate credit ratings or securities analyst rankings of the Registrants and credit ratings;their securities;
any requirement to record impairment charges pursuant to GAAP with respect to any of our significant investments;
laws or regulations to reduce emissions of GHGs 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;
weather and other conditions affecting generation, transmission and distribution operations, operating costs and customer energy use;
catastrophic events such as fires, earthquakes, explosions, floods, tornadoes, hurricanes and other storms, droughts, pandemic health events or other similar occurrences;
war, armed conflicts, terrorist attacks, or similar disruptive events;
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;

Table of Contents



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.

Table of Contents



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.




Table of Contents




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


 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Operating Revenues$1,845
 $1,889
 $5,521
 $5,685
        
Operating Expenses       
Operation       
Fuel202
 227
 576
 607
Energy purchases143
 151
 494
 531
Other operation and maintenance397
 417
 1,217
 1,292
Depreciation257
 232
 745
 692
Taxes, other than income69
 76
 214
 229
Total Operating Expenses1,068
 1,103
 3,246
 3,351
        
Operating Income777
 786
 2,275
 2,334
        
Other Income (Expense) - net(76) 49
 (235) 284
        
Interest Expense230
 223
 669
 671
        
Income Before Income Taxes471
 612
 1,371
 1,947
        
Income Taxes116
 139
 321
 510
        
Net Income$355
 $473
 $1,050
 $1,437
        
Earnings Per Share of Common Stock: 
Net Income Available to PPL Common Shareowners:       
Basic$0.52
 $0.70
 $1.53
 $2.12
Diluted$0.51
 $0.69
 $1.53
 $2.11
        
Dividends Declared Per Share of Common Stock$0.3950
 $0.38
 $1.185
 $1.14
        
Weighted-Average Shares of Common Stock Outstanding
(in thousands)
       
Basic686,563
 678,114
 683,783
 676,905
Diluted688,746
 680,348
 686,081
 679,969
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

Table of Contents

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
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Operating Revenues$1,803
 $1,848
 $3,882
 $3,974
        
Operating Expenses       
Operation       
Fuel168
 189
 362
 403
Energy purchases138
 148
 388
 389
Other operation and maintenance482
 506
 972
 974
Depreciation300
 273
 584
 542
Taxes, other than income75
 74
 155
 157
Total Operating Expenses1,163
 1,190
 2,461
 2,465
        
Operating Income640
 658
 1,421
 1,509
        
Other Income (Expense) - net131
 234
 183
 191
        
Interest Expense246
 235
 487
 474
        
Income Before Income Taxes525
 657
 1,117
 1,226
        
Income Taxes84
 142
 210
 259
        
Net Income$441
 $515
 $907
 $967
        
Earnings Per Share of Common Stock: 
Net Income Available to PPL Common Shareowners:       
Basic$0.61
 $0.74
 $1.26
 $1.39
Diluted$0.60
 $0.73
 $1.24
 $1.38
        
Weighted-Average Shares of Common Stock Outstanding
(in thousands)
       
Basic721,785
 699,006
 721,406
 696,772
Diluted730,915
 700,976
 730,436
 698,161
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.



Table of Contents




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

 Nine Months Ended September 30,
 2017 2016
Cash Flows from Operating Activities 
  
Net income$1,050
 $1,437
Adjustments to reconcile net income to net cash provided by operating activities 
  
Depreciation745
 692
Amortization72
 54
Defined benefit plans - expense (income)(69) (29)
Deferred income taxes and investment tax credits284
 436
Unrealized (gains) losses on derivatives, and other hedging activities194
 107
Stock-based compensation expense30
 23
Other(8) (12)
Change in current assets and current liabilities 
  
Accounts receivable25
 (29)
Accounts payable(93) (40)
Unbilled revenues81
 32
Fuel, materials and supplies35
 8
Prepayments(37) (34)
Taxes payable6
 40
Regulatory assets and liabilities, net(3) (32)
Accrued interest49
 32
Other current liabilities(53) (48)
Other5
 (5)
Other operating activities   
Defined benefit plans - funding(558) (345)
Other assets4
 18
Other liabilities(5) (75)
Net cash provided by operating activities1,754
 2,230
Cash Flows from Investing Activities 
  
Expenditures for property, plant and equipment(2,152) (2,073)
Expenditures for intangible assets(25) (23)
Other investing activities13
 30
Net cash used in investing activities(2,164) (2,066)
Cash Flows from Financing Activities 
  
Issuance of long-term debt1,088
 1,241
Retirement of long-term debt(60) (905)
Settlement of cross-currency swaps—
 46
Issuance of common stock275
 133
Payment of common stock dividends(800) (772)
Net increase (decrease) in short-term debt269
 (268)
Other financing activities(34) (33)
Net cash provided by (used in) financing activities738
 (558)
Effect of Exchange Rates on Cash and Cash Equivalents7
 (26)
Net Increase (Decrease) in Cash and Cash Equivalents335
 (420)
Cash and Cash Equivalents at Beginning of Period341
 836
Cash and Cash Equivalents at End of Period$676
 $416
    
Supplemental Disclosures of Cash Flow Information   
Significant non-cash transactions:   
Accrued expenditures for property, plant and equipment at September 30,$373
 $293
Accrued expenditures for intangible assets at September 30,$60
 $104

 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
Net income$441
 $515
 $907
 $967
        
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), $0, ($2)(377) (250) (83) (134)
Qualifying derivatives, net of tax of ($8), ($4), ($4), $035
 19
 16
 (1)
Defined benefit plans: 
 

    
Prior service costs, net of tax of $0, $0, $0, $0—
 (1) —
 (1)
Net actuarial gain (loss), net of tax of $1, $0, $2, $0(2) —
 (5) (1)
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): 
  
    
Qualifying derivatives, net of tax of $6, $3, $0, $1(27) (19) (3) (7)
Defined benefit plans: 
  
    
Prior service costs, net of tax of $0, $0, $0, $01
 1
 1
 1
Net actuarial (gain) loss, net of tax of ($6), ($9), ($11), ($18)21
 34
 42
 70
Total other comprehensive income (loss)(349) (216) (32) (73)
        
Comprehensive income$92
 $299
 $875
 $894
 
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 Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
 Six Months Ended June 30,
 2019 2018
Cash Flows from Operating Activities 
  
Net income$907
 $967
Adjustments to reconcile net income to net cash provided by operating activities 
  
Depreciation584
 542
Amortization31
 34
Defined benefit plans - (income)(135) (101)
Deferred income taxes and investment tax credits154
 171
Unrealized (gains) losses on derivatives, and other hedging activities22
 (91)
Stock-based compensation expense19
 16
Other(7) (9)
Change in current assets and current liabilities 
  
Accounts receivable22
 46
Accounts payable(102) (90)
Unbilled revenues70
 91
Fuel, materials and supplies19
 32
Prepayments(79) (60)
Regulatory assets and liabilities, net(72) 42
Accrued interest(63) (79)
Other current liabilities(85) (47)
Other11
 12
Other operating activities   
Defined benefit plans - funding(207) (206)
Proceeds from transfer of excess benefit plan funds—
 65
Other assets11
 (67)
Other liabilities(30) 57
Net cash provided by operating activities1,070
 1,325
Cash Flows from Investing Activities 
  
Expenditures for property, plant and equipment(1,474) (1,527)
Purchase of investments(55) (65)
Proceeds from the sale of investments61
 —
Other investing activities(11) (57)
Net cash used in investing activities(1,479) (1,649)
Cash Flows from Financing Activities 
  
Issuance of long-term debt769
 584
Retirement of long-term debt(200) (250)
Issuance of common stock35
 147
Payment of common stock dividends(594) (558)
Net increase in short-term debt206
 788
Other financing activities(18) (16)
Net cash provided by financing activities198
 695
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash(4) (7)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash(215) 364
Cash, Cash Equivalents and Restricted Cash at Beginning of Period643
 511
Cash, Cash Equivalents and Restricted Cash at End of Period$428
 $875
    
Supplemental Disclosures of Cash Flow Information   
Significant non-cash transactions:   
Accrued expenditures for property, plant and equipment at June 30,$278
 $329
Accrued expenditures for intangible assets at June 30,$59
 $59

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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$676
 $341
$406
 $621
Accounts receivable (less reserve: 2017, $52; 2016, $54) 
  
Accounts receivable (less reserve: 2019, $60; 2018, $56) 
  
Customer617
 666
662
 663
Other96
 46
110
 107
Unbilled revenues405
 480
425
 496
Fuel, materials and supplies323
 356
286
 303
Prepayments101
 63
142
 70
Price risk management assets57
 63
133
 109
Other current assets56
 52
67
 63
Total Current Assets2,331
 2,067
2,231
 2,432
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant36,678
 34,674
40,793
 39,734
Less: accumulated depreciation - regulated utility plant6,624
 6,013
7,583
 7,310
Regulated utility plant, net30,054
 28,661
33,210
 32,424
Non-regulated property, plant and equipment422
 413
342
 355
Less: accumulated depreciation - non-regulated property, plant and equipment154
 134
104
 101
Non-regulated property, plant and equipment, net268
 279
238
 254
Construction work in progress1,494
 1,134
1,682
 1,780
Property, Plant and Equipment, net31,816
 30,074
35,130
 34,458
      
Other Noncurrent Assets 
  
 
  
Regulatory assets1,869
 1,918
1,662
 1,673
Goodwill3,134
 3,060
3,139
 3,162
Other intangibles666
 700
710
 716
Pension benefit asset532
 9
832
 535
Price risk management assets267
 336
209
 228
Other noncurrent assets143
 151
291
 192
Total Other Noncurrent Assets6,611
 6,174
6,843
 6,506
      
Total Assets$40,758
 $38,315
$44,204
 $43,396
 
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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$1,211
 $923
$1,636
 $1,430
Long-term debt due within one year448
 518
136
 530
Accounts payable838
 820
830
 989
Taxes110
 101
111
 110
Interest322
 270
215
 278
Dividends272
 259
298
 296
Customer deposits291
 276
265
 257
Regulatory liabilities87
 101
60
 122
Other current liabilities570
 569
512
 551
Total Current Liabilities4,149
 3,837
4,063
 4,563
      
Long-term Debt19,110
 17,808
20,965
 20,069
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes4,224
 3,889
2,986
 2,796
Investment tax credits130
 132
125
 126
Accrued pension obligations796
 1,001
716
 771
Asset retirement obligations312
 428
223
 264
Regulatory liabilities873
 899
2,685
 2,714
Other deferred credits and noncurrent liabilities472
 422
458
 436
Total Deferred Credits and Other Noncurrent Liabilities6,807
 6,771
7,193
 7,107
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Equity 
  
 
  
Common stock - $0.01 par value (a)7
 7
7
 7
Additional paid-in capital10,122
 9,841
11,069
 11,021
Earnings reinvested4,066
 3,829
4,903
 4,593
Accumulated other comprehensive loss(3,503) (3,778)(3,996) (3,964)
Total Equity10,692
 9,899
11,983
 11,657
      
Total Liabilities and Equity$40,758
 $38,315
$44,204
 $43,396
 
(a)1,560,000 shares authorized; 688,133721,840 and 679,731720,323 shares issued and outstanding at SeptemberJune 30, 20172019 and December 31, 2016.2018.


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
March 31, 2019721,371
 $7
 $11,051
 $4,761
 $(3,647) $12,172
Common stock issued8,402
 

 303
     303
469
   15
     15
Stock-based compensation    (22)     (22)    3
     3
Net income      1,050
   1,050
      441
   441
Dividends and dividend equivalents      (813)   (813)
Dividends and dividend equivalents (b)      (299)   (299)
Other comprehensive income (loss)        275
 275
        (349) (349)
September 30, 2017688,133
 $7
 $10,122
 $4,066
 $(3,503) $10,692
June 30, 2019721,840
 $7
 $11,069
 $4,903
 $(3,996) $11,983
                      
December 31, 2015673,857
 $7
 $9,687
 $2,953
 $(2,728) $9,919
December 31, 2018720,323
 $7
 $11,021
 $4,593
 $(3,964) $11,657
Common stock issued5,411
  
 168
  
  
 168
1,517
 

 47
     47
Stock-based compensation 
  
 (31)  
  
 (31)    1
     1
Net income 
  
  
 1,437
  
 1,437
      907
   907
Dividends and dividend equivalents 
  
  
 (773)  
 (773)
Dividends and dividend equivalents (b)      (597)   (597)
Other comprehensive income (loss) 
  
  
  
 (752) (752)        (32) (32)
Adoption of stock-based compensation guidance cumulative effect adjustment      7
   7
September 30, 2016679,268
 $7
 $9,824
 $3,624
 $(3,480) $9,975
June 30, 2019721,840
 $7
 $11,069
 $4,903
 $(3,996) $11,983
                      
March 31, 2018697,383
 $7
 $10,411
 $4,037
 $(3,279) $11,176
Common stock issued1,745
   48
     48
Stock-based compensation    3
     3
Net income      515
   515
Dividends and dividend equivalents (b)      (286)   (286)
Other comprehensive income (loss)        (216) (216)
June 30, 2018699,128
 $7
 $10,462
 $4,266
 $(3,495) $11,240
           
December 31, 2017693,398
 $7
 $10,305
 $3,871
 $(3,422) $10,761
Common stock issued5,730
  
 163
  
  
 163
Stock-based compensation 
  
 (6)  
  
 (6)
Net income 
  
  
 967
  
 967
Dividends and dividend equivalents (b) 
  
  
 (572)  
 (572)
Other comprehensive income (loss) 
  
  
  
 (73) (73)
June 30, 2018699,128
 $7
 $10,462
 $4,266
 $(3,495) $11,240
           
(a)Shares in thousands. Each share entitles the holder to one vote on any question presented at any shareowners' meeting.
(b)
Dividends declared per share of common stock were $0.4125 and $0.8250 for the three and six months ended June 30, 2019 and $0.4100 and $0.8200 for the three and six months ended June 30, 2018.


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




Table of Contents




THIS PAGE INTENTIONALLY LEFT BLANK.


Table of Contents




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


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 20162019 2018 2019 2018
Operating Revenues$547
 $539
 $1,620
 $1,619
$521
 $517
 $1,166
 $1,156
              
Operating Expenses 
  
     
  
    
Operation 
  
     
  
    
Energy purchases121
 129
 374
 414
110
 115
 281
 276
Other operation and maintenance133
 144
 435
 431
130
 159
 280
 292
Depreciation77
 64
 228
 185
96
 88
 191
 173
Taxes, other than income27
 26
 79
 79
24
 22
 55
 54
Total Operating Expenses358
 363
 1,116
 1,109
360
 384
 807
 795
              
Operating Income189
 176
 504
 510
161
 133
 359
 361
              
Other Income (Expense) - net4
 4
 8
 12
6
 7
 11
 13
              
Interest Income from Affiliate2
 —
 3
 —
—
 1
 2
 1
              
Interest Expense36
 32
 105
 97
41
 39
 83
 76
              
Income Before Income Taxes159
 148
 410
 425
126
 102
 289
 299
              
Income Taxes64
 58
 159
 162
32
 27
 74
 76
              
Net Income (a)$95
 $90
 $251
 $263
$94
 $75
 $215
 $223
 
(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)
Nine Months Ended September 30,Six Months Ended June 30,
2017 20162019 2018
Cash Flows from Operating Activities 
  
 
  
Net income$251
 $263
$215
 $223
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation228
 185
191
 173
Amortization25
 19
11
 11
Defined benefit plans - expense10
 9
Deferred income taxes and investment tax credits129
 151
36
 53
Other(8) (14)(9) (9)
Change in current assets and current liabilities 
  
 
  
Accounts receivable7
 (6)7
 37
Accounts payable(38) (1)(39) (60)
Unbilled revenues30
 10
31
 30
Prepayments(31) 29
(64) (47)
Regulatory assets and liabilities, net—
 (41)(40) (27)
Taxes payable10
 (6)(4) (1)
Other(9) (13)(7) 1
Other operating activities 
  
 
  
Defined benefit plans - funding(24) —
(21) (28)
Other assets(2) 15
4
 (41)
Other liabilities(3) (5)3
 49
Net cash provided by operating activities575
 595
314
 364
      
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(851) (739)(533) (518)
Expenditures for intangible assets(7) (3)
Net increase in notes receivable from affiliate(2) —
Other investing activities2
 2
3
 (3)
Net cash used in investing activities(858) (740)(530) (521)
      
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt470
 224
—
 398
Retirement of long-term debt—
 (224)
Contributions from parent575
 200
—
 425
Payment of common stock dividends to parent(231) (193)(215) (222)
Net increase (decrease) in short-term debt(295) 130
Net increase in short-term debt185
 —
Other financing activities(6) (3)(1) (4)
Net cash provided by financing activities513
 134
Net cash provided by (used in) financing activities(31) 597
      
Net Increase (Decrease) in Cash and Cash Equivalents230
 (11)
Cash and Cash Equivalents at Beginning of Period13
 47
Cash and Cash Equivalents at End of Period$243
 $36
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash(247) 440
Cash, Cash Equivalents and Restricted Cash at Beginning of Period269
 51
Cash, Cash Equivalents and Restricted Cash at End of Period$22
 $491
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at September 30,$190
 $166
Accrued expenditures for property, plant and equipment at June 30,$158
 $180


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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$243
 $13
$20
 $267
Accounts receivable (less reserve: 2017, $25; 2016, $28) 
  
Accounts receivable (less reserve: 2019, $28; 2018, $27) 
  
Customer275
 272
286
 264
Other10
 21
21
 38
Accounts receivable from affiliates1
 —
10
 11
Notes receivable from affiliate2
 —
Unbilled revenues84
 114
89
 120
Materials and supplies31
 32
26
 25
Prepayments40
 9
62
 5
Regulatory assets14
 19
17
 11
Other current assets11
 8
8
 9
Total Current Assets711
 488
539
 750
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant10,449
 9,654
12,036
 11,637
Less: accumulated depreciation - regulated utility plant2,880
 2,714
2,961
 2,856
Regulated utility plant, net7,569
 6,940
9,075
 8,781
Construction work in progress699
 641
627
 586
Property, Plant and Equipment, net8,268
 7,581
9,702
 9,367
      
Other Noncurrent Assets 
  
 
  
Regulatory assets1,073
 1,094
805
 824
Intangibles256
 251
260
 260
Other noncurrent assets15
 12
48
 42
Total Other Noncurrent Assets1,344
 1,357
1,113
 1,126
      
Total Assets$10,323
 $9,426
$11,354
 $11,243
 
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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$—
 $295
$185
 $—
Long-term debt due within one year—
 224
Accounts payable397
 367
374
 418
Accounts payable to affiliates38
 42
30
 25
Taxes22
 12
8
 12
Interest38
 34
37
 37
Regulatory liabilities72
 83
43
 74
Other current liabilities90
 101
95
 101
Total Current Liabilities657
 1,158
772
 667
      
Long-term Debt3,298
 2,607
3,695
 3,694
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes2,036
 1,899
1,371
 1,320
Accrued pension obligations257
 281
253
 282
Regulatory liabilities661
 675
Other deferred credits and noncurrent liabilities89
 90
141
 144
Total Deferred Credits and Other Noncurrent Liabilities2,382
 2,270
2,426
 2,421
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Equity 
  
 
  
Common stock - no par value (a)364
 364
364
 364
Additional paid-in capital2,729
 2,154
3,158
 3,158
Earnings reinvested893
 873
939
 939
Total Equity3,986
 3,391
4,461
 4,461
      
Total Liabilities and Equity$10,323
 $9,426
$11,354
 $11,243
 
(a)170,000 shares authorized; 66,368 shares issued and outstanding at SeptemberJune 30, 20172019 and December 31, 2016.2018.


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
December 31, 201666,368
 $364
 $2,154
 $873
 $3,391
Net income

 

 

 251
 251
Capital contributions from PPL

 

 575
 

 575
Dividends declared on common stock

 

 

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

 

 

 263
 263
Capital contributions from PPL

 

 200
 

 200
Dividends declared on common stock

 

 

 (193) (193)
September 30, 201666,368
 $364
 $2,134
 $891
 $3,389
 
Common
stock
shares
outstanding
(a)
 
Common
stock
 
Additional
paid-in
capital
 
Earnings
reinvested
 Total
March 31, 201966,368
 $364
 $3,158
 $940
 $4,462
Net income      94
 94
Dividends declared on common stock      (95) (95)
June 30, 201966,368
 $364
 $3,158
 $939
 $4,461
          
December 31, 201866,368
 $364
 $3,158
 $939
 $4,461
Net income

 

 

 215
 215
Dividends declared on common stock

 

 

 (215) (215)
June 30, 201966,368
 $364
 $3,158
 $939
 $4,461
          
March 31, 201866,368
 $364
 $2,729
 $975
 $4,068
Net income      75
 75
Capital contributions from parent    425
   425
Dividends declared on common stock      (150) (150)
June 30, 201866,368
 $364
 $3,154
 $900
 $4,418
          
December 31, 201766,368
 $364
 $2,729
 $899
 $3,992
Net income

 

 

 223
 223
Capital contributions from parent

 

 425
 

 425
Dividends declared on common stock

 

 

 (222) (222)
June 30, 201866,368
 $364
 $3,154
 $900
 $4,418
 
(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.





























Table of Contents




THIS PAGE INTENTIONALLY LEFT BLANK.



Table of Contents



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


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 20162019 2018 2019 2018
Operating Revenues$818
 $835
 $2,350
 $2,382
$732
 $743
 $1,577
 $1,615
              
Operating Expenses 
  
  
  
 
  
  
  
Operation 
  
  
  
 
  
  
  
Fuel202
 227
 576
 607
168
 189
 362
 403
Energy purchases22
 24
 120
 118
27
 33
 106
 113
Other operation and maintenance199
 197
 598
 603
208
 211
 422
 416
Depreciation114
 102
 324
 301
135
 118
 258
 235
Taxes, other than income17
 16
 49
 46
18
 18
 36
 35
Total Operating Expenses554
 566
 1,667
 1,675
556
 569
 1,184
 1,202
              
Operating Income264
 269
 683
 707
176
 174
 393
 413
              
Other Income (Expense) - net1
 (3) (5) (9)—
 1
 —
 (2)
              
Interest Expense49
 50
 148
 147
58
 52
 112
 102
              
Interest Expense with Affiliate5
 4
 13
 12
9
 6
 16
 11
              
Income Before Income Taxes211
 212
 517
 539
109
 117
 265
 298
              
Income Taxes79
 79
 195
 202
3
 31
 35
 70
              
Net Income(a)$132
 $133
 $322
 $337
$106
 $86
 $230
 $228
 
(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)
Nine Months Ended September 30,Six Months Ended June 30,
2017 20162019 2018
Cash Flows from Operating Activities 
  
 
  
Net income$322
 $337
$230
 $228
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation324
 301
258
 235
Amortization19
 21
16
 9
Defined benefit plans - expense19
 20
5
 8
Deferred income taxes and investment tax credits173
 212
47
 30
Other1
 —
(1) (1)
Change in current assets and current liabilities 
  
 
  
Accounts receivable18
 (43)24
 16
Accounts payable(30) 7
(34) (10)
Accounts payable to affiliates3
 4
Unbilled revenues19
 6
13
 40
Fuel, materials and supplies34
 7
21
 26
Regulatory assets and liabilities, net(32) 69
Taxes payable13
 —
(25) (25)
Accrued interest41
 42
7
 —
Other(1) (4)(23) (39)
Other operating activities 
  
 
  
Defined benefit plans - funding(32) (82)(28) (122)
Expenditures for asset retirement obligations(22) (15)(45) (26)
Other assets5
 1
(1) (1)
Other liabilities14
 2
13
 3
Net cash provided by operating activities920
 816
445
 440
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(579) (600)(530) (564)
Other investing activities4
 1
Net cash used in investing activities(575) (599)(530) (564)
Cash Flows from Financing Activities 
  
 
  
Net increase (decrease) in notes payable with affiliate(4) 84
90
 (126)
Issuance of long-term debt with affiliate—
 250
Issuance of long-term debt60
 221
705
 100
Retirement of long-term debt(60) (221)(200) —
Net increase (decrease) in short-term debt5
 (130)(418) 72
Debt issuance and credit facility costs(3) (3)
Distributions to member(316) (224)(137) (161)
Contributions from member—
 37
63
 —
Net cash used in financing activities(318) (236)
Net Increase (Decrease) in Cash and Cash Equivalents27
 (19)
Other financing activities(10) (2)
Net cash provided by financing activities93
 133
Net Increase in Cash and Cash Equivalents8
 9
Cash and Cash Equivalents at Beginning of Period13
 30
24
 30
Cash and Cash Equivalents at End of Period$40
 $11
$32
 $39
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at September 30,$142
 $86
Accrued expenditures for property, plant and equipment at June 30,$91
 $112


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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$40
 $13
$32
 $24
Accounts receivable (less reserve: 2017, $25; 2016, $24) 
  
Accounts receivable (less reserve: 2019, $27; 2018, $27) 
  
Customer215
 235
219
 239
Other43
 17
69
 63
Accounts receivable from affiliates1
 —
1
 —
Unbilled revenues151
 170
156
 169
Fuel, materials and supplies264
 297
228
 248
Prepayments27
 24
30
 25
Regulatory assets20
 20
26
 25
Other current assets8
 4
Total Current Assets769
 780
761
 793
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant12,906
 12,746
14,072
 13,721
Less: accumulated depreciation - regulated utility plant1,685
 1,465
2,192
 2,125
Regulated utility plant, net11,221
 11,281
11,880
 11,596
Construction work in progress574
 317
929
 1,018
Property, Plant and Equipment, net11,795
 11,598
12,809
 12,614
      
Other Noncurrent Assets 
  
 
  
Regulatory assets796
 824
857
 849
Goodwill996
 996
996
 996
Other intangibles88
 95
74
 78
Other noncurrent assets71
 78
133
 82
Total Other Noncurrent Assets1,951
 1,993
2,060
 2,005
      
Total Assets$14,515
 $14,371
$15,630
 $15,412
 
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)
September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$190
 $185
$96
 $514
Long-term debt due within one year98
 194
136
 530
Notes payable with affiliate159
 163
Notes payable with affiliates203
 113
Accounts payable283
 251
283
 366
Accounts payable to affiliates8
 6
8
 9
Customer deposits57
 56
63
 61
Taxes52
 39
38
 63
Price risk management liabilities5
 4
5
 4
Regulatory liabilities15
 18
17
 48
Interest73
 32
39
 32
Asset retirement obligations94
 60
80
 82
Other current liabilities125
 119
136
 126
Total Current Liabilities1,159
 1,127
1,104
 1,948
      
Long-term Debt      
   
Long-term debt4,570
 4,471
5,216
 4,322
Long-term debt to affiliate400
 400
650
 650
Total Long-term Debt4,970
 4,871
5,866
 4,972
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,909
 1,735
1,020
 956
Investment tax credits130
 132
124
 126
Price risk management liabilities18
 16
Accrued pension obligations345
 350
264
 282
Asset retirement obligations261
 373
175
 214
Regulatory liabilities873
 899
2,024
 2,039
Price risk management liabilities24
 27
Other deferred credits and noncurrent liabilities178
 190
158
 136
Total Deferred Credits and Other Noncurrent Liabilities3,720
 3,706
3,783
 3,769
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Member's Equity4,666
 4,667
4,877
 4,723
      
Total Liabilities and Equity$14,515
 $14,371
$15,630
 $15,412
 
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
March 31, 2019$4,791
Net income106
Contributions from member63
Distributions to member(81)
Other comprehensive income (loss)(2)
June 30, 2019$4,877
 
December 31, 2018$4,723
Net income230
Contributions from member63
Distributions to member(137)
Other comprehensive income (loss)(2)
June 30, 2019$4,877
 
March 31, 2018$4,637
Net income322
86
Distributions to member(316)(92)
Other comprehensive income(7)1
September 30, 2017$4,666
June 30, 2018$4,632
  
December 31, 2015$4,517
December 31, 2017$4,563
Net income337
228
Contributions from member37
Distributions to member(224)(161)
Other comprehensive income4
2
September 30, 2016$4,671
June 30, 2018$4,632
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


Table of Contents




THIS PAGE INTENTIONALLY LEFT BLANK.




Table of Contents




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


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 20162019 2018 2019 2018
Operating Revenues              
Retail and wholesale$361
 $366
 $1,055
 $1,058
$328
 $331
 $725
 $738
Electric revenue from affiliate2
 2
 23
 19
6
 4
 19
 16
Total Operating Revenues363
 368
 1,078
 1,077
334
 335
 744
 754
              
Operating Expenses              
Operation              
Fuel76
 86
 225
 233
69
 72
 147
 151
Energy purchases18
 19
 107
 104
22
 28
 96
 104
Energy purchases from affiliate3
 5
 8
 10
2
 2
 4
 8
Other operation and maintenance89
 85
 262
 264
96
 93
 190
 182
Depreciation47
 43
 136
 126
56
 49
 107
 97
Taxes, other than income8
 9
 25
 24
10
 9
 19
 18
Total Operating Expenses241
 247
 763
 761
255
 253
 563
 560
              
Operating Income122
 121
 315
 316
79
 82
 181
 194
              
Other Income (Expense) - net(1) (1) (2) (6)(1) (1) (1) (2)
              
Interest Expense17
 18
 53
 53
22
 19
 43
 37
              
Income Before Income Taxes104
 102
 260
 257
56
 62
 137
 155
              
Income Taxes39
 39
 99
 98
12
 12
 29
 33
              
Net Income (a)$65
 $63
 $161
 $159
$44
 $50
 $108
 $122
 
(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)


Nine Months Ended September 30,Six Months Ended June 30,
2017 20162019 2018
Cash Flows from Operating Activities 
  
 
  
Net income$161
 $159
$108
 $122
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation136
 126
107
 97
Amortization11
 10
11
 7
Defined benefit plans - expense5
 6
1
 2
Deferred income taxes and investment tax credits96
 117
28
 18
Change in current assets and current liabilities 
  
 
  
Accounts receivable12
 (17)15
 11
Accounts receivable from affiliates6
 (11)6
 6
Accounts payable(12) 24
(16) (12)
Accounts payable to affiliates(10) (6)(4) (3)
Unbilled revenues11
 10
9
 24
Fuel, materials and supplies6
 11
27
 31
Regulatory assets and liabilities, net(13) 32
Taxes payable(15) —
(7) (2)
Accrued interest12
 13
4
 —
Other6
 1
(8) (7)
Other operating activities 
  
 
  
Defined benefit plans - funding(3) (45)(4) (57)
Expenditures for asset retirement obligations(13) (11)(12) (10)
Other assets5
 (3)(1) —
Other liabilities4
 (1)7
 (4)
Net cash provided by operating activities418
 383
258
 255
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(293) (343)(224) (296)
Net cash used in investing activities(293) (343)(224) (296)
Cash Flows from Financing Activities 
  
 
  
Net increase in notes payable with affiliates10
 —
Issuance of long-term debt60
 125
399
 100
Retirement of long-term debt(60) (125)(200) —
Net increase (decrease) in short-term debt21
 (14)
Debt issuance and credit facility costs(2) (1)
Net decrease in short-term debt(183) (16)
Payment of common stock dividends to parent(150) (87)(71) (81)
Contributions from parent—
 47
25
 43
Net cash used in financing activities(121) (55)
Other financing activities(5) (1)
Net cash provided by (used in) financing activities(35) 45
Net Increase (Decrease) in Cash and Cash Equivalents4
 (15)(1) 4
Cash and Cash Equivalents at Beginning of Period5
 19
10
 15
Cash and Cash Equivalents at End of Period$9
 $4
$9
 $19
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at September 30,$83
 $46
Accrued expenditures for property, plant and equipment at June 30,$40
 $57
 
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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$9
 $5
$9
 $10
Accounts receivable (less reserve: 2017, $1; 2016, $2) 
  
Accounts receivable (less reserve: 2019, $1; 2018, $1) 
  
Customer96
 109
99
 110
Other14
 11
38
 30
Unbilled revenues68
 77
Accounts receivable from affiliates22
 28
18
 24
Unbilled revenues64
 75
Fuel, materials and supplies137
 143
100
 127
Prepayments15
 12
15
 12
Regulatory assets11
 9
21
 21
Other current assets2
 1
Total Current Assets370
 393
368
 411
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant5,447
 5,357
6,018
 5,816
Less: accumulated depreciation - regulated utility plant575
 498
786
 741
Regulated utility plant, net4,872
 4,859
5,232
 5,075
Construction work in progress279
 133
438
 514
Property, Plant and Equipment, net5,151
 4,992
5,670
 5,589
      
Other Noncurrent Assets 
  
 
  
Regulatory assets413
 450
434
 431
Goodwill389
 389
389
 389
Other intangibles54
 59
44
 47
Other noncurrent assets13
 17
34
 16
Total Other Noncurrent Assets869
 915
901
 883
      
Total Assets$6,390
 $6,300
$6,939
 $6,883
 
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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$190
 $169
$96
 $279
Long-term debt due within one year98
 194
40
 434
Notes payable with affiliate10
 —
Accounts payable166
 148
146
 172
Accounts payable to affiliates17
 26
22
 26
Customer deposits27
 27
30
 29
Taxes25
 40
19
 26
Price risk management liabilities5
 4
5
 4
Regulatory liabilities5
 5
4
 17
Interest23
 11
15
 11
Asset retirement obligations33
 41
26
 23
Other current liabilities46
 36
47
 39
Total Current Liabilities645
 701
450
 1,060
      
Long-term Debt1,521
 1,423
1,964
 1,375
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,073
 974
663
 628
Investment tax credits36
 36
34
 34
Accrued pension obligations47
 53
Price risk management liabilities18
 16
Asset retirement obligations85
 104
63
 80
Regulatory liabilities388
 419
902
 915
Price risk management liabilities24
 27
Other deferred credits and noncurrent liabilities84
 87
96
 88
Total Deferred Credits and Other Noncurrent Liabilities1,737
 1,700
1,776
 1,761
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Stockholder's Equity 
  
 
  
Common stock - no par value (a)424
 424
424
 424
Additional paid-in capital1,682
 1,682
1,820
 1,795
Earnings reinvested381
 370
505
 468
Total Equity2,487
 2,476
2,749
 2,687
      
Total Liabilities and Equity$6,390
 $6,300
$6,939
 $6,883
 
(a)75,000 shares authorized; 21,294 shares issued and outstanding at SeptemberJune 30, 20172019 and December 31, 2016.2018.


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
December 31, 201621,294
 $424
 $1,682
 $370
 $2,476
Net income

 

 

 161
 161
Cash dividends declared on common stock

 

 

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

 

 

 159
 159
Capital contributions from LKE

 

 47
 

 47
Cash dividends declared on common stock

 

 

 (87) (87)
September 30, 201621,294
 $424
 $1,658
 $367
 $2,449
 
Common
stock
shares
outstanding
(a)
 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 Total
March 31, 201921,294
 $424
 $1,795
 $502
 $2,721
Net income

 

 

 44
 44
Capital contributions from parent

 

 25
 

 25
Cash dividends declared on common stock

 

 

 (41) (41)
June 30, 201921,294
 $424
 $1,820
 $505
 $2,749
          
December 31, 201821,294
 $424
 $1,795
 $468
 $2,687
Net income

 

 

 108
 108
Capital contributions from parent

 

 25
 

 25
Cash dividends declared on common stock

 

 

 (71) (71)
June 30, 201921,294
 $424
 $1,820
 $505
 $2,749
          
March 31, 201821,294
 $424
 $1,712
 $429
 $2,565
Net income

 

 

 50
 50
Capital contributions from parent

 

 43
 

 43
Cash dividends declared on common stock

 

 

 (47) (47)
June 30, 201821,294
 $424
 $1,755
 $432
 $2,611
          
December 31, 201721,294
 $424
 $1,712
 $391
 $2,527
Net income

 

 

 122
 122
Capital contributions from parent

 

 43
 

 43
Cash dividends declared on common stock

 

 

 (81) (81)
June 30, 201821,294
 $424
 $1,755
 $432
 $2,611
 
(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.




Table of Contents




THIS PAGE INTENTIONALLY LEFT BLANK.




Table of Contents




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


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 20162019 2018 2019 2018
Operating Revenues              
Retail and wholesale$457
 $469
 $1,295
 $1,324
$404
 $412
 $852
 $877
Electric revenue from affiliate3
 5
 8
 10
2
 2
 4
 8
Total Operating Revenues460
 474
 1,303
 1,334
406
 414
 856
 885
              
Operating Expenses              
Operation              
Fuel126
 141
 351
 374
99
 117
 215
 252
Energy purchases4
 5
 13
 14
5
 5
 10
 9
Energy purchases from affiliate2
 2
 23
 19
6
 4
 19
 16
Other operation and maintenance104
 107
 313
 320
105
 112
 213
 217
Depreciation67
 59
 188
 175
78
 70
 150
 138
Taxes, other than income9
 7
 24
 22
8
 9
 17
 17
Total Operating Expenses312
 321
 912
 924
301
 317
 624
 649
              
Operating Income148
 153
 391
 410
105
 97
 232
 236
              
Other Income (Expense) - net—
 (3) (3) (4)(2) 3
 —
 —
              
Interest Expense24
 24
 72
 71
28
 25
 54
 50
              
Income Before Income Taxes124
 126
 316
 335
75
 75
 178
 186
              
Income Taxes47
 48
 120
 128
14
 14
 36
 38
              
Net Income (a)$77
 $78
 $196
 $207
$61
 $61
 $142
 $148
 
(a)Net income approximatesequals 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)

Nine Months Ended September 30,Six Months Ended June 30,
2017 20162019 2018
Cash Flows from Operating Activities 
  
 
  
Net income$196
 $207
$142
 $148
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation188
 175
150
 138
Amortization7
 10
5
 2
Defined benefit plans - expense3
 4
Deferred income taxes and investment tax credits116
 122
29
 9
Other—
 (1)(2) (1)
Change in current assets and current liabilities 
  
 
  
Accounts receivable6
 (24)14
 4
Accounts receivable from affiliates(1) —
Accounts payable(6) (11)(8) 11
Accounts payable to affiliates(16) 2
(15) (12)
Unbilled revenues8
 (4)4
 16
Fuel, materials and supplies28
 (4)(6) (5)
Regulatory assets and liabilities, net(19) 37
Taxes payable(21) —
(2) 4
Accrued interest22
 22
3
 —
Other(6) 2
1
 (11)
Other operating activities 
  
 
  
Defined benefit plans - funding(22) (19)(2) (52)
Expenditures for asset retirement obligations(9) (4)(33) (16)
Other assets—
 (4)1
 (1)
Other liabilities8
 (4)8
 3
Net cash provided by operating activities501
 469
270
 274
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(283) (255)(305) (266)
Net increase in notes receivable with affiliates(10) —
Other investing activities4
 1
Net cash used in investing activities(289) (254)(305) (266)
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt—
 96
306
 —
Retirement of long-term debt—
 (96)
Net decrease in short-term debt(16) (41)
Debt issuance and credit facility costs(1) (1)
Net increase (decrease) in short-term debt(235) 88
Payment of common stock dividends to parent(171) (197)(91) (136)
Contributions from parent—
 20
68
 45
Net cash used in financing activities(188) (219)
Net Increase (Decrease) in Cash and Cash Equivalents24
 (4)
Other financing activities(4) —
Net cash provided by (used in) financing activities44
 (3)
Net Increase in Cash and Cash Equivalents9
 5
Cash and Cash Equivalents at Beginning of Period7
 11
14
 15
Cash and Cash Equivalents at End of Period$31
 $7
$23
 $20
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at September 30,$58
 $40
Accrued expenditures for property, plant and equipment at June 30,$52
 $55
 
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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$31
 $7
$23
 $14
Accounts receivable (less reserve: 2017, $1; 2016, $2) 
  
Accounts receivable (less reserve: 2019, $2; 2018, $2) 
  
Customer119
 126
120
 129
Other28
 5
27
 34
Accounts receivable from affiliates1
 —
Notes receivable from affiliate10
 —
Unbilled revenues87
 95
88
 92
Fuel, materials and supplies127
 154
128
 121
Prepayments14
 12
16
 11
Regulatory assets9
 11
5
 4
Other current assets6
 3
Total Current Assets432
 413
407
 405
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant7,452
 7,382
8,042
 7,895
Less: accumulated depreciation - regulated utility plant1,110
 965
1,403
 1,382
Regulated utility plant, net6,342
 6,417
6,639
 6,513
Construction work in progress293
 181
490
 503
Property, Plant and Equipment, net6,635
 6,598
7,129
 7,016
      
Other Noncurrent Assets 
  
 
  
Regulatory assets383
 374
423
 418
Goodwill607
 607
607
 607
Other intangibles34
 36
30
 31
Other noncurrent assets55
 57
95
 63
Total Other Noncurrent Assets1,079
 1,074
1,155
 1,119
      
Total Assets$8,146
 $8,085
$8,691
 $8,540
 
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)


September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$—
 $16
$—
 $235
Long-term debt due within one year96
 96
Accounts payable105
 78
124
 171
Accounts payable to affiliates42
 56
38
 53
Customer deposits30
 29
33
 32
Taxes24
 45
22
 24
Regulatory liabilities10
 13
13
 31
Interest38
 16
19
 16
Asset retirement obligations61
 19
54
 59
Other current liabilities35
 36
55
 35
Total Current Liabilities345
 308
454
 752
      
Long-term Debt2,328
 2,327
2,528
 2,225
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,289
 1,170
774
 735
Investment tax credits94
 96
90
 92
Accrued pension obligations37
 62
Asset retirement obligations176
 269
112
 134
Regulatory liabilities485
 480
1,122
 1,124
Other deferred credits and noncurrent liabilities43
 50
50
 36
Total Deferred Credits and Other Noncurrent Liabilities2,124
 2,127
2,148
 2,121
      
Commitments and Contingent Liabilities (Notes 6 and 9)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Stockholder's Equity 
  
 
  
Common stock - no par value (a)308
 308
308
 308
Additional paid-in capital2,616
 2,616
2,729
 2,661
Accumulated other comprehensive loss—
 (1)
Earnings reinvested425
 400
524
 473
Total Equity3,349
 3,323
3,561
 3,442
      
Total Liabilities and Equity$8,146
 $8,085
$8,691
 $8,540
 
(a)80,000 shares authorized; 37,818 shares issued and outstanding at SeptemberJune 30, 20172019 and December 31, 2016.2018.


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
 Total
December 31, 201637,818
 $308
 $2,616
 $400
 $(1) $3,323
Net income

 

 

 196
 

 196
Cash dividends declared on common stock

 

 

 (171) 

 (171)
Other comprehensive income

 

 

 

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

   20
 

 

 20
Net income

 

 

 207
 

 207
Cash dividends declared on common stock

 

 

 (197) 

 (197)
Other comprehensive income (loss)

 

 

 

 (1) (1)
September 30, 201637,818
 $308
 $2,616
 $393
 $(1) $3,316
 Common
stock
shares
outstanding
(a)		 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 Total
March 31, 201937,818
 $308
 $2,689
 $515
 $3,512
Net income

 

 

 61
 61
Capital contributions from parent

 

 40
 

 40
Cash dividends declared on common stock

 

 

 (52) (52)
June 30, 201937,818
 $308
 $2,729
 $524
 $3,561
          
December 31, 201837,818
 $308
 $2,661
 $473
 $3,442
Net income

 

 

 142
 142
Capital contributions from parent

 

 68
 

 68
Cash dividends declared on common stock

 

 

 (91) (91)
June 30, 201937,818
 $308
 $2,729
 $524
 $3,561
          
March 31, 201837,818
 $308
 $2,616
 $441
 $3,365
Net income

 

 

 61
 61
Capital contributions from parent

 

 45
 

 45
Cash dividends declared on common stock

 

 

 (57) (57)
June 30, 201837,818
 $308
 $2,661
 $445
 $3,414
          
December 31, 201737,818
 $308
 $2,616
 $433
 $3,357
Net income

 

 

 148
 148
Capital contributions from parent

 

 45
 

 45
Cash dividends declared on common stock

 

 

 (136) (136)
June 30, 201837,818
 $308
 $2,661
 $445
 $3,414
 
(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)

Index to Combined Notes to Condensed Financial Statements

The notes to the condensed financial statements that follow are a combined presentation. The following list indicates the Registrants to which the notes apply:
Registrant
PPLPPL ElectricLKELG&EKU
1. Interim Financial Statementsxxxxx
2. Summary of Significant Accounting Policiesxxxxx
3. Segment and Related Informationxxxxx
4. Revenue from Contracts with Customersxxxxx
5. Earnings Per Sharex
6. Income Taxesxxxxx
7. Utility Rate Regulationxxxxx
8. Financing Activitiesxxxxx
9. Leasesxxxxx
10. Defined Benefitsxxxxx
11. Commitments and Contingenciesxxxxx
12. Related Party Transactionsxxxx
13. Other Income (Expense) - netx
14. Fair Value Measurementsxxxxx
15. Derivative Instruments and Hedging Activitiesxxxxx
16. Asset Retirement Obligationsxxxx
17. Accumulated Other Comprehensive Income (Loss)x
18. New Accounting Guidance Pending Adoptionxxxxx

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, 20162018 is derived from that Registrant's 20162018 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 20162018 Form 10-K. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results to be expected for the full year ending December 31, 20172019 or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.



Table of Contents



2. Summary of Significant Accounting Policies
 
(PPL and PPL Electric)All Registrants)
 
The following accounting policy disclosures represent updates to Note 1 in each indicated Registrant's 20162018 Form 10-K and should be read in conjunction with those disclosures.

Accounts ReceivableRestricted Cash and Cash Equivalents(PPL and PPL Electric)

Reconciliation of Cash, Cash Equivalents and Restricted Cash

The following provides a reconciliation of Cash, Cash Equivalents and Restricted Cash reported within the Balance Sheets that sum to the total of the same amounts shown on the Statements of Cash Flows:
 PPL PPL Electric
 June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Cash and cash equivalents$406
 $621
 $20
 $267
Restricted cash - current (a)3
 3
 2
 2
Restricted cash - noncurrent (a)19
 19
 —
 —
Total Cash, Cash Equivalents and Restricted Cash$428
 $643
 $22
 $269

(a)Bank deposits and other cash equivalents that are restricted by agreement or that have been clearly designated for a specific purpose are classified as restricted cash. On the Balance Sheets, the current portion of restricted cash is included in "Other current assets," while the noncurrent portion is included in "Other noncurrent assets."

New Accounting Guidance Adopted

(All Registrants)

Accounting for Leases
Effective January 1, 2019, the Registrants adopted accounting guidance that requires lessees to recognize a right-of-use asset and lease liability for leases, unless determined to 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 result in straight-line expense recognition. Currently, all Registrant leases are operating leases.

Lessor accounting under the new guidance is similar to the current model, but updated to align with certain changes to the lessee model and current revenue recognition guidance. Lessors classify leases as operating, direct financing, or sales-type.
 
In accordanceadopting this new guidance, the Registrants elected to use the following practical expedients:
The Registrants did not re-assess the lease classifications or initial direct costs of existing leases. The Registrants also did not re-assess existing contracts for leases or lease classification.
The Registrants did not evaluate land easements that were not previously accounted for as leases under the new guidance. New land easements are evaluated under the new guidance beginning January 1, 2019.

See Note 9 for the required disclosures resulting from the adoption of the new guidance.

(PPL, LKE, LG&E & KU)

The following table shows the amounts recorded on the Balance Sheets as of January 1, 2019 as a result of the adoption of the new lease guidance using a modified retrospective transition method with transition applied as of the beginning of the period of adoption:

Table of Contents



 PPL LKE LG&E KU
Right-of-Use Asset (a)$81
 $56
 $23
 $31
Lease Liability- Current (b)23
 18
 9
 9
Lease Liability- Noncurrent (c)67
 46
 18
 26

(a)Right-of-Use Assets are recorded in "Other noncurrent assets" on the Balance Sheets.
(b)Current lease liabilities are recorded in "Other current liabilities" on the Balance Sheets.
(c)Noncurrent lease liabilities are recorded in "Other deferred credits and noncurrent liabilities" on the Balance Sheets.

(All Registrants)

Improvements to Accounting for Hedging Activities

Effective January 1, 2019, the Registrants adopted accounting guidance, using a PUC-approved purchasemodified retrospective approach, which reduces complexity when applying hedge accounting as well as improving the transparency of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative electricity suppliers at a discount, which reflects a provisionan entity's risk management activities. This guidance eliminates the separate measurement and reporting of hedge ineffectiveness for uncollectible accounts.cash flow and net investment hedges and provides for the ability to perform subsequent qualitative effectiveness assessments. The alternative electricity suppliers have no continuing involvement or interest inguidance also allows entities to apply the purchased accounts receivable. Accounts receivable that are acquired are initially recorded atshort-cut method to partial-term fair value onhedges of interest rate risk as well as expands the dateability to apply the critical terms match method to cash flow hedges of acquisition. Duringgroups of forecasted transactions.

See Note 15 for the three and nine months ended September 30, 2017, PPL Electric purchased $324 million and $968 millionadditional disclosures of accounts receivablethe income statement impacts of hedging activities required from alternative energy suppliers. During the three and nine months ended September 30, 2016, PPL Electric purchased $365 million and $1.0 billionadoption of accounts receivable from alternative electricity suppliers.this guidance. Disclosures related to ineffectiveness are no longer required. Other impacts of adopting this guidance were not material.



Table of Contents

3. Segment and Related Information
 
(PPL)
 
See Note 2 in PPL's 20162018 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 SeptemberJune 30 are as follows:
Three Months Nine MonthsThree Months Six Months
2017 2016 2017 20162019 2018 2019 2018
Income Statement Data       
Revenues from external customers       
Operating Revenues from external customers       
U.K. Regulated$477
 $515
 $1,547
 $1,673
$541
 $584
 $1,124
 $1,199
Kentucky Regulated818
 835
 2,350
 2,382
732
 743
 1,577
 1,615
Pennsylvania Regulated547
 539
 1,620
 1,619
521
 517
 1,166
 1,156
Corporate and Other3
 —
 4
 11
9
 4
 15
 4
Total$1,845
 $1,889
 $5,521
 $5,685
$1,803
 $1,848
 $3,882
 $3,974
              
Net Income 
  
  
  
 
  
  
  
U.K. Regulated (a)$126
 $281
 $560
 $915
$284
 $394
 $548
 $591
Kentucky Regulated125
 126
 299
 314
97
 77
 214
 210
Pennsylvania Regulated95
 91
 251
 263
94
 75
 215
 223
Corporate and Other9
 (25) (60) (55)(34) (31) (70) (57)
Total$355
 $473
 $1,050
 $1,437
$441
 $515
 $907
 $967


(a)Includes unrealized gains and losses from hedging foreign-currency relatedforeign currency economic activity. See Note 1315 for additional information.


The following provides Balance Sheet data for the segments and reconciliation to PPL's consolidated resultsBalance Sheets as of:

Table of Contents


 September 30,
2017		 December 31,
2016
Balance Sheet Data 
  
Assets 
  
U.K. Regulated (a)$16,052
 $14,537
Kentucky Regulated14,181
 14,037
Pennsylvania Regulated10,323
 9,426
Corporate and Other (b)202
 315
Total$40,758
 $38,315

 June 30,
2019		 December 31,
2018
Assets 
  
U.K. Regulated (a)$17,134
 $16,700
Kentucky Regulated15,296
 15,078
Pennsylvania Regulated11,371
 11,257
Corporate and Other (b)403
 361
Total$44,204
 $43,396
 
(a)Includes $11.7$12.6 billion and $10.8$12.4 billion of net PP&E as of SeptemberJune 30, 20172019 and December 31, 2016.2018. 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, andgoodwill, the elimination of inter-segment transactions.transactions as well as the assets of Safari Energy.


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


4. Revenue from Contracts with Customers

(All Registrants)

See Note 3 in PPL's 2018 Form 10-K for a discussion of the principal activities from which the Registrants and PPL’s segments generate their revenues.

The following tables reconcile "Operating Revenues" included in each Registrant's Statement of Income with revenues generated from contracts with customers for the periods ended June 30.
 2019 Three Months
 PPL PPL Electric LKE LG&E KU
Operating Revenues (a)$1,803
 $521
 $732
 $334
 $406
   Revenues derived from:         
Alternative revenue programs (b)(20) (2) (18) (3) (15)
Other (c)(10) (2) (6) (3) (3)
Revenues from Contracts with Customers$1,773
 $517
 $708
 $328
 $388
  
 2018 Three Months
 PPL PPL Electric LKE LG&E KU
Operating Revenues (a)$1,848
 $517
 $743
 $335
 $414
   Revenues derived from:  

 

 

 

Alternative revenue programs (b)9
 —
 9
 6
 3
Other (c)(13) (2) (4) (2) (2)
Revenues from Contracts with Customers$1,844
 $515
 $748
 $339
 $415
 2019 Six Months
 PPL PPL Electric LKE LG&E KU
Operating Revenues (a)$3,882
 $1,166
 $1,577
 $744
 $856
   Revenues derived from:  

 

 

 

Alternative revenue programs (b)(26) (6) (20) (5) (15)
Other (c)(19) (5) (10) (4) (6)
Revenues from Contracts with Customers$3,837
 $1,155
 $1,547
 $735
 $835
  

Table of Contents



 2018 Six Months
 PPL PPL Electric LKE LG&E KU
Operating Revenues (a)$3,974
 $1,156
 $1,615
 $754
 $885
   Revenues derived from:

   

 

 

Alternative revenue programs (b)41
 2
 39
 20
 19
Other (c)(28) (6) (9) (3) (6)
Revenues from Contracts with Customers$3,987
 $1,152
 $1,645
 $771
 $898

(a)PPL includes $541 million and $1,124 million for the three and six months ended June 30, 2019 and $584 million and $1,199 million for the three and six months ended June 30, 2018 of revenues from external customers reported by the U.K. Regulated segment. PPL Electric and LKE represent revenues from external customers reported by the Pennsylvania Regulated and Kentucky Regulated segments. See Note 3 for additional information.
(b)Alternative revenue programs include the transmission formula rate for PPL Electric, the ECR and DSM programs for LKE, LG&E and KU, the GLT program for LG&E, and the generation formula rate for KU. This line item shows the over/under collection of these rate mechanisms with over-collections of revenue shown as positive amounts in the table above and under-collections shown as negative amounts.
(c)Represents additional revenues outside the scope of revenues from contracts with customers such as leases and other miscellaneous revenues.

As discussed in Note 2 in PPL's 2018 Form 10-K, PPL's segments are segmented by geographic location. Revenues from external customers for each segment/geographic location are reconciled to revenues from contracts with customers in the footnotes to the tables above.

The following tables show revenues from contracts with customers disaggregated by customer class for the periods ended June 30.
 2019 Three Months
 PPL PPL Electric LKE LG&E KU
Licensed energy suppliers (a)$510
 $—
 $—
 $—
 $—
Residential572
 301
 271
 138
 133
Commercial302
 87
 215
 108
 107
Industrial156
 15
 141
 43
 98
Other (b)117
 13
 66
 29
 37
Wholesale - municipal4
 —
 4
 —
 4
Wholesale - other (c)11
 —
 11
 10
 9
Transmission101
 101
 —
 —
 —
Revenues from Contracts with Customers$1,773
 $517
 $708
 $328
 $388
          
 2018 Three Months
 PPL PPL Electric LKE LG&E KU
Licensed energy suppliers (a)$547
 $—
 $—
 $—
 $—
Residential588
 300
 288
 146
 142
Commercial296
 89
 207
 107
 100
Industrial155
 12
 143
 45
 98
Other (b)114
 13
 67
 30
 37
Wholesale - municipal31
 —
 31
 —
 31
Wholesale - other (c)12
 —
 12
 11
 7
Transmission101
 101
 —
 —
 —
Revenues from Contracts with Customers$1,844
 $515
 $748
 $339
 $415



Table of Contents



 2019 Six Months
 PPL PPL Electric LKE LG&E KU
Licensed energy suppliers (a)$1,066
 $—
 $—
 $—
 $—
Residential1,350
 708
 642
 327
 315
Commercial621
 182
 439
 229
 210
Industrial306
 32
 274
 87
 187
Other (b)232
 27
 136
 62
 74
Wholesale - municipal32
 —
 32
 —
 32
Wholesale - other (c)24
 —
 24
 30
 17
Transmission206
 206
 —
 —
 —
Revenues from Contracts with Customers$3,837
 $1,155
 $1,547
 $735
 $835
          
 2018 Six Months
 PPL PPL Electric LKE LG&E KU
Licensed energy suppliers (a)$1,131
 $—
 $—
 $—
 $—
Residential1,392
 708
 684
 343
 341
Commercial621
 187
 434
 231
 203
Industrial310
 25
 285
 89
 196
Other (b)220
 26
 135
 61
 74
Wholesale - municipal61
 —
 61
 —
 61
Wholesale - other (c)46
 —
 46
 47
 23
Transmission206
 206
 —
 —
 —
Revenues from Contracts with Customers$3,987
 $1,152
 $1,645
 $771
 $898

(a)Represents customers of WPD.
(b)Primarily includes revenues from pole attachments, street lighting, other public authorities and other non-core businesses.
(c)Includes wholesale power and transmission revenues. LG&E and KU amounts include intercompany power sales and transmission revenues, which are eliminated upon consolidation at LKE.

PPL Electric's revenues from contracts with customers are further disaggregated by distribution and transmission, which were $416 million and $101 million for the three months ended June 30, 2019 and $949 million and $206 million for the six months ended June 30, 2019. PPL Electric's revenue from contracts with customers disaggregated by distribution and transmission were $414 million and $101 million for the three months ended June 30, 2018 and $946 million and $206 million for the six months ended June 30, 2018.

Contract receivables from customers are primarily included in "Accounts receivable - Customer" and "Unbilled revenues" on the Balance Sheets.

The following table shows the accounts receivable balances that were impaired for the periods ended June 30.
    
 Three Months Six Months
 2019 2018 2019 2018
PPL$2
 $3
 $11
 $13
PPL Electric—
 3
 6
 10
LKE1
 1
 3
 3
LG&E—
 —
 1
 1
KU1
 1
 2
 2


The following table shows the balances and certain activity of contract liabilities resulting from contracts with customers.

Table of Contents



 PPL PPL Electric LKE LG&E KU
Contract liabilities at December 31, 2018$42
 $23
 $9
 $5
 $4
Contract liabilities at June 30, 201947
 22
 9
 5
 4
Revenue recognized during the six months ended June 30, 2019 that was included in the contract liability balance at December 31, 201829
 11
 9
 5
 4
          
Contract liabilities at December 31, 2017$29
 $19
 $8
 $4
 $4
Contract liabilities at June 30, 201838
 14
 8
 4
 3
Revenue recognized during the six months ended June 30, 2018 that was included in the contract liability balance at December 31, 201718
 8
 8
 4
 4


Contract liabilities result from recording contractual billings in advance for customer attachments to the Registrants' infrastructure and payments received in excess of revenues earned to date. Advanced billings for customer attachments are recognized as revenue ratably over the billing period. Payments received in excess of revenues earned to date are recognized as revenue as services are delivered in subsequent periods.

At June 30, 2019, PPL had $56 million of performance obligations attributable to Corporate and Other that have not been satisfied. Of this amount, PPL expects to recognize approximately $49 million within the next 12 months. 

5. 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 These securities also include the PPL common stock forward sale agreements entered into in May 2018. See Note 8 in PPL's 2018 Form 10-K for additional information on these agreements. The forward sale agreements are dilutive under the Treasury Stock Method to the extent the average stock price of Contents

PPL's common shares exceeds the forward sale price prescribed in the agreements.
 
Reconciliations of the amounts of income and shares of PPL common stock (in thousands) for the periods ended SeptemberJune 30 used in the EPS calculation are:
Three Months Nine MonthsThree Months Six Months
2017 2016 2017 20162019 2018 2019 2018
Income (Numerator) 
  
  
  
 
  
  
  
Net income$355
 $473
 $1,050
 $1,437
$441
 $515
 $907
 $967
Less amounts allocated to participating securities1
 1
 2
 4
1
 —
 1
 1
Net income available to PPL common shareowners - Basic and Diluted$354
 $472
 $1,048
 $1,433
$440
 $515
 $906
 $966
              
Shares of Common Stock (Denominator) 
  
  
  
 
  
  
  
Weighted-average shares - Basic EPS686,563
 678,114
 683,783
 676,905
721,785
 699,006
 721,406
 696,772
Add incremental non-participating securities: 
  
  
  
 
  
  
  
Share-based payment awards2,183
 2,234
 2,298
 3,064
897
 173
 960
 491
Forward sale agreements8,233
 1,797
 8,070
 898
Weighted-average shares - Diluted EPS688,746
 680,348
 686,081
 679,969
730,915
 700,976
 730,436
 698,161
              
Basic EPS 
  
  
  
 
  
  
  
Net Income available to PPL common shareowners$0.52
 $0.70
 $1.53
 $2.12
$0.61
 $0.74
 $1.26
 $1.39
              
Diluted EPS 
  
  
  
 
  
  
  
Net Income available to PPL common shareowners$0.51
 $0.69
 $1.53
 $2.11
$0.60
 $0.73
 $1.24
 $1.38

Table of Contents



 
For the periods ended SeptemberJune 30, PPL issued common stock related to stock-based compensation plans and the DRIP as follows (in thousands):
Three Months Nine MonthsThree Months Six Months
2017 2016 2017 20162019 2018 2019 2018
Stock-based compensation plans (a)256
 248
 1,707
 3,168
52
 12
 642
 488
DRIP355
 761
 1,169
 1,533
417
 526
 875
 1,011
 
(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 SeptemberJune 30, the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would have been antidilutive.
 Three Months Six Months
 2019 2018 2019 2018
Stock options—
 441
 —
 336
Restricted stock units—
 23
 —
 21
 Three Months Nine Months
 2017 2016 2017 2016
Stock options696
 696
 696
 696
Performance units—
 316
 —
 210

 

Table of Contents

5.6. Income Taxes

Reconciliations of income taxes for the periods ended SeptemberJune 30 are as follows.
(PPL)
 Three Months Six Months
 2019 2018 2019 2018
Federal income tax on Income Before Income Taxes at statutory tax rate - 21%$110
 $138
 $235
 $257
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit8
 10
 21
 25
Valuation allowance adjustments (b)7
 5
 14
 12
Impact of lower U.K. income tax rates(6) (6) (14) (13)
Amortization of excess deferred federal and state income taxes(10) (9) (21) (19)
Deferred tax impact of state tax reform (a)—
 9
 —
 9
Interest benefit on U.K. financing entities(3) (4) (6) (9)
Kentucky recycling credit, net of federal income tax expense (b)(20) —
 (20) —
Other(2) (1) 1
 (3)
Total increase (decrease)(26) 4
 (25) 2
Total income taxes$84
 $142
 $210
 $259

(PPL)
 Three Months Nine Months
 2017 2016 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$165
 $214
 $480
 $681
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit14
 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) —
 (7) (6)
Interest benefit on U.K. financing entities(4) (4) (12) (13)
Stock-based compensation—
 (1) (7) (12)
Other(5) (7) (10) (9)
Total increase (decrease)(49) (75) (159) (171)
Total income taxes$116
 $139
 $321
 $510


(a)LowerDuring the second quarter of 2018, LKE recorded deferred income taxestax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax benefit of accelerated pension contributions made in the first quarter of 2017. The related tax benefit is recognized over the annual periodrate reduction from 6% to 5%, as a result of utilizing an estimated annualenacted by HB 487, effective tax rate.January 1, 2018.
(b)During the second quarter of 2019, LKE recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The U.K. Finance Act 2016, enactedapplicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in September 2016, reducesKentucky, with the U.K. statutorybenefit recognized during the period in which the assets are placed into service. A valuation allowance of $3 million has been recognized related to this credit due to insufficient Kentucky taxable income projected at LKE.
(PPL Electric)       
 Three Months Six Months
 2019 2018 2019 2018
Federal income tax on Income Before Income Taxes at statutory tax rate - 21%$26
 $22
 $61
 $63
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit10
 8
 23
 24
Amortization of excess deferred income taxes(4) (3) (8) (8)
Other—
 —
 (2) (3)
Total increase (decrease)6
 5
 13
 13
Total income taxes$32
 $27
 $74
 $76


Table of Contents



(LKE)       
 Three Months Six Months
 2019 2018 2019 2018
Federal income tax on Income Before Income Taxes at statutory tax rate - 21%$23
 $25
 $56
 $63
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit4
 3
 10
 11
Deferred tax impact of state tax reform (a)—
 9
 —
 9
Valuation allowance adjustments (b)3
 —
 3
 —
Amortization of excess deferred federal and state income taxes(6) (6) (12) (11)
Kentucky recycling credit, net of federal income tax expense (b)(20) —
 (20) —
Other(1) —
 (2) (2)
Total increase (decrease)(20) 6
 (21) 7
Total income taxes$3
 $31
 $35
 $70


(a)During the second quarter of 2018, LKE recorded deferred income tax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax rate reduction from 6% to 5%, as enacted by HB 487, effective AprilJanuary 1, 2020 from 18% to 17%. As2018.
(b)During the second quarter of 2019, LKE recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, PPL reduced its net deferredqualify for a Kentucky recycling credit. The applicable credit provides tax liabilities andbenefits for a portion of the equipment costs for major recycling projects in Kentucky, with the benefit recognized during the period in which the assets are placed into service. A portion of this amount has been reserved due to insufficient Kentucky taxable income projected at LKE.
(LG&E)       
 Three Months Six Months
 2019 2018 2019 2018
Federal income tax on Income Before Income Taxes at statutory tax rate - 21%$12
 $13
 $29
 $33
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit2
 2
 5
 6
Valuation allowance adjustments (a)15
 —
 15
 —
Amortization of excess deferred federal and state income taxes(2) (3) (5) (5)
Kentucky recycling credit, net of federal income tax expense (a)(15) —
 (15) —
Other—
 —
 —
 (1)
Total increase (decrease)—
 (1) —
 —
Total income taxes$12
 $12
 $29
 $33


(a)During the second quarter of 2019, LG&E recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky, with the benefit recognized during the three and nine months ended September 30, 2016.period in which the assets are placed into service. This amount has been reserved due to insufficient Kentucky taxable income projected at LG&E.
(KU)       
 Three Months Six Months
 2019 2018 2019 2018
Federal income tax on Income Before Income Taxes at statutory tax rate - 21%$16
 $16
 $37
 $39
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit3
 2
 7
 7
Valuation allowance adjustments (a)5
 —
 5
 —
Amortization of excess deferred federal and state income taxes(4) (3) (7) (6)
Kentucky recycling credit, net of federal income tax expense (a)(5) —
 (5) —
Other(1) (1) (1) (2)
Total increase (decrease)(2) (2) (1) (1)
Total income taxes$14
 $14
 $36
 $38

(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

(a)During the second quarter of 2019, KU recorded a deferred income tax benefit associated with a project placed into service that prepares a generation waste material for reuse and, as a result, qualifies for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky, with the benefit recognized during the period in which the assets are placed into service. This amount has been reserved due to insufficient Kentucky taxable income projected at KU.
(LKE)         
 Three Months Nine Months
 2017 2016 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$74
 $74
 $181
 $189
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit8
 8
 19
 20
Amortization of investment tax credit(1) (1) (2) (2)
Stock-based compensation—
 (1) (1) (2)
Other(2) (1) (2) (3)
Total increase (decrease)5
 5
 14
 13
Total income taxes$79
 $79
 $195
 $202


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 Months Nine Months
 2017 2016 2017 2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%$43
 $44
 $111
 $117
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit5
 5
 11
 12
Other(1) (1) (2) (1)
Total increase (decrease)4
 4
 9
 11
Total income taxes$47
 $48
 $120
 $128
Other


U.S. Tax Reform (All Registrants)

TheIRS issued proposed regulations for certain provisions of the TCJA in 2018, including interest deductibility and Global Intangible Low-Taxed Income (GILTI). In June 2019, the IRS issued both final and new proposed regulations relating to GILTI. PPL has determined that neither these final nor proposed regulations materially change PPL's current interpretation of the statutory impact of these rules on the company. Proposed regulations relating to the limitation on the deductibility of interest expense were issued in November 2018 and such regulations provide detailed rules implementing the broader statutory provisions. These proposed regulations should not apply to the Registrants until the year in which the regulations are issued in final form, which is expected to be in the fourth quarter of 2019. It is uncertain what form the final regulations will take and, therefore, the Registrants cannot predict what impact the final regulations will have on the tax deductibility of interest expense. However, if the proposed regulations were issued as final in their current form, the Registrants could have a limitation on a portion of their interest expense deduction for tax purposes and such limitation could be significant. PPL expressed its views on these proposed regulations in a comment letter addressed to the IRS on February 26, 2019.

6.7. 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
September 30,
2017		 December 31,
2016		 September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Current Regulatory Assets:              
Environmental cost recovery$4
 $6
 $—
 $—
Generation formula rate8
 11
 —
 —
Transmission service charge—
 7
 —
 7
Gas supply clause6
 3
 —
 —
$12
 $12
 $—
 $—
Smart meter rider12
 6
 12
 6
11
 11
 11
 11
Storm costs1
 5
 1
 5
Plant outage costs13
 10
 —
 —
Other3
 1
 1
 1
7
 3
 6
 —
Total current regulatory assets (a)$34
 $39
 $14
 $19
$43
 $36
 $17
 $11
              
Noncurrent Regulatory Assets:              
Defined benefit plans$908
 $947
 $530
 $549
$944
 $963
 $548
 $558
Taxes recoverable through future rates347
 340
 347
 340
Storm costs37
 57
 —
 9
46
 56
 18
 22
Unamortized loss on debt55
 61
 30
 36
40
 45
 18
 22
Interest rate swaps29
 31
 —
 —
23
 20
 —
 —
Terminated interest rate swaps93
 98
 —
 —
84
 87
 —
 —
Accumulated cost of removal of utility plant166
 159
 166
 159
205
 200
 205
 200
AROs224
 211
 —
 —
296
 273
 —
 —
Act 129 compliance rider16
 19
 16
 19
Other10
 14
 —
 1
8
 10
 —
 3
Total noncurrent regulatory assets$1,869
 $1,918
 $1,073
 $1,094
$1,662
 $1,673
 $805
 $824


Table of Contents




PPL PPL ElectricPPL PPL Electric
September 30,
2017		 December 31,
2016		 September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Current Regulatory Liabilities:              
Generation supply charge$29
 $23
 $29
 $23
$20
 $33
 $20
 $33
Transmission service charge6
 —
 6
 —
Environmental cost recovery5
 16
 —
 —
Universal service rider19
 14
 19
 14
14
 27
 14
 27
Transmission formula rate4
 15
 4
 15
Fuel adjustment clause11
 11
 —
 —
Act 129 compliance rider7
 17
 7
 17
Storm damage expense7
 13
 7
 13
TCJA customer refund7
 20
 6
 3
Storm damage expense rider3
 5
 3
 5
Generation formula rate—
 7
 —
 —
Other4
 8
 —
 1
11
 14
 —
 6
Total current regulatory liabilities$87
 $101
 $72
 $83
$60
 $122
 $43
 $74
              
Noncurrent Regulatory Liabilities:              
Accumulated cost of removal of utility plant$678
 $700
 $—
 $—
$670
 $674
 $—
 $—
Power purchase agreement - OVEC (b)69
 75
 —
 —
Net deferred tax assets21
 23
 —
 —
Power purchase agreement - OVEC55
 59
 —
 —
Net deferred taxes1,791
 1,826
 610
 629
Defined benefit plans27
 23
 —
 —
50
 37
 9
 5
Terminated interest rate swaps74
 78
 —
 —
70
 72
 —
 —
TCJA customer refund (b)42
 41
 42
 41
Other4
 —
 —
 —
7
 5
 —
 —
Total noncurrent regulatory liabilities$873
 $899
 $—
 $—
$2,685
 $2,714
 $661
 $675
LKE LG&E KULKE LG&E KU
September 30,
2017		 December 31,
2016		 September 30,
2017		 December 31,
2016		 September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Current Regulatory Assets:                      
Environmental cost recovery$4
 $6
 $4
 $6
 $—
 $—
Generation formula rate8
 11
 —
 —
 8
 11
Plant outage costs$13
 $10
 $9
 $7
 $4
 $3
Gas supply clause6
 3
 6
 3
 —
 —
12
 12
 12
 12
 —
 —
Other2
 —
 1
 —
 1
 —
1
 3
 —
 2
 1
 1
Total current regulatory assets$20
 $20
 $11
 $9
 $9
 $11
$26
 $25
 $21
 $21
 $5
 $4
                      
Noncurrent Regulatory Assets:                      
Defined benefit plans$378
 $398
 $235
 $246
 $143
 $152
$396
 $405
 $244
 $249
 $152
 $156
Storm costs37
 48
 20
 26
 17
 22
28
 34
 17
 20
 11
 14
Unamortized loss on debt25
 25
 16
 16
 9
 9
22
 23
 14
 15
 8
 8
Interest rate swaps29
 31
 29
 31
 —
 —
23
 20
 23
 20
 —
 —
Terminated interest rate swaps93
 98
 54
 57
 39
 41
84
 87
 49
 51
 35
 36
AROs224
 211
 57
 70
 167
 141
296
 273
 85
 75
 211
 198
Plant retirement costs2
 4
 —
 —
 2
 4
Other8
 9
 2
 4
 6
 5
8
 7
 2
 1
 6
 6
Total noncurrent regulatory assets$796
 $824
 $413
 $450
 $383
 $374
$857
 $849
 $434
 $431
 $423
 $418


Table of Contents




LKE LG&E KULKE LG&E KU
September 30,
2017		 December 31,
2016		 September 30,
2017		 December 31,
2016		 September 30,
2017		 December 31,
2016		June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Current Regulatory Liabilities:                      
Demand side management$—
 $3
 $—
 $2
 $—
 $1
Environmental cost recovery$5
 $16
 $2
 $6
 $3
 $10
Fuel adjustment clause11
 11
 3
 2
 8
 9
6
 —
 —
 —
 6
 —
TCJA customer refund1
 17
 —
 7
 1
 10
Generation formula rate—
 7
 —
 —
 —
 7
Other4
 4
 2
 1
 2
 3
5
 8
 2
 4
 3
 4
Total current regulatory liabilities$15
 $18
 $5
 $5
 $10
 $13
$17
 $48
 $4
 $17
 $13
 $31
                      
Noncurrent Regulatory Liabilities:                      
Accumulated cost of removal
of utility plant
$678
 $700
 $281
 $305
 $397
 $395
$670
 $674
 $274
 $279
 $396
 $395
Power purchase agreement - OVEC (b)69
 75
 48
 52
 21
 23
Net deferred tax assets21
 23
 21
 23
 —
 —
Power purchase agreement - OVEC55
 59
 38
 41
 17
 18
Net deferred taxes1,181
 1,197
 551
 557
 630
 640
Defined benefit plans27
 23
 —
 —
 27
 23
41
 32
 —
 —
 41
 32
Terminated interest rate swaps74
 78
 37
 39
 37
 39
70
 72
 35
 36
 35
 36
Other4
 —
 1
 —
 3
 —
7
 5
 4
 2
 3
 3
Total noncurrent regulatory liabilities$873
 $899
 $388
 $419
 $485
 $480
$2,024
 $2,039
 $902
 $915
 $1,122
 $1,124
  
(a)For PPL, these amounts are included in "Other current assets" on the Balance Sheets.
(b)ThisRelates to amounts owed to PPL Electric customers as a result of the reduced U.S. federal corporate income tax rate as enacted by the TCJA, for the period of January 1, 2018 through June 30, 2018 which is not yet reflected in distribution customer rates. The initial liability was recorded as an offsetduring the second quarter of 2018. The distribution method back to an intangible asset that was recordedcustomers of this liability must be proposed to the PUC at fair value upon the acquisitionearlier of LKE by PPL.May 2021 or PPL Electric’s next rate case.


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


Rate Case Proceedings

In November 2016,On September 28, 2018, LG&E and KU filed requests with the KPSC for an increase in annual base electricity rates of approximately $112 million at KU and increases in annual base electricity and gas rates.rates of approximately $35 million and $25 million at LG&E's&E. LG&E’s and KU'sKU’s applications included requests for CPCNs for implementingalso sought to include changes associated with the TCJA and state tax reform in the calculation of the proposed base rates and to terminate the TCJA bill credit mechanism when new base rates go into effect. The elimination of the TCJA bill credit mechanism will result in an Advanced Metering System programestimated annual electricity revenue increase of approximately $58 million at KU and increases in electricity and gas revenues of approximately $40 million and $12 million at LG&E. The applications were based on a Distribution Automation program.forecasted test year of May 1, 2019 through April 30, 2020 with a requested return-on-equity of 10.42%.


On April 19, 2017 and MayMarch 1, 2017,2019, LG&E and KU, along with substantially all intervening parties to the proceeding, filed with the KPSC, stipulation and recommendation agreements (stipulations) with the KPSC resolving all material issues with the parties. Among other things,In addition to terminating the TCJA bill credit mechanism, the proposed stipulations provided for increases in annual revenue requirements associated with KU base electricity rates of $55approximately $58 million LG&Eat KU and increases in annual base electricity rates of $59 million and LG&E base gas rates of $8approximately $4 million reflectingand $20 million at LG&E, based on a return on equityreturn-on-equity of 9.75%, the withdrawal of LG&E's and KU's request for a CPCN for the Advanced Metering System and other changes to the revenue requirements, which dealt primarily with the timing of cost recovery, including depreciation rates.9.725%.


On June 22, 2017,April 30, 2019, the KPSC issued orders ruling on open issues and approving with certain modifications, the proposed stipulations filed in April and May 2017. On June 29, 2017, the KPSC issued furtherMarch 2019. The 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$56 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 3.2% at KU and increases associated with base electricity and gas raterates of $2 million and $19 million at LG&E. With the termination of the TCJA bill credit mechanism, this represents annual revenue increases of 5.2%$187 million ($114 million at KU and 2.1%$73 million at LG&E.&E). The new base rates and all elements of the orders became effective Julyon May 1, 2017. On June 23, 2017,2019.


Table of Contents



Federal Matters

FERC Transmission Rate Filing

(PPL, LKE, LG&E and KU)

In August 2018, LG&E and KU submitted an application to the KPSC also issued orders establishing an authorized return on equityFERC requesting elimination of 9.7% for allcertain on-going credits to a sub-set of transmission customers relating to the 1998 merger of LG&E’s and KU's parent entities and the 2006 withdrawal of LG&E and KU from the Midcontinent Independent System Operator, Inc. (MISO), a regional transmission operator and energy market. The application sought termination of LG&E's and KU's commitment to provide mitigation for certain horizontal market power concerns arising out of the 1998 merger for certain transmission service between MISO and LG&E and KU. The affected transmission customers are a limited number of municipal entities in Kentucky. The amounts at issue are generally waivers or credits granted to such customers for either LG&E and KU or MISO transmission charges incurred depending upon the direction of certain transmission service incurred by the municipalities. Due to the development of robust, accessible energy markets over time, LG&E and KU believe the mitigation commitments are no longer relevant or appropriate. On March 21, 2019, the FERC issued an Order granting LG&E's and KU's request to remove the on-going credits, conditioned upon the implementation by LG&E and KU of a transition mechanism for certain existing approved ECR planspower supply arrangements, which transition mechanism will be subject to FERC review and projects, replacingapproval. On July 12, 2019, LG&E and KU submitted their proposed transition mechanism to the prior authorized return on equity levelsFERC for review and approval. LG&E and KU currently receive recovery of 9.8% for CCR projectswaivers and 10% for allcredits provided through other ECR approved projects, effectiverate mechanisms.

(PPL and PPL Electric)

In April 2019, PPL Electric filed its annual transmission formula rate update with bills issued in August 2017. Thethe FERC, reflecting a revised revenue requirement, which includes the impact of the new authorized returnTCJA. The filing established the revenue requirement used to set rates that took effect in June 2019.

Transmission Customer Complaint(PPL, LKE, LG&E and KU)

In September 2018, a transmission customer filed a complaint with the FERC against LG&E and KU alleging LG&E and KU have violated and continue to violate their obligations under an existing rate schedule to credit this customer for ECR projects is not expectedcertain transmission charges from MISO. On February 21, 2019, the FERC issued an Order concluding that the MISO transmission charges in question did qualify for credits under the rate schedule and required LG&E and KU to be significant in 2017.

Table of Contents

Gas Franchise(LKE and LG&E)
LG&E’s gas franchise agreementreimburse the customer for the Louisville/Jefferson County service area expired in March 2016. In August 2016, LG&Eeligible credits. The reimbursement was not significant 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 will 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 filedwas completed by LG&E and KU in March 2019. LG&E and KU currently receive recovery for such credits through other rate mechanisms.

TCJA Impact on FERC Rates (All Registrants)

In November 2018, the FERC issued a Policy Statement stating that the appropriate ratemaking treatment for changes in accumulated deferred income taxes as a result of the TCJA would be addressed in a Notice of Proposed Rulemaking. Also in November 2016,2018, the FERC issued the Notice of Proposed Rulemaking, which proposed that public utility transmission providers include mechanisms in their formula rates to deduct excess accumulated deferred income taxes from, or add deficient accumulated deferred income taxes to, rate base and adjust their income tax allowances by amortized excess or deficient accumulated deferred income taxes. The Notice of Proposed Rulemaking did not prescribe the mechanism companies should use to adjust their formula rates.

LG&E and KU are currently assessing the Notice of Proposed Rulemaking and are continuing to monitor guidance issued by the FERC. On February 5, 2019, in connection with a separate element of federal and Kentucky state tax reform effects, LG&E and KU filed an amended complaint against LG&E relatinga request with the FERC to these issues. LG&E submitted KPSC filingsamend their transmission formula rates to respondincorporate reductions to request dismissal of and consolidate certain claims or aspectscorporate income tax rates as a result of the proceedings. In January 2017,TCJA and HB 487. The FERC approved this request effective June 1, 2019. LG&E and KU do not anticipate the KPSC issued an order denying Louisville/Jefferson County's motionimpact of the TCJA and HB 487 related to dismiss, consolidatingtheir FERC-jurisdictional rates to be significant. 
On February 28, 2019, PPL Electric filed with the matter with LG&E's filed applicationFERC proposed revisions to its transmission formula rate template pursuant to Section 205 of the Federal Power Act and establishing a procedural scheduleSection 35.13 of the Rules and Regulation of the FERC. Specifically, PPL Electric proposed to modify its formula rate to permit the return or recovery of excess or deficient accumulated deferred income taxes (ADIT) resulting from the TCJA and permit PPL Electric to prospectively account for the case.income tax expense associated with the depreciation of the equity component of the AFUDC. On September 28, 2017, oral argumentsApril 29, 2019, the FERC accepted the proposed revisions to the

Table of Contents



formula rate template, which were heard byeffective June 1, 2019, as well as the KPSCproposed adjustments to ADIT, effective January 1, 2018.

Other

Purchase of Receivables Program (PPL and PPL Electric)

In accordance with a final order is expectedPUC-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 2017. Until the KPSC issues a final order in this proceeding, LG&E cannot predictpurchased accounts receivable. Accounts receivable that are acquired are initially recorded at fair value on the ultimate outcomedate of this matter but does not anticipate that it will have a material effect on its financial condition or resultsacquisition. During the three and six months ended June 30, 2019, PPL Electric purchased $271 million and $619 million 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.

accounts receivable from alternate suppliers. During the three and six months ended June 30, 2018, PPL Electric purchased $297 million and $673 million of accounts receivable from alternate suppliers.
7.
8. Financing Activities


Credit Arrangements and Short-term Debt


(All Registrants)


The Registrants maintain credit facilities to enhance liquidity, provide credit support and provideact as 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 listed in the borrowed column below are recorded as "Short-term debt" on the Balance Sheets.Sheets, except for amounts borrowed under LG&E's Term Loan Facility which were recorded as "Long-term debt due within one year" on the December 31, 2018 Balance Sheet. The following credit facilities were in place at:
September 30, 2017 December 31, 2016June 30, 2019 December 31, 2018
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
 £155
 £—
 £54
 £160
 £—
Jan. 2023 £210
 £158
 £—
 £52
 £157
 £—
Term Loan Facility (b)Dec. 2017 230
 230
 —
 —
 —
 —
WPD (South West)   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit FacilityJuly 2021 245
 —
 —
 245
 —
 —
WPD (East Midlands)  
  
  
  
  
  
Syndicated Credit Facility (b)July 2021 300
 81
 —
 219
 38
 —
WPD (West Midlands)  
  
  
  
  
  
Syndicated Credit Facility (c)July 2021 245
 —
 —
 245
 110
 —
July 2021 300
 33
 —
 267
 —
 —
WPD (East Midlands)  
  
  
  
  
  
Syndicated Credit Facility (d)July 2021 300
 116
 —
 184
 9
 —
WPD (West Midlands)  
  
  
  
  
  
Uncommitted Credit Facilities  100
 —
 4
 96
 —
 4
Total U.K. Credit Facilities (d)  £1,155
 £272
 £4
 £879
 £195
 £4
U.S.             
PPL Capital Funding             
Syndicated Credit FacilityJuly 2021 300
 —
 —
 300
 —
 —
Jan. 2024 $1,450
 $—
 $1,014
 $436
 $—
 $669
Uncommitted Credit Facilities (e)  100
 70
 4
 26
 60
 4
Total U.K. Credit Facilities (f)  £1,385
 £571
 £4
 £809
 £339
 £4
Bilateral Credit FacilityMar. 2020 100
 —
 15
 85
 —
 15
Total PPL Capital Funding Credit Facilities $1,550
 $—
 $1,029
 $521
 $—
 $684
            


Table of Contents




September 30, 2017 December 31, 2016June 30, 2019 December 31, 2018
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
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
            
PPL Electric   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit FacilityJan. 2022 $650
 $—
 $1
 $649
 $—
 $296
            
LKE   
  
  
  
  
  
Syndicated Credit FacilityOct. 2018 $75
 $—
 $—
 $75
 $—
 $—
Jan. 2024 $650
 $—
 $186
 $464
 $—
 $1
                        
LG&E   
  
  
  
  
     
  
  
  
  
  
Syndicated Credit FacilityJan. 2022 $500
 $—
 $190
 $310
 $—
 $169
Jan. 2024 $500
 $—
 $96
 $404
 $—
 $279
Term Loan Credit FacilityOct. 2019 —
 —
 —
 —
 200
 —
Total LG&E Credit Facilities $500
 $—
 $96
 $404
 $200
 $279
                        
KU   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit FacilityJan. 2022 $400
 $—
 $—
 $400
 $—
 $16
Jan. 2024 $400
 $—
 $—
 $400
 $—
 $235
Letter of Credit FacilityOct. 2020 198
 —
 198
 —
 —
 198
Oct. 2020 198
 —
 198
 —
 —
 198
Total KU Credit Facilities  $598
 $—
 $198
 $400
 $—
 $214
  $598
 $—
 $198
 $400
 $—
 $433
 
(a)The amounts borrowed at SeptemberJune 30, 20172019 and December 31, 20162018 were USD-denominated borrowings of $200 million for both periods, which bore interest at 2.06%3.25% and 1.43%3.17%. The unused capacity reflects the amount borrowed in GBP of £156 million as of the date borrowed.
(b)
The amountamounts borrowed at SeptemberJune 30, 2017 was a2019 and December 31, 2018 were GBP-denominated borrowingborrowings which equated to $296$102 millionand $48 million and bore interest at 1.50%1.13% and 1.12%.
(c)The amount borrowed at December 31, 2016June 30, 2019 was a GBP-denominated borrowingborrowings which equated to $137$41 million and bore interest at 0.66%1.13%.
(d)
The amounts borrowed at SeptemberAt June 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 September 30, 2017,2019, the unused capacity under the U.K. credit facilities was $1.0$1.1 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.credit facilities. The following commercial paper programs were in place at:

 June 30, 2019 December 31, 2018
 
Weighted -
Average
Interest Rate
 Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
 
Weighted -
Average
Interest Rate
 
Commercial
Paper
Issuances
PPL Capital Funding2.74% $1,500
 $1,014
 $486
 2.82% $669
PPL Electric 
2.59% 650
 185
 465
 
 —
LG&E2.59% 350
 96
 254
 2.94% 279
KU
 350
 —
 350
 2.94% 235
Total  $2,850
 $1,295
 $1,555
   $1,183

Table of Contents

 September 30, 2017 December 31, 2016
 
Weighted -
Average
Interest Rate
 Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
 
Weighted -
Average
Interest Rate
 
Commercial
Paper
Issuances
PPL Capital Funding1.41% $1,000
 $285
 $715
 1.10% $20
PPL Electric
 650
 —
 650
 1.05% 295
LG&E1.38% 350
 190
 160
 0.94% 169
KU
 350
 —
 350
 0.87% 16
Total  $2,350
 $475
 $1,875
   $500


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


See Note 1012 for discussion of intercompany borrowings.


Long-term Debt


(PPL)


In March 2017,June 2019, WPD (South Wales) issuedplc executed and drew £50 million under a 5-year term loan facility due 2024 at a rate of 0.01% Index-linked Senior Notes due 2029. WPD (South Wales) received proceeds of £53 million, which equated2.189%, 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,be reset quarterly as detailed in the terms of the related indenture.agreement. The borrowing equated to $63 million at the time of drawdown, net of fees. The proceeds were used for general corporate purposes.


(PPL, LKE and LG&E)

In September 2017, PPL Capital FundingApril 2019, LG&E issued $500$400 million of 4.00% Senior Notes4.25% First Mortgage Bonds due 2047. PPL Capital Funding2049. LG&E received proceeds of $490$396 million, net of a discountdiscounts and underwriting fees, which were used to repay short-term debt obligationscommercial paper and for general corporate purposes.LG&E's term loan.


(PPL and PPL Electric)


Table of Contents
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 2017,2019, the Louisville/Jefferson County Metro Government of Jefferson, Kentucky remarketed $128 million of Pollution Control Revenue Bonds, 20032001 Series A (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 1.50%1.85% through their mandatory purchase date of April 1, 2019.2021.


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 2017,2019, 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

Table of Contents

on behalf of LG&E. The bonds were remarketed at a long-term rate and will bear interest at 1.25%1.65% through their mandatory purchase date of June 3, 2019.1, 2021.


In June 2017,2019, the Louisville/Jefferson CountyCountry 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%1.65% through their mandatory purchase date of June 3,1, 2021.

In June 2019, LG&E issued a notice to bondholders of its intention to convert the $40 million Louisville/Jefferson County Metro Government of Kentucky Pollution Control Revenue Bonds, 2005 Series A (Louisville Gas and Electric Company Project) to a weekly interest rate, as permitted under the loan documents. The conversion was completed on August 1, 2019. In connection with the conversion, LG&E purchased these bonds from the remarketing agent and will hold them until a later date, at which time LG&E may refinance, remarket or further convert such bonds.


(PPL, LKE and KU)

In April 2019, KU reopened its 4.375% First Mortgage Bonds due 2045 and issued an additional $300 million of this series. KU received proceeds of $303 million, including premiums and underwriting fees, which were used to repay commercial paper and for other general corporate purposes.

(PPL)


Equity Securities

ATM Program

In February 2015,2018, PPL entered into two separatean equity distribution agreements,agreement, pursuant to which PPL may sell, from time to time, up to an aggregate of $500 million$1.0 billion of its common stock. Forstock through an at-the-market offering program; including a forward sales component. The compensation paid to the periodsselling agents by PPL may be up to 2% of the gross offering proceeds of the shares. There were no issuances under the ATM program for the six months ended SeptemberJune 30, PPL issued the following:2019.
 Three Months Nine Months
 2017 2016 2017 2016
Number of shares (in thousands)2,049
 710
 5,526
 710
Average share price$39.04
 $35.23
 $38.49
 $35.23
Net Proceeds$79
 $25
 $211
 $25


Distributions


In August 2017,May 2019, PPL declared a quarterly common stock dividend, payable October 2, 2017,July 1, 2019, of 39.541.25 cents per share (equivalent to $1.58$1.65 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.


9. Leases

(All Registrants)

The Registrants determine whether contractual arrangements contain a lease by evaluating whether those arrangements either implicitly or explicitly identify an asset, whether the Registrants have the right to obtain substantially all of the economic benefits from use of the asset throughout the term of the arrangement, and whether the Registrants have the right to direct the use of the asset. Renewal options are included in the lease term if it is reasonably certain the Registrants will exercise those options. Periods for which the Registrants are reasonably certain not to exercise termination options are also included in the lease term. The Registrants have certain agreements with lease and non-lease components, such as office space leases, which are generally accounted for separately.

LKE, LG&E and KU have entered into various operating leases primarily for office space, vehicles and railcars. The leases generally have fixed payments with expiration dates ranging from 2019 to 2025, some of which have options to extend the leases from one year to ten years and some have options to terminate at LKE's, LG&E's and KU's discretion. For leases that

Table of Contents



existed as of December 31, 2018, payments associated with renewal options are not included in the measurement of the lease liability and right-of-use (ROU) asset.

WPD and Safari Energy have entered into various operating leases primarily for office space, land easements and telecom assets. These leases generally have fixed payments with expiration dates ranging from 2019 through 2028, except for the land agreements which extend through 2116.

PPL Electric also has operating leases which do not have a significant impact to its operations.

Short-term Leases

Short-term leases are leases with a term that is 12 months or less and do not include a purchase option or option to extend the initial term of the lease to greater than 12 months that the Registrants are reasonably certain to exercise. The Registrants have made an accounting policy election to not recognize the ROU asset and the lease liability arising from leases classified as short-term. Expenses related to short-term leases are included in the tables below.

Discount Rate

The discount rate for a lease is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the Registrants are required to use their incremental borrowing rate, which is the rate the Registrants would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.

The Registrants receive secured borrowing rates from financial institutions based on their applicable credit profiles. The Registrants use the secured rate which corresponds with the term of the applicable lease.

Practical Expedients

See Note 2 for information on the adoption of the new lease guidance as well as the practical expedients the Registrants have elected as part of the transition.

(PPL, LKE, LG&E and KU)

Lessee Transactions

The following table provides the components of lease cost for the Registrants' operating leases for the periods ended June 30, 2019.
 2019 Three Months
 PPL LKE LG&E KU
Lease cost:       
Operating lease cost$7
 $5
 $2
 $3
Short-term lease cost2
 1
 1
 —
Total lease cost$9
 $6
 $3
 $3
        
 2019 Six Months
 PPL LKE LG&E KU
Lease cost:       
Operating lease cost$14
 $12
 $6
 $6
Short-term lease cost2
 1
 1
 —
Total lease cost$16
 $13
 $7
 $6

The following table provides other key information related to the Registrants' operating leases at June 30, 2019.
 PPL LKE LG&E KU
Cash paid for amounts included in the measurement of lease liabilities:       
Operating cash flows from operating leases$14
 $12
 $6
 $6
Right-of-use asset obtained in exchange for new operating lease liabilities7
 6
 2
 4


Table of Contents




The following table provides the total future minimum rental payments for operating leases, as well as a reconciliation of these undiscounted cash flows to the lease liabilities recognized on the Balance Sheets as of June 30, 2019.
 PPL LKE LG&E KU
2019 (a)$20
 $18
 $7
 $10
202019
 14
 5
 8
202114
 10
 4
 6
20229
 7
 3
 4
20238
 6
 2
 3
20247
 5
 2
 3
Thereafter22
 4
 1
 2
Total$99
 $64
 $24
 $36
        
Weighted-average discount rate 
3.77% 3.97% 3.89% 4.02%
Weighted-average remaining lease term (in years)  
9
 5
 5
 5
Current lease liabilities (b)$20
 $16
 $6
 $9
Non-current lease liabilities (b)62
 42
 17
 24
Right-of-use assets (c)74
 50
 19
 29

(a)Represents future minimum lease payments for the remainder of 2019.
(b)Current lease liabilities are included in "Other Current Liabilities" on the Balance Sheets. Non-current lease liabilities are included in "Other deferred credits and noncurrent liabilities" on the Balance Sheets. The difference between the total future minimum lease payments and the recorded lease liabilities is due to the impact of discounting.
(c)Right-of-use assets are included in "Other noncurrent assets" on the Balance Sheets.

At December 31, 2018, the total future minimum rental payments for all operating leases were estimated to be:
 PPL LKE LG&E KU
2019$26
 $20
 $10
 $10
202021
 15
 6
 9
202115
 11
 4
 7
202213
 7
 3
 4
20238
 6
 3
 3
Thereafter33
 11
 4
 6
Total$116
 $70
 $30
 $39


Lessor Transactions

Third parties lease land from LKE, LG&E and KU at certain generation plants to produce refined coal used to generate electricity. The leases are operating leases and expire in 2021. Payments are allocated among lease and non-lease components as stated in the agreements. Lease payments are fixed or are determined based on the amount of refined coal used in electricity generation at the facility. Payments received are primarily recorded as a regulatory liability and are amortized in accordance with regulatory approvals.

WPD leases property and telecom assets to third parties, which generally expire through 2029. These leases are operating leases. Generally, lease payments are fixed and include only a lease component.

At June 30, 2019, PPL, LKE, LG&E and KU expect to receive the following lease payments over the remaining term of their operating lease agreements:

Table of Contents



 PPL LKE LG&E KU
2019 (a)$7
 $4
 $—
 $4
202013
 7
 —
 7
202111
 6
 1
 5
20224
 —
 —
 —
20234
 1
 —
 —
20244
 —
 —
 —
Thereafter12
 —
 —
 —
Total$55
 $18
 $1
 $16
        
Lease income recognized for the three months ended June 30, 2019$6
 $4
 $2
 $2
Lease income recognized for the six months ended June 30, 2019$9
 $6
 $2
 $4


(a)Represents future minimum lease payments for the remainder of 2019.

8.10. 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 LG&E for the periods ended SeptemberJune 30:
 Pension Benefits
 Three Months Six Months
 U.S. U.K. U.S. U.K.
 2019 2018 2019 2018 2019 2018 2019 2018
PPL               
Service cost$12
 $15
 $17
 $21
 $25
 $31
 $34
 $42
Interest cost41
 39
 48
 47
 82
 78
 95
 94
Expected return on plan assets(61) (62) (150) (150) (122) (124) (298) (300)
Amortization of:               
Prior service cost2
 3
 —
 —
 4
 5
 —
 —
Actuarial loss14
 19
 23
 38
 27
 41
 47
 77
Net periodic defined benefit costs (credits) before settlements8
 14
 (62) (44) 16
 31
 (122) (87)
Settlements—
 —
 —
 —
 1
 —
 —
 —
Net periodic defined benefit costs (credits)$8
 $14
 $(62) $(44) $17
 $31
 $(122) $(87)
 Pension Benefits
 Three Months Nine Months
 U.S. U.K. U.S. U.K.
 2017 2016 2017 2016 2017 2016 2017 2016
PPL               
Service cost$17
 $16
 $20
 $17
 $49
 $49
 $57
 $53
Interest cost42
 44
 45
 58
 126
 131
 132
 182
Expected return on plan assets(58) (57) (130) (124) (173) (171) (382) (389)
Amortization of:               
Prior service cost2
 2
 —
 —
 7
 6
 —
 —
Actuarial loss18
 12
 36
 34
 52
 37
 107
 107
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)$28
 $20
 $(29) $(15) $69
 $55
 $(86) $(47)



 Pension Benefits
 Three Months Six Months
 2019 2018 2019 2018
LKE       
Service cost$5
 $5
 $11
 $12
Interest cost17
 16
 33
 32
Expected return on plan assets(26) (25) (51) (51)
Amortization of:       
Prior service cost2
 2
 4
 4
Actuarial loss (a)6
 8
 10
 18
Net periodic defined benefit costs (b)$4
 $6
 $7
 $15

Table of Contents


(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$1 million for the three and ninesix months ended SeptemberJune 30, 20172019 and $4$2 million and $6 million for the ninethree and six months ended SeptemberJune 30, 2016.2018. This difference is recorded as a regulatory asset.

Table of Contents



(b)Due to the amount of lump sum payment distributions from the LG&E qualified pension plan, a settlement charge of $4 million was incurred for the three and six months ended June 30, 2018. In accordance with existing regulatory accounting treatment, LG&E has maintained the settlement charge in regulatory assets. The amount is being amortized in accordance with existing regulatory practice.
 Pension Benefits
 Three Months Six Months
 2019 2018 2019 2018
LG&E       
Service cost$1
 $1
 $1
 $1
Interest cost3
 3
 6
 6
Expected return on plan assets(5) (6) (11) (11)
Amortization of:       
Prior service cost2
 2
 3
 3
Actuarial loss (a)1
 1
 3
 3
Net periodic defined benefit costs (b)$2
 $1
 $2
 $2

(a)As a result of treatment approved by the KPSC, 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 ninesix months ended SeptemberJune 30, 20172019 and $1 million for the threesix months ended SeptemberJune 30, 2016. These differences are2018. This difference is recorded as a regulatory assets.asset.
(b)Due to the amount of lump sum payment distributions from the LG&E qualified pension plan, a settlement charge of $5$4 million was incurred.incurred for the three and six months ended June 30, 2018. In accordance with existing regulatory accounting treatment, LG&E has maintained the settlement charge in regulatory assets. The amount will beis being amortized in accordance with existing regulatory practice.
 Other Postretirement Benefits
 Three Months Six Months
 2019 2018 2019 2018
PPL       
Service cost$1
 $3
 $2
 $4
Interest cost5
 7
 11
 10
Expected return on plan assets(4) (9) (9) (13)
Amortization of prior service cost—
 1
 —
 —
Net periodic defined benefit costs$2
 $2
 $4
 $1
        
LKE       
Service cost$1
 $1
 $2
 $2
Interest cost2
 2
 4
 4
Expected return on plan assets(2) (2) (4) (4)
Amortization of:       
Prior service cost1
 1
 1
 1
Actuarial gain(1) (1) (1) (1)
Net periodic defined benefit costs$1
 $1
 $2
 $2

 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
        

Table of Contents

 Other Postretirement Benefits
 Three Months Nine Months
 2017 2016 2017 2016
LKE       
Service cost$1
 $1
 $3
 $3
Interest cost2
 2
 6
 7
Expected return on plan assets(2) (2) (5) (5)
Amortization of prior service cost1
 1
 1
 2
Net periodic defined benefit costs$2
 $2
 $5
 $7


(PPL Electric, LG&E and KU)


In addition to the specific plan 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 1012 for moreadditional 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 SeptemberJune 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 Months Six Months
 2019 2018 2019 2018
PPL Electric$2
 $3
 $5
 $7
LG&E1
 2
 2
 4
KU—
 1
 —
 2


Table of Contents


 Three Months Nine Months
 2017 2016 2017 2016
PPL Electric$6
 $6
 $19
 $17
LG&E3
 2
 8
 7
KU2
 2
 7
 8



Expected Cash Flows(All Registrants)

The non-service cost components of net periodic defined benefit costs (credits) (interest cost, expected return on plan assets, amortization of prior service cost and amortization of actuarial gain and loss) are presented in "Other Income (Expense) - U.K. Pension Plansnet" on the Statements of Income. See Note 13 for additional information.

(PPL)

For the nine months ended September 30, 2017, WPD contributed $485 million to its U.K. pension plans. These contributions fund all of 2017 contributions and a portion of 2018 contributions. WPD does not expect to make additional contributions in 2017.


9.11. 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(Talen Litigation(PPL)

Background

In September 2013, one of PPL's former subsidiaries, PPL Montana entered into an agreement to sell its hydroelectric generating facilities. In June 2014, PPL and LKE)
See footnote (e)PPL Energy Supply, the parent company of PPL Montana, entered into various definitive agreements with affiliates of Riverstone to spin off PPL Energy Supply and ultimately combine it with Riverstone's competitive power generation businesses to form a stand-alone company named Talen Energy. In November 2014, after executing the spinoff agreements but prior to the tableclosing of the spinoff transaction, PPL Montana closed the sale of its hydroelectric generating facilities. Subsequently, on June 1, 2015, the spinoff of PPL Energy Supply was completed. Following the spinoff transaction, PPL had no continuing ownership interest in "Guaranteesor control of PPL Energy Supply. In connection with the spinoff transaction, PPL Montana became Talen Montana, LLC (Talen Montana), a subsidiary of Talen Energy. Talen Energy Marketing also became a subsidiary of Talen Energy as a result of the June 2015 spinoff of PPL Energy Supply. Talen Energy has owned and Other Assurances" belowoperated both Talen Montana and Talen Energy Marketing since the spinoff. At the time of the spinoff, affiliates of Riverstone acquired a 35% ownership interest in Talen Energy. Riverstone subsequently acquired the remaining interests in Talen Energy in a take private transaction in December 2016.

Talen Montana, LLC v. PPL Corporation et al.

On October 29, 2018, Talen Montana filed a complaint against PPL and certain of its affiliates and current and former officers and directors in the First Judicial District of the State of Montana, Lewis & Clark County (Talen Direct Action). Talen Montana alleges that in November 2014, PPL and certain officers and directors improperly distributed to PPL's subsidiaries $733 million of the proceeds from the sale of Talen Montana's (then PPL Montana's) hydroelectric generating facilities, rendering PPL Montana insolvent. The complaint includes claims for, informationamong other things, breach of fiduciary duty; aiding and abetting breach of fiduciary duty; breach of an LLC agreement; breach of the implied duty of good faith and fair dealing; tortious interference; negligent misrepresentation; and constructive fraud. Talen Montana is seeking unspecified damages, including punitive damages, and other relief. In December 2018, PPL moved to dismiss the Talen Direct Action for lack of jurisdiction and, in the alternative, to dismiss because Delaware is the appropriate forum to decide this case. In January 2019, Talen Montana dismissed without prejudice all current and former PPL Corporation directors from the case. The parties engaged in limited jurisdictional discovery, and oral argument regarding the PPL parties' motion to dismiss is scheduled for August 22, 2019.

Talen Montana Retirement Plan and Talen Energy Marketing, LLC, Individually and on an LKE indemnity relatingBehalf of All Others Similarly Situated v. PPL Corporation et al.

Also on October 29, 2018, Talen Montana Retirement Plan and Talen Energy Marketing filed a putative class action complaint on behalf of current and contingent creditors of Talen Montana who allegedly suffered harm or allegedly will suffer reasonably foreseeable harm as a result of the November 2014 distribution. The action was filed in the Sixteenth Judicial District of the State of Montana, Rosebud County, against PPL and certain of its affiliates and current and former officers and directors (Talen Putative Class Action). The plaintiffs assert claims for, among other things, fraudulent transfer, both actual and constructive; recovery against subsequent transferees; civil conspiracy; aiding and abetting tortious conduct; and unjust enrichment.They are seeking avoidance of the purportedly fraudulent transfer, unspecified damages, including punitive damages, the imposition of a

Table of Contents



constructive trust, and other relief. In December 2018, PPL removed the Talen Putative Class Action from the Sixteenth Judicial District of the State of Montana to itsthe United States District Court for the District of Montana, Billings Division. In January 2019, the plaintiffs moved to remand the Talen Putative Class Action back to state court, and dismissed without prejudice all current and former WKE lease,PPL Corporation directors from the case. The parties engaged in limited discovery in connection with the motion to remand, at the conclusion of which the parties will complete their briefings on the matter to enable the Court to consider the remand motion.

PPL Corporation et al. vs. Riverstone Holdings LLC, Talen Energy Corporation et al.

On November 30, 2018, PPL, certain PPL affiliates, and certain current and former officers and directors (PPL plaintiffs) filed a complaint in the Court of Chancery of the State of Delaware seeking various forms of relief against Riverstone, Talen Energy and certain of their affiliates (Delaware Action). In the complaint, the PPL plaintiffs ask the Delaware Court of Chancery for declaratory and injunctive relief. This includes a declaratory judgment that, under the separation agreement governing the spinoff of PPL Energy Supply, all related claims that arise must be heard in Delaware; that the statute of limitations in Delaware and the spinoff agreement bar these claims at this point; that PPL is not liable for the claims in either the Talen Direct Action or the Talen Putative Class Action as PPL Montana was solvent at all relevant times; and that the separation agreement requires that Talen Energy indemnify PPL for all losses arising from the debts of Talen Montana, among other things. PPL's complaint also seeks damages against Riverstone for interfering with the separation agreement and against Riverstone affiliates for breach of the implied covenant of good faith and fair dealing. The complaint was subsequently amended on January 11, 2019 and March 20, 2019, including to add claims related legal proceedings.to indemnification with respect to the Talen Direct Action and the Talen Putative Class Action (together, the Montana Actions), request a declaration that the Montana Actions are time-barred under the spinoff agreements, and allege additional facts to support the tortious interference claim. In April 2019, the defendants filed motions to dismiss the amended complaint. On July 11, 2019, the Court heard oral arguments from the parties regarding the motions to dismiss. The Court is expected to rule on the matters raised in the motions to dismiss within ninety days of the oral argument date.

With respect to each of the Talen-related matters described above, PPL believes that the 2014 distribution of proceeds was made in compliance with all applicable laws and that PPL Montana was solvent at all relevant times. Additionally, the agreements entered into in connection with the spinoff, which PPL and affiliates of Talen Energy and Riverstone negotiated and executed prior to the 2014 distribution, directly address the treatment of the proceeds from the sale of PPL Montana's hydroelectric generating facilities; in those agreements, Talen Energy and Riverstone definitively agreed that PPL was entitled to retain the proceeds.

PPL believes that it has meritorious defenses to the claims made in the Montana Actions and intends to continue to vigorously defend against these actions. The Montana Actions and the Delaware Action are all in the early stages of litigation; at this time, PPL cannot predict the outcome of these matters or estimate the range of possible losses, if any, that PPL might incur as a result of the claims, although they could be material.

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 (U.S. District Court) alleging violations of the Clean Air Act, RCRA, 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

Table of Contents

for a class consisting of residents within four miles of the Cane Run plant.plant, which retired three coal-fired units in 2015. 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, the plaintiffs filed an amended complaint removing the personal injury claims and removing certain previously named plaintiffs. In February 2017, the U.S. District Court issued an orderOrder dismissing PPL as a defendant and dismissing the final federal claim against LG&E under&E. In April 2017, 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, theU.S. District Court issued an orderOrder declining to exercise supplemental jurisdiction on the state law claims and dismissingdismissed the case in its entirety, subject to certain federal appeals or state court re-filing rights of the parties. Onentirety. In June 16, 2017, the plaintiffs filed a class action complaint in Jefferson County, Kentucky Circuit Court, Kentucky, against LG&E regarding thealleging 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.Proceedings are currently underway regarding potential class certification, for which a decision may be rendered in 2019. 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 2015matter and the remaining two coal-fired units at the plant in June 2015.an estimate or range of possible losses cannot be determined.


Table of Contents



E.W. Brown Environmental Claims(PPL, LKE and KU)

OnIn July 12, 2017, the Kentucky Waterways Alliance and the Sierra Club filed a citizen suit complaint against KU in the U.S. District Court for the Eastern District of Kentucky (U.S. District Court) alleging discharges at the E.W. Brown plant in violation of the Clean Water Act and the plant’s water discharge permit and alleging contamination that may present an imminent and substantial endangerment in 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 seeksought injunctive relief ordering KU to take all actions necessary to comply with the Clean Water Act violations,and RCRA, including ceasing the discharges in question, abating effects associated with prior discharges and eliminating the alleged imminent and substantial endangerment. These plaintiffs also seeksought assessment of civil penalties and an award of litigation costs and attorney fees. In December 2017 the U.S. District Court issued an Order dismissing the Clean Water Act and RCRA complaints against KU in their entirety. In January 2018, the plaintiffs appealed the dismissal Order to the U.S. Court of Appeals for the Sixth Circuit. In September 2018, the U.S. Court of Appeals for the Sixth Circuit issued its ruling affirming the lower court's decision to dismiss the Clean Water Act claims but reversing its dismissal of the RCRA claims against KU and remanding the latter to the U.S. District Court. In October 2018, KU filed a petition for rehearing to the U.S. Court of Appeals for the Sixth Circuit regarding the RCRA claims. In November 2018, the U.S. Court of Appeals for the Sixth Circuit denied KU's petition for rehearing regarding the RCRA claims. On January 8, 2019, KU filed an answer to plaintiffs’ complaint in the U.S. District Court. PPL, LKE and KU cannot predict the outcome of this matterthese matters and an estimate or the potential impact on the operationsrange of possible losses cannot be determined.

KU is undertaking extensive remedial measures at the E.W. Brown plant including increased capital or operating costs, if any. 

(PPL, LKE, LG&Eclosure of the former ash pond, implementation of a groundwater remedial action plan and KU)

Trimble County Water Discharge Permit
In May 2010, the Kentucky Waterways Allianceperformance of a corrective action plan including aquatic study of adjacent surface waters and other environmental groups filedrisk assessment. The aquatic study and risk assessment was undertaken pursuant to a petition2017 agreed Order with the Kentucky Energy and Environment Cabinet (KEEC) challenging. KU conducted sampling of Herrington Lake in 2017 and 2018. KU submitted the Kentucky Pollutant Discharge Elimination System permit issuedrequired aquatic study and risk assessment, conducted by an independent third-party consultant, to the KEEC in April 2010, which covers waterJune 2019 finding that discharges from the Trimble County plant. In November 2010,E.W. Brown plant have not had any significant impact on Herrington Lake and that the water in the lake is safe for recreational use and meets safe drinking water standards. However, until the KEEC issued a final order upholdingassesses the permit, which was subsequently appealed by the environmental groups. In September 2013, the Franklin Circuit Court reversed the KEEC order upholding the permitstudy and remanded the permitissues any regulatory determinations, PPL, LKE and KU are unable 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 aredetermine whether additional remedial measures will be 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 believe that all permits and regulatory approvals issued for the project comply with applicable state and federal laws.E.W. Brown plant.

Regulatory Issues(All Registrants)
 
See Note 67 for information on regulatory matters related to utility rate regulation.


Table of Contents


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 cannotan estimate aor range of reasonably possible losses if any.cannot be determined.
 
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,

Table of Contents



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 generation plants. Among other things, the Clean Air Act requires the EPA periodically to review and establish concentration levels in the ambient air for six pollutants to protect public health and welfare. The six 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 six pollutants require states to adopt implementation plans, known as state implementation plans, which detail how the state will attain the standards that are mandated by the relevant law or regulation.

Table of Contents

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.
 
Ozone
 
The EPA issued the current ozone standard in October 2015. Under the Clean Air Act, theThe states and the EPA are required to determine (based on ambient air monitoring data) those areas that meet the standard and those that are in non-attainment. Thenonattainment. In April 2018, the EPA was scheduled to designate areasdesignated Jefferson County, Kentucky (Louisville) as being in attainment or nonattainment ofwith the current ozone standard by no later than October 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. Whilestandard. Although implementation of the 2015 ozone standard could potentially require the addition of SCRs at someLG&E's Mill Creek station, PPL, LKE and LG&E and KU generating units, PPL, LKE, LG&E and KU are currently unable to determine what, theif any, compliance measures and deadlines may ultimately be with respect torequired until the new standard.Louisville Metro Air Pollution District prepares a state implementation plan.


States are also obligated to address interstate transport issues associated with 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. As a result of a partial consent decree addressing claims regarding federal implementation, the EPA and several states, including Kentucky, are evaluatinghave evaluated the need for further nitrogen oxide reductions from fossil-fueled plants to address interstate impacts. WhileIn July 2018, the EPA approved Kentucky's proposed state implementation plan finding that no additional reductions beyond existing and planned controls set forth in Kentucky's existing State Implementation Plan are necessary to prevent Kentucky from contributing significantly to any other state’s nonattainment. In September 2018, the EPA announced its

Table of Contents



denial of petitions filed by Maryland and Delaware alleging that states including Kentucky and Pennsylvania contribute to nonattainment in the petitioning states. PPL, LKE, LG&E and KU are unable to predict the outcome of ongoing and future evaluations by the EPA and the states, or whether such evaluations could potentially result in requirements for nitrogen oxide reductions beyond those currently required under the Cross StateCross-State Air Pollution Rule.


Sulfur Dioxide
In 2010, the EPA issued 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. As 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 ensure continuing compliance with the NAAQS. PPL, LKE, LG&E and KU do not anticipate any further measures to achieve compliance with the new sulfur dioxide standards.

Climate Change
 
There is continuing world-wide attention focused on issues related to climate change. In June 2016, President Obama announced that the United States, Canada and Mexico 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 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,rules issued in 2015 imposing GHG emission standards for both new and existing power plants, the U.S. committed to an initial reduction target of 26% to 28% below 2005 levels by 2025. However, 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.

Table of Contents

Additionally, in March 2017, the President issued an Executive Order (the March 2017 Executive Order) directing the EPA to review proposed and final rules relating to GHG reductions for consistency with certain policy directives and suspend, revise, or rescind those rules as appropriate. The 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 allowancesreduction credits to offset emissions associated with WPD's operations. The cost of these allowancescredits is not significant and is included in WPD's current operating expenses.

The current U.K. carbon allowance scheme ended on March 31, 2019, with the last reporting year being April 2018 through March 2019. It is now being replaced by reporting requirements under the Streamlined Energy and Carbon Reporting framework along with a tax (called “Climate Change Levy”) which is equivalent to the current cost of the carbon reduction credits. The cost of the tax is not significant and will be included in WPD’s operating expenses.
The EPA's Rules under Section 111 of theAffordable Clean Air Act, including the EPA's Clean Power PlanEnergy Rule
As further described below, inIn 2015, the EPA finalized rules imposing stringent GHG emission standards for both new and existing power plants. The EPA has also issued a proposed federal implementation plan that would applyplants based on plant specific energy efficiency upgrades, fuel switching from coal to any states that failnatural gas, and deployment of renewable generation (the Clean Power Plan).

Following legal challenges 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 individual 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 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 reviewPlan, a stay of those rules by the U.S. Supreme Court if a writ of certiorari is filed and granted. In addition, the President's March 2017 Executive Order requiresrequiring the EPA to review the rules for new plants and existing power plants and suspend, revise or rescind them as appropriate. InClean Power Plan 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 whatClean Power Plan. In July 2019, the EPA proposed in 2012 and is not continuously achievable under all operating modes, such as frequent start-ups and shutdowns. The preclusion of new coal-fired plants could have a significant industry-wide impact.
The EPA's rule for existing power plants, referred to asrescinded the Clean Power Plan was publishedand finalized the Affordable Clean Energy (ACE) Rule as a replacement with respect to existing sources. The ACE Rule gives states broad latitude in the Federal Register in October 2015.establishing emission guidelines providing for plant-specific efficiency upgrades or "heat-rate improvements" that will reduce GHG emissions per unit of electricity generated. The Clean Power Plan contains state-specific rate-based and mass-based reduction goals and guidelines for the development, submission and implementationACE Rule provides a list of state implementation plans to achieve the state goals. State-specific goals were calculated from 2012 data"candidate technologies" that will be considered 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 asin establishing standards of performance on a case by case basis at individual power plants. States are generally allowed three years to how theirsubmit state plans establishing standards of performance. While compliance plans candeadlines will be crafted, includingimposed on a plant-specific basis, 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 optionEPA anticipates that most facilities will be required to demonstrate compliance through emissions trading and multi-state collaborations. Underwithin two years of plan approval. In 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 ultimately remains in place in its current form, and Kentucky fails to develop an approvable implementation plan by the applicable deadline,final rule, the EPA may impose a federal implementation plan that coulddid not finalize its proposed new criteria for determining whether such efficiency projects would trigger New Source Review and thus be subject to more stringent than whatemission controls. Instead, the state plan might provide. Dependingagency intends to take final action on the provisions ofproposed New Source Review revisions in a separate final action at a later date.

The Kentucky General Assembly passed legislation in April 2014 limiting the measures that the Kentucky implementation plan, LG&EEnergy and KUEnvironment Cabinet may needconsider in setting performance standards to modify their current portfoliocomply with federal requirements for GHG emission reductions. The legislation provides that such state GHG performance standards will be strictly based on emission reductions, efficiency measures and other improvements available at each power plant. These statutory restrictions are broadly consistent with the EPA's ACE Rule.

Table of generating assets during the next decade and/or participate in an allowance trading program.Contents




LG&E and KU are monitoring developments at the state and federal level. Until legal challenges and regulatory determinations relating to repeal and replacement of the Clean Power Plan are completed and the state determines implementation measures, 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 costrate 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 will 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.

Table of Contents


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. The parties have entered into a tolling agreement with respect to this matter through August 9, 2019. The parties are conducting initial negotiations regarding potential settlement of the matter. 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)
 
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 In March 2018, the EPA proposed amendments to approve equally protective state programsthe CCR rule primarily relating to impoundment closure and remediation requirements. In July 2018, the EPA published in the Federal Register a final rule extending the deadline for closure of certain impoundments to October 2020 and adopting substantive changes relating to certifications, suspensions of groundwater monitoring and groundwater protection standards for certain constituents. In July 2019, the EPA released proposed amendments to the CCR Rule relating to reporting, public information, boron standards, beneficial use and waste piles. The EPA has announced that would operate in lieuadditional amendments to the rule will be proposed. In August 2018, the D.C. Circuit Court of Appeals vacated and remanded portions of the CCR Rule. rule including provisions allowing unlined impoundments to continue operating and exempting inactive impoundments at inactive plants from regulation. As a result of subsequent challenges to the CCR Rule amendments, on March 13, 2019, the D.C. Circuit Court granted the EPA’s motion for voluntary remand of the amended rule without voiding it. Consequently, the CCR Rule amendments, including the extended compliance deadline, will remain in place as the EPA considers further rule amendments and revisions. PPL, LKE, LG&E and KU are unable to predict the outcome of the ongoing rulemaking or potential impacts on current LG&E and KU compliance plans. The Registrants are currently finalizing closure plans and schedules.

In January 2017, the Kentucky Energy and Environment Cabinet issued a new state rule effective May 2017,relating to CCR management aimed at reflecting the requirements of the federal CCR rule. In May 2017,As a resident adjacent toresult of a subsequent legal challenge in January 2018, the Franklin County, Kentucky Court issued an opinion invalidating certain procedural elements of the rule. LG&E's&E and KU's Trimble County plant filedKU presently operate their facilities under continuing permits authorized under the former program and do not currently anticipate material impacts as a lawsuit in state court againstresult of the judicial ruling. The Kentucky Energy and Environmental Cabinet has announced it expects to propose new state rules in 2019 aimed at addressing the procedural deficiencies identified by the court and LG&E seeking to invalidateproviding the new rule. PPL, LKE, LG&E and KU cannot predict the outcomeregulatory framework necessary for operation of the litigation, but anticipate continued operation under the formerstate CCR program in lieu of the event that the new rule is struck down.federal CCR Rule, as provided by applicable law.
 
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 the federal CCR rule, requirements, KU also received KPSC approval for its plans to close impoundments at the retired Green River, Pineville and Tyrone plants to comply with applicable state law requirements. See Note 6 inlaw. Since

Table of Contents



2017, LG&E and KU have commenced closure of many of the Registrants' 2016 Form 10-K for additional information.subject impoundments and have completed closure of some of the smaller impoundments. LG&E and KU expect to commence closure of the remaining impoundments no later than October 31, 2020. LG&E and KU generally expect to complete impoundment closures within five years of commencement, although a longer period may be required to complete closure of some facilities.
 
In connection with the final CCR rule, LG&E and KU recorded adjustments to existing AROs duringbeginning in 2015 2016 and 2017.continue to record adjustments as required. See Note 1516 below and Note 19 in the Registrants' 20162018 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.


Clean Water Act Jurisdiction
Table
For several years the EPA has been seeking to clarify which discharges are subject to the Clean Water Act. The issue is primarily significant to PPL's operations with respect to discharges to groundwater from ash basins. There has been substantial disagreement over whether Clean Water Act jurisdiction covers discharges of Contents
contaminants to groundwater which reach surface water via a direct hydrologic connection. In particular, various environmental groups and other stakeholders argue that leaking impoundments located at coal-fired power plants are subject to Clean Water Act jurisdiction, while facility owners and many states contend that such situations are more appropriately addressed under the EPA's CCR Rule and state regulatory programs.


Most recently, on April 12, 2019, the EPA released an interpretive statement concluding that Clean Water Act jurisdiction does not cover discharges to groundwater regardless of any hydrologic connection between groundwater and jurisdictional surface water.

The issue has been subject to extensive litigation in federal courts including the citizen suit filed against KU with respect to its E.W. Brown plant,as discussed under “Legal Matters” - “E.W. Brown Environmental Claims” above, resulting in contradictory rulings by courts in different jurisdictions. On February 19, 2019, the U.S. Supreme Court agreed to review a lower court ruling on the issue. The U.S. Supreme Court’s ruling in that case, likely to be issued in the first half of 2020, is expected to provide additional clarification on the scope of Clean Water Act jurisdiction. Extending Clean Water Act jurisdiction to such discharges could potentially subject certain releases from CCR impoundments to additional permitting and remediation requirements.

PPL, LKE, LG&E and KU are unable to predict the outcome of current or future regulatory proceedings or litigation or potential impacts on current LG&E and KU compliance plans.

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. 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 proposed rule is expected to be finalized by the fall of 2019. On April 12, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated and remanded portions of the ELGs concerning legacy wastewater and CCR leachate. The EPA

Table of Contents



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. Additionally, certain aspects of these compliance plans and estimates relate to developments in state water quality standards, which are separate from the ELG rule or its implementation. Costs to comply with ELGs or other discharge limits which are expected to be significant,significant. Certain costs are included in the Registrants’ capital plans and 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.In addition to the actions described above, 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 reasonably possible costs cannot currently be estimated. Depending on the circumstances in each case, certain costs, which may be subject to rate recovery, could be significant. LG&E and KU cannot currently estimate a possible loss or range of possible losses related to this matter.


(All Registrants)

Other Issues
In June 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
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 potentially responsible for investigating, responding to agency inquiries, implementing various preventative measures, and/or remediating or have completedcontamination under programs other than those described in 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.sections above. 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 onabout 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.


Table of Contents


At September 30, 2017 and December 31, 2016, PPL Electric hadis potentially responsible for a recorded liability of $10 million representing its best estimateshare of the probable loss incurred to remediatecosts 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, noted above. Depending on the outcomecosts of investigations at sites where investigationswhich have not begun or been, completed, or developments at sites for which information is incomplete, additional costs of remediation could be incurred; however, such costsand are not expected to be, significant.significant to PPL Electric.

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 complianceto comply 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.

PPL Electric had a recorded liability of $11 million at June 30, 2019 and December 31, 2018 representing its best estimate of the probable loss incurred to remediate the sites noted in this section. 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.
 
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 applicableavailable to cover certain of the costs or other obligations related to these matters, but the amount of insurance coverage or reimbursement cannot be estimated or assured.



Table of Contents



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 was 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.
 

Table of Contents

(All Registrants)
 
The table below details guarantees provided as of SeptemberJune 30, 2017.2019. "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.entities," Thefor which PPL has a total recorded liability of $5 million at SeptemberJune 30, 2017 was $212019 and $6 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.2018. For reporting purposes, on a consolidated basis, all guarantees of PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.
Exposure at
September 30, 2017		 Expiration
Date		Exposure at
June 30, 2019		 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) 2021
WPD guarantee of pension and other obligations of unconsolidated entities95
(c)  79
(c)  
    
PPL Electric        
Guarantee of inventory value17
(d) 201810
(d) 2020
    
LKE        
Indemnification of lease termination and other divestitures301
(e) 2021 - 2023200
(e) 2021
    
LG&E and KU        
LG&E and KU guarantee of shortfall related to OVEC (f)  
LG&E and KU obligation of shortfall related to OVEC (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 SeptemberJune 30, 2017,2019, 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 partythird-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.

Table of Contents



(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 indemnifications 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 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.

Table of Contents

(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 $118$112 million at SeptemberJune 30, 2017,2019, consisting of LG&E's share of $82$77 million and KU's share of $36$35 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 20162018 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. 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.


In March 2018, a sponsor with a pro-rata share of certain OVEC obligations of 4.85% filed for bankruptcy under Chapter 11 and, in August 2018, received a rejection Order for the OVEC power purchase contract in the bankruptcy proceeding. OVEC and certain sponsors are appealing this action, in addition to pursuing appropriate rejection claims in the bankruptcy proceeding. OVEC and certain of its sponsors, 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, establishing or continuing debt reserve accounts or other changes involving OVEC's existing short and long-term debt. The ultimate outcome of these matters, including the sponsor bankruptcy and related proceedings and any other 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 Registrants believe 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.
 
10.12. 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 serviceservices companies, the costs of thesedirectly assignable and attributable services are charged to the respective recipients as direct support costs. General costs that cannot be directly assigned or 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. PPL Services may also use a ratio of overall direct and indirect costs or a weighted average cost ratio. 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 SeptemberJune 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 Months Six Months
 2019 2018 2019 2018
PPL Electric from PPL Services 
$13
 $15
 $29
 $31
LKE from PPL Services5
 7
 14
 14
PPL Electric from PPL EU Services37
 41
 74
 76
LG&E from LKS37
 39
 75
 77
KU from LKS41
 43
 84
 85

 Three Months Nine Months
 2017 2016 2017 2016
PPL Electric from PPL Services$43
 $33
 $138
 $98
LKE from PPL Services4
 4
 15
 13
PPL Electric from PPL EU Services15
 17
 48
 50
LG&E from LKS38
 40
 120
 128
KU from LKS43
 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 overhead costsoverheads associated with union and hourly employees performing work for the other company, charges related to jointly ownedjointly-owned generating units and other miscellaneous charges. Tax settlements between LKE and LG&E and KU are reimbursed through LKS.



Table of Contents



Intercompany Borrowings


(PPL Electric)


PPL Energy Funding maintains a $400$650 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 June 30, 2019 and December 31, 2016.2018. The interest rates on borrowings are equal to one-month LIBOR plus a spread. The interest rateInterest income is reflected in "Interest Income from Affiliate" on the outstanding borrowing at September 30, 2017 was 2.98%.Income Statement.


Table of Contents


(LKE)


LKE maintains a $225$375 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 SeptemberJune 30, 20172019 and December 31, 2016, $1592018, $203 million and $163$113 million were outstanding and reflected in "Notes payable with affiliate"affiliates" on the Balance Sheets. The interest rates on the outstanding borrowingborrowings at SeptemberJune 30, 20172019 and December 31, 20162018 were 2.73%3.93% and 2.12%3.85%. Interest expense on the revolving line of credit was not significant for the three and six months ended June 30, 2019 and 2018.


LKE maintains an agreement with a PPL affiliate that has a $300 million borrowing limit whereby LKE can loan funds on a short-term basis at market-based rates. No balance was outstanding at June 30, 2019 and December 31, 2018. The interest rate on the loan is based on the PPL affiliate's credit rating and equal to one-month LIBOR plus a spread.

LKE maintains ten-year notes of $400 million ten-year noteand $250 million with a PPL affiliate with an interest raterates of 3.5% and 4%. At SeptemberJune 30, 20172019 and December 31, 2016,2018, the note wasnotes were 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" Interest expense on the Balance Sheet. No balances were outstanding at December 31, 2016. The interest rate on the outstanding borrowings at September 30, 2017$400 million note was 1.46%. Interest expense incurred on the money pool agreement with KU was not significant$4 million and $7 million for the three and ninesix months ended SeptemberJune 30, 2017.

(KU)

KU participates in an intercompany money pool agreement whereby LKE and/or LG&E make available to KU funds up to $5002019 and $3 million at an interest rate based on a market index of commercial paper issues. At September 30, 2017, KU had no payable balance outstanding, but had a $10and $7 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 ninesix months ended SeptemberJune 30, 2017.2018. Interest expense on the $250 million note was $3 million and $5 million for the three and six months ended June 30, 2019 and $2 million for the three and six months ended June 30, 2018.


VEBA Funds Receivable (PPL Electric)

In May 2018, PPL received a favorable private letter ruling from the IRS permitting a transfer of excess funds from the PPL Bargaining Unit Retiree Health Plan VEBA to a new subaccount within the VEBA, to be used to pay medical claims of active bargaining unit employees. Based on PPL Electric's participation in PPL’s Other Postretirement Benefit plan, PPL Electric was allocated a portion of the excess funds from PPL Services. These funds have been recorded as an intercompany receivable on PPL Electric's Balance Sheets. The receivable balance decreases as PPL Electric pays incurred medical claims and is reimbursed by PPL Services. The intercompany receivable balance associated with these funds was $40 million as of June 30, 2019, of which $10 million was reflected in "Accounts receivable from affiliates" and $30 million was reflected in "Other noncurrent assets" on the PPL Electric Balance Sheet. The intercompany receivable balance associated with these funds was $45 million as of December 31, 2018, of which $10 million was reflected in "Account receivable from affiliates" and $35 million was reflected in "Other noncurrent assets" on the PPL Electric Balance Sheet.

Other(PPL Electric, LG&E and KU)


See Note 810 for discussions regarding intercompany allocations associated with defined benefits.


11.

Table of Contents



13. Other Income (Expense) - net
 
(PPL)
 
"OtherThe details of "Other Income (Expense) - net" for the three and nine monthsperiods ended SeptemberJune 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.were:

 Three Months Six Months
 2019 2018 2019 2018
Other Income     
  
Economic foreign currency exchange contracts (Note 15)$45
 $164
 $12
 $52
Defined benefit plans - non-service credits (Note 10)80
 66
 160
 134
Interest income3
 2
 9
 2
AFUDC - equity component6
 5
 11
 10
Miscellaneous3
 —
 9
 1
Total Other Income137
 237
 201
 199
Other Expense 
  
  
  
Charitable contributions—
 1
 2
 5
Miscellaneous6
 2
 16
 3
Total Other Expense6
 3
 18
 8
Other Income (Expense) - net$131
 $234
 $183
 $191


12.14. Fair Value Measurements
 
(All Registrants)
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models) and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of financial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values. During the three and nine months ended September 30, 2017 and 2016, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 20162018 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:

 June 30, 2019 December 31, 2018
 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL 
  
  
  
  
  
  
  
Assets               
Cash and cash equivalents$406
 $406
 $—
 $—
 $621
 $621
 $—
 $—
Restricted cash and cash equivalents (a)22
 22
 —
 —
 22
 22
 —
 —
Special use funds (a):               
Money market fund1
 1
 —
 —
 59
 59
 —
 —
Commingled debt fund measured at NAV (b)32
 —
 —
 —
 —
 —
 —
 —
Commingled equity fund measured at NAV (b)28
 —
 —
 —
 —
 —
 —
 —
Total special use funds61
 1
 —
 —
 59
 59
 —
 —

Table of Contents




September 30, 2017 December 31, 2016June 30, 2019 December 31, 2018
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL 
  
  
  
  
  
  
  
Assets               
Cash and cash equivalents$676
 $676
 $—
 $—
 $341
 $341
 $—
 $—
Restricted cash and cash equivalents (a)24
 24
 —
 —
 26
 26
 —
 —
Price risk management assets (b): 
  
 

 

  
  
  
  
Price risk management assets (c): 
  
 

 

  
  
  
  
Foreign currency contracts164
 —
 164
 —
 211
 —
 211
 —
181
 —
 181
 —
 202
 —
 202
 —
Cross-currency swaps160
 —
 160
 —
 188
 —
 188
 —
161
 —
 161
 —
 135
 —
 135
 —
Total price risk management assets324
 —
 324
 —
 399
 —
 399
 —
342
 —
 342
 —
 337
 —
 337
 —
Total assets$1,024
 $700
 $324
 $—
 $766
 $367
 $399
 $—
$831
 $429
 $342
 $—
 $1,039
 $702
 $337
 $—
                              
Liabilities 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Price risk management liabilities (b): 
  
  
  
  
  
  
  
Price risk management liabilities (c): 
  
  
  
  
  
  
  
Interest rate swaps$31
 $—
 $31
 $—
 $31
 $—
 $31
 $—
$31
 $—
 $31
 $—
 $20
 $—
 $20
 $—
Foreign currency contracts167
 —
 167
 —
 27
 —
 27
 —
—
 —
 —
 —
 2
 —
 2
 —
Total price risk management liabilities$198
 $—
 $198
 $—
 $58
 $—
 $58
 $—
$31
 $—
 $31
 $—
 $22
 $—
 $22
 $—
                              
PPL Electric 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Assets 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Cash and cash equivalents$243
 $243
 $—
 $—
 $13
 $13
 $—
 $—
$20
 $20
 $—
 $—
 $267
 $267
 $—
 $—
Restricted cash and cash equivalents (a)2
 2
 —
 —
 2
 2
 —
 —
2
 2
 —
 —
 2
 2
 —
 —
Total assets$245
 $245
 $—
 $—
 $15
 $15
 $—
 $—
$22
 $22
 $—
 $—
 $269
 $269
 $—
 $—
                              
LKE 
  
  
  
  
  
     
  
  
  
  
  
    
Assets                              
Cash and cash equivalents $40
 $40
 $—
 $—
 $13
 $13
 $—
 $—
$32
 $32
 $—
 $—
 $24
 $24
 $—
 $—
Cash collateral posted to counterparties (c)1
 1
 —
 —
 3
 3
 —
 —
Total assets$41
 $41
 $—
 $—
 $16
 $16
 $—
 $—
$32
 $32
 $—
 $—
 $24
 $24
 $—
 $—
                              
Liabilities 
  
  
  
  
  
     
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
     
  
  
  
  
  
    
Interest rate swaps$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
$23
 $—
 $23
 $—
 $20
 $—
 $20
 $—
Total price risk management liabilities$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
$23
 $—
 $23
 $—
 $20
 $—
 $20
 $—
                              
LG&E 
  
  
  
  
  
     
  
  
  
  
  
    
Assets 
  
  
  
  
  
     
  
  
  
  
  
    
Cash and cash equivalents$9
 $9
 $—
 $—
 $5
 $5
 $—
 $—
$9
 $9
 $—
 $—
 $10
 $10
 $—
 $—
Cash collateral posted to counterparties (c)1
 1
 —
 —
 3
 3
 —
 —
Total assets$10
 $10
 $—
 $—
 $8
 $8
 $—
 $—
$9
 $9
 $—
 $—
 $10
 $10
 $—
 $—
                              
Liabilities 
  
  
  
  
  
     
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
     
  
  
  
  
  
    
Interest rate swaps$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
$23
 $—
 $23
 $—
 $20
 $—
 $20
 $—
Total price risk management liabilities$29
 $—
 $29
 $—
 $31
 $—
 $31
 $—
$23
 $—
 $23
 $—
 $20
 $—
 $20
 $—
                              
KU               
Assets               
Cash and cash equivalents$23
 $23
 $—
 $—
 $14
 $14
 $—
 $—
Total assets$23
 $23
 $—
 $—
 $14
 $14
 $—
 $—

Table of Contents

 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)In accordance with accounting guidance, certain investments that are measured at fair value using net asset value per share (NAV), or its equivalent, have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
(c)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.



Table of Contents



Special Use Funds

(PPL)

The special use funds are investments restricted for paying active union employee medical costs. In May 2018, PPL received a favorable private letter ruling from the IRS permitting a transfer of excess funds from the PPL Bargaining Unit Retiree Health Plan VEBA to a new subaccount within the VEBA to be used to pay medical claims of active bargaining unit employees. In 2019, the funds are invested primarily in commingled debt and equity funds measured at NAV. In 2018, the funds were invested in money market funds.

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 exchange 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.
 June 30, 2019 December 31, 2018
 Carrying
Amount (a)		 Fair Value Carrying
Amount (a)		 Fair Value
PPL$21,101
 $24,980
 $20,599
 $22,939
PPL Electric3,695
 4,212
 3,694
 3,901
LKE6,002
 6,652
 5,502
 5,768
LG&E2,004
 2,223
 1,809
 1,874
KU2,624
 2,940
 2,321
 2,451
 September 30, 2017 December 31, 2016
 Carrying
Amount (a)		 Fair Value Carrying
Amount (a)		 Fair Value
PPL$19,558
 $23,357
 $18,326
 $21,355
PPL Electric3,298
 3,724
 2,831
 3,148
LKE5,068
 5,592
 5,065
 5,439
LG&E1,619
 1,768
 1,617
 1,710
KU2,328
 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.
 
13.15. 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

Table of Contents

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.
 

Table of Contents



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 these contracts meet the definition of a derivative. All derivatives are recognized on the Balance Sheets at their fair value, unless NPNS is elected.
 
The following summarizes the market risks that affect PPL and its subsidiaries.
 
Interest Rate Risk
 
PPL and its subsidiaries are exposed to interest rate risk associated with forecasted fixed-rate and existing floating-rate debt issuances. PPL and 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, WPD, 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 methods in place.


Foreign Currency 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 Risk
 
PPL is exposed to commodity price risk through its domestic subsidiaries as described below.
 
•
PPL Electric is required to purchase electricity to fulfill its obligation as a PLR. Potential commodity price risk is insignificant and mitigated through its PUC-approved cost recovery mechanism and full-requirement supply agreements to serve its PLR customers which transfer the risk to energy suppliers.
•
LG&E's and KU's rates include certain mechanisms for fuel, fuel-related expenses and energy purchases. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.
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 regulations, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2018 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.
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.


Table of Contents


Equity Securities Price Risk
 
PPL and its subsidiaries are exposed to equity securities price risk associated with the fair value of the defined benefit plans' assets. This risk is significantly mitigated at the regulated domestic utilities and for certain plans at WPD due to the recovery methods in place.
PPL is exposed to equity securities price risk from future stock sales and/or purchases.



Table of Contents



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 or KU defaults on its obligation, those Registrants would be required to seek replacement power or replacement fuel in the market. In general, subject to regulatory review or other processes, appropriate incremental costs incurred by these entities would be recoverable from customers through applicable rate mechanisms, thereby mitigating the financial risk for these entities.
 
PPL and its subsidiaries have credit policies in place to manage credit risk, including the use of an established credit approval process, daily monitoring of counterparty positions and the use of master netting agreements or provisions. These agreements generally include credit mitigation provisions, such as margin, prepayment or collateral requirements. PPL and its subsidiaries may request additional credit assurance, in certain circumstances, 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, LG&E and LG&E)KU)
 
Net derivative positions on the balance sheets are not offset against the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.


PPL had a $17$32 million obligation to return cash collateral under master netting arrangements at SeptemberJune 30, 20172019 and a $19$40 million obligation to return cash collateral under master netting arrangements at December 31, 2016.2018.


PPL had no obligation to post cash collateral under master netting arrangements at June 30, 2019 and December 31, 2018.

LKE, LG&E and LG&EKU had no obligation to return cash collateral under master netting arrangements at SeptemberJune 30, 20172019 and December 31, 2016.2018.
 
PPL, LKE, and LG&E posted $1 million and $3 million ofKU had no obligation to post cash collateral under master netting arrangements at SeptemberJune 30, 20172019 and December 31, 2016.2018.

See "Offsetting Derivative Instruments" below for a summary of derivative positions presented in the balance sheets where a right of setoff exists under these arrangements.
 
Interest Rate Risk
 
(All Registrants)
 
PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. A variety of financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolio,portfolios, adjust the duration of the debt portfolioportfolios 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 SeptemberJune 30, 2017,2019, PPL held an

Table of Contents

aggregate notional value in interest rate swap contracts of £188£250 million (approximately $242$316 million based on spot rates) that mature in 20272031 to hedge the interest payments of WPD East Midland's anticipated WPDSeptember 2019 debt issuances. These swaps require a mandatory early redemption on or before November 30, 2017.issuance.


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 September 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

Table of hedge ineffectiveness associated with interest rate derivatives. Contents




At SeptemberJune 30, 2017,2019, PPL held an aggregate notional value in cross-currency interest rate swap contracts of $802$702 million that range in maturity from 20172021 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 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 ninesix months ended SeptemberJune 30, 2017, PPL had an insignificant amount of cash flow hedges reclassified into earnings associated with discontinued cash flow hedges. For the three2019 and nine months ended September 30, 2016,2018, PPL had no cash flow hedges reclassified into earnings associated with discontinued cash flow hedges.
 
At SeptemberJune 30, 2017,2019, 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 terminated swap contracts, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense. Realized gains and losses are recognized in "Interest Expense" on the Statements of Income at the time the underlying hedged interest expense is recorded. At SeptemberJune 30, 2017,2019, 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. TheThere were no contracts outstanding at SeptemberJune 30, 2017 had a notional amount of £92 million (approximately $125 million based on contracted rates). These contracts mature in December 2017.2019.
 
At SeptemberJune 30, 20172019 and December 31, 2016,2018, PPL had $22 million and $21$31 million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI.
 

Table of Contents

Economic Activity
 
PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At SeptemberJune 30, 2017,2019, the total exposure hedged by PPL was approximately £2.7£1.2 billion (approximately $3.7$1.7 billion based on contracted rates). These contracts hadhave termination dates ranging from October 2017July 2019 through AprilDecember 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 interest rate swaps that are recognized as regulatory assets or regulatory liabilities. See Note 67 for amounts recorded in regulatory assets and regulatory liabilities at SeptemberJune 30, 20172019 and December 31, 2016.2018.
 

Table of Contents



See Note 1 in each Registrant's 20162018 Form 10-K for additional information on accounting policies related to derivative instruments.
 
(PPL)
 
The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.
September 30, 2017 December 31, 2016June 30, 2019 December 31, 2018
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)$—
 $2
 $—
 $5
 $—
 $—
 $—
 $4
$—
 $8
 $—
 $5
 $—
 $—
 $—
 $4
Cross-currency swaps (b)28
 —
 —
 —
 32
 —
 —
 —
6
 —
 —
 —
 6
 —
 —
 —
Foreign currency contracts1
 —
 28
 86
 —
 —
 31
 21
—
 —
 127
 —
 —
 —
 103
 2
Total current29
 2
 28
 91
 32
 —
 31
 25
6
 8
 127
 5
 6
 —
 103
 6
Noncurrent: 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Price Risk Management 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Assets/Liabilities (a): 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Interest rate swaps (b)—
 —
 —
 24
 —
 —
 —
 27
—
 —
 —
 18
 —
 —
 —
 16
Cross-currency swaps (b)132
 —
 —
 —
 156
 —
 —
 —
155
 —
 —
 —
 129
 —
 —
 —
Foreign currency contracts—
 —
 135
 81
 —
 —
 180
 6
—
 —
 54
 —
 —
 —
 99
 —
Total noncurrent132
 —
 135
 105
 156
 —
 180
 33
155
 —
 54
 18
 129
 —
 99
 16
Total derivatives$161
 $2
 $163
 $196
 $188
 $—
 $211
 $58
$161
 $8
 $181
 $23
 $135
 $—
 $202
 $22
 
(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 periodsperiod ended SeptemberJune 30, 2017.2019.

Table of Contents


       Three Months Nine Months Three Months Six Months   Three Months Six Months
Derivative
Relationships		 
Derivative Gain
(Loss) Recognized in
OCI (Effective Portion)
 Location of
Gain (Loss)
Recognized
in Income
on Derivative		 Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)		 Gain (Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)		 
Derivative Gain
(Loss) Recognized in
OCI
 Derivative Gain
(Loss) Recognized in
OCI		 Location of
Gain (Loss)
Recognized
in Income
on Derivative		 Gain (Loss)
Reclassified
from AOCI
into Income		 Gain (Loss)
Reclassified
from AOCI
into
Income
Three Months Nine Months 
Cash Flow Hedges:                        
Interest rate swaps $—
 $(2) Interest expense $(2) $—
 $(6) $(1) $(8) $(8) Interest expense $(2) $(4)
Cross-currency swaps 1
 (34) Interest expense 1
 —
 1
 —
 51
 28
 Other income (expense) - net 35
 7
     Other income (expense) - net 2
 —
 (24) —
Total $1
 $(36)   $1
 $—
 $(29) $(1) $43
 $20
   $33
 $3
Net Investment Hedges:                 
      
Foreign currency contracts $1
 $1
           $1
 $1
      

Table of Contents


Derivatives Not Designated as Location of Gain (Loss) Recognized in    
Hedging Instruments Income on Derivative Three Months Nine Months
Foreign currency contracts Other income (expense) - net $(81) $(237)
Interest rate swaps Interest expense (1) (4)
  Total $(82) $(241)
Derivatives Not Designated as Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $1
 $2

Derivatives Not Designated as Location of Gain (Loss) Recognized in    
Hedging Instruments Income on Derivative Three Months Six Months
Foreign currency contracts Other income (expense) - net $45
 $12
Interest rate swaps Interest expense (1) (2)
  Total $44
 $10
Derivatives Not Designated as Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Six Months
Interest rate swaps Regulatory assets - noncurrent $(2) $(3)

 
The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the periodsperiod ended SeptemberJune 30, 2016.
2018.
       Three Months Nine Months Three Months Six Months   Three Months Six Months
Derivative
Relationships		 
Derivative Gain
(Loss) Recognized in
OCI (Effective Portion)
 Location of
Gain (Loss)
Recognized
in Income
on Derivative		 Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)		 Gain (Loss)
Reclassified
from AOCI
into
Income
(Effective
Portion)		 Gain (Loss)
Recognized
in Income
on Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)		 Derivative Gain
(Loss) Recognized in
OCI		 Derivative Gain
(Loss) Recognized in
OCI		 Location of
Gain (Loss)
Recognized
in Income
on Derivative		 Gain (Loss)
Reclassified
from AOCI
into Income		 Gain (Loss)
Reclassified
from AOCI
into Income
Three Months Nine Months 
Cash Flow Hedges:                        
Interest rate swaps $—
 $(21) Interest expense $(2) $—
 $(5) $—
 $—
 $—
 Interest expense $(2) $(4)
Cross-currency swaps 78
 87
 Interest expense 2
 —
 2
 —
 23
 (1) Other income (expense) - net 24
 12
     Other income (expense) - net 86
 —
 80
 —
Total $78
 $66
   $86
 $—
 $77
 $—
 $23
 $(1)   $22
 $8
Net Investment Hedges:                        
Foreign currency contracts $—
 $4
           $12
 $11
      

Derivatives Not Designated as Location of Gain (Loss) Recognized in    
Hedging Instruments Income on Derivative Three Months Six Months
Foreign currency contracts Other income (expense) - net $164
 $52
Interest rate swaps Interest expense (2) (3)
  Total $162
 $49
Derivatives Not Designated as Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Six Months
Interest rate swaps Regulatory assets - noncurrent $1
 $5

Table
The following table presents the effect of Contents

cash flow hedge activity on the Statement of Income for the period ended June 30, 2019.
  Location and Amount of Gain (Loss) Recognized in Income on Hedging Relationships
  Three Months Six Months
  Interest Expense Other Income (Expense) - net Interest Expense Other Income (Expense) - net
 
 Total income and expense line items presented in the income statement in which the effect of cash flow hedges are recorded$246
 $131
 $487
 $183
 The effects of cash flow hedges:       
 Gain (Loss) on cash flow hedging relationships:       
 Interest rate swaps:       
 Amount of gain (loss) reclassified from AOCI to income(2) —
 (4) —
 Cross-currency swaps:       
 Hedged items—
 (35) —
 (7)
 Amount of gain (loss) reclassified from AOCI to income—
 35
 —
 7

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

Table of Contents


 September 30, 2017 December 31, 2016
 Assets Liabilities Assets Liabilities
Current:       
Price Risk Management       
Assets/Liabilities:       
Interest rate swaps$—
 $5
 $—
 $4
Total current—
 5
 —
 4
Noncurrent:     
  
Price Risk Management     
  
Assets/Liabilities:     
  
Interest rate swaps—
 24
 —
 27
Total noncurrent—
 24
 —
 27
Total derivatives$—
 $29
 $—
 $31

 June 30, 2019 December 31, 2018
 Assets Liabilities Assets Liabilities
Current:       
Price Risk Management       
Assets/Liabilities:       
Interest rate swaps$—
 $5
 $—
 $4
Total current—
 5
 —
 4
Noncurrent:     
  
Price Risk Management     
  
Assets/Liabilities:     
  
Interest rate swaps—
 18
 —
 16
Total noncurrent—
 18
 —
 16
Total derivatives$—
 $23
 $—
 $20
 
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 SeptemberJune 30, 2017.2019.
 Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Nine Months Income on Derivatives Three Months Six Months
Interest rate swaps Interest expense $(1) $(4) Interest expense $(1) $(2)
 Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Nine Months Regulatory Assets Three Months Six Months
Interest rate swaps Regulatory assets - noncurrent $1
 $2
 Regulatory assets - noncurrent $(2) $(3)


The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets for the periods ended SeptemberJune 30, 2016.2018. 
  Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Six Months
Interest rate swaps Interest expense $(2) $(3)
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Six Months
Interest rate swaps Regulatory assets - noncurrent $1
 $5
  Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Nine Months
Interest rate swaps Interest expense $(2) $(6)
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $2
 $(7)

 

Table of Contents

(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.

Table of Contents


 Assets Liabilities
   Eligible for Offset     Eligible for Offset  
 Gross 
Derivative
Instruments
 
Cash
Collateral
Received
 Net Gross 
Derivative
Instruments
 
Cash
Collateral
Pledged
 Net
September 30, 2017               
Treasury Derivatives               
PPL$324
 $138
 $17
 $169
 $198
 $138
 $1
 $59
LKE—
 —
 —
 —
 29
 —
 1
 28
LG&E—
 —
 —
 —
 29
 —
 1
 28

December 31, 2016               
Assets Liabilities
  Eligible for Offset     Eligible for Offset  
Gross 
Derivative
Instruments
 
Cash
Collateral
Received
 Net Gross 
Derivative
Instruments
 
Cash
Collateral
Pledged
 Net
June 30, 2019               
Treasury Derivatives                              
PPL$399
 $27
 $19
 $353
 $58
 $27
 $3
 $28
$342
 $—
 $32
 $310
 $31
 $—
 $—
 $31
LKE—
 —
 —
 —
 31
 —
 3
 28
—
 —
 —
 —
 23
 —
 —
 23
LG&E—
 —
 —
 —
 31
 —
 3
 28
—
 —
 —
 —
 23
 —
 —
 23
 Assets Liabilities
   Eligible for Offset     Eligible for Offset  
 Gross 
Derivative
Instruments
 
Cash
Collateral
Received
 Net Gross 
Derivative
Instruments
 
Cash
Collateral
Pledged
 Net
December 31, 2018               
Treasury Derivatives               
PPL$337
 $2
 $40
 $295
 $22
 $2
 $—
 $20
LKE—
 —
 —
 —
 20
 —
 —
 20
LG&E—
 —
 —
 —
 20
 —
 —
 20

 
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 SeptemberJune 30, 2017,2019, 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:

Table of Contents

PPL LKE LG&EPPL LKE LG&E
Aggregate fair value of derivative instruments in a net liability position with credit risk-related contingent features$43
 $11
 $11
$5
 $5
 $5
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
5
 5
 5
 
(a)Includes the effect of net receivables and payables already recorded on the Balance Sheet.


Table of Contents




14. Goodwill and Other Intangible Assets
(PPL)
The change in the carrying amount of goodwill for the nine months ended 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 nine months ended 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.

15.16. Asset Retirement Obligations


(PPL, LKE, LG&E and KU)

The changes in the carrying amounts of AROs were as follows.
 PPL LKE LG&E KU
Balance at December 31, 2016$488
 $433
 $145
 $288
Accretion16
 15
 5
 10
Effect of foreign exchange rates2
 —
 —
 —
Changes in estimated timing or cost(70) (63) (12) (51)
Obligations settled(30) (30) (20) (10)
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 911 for information on the final CCR rule. LG&E also has AROs related to natural gas mains and wells. LG&E's and KU's transmission and distribution lines largely operate under perpetual property easement agreements, which do not generally require restoration upon removal of the property. Therefore, no material AROs are recorded for transmission and distribution assets. For LKE, LG&E and KU, all ARO accretion and depreciation expenses are reclassified as a regulatory asset. ARO regulatory assets associated with approved ECRcertain CCR projects for CCRs are amortized to expense over a period of 10 to 25 years based on retirement expenditures made related to the obligation.in accordance with regulatory approvals. 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 ofThe changes in closure plans related to expected costs and timingthe carrying amounts of closures. Further changes to AROs capital plans or operating costs may be requiredwere as estimates of future cash flows are refined based on closure developments and regulatory or legal proceedings.follows.

 PPL LKE LG&E KU
Balance at December 31, 2018$347
 $296
 $103
 $193
Accretion8
 7
 2
 5
Effect of foreign exchange rates(1) —
 —
 —
Changes in estimated timing or cost(6) (3) (4) 1
Obligations settled(45) (45) (12) (33)
Balance at June 30, 2019$303
 $255
 $89
 $166


Table of Contents


16.17. Accumulated Other Comprehensive Income (Loss)
 
(PPL and LKE)(PPL)
 
The after-tax changes in AOCI by component for the periods ended SeptemberJune 30 were as follows.
 
Foreign
currency
translation
adjustments
 
Unrealized gains (losses)
 on qualifying
derivatives
 Defined benefit plans  
   
Prior
service
costs
 
Actuarial
gain
(loss)
 Total
PPL         
March 31, 2019$(1,239) $(2) $(19) $(2,387) $(3,647)
Amounts arising during the period(377) 35
 —
 (2) (344)
Reclassifications from AOCI—
 (27) 1
 21
 (5)
Net OCI during the period(377) 8
 1
 19
 (349)
June 30, 2019$(1,616) $6
 $(18) $(2,368) $(3,996)
          
December 31, 2018$(1,533) $(7) $(19) $(2,405) $(3,964)
Amounts arising during the period(83) 16
 —
 (5) (72)
Reclassifications from AOCI—
 (3) 1
 42
 40
Net OCI during the period(83) 13
 1
 37
 (32)
June 30, 2019$(1,616) $6
 $(18) $(2,368) $(3,996)
          
March 31, 2018$(973) $(21) $(7) $(2,278) $(3,279)
Amounts arising during the period(250) 19
 (1) —
 (232)
Reclassifications from AOCI—
 (19) 1
 34
 16
Net OCI during the period(250) —
 —
 34
 (216)
June 30, 2018$(1,223) $(21) $(7) $(2,244) $(3,495)
          
December 31, 2017$(1,089) $(13) $(7) $(2,313) $(3,422)
Amounts arising during the period(134) (1) (1) (1) (137)
Reclassifications from AOCI—
 (7) 1
 70
 64
Net OCI during the period(134) (8) —
 69
 (73)
June 30, 2018$(1,223) $(21) $(7) $(2,244) $(3,495)
 
Foreign
currency
translation
adjustments
 
Unrealized gains (losses)
 on qualifying
derivatives
   Defined benefit plans  
   
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) $(3,778)
Amounts arising during the period195
 (29) —
 —
 (14) 152
Reclassifications from AOCI—
 24
 1
 1
 97
 123
Net OCI during the period195
 (5) 1
 1
 83
 275
September 30, 2017$(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) $(2,728)
Amounts arising during the period(837) 57
 —
 —
 (4) (784)
Reclassifications from AOCI—
 (62) (1) 1
 94
 32
Net OCI during the period(837) (5) (1) 1
 90
 (752)
September 30, 2016$(1,357) $(12) $(1) $(5) $(2,105) $(3,480)
            
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)
            



Table of Contents




 
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 thePPL's gains (losses) and related income taxes for reclassifications from AOCI for the periods ended SeptemberJune 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 Six Months Affected Line Item on the
Details about AOCI 2019 2018 2019 2018 Statements of Income
Qualifying derivatives          
Interest rate swaps $(2) $(2) $(4) $(4) Interest Expense
Cross-currency swaps 35
 24
 7
 12
 Other Income (Expense) - net
Total Pre-tax 33
 22
 3
 8
  
Income Taxes (6) (3) —
 (1)  
Total After-tax 27
 19
 3
 7
  
           
Defined benefit plans          
Prior service costs (a) (1) (1) (1) (1)  
Net actuarial loss (a) (27) (43) (53) (88)  
Total Pre-tax (28) (44) (54) (89)  
Income Taxes 6
 9
 11
 18
  
Total After-tax (22) (35) (43) (71)  
           
Total reclassifications during the period $5
 $(16) $(40) $(64)  

  Three Months Nine Months Affected Line Item on the
Details about AOCI 2017 2016 2017 2016 Statements of Income
Qualifying derivatives          
Interest rate swaps $(2) $(2) $(7) $(5) Interest Expense
Cross-currency swaps 2
 86
 (24) 80
 Other Income (Expense) - net
  1
 2
 1
 2
 Interest Expense
Total Pre-tax 1
 86
 (30) 77
  
Income Taxes (1) (17) 6
 (15)  
Total After-tax —
 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 (44) (41) (125) (121)  
Total Pre-tax (45) (42) (127) (123)  
Income Taxes 11
 11
 29
 28
  
Total After-tax (34) (31) (98) (95)  
           
Total reclassifications during the period $(34) $38
 $(123) $(32)  

(a)These AOCI components are included in the computation of net periodic defined benefit cost. See Note 10 for additional information.


17.18. 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

Table of Contents

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 and will determine the transition method they will apply once 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 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 business 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. The Registrants will adopt 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.this standard on January 1, 2020 with a modified retrospective approach through a cumulative-effect adjustment to retained earnings at the date of adoption. Key implementation activities in process include finalizing the population of financial instruments within the scope of this guidance and identifying potential differences between the Registrants’ current credit loss models and the requirements of this guidance.


Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostAccounting for Implementation Costs in a Cloud Computing Service Arrangement


In March 2017,August 2018, the FASB issued accounting guidance that changes the income statement presentation of net periodic benefit cost. This newrequires a customer in a cloud computing hosting arrangement that is a service contract to capitalize implementation costs consistent with internal-use software guidance for non-service arrangements. Prior guidance had not addressed these implementation costs. The guidance requires these capitalized implementation costs to be amortized over the term of the hosting arrangement to the statement of income line item where 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 compensationarrangement costs arising from services rendered during

Table of Contents

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.recorded. The guidance also makes certain changes to allowable methodologies such as allowing entities to applyprescribes the short-cut method to partial-term fair value hedgesfinancial statement classification of interest rate risk as well as expands the ability to applycapitalized implementation costs and cash flows associated with the critical terms match method to cash flow hedges of groups of forecasted transactions. The guidancearrangement. Additional quantitative and qualitative disclosures are also updates certain recognition and presentation requirements as well as disclosure requirements.required.


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.2019. This standard must be adopted using a modified retrospective approach and provides for certain transition elections that must be made priorapplied either retrospectively or prospectively to all implementation costs incurred after the first effectiveness testing date afterof adoption.


The Registrants are currently assessing the impact of adopting this guidance and will adopt this standard prospectively as of the beginning of the period theyadopted, which will adopt it.be January 1, 2020. Key implementation activities in process of being completed


Table of Contents



include assessing the population of cloud computing hosting arrangements in the scope of this guidance and identifying and evaluating industry issues.

(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 earlyThe Registrants will adopt this guidance for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

2020. The Registrants are currently assessing the impact of adopting this guidance and the period they will adopt it.


guidance.

Table of Contents




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' 20162018 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 ninesix months ended SeptemberJune 30, 20172019 with the same periods in 2016.2018. For PPL, "Results of Operations" also includes "Segment Earnings" and "Margins""Adjusted Gross 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""Adjusted Gross 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 adjusted gross 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;Virginia; 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).
 


Table of Contents




       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 regulated 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, unauditedRegistrant. Unaudited annual consolidated financial statements for the U.K. Regulated segment are furnished on a Form 8-K with the SEC.
 
In addition to PPL, the other Registrants included in this filing are as follows.
 
(PPL Electric)
 
PPL Electric, headquartered in Allentown, Pennsylvania, is a direct wholly owned subsidiary of PPL and a regulated public utility that is an electricity transmission and distribution service provider in eastern and central Pennsylvania. PPL Electric is subject to regulation as a public utility by the PUC, and certain of its transmission activities are subject to the jurisdiction of the FERC under the Federal Power Act. PPL Electric delivers electricity in its Pennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.
 
(LKE)
 
LKE, headquartered in Louisville, Kentucky, is a wholly owned subsidiary of PPL and a holding company that owns regulated utility operations through its subsidiaries, LG&E and KU, which constitute substantially all of LKE's assets. LG&E and KU are engaged in the generation, transmission, distribution and sale of electricity. LG&E also engages in the distribution and sale of natural gas. LG&E and KU maintain separate corporate identities and serve customers in Kentucky under their respective names. KU also serves customers in Virginia under the Old Dominion Power name and in Tennessee under the KU name.
 
(LG&E)
 
LG&E, headquartered in Louisville, Kentucky, is a wholly owned subsidiary of LKE and a regulated utility engaged in the generation, transmission, distribution and sale of electricity and distribution and sale of natural gas in Kentucky. LG&E is subject to regulation as a public utility by the KPSC, and certain of its transmission activities are subject to the jurisdiction of the FERC under the Federal Power Act.
 
(KU)
 
KU, headquartered in Lexington, Kentucky, is a wholly owned subsidiary of LKE and a regulated utility engaged in the generation, transmission, distribution and sale of electricity in Kentucky Virginia and Tennessee.Virginia. KU is subject to regulation as a public


Table of Contents




a public utility by the KPSC, the VSCC and the Tennessee 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 Kentucky customers under the KU name and 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 aoperates seven 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 differentin constructive regulatory jurisdictions with distinct regulatory structures and customer classes. The CompanyPPL believes this diversebusiness portfolio positions the company well for continued success and provides strong earnings and dividend growth potential that will create significant value for its shareowners and positions PPL well for continued growth and success.potential.
 
PPL's businessesstrategy, and that of WPD, PPL Electric, LG&Ethe other Registrants, is to deliver best-in-sector operational performance, invest in a sustainable energy future, maintain a strong financial foundation, and KUengage and develop its people. PPL's business plan is designed 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 in the U.S. and RAV as applicable,in the U.K. Rate base growth is being 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, ourcentral to PPL's strategy is to recoverrecovering 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, and gas supply clauseclause) and recovery on construction work-in-progress)work-in-progress that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. In addition, the KPSC requires a utility to obtain a CPCN prior to constructing a facility, unless the construction is an ordinary extension of existing facilities in the usual course of business or does not involve sufficient capital outlayexpenditures 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 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. See "Financial and Operational Developments - U.K. Membership in European Union" for additional discussion of the U.K. earnings hedging activity.


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 wethe Registrants operate (U.K., U.S. federal and state). This is supported by oura 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.operational efficiency.


Table of Contents






Financial and Operational Developments

U.S. Tax Reform (All Registrants)


Tax reform has been discussed as a high priorityTheIRS issued proposed regulations for certain provisions of the U.S. presidential administration. Significant uncertainty exists asTCJA in 2018, including interest deductibility and Global Intangible Low-Taxed Income (GILTI). In June 2019, the IRS issued both final and new proposed regulations relating to GILTI. PPL has determined that neither these final nor proposed regulations materially change PPL's current interpretation of the statutory impact of these rules on the company. Proposed regulations relating to the ultimate changes that may be made,limitation on the timingdeductibility of those changesinterest expense were issued in November 2018 and such regulations provide detailed rules implementing the related impactbroader statutory provisions. These proposed regulations should not apply to the Registrants' financial condition or resultsRegistrants until the year in which the regulations are issued in final form, which is expected to be in the fourth quarter of operations. The2019. It is uncertain what form the final regulations will take and, therefore, the Registrants are working with industry groupscannot predict what impact the final regulations will have on the tax deductibility of interest expense. However, if the proposed regulations were issued as final in their current form, the Registrants could have a limitation on a portion of their interest expense deduction for tax purposes and carefully monitoring related developmentssuch limitation could be significant. PPL expressed its views on these proposed regulations in an effort both to have inputa comment letter addressed 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.IRS on February 26, 2019.

U.K. Membership in European Union (PPL)


On March 29, 2017,Following a voter referendum in June 2016, 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 period to establish the terms of that withdrawal undertriggered Article 50 of the Lisbon Treaty.Treaty to formally begin the process of leaving the European Union (EU), popularly referred to as Brexit. In November 2018, then U.K. Prime Minister Theresa May and the EU decided on a withdrawal agreement and a political declaration laying out the terms of the U.K.’s departure on March 29, 2019, and a transition period until December 2020. Any final withdrawal agreement and future trade relationship must be ratified by both the U.K. and EU parliaments.

The U.K. Parliament rejected the negotiated withdrawal agreement on three separate occasions. Following a series of Parliamentary indicative votes that failed to produce a clear majority for an alternative to the negotiated withdrawal agreement, on April 10, 2019, the U.K. requested to extend the Article 50 specifies thatprocess until June 30, 2019. The EU approved a longer than requested extension until October 31, 2019. The U.K. can leave the EU earlier if a member state decides to withdraw fromwithdrawal agreement is ratified before the EU, it must notifynew deadline.

May announced her resignation as prime minister and leader of the European Council of its intentionConservative Party on May 24, 2019, triggering a Conservative Party leadership contest for her replacement. May formally resigned on July 24, 2019, and was replaced by Boris Johnson, a former U.K. Foreign Secretary. While Johnson stated during his campaign that he is willing to leave the EU negotiatewithout an agreement, a majority in Parliament voted earlier this year to reject a no-deal outcome and could attempt to stop Johnson from taking the termsU.K. out of withdrawalthe EU without an agreement.

Significant uncertainty surrounds the status of negotiations and establishnext steps in the legal grounds for its future relationship withBrexit process, particularly as the EU. Article 50 provides two yearsEU has elected a new president of the EU Commission and key personnel changes have occurred within the current Brexit negotiating team.If an agreement is not reached and ratified by October 31, 2019, the default position is that the U.K. will exit from the dateEU without a withdrawal agreement. The U.K. may also request a further extension of the Article 50 notificationprocess, subject 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 ifapproval from all of the EU’s 27 remaining EU states agreemembers. The U.K. could also choose to an extension. Any withdrawal agreement will needrevoke Article 50 and remain a member of the EU.

PPL believes that its greatest risk related to be approved by bothBrexit is the European Council andpotential decline in the European Parliament. There remains significant uncertainty asvalue of the GBP compared to the ultimate outcomeU.S. dollar, particularly if the U.K. leaves the EU without a withdrawal agreement. A decline in the value of the withdrawal negotiations andGBP compared to the related impact on the U.K. economy and the GBP to U.S. dollar exchange rate.will reduce the value of WPD's earnings to PPL.


PPL has executed hedges to mitigate the foreign exchange risk to the Company'sits U.K. earnings. As of October 18, 2017,July 31, 2019, PPL's foreign exchange exposure related to budgeted earnings is 100% hedged for the remainder of 2017 at an average rate of $1.22 per GBP, 99% hedged for 2018 at an average rate of $1.32 per GBP, 100% hedged for 2019 at an average rate of $1.39$1.41 per GBP and 15%63% hedged for 2020 at an average rate of $1.47$1.46 per GBP.


PPL cannot predict the impact, in either the short-term or long-term, impact toon 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.material.


PPL does not expect the financial condition and results of operations of WPD itself to change significantly as a result of Brexit, with or without an approved plan of withdrawal. The regulatory environment and operation of WPD's businesses are not expected to change. RIIO-ED1, the current price control, with allowed revenues agreed with Ofgem runs through March 2023.

Table of Contents



The impact of a slower economy or recession on WPD would be mitigated in part because U.K. regulation provides that any reduction in the volume of electricity delivered will be recovered in allowed revenues in future periods through the K-factor adjustment. See "Item 1. Business - Segment Information - U.K. Regulated Segment" in PPL's 2018 Form 10-K for additional information on the current price control and K-factor adjustment. In addition, an increase in inflation would have a positive effect on revenues and RAV as annual inflation adjustments are applied to both revenues and RAV (and real returns are earned on inflated RAV). This impact, however, would be partially offset by higher operation and maintenance and interest expense on index-linked debt. With respect to access to financing, WPD has substantial borrowing capacity under existing credit facilities and expects to continue to have access to all major financial markets. With respect to access to and cost of equipment and other materials, WPD management continues to review U.K. government issued advice on preparations for Brexit without an approved plan of withdrawal and has taken actions to mitigate potential increasing costs and disruption to its critical sources of supply. Additionally, less than 1% of WPD's employees are non-U.K. EU nationals and no change in their domicile is expected.

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. 

Table of Contents

(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, GHGsGHG, and ELGs. See Note 9Notes 7, 11 and 16 to the Financial Statements for a discussion of the otherthese significant environmental matters. These and other stringent environmental requirements led PPL, LKE, LG&E and KU to retire approximately 1,000 MW of coal-fired generating plants in Kentucky since 2015.


TCJA Impact on FERC Rates (All Registrants)

In November 2018, the FERC issued a Policy Statement stating that the appropriate ratemaking treatment for changes in accumulated deferred income taxes as a result of the TCJA would be addressed in a Notice of Proposed Rulemaking. Also in November 2018, the FERC issued the Notice of Proposed Rulemaking, which proposed that public utility transmission providers include mechanisms in their formula rates to deduct excess accumulated deferred income taxes from, or add deficient accumulated deferred income taxes to, rate base and adjust their income tax allowances by amortized excess or deficient accumulated deferred income taxes. The Notice of Proposed Rulemaking did not prescribe the mechanism companies should use to adjust their formula rates.

LG&E and KU are currently assessing the Notice of Proposed Rulemaking and are continuing to monitor guidance issued by the FERC. On February 5, 2019, in connection with a separate element of federal and Kentucky state tax reform effects, LG&E and KU filed a request with the FERC to amend their transmission formula rates to incorporate reductions to corporate income tax rates as a result of the TCJA and HB 487. The FERC approved this request effective June 1, 2019. LG&E and KU do not anticipate the impact of the TCJA and HB 487 related to their FERC-jurisdictional rates to be significant. 

On February 28, 2019, PPL Electric filed with the FERC proposed revisions to its transmission formula rate template pursuant to Section 205 of the Federal Power Act and Section 35.13 of the Rules and Regulation of the FERC. Specifically, PPL Electric proposed to modify its formula rate to permit the return or recovery of excess or deficient accumulated deferred income taxes (ADIT) resulting from the TCJA and permit PPL Electric to prospectively account for the income tax expense associated with the depreciation of the equity component of the AFUDC. On April 29, 2019, the FERC accepted the proposed revisions to the formula rate template, which were effective June 1, 2019, as well as the proposed adjustments to ADIT, effective January 1, 2018.

Pennsylvania Alternative Ratemaking (PPL and PPL Electric)

In June 2018, Governor Tom Wolf signed into law Act 58 of 2018 (codified at 66 Pa. C.S. § 1330) authorizing public utilities to implement alternative rates and rate mechanisms in base rate proceedings before the PUC. The effective date of Act 58 was August 27, 2018. Under the new law, a public utility may file an application to establish alternative rates and rate mechanisms in a base rate proceeding. These alternative rates and rate mechanisms include, but are not limited to, decoupling mechanisms, performance-based rates, formula rates, multi-year rate plans, or a combination of those or other mechanisms.


Table of Contents



On April 25, 2019, the PUC issued an Implementation Order adopting its interpretation and implementation of Act 58 and establishing the procedures through which utilities may seek PUC approval of alternative rates and rate mechanisms.

RIIO-ED2 Review (PPL)

In 2018, Ofgem published its decision on the overall RIIO-2 framework, which covers all U.K. gas and electricity transmission and distribution price controls, following its consultation process earlier in the year. See “Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Financial and Operational Developments - Regulatory Requirements - RIIO-2 Framework Review,” in PPL's 2018 Form 10-K for details about the decision document. Management expects significant electricity distribution network investment will be required in RIIO-ED2 to achieve the U.K.’s carbon reduction targets and that Ofgem will need to design a framework that sufficiently incentivizes delivery of those objectives.

On August 6, 2019, Ofgem published its open letter consultation officially commencing the RIIO-ED2 process. WPD and PPL have been fully engaged in the RIIO-2 process and will be responding to this consultation. At this stage, PPL cannot predict the outcome of this process or the long-term impact the final RIIO-ED2 framework will have on its financial condition or results of operations. Any decision for RIIO-ED2 will not be finalized until November 2022. The RIIO-ED2 price control will come into effect on April 1, 2023.

FERC Transmission Rate Filing

(PPL, LKE, LG&E and KU)

In August 2018, LG&E and KU submitted an application to the FERC requesting elimination of certain on-going credits to a sub-set of transmission customers relating to the 1998 merger of LG&E’s and KU's parent entities and the 2006 withdrawal of LG&E and KU from the Midcontinent Independent System Operator, Inc. (MISO), a regional transmission operator and energy market. The application sought termination of LG&E's and KU's commitment to provide mitigation for certain horizontal market power concerns arising out of the 1998 merger for certain transmission service between MISO and LG&E and KU. The affected transmission customers are a limited number of municipal entities in Kentucky. The amounts at issue are generally waivers or credits granted to such customers for either LG&E and KU or MISO transmission charges incurred depending upon the direction of certain transmission service incurred by the municipalities. Due to the development of robust, accessible energy markets over time, LG&E and KU believe the mitigation commitments are no longer relevant or appropriate. On March 21, 2019, the FERC issued an Order granting LG&E's and KU's request to remove the on-going credits, conditioned upon the implementation by LG&E and KU of a transition mechanism for certain existing power supply arrangements, which transition mechanism will be subject to FERC review and approval. On July 12, 2019, LG&E and KU submitted their proposed transition mechanism to the FERC for review and approval. LG&E and KU currently receive recovery of waivers and credits provided through other rate mechanisms.

(PPL and PPL Electric)

In April 2019, PPL Electric filed its annual transmission formula rate update with the FERC, reflecting a revised revenue requirement, which includes the impact of the TCJA. The filing established the revenue requirement used to set rates that took effect in June 2019.

Rate Case Proceedings

(PPL, LKE, LG&E and KU)

On September 29, 2017,28, 2018, LG&E and KU filed requests with the KPSC for an increase in annual base electricity rates of approximately $112 million at KU and increases in annual base electricity and gas rates of approximately $35 million and $25 million at LG&E. LG&E’s and KU’s applications also sought to include changes associated with the TCJA and state tax reform in the calculation of the proposed base rates and to terminate the TCJA bill credit mechanism when new base rates go into effect. The elimination of the TCJA bill credit mechanism will result in an estimated annual electricity revenue increase of approximately $58 million at KU and increases in electricity and gas revenues of approximately $40 million and $12 million at LG&E. The applications were based on a forecasted test year of May 1, 2019 through April 30, 2020 with a requested return-on-equity of 10.42%.

On March 1, 2019, LG&E and KU, along with substantially all intervening parties to the proceeding, filed stipulation and

Table of Contents



recommendation agreements (stipulations) with the KPSC resolving all material issues with the parties. In addition to terminating the TCJA bill credit mechanism, the proposed stipulations provided for increases in annual revenue requirements associated with base electricity rates of approximately $58 million at KU and increases in annual base electricity and gas rates of approximately $4 million and $20 million at LG&E, based on a return-on-equity of 9.725%.

On April 30, 2019, the KPSC issued orders ruling on open issues and approving the proposed stipulations filed in March 2019. The orders provide for increases in annual revenue requirements associated with base electricity rates of $56 million at KU and increases associated with base electricity and gas rates of $2 million and $19 million at LG&E. With the termination of the TCJA bill credit mechanism, this represents annual revenue increases of $187 million ($114 million at KU and $73 million at LG&E). The new base rates and all elements of the orders became effective on May 1, 2019.

(KU)

On July 12, 2019, KU filed a request seeking approval fromwith the VSCC tofor an increase annual Virginia base electricity revenue by $7rates of approximately $13 million, representing an increase of 10.4%18.2%. KU's request is based on an authorized 10.42%10.5% return on equity. Subject to regulatory review and approval, new rates would become effective July 1, 2018.April 12, 2020.

(PPL, LKE and KU)

In October 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. In December 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.


Table of Contents



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 ninesix months ended SeptemberJune 30, 20172019 with the same periods in 2016.2018. The "Segment Earnings" and "Margins""Adjusted Gross 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,"Adjusted Gross 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""Adjusted Gross 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 Adjusted Gross 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 ninesix months ended SeptemberJune 30, 20172019 with the same periods in 2016.2018. The "Earnings" discussion provides a summary of earnings. The "Margins""Adjusted Gross 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.



Table of Contents

PPL: Statement of Income Analysis, Segment Earnings and Adjusted Gross Margins


Statement of Income Analysis
 
Net income for the periods ended SeptemberJune 30 includes the following results.
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues$1,845
 $1,889
 $(44) $5,521
 $5,685
 $(164)$1,803
 $1,848
 $(45) $3,882
 $3,974
 $(92)
Operating Expenses                      
Operation                      
Fuel202
 227
 (25) 576
 607
 (31)168
 189
 (21) 362
 403
 (41)
Energy purchases143
 151
 (8) 494
 531
 (37)138
 148
 (10) 388
 389
 (1)
Other operation and maintenance397
 417
 (20) 1,217
 1,292
 (75)482
 506
 (24) 972
 974
 (2)
Depreciation257
 232
 25
 745
 692
 53
300
 273
 27
 584
 542
 42
Taxes, other than income69
 76
 (7) 214
 229
 (15)75
 74
 1
 155
 157
 (2)
Total Operating Expenses1,068
 1,103
 (35) 3,246
 3,351
 (105)1,163
 1,190
 (27) 2,461
 2,465
 (4)
Other Income (Expense) - net(76) 49
 (125) (235) 284
 (519)131
 234
 (103) 183
 191
 (8)
Interest Expense230
 223
 7
 669
 671
 (2)246
 235
 11
 487
 474
 13
Income Taxes116
 139
 (23) 321
 510
 (189)84
 142
 (58) 210
 259
 (49)
Net Income$355
 $473
 $(118) $1,050
 $1,437
 $(387)$441
 $515
 $(74) $907
 $967
 $(60)



Table of Contents



Operating Revenues
 
The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Domestic:      
PPL Electric Distribution price (a)$16
 $46
$(7) $2
PPL Electric Distribution volume(20) (30)(6) (4)
PPL Electric PLR Revenue (b)(1) (32)
PPL Electric PLR (b)(5) 5
PPL Electric Transmission Formula Rate(c)20
 25
5
 12
LKE Base rates31
 31
LKE Volumes(41) (86)
PPL Electric TCJA refund (d)17
 (7)
LKE Retail Rates (e)35
 35
LKE ECR15
 19
LKE Fuel and other energy prices(8) 10
1
 (9)
LKE Volumes (f)(52) (82)
LKE Demand revenue (g)(9) (8)
Other(3) (2)4
 20
Total Domestic(6) (38)(2) (17)
U.K.:      
Price(3) 74
26
 51
Volume(12) (24)(29) (43)
Foreign currency exchange rates(21) (183)(34) (74)
Other(2) 7
(6) (9)
Total U.K.(38) (126)(43) (75)
Total$(44) $(164)$(45) $(92)


(a)Distribution rider prices resulted in increases of $16 million and $40 million forprice variances were primarily due to reconcilable cost recovery mechanisms approved by the three and nine months ended September 30, 2017.PUC.
(b)DecreaseThe decrease for the ninethree months ended SeptemberJune 30, 2017 compared with 2016,2019 was primarily due to lower transmission enhancement expenses. The increase for the six months ended June 30, 2019 was primarily due to higher energy prices at PPL Electric.volumes partially offset by lower transmission enhancement expenses.
(c)The Transmission Formula Rate revenues include $11 million and $27 million for the three and six months ended June 30, 2019, related to the unfavorable impact of the TCJA which reduced the new revenue requirement that went into effect June 1, 2018.
(d)Represents the estimated income tax savings owed to or already returned to distribution customers related to the reduced U.S. federal corporate income taxes as a result of the TCJA. The TCJA customer refund for the period January through June 2018 was recorded as a regulatory liability during the second quarter of 2018 and the negative surcharge rate for distribution customers went into effect July 1, 2018, based on the PUC Order.
(e)The higher retail rates were due to higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(f)The decreases were primarily due to weather.
(g)The decreases were primarily due to the departure of eight municipal customers effective April 30, 2019.

Table of Contents



Fuel


Fuel decreased $25$21 million for the three months ended SeptemberJune 30, 20172019 compared with 20162018, primarily due to a $16$14 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$6 million decrease in volumes driven by milderthe departure of eight municipal customers on April 30, 2019 in Kentucky.

Fuel decreased $41 million for the six months endedJune 30, 2019 compared with 2018, primarily due to a $25 million decrease in volumes driven by weather, a $6 million decrease in 2017volumes driven by the departure of eight municipal customers on April 30, 2019 and an $11 million decrease in commodity costs in Kentucky.

Energy Purchases

Energy purchases decreased $10 million for the three months ended June 30, 2019 compared with 2018, primarily due to a $6 million decrease in transmission enhancement expenses at PPL Electric and a $4 million decrease in market prices for coal.volumes driven by weather at LG&E.

Energy Purchases


Energy purchases decreased $8$1 million for the threesix months ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to a $12 million decrease in PLRtransmission enhancement expenses at PPL Electric and a $5 million decrease in volumes driven by weather at LG&E, partially offset by a $6$16 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 and an $11 million decrease in PLR volumes at PPL Electric.



Table of Contents



Other Operation and Maintenance


The increase (decrease) in other operation and maintenance for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Domestic:      
PPL Electric Act 129$3
 $11
PPL Electric payroll-related costs(5) (6)
PPL Electric vegetation management(4) (7)
PPL Electric bad debts(4) (10)
PPL Electric storm costs$(10) $(1)
PPL Electric contractor-related expenses4
 6
LKE gas distribution maintenance and compliance2
 4
LKE transmission credits3
 7
LKE DSM program costs(4) (7)
Other(1) 1
(18) 4
U.K.:      
Pension (a)(17) (52)
Foreign currency exchange rates(2) (18)(7) (14)
Network maintenance4
 (4)
Third-party engineering(1) 5
(3) (5)
Other7
 5
9
 4
Total$(20) $(75)$(24) $(2)


Depreciation
The increase (decrease) in depreciation for the periods ended June 30, 2019 compared with 2018 was due to:
 Three Months Six Months
Additions to PP&E, net$18
 $36
Foreign currency exchange rates(4) (8)
Depreciation rates (a)13
 13
Other—
 1
Total$27
 $42

(a)The decreasesHigher depreciation rates were primarily due to increases in expected returns on higher asset balanceseffective May 1, 2019 at LG&E and lower interest costs due to a lower discount rate.KU.

Depreciation
Depreciation increased $25 million and $53 million for the three and nine months ended 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
 
OtherThe increase (decrease) in other income (expense) - net decreased $125 million and $519 million for the three and nine monthsperiods ended SeptemberJune 30, 20172019 compared with 2016, primarily2018 was due to changes in realized and unrealized gains (losses) on foreign currency contracts to economically hedge GBP denominated earnings from WPD.to:
 Three Months Six Months
Economic foreign currency exchange contracts (Note 15)$(119) $(40)
Defined benefit plans - non-service credits (Note 10)14
 26
Other2
 6
Total$(103) $(8)
 

Table of Contents

Interest Expense


The increase (decrease) in interest expense for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Long-term debt interest expense$9
 $22
$10
 $14
Short-term debt interest expense2
 6
3
 4
Foreign currency exchange rates(4) (31)(6) (12)
Other—
 1
4
 7
Total$7
 $(2)$11
 $13
 

Table of Contents



Income Taxes 


The increase (decrease) in income taxes for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
 Three Months Nine Months
Change in pre-tax income at current period tax rates$(56) $(198)
Valuation allowances adjustments—
 (4)
U.S. income tax on foreign earnings - net of foreign tax credit (a)(7) (21)
Impact of U.K. Finance Acts (b)39
 30
Stock-based compensation1
 5
Other—
 (1)
Total$(23) $(189)
 Three Months Six Months
Change in pre-tax income$(29) $(27)
Deferred tax impact of Kentucky state tax reform (a)(9) (9)
Kentucky recycling credit, net of federal income tax expense (b)(20) (20)
Other—
 7
Total$(58) $(49)

(a)LowerDuring the second quarter of 2018, LKE recorded deferred income taxestax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax benefit of accelerated pension contributions made in the first quarter of 2017. The related tax benefit is recognized over the annual periodrate reduction from 6% to 5%, as a result of utilizing an estimated annualenacted by HB 487, effective tax rate.January 1, 2018.
(b)The U.K. Finance Act 2016, enacted in September 2016, reducesDuring the U.K. statutorysecond quarter of 2019, LKE recorded a deferred income tax rate effective April 1, 2020 from 18% to 17%. Asbenefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, PPL reduced its net deferredqualify for a Kentucky recycling credit. The applicable credit provides tax liabilities andbenefits for a portion of the equipment costs for major recycling projects in Kentucky, with the benefit recognized a deferred tax benefit during the three and nine months ended September 30, 2016.period in which the assets are placed into service. A valuation allowance of $3 million has been recognized related to this credit due to insufficient Kentucky taxable income projected at LKE.


Segment Earnings
 
PPL's net income by reportable segments for the periods ended SeptemberJune 30 were as follows:
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
U.K. Regulated$126
 $281
 $(155) $560
 $915
 $(355)$284
 $394
 $(110) $548
 $591
 $(43)
Kentucky Regulated125
 126
 (1) 299
 314
 (15)97
 77
 20
 214
 210
 4
Pennsylvania Regulated95
 91
 4
 251
 263
 (12)94
 75
 19
 215
 223
 (8)
Corporate and Other (a)9
 (25) 34
 (60) (55) (5)(34) (31) (3) (70) (57) (13)
Net Income$355
 $473
 $(118) $1,050
 $1,437
 $(387)$441
 $515
 $(74) $907
 $967
 $(60)
 
(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 changes in 2017decrease for the six months ended June 30, 2019, compared with 2016 are2018, was primarily due to the timing impact of recording annual estimated taxes. This impact is expected to continue to reverse through the remainder of the year.higher operation and maintenance expense.


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:may include items such as:



Table of Contents

• Unrealized gains or losses on foreign currency 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

Table of Contents



PPL's underlying hedged earnings. See Note 1315 to the Financial Statements and "Risk Management" below for additional information on foreign currency economic activity.


PPL's Earnings from Ongoing Operations by reportable segment for the periods ended SeptemberJune 30 were as follows:
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
U.K. Regulated$163
 $235
 $(72) $682
 $741
 $(59)$264
 $254
 $10
 $568
 $516
 $52
Kentucky Regulated125
 126
 (1) 300
 314
 (14)97
 86
 11
 214
 219
 (5)
Pennsylvania Regulated95
 91
 4
 251
 263
 (12)94
 75
 19
 215
 223
 (8)
Corporate and Other5
 (25) 30
 (64) (53) (11)(33) (31) (2) (67) (57) (10)
Earnings from Ongoing Operations$388
 $427
 $(39) $1,169
 $1,265
 $(96)$422
 $384
 $38
 $930
 $901
 $29


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 53%60% of PPL's Net Income for the ninesix months ended SeptemberJune 30, 20172019 and 39% of PPL's assets at SeptemberJune 30, 2017.2019.
 
Net Income and Earnings from Ongoing Operations for the periods ended SeptemberJune 30 include the following results.
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating revenues$477
 $515
 $(38) $1,547

$1,673
 $(126)$541
 $584
 $(43) $1,124

$1,199
 $(75)
Other operation and maintenance69
 78
 (9) 195
 260
 (65)133
 137
 (4) 251
 269
 (18)
Depreciation58
 58
 —
 170
 178
 (8)64
 63
 1
 126
 125
 1
Taxes, other than income33
 34
 (1) 94
 104
 (10)32
 34
 (2) 64
 68
 (4)
Total operating expenses160
 170
 (10) 459
 542
 (83)229
 234
 (5) 441
 462
 (21)
Other Income (Expense) - net(80) 50
 (130) (236) 283
 (519)124
 229
 (105) 169
 182
 (13)
Interest Expense103
 100
 3
 294
 310
 (16)96
 97
 (1) 195
 204
 (9)
Income Taxes8
 14
 (6) (2) 189
 (191)56
 88
 (32) 109
 124
 (15)
Net Income126

281
 (155) 560

915
 (355)284

394
 (110) 548

591
 (43)
Less: Special Items(37) 46
 (83) (122) 174
 (296)20
 140
 (120) (20) 75
 (95)
Earnings from Ongoing Operations$163
 $235
 $(72) $682
 $741
 $(59)$264
 $254
 $10
 $568
 $516
 $52
 
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 SeptemberJune 30.

Table of Contents

 Income Statement Line Item Three Months Nine Months
  2017 2016 2017 2016
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  $(37) $46
 $(122) $174
 Income Statement Line Item Three Months Six Months
  2019 2018 2019 2018
Foreign currency economic hedges, net of tax of ($7), ($37), $4, ($20) (a)Other Income (Expense) - net $24
 $140
 $(16) $75
Other, net of tax of $1, $0, $1, $0 (b)Other operation and maintenance (4) —
 (4) —
Total Special Items  $20
 $140
 $(20) $75
 
(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 quarterSettlement of 2016, PPL settled 2017 and 2018 foreign currency contracts, resulting in $310 million of cash received ($202 million after-tax).a contractual dispute.
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. Adjusted 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.

Table of Contents


 Three Months Nine Months
U.K. 
  
Gross margins$(17) $52
Other operation and maintenance7
 50
Depreciation(3) (12)
Interest expense(7) (15)
Other(2) (4)
Income taxes(2) 2
U.S.   
Interest expense and other1
 3
Income taxes(3) 28
Foreign currency exchange, after-tax(46) (163)
Earnings from Ongoing Operations(72) (59)
Special items, after-tax(83) (296)
Net Income$(155) $(355)


 Three Months Six Months
U.K. 
  
U.K. Adjusted Gross Margins$(7) $4
Other operation and maintenance(3) 2
Depreciation(4) (9)
Other Income (Expense) - net19
 39
Interest expense(4) (3)
Income taxes2
 (3)
U.S.   
Income taxes—
 1
Other1
 (2)
Foreign currency exchange, after-tax6
 23
Earnings from Ongoing Operations10
 52
Special items, after-tax(120) (95)
Net Income$(110) $(43)

U.K.

See "Margins"Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of U.K. Adjusted 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, partially offset by $4 million from higher network maintenance expense.

Lower other operation and maintenance expense for the nine month period primarily due to $52 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.


Higher interest expenseother income (expense) - net for the three and ninesix 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 related to tax rate changes to deferred taxes, partially offset by a decrease of $4 million from lower pre-tax income.


Table of Contents

Lower income taxes for the nine month period primarily due to decreases of $10 million related to accelerated tax 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-taxpension 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 28%24% of PPL's Net Income for the ninesix months ended SeptemberJune 30, 20172019 and 35% of PPL's assets at SeptemberJune 30, 2017.2019.
 
Net Income and Earnings from Ongoing Operations for the periods ended SeptemberJune 30 include the following results.
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating revenues$818
 $835
 $(17) $2,350
 $2,382
 $(32)$732
 $743
 $(11) $1,577
 $1,615
 $(38)
Fuel 202
 227
 (25) 576
 607
 (31)168
 189
 (21) 362
 403
 (41)
Energy purchases22
 24
 (2) 120
 118
 2
27
 33
 (6) 106
 113
 (7)
Other operation and maintenance199
 197
 2
 598
 603
 (5)208
 211
 (3) 422
 416
 6
Depreciation114
 102
 12
 324
 301
 23
135
 118
 17
 258
 235
 23
Taxes, other than income17
 16
 1
 49
 46
 3
18
 18
 —
 36
 35
 1
Total operating expenses554
 566
 (12) 1,667
 1,675
 (8)556
 569
 (13) 1,184
 1,202
 (18)
Other Income (Expense) - net1
 (3) 4
 (5) (9) 4
—
 1
 (1) —
 (2) 2
Interest Expense65
 65
 —
 196
 194
 2
78
 69
 9
 148
 136
 12
Income Taxes75
 75
 —
 183
 190
 (7)1
 29
 (28) 31
 65
 (34)
Net Income125
 126
 (1) 299
 314
 (15)97
 77
 20
 214
 210
 4
Less: Special Items—
 —
 —
 (1) —
 (1)—
 (9) 9
 —
 (9) 9
Earnings from Ongoing Operations$125
 $126
 $(1) $300
 $314
 $(14)$97
 $86
 $11
 $214
 $219
 $(5)


The following after-tax gain (loss)gains (losses), which management considers a special item,items, impacted the Kentucky Regulated segment's results and isare excluded from Earnings from Ongoing Operations during the periods ended SeptemberJune 30.
Income Statement Line Item Three Months Nine MonthsIncome Statement Line Item Three Months Six Months
 2017 2016 2017 2016 2019 2018 2019 2018
Adjustment to investment, net of tax of $0, $0, $0, $0 (a)Other Income (Expense) - net $—
 $—
 $(1) $—
Kentucky state tax reform (a)Income Taxes $—
 $(9) $—
 $(9)
Total Special Items $—
 $—
 $(1) $—
  $—
 $(9) $—
 $(9)


Table of Contents



(a)KUDuring the second quarter of 2018, LKE recorded a write-off of an equity method investment.deferred income tax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax rate reduction from 6% to 5%, as enacted by HB 487, effective January 1, 2018. See Note 6 to the Financial Statements for additional information.


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 Adjusted Gross Margins and the itemitems that management considers special on separate lines and not in their respective Statement of Income line items.

Table of Contents

Three Months Nine MonthsThree Months Six Months
Kentucky Gross Margins$10
 $(13)
Kentucky Adjusted Gross Margins$3
 $(2)
Other operation and maintenance(5) 6
3
 (9)
Depreciation(10) (15)(5) (9)
Taxes, other than income—
 (2)1
 —
Other Income (Expense) - net4
 5
(1) 2
Interest Expense—
 (2)(9) (12)
Income Taxes—
 7
19
 25
Earnings from Ongoing Operations(1) (14)11
 (5)
Special items, after-tax—
 (1)9
 9
Net Income$(1) $(15)$20
 $4
 
See "Margins"Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of Kentucky Adjusted Gross Margins.


Higher other operation and maintenance expense for the six month period primarily due to a $4 million increase in gas distribution maintenance and compliance and increases in various costs that were not individually significant.

Higher depreciation expense for the three and nine month periodsperiod primarily due to higher depreciation rates effective JulyMay 1, 2017, and additions2019.

Higher depreciation expense for the six month period primarily due to PP&E,a $5 million increase related to additional assets placed into service, net of retirements.retirements and a $4 million increase related to higher depreciation rates effective May 1, 2019.

Higher interest expense for the three and six month periods due to increased borrowings and higher interest rates.

Lower income taxes for the three month period primarily due to the recording of a deferred tax benefit related to a Kentucky recycling credit of $17 million.

Lower income taxes for the six month period primarily due to the recording of a deferred tax benefit related to a Kentucky recycling credit of $17 million and lower income taxes of $8 million due to lower pre-tax income.
 
Pennsylvania Regulated Segment
 
The Pennsylvania Regulated segment includes the regulated electricity transmission and distribution operations of PPL Electric. In addition, certain costs are allocated to the Pennsylvania Regulated segment. The Pennsylvania Regulated segment represents 24% of PPL's Net Income for the ninesix months ended SeptemberJune 30, 20172019 and 25%26% of PPL's assets at SeptemberJune 30, 2017.2019.


Net Income and Earnings from Ongoing Operations for the periods ended SeptemberJune 30 include the following results.

Table of Contents


 Three Months Nine Months
 2017 2016 $ Change 2017 2016 $ Change
Operating revenues$547
 $539
 $8
 $1,620
 $1,619
 $1
Energy purchases121
 129
 (8) 374
 414
 (40)
Other operation and maintenance132
 143
 (11) 435
 431
 4
Depreciation77
 64
 13
 228
 185
 43
Taxes, other than income27
 26
 1
 79
 79
 —
Total operating expenses357
 362
 (5) 1,116
 1,109
 7
Other Income (Expense) - net5
 4
 1
 11
 12
 (1)
Interest Expense36
 32
 4
 105
 97
 8
Income Taxes64
 58
 6
 159
 162
 (3)
Net Income95
 91
 4
 251
 263
 (12)
Less: Special Items (a)—

—
 —
 —

—
 —
Earnings from Ongoing Operations$95
 $91
 $4
 $251
 $263
 $(12)

 Three Months Six Months
  
2019 2018 $ Change 2019 2018 $ Change
Operating revenues$521
 $517
 $4
 $1,166
 $1,156
 $10
Energy purchases110
 115
 (5) 281
 276
 5
Other operation and maintenance130
 159
 (29) 280
 292
 (12)
Depreciation96
 88
 8
 191
 173
 18
Taxes, other than income24
 22
 2
 55
 54
 1
Total operating expenses360
 384
 (24) 807
 795
 12
Other Income (Expense) - net6
 8
 (2) 13
 14
 (1)
Interest Expense41
 39
 2
 83
 76
 7
Income Taxes32
 27
 5
 74
 76
 (2)
Net Income94
 75
 19
 215
 223
 (8)
Less: Special Items (a)—

—
 —
 —

—
 —
Earnings from Ongoing Operations$94
 $75
 $19
 $215
 $223
 $(8)
 
(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 Adjusted Gross Margins on a separate line and not in their respective Statement of Income line items.
 Three Months Nine Months
Pennsylvania Gross Margins$6
 $14
Other operation and maintenance16
 8
Depreciation(8) (29)
Taxes, other than income(1) 1
Other Income (Expense) - net1
 (1)
Interest Expense(4) (8)
Income Taxes(6) 3
Net Income$4
 $(12)

Table of Contents

 Three Months Six Months
Pennsylvania Adjusted Gross Margins$17
 $6
Other operation and maintenance17
 5
Depreciation(4) (12)
Taxes, other than income(2) (1)
Other Income (Expense) - net(2) (1)
Interest Expense(2) (7)
Income Taxes(5) 2
Net Income$19
 $(8)
 
See "Margins"Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of Pennsylvania Adjusted Gross Margins.


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

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 ninesix month periods primarily due to transmission and distribution additionsadditional assets placed into service, related to the ongoing efforts to improveensure the reliability of the delivery system and replacethe replacement of aging infrastructure, net of retirements.


Higher interest expense for the ninesix month period primarily due to the June 2018 issuance of $475$400 million of 3.950%4.15% First Mortgage Bonds in May 2017.Bonds.


Higher income taxes for the three month period primarily due to higher pre-tax income.

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

Table of Contents



 2017 Three Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$126
 $125
 $95
 $9
 $355
Less: Special Items (expense) benefit:         
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(37) —
 —
 4
 (33)
Earnings from Ongoing Operations$163
 $125
 $95
 $5
 $388
 2016 Three Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$281
 $126
 $91
 $(25) $473
Less: Special Items (expense) benefit:         
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 Items46
 —
 —
 —
 46
Earnings from Ongoing Operations$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

Table of Contents

 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

 2019 Three Months
 
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$284
 $97
 $94
 $(34) $441
Less: Special Items (expense) benefit:         
Foreign currency economic hedges, net of tax of ($7)24
 —
 —
 —
 24
Talen litigation costs, net of tax of $1 (a)—
 —
 —
 (1) (1)
Other, net of tax of $1(4) —
 —
 —
 (4)
Total Special Items20
 —
 —
 (1) 19
Earnings from Ongoing Operations$264
 $97
 $94
 $(33) $422
          
 2018 Three Months
 U.K.
Regulated		 KY
Regulated		 PA
Regulated		 Corporate
and Other		 Total
Net Income$394
 $77
 $75
 $(31) $515
Less: Special Items (expense) benefit:         
Foreign currency economic hedges, net of tax of ($37)140
 —
 —
 —
 140
Kentucky state tax reform—
 (9) —
 —
 (9)
Total Special Items140
 (9) —
 —
 131
Earnings from Ongoing Operations$254
 $86
 $75
 $(31) $384



 

 

 

 

          
 2019 Six Months
 U.K.
Regulated		 KY
Regulated		 PA
Regulated		 Corporate
and Other		 Total
Net Income$548
 $214
 $215
 $(70) $907
Less: Special Items (expense) benefit:         
Foreign currency economic hedges, net of tax of $4(16) —
 —
 —
 (16)
Talen litigation costs, net of tax of $1 (a)—
 —
 —
 (3) (3)
Other, net of tax of $1(4) —
 —
 —
 (4)
Total Special Items(20) —
 —
 (3) (23)
Earnings from Ongoing Operations$568
 $214
 $215
 $(67) $930
          
 2018 Six Months
 U.K.
Regulated		 KY
Regulated		 PA
Regulated		 Corporate
and Other		 Total
Net Income$591
 $210
 $223
 $(57) $967
Less: Special Items (expense) benefit:         
Foreign currency economic hedges, net of tax of ($20)75
 —
 —
 —
 75
Kentucky state tax reform—
 (9) —
 —
 (9)
Total Special Items75
 (9) —
 —
 66
Earnings from Ongoing Operations$516
 $219
 $223
 $(57) $901
 
(a)Represents a tax settlement associatedPPL incurred legal expenses related to litigation with its former affiliate, Talen Montana, and related cases. See Note 11 to the former Supply segment. Included in "Taxes, other than income" on theFinancial Statements of Income.for additional information.


Adjusted Gross Margins
 
Management also utilizes the following non-GAAP financial measures as indicators of performance for its businesses:
 
"U.K. Adjusted 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.
 

Table of Contents



"Kentucky Adjusted 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 Adjusted 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, Storm Damage 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 Adjusted Gross Margins
 
The following table shows Adjusted Gross Margins by PPL's reportable segment and by component, as applicable, for the periods ended SeptemberJune 30 as well as the change between periods. The factors that gave rise to the changes are described following the table.

Table of Contents

 Three Months Six Months
 2019 2018 $ Change 2019 2018 $ Change
U.K. Regulated 
  
  
  
  
  
U.K. Adjusted Gross Margins$500
 $538
 $(38) $1,046
 $1,111
 $(65)
Impact of changes in foreign currency exchange rates    (31)     (69)
U.K. Adjusted Gross Margins excluding impact of foreign currency exchange rates    $(7)     $4
            
Kentucky Regulated           
Kentucky Adjusted Gross Margins           
LG&E$220
 $216
 $4
 $458
 $457
 $1
KU264
 265
 (1) 556
 559
 (3)
Total Kentucky Adjusted Gross Margins$484
 $481
 $3
 $1,014
 $1,016
 $(2)
            
Pennsylvania Regulated           
Pennsylvania Adjusted Gross Margins           
Distribution$204
 $192
 $12
 $464
 $470
 $(6)
Transmission142
 137
 5
 285
 273
 12
Total Pennsylvania Adjusted Gross Margins$346
 $329
 $17
 $749
 $743
 $6
 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. Adjusted Gross Margins
 
U.K. Adjusted Gross Margins, excluding the impact of changes in foreign currency exchange rates, decreased for the three months ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to $12$29 million of lower volumes, and $3partially offset by $26 million from the April 1, 20172019 price decrease, which includes lower true-up mechanisms partially offset by higher base demand revenue.increase.



Table of Contents



U.K. Adjusted Gross Margins, excluding the impact of changes in foreign currency exchange rates, increased for the ninesix months ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to $83$51 million from the April 1, 20162018 and 2019 price increaseincreases, partially offset by $24$43 million of lower volumes and $9 million from the April 1, 2017 price decrease, which includes lower true-up mechanisms partially offset by higher base demand revenue.volumes.


Kentucky Adjusted Gross Margins
 
Kentucky Adjusted Gross Margins increased for the three months ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to higher baseretail rates approved by the KPSC of $31$35 million ($1814 million at LG&E and $13$21 million at KU) as new base rates were approved by, inclusive of the KPSC effective July 1, 2017,termination of the TCJA bill credit mechanism. This was partially offset by $20$26 million of lowerdecreased sales volumes primarily due to milder weather in 2017 ($812 million at LG&E and $12$14 million at KU). and $8 million of decreased demand revenues at KU primarily due to the departure of eight municipal customers on April 30, 2019.


Kentucky Adjusted Gross Margins decreased for the ninesix months ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to $51$36 million of lowerdecreased sales volumes primarily due to milder weather in 2017 ($1716 million at LG&E and $34$20 million at KU), and $7 million of decreased demand revenues at KU primarily due to the departure of eight municipal customers on April 30, 2019. This was partially offset by higher baseretail rates approved by the KPSC of $31$35 million ($1814 million at LG&E and $13$21 million at KU) as new base rates were approved by, inclusive of the KPSC effective July 1, 2017.termination of the TCJA bill credit mechanism.


Pennsylvania Adjusted Gross Margins


Distribution


Distribution margins decreasedAdjusted Gross Margins increased for the three and nine month periodsmonths ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to $11$17 million and $16from the timing of recording the regulatory liability related to the TCJA in 2018 as a result of the PUC Rate Order in May 2018. The increase was partially offset by $6 million of lower electricity sales volumes primarily due to milder weather in 2017.weather.


Distribution Adjusted Gross Margins decreased for the six months ended June 30, 2019 compared with 2018, primarily due to a $6 million increased customer refund related to the reduced U.S. federal corporate income taxes as a result of the TCJA.

Transmission


Transmission marginsAdjusted Gross Margins increased for the three months ended SeptemberJune 30, 20172019, compared with 2016,2018, primarily due to an increase of $20$17 million from returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability.

Table of Contents


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 $17$11 million decreasefrom the impact of the reduced U.S. federal corporate income taxes as a result of a lower PPL zonal peak load billing factorthe TCJA, which affected transmission revenuerevenues in the second quarter of 2019.

Transmission Adjusted Gross Margins increased for the six months ended June 30, 2019, compared with 2018, primarily due to an increase of $43 million from returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability, partially offset by $27 million from the impact of the reduced U.S. federal corporate income taxes as a result of the TCJA in the first five months of 2017.2019.


Reconciliation of Adjusted Gross 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 SeptemberJune 30.
 2017 Three Months
 U.K.
Gross
Margins		 Kentucky
Gross
Margins		 PA Gross
Margins		 Other (a) Operating
Income (b)
Operating Revenues$467
(c)$818
 $547
 $13
 $1,845
Operating Expenses         
Fuel—
 202
 —
 —
 202
Energy purchases—
 22
 121
 —
 143
Other operation and maintenance26
 30
 29
 312
 397
Depreciation—
 16
 5
 236
 257
Taxes, other than income—
 1
 25
 43
 69
Total Operating Expenses26
 271
 180
 591
 1,068
Total   $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
Table of Contents




2017 Nine Months2019 Three Months
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Margins
 Other (a) 
Operating
Income (b)
U.K.
Adjusted Gross
Margins		 Kentucky
Adjusted Gross
Margins		 Pennsylvania Adjusted Gross
Margins		 Other (a) Operating
Income (b)
Operating Revenues$1,517
(c)$2,350
 $1,620
 $34
 $5,521
$531
(c)$732
 $521
 $19
 $1,803
Operating Expenses                  
Fuel—
 576
 —
 —
 576
—
 168
 —
 —
 168
Energy purchases—
 120
 374
 —
 494
—
 27
 110
 1
 138
Other operation and maintenance71
 82
 89
 975
 1,217
31
 23
 31
 397
 482
Depreciation—
 48
 14
 683
 745
—
 29
 12
 259
 300
Taxes, other than income—
 4
 76
 134
 214
—
 1
 22
 52
 75
Total Operating Expenses71
 830
 553
 1,792
 3,246
31
 248
 175
 709
 1,163
Total $1,446
 $1,520
 $1,067
 $(1,758) $2,275
$500
 $484
 $346
 $(690) $640
         
2018 Three Months
U.K.
Adjusted Gross
Margins		 Kentucky
Adjusted Gross
Margins		 Pennsylvania Adjusted Gross
Margins		 Other (a) Operating
Income (b)
Operating Revenues$574
(c)$743
 $517
 $14
 $1,848
Operating Expenses         
Fuel—
 189
 —
 —
 189
Energy purchases—
 33
 115
 —
 148
Other operation and maintenance36
 23
 43
 404
 506
Depreciation—
 17
 8
 248
 273
Taxes, other than income—
 —
 22
 52
 74
Total Operating Expenses36
 262
 188
 704
 1,190
Total $538
 $481
 $329
 $(690) $658
         
2019 Six Months
U.K.
Adjusted Gross
Margins		 Kentucky
Adjusted Gross
Margins		 Pennsylvania Adjusted Gross
Margins		 Other (a) Operating
Income (b)
Operating Revenues$1,105
(c)$1,577
 $1,166
 $34
 $3,882
Operating Expenses         
Fuel—
 362
 —
 —
 362
Energy purchases—
 106
 281
 1
 388
Other operation and maintenance59
 45
 62
 806
 972
Depreciation—
 48
 22
 514
 584
Taxes, other than income—
 2
 52
 101
 155
Total Operating Expenses59
 563
 417
 1,422
 2,461
Total $1,046
 $1,014
 $749
 $(1,388) $1,421
         


Table of Contents




2016 Nine Months2018 Six Months
U.K.
Gross
Margins
 
Kentucky
Gross
Margins
 
PA Gross
Margins
 Other (a) 
Operating
Income (b)
U.K.
Adjusted Gross
Margins		 Kentucky
Adjusted Gross
Margins		 Pennsylvania Adjusted Gross
Margins		 Other (a) Operating
Income (b)
Operating Revenues$1,641
(c)$2,382
 $1,619
 $43
 $5,685
$1,179
(c)$1,615
 $1,156
 $24
 $3,974
Operating Expenses                  
Fuel—
 607
 —
 —
 607
—
 403
 —
 —
 403
Energy purchases—
 118
 414
 (1) 531
—
 113
 276
 —
 389
Other operation and maintenance75
 81
 77
 1,059
 1,292
68
 48
 69
 789
 974
Depreciation—
 40
 —
 652
 692
—
 34
 16
 492
 542
Taxes, other than income—
 3
 75
 151
 229
—
 1
 52
 104
 157
Total Operating Expenses75
 849
 566
 1,861
 3,351
68
 599
 413
 1,385
 2,465
Total $1,566
 $1,533
 $1,053
 $(1,818) $2,334
$1,111
 $1,016
 $743
 $(1,361) $1,509
 
(a)Represents amounts excluded from Adjusted Gross Margins.
(b)As reported on the Statements of Income.
(c)Excludes ancillary revenues of $11$10 million and $30$19 million for the three and ninesix months ended SeptemberJune 30, 20172019 and $11$10 million and $32$20 million for the three and ninesix months ended SeptemberJune 30, 2016.2018.

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, primarily 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 base revenue from the April 1, 2017 price reset.

(PPL's Kentucky Regulated Segment and LKE, LG&E and KU)
Lower 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.

(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.
(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 Adjusted Gross Margins


Statement of Income Analysis


Net income for the periods ended SeptemberJune 30 includes the following results.
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues$547
 $539
 $8
 $1,620
 $1,619
 $1
$521
 $517
 $4
 $1,166
 $1,156
 $10
Operating Expenses                      
Operation                      
Energy purchases121
 129
 (8) 374
 414
 (40)110
 115
 (5) 281
 276
 5
Other operation and maintenance133
 144
 (11) 435
 431
 4
130
 159
 (29) 280
 292
 (12)
Depreciation77
 64
 13
 228
 185
 43
96
 88
 8
 191
 173
 18
Taxes, other than income27
 26
 1
 79
 79
 —
24
 22
 2
 55
 54
 1
Total Operating Expenses358
 363
 (5) 1,116
 1,109
 7
360
 384
 (24) 807
 795
 12
Other Income (Expense) - net4
 4
 —
 8
 12
 (4)6
 7
 (1) 11
 13
 (2)
Interest Income from Affiliate2
 —
 2
 3
 —
 3
—
 1
 (1) 2
 1
 1
Interest Expense36
 32
 4
 105
 97
 8
41
 39
 2
 83
 76
 7
Income Taxes64
 58
 6
 159
 162
 (3)32
 27
 5
 74
 76
 (2)
Net Income$95
 $90
 $5
 $251
 $263
 $(12)$94
 $75
 $19
 $215
 $223
 $(8)


Operating Revenues
 
The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Distribution Price (a)$16
 $46
Distribution price (a)$(7) $2
Distribution volume(20) (30)(6) (4)
PLR (b)(1) (32)(5) 5
Transmission Formula Rate(c)20
 25
5
 12
TCJA refund (d)17
 (7)
Other(7) (8)—
 2
Total$8
 $1
$4
 $10


(a)Distribution rider prices resulted in increases of $16 million and $40 million forprice variances were primarily due to reconcilable cost recovery mechanisms approved by the three and nine months ended September 30, 2017.PUC.
(b)The decrease for the nine month periodthree months ended June 30, 2019 was primarily due to lower transmission enhancement expenses. The increase for six months ended June 30, 2019 was primarily due to higher energy prices as described below.volumes partially offset by lower transmission enhancement expenses.


Table of Contents



(c)The Transmission Formula Rate revenues include $11 million and $27 million for the three and six months ended June 30, 2019 related to the unfavorable impact of the TCJA which reduced the new revenue requirement that went into effect June 1, 2018.
(d)Represents the estimated income tax savings owed to or already returned to distribution customers related to the reduced U.S. federal corporate income taxes as a result of the TCJA. The TCJA customer refund for the period January through June 2018 was recorded as a regulatory liability during the second quarter of 2018 and the negative surcharge rate for distribution customers went into effect July 1, 2018, based on the PUC Order.

Energy Purchases


Energy purchases decreased $8$5 million for the three months ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to lower transmission enhancement expenses of $6 million.

Energy purchases increased $5 million for the six months ended June 30, 2019 compared with 2018, primarily due to higher PLR volumes of $12$16 million, partially offset by higher PLR priceslower transmission enhancement expenses of $6$12 million.

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


Other Operation and Maintenance


The increase (decrease)decrease in other operation and maintenance for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:

Table of Contents

 Three Months Six Months
Storm costs$(10) $(1)
Service company costs(6) (4)
Bad debts(3) (3)
Inventory reserve(3) —
Act 129(2) (1)
Act 129 Smart Meter Program(1) (3)
Contractor-related expenses4
 6
Other(8) (6)
Total$(29) $(12)
 Three Months Nine Months
Corporate service costs$—
 $17
Vegetation management(4) (7)
Payroll-related costs(5) (6)
Act 1293
 11
Bad debts(4) (10)
Other(1) (1)
Total$(11) $4

Depreciation
 
Depreciation increased $13$8 million and $43$18 million for the three and ninesix months ended SeptemberJune 30, 20172019 compared with 2016,2018, 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$2 million and $8$7 million for the three and ninesix months ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to the May 2017June 2018 issuance of $475$400 million of 3.950%4.15% First Mortgage Bonds due 2047.2048.


Income Taxes


The increase (decrease) in income taxes for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Change in pre-tax income at current period tax rates$3
 $(7)
Stock-based compensation—
 2
Change in pre-tax income$6
 $(3)
Other3
 2
(1) 1
Total$6
 $(3)$5
 $(2)


Earnings
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
2017 2016 2017 20162019 2018 2019 2018
Net Income$95
 $90
 $251
 $263
$94
 $75
 $215
 $223
Special items, gains (losses), after-tax (a)—
 —
 —
 —
Special Item, gain (loss), after-tax (a)—
 —
 —
 —
 

Table of Contents



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


Earnings increased for the three month period in 20172019 compared with 2016 as higher transmission margins from2018, driven primarily by timing impacts related to U.S. tax reform, returns on additional capital investments in transmission and lower other operation and maintenance expense, werepartially offset by lower sales volumes due to unfavorable weather and higher depreciation expense.


Earnings decreased for the ninesix month period in 20172019 compared with 2016,2018, driven primarily by year-over-year differences in the impact of reduced income taxes in rates due to U.S. tax reform, higher depreciation expense primarily due to transmission and distribution additions placed into service related to the ongoing efforts to improve reliability and replace aging infrastructure, net of retirements, higher interest expense, and lower distribution margins primarily due to lower sales volumes due to unfavorable weather in 2017. Higher transmission margins frompartially offset by returns on additional capital investments were partially offset by a lower PPL zonal peak load billing factor.in transmission.


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

Table of Contents

 Three Months Six Months
Pennsylvania Adjusted Gross Margins$17
 $6
Other operation and maintenance17
 5
Depreciation(4) (12)
Taxes, other than income(2) (1)
Other Income (Expense) - net(2) (1)
Interest Expense(2) (7)
Income Taxes(5) 2
Net Income$19
 $(8)

 Three Months Nine Months
Pennsylvania Gross Margins$6
 $14
Other operation and maintenance16
 8
Depreciation(8) (29)
Taxes, other than income(1) 1
Other Income (Expense) - net2
 (1)
Interest Expense(4) (8)
Income Taxes(6) 3
Net Income$5
 $(12)
Adjusted Gross Margins
 
"PennsylvaniaAdjusted Gross 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 - Adjusted Gross Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods. Within PPL's discussion, PPL Electric's Adjusted Gross Margins are referred to as "Pennsylvania Adjusted Gross Margins."


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 SeptemberJune 30. 
2017 Three Months 2016 Three Months2019 Three Months 2018 Three Months
PA Gross
Margins
 Other (a) 
Operating
Income (b)
 PA Gross
Margins		 Other (a) 
Operating
Income (b)
Adjusted Gross
Margins
 Other (a) 
Operating
Income (b)
 
Adjusted Gross
Margins
 Other (a) 
Operating
Income (b)
Operating Revenues$547
 $—
 $547
 $539
 $—
 $539
$521
 $—
 $521
 $517
 $—
 $517
Operating Expenses                      
Energy purchases121
 —
 121
 129
 —
 129
110
 —
 110
 115
 —
 115
Other operation and maintenance29
 104
 133
 24
 120
 144
31
 99
 130
 43
 116
 159
Depreciation5
 72
 77
 —
 64
 64
12
 84
 96
 8
 80
 88
Taxes, other than income25
 2
 27
 25
 1
 26
22
 2
 24
 22
 —
 22
Total Operating Expenses180
 178
 358
 178
 185
 363
175
 185
 360
 188
 196
 384
Total $367
 $(178) $189
 $361
 $(185) $176
$346
 $(185) $161
 $329
 $(196) $133
                      
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


Table of Contents



 2019 Six Months 2018 Six Months
 Adjusted Gross
Margins		 Other (a) 
Operating
Income (b)
  Adjusted Gross
Margins		 Other (a) 
Operating
Income (b)
Operating Revenues$1,166
 $—
 $1,166
 $1,156
 $—
 $1,156
Operating Expenses           
Energy purchases281
 —
 281
 276
 —
 276
Other operation and maintenance62
 218
 280
 69
 223
 292
Depreciation22
 169
 191
 16
 157
 173
Taxes, other than income52
 3
 55
 52
 2
 54
Total Operating Expenses417
 390
 807
 413
 382
 795
Total   $749
 $(390) $359
 $743
 $(382) $361

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

Table of Contents

LKE: Statement of Income Analysis, Earnings and Adjusted Gross Margins
 
Statement of Income Analysis
 
Net income for the periods ended SeptemberJune 30 includes the following results.
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues$818
 $835
 $(17) $2,350
 $2,382
 $(32)$732
 $743
 $(11) $1,577
 $1,615
 $(38)
Operating Expenses                      
Operation                      
Fuel202
 227
 (25) 576
 607
 (31)168
 189
 (21) 362
 403
 (41)
Energy purchases22
 24
 (2) 120
 118
 2
27
 33
 (6) 106
 113
 (7)
Other operation and maintenance199
 197
 2
 598
 603
 (5)208
 211
 (3) 422
 416
 6
Depreciation114
 102
 12
 324
 301
 23
135
 118
 17
 258
 235
 23
Taxes, other than income17
 16
 1
 49
 46
 3
18
 18
 —
 36
 35
 1
Total Operating Expenses554
 566
 (12) 1,667
 1,675
 (8)556
 569
 (13) 1,184
 1,202
 (18)
Other Income (Expense) - net1
 (3) 4
 (5) (9) 4
—
 1
 (1) —
 (2) 2
Interest Expense49
 50
 (1) 148
 147
 1
58
 52
 6
 112
 102
 10
Interest Expense with Affiliate5
 4
 1
 13
 12
 1
9
 6
 3
 16
 11
 5
Income Taxes79
 79
 —
 195
 202
 (7)3
 31
 (28) 35
 70
 (35)
Net Income$132
 $133
 $(1) $322
 $337
 $(15)$106
 $86
 $20
 $230
 $228
 $2


Operating Revenues


The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Base rates$31
 $31
Volumes(41) (86)
Higher retail rates (a)$35
 $35
ECR15
 19
Fuel and other energy prices(8) 10
1
 (9)
Volumes (b)(52) (82)
Demand revenue (c)(9) (8)
Other1
 13
(1) 7
Total$(17) $(32)$(11) $(38)


(a)The higher retail rates were due to higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(b)The decreases were primarily due to weather.
(c)The decreases were primarily due to the departure of eight municipal customers effective April 30, 2019.


Table of Contents



Fuel


Fuel decreased $25$21 million for the three months ended SeptemberJune 30, 20172019 compared with 20162018, primarily due to a $16$14 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$6 million decrease in volumes driven by milder weather in 2017 andthe departure of eight municipal customers on April 30, 2019.

Fuel decreased $41 million for the six months endedJune 30, 2019 compared with 2018, primarily due to a $4$25 million decrease in market prices for coal.volume driven by weather, a $6 million decrease in volumes driven by the departure of eight municipal customers on April 30, 2019 and an $11 million decrease in commodity costs.


DepreciationEnergy Purchases


Depreciation increased $12Energy purchases decreased $6 million for the three months ended SeptemberJune 30, 20172019 compared with 20162018, primarily due to a $7decrease in volumes driven by weather.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended June 30, 2019 compared with 2018 was due to:
 Three Months Six Months
Gas distribution maintenance and compliance$2
 $4
Transmission credits3
 7
Vegetation management(1) 1
Administrative and general(2) —
Plant operations and maintenance(2) (2)
DSM program costs(4) (7)
Other1
 3
Total$(3) $6

Depreciation

Depreciation increased $17 million for the three months ended June 30, 2019 compared with 2018, primarily due to a $13 million increase related to higher depreciation rates effective JulyMay 1, 20172019, and a $5$3 million increase related to additions to PP&E,additional assets placed into service, net of retirements.


Depreciation increased $23$23 million for the ninesix months endedSeptember June 30, 20172019 compared with 20162018, primarily due to a $16 million increase related to additions to PP&E, net of retirements, and a $7$13 million increase related to higher depreciation rates effective JulyMay 1, 2017.2019 and an $8 million increase related to additional assets placed into service, net of retirements.


Interest Expense
Interest expense increased $6 million for the three months ended June 30, 2019 compared with 2018, primarily due to increased borrowings and higher interest rates.

Income Taxes

The increase (decrease) in income taxes for the periods ended June 30, 2019 compared with 2018 was due to:

 Three Months Six Months
Change in pre-tax income$(2) $(8)
Deferred tax impact of Kentucky state tax reform (a)(9) (9)
Kentucky recycling credit, net of federal income tax expense (b)(20) (20)
Valuation allowance adjustments (b)3
 3
Other—
 (1)
Total$(28) $(35)


Table of Contents




(a)During the second quarter of 2018, LKE recorded deferred income tax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax rate reduction from 6% to 5%, as enacted by HB 487, effective January 1, 2018.
(b)During the second quarter of 2019, LKE recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky, with the benefit recognized during the period in which the assets are placed into service. A portion of this amount has been reserved due to insufficient Kentucky taxable income projected at LKE.

Earnings
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
2017 2016 2017 20162019 2018 2019 2018
Net Income$132
 $133
 $322
 $337
$106
 $86
 $230
 $228
Special items, gains (losses), after-tax—
 —
 (1) —
—
 (9) —
 (9)


EarningsExcluding special items, earnings increased for the three month period in 2019 compared with 2018, primarily due to higher retail rates approved by the KPSC, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019 and lower income taxes, partially offset by lower sales volumes driven primarily by weather, higher depreciation expense and higher interest expense.

Excluding special items, earnings decreased for the three and ninesix month periodsperiod in 20172019 compared with 2016,2018, primarily due to lower sales volumes driven primarily by milder weather, higher other operation and maintenance expense, higher depreciation expense and higher depreciationinterest expense, partially offset by higher baseretail rates approved by the KPSC, inclusive of the termination of the TCJA bill credit mechanism, effective JulyMay 1, 2017.2019 and lower income taxes.


The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Adjusted Gross Margins and an itemthe items that management considers special on separate lines and not in their respective Statement of Income line items.  
Three Months Nine MonthsThree Months Six Months
Margins$10
 $(13)
Adjusted Gross Margins$3
 $(2)
Other operation and maintenance(5) 6
3
 (9)
Depreciation(10) (15)(5) (9)
Taxes, other than income—
 (2)1
 —
Other Income (Expense) - net4
 5
(1) 2
Interest Expense—
 (2)(9) (15)
Income Taxes—
 7
19
 26
Special items, gains (losses), after-tax (a)—
 (1)9
 9
Net Income$(1) $(15)$20
 $2


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


Adjusted Gross Margins
 
"Adjusted Gross 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 - Adjusted Gross 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 Adjusted Gross Margins are referred to as "Kentucky Adjusted Gross Margins."
 
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 SeptemberJune 30.

Table of Contents



2017 Three Months 2016 Three Months2019 Three Months 2018 Three Months
Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)		Adjusted Gross Margins Other (a) Operating
Income (b)		 Adjusted Gross Margins Other (a) Operating
Income (b)
Operating Revenues$818
 $—
 $818
 $835
 $—
 $835
$732
 $—
 $732
 $743
 $—
 $743
Operating Expenses                      
Fuel202
 —
 202
 227
 —
 227
168
 —
 168
 189
 —
 189
Energy purchases22
 —
 22
 24
 —
 24
27
 —
 27
 33
 —
 33
Other operation and maintenance30
 169
 199
 33
 164
 197
23
 185
 208
 23
 188
 211
Depreciation16
 98
 114
 14
 88
 102
29
 106
 135
 17
 101
 118
Taxes, other than income1
 16
 17
 —
 16
 16
1
 17
 18
 —
 18
 18
Total Operating Expenses271
 283
 554
 298
 268
 566
248
 308
 556
 262
 307
 569
Total$547
 $(283) $264
 $537
 $(268) $269
$484
 $(308) $176
 $481
 $(307) $174
                      
2019 Six Months 2018 Six Months
Adjusted Gross Margins Other (a) Operating
Income (b)		 Adjusted Gross Margins Other (a) Operating
Income (b)
Operating Revenues$1,577
 $—
 $1,577
 $1,615
 $—
 $1,615
Operating Expenses           
Fuel362
 —
 362
 403
 —
 403
Energy purchases106
 —
 106
 113
 —
 113
Other operation and maintenance45
 377
 422
 48
 368
 416
Depreciation48
 210
 258
 34
 201
 235
Taxes, other than income2
 34
 36
 1
 34
 35
Total Operating Expenses563
 621
 1,184
 599
 603
 1,202
Total$1,014
 $(621) $393
 $1,016
 $(603) $413

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 Adjusted Gross Margins.
(b)As reported on the Statements of Income.


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


Net income for the periods ended SeptemberJune 30 includes the following results.
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues    

     

    

     

Retail and wholesale$361
 $366
 $(5) $1,055
 $1,058
 $(3)$328
 $331
 $(3) $725
 $738
 $(13)
Electric revenue from affiliate2
 2
 —
 23
 19
 4
6
 4
 2
 19
 16
 3
Total Operating Revenues363
 368
 (5) 1,078
 1,077
 1
334
 335
 (1) 744
 754
 (10)
Operating Expenses    

     

    

     

Operation                      
Fuel76
 86
 (10) 225
 233
 (8)69
 72
 (3) 147
 151
 (4)
Energy purchases18
 19
 (1) 107
 104
 3
22
 28
 (6) 96
 104
 (8)
Energy purchases from affiliate3
 5
 (2) 8
 10
 (2)2
 2
 —
 4
 8
 (4)
Other operation and maintenance89
 85
 4
 262
 264
 (2)96
 93
 3
 190
 182
 8
Depreciation47
 43
 4
 136
 126
 10
56
 49
 7
 107
 97
 10
Taxes, other than income8
 9
 (1) 25
 24
 1
10
 9
 1
 19
 18
 1
Total Operating Expenses241
 247
 (6) 763
 761
 2
255
 253
 2
 563
 560
 3
Other Income (Expense) - net(1) (1) —
 (2) (6) 4
(1) (1) —
 (1) (2) 1
Interest Expense17
 18
 (1) 53
 53
 —
22
 19
 3
 43
 37
 6
Income Taxes39
 39
 —
 99
 98
 1
12
 12
 —
 29
 33
 (4)
Net Income$65
 $63
 $2
 $161
 $159
 $2
$44
 $50
 $(6) $108
 $122
 $(14)


Table of Contents




Operating Revenues


The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Base rates$18
 $18
Volumes(16) (26)
Higher retail rates (a)$14
 $14
ECR7
 9
Fuel and other energy prices(4) 4
2
 1
Volumes (b)(21) (36)
Demand revenue(1) (1)
Other(3) 5
(2) 3
Total$(5) $1
$(1) $(10)


(a)The higher retail rates were due to higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(b)The decreases were primarily due to weather.

Fuel


Fuel decreased $10$3 million for the three months ended SeptemberJune 30, 20172019 compared with 2016,2018, primarily due to a $6 million decrease in market prices for coal and a $5 million decrease in volumes driven by milder weatherweather.

Energy Purchases

Energy purchases decreased $6 million and $8 million for the three and six months ended June 30, 2019 compared with 2018, primarily due to a decrease in the third quarter of 2017.volumes driven by weather.


Other Operation and Maintenance


The increase (decrease) in other operation and maintenance for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Gas distribution maintenance and compliance$2
 $4
Transmission credits1
 2
Vegetation management1
 2
Plant operations and maintenance$1
 $(1)1
 2
Pension expense1
 1
Timing and scope of generation maintenance outages—
 (1)
Storm costs—
 (1)
DSM program costs(2) (4)
Other2
 —
—
 2
Total$4
 $(2)$3
 $8


Depreciation


Depreciation increased $4$7 million for the three months ended SeptemberJune 30, 20172019 compared with 20162018, primarily due to higher depreciation rates effective May 1, 2019.

Depreciation increased $10 million for the six months ended June 30, 2019 compared with 2018, primarily due to a $2$6 million increase related to higher depreciation rates effective JulyMay 1, 20172019 and a $2$4 million increase related to additions to PP&E,additional assets placed into service, net of retirements.


Interest Expense

Interest expense increased $3 million and $6 million for the three and six months ended June 30, 2019 compared with 2018, primarily due to increased borrowings and higher interest rates.


Table of Contents



Earnings
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
2017 2016 2017 20162019 2018 2019 2018
Net Income$65
 $63
 $161
 $159
$44
 $50
 $108
 $122
Special items, gains (losses), after-tax (a)—
 —
 —
 —
—
 —
 —
 —


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

Earnings increaseddecreased for the three and six month periodperiods in 20172019 compared with 2016,2018, primarily due to higher base rates effective July 1, 2017, partially offset by lower sales volumes driven by milder weather.

Earnings increased for the nine month period in 2017 compared with 2016, primarily due toweather, higher base rates effective July 1, 2017 and lower other operation and maintenance expense, higher depreciation expense and higher interest expense, partially offset by lower sales volumes drivenhigher retail rates approved by milder weather.the KPSC, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.


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

Table of Contents

Three Months Nine MonthsThree Months Six Months
Margins$8
 $2
Adjusted Gross Margins$4
 $1
Other operation and maintenance(4) 3
(5) (10)
Depreciation(5) (6)(1) (4)
Taxes, other than income2
 —
(1) —
Other Income (Expense) - net—
 4
—
 1
Interest Expense1
 —
(3) (6)
Income Taxes—
 (1)—
 4
Net Income$2
 $2
$(6) $(14)
 
Adjusted Gross Margins
 
"Adjusted Gross 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 - Adjusted Gross 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 Adjusted Gross Margins are included in "Kentucky Adjusted Gross Margins."
 
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 SeptemberJune 30.
2017 Three Months 2016 Three Months2019 Three Months 2018 Three Months
Margins Other (a) Operating Income (b) Margins Other (a) Operating Income (b)Adjusted Gross Margins Other (a) Operating Income (b) Adjusted Gross Margins Other (a) Operating Income (b)
Operating Revenues$363
 $—
 $363
 $368
 $—
 $368
$334
 $—
 $334
 $335
 $—
 $335
Operating Expenses                      
Fuel76
 —
 76
 86
 —
 86
69
 —
 69
 72
 —
 72
Energy purchases, including affiliate21
 —
 21
 24
 —
 24
24
 —
 24
 30
 —
 30
Other operation and maintenance13
 76
 89
 13
 72
 85
8
 88
 96
 10
 83
 93
Depreciation7
 40
 47
 8
 35
 43
13
 43
 56
 7
 42
 49
Taxes, other than income1
 7
 8
 —
 9
 9
—
 10
 10
 —
 9
 9
Total Operating Expenses118
 123
 241
 131
 116
 247
114
 141
 255
 119
 134
 253
Total $245
 $(123) $122
 $237
 $(116) $121
$220
 $(141) $79
 $216
 $(134) $82
                      
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

Table of Contents



 2019 Six Months 2018 Six Months
 Adjusted Gross Margins Other (a) Operating Income (b) Adjusted Gross Margins Other (a) Operating Income (b)
Operating Revenues$744
 $—
 $744
 $754
 $—
 $754
Operating Expenses           
Fuel147
 —
 147
 151
 —
 151
Energy purchases, including affiliate100
 —
 100
 112
 —
 112
Other operation and maintenance17
 173
 190
 19
 163
 182
Depreciation21
 86
 107
 15
 82
 97
Taxes, other than income1
 18
 19
 —
 18
 18
Total Operating Expenses286
 277
 563
 297
 263
 560
Total   $458
 $(277) $181
 $457
 $(263) $194
 
(a)Represents amounts excluded from Adjusted Gross Margins.
(b)As reported on the Statements of Income.


Table of Contents

KU: Statement of Income Analysis, Earnings and Adjusted Gross Margins


Statement of Income Analysis
 
Net income for the periods ended SeptemberJune 30 includes the following results.
Three Months Nine MonthsThree Months Six Months
2017 2016 $ Change 2017 2016 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues                      
Retail and wholesale$457
 $469
 $(12) $1,295
 $1,324
 $(29)$404
 $412
 $(8) $852
 $877
 $(25)
Electric revenue from affiliate3
 5
 (2) 8
 10
 (2)2
 2
 —
 4
 8
 (4)
Total Operating Revenues460
 474
 (14) 1,303
 1,334
 (31)406
 414
 (8) 856
 885
 (29)
Operating Expenses                      
Operation                      
Fuel126
 141
 (15) 351
 374
 (23)99
 117
 (18) 215
 252
 (37)
Energy purchases4
 5
 (1) 13
 14
 (1)5
 5
 —
 10
 9
 1
Energy purchases from affiliate2
 2
 —
 23
 19
 4
6
 4
 2
 19
 16
 3
Other operation and maintenance104
 107
 (3) 313
 320
 (7)105
 112
 (7) 213
 217
 (4)
Depreciation67
 59
 8
 188
 175
 13
78
 70
 8
 150
 138
 12
Taxes, other than income9
 7
 2
 24
 22
 2
8
 9
 (1) 17
 17
 —
Total Operating Expenses312
 321
 (9) 912
 924
 (12)301
 317
 (16) 624
 649
 (25)
Other Income (Expense) - net—
 (3) 3
 (3) (4) 1
(2) 3
 (5) —
 —
 —
Interest Expense24
 24
 —
 72
 71
 1
28
 25
 3
 54
 50
 4
Income Taxes47
 48
 (1) 120
 128
 (8)14
 14
 —
 36
 38
 (2)
Net Income$77
 $78
 $(1) $196
 $207
 $(11)$61
 $61
 $—
 $142
 $148
 $(6)


Operating RevenueRevenues
 
The increase (decrease) in operating revenuerevenues for the periods ended SeptemberJune 30, 20172019 compared with 20162018 was due to:
Three Months Nine MonthsThree Months Six Months
Base rates$13
 $13
Volumes(27) (57)
Higher retail rates (a)$21
 $21
ECR8
 10
Volumes (b)(29) (45)
Demand revenue (c)(8) (7)
Fuel and other energy prices(3) 5
(2) (12)
Other3
 8
2
 4
Total$(14) $(31)$(8) $(29)



Table of Contents



(a)The higher retail rates were due to higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(b)The decreases were primarily due to weather.
(c)The decreases were primarily due to the departure of eight municipal customers effective April 30, 2019.

Fuel


Fuel decreased $15$18 million for the three months ended SeptemberJune 30, 20172019 compared with 2016,2018, 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 $29$6 million decrease in volumes driven by milderthe departure of eight municipal customers on April 30, 2019.

Fuel decreased $37 million for the six months ended June 30, 2019 compared with 2018, primarily due to a $23 million decrease in volumes driven by weather, a $6 million decrease in 2017.volumes driven by the departure of eight municipal customers on April 30, 2019 and a $9 million decrease in commodity costs.


Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended June 30, 2019 compared with 2018 was due to:

Table of Contents

 Three Months Six Months
Transmission credits$2
 $5
Plant operations and maintenance(3) (4)
Vegetation management(2) (1)
DSM program costs(2) (3)
Other(2) (1)
Total$(7) $(4)

Depreciation


Depreciation increased $8 million for the three months ended SeptemberJune 30, 20172019 compared with 20162018, primarily due to higher depreciation rates effective May 1, 2019.

Depreciation increased $12 million for the six months ended June 30, 2019 compared with 2018, primarily due to a $5$7 million increase related to higher depreciation rates effective JulyMay 1, 20172019 and a $3$4 million increase related to additions to PP&E,additional assets placed into service, net of retirements.


DepreciationInterest Expense

Interest expense increased $13$3 million for the ninethree months ended September June 30, 20172019 compared with 20162018, primarily due to an $8 million increase related to additions to PP&E, net of retirements,increased borrowings and a $5 million increase related to higher depreciation rates effective July 1, 2017.interest rates.


Earnings
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
2017 2016 2017 20162019 2018 2019 2018
Net Income$77
 $78
 $196
 $207
$61
 $61
 $142
 $148
Special items, gains (losses), after-tax(a)—
 —
 (1) —
—
 —
 —
 —


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

Earnings decreased for the threesix month period in 20172019 compared with 2016,2018, primarily due to lower electricity sales volumes driven primarily by milder weather, higher depreciation expense and higher depreciationinterest expense, partially offset by higher baseretail rates approved by the KPSC, inclusive of the termination of the TCJA bill credit mechanism, effective JulyMay 1, 2017.

Earnings decreased for the nine month period in 2017 compared with 2016, primarily due to lower electricity sales volumes driven by milder weather and higher depreciation expense, partially offset by higher base rates effective July 1, 20172019, and lower 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 Adjusted Gross Margins on a separate line and not in their respective Statement of Income line items.

Table of Contents


 Three Months Nine Months
Margins$2
 $(15)
Other operation and maintenance—
 7
Depreciation(5) (9)
Taxes, other than income(2) (2)
Other Income (Expense) - net3
 2
Interest Expense—
 (1)
Income Taxes1
 8
Special items, gains (losses), after-tax (a)—
 (1)
Net Income$(1) $(11)


(a)See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated Segment" for details of the special item.
 Three Months Six Months
Adjusted Gross Margins$(1) $(3)
Other operation and maintenance9
 3
Depreciation(2) (4)
Taxes, other than income2
 —
Other Income (Expense) - net(5) —
Interest Expense(3) (4)
Income Taxes—
 2
Net Income$—
 $(6)
 
Adjusted Gross Margins
 
"Adjusted Gross 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 - Adjusted Gross 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 Adjusted Gross Margins are included in "Kentucky Adjusted Gross Margins."
 
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 SeptemberJune 30.

Table of Contents

2017 Three Months 2016 Three Months2019 Three Months 2018 Three Months
Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)		Adjusted Gross Margins Other (a) Operating
Income (b)		 Adjusted Gross Margins Other (a) Operating
Income (b)
Operating Revenues$460
 $—
 $460
 $474
 $—
 $474
$406
 $—
 $406
 $414
 $—
 $414
Operating Expenses                      
Fuel126
 —
 126
 141
 —
 141
99
 —
 99
 117
 —
 117
Energy purchases, including affiliate6
 —
 6
 7
 —
 7
11
 —
 11
 9
 —
 9
Other operation and maintenance17
 87
 104
 20
 87
 107
15
 90
 105
 13
 99
 112
Depreciation9
 58
 67
 6
 53
 59
16
 62
 78
 10
 60
 70
Taxes, other than income—
 9
 9
 —
 7
 7
1
 7
 8
 —
 9
 9
Total Operating Expenses158
 154
 312
 174
 147
 321
142
 159
 301
 149
 168
 317
Total$302
 $(154) $148
 $300
 $(147) $153
$264
 $(159) $105
 $265
 $(168) $97
                      
2017 Nine Months 2016 Nine Months2019 Six Months 2018 Six Months
Margins Other (a) Operating
Income (b)		 Margins Other (a) Operating
Income (b)		Adjusted Gross Margins Other (a) Operating
Income (b)		 Adjusted Gross Margins Other (a) Operating
Income (b)
Operating Revenues$1,303
 $—
 $1,303
 $1,334
 $—
 $1,334
$856
 $—
 $856
 $885
 $—
 $885
Operating Expenses                      
Fuel351
 —
 351
 374
 —
 374
215
 —
 215
 252
 —
 252
Energy purchases, including affiliate36
 —
 36
 33
 —
 33
29
 —
 29
 25
 —
 25
Other operation and maintenance49
 264
 313
 49
 271
 320
28
 185
 213
 29
 188
 217
Depreciation24
 164
 188
 20
 155
 175
27
 123
 150
 19
 119
 138
Taxes, other than income1
 23
 24
 1
 21
 22
1
 16
 17
 1
 16
 17
Total Operating Expenses461
 451
 912
 477
 447
 924
300
 324
 624
 326
 323
 649
Total$842
 $(451) $391
 $857
 $(447) $410
$556
 $(324) $232
 $559
 $(323) $236


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



Table of Contents



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 KU
September 30, 2017         
Cash and cash equivalents$676
 $243
 $40
 $9
 $31
Notes receivable from affiliate  2
 —
 —
 10
Short-term debt1,211
 —
 190
 190
 —
Notes payable with affiliate  —
 159
 10
 —
          
December 31, 2016         
Cash and cash equivalents$341
 $13
 $13
 $5
 $7
Short-term debt923
 295
 185
 169
 16
Notes payable with affiliate  —
 163
 —
 —
 PPL (a) PPL Electric LKE LG&E KU
June 30, 2019         
Cash and cash equivalents$406
 $20
 $32
 $9
 $23
Short-term debt1,636
 185
 96
 96
 —
Long-term debt due within one year136
 —
 136
 40
 96
Notes payable with affiliates  —
 203
 —
 —
          
December 31, 2018         
Cash and cash equivalents$621
 $267
 $24
 $10
 $14
Short-term debt1,430
 —
 514
 279
 235
Long-term debt due within one year530
 —
 530
 434
 96
Notes payable with affiliates  —
 113
 —
 —
 
(a)At SeptemberJune 30, 2017, $862019, $21 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL would not anticipate a materialan incremental U.S. tax cost. Historically, dividends paid by foreign subsidiaries have been limited to distributions of the current year's earnings. See Note 56 to the Financial Statements in PPL's 20162018 Form 10-K for additional information on undistributed earnings of WPD.
 

Table of Contents

Net cash provided by (used in) operating, investing and financing activities for the ninesix month periods ended SeptemberJune 30, and the changes between periods, were as follows.
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
2017         
2019         
Operating activities$1,754
 $575
 $920
 $418
 $501
$1,070
 $314
 $445
 $258
 $270
Investing activities(2,164) (858) (575) (293) (289)(1,479) (530) (530) (224) (305)
Financing activities738
 513
 (318) (121) (188)198
 (31) 93
 (35) 44
2016         
2018         
Operating activities$2,230
 $595
 $816
 $383
 $469
$1,325
 $364
 $440
 $255
 $274
Investing activities(2,066) (740) (599) (343) (254)(1,649) (521) (564) (296) (266)
Financing activities(558) 134
 (236) (55) (219)695
 597
 133
 45
 (3)
Change - Cash Provided (Used)                  
Operating activities$(476) $(20) $104
 $35
 $32
$(255) $(50) $5
 $3
 $(4)
Investing activities(98) (118) 24
 50
 (35)170
 (9) 34
 72
 (39)
Financing activities1,296
 379
 (82) (66) 31
(497) (628) (40) (80) 47
 
Operating Activities
 
The components of the change in cash provided by (used in) operating activities for the ninesix months ended SeptemberJune 30, 20172019 compared with 20162018 were as follows.

Table of Contents


 PPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)         
Net income$(387) $(12) $(15) $2
 $(11)
Non-cash components(23) 34
 (18) (11) 4
Working capital91
 (3) 78
 (9) 31
Defined benefit plan funding(213) (24) 50
 42
 (3)
Other operating activities56
 (15) 9
 11
 11
Total$(476) $(20) $104
 $35
 $32

 PPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)         
Net income$(60) $(8) $2
 $(14) $(6)
Non-cash components106
 1
 44
 23
 34
Working capital(226) (49) (126) (67) (72)
Defined benefit plan funding(1) 7
 94
 53
 50
Other operating activities(74) (1) (9) 8
 (10)
Total$(255) $(50) $5
 $3
 $(4)
 
(PPL)


PPL's cash provided by operating activities in 20172019 decreased $476$255 million compared with 2016.2018.
The $27Net income decreased $60 million decreasebetween the periods and included an increase in non-cash componentscharges of $106 million. The increase in non-cash charges 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 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 $91 million increase 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).

Defined benefit plan funding was $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 $20 million compared with 2016.

Table of Contents

The $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 an increase in the U.K. net periodic defined benefit credits (primarily due to lower levels of unrecognized losses being amortized) and a decrease in deferred income taxes (primarily due to book versus tax plant timing differences).


The $3$226 million decrease in cash from changes in working capital was primarily due to an increase in net regulatory assets and liabilities (primarily due to the impact of the TCJA and timing of rate recovery mechanisms), a decrease in other current liabilities (primarily due to timing of payments), an increase in accounts receivable (primarily due to timing of receipts), an increase in unbilled revenues (primarily due to weather and higher rates), and an increase in prepayments (primarily due to timing of payments).

The $74 million decrease in cash provided by other operating activities was primarily due to the $65 million transfer of excess benefits funds, in 2018, related to the favorable private letter ruling received by PPL from the IRS permitting a transfer of excess funds from the PPL Bargaining Unit Retiree Health Plan VEBA to a new subaccount within the VEBA, to be used to pay for medical claims of active bargaining unit employees.

(PPL Electric)
PPL Electric's cash provided by operating activities in 2019 decreased $50 million compared with 2018.
Net income decreased $8 million between the periods and included an increase in non-cash components of $1 million. The increase in non-cash components was due to an $18 million increase in depreciation expense (primarily due to additional assets placed into service, related to the ongoing efforts to ensure reliability of the delivery system and the replacement of aging infrastructure as well as the roll-out of the Act 129 Smart Meter program) partially offset by a $17 million decrease in deferred income taxes (due to book versus tax plant timing differences and Federal net operating losses, partially offset by a book to tax timing difference related to the TCJA regulatory liability).

The $49 million decrease in cash from changes in working capital was primarily due to an increase in accounts receivable (primarily due to timing of receipts), an increase in prepayments (primarily due to an increase in the 20172019 gross receipts tax prepayment compared to 2016)2018 and a 2018 state income tax overpayment to be applied to the 2019 state income tax liability), and an increase in net regulatory assets and liabilities (due to timing of rate recovery mechanisms), partially offset by an increase in accounts payable (primarily due to timing of payments).

Defined benefit plan funding was $7 million lower in 2019.

The $1 million decrease in cash provided by other operating activities was primarily due to a decrease in non-current regulatory liabilities (primarily due to a $37 million TCJA liability in 2018), partially offset by a decrease in non-current regulatory assets (due to timing of rate recovery mechanisms, amortization of storm costs incurred in the prior year and $21 million of storm costs incurred in 2018).

(LKE)
LKE's cash provided by operating activities in 2019 increased $5 million compared with 2018.

Table of Contents



•
Net income increased $2 million between the periods and included an increase in non-cash charges of $44 million. The increase in non-cash charges was primarily driven by an increase in depreciation expense (primarily due to higher depreciation rates and additional assets placed into service, net of retirements) and deferred income tax expense (primarily due to book versus tax plant timing differences, partially offset by a deferred tax benefit related to a Kentucky recycling credit).

The decrease in cash from changes in working capital was primarily driven by an increase in net regulatory assets and liabilities (primarily due to the impact of the TCJA and timing of rate recovery mechanisms), an increase in unbilled revenues (primarily due to weather and higher retail rates effective May 1, 2019) and a decrease in accounts payable (primarily due to timing of payments), partially offset by a decreasean increase in net regulatory assets andother current liabilities (due(primarily due to timing of rate recovery mechanisms), 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 benefit) and a decrease in accounts receivable (primarily due to a decrease in volumes due to milder weather in 2017 and income tax refunds received)payments).


•
Defined benefit plan funding was $94 million lower in 2019.
Defined benefit plan funding was $24 million higher in 2017.

(LKE)
LKE's cash provided by operating activities in 2017 increased $104 million compared with 2016.
The increasedecrease in cash from changes in working capitalLKE's other operating activities was primarily driven by decreases 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 taxes payable due to timing of payments, partially offset by a decrease in accounts payable due to the timing of fuel purchases and payments.ARO expenditures.

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


(LG&E)
 
LG&E's cash provided by operating activities in 20172019 increased $35$3 million compared with 2016.2018.
•
Net income decreased $14 million between the periods and included an increase in non-cash charges of $23 million. The increase in non-cash charges was primarily driven by an increase in depreciation expense (primarily due to higher depreciation rates and additional assets placed into service, net of retirements) and deferred income tax expense (primarily due to book versus tax plant timing differences).

The decrease in cash from changes in working capital was primarily driven by decreasesan increase in accounts payablenet regulatory assets and liabilities (primarily due to fuel purchases from lower generationthe impact of the TCJA and the timing of paymentsrate recovery mechanisms) and taxes payablean increase in unbilled revenues (primarily due to timing of payments, partially offset by decreases in accounts receivable from customersweather and unbilled revenues due to milder weather in 2017 compared to 2016 and accounts receivable from affiliates due to timing of intercompany settlements associated with inventory and energy sales to KU.higher retail rates effective May 1, 2019).


•
Defined benefit plan funding was $53 million lower in 2019.
Defined benefit plan funding was $42 million lower in 2017.


(KU)
 
KU's cash provided by operating activities in 2017 increased $322019 decreased $4 million compared with 2016.2018.
•
Net income decreased $6 million between the periods and included an increase in non-cash charges of $34 million. The increase in non-cash charges was primarily driven by an increase in deferred income tax expense (primarily due to book versus tax plant timing differences) and depreciation expense (primarily due to higher depreciation rates and additional assets placed into service, net of retirements).

The increasedecrease in cash from changes in working capital was primarily driven by an increase in net regulatory assets and liabilities (primarily due to the impact of the TCJA and the timing of rate recovery mechanisms), an increase in unbilled revenues (primarily due to weather and higher retail rates effective May 1, 2019), and a decrease in accounts payable (primarily due to timing of payments), partially offset by an increase in other current liabilities (primarily due to timing of payments) and a decrease in accounts receivable from customers and unbilled revenues(primarily due to milder weatherweather).

Defined benefit plan funding was $50 million lower in 2017 compared to 2016, a2019.

The decrease in fuel purchases due to lower generationcash from KU's other operating activities was primarily 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 and accounts payable to affiliates due to timing of intercompany settlements associated with inventory and energy purchases from LG&E.ARO expenditures.


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 ninesix months ended SeptemberJune 30, 20172019 compared with 20162018 was as follows.

Table of Contents



 PPL PPL Electric LKE LG&E KU
Decrease (Increase)$(79) $(112) $21
 $50
 $(28)
 PPL PPL Electric LKE LG&E KU
Decrease (Increase)$53
 $(15) $34
 $72
 $(39)

Table of Contents



For PPL, the increasedecrease in expenditures was due to lower project expenditures at WPD, LKE and LG&E, partially offset by higher project expenditures at PPL Electric and KU partially offset by lower projectKU. The decrease in expenditures at WPD was primarily due to a decrease in expenditures to enhance system reliability and a decrease in foreign currency exchange rates. The decrease in expenditures at LKE was primarily due to decreased spending for environmental water projects at LG&E.&E's Mill Creek and Trimble County plants and KU's Ghent plant, offset by spending on various other projects at KU that are not individually significant. The increase in project expenditures for PPL Electric was primarily due to an increase in capital spending related to the ongoing efforts to improve reliability and 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 increase in expenditures for KU was primarily due to increased spending for environmental water projects at KU’s Ghent plant.infrastructure.

Financing Activities
 
(All Registrants)
 
The components of the change in cash provided by (used in) financing activities for the ninesix months ended SeptemberJune 30, 20172019 compared with 20162018 were as follows.
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)                  
Debt issuance/retirement, net$692
 $470
 $—
 $—
 $—
$235
 $(398) $405
 $99
 $306
Settlement of cross-currency swaps(46) —
 —
 —
 —
Debt issuance/retirement with affiliate, net—
 —
 (250) —
 —
Stock issuances/redemptions, net142
 —
 —
 —
 —
(112) —
 —
 —
 —
Dividends(28) (38) —
 (63) 26
(36) 7
 —
 10
 45
Capital contributions/distributions, net—
 375
 (129) (47) (20)—
 (425) 87
 (18) 23
Change in short-term debt, net537
 (425) 135
 35
 25
(582) 185
 (490) (167) (323)
Notes payable with affiliate—
 —
 (88) 10
 —
—
 —
 216
 —
 —
Other financing activities(1) (3) —
 (1) —
(2) 3
 (8) (4) (4)
Total$1,296
 $379
 $(82) $(66) $31
$(497) $(628) $(40) $(80) $47
 
See Note 78 to the Financial Statements in this Form 10-Q for information on 20172019 short-term and long-term debt activity, equity transactions and PPL dividends. See Note 8 to the Financial Statements in the Registrants' 20162018 Form 10-K for information on 20162018 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 SeptemberJune 30, 2017,2019, the total committed borrowing capacity under credit facilities and the use of that capacityborrowings under these credit facilities was as follows:were:
 
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
 $—
 $303
 $1,097
$1,550
 $—
 $1,029
 $521
PPL Electric Credit Facility650
 —
 1
 649
650
 —
 186
 464
              
LKE Credit Facility75
 —
 —
 75
LG&E Credit Facility500
 —
 190
 310
LG&E Credit Facilities500
 —
 96
 404
KU Credit Facilities598
 —
 198
 400
598
 —
 198
 400
Total LKE1,173
 —
 388
 785
1,098
 —
 294
 804
Total U.S. Credit Facilities (a)$3,223
 $—
 $692
 $2,531
$3,298
 $—
 $1,509
 $1,789
Total U.K. Credit Facilities (b)£1,285
 £501
 £—
 £783
£1,055
 £272
 £—
 £783
 


Table of Contents




(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%6%, LKE - 21%22%, LG&E - 7% and KU - 37%.
(b)The amounts borrowed at SeptemberJune 30, 20172019 were a USD-denominated borrowing of $200 million and GBP-denominated borrowings of £114 which equated to $446$143 million. The unused capacity reflects the USD-denominated borrowing amount borrowed in GBP of £156 million as of the date borrowed. At SeptemberJune 30, 2017,2019, the USD equivalent of unused capacity under the U.K. committed credit facilities was $1.0 billion.$989 million.


The commitments under the U.K. credit facilities are provided by a diverse bank group, with no one bank providing more than 20%13% of the total committed capacity.
 
See Note 78 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 
Non-affiliate Used
Capacity
 
Unused
Capacity
LKE Credit Facility$225
 $159
 $—
 $66
$375
 $203
 $—
 $172
LG&E Money Pool (a)500
 10
 190
 300
500
 —
 96
 404
KU Money Pool (a)500
 —
 —
 500
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 1012 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.credit facility. The following commercial paper programs were in place at SeptemberJune 30, 2017:2019:
Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
PPL Capital Funding$1,000
 $285
 $715
$1,500
 $1,014
 $486
PPL Electric650
 —
 650
650
 185
 465
          
LG&E350
 190
 160
350
 96
 254
KU350
 —
 350
350
 —
 350
Total LKE700
 190
 510
700
 96
 604
Total PPL$2,350
 $475
 $1,875
$2,850
 $1,295
 $1,555


Long-term Debt (All Registrants)


See Note 78 to the Financial Statements for information regarding the Registrants’ long-term debt activities.


(PPL)

Equity Securities Activities

ATM Program

ForIn February 2018, PPL entered into an equity distribution agreement, pursuant to which PPL may sell, from time to time, up to an aggregate of $1.0 billion of its common stock through an at-the-market offering program; including a forward sales component. The compensation paid to the periodsselling agents by PPL may be up to 2% of the gross offering proceeds of the shares. There were no issuances under the ATM program for the three and six months ended SeptemberJune 30, 2017, PPL issued the following:2019.
 Three Months Nine Months
Number of shares (in thousands)2,049
 5,526
Average share price$39.04
 $38.49
Net Proceeds$79
 $211



Table of Contents




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


Common Stock Dividends
 
In August 2017,May 2019, PPL declared a quarterly common stock dividend, payable October 2, 2017,July 1, 2019, of 39.541.25 cents per share (equivalent to $1.58$1.65 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 reviewedreview 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 2017:2019:


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


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's2019, Moody’s and S&P assigned ratings of A1 and A to PPL Electric's $475LG&E’s $400 million 3.95%4.25% First Mortgage Bonds due 2047.2049. The bonds were issued April 1, 2019.


In August 2017,March 2019, Moody’s and S&P assigned ratings of A1 and A to the County of Jefferson, Kentucky’s $128 million 1.85% Pollution Control Revenue Bonds, 2001 Series A (Louisville Gas and Electric Company Project), due 2033, previously issued on behalf of LG&E. The bonds were remarketed April 1, 2019.

In May 2019, Moody's assigned a rating of A1, and in June 2019, S&P confirmed itsassigned a rating of A for LCIDA's $116to LG&E's $31 million 1.80% Pollution Control1.65% Series A Environmental Facilities Revenue Refunding Bonds (PPL Electric Utilities Corporation Project)due 2033. The bonds were remarketed June 1, 2019.

In May 2019, Moody's assigned a rating of A1, and in June 2019, S&P assigned a rating of A to LG&E's $35 million 1.65% Series 2016A due 2029 and LCIDA's $108 million 1.80% Pollution ControlB Environmental Facilities Revenue Refunding Bonds (PPL Electric Utilities Corporation Project) Series 2016B due 2027, each previously issued on behalf of PPL Electric.2033. The bonds were remarketed June 1, 2019.


(PPL, LKE and LG&E)KU)


In March 2017,2019, Moody’s assigned a rating of A1 and S&P confirmed its rating of A for the Louisville/Jefferson Metro Government of Kentucky's $128to KU’s $300 million 1.5% Pollution Control Revenue4.375% First Mortgage Bonds 2003 Series A (Louisville Gas and Electric Company Project) due 2033, previously2045. The bonds were issued on behalf of LG&E.April 1, 2019.

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


Table of Contents

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 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 1315 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 SeptemberJune 30, 2017.2019.
 

Table of Contents



(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' 20162018 Form 10-K.


Risk Management
 
Market Risk
 
(All Registrants)
 
See Notes 1214 and 1315 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.


Table of Contents


The following interest rate hedges were outstanding at SeptemberJune 30, 2017.2019.
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$316
 $(8) $(4) 2031
Cross-currency swaps (c)802
 162
 (90) 2028702
 163
 (18) 2028
Economic hedges              
Interest rate swaps (d)147
 (29) (1) 2033147
 (24) (1) 2033
LKE              
Economic hedges 
  
  
   
  
  
  
Interest rate swaps (d)147
 (29) (1) 2033147
 (24) (1) 2033
LG&E 
  
  
   
  
  
  
Economic hedges 
  
  
   
  
  
  
Interest rate swaps (d)147
 (29) (1) 2033147
 (24) (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)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 SeptemberJune 30, 20172019 was insignificant for

Table of Contents



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 SeptemberJune 30, 20172019 is shown below.
10% Adverse
Movement
in Rates
10% Adverse
Movement
in Rates
PPL$600
$672
PPL Electric165
180
LKE172
205
LG&E63
87
KU95
106
 
Foreign Currency Risk (PPL)
 
PPL is exposed to foreign currency risk primarily through investments in and earnings of 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 SeptemberJune 30, 2017.2019.
 
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
 
Exposure
Hedged
 
Fair Value,
Net - Asset
(Liability)
 
Effect of a
10%
Adverse
Movement
in Foreign
Currency
Exchange
Rates (a)
 
Maturities
Ranging
Through
Economic hedges (b)£1,154
 $180
 $(126) 2020
 
(a)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.

Table of Contents

(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 required to purchase electricity to fulfill its obligation as a PLR. Potential commodity price risk is insignificant and mitigated through its PUC-approved cost recovery mechanism and full-requirement supply agreements to serve its PLR customers which transfer the risk to energy suppliers.
•
LG&E's and KU's rates include certain mechanisms for fuel, fuel-related expenses and energy purchases. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.
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 regulations, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2018 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.

WPD is exposed to volumetric risk which is significantly mitigated as a result
Table 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.Contents


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 1214 and 1315 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' 20162018 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 gainloss of $194$84 million for the ninesix months ended SeptemberJune 30, 2017,2019, which primarily reflected a $345$125 million increasedecrease to PP&E, and a $75$23 million increasedecrease to goodwill and an $9 million decrease to other net assets, partially offset by a $203$73 million increasedecrease to long-term debt and a $23 million increase to other net liabilities.debt. Changes in this exchange rate resulted in a foreign currency translation loss of $840$143 million for the ninesix months ended SeptemberJune 30, 2016,2018, which primarily reflected a $1.6 billion$227 million decrease to PP&E, and $375a $45 million decrease to goodwill and a $2 million increase to other net liabilities, partially offset by a $995$131 million decrease to long-term debt and a $160 million decrease to other net liabilities.debt. 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 1012 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

Capacity Needs(PPL, LKE, LG&E and KU)

As a result of environmental requirements and energy efficiency measures, KU retired two older coal-fired electricity generating units at the E.W. Brown plant in February 2019 with a combined summer rating capacity of 272 MW. Despite the retirement of these units, LG&E and KU maintain sufficient generating capacity to the Financial Statements in the Registrants' 2016 Form 10-K for information on the more significant activities.serve their load.



Table of Contents

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 below for further discussion of the EPA's CCR Rule and Note 911 to the Financial Statements for a discussion of the moreother significant environmental matters including:
including Legal Matters,
NAAQS, Climate Change,
CCRs,
ELGs, and
NAAQS.

ELGs. Additionally, see "Item 1. Business - Environmental Matters" in the Registrants' 20162018 Form 10-K for additional information.

EPA’s CCR Rule (PPL, LKE, LG&E and KU)

Over the next several years, LG&E and KU anticipate undertaking extensive measures, including significant capital expenditures, in complying with the provisions of the EPA's CCR Rule. Although LG&E and KU have identified compliance

Table of Contents



strategies and are finalizing closure plans and schedules as required by the CCR Rule, remaining regulatory uncertainties could substantially impact current plans. As a result of a judicial settlement, legislative amendments, and the EPA's review of the current program, the EPA is in the process of undertaking significant revisions to the CCR Rule. In July 2018, the EPA published certain amendments to the CCR Rule which include extending the deadline for commencement of closure of certain impoundments from April 2019 to October 31, 2020. The EPA has announced that additional amendments to the rule will be proposed. In August 2018, the D.C. Circuit Court of Appeals vacated and remanded portions of the CCR Rule, including the provisions allowing unlined impoundments to continue operating and provisions exempting certain inactive impoundments from regulation. The exact impact of the judicial decision will be highly dependent on the EPA's rulemaking actions on remand and any subsequent legal challenges. LG&E and KU are evaluating the specific plan impacts of developments to date and will continue to monitor the EPA's ongoing regulatory proceedings.

In connection with the CCR Rule, LG&E and KU have recorded adjustments to existing AROs beginning in 2015 and continue to record adjustments as required. See Note 19 to the Financial Statements in the Registrants’ 2018 Form 10-K for additional information on environmental matters.AROs. LG&E and KU continue to perform technical evaluations related to their plans to close impoundments at all of their generating plants. Although LG&E and KU believe their recorded liabilities appropriately reflect their obligations under current rules, changes to current compliance strategies as a result of ongoing regulatory proceedings or other developments could result in additional closure costs. It is not currently possible to determine the magnitude of any potential cost increases related to changes in compliance strategies or plans, and the timing of future cash outflows are indeterminable at this time. As rules are revised, technical evaluations are completed, and the timing and details of impoundment closures develop further on a plant by-plant basis, LG&E and KU will update their cost estimates and record any changes as necessary to their ARO liability, which could be material. These costs are subject to rate recovery.

New Accounting Guidance(All Registrants)
 
See Note 17Notes 2 and 18 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.
 
Application of Critical Accounting Policies(All Registrants)
 
Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following table summarizes the accounting policies by Registrant that are particularly important to an understanding of the reported financial condition or results of operations, and require management to make estimates or other judgments of matters that are inherently uncertain. See "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrants' 20162018 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
Regulatory Assets and LiabilitiesXXXXX
Price Risk ManagementX
Goodwill ImpairmentX   X X X
AROsX   X X X
Price Risk ManagementX
Regulatory Assets and LiabilitiesXXXXX
Revenue Recognition - Unbilled Revenue     X X X




Table of Contents




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 SeptemberJune 30, 2017,2019, 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 controlcontrols over financial reporting during the Registrants' thirdsecond 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 involvinglegal, tax, regulatory, environmental andor other matters, which information is incorporated by reference into this Part II,administrative proceedings that became reportable events or were pending in the second quarter of 2019 see:
 
"Item 3. Legal Proceedings" in each Registrant's 20162018 Form 10-K; and
Notes 6, 7 and 911 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' 20162018 Form 10-K.


Item 4. Mine Safety Disclosures
 
Not applicable.
 

Table of Contents



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)-32-23 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

4(a)
-Supplemental Indenture No. 16, dated as of September 8, 2017, among PPL Capital Funding, Inc., PPL Corporation and The Bank of New York Mellon (as successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank)), as Trustee (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 6, 2017)
*4(b)10(a)
-£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
*4(c)
-Amendment No. 1 to PPL Employee Stock Ownership Plan, dated October 2, 2017
*10(a)-1
-£20,000,000 Uncommitted50,000,000 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
*10(a)-2
-Amendment to said Uncommitted Facility Letter, dated as of July 28, 2017
*10(b)
-$200,000,000 Term Loan Credit Agreement dated as of October 26, 2017,June 7, 2019, among Louisville Gas and Electric Company,Western Power Distribution plc, as the Borrower, the Lenders from time to time party heretoNational Westminster Bank plc as Original Lender, and U.S.National Westminster Bank National Association,plc as Administrative Agent
*12(a)
-PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(b)
-PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(c)
-LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
*12(d)
-Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
*12(e)
-Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
   
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended SeptemberJune 30, 2017,2019, filed by the following officers for the following companies:
   
*31(a)
-PPL Corporation's principal executive officer
*31(b)
-PPL Corporation's principal financial officer
*31(c)
-PPL Electric Utilities Corporation's principal executive officer
*31(d)
-PPL Electric Utilities Corporation's principal financial officer
*31(e)
-LG&E and KU Energy LLC's principal executive officer
*31(f)
-LG&E and KU Energy LLC's principal financial officer
*31(g)
-Louisville Gas and Electric Company's principal executive officer
*31(h)
-Louisville Gas and Electric Company's principal financial officer
*31(i)
-Kentucky Utilities Company's principal executive officer
*31(j)
-Kentucky Utilities Company's principal financial officer
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended SeptemberJune 30, 2017,2019, furnished by the following officers for the following companies:
   
*32(a)
-PPL Corporation's principal executive officer and principal financial officer
*32(b)
-PPL Electric Utilities Corporation's principal executive officer and principal financial officer
*32(c)
-LG&E and KU Energy LLC's principal executive officer and principal financial officer
*32(d)
-Louisville Gas and Electric Company's principal executive officer and principal financial officer
*32(e)
-Kentucky Utilities Company's principal executive officer and principal financial officer

Table of Contents

   
101.INS-XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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
104-The Cover Page Interactive Data File is formatted as Inline XBRL and contained in Exhibits 101.


Table of Contents




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.
 
  PPL Corporation
  (Registrant) 
    
    
    
Date:November 1, 2017August 6, 2019/s/  Stephen K. BreiningerMarlene C. Beers 
  
Stephen K. BreiningerMarlene C. Beers
Vice President and Controller
 
  (Principal Accounting Officer) 
    
    
    
  PPL Electric Utilities Corporation
  (Registrant) 
    
    
    
Date:November 1, 2017August 6, 2019/s/  Marlene C. BeersStephen K. Breininger 
  
Marlene C. BeersStephen K. Breininger
Vice President-Finance and Regulatory Affairs and Controller
 
  (Principal Financial Officer and Principal Accounting Officer) 
    
    
    
  LG&E and KU Energy LLC
  (Registrant) 
    
  Louisville Gas and Electric Company
  (Registrant) 
    
  Kentucky Utilities Company
  (Registrant) 
    
    
    
Date:November 1, 2017August 6, 2019/s/  Kent W. Blake 
  
Kent W. Blake
Chief Financial Officer
 
  (Principal Financial Officer and Principal Accounting Officer) 














110120