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


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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, 2018.2019
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




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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 every Interactive Data File required to be submitted 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 such files). 
PPL Corporation
Yes X   
☒
No☐ 
PPL Electric Utilities Corporation
Yes X   
☒
No☐ 
LG&E and KU Energy LLC
Yes X   
☒
No☐ 
Louisville Gas and Electric Company
Yes X   
☒
No☐ 
Kentucky Utilities Company
Yes X   
☒
No☐ 
 
Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, smaller reporting companies or emerging growth companies. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated
filer
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
Emerging growth company
PPL Corporation[ X ]☒[     ]☐[     ]☐[     ]☐[     ]☐
PPL Electric Utilities Corporation[     ]☐[     ]☐[ X ]☒[     ]☐[     ]☐
LG&E and KU Energy LLC[     ]☐[     ]☐[ X ]☒[     ]☐[     ]☐
Louisville Gas and Electric Company[     ]☐[     ]☐[ X ]☒[     ]☐[     ]☐
Kentucky Utilities Company[     ]☐[     ]☐[ X ]☒[     ]☐[     ]☐


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




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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

PPL CorporationCommon stock, $0.01 par value, 720,199,922722,247,303 shares outstanding at October 25, 2018.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, 2018.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, 2018.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, 2018.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.




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PPL CORPORATION
PPL ELECTRIC UTILITIES CORPORATION
LG&E AND KU ENERGY LLC
LOUISVILLE GAS AND ELECTRIC COMPANY
KENTUCKY UTILITIES COMPANY
 
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20182019
 
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This combined Form 10-Q is separately filed by the following Registrants in their individual capacity: PPL Corporation, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant, except that information under "Forward-Looking Information" relating to subsidiaries of PPL Corporation is also attributed to PPL Corporation and information relating to the subsidiaries of LG&E and KU Energy LLC is also attributed to LG&E and KU Energy LLC.
 
Unless otherwise specified, references in this Report, individually, to PPL Corporation, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company are references to such entities directly or to one or more of their subsidiaries, as the case may be, the financial results of which subsidiaries are consolidated into such Registrants' 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
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




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 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
  
2.   Summary of Significant Accounting Policies
34
3.   Segment and Related Information
35
  
4.   Revenue from Contracts with Customers
36
  
5.   Earnings Per Share
39
  
6.   Income Taxes
40
  
7.   Utility Rate Regulation
4442
  
8.   Financing Activities
5046
  
9. Leases
48
10. Defined Benefits
51
11. Commitments and Contingencies
53
  
10. Commitments and Contingencies12. Related Party Transactions
5562
  
11. Related Party Transactions13. Other Income (Expense) - net
64
  
12. Other Income (Expense) - net14. Fair Value Measurements
64
15. Derivative Instruments and Hedging Activities
66
  
13. Fair Value Measurements16. Asset Retirement Obligations
6674
  
14. Derivative Instruments and Hedging Activities17. Accumulated Other Comprehensive Income (Loss)
6974
  
15. Asset Retirement Obligations
76
16. Accumulated Other Comprehensive Income (Loss)
76
17.18. New Accounting Guidance Pending Adoption
7875
 Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 
  
Overview
8177
   
Introduction
8177
   
Business Strategy
8379
   
Financial and Operational Developments
80
Results of Operations
84
  
Results of Operations
89
PPL Corporation and Subsidiaries - Statement of Income Analysis, Segment Earnings and Adjusted Gross Margins
9084
   
PPL Electric Utilities Corporation and Subsidiaries - Statement of Income Analysis, Earnings and Adjusted Gross Margins
10496
   
LG&E and KU Energy LLC and Subsidiaries - Statement of Income Analysis, Earnings and Adjusted Gross Margins
10799
   
Louisville Gas and Electric Company - Statement of Income Analysis, Earnings and Adjusted Gross Margins
110102
   
Kentucky Utilities Company - Statement of Income Analysis, Earnings and Adjusted Gross Margins
113105
  
Financial Condition
108
Liquidity and Capital Resources
108
Risk Management
114
Foreign Currency Translation
116
   
Liquidity and Capital ResourcesRelated Party Transactions
116
   
Risk ManagementAcquisitions, Development and Divestitures
122116
   
Foreign Currency TranslationEnvironmental Matters
124
Related Party Transactions
124
Acquisitions, Development and Divestitures
125
Environmental Matters
125116
  
New Accounting Guidance
125117
  
Application of Critical Accounting Policies
126117
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
127118
 
Item 4.  Controls and Procedures
127118
PART II.  OTHER INFORMATION 
 
Item 1. Legal Proceedings
127118
 
Item 1A. Risk Factors
127118
 
Item 4. Mine Safety Disclosures
127118
 
Item 5. Other Information6. Exhibits
127
Item 6. Exhibits
128119
SIGNATURES
130120
COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 




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GLOSSARY OF TERMS AND ABBREVIATIONS
 
PPL Corporation and its subsidiaries
 
KU - Kentucky Utilities Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky.
 
LG&E - Louisville Gas and Electric Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas in Kentucky.
 
LKE - LG&E and KU Energy LLC, a subsidiary of PPL and the parent of LG&E, KU and other subsidiaries.
 
LKS - LG&E and KU Services Company, a subsidiary of LKE that provides administrative, management, and support services primarily to LKE and its subsidiaries.
 
PPL - PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding, PPL Capital Funding, LKE and other subsidiaries.
 
PPL Capital Funding - PPL Capital Funding, Inc., a financing subsidiary of PPL that provides financing for the operations of PPL and certain subsidiaries. Debt issued by PPL Capital Funding is guaranteed as to payment by PPL.
 
PPL Electric - PPL Electric Utilities Corporation, a public utility subsidiary of PPL engaged in the regulated transmission and distribution of electricity in its Pennsylvania service area and that provides electricity supply to its retail customers in this area as a PLR.
 
PPL Energy Funding - PPL Energy Funding Corporation, a subsidiary of PPL and the parent holding company of PPL Global and other subsidiaries.
 
PPL EU Services - PPL EU Services Corporation, a subsidiary of PPL that provides administrative, management and support services primarily to PPL Electric.
 
PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Funding that, primarily through its subsidiaries, owns and operates WPD, PPL's regulated electricity distribution businesses in the U.K.


PPL Services - PPL Services Corporation, a subsidiary of PPL that provides administrative, management and support services to PPL and its subsidiaries.
 
PPL WPD Limited - an indirect U.K. subsidiary of PPL Global. Following a reorganizationreorganizations in October 2015 and October 2017, PPL WPD Limited is an 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, an 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.
 

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

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

Other terms and abbreviations

£ - British pound sterling.

20172018 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2017.2018.
 
Act 11 - Act 11 of 2012 that became effective on April 16, 2012. The Pennsylvania legislation authorized 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 (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.


Adjusted Gross 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).

Advanced Metering System - meters and meter-reading systems that provide two-way communication capabilities, which communicate usage and other relevant data to LG&E and KU at regular intervals, and are also able to receive information from LG&E and KU, such as software upgrades and requests to provide meter readings in real time.

AFUDC - allowance for funds used during construction. The cost of equity and debt funds used to finance construction projects of regulated businesses, which is capitalized as part of construction costs.


AOCI - accumulated other comprehensive income or loss.


ARO - asset retirement obligation.

ATM Program - at-the-market stock offering program.

CCR(s) - coal combustion residual(s). CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.

Clean Air Act - federal legislation enacted to address certain environmental issues related to air emissions, including acid rain, ozone and toxic air emissions.
 
Clean Water Act - federal legislation enacted to address certain environmental issues relating to water quality including effluent discharges, cooling water intake, and dredge and fill activities.


COBRA - Consolidated Omnibus Budget Reconciliation Act, which provides individuals the option to temporarily continue employer group health insurance coverage after termination of employment.

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.
 
CPIH - Consumer Price Index including owner-occupiers' housing costs. An aggregate measure of changes in the cost of living in the U.K., including a measure of owner-occupiers' housing costs.

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.


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

DNO - Distribution Network Operator in the U.K.

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


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.


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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.

DUoS - Distribution Use of System, the charge to licensed third party energy suppliers who are WPD's customers and use WPD's networks to deliver electricity to their customers, the end-users.
 
Earnings from Ongoing Operations- a non-GAAP financial measure of earnings adjusted for the impact of special items and used in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A).


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


ELG(s)- Effluent Limitation Guidelines, regulations promulgated by the EPA.

EPA - Environmental Protection Agency, a U.S. government agency.


EPS - earnings per share.

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


GHG(s) -greenhouse gas(es).

GLT - gas line tracker. The KPSC approved mechanism for LG&E's recovery of costs associated with gas transmission lines, gas service lines, gas risers, leak mitigation, and gas main replacements.


HB 487 - House Bill 487. Comprehensive Kentucky state tax legislation enacted onin April 27, 2018.


IBEW - International Brotherhood of Electrical Workers.

IRS - Internal Revenue Service, a U.S. government agency.

IT - Information Technology.
 
KPSC - Kentucky Public Service Commission, the state agency that has jurisdiction over the regulation of rates and service of utilities in Kentucky.


kV - kilovolt.

kWh - kilowatt hour, basic unit of electrical energy.


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LIBOR - London Interbank Offered Rate.


Mcf - one thousand cubic feet, a unit of measure for natural gas.

Moody's - Moody's Investors Service, Inc., a credit rating agency.

MPR - Mid-period review, which is a review of output requirements in RIIO-ED1 that can be initiated by Ofgem halfway through the price control covering material changes to existing outputs that can be justified by clear changes in government policy or new outputs that may be needed to meet the needs of consumers and other network users. On April 30, 2018, Ofgem decided not to engage in a mid-period review of the RIIO-ED1 price-control period.

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.
 
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.
 

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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 capacities of 2,120 MW.


Performance unit - 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; or (ii) corporate return on equity (ROE) based on the average of the annual ROE for each year of the three-year performance period.


PJM - PJM Interconnection, L.L.C., operator of the electricity transmission network and electricity energy market in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

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.



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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 have 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.


Riverstone - 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.



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RPI - retail price index, is a measure of inflation in the United Kingdom published monthly by the Office for National Statistics.
 
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.


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 - Standard & Poor'sS&P Global Ratings, Services, 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.
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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 - refers to U.K. Finance Act of 2015 and 2016, enacted in November 2015 and September 2016 respectively, which collectively reduced the U.K. statutory corporate income tax rate from 20% to 19%, effective April 1, 2017 and from 19% to 17%, effective April 1, 2020.

VEBA - Voluntary Employee Beneficiary Association. A tax-exempt trust under the Internal Revenue Code Section 501(c)(9) used by employers to fund and pay eligible medical, life and similar benefits.


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


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Forward-looking Information
 
Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical fact are "forward-looking statements" within the meaning of the federal securities laws. Although the Registrants believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct. Forward-looking statements are subject to many risks and uncertainties, and actual results may differ materially from the results discussed in forward-looking statements. In addition to the specific factors discussed in each Registrant's 20172018 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 proceedings;
changes in U.S. state or federal or U.K. tax laws or regulations, including regulations;
the TCJA;
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;
developments related to ongoing 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 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 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;

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business dispositions or acquisitions and our ability to realize expected benefits from such business transactions;
collective labor bargaining negotiations; and
the outcome of litigation against the Registrants and their subsidiaries.


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

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




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


 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017
Operating Revenues$1,872
 $1,845
 $5,846
 $5,521
        
Operating Expenses       
Operation       
Fuel206
 202
 609
 576
Energy purchases149
 143
 538
 494
Other operation and maintenance479
 438
 1,453
 1,340
Depreciation275
 257
 817
 745
Taxes, other than income77
 69
 234
 214
Total Operating Expenses1,186
 1,109
 3,651
 3,369
        
Operating Income686
 736
 2,195
 2,152
        
Other Income (Expense) - net106
 (35) 297
 (112)
        
Interest Expense244
 230
 718
 669
        
Income Before Income Taxes548
 471
 1,774
 1,371
        
Income Taxes103
 116
 362
 321
        
Net Income$445
 $355
 $1,412
 $1,050
        
Earnings Per Share of Common Stock: 
Net Income Available to PPL Common Shareowners:       
Basic$0.63
 $0.52
 $2.02
 $1.53
Diluted$0.62
 $0.51
 $2.01
 $1.53
        
Dividends Declared Per Share of Common Stock$0.41
 $0.395
 $1.23
 $1.185
        
Weighted-Average Shares of Common Stock Outstanding
(in thousands)
       
Basic703,730
 686,563
 699,117
 683,783
Diluted710,517
 688,746
 702,305
 686,081
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

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

 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017
Net income$445
 $355
 $1,412
 $1,050
        
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, $0, ($2), ($1)(187) (12) (321) 195
Qualifying derivatives, net of tax of ($5), $0, ($5), $722
 1
 21
 (29)
Defined benefit plans: 
 

    
Prior service costs, net of tax of $0, $0, $0, $0—
 —
 (1) —
Net actuarial gain (loss), net of tax of $3, $2, $3, $9(8) (3) (9) (14)
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): 
  
    
Qualifying derivatives, net of tax of $3, $1, $4, ($6)(14) —
 (21) 24
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $0—
 —
 —
 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 ($8), ($10), ($26), ($28)34
 34
 104
 97
Total other comprehensive income (loss)(153) 20
 (226) 275
        
Comprehensive income$292
 $375
 $1,186
 $1,325
 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.



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

 Nine Months Ended September 30,
 2018 2017
Cash Flows from Operating Activities 
  
Net income$1,412
 $1,050
Adjustments to reconcile net income to net cash provided by operating activities 
  
Depreciation817
 745
Amortization56
 72
Defined benefit plans - (income)(146) (69)
Deferred income taxes and investment tax credits255
 284
Unrealized (gains) losses on derivatives, and other hedging activities(129) 194
Stock-based compensation expense21
 30
Other(12) (8)
Change in current assets and current liabilities 
  
Accounts receivable38
 25
Accounts payable(55) (93)
Unbilled revenues129
 81
Fuel, materials and supplies25
 35
Prepayments(38) (37)
Taxes payable20
 6
Regulatory assets and liabilities, net39
 (3)
Accrued interest48
 49
Other current liabilities(36) (53)
Other(21) 5
Other operating activities   
Defined benefit plans - funding(284) (558)
Proceeds from transfer of excess benefit plan funds65
 —
Other assets(38) 4
Other liabilities44
 (5)
Net cash provided by operating activities2,210
 1,754
Cash Flows from Investing Activities 
  
Expenditures for property, plant and equipment(2,344) (2,152)
Purchase of available-for-sale securities(65) —
Other investing activities(57) (16)
Net cash used in investing activities(2,466) (2,168)
Cash Flows from Financing Activities 
  
Issuance of long-term debt602
 1,088
Retirement of long-term debt(277) (60)
Issuance of common stock678
 275
Payment of common stock dividends(846) (800)
Net increase in short-term debt481
 269
Other financing activities(20) (34)
Net cash provided by financing activities618
 738
Effect of Exchange Rates on Cash, Cash Equivalents and Restricted Cash(9) 7
Net Increase in Cash, Cash Equivalents and Restricted Cash353
 331
Cash, Cash Equivalents and Restricted Cash at Beginning of Period511
 365
Cash, Cash Equivalents and Restricted Cash at End of Period$864
 $696
    
Supplemental Disclosures of Cash Flow Information   
Significant non-cash transactions:   
Accrued expenditures for property, plant and equipment at September 30,$311
 $373
Accrued expenditures for intangible assets at September 30,$70
 $60

 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.



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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.

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


September 30,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$842
 $485
$406
 $621
Accounts receivable (less reserve: 2018, $54; 2017, $51) 
  
Accounts receivable (less reserve: 2019, $60; 2018, $56) 
  
Customer684
 681
662
 663
Other58
 100
110
 107
Unbilled revenues411
 543
425
 496
Fuel, materials and supplies295
 320
286
 303
Prepayments103
 66
142
 70
Price risk management assets91
 49
133
 109
Other current assets61
 50
67
 63
Total Current Assets2,545
 2,294
2,231
 2,432
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant39,144
 38,228
40,793
 39,734
Less: accumulated depreciation - regulated utility plant7,196
 6,785
7,583
 7,310
Regulated utility plant, net31,948
 31,443
33,210
 32,424
Non-regulated property, plant and equipment365
 384
342
 355
Less: accumulated depreciation - non-regulated property, plant and equipment111
 110
104
 101
Non-regulated property, plant and equipment, net254
 274
238
 254
Construction work in progress1,816
 1,375
1,682
 1,780
Property, Plant and Equipment, net34,018
 33,092
35,130
 34,458
      
Other Noncurrent Assets 
  
 
  
Regulatory assets1,525
 1,504
1,662
 1,673
Goodwill3,242
 3,258
3,139
 3,162
Other intangibles700
 697
710
 716
Pension benefit asset615
 284
832
 535
Price risk management assets206
 215
209
 228
Other noncurrent assets191
 135
291
 192
Total Other Noncurrent Assets6,479
 6,093
6,843
 6,506
      
Total Assets$43,042
 $41,479
$44,204
 $43,396
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.




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


September 30,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$1,549
 $1,080
$1,636
 $1,430
Long-term debt due within one year330
 348
136
 530
Accounts payable814
 924
830
 989
Taxes121
 105
111
 110
Interest326
 282
215
 278
Dividends287
 273
298
 296
Customer deposits265
 292
265
 257
Regulatory liabilities136
 95
60
 122
Other current liabilities555
 624
512
 551
Total Current Liabilities4,383
 4,023
4,063
 4,563
      
Long-term Debt19,924
 19,847
20,965
 20,069
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes2,717
 2,462
2,986
 2,796
Investment tax credits127
 129
125
 126
Accrued pension obligations649
 800
716
 771
Asset retirement obligations279
 312
223
 264
Regulatory liabilities2,739
 2,704
2,685
 2,714
Other deferred credits and noncurrent liabilities441
 441
458
 436
Total Deferred Credits and Other Noncurrent Liabilities6,952
 6,848
7,193
 7,107
      
Commitments and Contingent Liabilities (Notes 7 and 10)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Equity 
  
 
  
Common stock - $0.01 par value (a)7
 7
7
 7
Additional paid-in capital11,001
 10,305
11,069
 11,021
Earnings reinvested4,423
 3,871
4,903
 4,593
Accumulated other comprehensive loss(3,648) (3,422)(3,996) (3,964)
Total Equity11,783
 10,761
11,983
 11,657
      
Total Liabilities and Equity$43,042
 $41,479
$44,204
 $43,396
 
(a)1,560,000 shares authorized; 719,702721,840 and 693,398720,323 shares issued and outstanding at SeptemberJune 30, 20182019 and December 31, 2017.2018.


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




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


Common
stock
shares
outstanding (a)		 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 
Accumulated
other
comprehensive
loss
 Total
March 31, 2019721,371
 $7
 $11,051
 $4,761
 $(3,647) $12,172
Common stock issued469
   15
     15
Stock-based compensation    3
     3
Net income      441
   441
Dividends and dividend equivalents (b)      (299)   (299)
Other comprehensive income (loss)        (349) (349)
June 30, 2019721,840
 $7
 $11,069
 $4,903
 $(3,996) $11,983
           
December 31, 2018720,323
 $7
 $11,021
 $4,593
 $(3,964) $11,657
Common stock issued1,517
 

 47
     47
Stock-based compensation    1
     1
Net income      907
   907
Dividends and dividend equivalents (b)      (597)   (597)
Other comprehensive income (loss)        (32) (32)
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
Common
stock
shares
outstanding (a)		 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 
Accumulated
other
comprehensive
loss
 Total           
December 31, 2017693,398
 $7
 $10,305
 $3,871
 $(3,422) $10,761
693,398
 $7
 $10,305
 $3,871
 $(3,422) $10,761
Common stock issued26,304
 

 699
     699
5,730
  
 163
  
  
 163
Stock-based compensation    (3)     (3) 
  
 (6)  
  
 (6)
Net income      1,412
   1,412
 
  
  
 967
  
 967
Dividends and dividend equivalents      (860)   (860)
Dividends and dividend equivalents (b) 
  
  
 (572)  
 (572)
Other comprehensive income (loss)        (226) (226) 
  
  
  
 (73) (73)
September 30, 2018719,702
 $7
 $11,001
 $4,423
 $(3,648) $11,783
June 30, 2018699,128
 $7
 $10,462
 $4,266
 $(3,495) $11,240
                      
December 31, 2016679,731
 $7
 $9,841
 $3,829
 $(3,778) $9,899
Common stock issued8,402
  
 303
  
  
 303
Stock-based compensation 
  
 (22)  
  
 (22)
Net income 
  
  
 1,050
  
 1,050
Dividends and dividend equivalents 
  
  
 (813)  
 (813)
Other comprehensive income (loss) 
  
  
  
 275
 275
September 30, 2017688,133
 $7
 $10,122
 $4,066
 $(3,503) $10,692
           
(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.




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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,
2018 2017 2018 20172019 2018 2019 2018
Operating Revenues$548
 $547
 $1,704
 $1,620
$521
 $517
 $1,166
 $1,156
              
Operating Expenses 
  
     
  
    
Operation 
  
     
  
    
Energy purchases127
 121
 403
 374
110
 115
 281
 276
Other operation and maintenance127
 133
 419
 435
130
 159
 280
 292
Depreciation89
 77
 262
 228
96
 88
 191
 173
Taxes, other than income27
 27
 81
 79
24
 22
 55
 54
Total Operating Expenses370
 358
 1,165
 1,116
360
 384
 807
 795
              
Operating Income178
 189
 539
 504
161
 133
 359
 361
              
Other Income (Expense) - net5
 4
 18
 8
6
 7
 11
 13
              
Interest Income from Affiliate4
 2
 5
 3
—
 1
 2
 1
              
Interest Expense41
 36
 117
 105
41
 39
 83
 76
              
Income Before Income Taxes146
 159
 445
 410
126
 102
 289
 299
              
Income Taxes35
 64
 111
 159
32
 27
 74
 76
              
Net Income (a)$111
 $95
 $334
 $251
$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,
2018 20172019 2018
Cash Flows from Operating Activities 
  
 
  
Net income$334
 $251
$215
 $223
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation262
 228
191
 173
Amortization17
 25
11
 11
Defined benefit plans - expense2
 10
Deferred income taxes and investment tax credits77
 129
36
 53
Other(13) (8)(9) (9)
Change in current assets and current liabilities 
  
 
  
Accounts receivable22
 7
7
 37
Accounts payable(46) (38)(39) (60)
Unbilled revenues45
 30
31
 30
Prepayments(25) (31)(64) (47)
Regulatory assets and liabilities, net(25) —
(40) (27)
Taxes payable(1) 10
(4) (1)
Other12
 (9)(7) 1
Other operating activities 
  
 
  
Defined benefit plans - funding(28) (24)(21) (28)
Other assets(37) (2)4
 (41)
Other liabilities54
 (3)3
 49
Net cash provided by operating activities650
 575
314
 364
      
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(835) (851)(533) (518)
Net decrease in notes receivable from affiliate—
 (2)
Other investing activities(2) (5)3
 (3)
Net cash used in investing activities(837) (858)(530) (521)
      
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt398
 470
—
 398
Contributions from parent429
 575
—
 425
Payment of common stock dividends to parent(271) (231)(215) (222)
Net decrease in short-term debt—
 (295)
Net increase in short-term debt185
 —
Other financing activities(4) (6)(1) (4)
Net cash provided by financing activities552
 513
Net cash provided by (used in) financing activities(31) 597
      
Net Increase in Cash, Cash Equivalents and Restricted Cash365
 230
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash(247) 440
Cash, Cash Equivalents and Restricted Cash at Beginning of Period51
 15
269
 51
Cash, Cash Equivalents and Restricted Cash at End of Period$416
 $245
$22
 $491
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at September 30,$171
 $190
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,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$414
 $49
$20
 $267
Accounts receivable (less reserve: 2018, $26; 2017, $24) 
  
Accounts receivable (less reserve: 2019, $28; 2018, $27) 
  
Customer309
 279
286
 264
Other18
 71
21
 38
Accounts receivable from affiliates11
 —
10
 11
Unbilled revenues82
 127
89
 120
Materials and supplies26
 34
26
 25
Prepayments31
 6
62
 5
Regulatory assets18
 16
17
 11
Other current assets10
 6
8
 9
Total Current Assets919
 588
539
 750
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant11,332
 10,785
12,036
 11,637
Less: accumulated depreciation - regulated utility plant2,848
 2,778
2,961
 2,856
Regulated utility plant, net8,484
 8,007
9,075
 8,781
Construction work in progress643
 508
627
 586
Property, Plant and Equipment, net9,127
 8,515
9,702
 9,367
      
Other Noncurrent Assets 
  
 
  
Regulatory assets738
 709
805
 824
Intangibles260
 259
260
 260
Other noncurrent assets52
 11
48
 42
Total Other Noncurrent Assets1,050
 979
1,113
 1,126
      
Total Assets$11,096
 $10,082
$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,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$185
 $—
Accounts payable$384
 $386
374
 418
Accounts payable to affiliates25
 31
30
 25
Taxes7
 8
8
 12
Interest43
 36
37
 37
Regulatory liabilities72
 86
43
 74
Other current liabilities99
 98
95
 101
Total Current Liabilities630
 645
772
 667
      
Long-term Debt3,693
 3,298
3,695
 3,694
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes1,258
 1,154
1,371
 1,320
Accrued pension obligations210
 246
253
 282
Regulatory liabilities686
 668
661
 675
Other deferred credits and noncurrent liabilities135
 79
141
 144
Total Deferred Credits and Other Noncurrent Liabilities2,289
 2,147
2,426
 2,421
      
Commitments and Contingent Liabilities (Notes 7 and 10)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Equity 
  
 
  
Common stock - no par value (a)364
 364
364
 364
Additional paid-in capital3,158
 2,729
3,158
 3,158
Earnings reinvested962
 899
939
 939
Total Equity4,484
 3,992
4,461
 4,461
      
Total Liabilities and Equity$11,096
 $10,082
$11,354
 $11,243
 
(a)170,000 shares authorized; 66,368 shares issued and outstanding at SeptemberJune 30, 20182019 and December 31, 2017.2018.


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
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
Common
stock
shares
outstanding
(a)
 
Common
stock
 
Additional
paid-in
capital
 
Earnings
reinvested
 Total         
December 31, 201766,368
 $364
 $2,729
 $899
 $3,992
66,368
 $364
 $2,729
 $899
 $3,992
Net income

 

 

 334
 334


 

 

 223
 223
Capital contributions from parent

 

 429
 

 429


 

 425
 

 425
Dividends declared on common stock

 

 

 (271) (271)

 

 

 (222) (222)
September 30, 201866,368
 $364
 $3,158
 $962
 $4,484
         
December 31, 201666,368
 $364
 $2,154
 $873
 $3,391
Net income

 

 

 251
 251
Capital contributions from parent

 

 575
 

 575
Dividends declared on common stock

 

 

 (231) (231)
September 30, 201766,368
 $364
 $2,729
 $893
 $3,986
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.





























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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,
2018 2017 2018 20172019 2018 2019 2018
Operating Revenues$802
 $818
 $2,417
 $2,350
$732
 $743
 $1,577
 $1,615
              
Operating Expenses 
  
  
  
 
  
  
  
Operation 
  
  
  
 
  
  
  
Fuel206
 202
 609
 576
168
 189
 362
 403
Energy purchases22
 22
 135
 120
27
 33
 106
 113
Other operation and maintenance216
 197
 632
 594
208
 211
 422
 416
Depreciation119
 114
 354
 324
135
 118
 258
 235
Taxes, other than income18
 17
 53
 49
18
 18
 36
 35
Total Operating Expenses581
 552
 1,783
 1,663
556
 569
 1,184
 1,202
              
Operating Income221
 266
 634
 687
176
 174
 393
 413
              
Other Income (Expense) - net—
 (1) (2) (9)—
 1
 —
 (2)
              
Interest Expense52
 49
 154
 148
58
 52
 112
 102
              
Interest Expense with Affiliate7
 5
 18
 13
9
 6
 16
 11
              
Income Before Income Taxes162
 211
 460
 517
109
 117
 265
 298
              
Income Taxes32
 79
 102
 195
3
 31
 35
 70
              
Net Income(a)$130
 $132
 $358
 $322
$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,
 2018 2017 2018 2017
Net income$130
 $132
 $358
 $322
        
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, $0, $7—
 (1) —
 (12)
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
Defined benefit plans:       
Prior service costs, net of tax of $0, ($1), $0, ($1)1
 —
 2
 1
Net actuarial (gain) loss, net of tax of $0, $0, ($1), ($2)1
 1
 2
 3
Total other comprehensive income (loss)2
 —
 4
 (7)
        
Comprehensive income$132
 $132
 $362
 $315

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,
2018 20172019 2018
Cash Flows from Operating Activities 
  
 
  
Net income$358
 $322
$230
 $228
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation354
 324
258
 235
Amortization13
 19
16
 9
Defined benefit plans - expense12
 19
5
 8
Deferred income taxes and investment tax credits71
 173
47
 30
Other(2) 1
(1) (1)
Change in current assets and current liabilities 
  
 
  
Accounts receivable8
 18
24
 16
Accounts payable4
 (30)(34) (10)
Accounts payable to affiliates7
 3
Unbilled revenues54
 19
13
 40
Fuel, materials and supplies17
 34
21
 26
Regulatory assets and liabilities, net62
 (3)(32) 69
Taxes payable(11) 13
(25) (25)
Accrued interest41
 41
7
 —
Other(36) 2
(23) (39)
Other operating activities 
  
 
  
Defined benefit plans - funding(126) (32)(28) (122)
Expenditures for asset retirement obligations(46) (22)(45) (26)
Other assets(1) 5
(1) (1)
Other liabilities8
 14
13
 3
Net cash provided by operating activities787
 920
445
 440
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(826) (579)(530) (564)
Other investing activities1
 4
Net cash used in investing activities(825) (575)(530) (564)
Cash Flows from Financing Activities 
  
 
  
Net increase (decrease) in notes payable with affiliate(145) (4)90
 (126)
Issuance of long-term debt with affiliate250
 —
—
 250
Issuance of long-term debt118
 60
705
 100
Retirement of long-term debt(27) (60)(200) —
Net increase (decrease) in short-term debt(418) 72
Distributions to member(217) (316)(137) (161)
Net increase in short-term debt60
 5
Contributions from member63
 —
Other financing activities(2) (3)(10) (2)
Net cash provided by (used in) financing activities37
 (318)
Net Increase (Decrease) in Cash and Cash Equivalents(1) 27
Net cash provided by financing activities93
 133
Net Increase in Cash and Cash Equivalents8
 9
Cash and Cash Equivalents at Beginning of Period30
 13
24
 30
Cash and Cash Equivalents at End of Period$29
 $40
$32
 $39
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at September 30,$108
 $142
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,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$29
 $30
$32
 $24
Accounts receivable (less reserve: 2018, $26; 2017, $25) 
  
Accounts receivable (less reserve: 2019, $27; 2018, $27) 
  
Customer230
 246
219
 239
Other47
 44
69
 63
Accounts receivable from affiliates1
 —
Unbilled revenues149
 203
156
 169
Fuel, materials and supplies238
 254
228
 248
Prepayments32
 25
30
 25
Regulatory assets11
 18
26
 25
Other current assets7
 8
Total Current Assets743
 828
761
 793
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant13,438
 13,187
14,072
 13,721
Less: accumulated depreciation - regulated utility plant2,031
 1,785
2,192
 2,125
Regulated utility plant, net11,407
 11,402
11,880
 11,596
Construction work in progress1,000
 627
929
 1,018
Property, Plant and Equipment, net12,407
 12,029
12,809
 12,614
      
Other Noncurrent Assets 
  
 
  
Regulatory assets787
 795
857
 849
Goodwill996
 996
996
 996
Other intangibles80
 86
74
 78
Other noncurrent assets75
 68
133
 82
Total Other Noncurrent Assets1,938
 1,945
2,060
 2,005
      
Total Assets$15,088
 $14,802
$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,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$304
 $244
$96
 $514
Long-term debt due within one year330
 98
136
 530
Notes payable with affiliates80
 225
203
 113
Accounts payable271
 338
283
 366
Accounts payable to affiliates14
 7
8
 9
Customer deposits60
 58
63
 61
Taxes55
 66
38
 63
Price risk management liabilities4
 4
5
 4
Regulatory liabilities64
 9
17
 48
Interest73
 32
39
 32
Asset retirement obligations86
 85
80
 82
Other current liabilities127
 161
136
 126
Total Current Liabilities1,468
 1,327
1,104
 1,948
      
Long-term Debt      
Long-term debt4,521
 4,661
5,216
 4,322
Long-term debt to affiliate650
 400
650
 650
Total Long-term Debt5,171
 5,061
5,866
 4,972
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes922
 866
1,020
 956
Investment tax credits127
 129
124
 126
Price risk management liabilities15
 22
18
 16
Accrued pension obligations256
 365
264
 282
Asset retirement obligations231
 271
175
 214
Regulatory liabilities2,053
 2,036
2,024
 2,039
Other deferred credits and noncurrent liabilities137
 162
158
 136
Total Deferred Credits and Other Noncurrent Liabilities3,741
 3,851
3,783
 3,769
      
Commitments and Contingent Liabilities (Notes 7 and 10)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Member's Equity4,708
 4,563
4,877
 4,723
      
Total Liabilities and Equity$15,088
 $14,802
$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
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 income86
Distributions to member(92)
Other comprehensive income1
June 30, 2018$4,632
Member's
Equity
 
December 31, 2017$4,563
$4,563
Net income358
228
Distributions to member(217)(161)
Other comprehensive income4
2
September 30, 2018$4,708
 
December 31, 2016$4,667
Net income322
Distributions to member(316)
Other comprehensive income (loss)(7)
September 30, 2017$4,666
June 30, 2018$4,632
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.


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Table of Contents




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


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Operating Revenues              
Retail and wholesale$357
 $361
 $1,095
 $1,055
$328
 $331
 $725
 $738
Electric revenue from affiliate5
 2
 21
 23
6
 4
 19
 16
Total Operating Revenues362
 363
 1,116
 1,078
334
 335
 744
 754
              
Operating Expenses              
Operation              
Fuel83
 76
 234
 225
69
 72
 147
 151
Energy purchases17
 18
 121
 107
22
 28
 96
 104
Energy purchases from affiliate2
 3
 10
 8
2
 2
 4
 8
Other operation and maintenance95
 87
 277
 258
96
 93
 190
 182
Depreciation49
 47
 146
 136
56
 49
 107
 97
Taxes, other than income9
 8
 27
 25
10
 9
 19
 18
Total Operating Expenses255
 239
 815
 759
255
 253
 563
 560
              
Operating Income107
 124
 301
 319
79
 82
 181
 194
              
Other Income (Expense) - net(3) (3) (5) (6)(1) (1) (1) (2)
              
Interest Expense20
 17
 57
 53
22
 19
 43
 37
              
Income Before Income Taxes84
 104
 239
 260
56
 62
 137
 155
              
Income Taxes18
 39
 51
 99
12
 12
 29
 33
              
Net Income (a)$66
 $65
 $188
 $161
$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,
2018 20172019 2018
Cash Flows from Operating Activities 
  
 
  
Net income$188
 $161
$108
 $122
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation146
 136
107
 97
Amortization10
 11
11
 7
Defined benefit plans - expense2
 5
1
 2
Deferred income taxes and investment tax credits46
 96
28
 18
Change in current assets and current liabilities 
  
 
  
Accounts receivable14
 12
15
 11
Accounts receivable from affiliates2
 6
6
 6
Accounts payable14
 (12)(16) (12)
Accounts payable to affiliates(2) (10)(4) (3)
Unbilled revenues30
 11
9
 24
Fuel, materials and supplies9
 6
27
 31
Regulatory assets and liabilities, net24
 (2)(13) 32
Taxes payable4
 (15)(7) (2)
Accrued interest13
 12
4
 —
Other(14) 8
(8) (7)
Other operating activities 
  
 
  
Defined benefit plans - funding(59) (3)(4) (57)
Expenditures for asset retirement obligations(17) (13)(12) (10)
Other assets—
 5
(1) —
Other liabilities—
 4
7
 (4)
Net cash provided by operating activities410
 418
258
 255
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(420) (293)(224) (296)
Net cash used in investing activities(420) (293)(224) (296)
Cash Flows from Financing Activities 
  
 
  
Net increase in notes payable with affiliates—
 10
Issuance of long-term debt100
 60
399
 100
Retirement of long-term debt—
 (60)(200) —
Net increase (decrease) in short-term debt(23) 21
Net decrease in short-term debt(183) (16)
Payment of common stock dividends to parent(113) (150)(71) (81)
Contributions from parent43
 —
25
 43
Other financing activities(1) (2)(5) (1)
Net cash provided by (used in) financing activities6
 (121)(35) 45
Net Increase (Decrease) in Cash and Cash Equivalents(4) 4
(1) 4
Cash and Cash Equivalents at Beginning of Period15
 5
10
 15
Cash and Cash Equivalents at End of Period$11
 $9
$9
 $19
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at September 30,$51
 $83
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.


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


September 30,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$11
 $15
$9
 $10
Accounts receivable (less reserve: 2018, $1; 2017, $1) 
  
Accounts receivable (less reserve: 2019, $1; 2018, $1) 
  
Customer102
 116
99
 110
Other13
 13
38
 30
Unbilled revenues61
 91
68
 77
Accounts receivable from affiliates22
 24
18
 24
Fuel, materials and supplies122
 131
100
 127
Prepayments14
 11
15
 12
Regulatory assets11
 12
21
 21
Other current assets3
 3
Total Current Assets359
 416
368
 411
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant5,684
 5,587
6,018
 5,816
Less: accumulated depreciation - regulated utility plant707
 614
786
 741
Regulated utility plant, net4,977
 4,973
5,232
 5,075
Construction work in progress520
 305
438
 514
Property, Plant and Equipment, net5,497
 5,278
5,670
 5,589
      
Other Noncurrent Assets 
  
 
  
Regulatory assets400
 411
434
 431
Goodwill389
 389
389
 389
Other intangibles49
 53
44
 47
Other noncurrent assets27
 12
34
 16
Total Other Noncurrent Assets865
 865
901
 883
      
Total Assets$6,721
 $6,559
$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,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$176
 $199
$96
 $279
Long-term debt due within one year234
 98
40
 434
Accounts payable152
 179
146
 172
Accounts payable to affiliates22
 23
22
 26
Customer deposits28
 27
30
 29
Taxes29
 25
19
 26
Price risk management liabilities4
 4
5
 4
Regulatory liabilities26
 3
4
 17
Interest24
 11
15
 11
Asset retirement obligations21
 24
26
 23
Other current liabilities39
 52
47
 39
Total Current Liabilities755
 645
450
 1,060
      
Long-term Debt1,574
 1,611
1,964
 1,375
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes611
 572
663
 628
Investment tax credits35
 35
34
 34
Price risk management liabilities15
 22
18
 16
Accrued pension obligations—
 45
Asset retirement obligations86
 97
63
 80
Regulatory liabilities920
 919
902
 915
Other deferred credits and noncurrent liabilities80
 86
96
 88
Total Deferred Credits and Other Noncurrent Liabilities1,747
 1,776
1,776
 1,761
      
Commitments and Contingent Liabilities (Notes 7 and 10)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Stockholder's Equity 
  
 
  
Common stock - no par value (a)424
 424
424
 424
Additional paid-in capital1,755
 1,712
1,820
 1,795
Earnings reinvested466
 391
505
 468
Total Equity2,645
 2,527
2,749
 2,687
      
Total Liabilities and Equity$6,721
 $6,559
$6,939
 $6,883
 
(a)75,000 shares authorized; 21,294 shares issued and outstanding at SeptemberJune 30, 20182019 and December 31, 2017.2018.


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
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
Common
stock
shares
outstanding
(a)
 
Common
stock
 Additional
paid-in
capital		 Earnings
reinvested		 Total         
December 31, 201721,294
 $424
 $1,712
 $391
 $2,527
21,294
 $424
 $1,712
 $391
 $2,527
Net income

 

 

 188
 188


 

 

 122
 122
Capital contributions from parent

 

 43
 

 43


 

 43
 

 43
Cash dividends declared on common stock

 

 

 (113) (113)

 

 

 (81) (81)
September 30, 201821,294
 $424
 $1,755
 $466
 $2,645
         
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
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.




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


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Operating Revenues              
Retail and wholesale$445
 $457
 $1,322
 $1,295
$404
 $412
 $852
 $877
Electric revenue from affiliate2
 3
 10
 8
2
 2
 4
 8
Total Operating Revenues447
 460
 1,332
 1,303
406
 414
 856
 885
              
Operating Expenses              
Operation              
Fuel123
 126
 375
 351
99
 117
 215
 252
Energy purchases5
 4
 14
 13
5
 5
 10
 9
Energy purchases from affiliate5
 2
 21
 23
6
 4
 19
 16
Other operation and maintenance114
 104
 331
 312
105
 112
 213
 217
Depreciation70
 67
 208
 188
78
 70
 150
 138
Taxes, other than income9
 9
 26
 24
8
 9
 17
 17
Total Operating Expenses326
 312
 975
 911
301
 317
 624
 649
              
Operating Income121
 148
 357
 392
105
 97
 232
 236
              
Other Income (Expense) - net1
 —
 1
 (4)(2) 3
 —
 —
              
Interest Expense24
 24
 74
 72
28
 25
 54
 50
              
Income Before Income Taxes98
 124
 284
 316
75
 75
 178
 186
              
Income Taxes21
 47
 59
 120
14
 14
 36
 38
              
Net Income (a)$77
 $77
 $225
 $196
$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,
2018 20172019 2018
Cash Flows from Operating Activities 
  
 
  
Net income$225
 $196
$142
 $148
Adjustments to reconcile net income to net cash provided by operating activities 
  
 
  
Depreciation208
 188
150
 138
Amortization2
 7
5
 2
Defined benefit plans - expense—
 3
Deferred income taxes and investment tax credits37
 116
29
 9
Other(2) —
(2) (1)
Change in current assets and current liabilities 
  
 
  
Accounts receivable2
 6
14
 4
Accounts receivable from affiliates—
 (1)
Accounts payable(2) (6)(8) 11
Accounts payable to affiliates(8) (16)(15) (12)
Unbilled revenues24
 8
4
 16
Fuel, materials and supplies8
 28
(6) (5)
Regulatory assets and liabilities, net38
 (1)(19) 37
Taxes payable11
 (21)(2) 4
Accrued interest21
 22
3
 —
Other(4) (5)1
 (11)
Other operating activities 
  
 
  
Defined benefit plans - funding(53) (22)(2) (52)
Expenditures for asset retirement obligations(29) (9)(33) (16)
Other assets(1) —
1
 (1)
Other liabilities8
 8
8
 3
Net cash provided by operating activities485
 501
270
 274
Cash Flows from Investing Activities 
  
 
  
Expenditures for property, plant and equipment(405) (283)(305) (266)
Net increase in notes receivable with affiliates—
 (10)
Other investing activities1
 4
Net cash used in investing activities(404) (289)(305) (266)
Cash Flows from Financing Activities 
  
 
  
Issuance of long-term debt18
 —
306
 —
Retirement of long-term debt(27) —
Net increase (decrease) in short-term debt83
 (16)(235) 88
Payment of common stock dividends to parent(196) (171)(91) (136)
Contributions from parent45
 —
68
 45
Other financing activities(1) (1)(4) —
Net cash used in financing activities(78) (188)
Net cash provided by (used in) financing activities44
 (3)
Net Increase in Cash and Cash Equivalents3
 24
9
 5
Cash and Cash Equivalents at Beginning of Period15
 7
14
 15
Cash and Cash Equivalents at End of Period$18
 $31
$23
 $20
      
Supplemental Disclosure of Cash Flow Information      
Significant non-cash transactions:      
Accrued expenditures for property, plant and equipment at September 30,$57
 $58
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,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Assets 
  
 
  
      
Current Assets 
  
 
  
Cash and cash equivalents$18
 $15
$23
 $14
Accounts receivable (less reserve: 2018, $2; 2017, $1) 
  
Accounts receivable (less reserve: 2019, $2; 2018, $2) 
  
Customer128
 130
120
 129
Other25
 30
27
 34
Unbilled revenues88
 112
88
 92
Fuel, materials and supplies116
 123
128
 121
Prepayments17
 14
16
 11
Regulatory assets—
 6
5
 4
Other current assets4
 5
Total Current Assets396
 435
407
 405
      
Property, Plant and Equipment 
  
 
  
Regulated utility plant7,746
 7,592
8,042
 7,895
Less: accumulated depreciation - regulated utility plant1,323
 1,170
1,403
 1,382
Regulated utility plant, net6,423
 6,422
6,639
 6,513
Construction work in progress479
 321
490
 503
Property, Plant and Equipment, net6,902
 6,743
7,129
 7,016
      
Other Noncurrent Assets 
  
 
  
Regulatory assets387
 384
423
 418
Goodwill607
 607
607
 607
Other intangibles31
 33
30
 31
Other noncurrent assets77
 52
95
 63
Total Other Noncurrent Assets1,102
 1,076
1,155
 1,119
      
Total Assets$8,400
 $8,254
$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,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018
Liabilities and Equity 
  
 
  
      
Current Liabilities 
  
 
  
Short-term debt$128
 $45
$—
 $235
Long-term debt due within one year96
 —
96
 96
Accounts payable105
 137
124
 171
Accounts payable to affiliates47
 53
38
 53
Customer deposits32
 31
33
 32
Taxes30
 19
22
 24
Regulatory liabilities38
 6
13
 31
Interest37
 16
19
 16
Asset retirement obligations65
 61
54
 59
Other current liabilities43
 46
55
 35
Total Current Liabilities621
 414
454
 752
      
Long-term Debt2,224
 2,328
2,528
 2,225
      
Deferred Credits and Other Noncurrent Liabilities 
  
 
  
Deferred income taxes719
 691
774
 735
Investment tax credits92
 94
90
 92
Accrued pension obligations—
 36
Asset retirement obligations145
 174
112
 134
Regulatory liabilities1,133
 1,117
1,122
 1,124
Other deferred credits and noncurrent liabilities35
 43
50
 36
Total Deferred Credits and Other Noncurrent Liabilities2,124
 2,155
2,148
 2,121
      
Commitments and Contingent Liabilities (Notes 7 and 10)

 

Commitments and Contingent Liabilities (Notes 7 and 11)


 


      
Stockholder's Equity 
  
 
  
Common stock - no par value (a)308
 308
308
 308
Additional paid-in capital2,661
 2,616
2,729
 2,661
Earnings reinvested462
 433
524
 473
Total Equity3,431
 3,357
3,561
 3,442
      
Total Liabilities and Equity$8,400
 $8,254
$8,691
 $8,540
 
(a)80,000 shares authorized; 37,818 shares issued and outstanding at SeptemberJune 30, 20182019 and December 31, 2017.2018.


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
income (loss)
 TotalCommon
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
37,818
 $308
 $2,616
 $433
 $3,357
Net income

 

 

 148
 148
Capital contributions from parent

 

 45
 

 

 45


 

 45
 

 45
Net income

 

 

 225
 

 225
Cash dividends declared on common stock

 

 

 (196) 

 (196)

 

 

 (136) (136)
September 30, 201837,818
 $308
 $2,661
 $462
 $—
 $3,431
           
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
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, 20172018 is derived from that Registrant's 20172018 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 20172018 Form 10-K. The results of operations for the three and ninesix months ended SeptemberJune 30, 20182019 are not necessarily indicative of the results to be expected for the full year ending December 31, 20182019 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
 
(All Registrants)
 
The following accounting policy disclosures represent updates to Note 1 in each Registrant's 20172018 Form 10-K and should be read in conjunction with those disclosures.


Income TaxesRestricted Cash and Cash Equivalents(PPL and PPL Electric)


Reconciliation of Cash, Cash Equivalents and Restricted Cash

The Registrants recognized certain provisional amounts relatingfollowing provides a reconciliation of Cash, Cash Equivalents and Restricted Cash reported within the Balance Sheets that sum to the impacttotal of the enactment of the TCJA in their December 31, 2017 financial statements, in accordance with SEC guidance. Included in those provisionalsame amounts were estimates of: tax depreciation, deductible executive compensation, accumulated foreign earnings, foreign tax credits, and deemed dividends from foreign subsidiaries, all of which were basedshown on the interpretation and applicationStatements of various provisions of the TCJA.
Cash Flows:

In the third quarter of 2018, PPL filed its consolidated federal income tax return, which was prepared using guidance issued by the U.S. Treasury Department and the IRS since the filing of each Registrant’s 2017 Form 10-K. Accordingly, the Registrants have updated the following provisional amounts and now consider them to be complete: (1) the amount of the deemed dividend and associated foreign tax credits relating to the transition tax imposed on accumulated foreign earnings as of December 31, 2017; (2) the amount of accelerated 100% “bonus” depreciation PPL is eligible to claim in its 2017 federal income tax return; and (3) the related impacts on PPL's 2017 consolidated federal net operating loss to be carried forward to future periods. In addition, the Registrants recorded the tax impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on the changes to deferred tax assets and liabilities resulting from the completed provisional amounts. The completed provisional amounts related to the tax rate reduction had an insignificant impact on the net regulatory liabilities of PPL's U.S. regulated operations. See Note 6 to the Financial Statements for the final amounts reported in PPL's 2017 federal income tax return, provisional adjustment amounts for the year ended December 31, 2017, the related measurement period adjustments and the resulting tax impact for the three and nine months ended September 30, 2018.

The Registrants' accounting related to the effects of the TCJA on financial results for the period ended December 31, 2017 is complete as of September 30, 2018 with respect to the three items discussed above. The Registrants continue to analyze the impact of the TCJA on the deductibility of executive compensation awarded on or before November 2, 2017. The Registrants do not currently anticipate a material change from what was reflected in the December 31, 2017 financial statements and expect to record the impact, if any, of changes in the deductibility of executive compensation in the fourth quarter of 2018.


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 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 Revenue from Contracts with CustomersLeases

Effective January 1, 2018,2019, the Registrants adopted accounting guidance that establishesrequires lessees to recognize a comprehensive newright-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 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 control of promised goods or services to customers in an amount that reflects the consideration to which the entity expectslessees, requiring leases to be entitledclassified as either operating or finance. Operating leases result in exchange for those goodsstraight-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 services. sales-type.
In adopting this new guidance, the Registrants elected to use the following practical expedients:
The Registrants adopted thisdid 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 using the modified retrospective transition method. No cumulative effect adjustment was required as of thebeginning January 1, 2018 adoption date.2019.


The adoption of this guidance did not have a material impact on the Registrants' revenue recognition policies. See Note 49 for the required disclosures resulting from the adoption of this standard.the new guidance.


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

Effective January 1, 2018, the Registrants adopted accounting guidance that changes the income statement presentation of net periodic benefit cost. Retrospectively, this guidance requires the service cost component to be disaggregated from other components of net benefit cost and presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefits are presented separately from the line items that include the service cost and outside of any subtotal of operating income. Prospectively, the guidance limits the capitalization to the service cost component of net periodic benefit costs.

For (PPL, the non-service cost components of net periodic benefit costs were in a net credit position for the three and nine months ended September 30, 2018. The non-service cost credits that would have been capitalized under previous guidance, but are now recorded as income within "Other Income (Expense) - net," were $5 million ($4 million after-tax or $0.01 per share) and $16 million ($13 million after-tax or $0.02 per share) for the three and nine months ended September 30, 2018. For PPL Electric,LKE, LG&E and KU, non-service costs or credits that would have been capitalized under previous guidance are now recognized as a regulatory asset or regulatory liability, as applicable, in accordance with regulatory approvals.& KU)


The following providestable shows the non-service cost components of net periodic benefits (costs) or credits presented in "Other Income (Expense) - net" in 2018 and reclassified from "Other operation and maintenance" to "Other Income (Expense) - net" in 2017amounts recorded on the StatementsBalance Sheets as of IncomeJanuary 1, 2019 as a result of the adoption.adoption of the new lease guidance using a modified retrospective transition method with transition applied as of the beginning of the period of adoption:

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 Three Months Nine Months
 2018 2017 2018 2017
PPL$61
 $41
 $195
 $123
PPL Electric1
 —
 4
 —
LKE1
 (2) 3
 (4)
LG&E—
 (2) (1) (4)
KU—
 —
 2
 (1)
 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

PPL and PPL Electric elected to use the practical expedient that permits using the amounts disclosed in the defined benefit plan note for the prior comparative period as the estimation basis for applying the retrospective presentation requirements.

Presentation of Restricted Cash in the Statement of Cash Flows(PPL and PPL Electric)

Effective January 1, 2018, PPL and PPL Electric adopted accounting guidance that changes the cash flow statement presentation of restricted cash. Under the new guidance, amounts considered restricted cash are presented with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts on the Statements of Cash Flows. The guidance requires a reconciliation of the total cash, cash equivalents and restricted cash from the Statement of Cash Flows to amounts on the Balance Sheets and disclosure of the nature of the restrictions. PPL and PPL Electric have applied this guidance on a retrospective basis for all periods presented. The adoption of this guidance did not have a material impact on the Statements of Cash Flows.


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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
 September 30,
2018		 December 31, 2017 September 30,
2018		 December 31, 2017
Cash and cash equivalents$842
 $485
 $414
 $49
Restricted cash - current (a)3
 3
 2
 2
Restricted cash - noncurrent (a)19
 23
 —
 —
Total Cash, Cash Equivalents and Restricted Cash$864
 $511
 $416
 $51


(a)Bank deposits and other cash equivalents thatRight-of-Use Assets are restricted by agreement or that have been clearly designated for a specific purpose are classified as restricted cash. Onrecorded in "Other noncurrent assets" on the Balance Sheets, the current portion of restricted cash is includedSheets.
(b)Current lease liabilities are recorded in "Other current assets," whileliabilities" on the noncurrent portion is includedBalance Sheets.
(c)Noncurrent lease liabilities are recorded in "Other deferred credits and noncurrent assets."liabilities" on the Balance Sheets.


(All Registrants)

Improvements to Accounting for Hedging Activities

Effective January 1, 2019, the Registrants adopted accounting guidance, using a modified retrospective approach, which reduces complexity when applying hedge accounting as well as improving the transparency of an entity's risk management activities. This guidance eliminates the separate measurement and reporting of hedge ineffectiveness for cash flow and net investment hedges and provides for the ability to perform subsequent qualitative effectiveness assessments. The guidance also allows entities to apply the short-cut method to partial-term fair value hedges of interest rate risk as well as expands the ability to apply the critical terms match method to cash flow hedges of groups of forecasted transactions.

See Note 15 for the additional disclosures of the income statement impacts of hedging activities required from the adoption of this guidance. Disclosures related to ineffectiveness are no longer required. Other impacts of adopting this guidance were not material.

3. Segment and Related Information
 
(PPL)
 
See Note 2 in PPL's 20172018 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
2018 2017 2018 20172019 2018 2019 2018
Operating Revenues from external customers              
U.K. Regulated$517
 $477
 $1,716
 $1,547
$541
 $584
 $1,124
 $1,199
Kentucky Regulated802
 818
 2,417
 2,350
732
 743
 1,577
 1,615
Pennsylvania Regulated548
 547
 1,704
 1,620
521
 517
 1,166
 1,156
Corporate and Other5
 3
 9
 4
9
 4
 15
 4
Total$1,872
 $1,845
 $5,846
 $5,521
$1,803
 $1,848
 $3,882
 $3,974
              
Net Income 
  
  
  
 
  
  
  
U.K. Regulated (a)$245
 $126
 $836
 $560
$284
 $394
 $548
 $591
Kentucky Regulated122
 125
 332
 299
97
 77
 214
 210
Pennsylvania Regulated112
 95
 335
 251
94
 75
 215
 223
Corporate and Other(34) 9
 (91) (60)(34) (31) (70) (57)
Total$445
 $355
 $1,412
 $1,050
$441
 $515
 $907
 $967


(a)Includes unrealized gains and losses from hedging foreign currency economic activity. See Note 1415 for additional information.


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

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 September 30,
2018		 December 31,
2017
Assets 
  
U.K. Regulated (a)$16,823
 $16,813
Kentucky Regulated14,754
 14,468
Pennsylvania Regulated11,110
 10,082
Corporate and Other (b)355
 116
Total$43,042
 $41,479

 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 $12.4$12.6 billion and $12.5$12.4 billion of net PP&E as of SeptemberJune 30, 20182019 and December 31, 2017.2018. 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, goodwill, and the elimination of inter-segment transactions.transactions as well as the assets of Safari Energy.

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(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)


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

U.K. Regulated Segment Revenue(PPL)

The U.K. Regulated Segment generates revenues from contracts with customers primarily from WPD’s DUoS operations.

DUoS revenues result from WPD charging licensed third-party energy suppliers for their use of WPD’s distribution systems to deliver energy to their customers. WPD satisfies its performance obligation and DUoS revenue is recognized over-time as electricity is delivered. The amount of revenue recognized is based on actual and forecasted volumes of electricity delivered during the period multiplied by a per-unit energy tariff, plus fixed charges. This method of recognition fairly presents WPD's transfer of electric service to the customer as the calculation is based on volumes, and the tariff rate is set by WPD using a methodology prescribed by Ofgem. Customers are billed monthly and outstanding amounts are typically due within 14 days of the invoice date.

DUoS customers are “at will” customers of WPD with no term contract and no minimum purchase commitment. Performance obligations are limited to the service requested and received to date. Accordingly, there is no unsatisfied performance obligation associated with WPD’s DUoS contracts.

Pennsylvania Regulated Segment Revenue(PPL and PPL Electric)

The Pennsylvania Regulated Segment generates substantially all of its revenues from contracts with customers from PPL Electric’s tariff-based distribution and transmission of electricity.

Distribution Revenue

PPL Electric provides distribution services to residential, commercial, industrial, municipal and governmental end users of energy. PPL Electric satisfies its performance obligation to its distribution customers and revenue is recognized over-time as electricity is delivered and simultaneously consumed by the customer. The amount of revenue recognized is the volume of electricity delivered during the period multiplied by a per-unit of energy tariff, plus a monthly fixed charge. This method of recognition fairly presents PPL Electric's transfer of electric service to the customer as the calculation is based on actual volumes, and the per-unit of energy tariff rate and the monthly fixed charge are set by the PUC. Customers are typically billed monthly and outstanding amounts are typically due within 21 days of the date of the bill.

Distribution customers are "at will" customers of PPL Electric with no term contract and no minimum purchase commitment. Performance obligations are limited to the service requested and received to date. Accordingly, there is no unsatisfied performance obligation associated with PPL Electric’s retail account contracts.

Transmission Revenue

PPL Electric generates transmission revenues from a FERC-approved PJM Open Access Transmission Tariff. An annual revenue requirement for PPL Electric to provide transmission services is calculated using a formula-based rate. This revenue requirement is converted into a daily rate (dollars per day). PPL Electric satisfies its performance obligation to provide transmission services and revenue is recognized over-time as transmission services are provided and consumed. This method of recognition fairly presents PPL Electric's transfer of transmission services as the daily rate is set by a FERC approved formula-based rate. PJM remits payment on a weekly basis.


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PPL Electric's agreement to provide transmission services contains no minimum purchase commitment. The performance obligation is limited to the service requested and received to date. Accordingly, PPL Electric has no unsatisfied performance obligations.

Kentucky Regulated Segment Revenue(PPL, LKE, LG&E and KU)

The Kentucky Regulated Segment generates substantially all of its revenues from contracts with customers from LG&E's and KU's regulated tariff-based sales of electricity and LG&E's regulated tariff-based sales of natural gas.

LG&E and KU are engaged in the generation, transmission, distribution and sale of electricity in Kentucky and, in KU's case, Virginia. LG&E also engages in the distribution and sale of natural gas in Kentucky. Revenue from these activities is generated from tariffs approved by applicable regulatory authorities including the FERC, KPSC and VSCC. LG&E and KU satisfy their performance obligations upon LG&E's and KU's delivery of electricity and LG&E's delivery of natural gas to customers. This revenue is recognized over-time as the customer simultaneously receives and consumes the benefits provided by LG&E and KU. The amount of revenue recognized is the billed volume of electricity or natural gas delivered multiplied by a tariff rate per-unit of energy, plus any applicable fixed charges or additional regulatory mechanisms. Customers are billed monthly and outstanding amounts are typically due within 22 days of the date of the bill. Additionally, unbilled revenues are recognized as a result of customers' bills rendered throughout the month, rather than bills being rendered at the end of the month. Unbilled revenues for a month are calculated by multiplying an estimate of unbilled kWh or Mcf delivered but not yet billed by the estimated average cents per kWh or Mcf. Any difference between estimated and actual revenues is adjusted the following month when the previous unbilled estimate is reversed and actual billings occur. This method of recognition fairly presents LG&E's and KU's transfer of electricity and LG&E's transfer of natural gas to the customer as the amount recognized is based on actual and estimated volumes delivered and the tariff rate per-unit of energy and any applicable fixed charges or regulatory mechanisms as set by the respective regulatory body.

LG&E's and KU's customers generally have no minimum purchase commitment. Performance obligations are limited to the service requested and received to date. Accordingly, there is no unsatisfied performance obligation associated with these customers.

(All Registrants)


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 September 30, 2018.June 30.
Three Months2019 Three Months
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Operating Revenues (a)$1,872
 $548
 $802
 $362
 $447
$1,803
 $521
 $732
 $334
 $406
Revenues derived from:                  
Alternative revenue programs (b)(4) (3) (1) (4) 3
(20) (2) (18) (3) (15)
Other (c)(15) (3) (5) (2) (3)(10) (2) (6) (3) (3)
Revenues from Contracts with Customers$1,853
 $542
 $796
 $356
 $447
$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
Nine Months2019 Six Months
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Operating Revenues (a)$5,846
 $1,704
 $2,417
 $1,116
 $1,332
$3,882
 $1,166
 $1,577
 $744
 $856
Revenues derived from:           

 

 

 

Alternative revenue programs (b)37
 (1) 38
 16
 22
(26) (6) (20) (5) (15)
Other (c)(43) (9) (14) (5) (9)(19) (5) (10) (4) (6)
Revenues from Contracts with Customers$5,840
 $1,694
 $2,441
 $1,127
 $1,345
$3,837
 $1,155
 $1,547
 $735
 $835
 


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 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 $517$541 million and $1.7 billion$1,124 million for the three and ninesix months ended SeptemberJune 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, include the over/under-collection of its transmission formula rate. Alternative revenueECR and DSM programs for LKE, LG&E and KU, includethe GLT program for LG&E, and the generation formula rate for KU. This line item shows the over/under collection forof these rate mechanisms with over-collections of revenue shown as positive amounts in the ECRtable above and DSM programsunder-collections shown as well as LG&E's over/under collection of its GLT program and KU'snegative amounts.

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over/under collection of its generation formula rate. Over-collections of revenue are shown as positive amounts in the table above; under-collections are 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 20172018 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 tablefootnotes to the tables above. For PPL Electric, revenues from contracts with customers are further disaggregated by distribution and transmission, which were $442 million and $100 million for the three months ended September 30, 2018 and $1.4 billion and $306 million for the nine months ended September 30, 2018.


The following tables show revenues from contracts with customers disaggregated by customer class for the periods ended September 30, 2018.June 30.
Three Months2019 Three Months
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Licensed energy suppliers (a)$475
 $—
 $—
 $—
 $—
$510
 $—
 $—
 $—
 $—
Residential647
 328
 319
 162
 157
572
 301
 271
 138
 133
Commercial307
 88
 219
 112
 107
302
 87
 215
 108
 107
Industrial156
 12
 144
 45
 99
156
 15
 141
 43
 98
Other (b)119
 14
 65
 27
 39
117
 13
 66
 29
 37
Wholesale - municipal30
 —
 30
 —
 30
4
 —
 4
 —
 4
Wholesale - other (c)19
 —
 19
 10
 15
11
 —
 11
 10
 9
Transmission100
 100
 —
 —
 —
101
 101
 —
 —
 —
Revenues from Contracts with Customers$1,853
 $542
 $796
 $356
 $447
$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




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Nine Months2019 Six Months
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Licensed energy suppliers (a)$1,606
 $—
 $—
 $—
 $—
$1,066
 $—
 $—
 $—
 $—
Residential2,039
 1,036
 1,003
 505
 498
1,350
 708
 642
 327
 315
Commercial928
 275
 653
 343
 310
621
 182
 439
 229
 210
Industrial466
 37
 429
 134
 295
306
 32
 274
 87
 187
Other (b)339
 40
 200
 88
 113
232
 27
 136
 62
 74
Wholesale - municipal91
 —
 91
 —
 91
32
 —
 32
 —
 32
Wholesale - other (c)65
 —
 65
 57
 38
24
 —
 24
 30
 17
Transmission306
 306
 —
 —
 —
206
 206
 —
 —
 —
Revenues from Contracts with Customers$5,840
 $1,694
 $2,441
 $1,127
 $1,345
$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.

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The following table shows the accounts receivable balances that were impaired for the periods ended September 30, 2018.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

 Three Months Nine Months
PPL$11
 $24
PPL Electric7
 17
LKE4
 7
LG&E2
 3
KU2
 4


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

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 PPL PPL Electric LKE LG&E KU
Contract liabilities as of December 31, 2017$29
 $19
 $8
 $4
 $4
Contract liabilities as of September 30, 201840
 17
 8
 4
 4
The following table shows the revenue recognized during the period ended September 30, 2018 that was included in the contract liability balance at December 31, 2017.
 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

 Nine Months
PPL$22
PPL Electric8
LKE8
LG&E4
KU4


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 SeptemberJune 30, 2018,2019, PPL had $65$56 million of performance obligations attributable to Corporate and Other that have not been satisfied. Of this amount, PPL expects to recognize approximately $44$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. In 2018, theseThese securities also includedinclude the PPL common stock forward sale agreements.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 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 Six Months
 2019 2018 2019 2018
Income (Numerator) 
  
  
  
Net income$441
 $515
 $907
 $967
Less amounts allocated to participating securities1
 —
 1
 1
Net income available to PPL common shareowners - Basic and Diluted$440
 $515
 $906
 $966
        
Shares of Common Stock (Denominator) 
  
  
  
Weighted-average shares - Basic EPS721,785
 699,006
 721,406
 696,772
Add incremental non-participating securities: 
  
  
  
Share-based payment awards897
 173
 960
 491
Forward sale agreements8,233
 1,797
 8,070
 898
Weighted-average shares - Diluted EPS730,915
 700,976
 730,436
 698,161
        
Basic EPS 
  
  
  
Net Income available to PPL common shareowners$0.61
 $0.74
 $1.26
 $1.39
        
Diluted EPS 
  
  
  
Net Income available to PPL common shareowners$0.60
 $0.73
 $1.24
 $1.38

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 Three Months Nine Months
 2018 2017 2018 2017
Income (Numerator) 
  
  
  
Net income$445
 $355
 $1,412
 $1,050
Less amounts allocated to participating securities1
 1
 2
 2
Net income available to PPL common shareowners - Basic and Diluted$444
 $354
 $1,410
 $1,048
        
Shares of Common Stock (Denominator) 
  
  
  
Weighted-average shares - Basic EPS703,730
 686,563
 699,117
 683,783
Add incremental non-participating securities: 
  
  
  
Share-based payment awards298
 2,183
 427
 2,298
Forward sale agreements6,489
 —
 2,761
 —
Weighted-average shares - Diluted EPS710,517
 688,746
 702,305
 686,081
        
Basic EPS 
  
  
  
Net Income available to PPL common shareowners$0.63
 $0.52
 $2.02
 $1.53
        
Diluted EPS 
  
  
  
Net Income available to PPL common shareowners$0.62
 $0.51
 $2.01
 $1.53

 
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
2018 2017 2018 20172019 2018 2019 2018
Stock-based compensation plans (a)80
 256
 568
 1,707
52
 12
 642
 488
DRIP493
 355
 1,504
 1,169
417
 526
 875
 1,011
 
(a)Includes stock options exercised, vesting of performance units, vesting of restricted stock units and conversion of stock units granted to directors.

See Note 8 for additional information on common stock issued under the ATM Program and settlement of a portion of the PPL common stock forward sale agreements.


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
 2018 2017 2018 2017
Stock options15
 696
 229
 696
Restricted stock units2
 —
 15
 —

 
6. Income Taxes

(All Registrants)

Tax Cuts and Jobs Act (TCJA)

The Registrants recognized certain provisional amounts relating to the impact of the enactment of the TCJA in their December 31, 2017 financial statements, in accordance with SEC guidance. Included in those provisional amounts were estimates of: tax depreciation, deductible executive compensation, accumulated foreign earnings, foreign tax credits, and deemed dividends from foreign subsidiaries, all of which were based on the interpretation and application of various provisions of the TCJA.

In the third quarter of 2018, PPL filed its consolidated federal income tax return, which was prepared using guidance issued by the U.S. Treasury Department and the IRS since the filing of each Registrant’s 2017 Form 10-K. Accordingly, the Registrants have updated the following provisional amounts and now consider them to be complete: (1) the amount of the deemed dividend and associated foreign tax credits relating to the transition tax imposed on accumulated foreign earnings as of December 31,

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2017; (2) the amount of accelerated 100% “bonus” depreciation PPL is eligible to claim in its 2017 federal income tax return; and (3) the related impacts on PPL's 2017 consolidated federal net operating loss to be carried forward to future periods. In addition, the Registrants recorded the tax impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on the changes to deferred tax assets and liabilities resulting from the completed provisional amounts. The completed provisional amounts related to the tax rate reduction had an insignificant impact on the net regulatory liabilities of PPL's U.S. regulated operations. The final amounts reported in PPL's 2017 federal income tax return, provisional adjustment amounts for the year ended December 31, 2017, the related measurement period adjustments and the resulting tax impact for the three and nine months ended September 30, 2018 are as follows.
 Taxable Income (Loss) (a)
 Adjustments per 2017 Tax Return Adjustments per 2017 Tax Provision September 30, 2018 Adjustment
PPL     
Deemed Dividend$397
 $462
 $(65)
Bonus Depreciation (b)(67) —
 (67)
Consolidated Federal Net Operating Loss due to the TCJA(c)(330) (462) 132
   Total$—
 $—
 $—
      
PPL Electric     
Bonus Depreciation (b)$(39) $—
 $(39)
Consolidated Federal Net Operating Loss reallocated due to the TCJA (c)(68) (105) 37
   Total$(107) $(105) $(2)
      
LKE     
Bonus Depreciation (b)$(28) $—
 $(28)
Consolidated Federal Net Operating Loss reallocated due to the TCJA (c)(32) (45) 13
   Total$(60) $(45) $(15)
      
LG&E     
Bonus Depreciation (b)$(17) $—
 $(17)
Consolidated Federal Net Operating Loss reallocated due to the TCJA (c)17
 —
 17
   Total$—
 $—
 $—
      
KU     
Bonus Depreciation (b)$(11) $—
 $(11)
Consolidated Federal Net Operating Loss reallocated due to the TCJA (c)11
 —
 11
   Total$—
 $—
 $—

(a)The above table reflects, for each item, the amount subject to change as a result of the TCJA and does not reflect the total amount of each item included in the return and the provision.
(b)The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Increases in tax depreciation reduce the Registrants' taxes payable and increase net deferred tax liabilities with no impact to “Income Taxes” on the Statements of Income.
(c)An increase in the consolidated federal net operating loss reduces net deferred tax liabilities with the opposite effect if there is a decrease in the consolidated federal net operating loss. These increases or decreases have no impact to “Income Taxes” on the Statements of Income.
 Income Tax Expense (Benefit)
 Adjustments per 2017 Tax Return Adjustments per 2017 Tax Provision September 30, 2018 Adjustment
PPL     
Deemed Dividend$139
 $161
 $(22)
Foreign Tax Credits(157) (205) 48
Valuation of Foreign Tax Credit Carryforward110
 145
 (35)
Reduction in U.S. federal income tax rate (a)229
 220
 9
   Total$321
 $321
 $—
      

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 Income Tax Expense (Benefit)
 Adjustments per 2017 Tax Return Adjustments per 2017 Tax Provision September 30, 2018 Adjustment
PPL Electric     
Reduction in U.S. federal income tax rate (a)$(13) $(13) $—
      
LKE     
Reduction in U.S. federal income tax rate (a)$110
 $112
 $(2)

(a)The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.

The Registrants' accounting related to the effects of the TCJA on financial results for the period ended December 31, 2017 is complete as of September 30, 2018 with respect to the three items discussed above. The Registrants continue to analyze the impact of the TCJA on the deductibility of executive compensation awarded on or before November 2, 2017. The Registrants do not currently anticipate a material change from what was reflected in the December 31, 2017 financial statements and expect to record the impact, if any, of changes in the deductibility of executive compensation in the fourth quarter of 2018.


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
 2018 2017 2018 2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)$115
 $165
 $373
 $480
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit9
 14
 34
 37
Valuation allowance adjustments5
 4
 17
 9
Impact of lower U.K. income tax rates relative to U.S. income tax rates (a)(7) (45) (20) (133)
U.S. income tax on foreign earnings - net of foreign tax credit (a) (b)1
 (8) 2
 (24)
Federal and state tax reserve adjustments—
 —
 3
 —
Impact of the U.K. Finance Acts(4) (3) (7) (12)
Depreciation and other items not normalized(1) (2) (4) (7)
Amortization of excess deferred income taxes (a)(11) —
 (30) —
Deferred tax impact of state tax reform (c)—
 —
 9
 —
Interest benefit on U.K. financing entities(4) (4) (13) (12)
Stock-based compensation—
 —
 1
 (7)
Other—
 (5) (3) (10)
Total increase (decrease)(12) (49) (11) (159)
Total income taxes$103
 $116
 $362
 $321


(a)The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.
(b)Lower income taxes in 2017 primarily due to the tax benefit of accelerated pension contributions made in the first quarter of 2017. The related tax benefit was recognized over the annual period as a result of utilizing an estimated annual effective tax rate.
(c)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.

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(PPL Electric)       
 Three Months Nine Months
 2018 2017 2018 2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)$30
 $56
 $93
 $144
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit12
 9
 35
 26
Depreciation and other items not normalized(1) (1) (4) (5)
Amortization of excess deferred income taxes (a)(5) —
 (13) —
Stock-based compensation—
 —
 —
 (5)
Other(1) —
 —
 (1)
Total increase (decrease)5
 8
 18
 15
Total income taxes$35
 $64
 $111
 $159

(a)The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.

(LKE)       
 Three Months Nine Months
 2018 2017 2018 2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)$34
 $74
 $97
 $181
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit (b)6
 8
 17
 19
Amortization of investment tax credit(1) (1) (3) (2)
Deferred tax impact of U.S. tax reform (a)(2) —
 (2) —
Deferred tax impact of state tax reform (c)—
 —
 9
 —
Amortization of excess deferred income taxes (a)(3) —
 (14) —
Other(2) (2) (2) (3)
Total increase (decrease)(2) 5
 5
 14
Total income taxes$32
 $79
 $102
 $195

(a)The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.
(b)The Kentucky corporateDuring the second quarter of 2019, LKE recorded a deferred income tax rate was reduced from 6%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 valuation allowance of $3 million has been recognized related to 5%, as enacted by HB 487, effective January 1, 2018.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


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(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


(c)(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.

(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

(LG&E)       
 Three Months Nine Months
 2018 2017 2018 2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)$18
 $36
 $50
 $91
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit (b)3
 4
 9
 10
Amortization of excess deferred income taxes (a)(1) —
 (6) —
Other(2) (1) (2) (2)
Total increase (decrease)—
 3
 1
 8
Total income taxes$18
 $39
 $51
 $99


(a)The U.S. federal corporateDuring the second quarter of 2019, LG&E recorded a deferred income tax rate was reduced from 35%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. This amount has been reserved due to 21%, as enacted by the TCJA, effective January 1, 2018.
(b)Theinsufficient Kentucky corporatetaxable income tax rate was reduced from 6% to 5%, as enacted by HB 487, effective January 1, 2018.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

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(KU)       
 Three Months Nine Months
 2018 2017 2018 2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)$21
 $43
 $60
 $111
Increase (decrease) due to: 
  
  
  
State income taxes, net of federal income tax benefit (b)3
 5
 10
 11
Amortization of excess deferred income taxes (a)(2) —
 (8) —
Other(1) (1) (3) (2)
Total increase (decrease)—
 4
 (1) 9
Total income taxes$21
 $47
 $59
 $120


(a)The U.S. federal corporateDuring the second quarter of 2019, KU recorded a deferred income tax rate was reduced from 35%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 21%, as enacted by the TCJA, effective January 1, 2018.
(b)Theinsufficient Kentucky corporatetaxable income tax rate was reduced from 6% to 5%, as enacted by HB 487, effective January 1, 2018.projected at KU.


Kentucky StateTable of Contents




Other

U.S. Tax Reform (All Registrants)


HB 487, which became lawTheIRS 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 April 27, 2018, provides for significant changesthe company. Proposed regulations relating to the Kentuckylimitation 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 code including (1) adopting mandatory combined reporting for corporate membersdeductibility of unitary business groups for taxable years beginninginterest expense. However, if the proposed regulations were issued as final in their current form, the Registrants could have a limitation on or after January 1, 2019 (members of a unitary business group may make an eight-year binding election to file consolidated corporate income tax returns with all membersportion of their federal affiliated group)interest expense deduction for tax purposes and (2)such limitation could be significant. PPL expressed its views on these proposed regulations in a reduction in the Kentucky corporate income tax rate from 6% to 5% for taxable years beginning after December 31, 2017. LKE recognized a deferred tax charge of $9 million in the second quarter of 2018 primarily associated with the remeasurement of non-regulated accumulated deferred income tax balances.

As indicated in Note 1 in the Registrants' 2017 Form 10-K, LG&E's and KU's accounting for income taxes is impacted by rate regulation. Therefore, reductions in regulated accumulated deferred income tax balances duecomment letter addressed to the reduction in the Kentucky corporate income tax rate to 5% under the provisions of HB 487 may result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers in future periods. In the second quarter of 2018, LG&E and KU recorded the impact of the reduced tax rate, related to the remeasurement of deferred income taxes, as an increase in regulatory liabilities of $16 million and $19 million. In a separate regulatory proceeding, LG&E and KU have requested to begin returning state excess deferred income taxes to customers in conjunction with the 2018 Kentucky base rate case, which was filedIRS on September 28, 2018. See Note 7 for additional information related to the rate case proceedings. PPL is evaluating the impact, if any, of unitary or elective consolidated income tax reporting on all its Registrants.February 26, 2019.


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,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Current Regulatory Assets:              
Environmental cost recovery$—
 $5
 $—
 $—
Generation formula rate—
 6
 —
 —
Gas supply clause$12
 $12
 $—
 $—
Smart meter rider16
 15
 16
 15
11
 11
 11
 11
Plant outage costs7
 3
 —
 —
13
 10
 —
 —
Gas supply clause3
 4
 —
 —
Other3
 1
 2
 1
7
 3
 6
 —
Total current regulatory assets (a)$29
 $34
 $18
 $16
$43
 $36
 $17
 $11
              
Noncurrent Regulatory Assets:       
Defined benefit plans$944
 $963
 $548
 $558
Storm costs46
 56
 18
 22
Unamortized loss on debt40
 45
 18
 22
Interest rate swaps23
 20
 —
 —
Terminated interest rate swaps84
 87
 —
 —
Accumulated cost of removal of utility plant205
 200
 205
 200
AROs296
 273
 —
 —
Act 129 compliance rider16
 19
 16
 19
Other8
 10
 —
 3
Total noncurrent regulatory assets$1,662
 $1,673
 $805
 $824


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 PPL PPL Electric
 September 30,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017
Noncurrent Regulatory Assets:       
Defined benefit plans$847
 $880
 $486
 $504
Taxes recoverable through future rates3
 3
 3
 3
Storm costs (b)45
 33
 22
 —
Unamortized loss on debt47
 54
 23
 29
Interest rate swaps18
 26
 —
 —
Terminated interest rate swaps88
 92
 —
 —
Accumulated cost of removal of utility plant190
 173
 190
 173
AROs267
 234
 —
 —
 Act 129 compliance rider12
 —
 12
 —
Other8
 9
 2
 —
Total noncurrent regulatory assets$1,525
 $1,504
 $738
 $709
 PPL PPL Electric
 June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Current Regulatory Liabilities:       
Generation supply charge$20
 $33
 $20
 $33
Environmental cost recovery5
 16
 —
 —
Universal service rider14
 27
 14
 27
TCJA customer refund7
 20
 6
 3
Storm damage expense rider3
 5
 3
 5
Generation formula rate—
 7
 —
 —
Other11
 14
 —
 6
Total current regulatory liabilities$60
 $122
 $43
 $74
        
Noncurrent Regulatory Liabilities:       
Accumulated cost of removal of utility plant$670
 $674
 $—
 $—
Power purchase agreement - OVEC55
 59
 —
 —
Net deferred taxes1,791
 1,826
 610
 629
Defined benefit plans50
 37
 9
 5
Terminated interest rate swaps70
 72
 —
 —
TCJA customer refund (b)42
 41
 42
 41
Other7
 5
 —
 —
Total noncurrent regulatory liabilities$2,685
 $2,714
 $661
 $675
 PPL PPL Electric
 September 30,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017
Current Regulatory Liabilities:       
Generation supply charge$35
 $34
 $35
 $34
Transmission service charge2
 9
 2
 9
Environmental cost recovery22
 1
 —
 —
Universal service rider23
 26
 23
 26
Transmission formula rate8
 9
 8
 9
Fuel adjustment clause7
 3
 —
 —
TCJA customer refund (c)26
 —
 —
 —
Storm damage expense rider4
 8
 4
 8
Other9
 5
 —
 —
Total current regulatory liabilities$136
 $95
 $72
 $86
        
Noncurrent Regulatory Liabilities:       
Accumulated cost of removal of utility plant$678
 $677
 $—
 $—
Power purchase agreement - OVEC (d)62
 68
 —
 —
Net deferred taxes (e)1,846
 1,853
 642
 668
Defined benefit plans33
 27
 —
 —
Terminated interest rate swaps72
 74
 —
 —
TCJA customer refund (f)41
 —
 41
 —
Other7
 5
 3
 —
Total noncurrent regulatory liabilities$2,739
 $2,704
 $686
 $668
 LKE LG&E KU
 June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Current Regulatory Assets:           
Plant outage costs$13
 $10
 $9
 $7
 $4
 $3
Gas supply clause12
 12
 12
 12
 —
 —
Other1
 3
 —
 2
 1
 1
Total current regulatory assets$26
 $25
 $21
 $21
 $5
 $4
            
Noncurrent Regulatory Assets:           
Defined benefit plans$396
 $405
 $244
 $249
 $152
 $156
Storm costs28
 34
 17
 20
 11
 14
Unamortized loss on debt22
 23
 14
 15
 8
 8
Interest rate swaps23
 20
 23
 20
 —
 —
Terminated interest rate swaps84
 87
 49
 51
 35
 36
AROs296
 273
 85
 75
 211
 198
Other8
 7
 2
 1
 6
 6
Total noncurrent regulatory assets$857
 $849
 $434
 $431
 $423
 $418

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 LKE LG&E KU
 September 30,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017
Current Regulatory Assets:           
Plant outage costs$7
 $3
 $7
 $3
 $—
 $—
Generation formula rate—
 6
 —
 —
 —
 6
Gas supply clause3
 4
 3
 4
 —
 —
Other1
 5
 1
 5
 —
 —
Total current regulatory assets$11
 $18
 $11
 $12
 $—
 $6
            

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 LKE LG&E KU
 September 30,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017
Noncurrent Regulatory Assets:           
Defined benefit plans$361
 $376
 $227
 $234
 $134
 $142
Storm costs23
 33
 12
 18
 11
 15
Unamortized loss on debt24
 25
 15
 16
 9
 9
Interest rate swaps18
 26
 18
 26
 —
 —
Terminated interest rate swaps88
 92
 52
 54
 36
 38
AROs267
 234
 74
 61
 193
 173
Other6
 9
 2
 2
 4
 7
Total noncurrent regulatory assets$787
 $795
 $400
 $411
 $387
 $384
LKE LG&E KULKE LG&E KU
September 30,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017		 September 30,
2018		 December 31,
2017		June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018		 June 30,
2019		 December 31,
2018
Current Regulatory Liabilities:                      
Environmental cost recovery$22
 $1
 $11
 $—
 $11
 $1
$5
 $16
 $2
 $6
 $3
 $10
Fuel adjustment clause7
 3
 —
 —
 7
 3
6
 —
 —
 —
 6
 —
Gas line tracker2
 3
 2
 3
 —
 —
TCJA customer refund (c)26
 —
 12
 —
 14
 —
TCJA customer refund1
 17
 —
 7
 1
 10
Generation formula rate—
 7
 —
 —
 —
 7
Other7
 2
 1
 —
 6
 2
5
 8
 2
 4
 3
 4
Total current regulatory liabilities$64
 $9
 $26
 $3
 $38
 $6
$17
 $48
 $4
 $17
 $13
 $31
                      
Noncurrent Regulatory Liabilities:                      
Accumulated cost of removal
of utility plant
$678
 $677
 $280
 $282
 $398
 395
$670
 $674
 $274
 $279
 $396
 $395
Power purchase agreement - OVEC (d)62
 68
 43
 47
 19
 21
55
 59
 38
 41
 17
 18
Net deferred taxes (e)1,204
 1,185
 560
 552
 644
 633
1,181
 1,197
 551
 557
 630
 640
Defined benefit plans33
 27
 —
 —
 33
 27
41
 32
 —
 —
 41
 32
Terminated interest rate swaps72
 74
 36
 37
 36
 37
70
 72
 35
 36
 35
 36
Other4
 5
 1
 1
 3
 4
7
 5
 4
 2
 3
 3
Total noncurrent regulatory liabilities$2,053
 $2,036
 $920
 $919
 $1,133
 $1,117
$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)Storm costs incurred in PPL Electric's territory from a March 2018 storm will be amortized from 2019 through 2021.
(c)Relates to estimated amounts owed to LG&E and KU customers as a result of the reduced U.S. federal corporate income tax rate as enacted by the TCJA, effective January 1, 2018. Amounts owed will be distributed through the TCJA bill credit.
(d)This liability was recorded as an offset to an intangible asset that was recorded at fair value upon the acquisition of LKE by PPL.
(e)Primarily relates to excess deferred taxes recorded as a result of the TCJA, which reduced the U.S. federal corporate income tax rate effective January 1, 2018, requiring deferred tax balances and the associated regulatory liabilities to be remeasured as of December 31, 2017. LG&E and KU began distributing amounts through the TCJA bill credit effective April 1, 2018.
(f)Relates 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 during the second quarter of 2018. The distribution method back to customers of this liability must be proposed to the PUC at the earlier of 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


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 of approximately $35 million and $25 million respectively, at LG&E. The proposed base rate increases would result in an electricity rate increase of 6.9% at KU and

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electricity and gas rate increases of 3% and 7.5%, respectively, at LG&E. As discussed in the "TCJA Impact on LG&E and KU Rates" section below, LG&E’s and KU’s applications seekalso sought to include applicable 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 the new base rates go into effect. 

New rates are expected to become effective on May 1, 2019.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 arewere 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, cannot predictalong with substantially all intervening parties to the outcome of these proceedings.

CPCN Filing

On January 10, 2018, LG&Eproceeding, filed stipulation and KU filed an application for a CPCNrecommendation agreements (stipulations) with the KPSC requesting approval to implement Advanced Metering Systems across their Kentucky service territories, including gas operations for LG&E. The application projected completion in 2021 with estimated capital costs of $166 million and $155 million for LG&E and KU. On August 30, 2018, the KPSC issued an Order denying the CPCN for full deployment of the Advanced Metering Systems. The KPSC acknowledged the benefits of Advanced Metering Systems, expanded LG&E's and KU's Advanced Metering System pilot programs and encouraged LG&E and KU to consider other items to enhance the customer experience. This decision is not expected to have a significant impact on LG&E's and KU's results of operations.

TCJA Impact on LG&E and KU Rates

On December 21, 2017, Kentucky Industrial Utility Customers, Inc. submitted a complaintresolving all material issues with the KPSC against LG&E and KU, as well as other utility companies in Kentucky, alleging that their respective rates would no longer be fair, just and reasonable followingparties. In addition to terminating the enactment of the TCJA reducing the federal corporate tax rate from 35% to 21%. The complaint requested the KPSC to issue an Order requiring LG&E and KU to begin deferring, as of January 1, 2018, the revenue requirement effect of all income tax expense savings resulting from the federal corporate income tax reduction, including the amortization of excess deferred income taxes by recording those savings in a regulatory liability account and establishing a process by which the federal corporate income tax savings will be passed back to customers.

On January 29, 2018, LG&E, KU, Kentucky Industrial Utility Customers, Inc. and the Office of the Attorney General reached a settlement agreement to commence returning savings related to the TCJA to their customers through their ECR, DSM and LG&E's GLT rate mechanisms beginning in March 2018 and through a new bill credit mechanism, from April 1, 2018 through April 30, 2019 and thereafter until tax-reform related savings are reflectedthe proposed stipulations provided for increases in changes inannual revenue requirements associated with base rates. The estimated impact of the rate reduction represents approximately $91 million in KU electricity revenues ($70 million through the new bill credit and $21 million through existing rate mechanisms), $69 million in LG&E electricity revenues ($49 million through the new bill credit and $20 million through existing rate mechanisms) and $17 million in LG&E gas revenues (substantially all through the new bill credit) for the period January 2018 through April 2019.

On March 20, 2018, the KPSC issued an Order approving, with certain modifications, the settlement agreement reached between LG&E, KU, Kentucky Industrial Utility Customers, Inc. and the Office of the Attorney General. The KPSC estimates that, pursuant to its modifications, electricity revenues would incorporate reductionsrates of approximately $108 million for KU ($87 million through the new bill credit and $21 million through existing rate mechanisms) and $79 million for LG&E ($59 million through the new bill credit and $20 million through existing rate mechanisms). This represents $27 million ($17$58 million at KU and $10increases in annual base electricity and gas rates of approximately $4 million and $20 million at LG&E) in additional reductions from the amounts proposed by the settlement. The KPSC's modifications to the settlement include certain changes in assumptions or inputs used in assessing tax reform or calculating LG&E's and KU's electricity rates. LG&E, gas rate reductions were not modified significantly from the amount included in the settlement agreement.based on a return-on-equity of 9.725%.


On March 26, 2018, LG&E and KU filed a petition for reconsideration and request for hearing with the KPSC, taking exception to the KPSC's modifications and the process, and also requested certain relief from implementing the amounts represented by the additional reductions until the matter is fully resolved. On March 28, 2018, the Office of the Attorney General filed a response to the petition and gave notice of its withdrawal from the settlement agreement.

On March 28, 2018,April 30, 2019, the KPSC issued an Order granting LG&E'sorders ruling on open issues and KU's requestapproving the proposed stipulations filed in March 2019. The orders provide for reconsideration and amending its March 20, 2018 Order by suspending the approvedincreases in annual revenue requirements associated with base electricity rates allowing LG&E and KU, on an interim basis, to return savings related to the TCJA at the rates agreed to in the January 29, 2018 settlement.

On September 28, 2018, the KPSC issued an Order on reconsideration, implementing rates reflecting electricity revenue reductions of $101 million for KU ($80 million through the new bill credit and $21 million through existing rate mechanisms),

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$74 million for LG&E electricity revenues ($54 million through the new bill credit and $20 million through existing rate mechanisms) and $16 million LG&E gas revenues (substantially all through the new bill credit) for the period January 2018 through April 2019. This represents lower revenue reduction amounts than the March 20, 2018 Order of approximately $13 million ($7$56 million at KU and $6increases 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). LG&EThe new base rates and KU have been implementing interim partial rate reductions since April 2018, as authorized by the KPSC on March 28, 2018, and recording reserves up to the higher reduction amounts originally approved in the March 20, 2018 Order. The September 28, 2018 Order is not expected to have a material adverse impact on LG&E's and KU's financial condition or results of operations.

Additionally, on January 8, 2018, the VSCC ordered KU, as well as other utilities in Virginia, to accrue regulatory liabilities reflecting the Virginia jurisdictional revenue requirement impactsall elements of the reduced federal corporate tax rate. On March 22, 2018, KU reached a settlement agreement regarding its rate case in Virginia. New rates, inclusive of TCJA impacts, wereorders became effective June 1, 2018. The settlement also stipulates that actual tax savings for the five month period prior to new rates taking effect would be addressed through KU's annual information filing for calendar year 2018. On May 8, 2018, the VSCC approved the settlement agreement. The TCJA and rate case are not expected to have a significant impact on KU's financial condition or results of operations related to Virginia.

On March 15, 2018, the FERC issued a Notice of Inquiry seeking information on whether and how it should address changes relating to accumulated deferred income taxes and bonus depreciation resulting from passage of the TCJA on FERC-jurisdictional rates. LG&E and KU have not made any submission in response to the Notice of Inquiry, but do not anticipate the impact of the TCJA related to their FERC-jurisdictional rates to be significant.

Gas Franchise(LKE and LG&E)
LG&E’s gas franchise agreement for the Louisville/Jefferson County service area expired in March 2016. In August 2016, LG&E and Louisville/Jefferson County entered into a revised franchise agreement with a 5-year term (with renewal options). The franchise fee may be modified at Louisville/Jefferson County's election upon 60 days' notice. However, any franchise fee is capped at 3% of gross receipts for natural gas service within the franchise area. The agreement further provides that if the KPSC determines that the franchise fee should be recovered from LG&E's Louisville/Jefferson county customers in the franchise areas as a separate line item on their bill, the franchise fee will revert to zero. In August 2016, LG&E filed an application requesting the KPSC to review and rule upon the recoverability of the franchise fee.

On March 14, 2018, the KPSC issued an Order authorizing the franchise fee to be recovered only from LG&E's Louisville/Jefferson County customers in the franchise area. As a result, the franchise fee will continue to be zero in accordance with the terms of the August 2016, 5-year gas franchise agreement.

(PPL and PPL Electric)

Pennsylvania Activities

TCJA Impact on PPL Electric Rates

On February 12, 2018, the PUC issued a Secretarial Letter requesting certain information from regulated utilities and inviting comment from interested parties on potential revision to customer rates as a result of enactment of the TCJA. PPL Electric submitted its response to the Secretarial Letter on March 9, 2018. On March 15, 2018, the PUC issued a Temporary Rates Order to allow time to determine the manner in which rates could be adjusted in response to the TCJA. The PUC issued another Temporary Rates Order on May 17, 2018 to address the impact of the TCJA and indicated that utilities without a currently pending general rate proceeding would receive a utility specific order. The PUC issued an Order specific to PPL Electric on May 17, 2018 which required PPL Electric to file a tariff or tariff supplement by June 15, 2018 to establish (a) temporary rates to include a negative surcharge of 0.56%, which was based on PPL Electric's 2017 taxable income, to be effective July 1, 2018, and (b) to record a deferred regulatory liability to reflect the tax savings associated with the TCJA for the period January 1 through June 30, 2018. On June 8, 2018, PPL Electric submitted a petition to the PUC to increase the negative surcharge proposed in the May 17, 2018 Order from 0.56% to 7.05% to reflect the estimated 2018 tax savings associated with the TCJA. The PUC approved PPL Electric's petition on June 14, 2018 and PPL Electric filed a tariff on June 15, 2018 reflecting the increased negative surcharge. The estimated 2018 full year impact of the rate reduction is $72 million in PPL Electric's operating revenues, of which $39 million relates to the period January 1, 2018 through June 30, 2018 and was recorded as a noncurrent regulatory liability in the second quarter of 2018 to be distributed to customers pursuant to a future rate adjustment. The remaining $33 million is the estimated impact for the period July 1, 2018 through December 31, 2018 and is being passed back to customers through the negative surcharge which began on July 1, 2018. 2019.



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On March 15, 2018, the FERC issued a Notice of Inquiry seeking information on whether and how it should address changes to FERC-jurisdictional rates relating to accumulated deferred income taxes and bonus depreciation resulting from passage of the TCJA. On March 16, 2018, PPL Electric filed a waiver request, pursuant to Rule 207(a)(5) of the Rules of Practice and Procedure of the FERC, to accelerate incorporation of the changes to the federal corporate income tax rate in its transmission formula rate commencing on June 1, 2018 rather than allowing the TCJA tax rate reduction to be initially incorporated in PPL Electric's June 1, 2019 transmission formula rate. The waiver was approved on April 23, 2018 and PPL Electric submitted its transmission formula rate, reflecting the TCJA rate reduction, on April 27, 2018. In addition, on May 21, 2018, PPL Electric, as part of a PJM Transmission Owners joint filing, submitted comments in response to the FERC's March 15, 2018 Notice of Inquiry. The filing requested guidance on how the reduction in accumulated deferred income taxes, resulting from the TCJA reduced federal corporate income tax rate, should be treated for ratemaking purposes. PPL Electric is currently awaiting FERC's decision on this matter. The changes, related to accumulated deferred income taxes impacting the transmission formula rate revenues, have not been significant since the new rate went into effect on June 1, 2018.

Federal Matters


FERC Transmission Rate Filing

(PPL, LKE, LG&E and KU)


FERC Transmission Rate Filing

OnIn August 3, 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’sKU'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 seekssought termination of LG&E’s&E's and KU’sKU'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 or Tennessee.Kentucky. The amounts at issue are generally waivers or credits granted to such customers for either LG&E and KU or for MISO transmission charges incurred depending upon the direction of certain transmission service incurred by the municipalities. LG&E and KU estimate that such charges may average approximately $22 million annually, depending upon actual transmission customer and market volumes, structures and prices, with such charges allocated according to LG&E's and KU’s respective transmission system ownership ratio. 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 such expenses inwaivers 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.

Transmission Customer Complaint(PPL, LKE, LG&E and KU cannot predict the outcome of the proceeding, including any effects on their financial condition or results of operations.KU)


Transmission Customer Complaint

OnIn September 21, 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 certain transmission charges from MISO. On October 11,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 reimburse the customer for the eligible credits. The reimbursement was not significant and was 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 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 answera request with the FERC to amend their transmission formula rates to incorporate reductions to corporate income tax rates as a result of the complaint arguing such MISO transmission transactions are not covered by the rate schedule,TCJA and the amounts in question are not eligible for credits.HB 487. The FERC approved this request effective June 1, 2019. LG&E and KU cannot predictdo not anticipate the outcomeimpact of the proceeding, but believe that any potential required credits wouldTCJA and HB 487 related to their FERC-jurisdictional rates to be subjectsignificant. 
On February 28, 2019, PPL Electric filed with the FERC proposed revisions to its transmission formula rate recovery.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


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

Other


Purchase of Receivables Program

(PPL (PPL and PPL Electric)

In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative electricity suppliers at a discount, which reflects a provision for uncollectible accounts. The alternative electricity suppliers have no continuing involvement or interest in the purchased accounts receivable. Accounts receivable that are acquired are initially recorded at fair value on the date of acquisition. During the three and ninesix months ended SeptemberJune 30, 2018,2019, PPL Electric purchased $334$271 million and $1 billion$619 million of accounts receivable from alternate suppliers. During the three and ninesix months ended SeptemberJune 30, 2017,2018, PPL Electric purchased $324$297 million and $968$673 million of accounts receivable from alternate suppliers.

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8. Financing Activities


Credit Arrangements and Short-term Debt


(All Registrants)


The Registrants maintain credit facilities to enhance liquidity, provide credit support and act 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, except for borrowingsamounts borrowed under LG&E's term loan agreement,Term Loan Facility which are reflected inwere recorded as "Long-term debt"debt due within one year" on the December 31, 2018 Balance Sheets.Sheet. The following credit facilities were in place at:
September 30, 2018 December 31, 2017June 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. 2023 £210
 £154
 £—
 £54
 £148
 £—
Jan. 2023 £210
 £158
 £—
 £52
 £157
 £—
Term Loan Facility (b)Dec. 2018 130
 130
 —
 —
 —
 —
WPD (South West)   
  
  
  
  
  
   
  
  
  
  
  
Syndicated Credit FacilityJuly 2021 245
 —
 —
 245
 —
 —
July 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 300
 93
 —
 207
 180
 —
July 2021 300
 33
 —
 267
 —
 —
WPD (West Midlands)  
  
  
  
  
  
Syndicated Credit Facility (d)July 2021 300
 50
 —
 250
 120
 —
Uncommitted Credit Facilities  130
 —
 4
 126
 —
 4
  100
 —
 4
 96
 —
 4
Total U.K. Credit Facilities (e)  £1,315
 £427
 £4
 £882
 £448
 £4
Total U.K. Credit Facilities (d)  £1,155
 £272
 £4
 £879
 £195
 £4
U.S.                          
PPL Capital Funding                          
Syndicated Credit FacilityJan. 2023 $950
 $—
 $691
 $259
 $—
 $230
Syndicated Credit FacilityNov. 2018 300
 —
 —
 300
 —
 —
Jan. 2024 $1,450
 $—
 $1,014
 $436
 $—
 $669
Bilateral Credit FacilityMar. 2019 100
 —
 20
 80
 —
 18
Mar. 2020 100
 —
 15
 85
 —
 15
Total PPL Capital Funding Credit Facilities $1,350
 $—
 $711
 $639
 $—
 $248
 $1,550
 $—
 $1,029
 $521
 $—
 $684
                        
PPL Electric   
  
  
  
  
  
Syndicated Credit FacilityJan. 2023 $650
 $—
 $1
 $649
 $—
 $1
            
LKE   
  
  
  
  
  
Syndicated Credit FacilityOct. 2018 $75
 $—
 $—
 $75
 $—
 $—
            
LG&E   
  
  
  
  
  
Syndicated Credit FacilityJan. 2023 $500
 $—
 $176
 $324
 $—
 $199
Term Loan Credit FacilityOct. 2019 200
 200
 —
 —
 100
 —
Total LG&E Credit Facilities $700
 $200
 $176
 $324
 $100
 $199


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September 30, 2018 December 31, 2017June 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 Electric   
  
  
  
  
  
Syndicated Credit FacilityJan. 2024 $650
 $—
 $186
 $464
 $—
 $1
            
LG&E   
  
  
  
  
  
Syndicated Credit FacilityJan. 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. 2023 $400
 $—
 $128
 $272
 $—
 $45
Jan. 2024 $400
 $—
 $—
 $400
 $—
 $235
Letter of Credit FacilityOct. 2020 198
 —
 198
 —
 —
 198
Oct. 2020 198
 —
 198
 —
 —
 198
Total KU Credit Facilities  $598
 $—
 $326
 $272
 $—
 $243
  $598
 $—
 $198
 $400
 $—
 $433
 
(a)The amounts borrowed at SeptemberJune 30, 20182019 and December 31, 20172018 were USD-denominated borrowings of $200 million for both periods, which bore interest at 2.90%3.25% and 2.17%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, 2019 and December 31, 2018 was awere GBP-denominated borrowingborrowings which equated to $168$102 millionand $48 million and bore interest at 1.97%1.13% and 1.12%.
(c)
The amountsamount borrowed at SeptemberJune 30, 2018 and December 31, 2017 were2019 was GBP-denominated borrowings which equated to $121 millionand $244$41 million and bore interest at 1.09% and 0.89%1.13%.
(d)The amounts borrowed at SeptemberAt June 30, 2018 and December 31, 2017 were GBP-denominated borrowings which equated to $65 million and $162 million and bore interest at 1.12% and 0.89%.
(e)At September 30, 2018,2019, the unused capacity under the U.K. credit facilities was $1.1 billion.

In October 2018, LKE's $75 million credit facility expired. LKE increased its revolving line of credit with a PPL Energy Funding subsidiary by $75 million to a limit of $375 million. See Note 11 for additional information.


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

 September 30, 2018 December 31, 2017
 
Weighted -
Average
Interest Rate
 Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
 
Weighted -
Average
Interest Rate
 
Commercial
Paper
Issuances
PPL Capital Funding2.38% $1,000
 $691
 $309
 1.64% $230
PPL Electric
 650
 —
 650
 
 —
LG&E2.34% 350
 176
 174
 1.83% 199
KU2.34% 350
 128
 222
 1.97% 45
Total  $2,350
 $995
 $1,355
   $474


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


See Note 1112 for discussion of intercompany borrowings.


Long-term Debt


(PPL)


In March 2018,June 2019, WPD (South Wales) issued £30plc 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 2036. WPD (South Wales) received proceeds of £31 million, which equated2.189%, to $44 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.

In May 2018, WPD (West Midlands) issued £30 million of 0.01% Index-linked Senior Notes due 2028. WPD (West Midlands) received proceeds of £31 million, which equated to $41 million at the time of issuance, net of fees and including a premium. The principal amount of the notes is adjusted based on changes in a specified index, as detailed in the terms of the related indenture. The proceeds were used for general corporate purposes.

In June 2018, PPL Capital Funding repaid the entire $250 million principal amount of its 1.90% Senior Notes upon maturity.


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In October 2018, WPD plc issued £350 million of 3.5% Senior Notes due 2026. WPD plc received proceeds of £346 million, which equated to $456 million at the time of issuance, net of fees and a discount. The proceeds will be used for general corporate purposes.


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


In June 2018, PPL ElectricApril 2019, LG&E issued $400 million of 4.15%4.25% First Mortgage Bonds due 2048. PPL Electric2049. LG&E received proceeds of $394$396 million, net of a discountdiscounts and underwriting fees, which were used to repay short-term debtcommercial paper and for general corporate purposes.LG&E's term loan.


(PPL, LKE and LG&E)


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In March 2018,April 2019, the County of Trimble,Jefferson, Kentucky remarketed $28$128 million of Pollution Control Revenue Bonds, 2001 Series A (Louisville Gas and Electric Company Project) due 20262033 previously issued on behalf of LG&E. The bonds were remarketed at a long-term rate and will bear interest at 2.30%1.85% through their mandatory purchase date of SeptemberApril 1, 2021.


In May 2018,June 2019, the Louisville/Jefferson County Metro Government of Trimble, Kentucky remarketed $35$31 million of Pollution ControlEnvironmental Facilities Revenue Refunding Bonds, 20012007 Series BA (Louisville Gas and Electric Company Project) due 20272033 previously issued on behalf of LG&E. The bonds were remarketed at a long-term rate and will bear interest at 2.55%1.65% through their mandatory purchase date of May 3, 2021.June 1, 2021.


In May 2018,June 2019, the CountyLouisville/Jefferson Country Metro Government of Jefferson, Kentucky remarketed $35$35 million of Pollution ControlEnvironmental Facilities Revenue Refunding Bonds, 20012007 Series B (Louisville Gas and Electric Company Project) due 20272033 previously issued on behalf of LG&E. The bonds were remarketed at a long-term rate and will bear interest at 2.55%1.65% through their mandatory purchase date of May 3, 2021.June 1, 2021.

(LKE)


In May 2018,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 borrowed $250and KU)

In April 2019, KU reopened its 4.375% First Mortgage Bonds due 2045 and issued an additional $300 million from a PPL affiliate through the issuance of a 4% ten-year note due 2028. Thethis series. KU received proceeds of $303 million, including premiums and underwriting fees, which were used to repay its outstanding notes payable to a PPL Energy Funding subsidiary. See Note 11commercial paper and for additional information related to intercompany borrowings.other general corporate purposes.


(PPL)


Equity Securities

Equity Forward Contracts

In May 2018, PPL completed a registered underwritten public offering of 55 million shares of its common stock. In conjunction with that offering, the underwriters exercised an option to purchase 8.25 million additional shares of PPL common stock solely to cover over-allotments.

In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the 63.25 million shares of PPL common stock. Full settlement of these forward sale agreements will occur no later than November 2019. Upon any physical settlements of any forward sale agreement, PPL will issue and deliver to the applicable forward counterparty shares of its common stock in exchange for cash proceeds per share equal to the forward sale price. The forward sale price will be calculated based on an initial forward price of $26.7057 per share reduced during the period the applicable forward contract is outstanding as specified in such forward sale agreement. PPL may, in certain circumstances, elect cash settlement or net share settlement for all or a portion of its rights or obligations under each forward sale agreement. The forward sale agreements are classified as equity transactions. PPL only receives proceeds and issues shares of common stock upon any settlements of the forward sale agreements. PPL intends to use net proceeds that it receives upon any settlement for general corporate purposes.

In September 2018, PPL settled a portion of the initial forward sale agreements by issuing 20 million shares of PPL common stock, resulting in net cash proceeds of $520 million. For the unsettled portion of the agreements, the only impact to the financial statements will be the inclusion of incremental shares within the calculation of diluted EPS using the Treasury Stock Method. See Note 5 for information on the forward sale agreements impact on the calculation of diluted EPS.

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ATM Program

In 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 selling agents by PPL may be up to 2% of the gross offering proceeds of the shares. PPL issued 4.2 million shares of common stock and received gross proceeds of $119 millionThere were no issuances under the ATM program for the ninesix months ended SeptemberJune 30, 2018.2019.


Distributions


In August 2018,May 2019, PPL declared a quarterly common stock dividend, payable OctoberJuly 1, 2018,2019, of 41.041.25 cents per share (equivalent to $1.64$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

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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


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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:

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 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.

9.10. 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.
 2018 2017 2018 2017 2018 2017 2018 2017
PPL               
Service cost$15
 $17
 $21
 $20
 $46
 $49
 $63
 $57
Interest cost39
 42
 46
 45
 117
 126
 140
 132
Expected return on plan assets(62) (58) (145) (130) (186) (173) (445) (382)
Amortization of:               
Prior service cost2
 2
 —
 —
 7
 7
 —
 —
Actuarial loss22
 18
 37
 36
 63
 52
 114
 107
Net periodic defined benefit costs (credits) before settlements and special termination benefits16
 21
 (41) (29) 47
 61
 (128) (86)
Settlements (a)—
 1
 —
 —
 —
 1
 —
 —
Special termination benefits (b)—
 —
 —
 —
 —
 1
 —
 —
Net periodic defined benefit costs (credits)$16
 $22
 $(41) $(29) $47
 $63
 $(128) $(86)

(a)Due to the amount of lump sum payment distributions from the LG&E qualified pension plan, a settlement charge of $1 million and $5 million for the three and nine months ended September 30, 2018 and $5 million for the three and nine months ended September 30, 2017 was incurred. In accordance with existing regulatory accounting treatment, LG&E has maintained the settlement charge in regulatory assets. The amount will be amortized in accordance with existing regulatory practice.
(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.

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 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

 Pension Benefits
 Three Months Nine Months
 2018 2017 2018 2017
LKE       
Service cost$6
 $6
 $18
 $18
Interest cost16
 17
 48
 51
Expected return on plan assets(25) (23) (76) (69)
Amortization of:       
Prior service cost3
 2
 7
 6
Actuarial loss (a)8
 8
 26
 23
Net periodic defined benefit costs (b)$8
 $10
 $23
 $29


(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 $2 million and $8$1 million for the three and ninesix months ended SeptemberJune 30, 20182019 and $3$2 million and $8$6 million for the three and ninesix months ended SeptemberJune 30, 2017.2018. This difference is recorded as a regulatory asset.

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(b)Due to the amount of lump sum payment distributions from the LG&E qualified pension plan, a settlement charge of $1$4 million and $5 millionwas incurred for the three and ninesix months ended SeptemberJune 30, 2018 and $5 million for the three and nine months ended September 30, 2017 was incurred.2018. In accordance with existing regulatory accounting treatment, LG&E has maintained the settlement charge in regulatory assets. The amount will beis being amortized in accordance with existing regulatory practice.
Pension BenefitsPension Benefits
Three Months Nine MonthsThree Months Six Months
2018 2017 2018 20172019 2018 2019 2018
LG&E              
Service cost$—
 $—
 $1
 $1
$1
 $1
 $1
 $1
Interest cost3
 3
 9
 9
3
 3
 6
 6
Expected return on plan assets(6) (5) (17) (16)(5) (6) (11) (11)
Amortization of:              
Prior service cost1
 1
 4
 3
2
 2
 3
 3
Actuarial loss (a)2
 3
 5
 7
1
 1
 3
 3
Net periodic defined benefit costs (b)$—
 $2
 $2
 $4
$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 for the ninethree and six months ended SeptemberJune 30, 20182019 and $1 million and $3 million for the three and ninesix months ended SeptemberJune 30, 2017.2018. This difference is recorded as a regulatory asset.
(b)Due to the amount of lump sum payment distributions from the LG&E qualified pension plan, a settlement charge of $1$4 million and $5 millionwas incurred for the three and ninesix months ended SeptemberJune 30, 2018 and $5 million for the three and nine months ended September 30, 2017 was incurred.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
 2018 2017 2018 2017
PPL       
Service cost$1
 $2
 $5
 $6
Interest cost5
 5
 15
 17
Expected return on plan assets(4) (6) (17) (17)
Amortization of prior service cost—
 —
 —
 (1)
Amortization of actuarial loss—
 1
 —
 1
Net periodic defined benefit costs$2
 $2
 $3
 $6
        

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 Other Postretirement Benefits
 Three Months Nine Months
 2018 2017 2018 2017
LKE       
Service cost$1
 $1
 $3
 $3
Interest cost2
 2
 6
 6
Expected return on plan assets(2) (2) (6) (5)
Amortization of:       
Prior service cost—
 1
 1
 1
Actuarial gain—
 —
 (1) —
Net periodic defined benefit costs$1
 $2
 $3
 $5


(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 1112 for additional 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


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 Three Months Nine Months
 2018 2017 2018 2017
PPL Electric$5
 $6
 $12
 $19
LG&E1
 3
 5
 8
KU1
 2
 3
 7



(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) - net" on the Statements of Income. See Note 1213 for additional information.


10.11. 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.


Claim by Former AffiliateTalen 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 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 closing 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 or 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 operated 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 LLC ("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, County of Lewis & Clark. OnClark 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 same day, proceeds from the sale of Talen Montana's (then PPL Montana's) hydroelectric generating facilities, rendering PPL Montana insolvent. The complaint includes claims for, among 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 certain otherTalen Energy Marketing, LLC, Individually and on Behalf 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 a complaintin 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 in(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

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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 Rosebud County.to the United States District Court for the District of Montana, Billings Division. In January 2019, the plaintiffs moved to remand the Talen Montana became a wholly owned subsidiaryPutative Class Action back to state court, and dismissed without prejudice all current and former 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 as a result of the June 2015 spinoff ofCorporation et al.

On November 30, 2018, PPL, Energy Supply. Talen Energy has owned and operated Talen Montana's business since the spinoff. At the time of the spinoff,certain PPL affiliates, of Riverstone acquired a 35% ownership interest in Talen Energy. See Note 8 to the Consolidated Financial Statements in PPL's 2017 Form 10-K for a description of the 2015 spinoff of PPL Energy Supply. Riverstone subsequently acquired the remaining interests in Talen Energy in 2016.


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The complaints allege that in 2014 PPL and its officers and directors improperly distributed $733 million of the proceeds from the November 2014 sale of Talen Montana's (then PPL Montana's) hydroelectric generating facilities to PPL's subsidiaries. The complaints also allege that PPL 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 its subsidiaries breached their fiduciary dutiesthe spinoff agreement bar these claims at this point; that PPL is not liable for the claims in connectioneither 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 2014 distribution.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 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 referenced 2014 distribution of proceeds was made in compliance with all applicable laws and that PPL Montana was solvent upon the 2014 distribution.at all relevant times. Additionally, in the agreements entered into in connection with respectthe spinoff, which PPL and affiliates of Talen Energy and Riverstone negotiated and executed prior to the spinoff, affiliates2014 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 from the November 2014 sale of PPL Montana's hydroelectric generating facilities. proceeds.

PPL believes that it has good and meritorious defenses to thesethe claims made in the Montana Actions and fully plansintends to continue to vigorously defend against these actions. AtThe 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 common law claims of nuisance, trespass and negligence. These plaintiffs seek injunctive relief and civil penalties, plus costs and attorney fees, for the alleged statutory violations. Under the common law claims, these plaintiffs seek monetary compensation and punitive damages for property damage and diminished property values for a class consisting of residents within four miles of the Cane Run plant, which retired three coal-fired units in 2015. In their individual capacities, these plaintiffs sought compensation for alleged adverse health effects. In July 2014, the court dismissed the 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 Order dismissing PPL as a defendant and dismissing the final federal claim against LG&E. In April 2017, the U.S. District Court issued an Order declining to exercise supplemental jurisdiction on the state law claims and dismissed the case in its entirety. In June 2017, the plaintiffs filed a class action complaint in Jefferson County, Kentucky Circuit Court, against LG&E alleging 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 occur in late 2018 orbe rendered in 2019. PPL, LKE and LG&E cannot predict the outcome of this matter and an estimate or range of possible losses cannot be determined.


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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 sought injunctive relief ordering KU to take all actions necessary to comply with the Clean Water Act 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 sought assessment of civil penalties and an award of litigation costs and attorney fees. OnIn December 28, 2017 the U.S. District Court issued an Order dismissing the Clean Water Act and RCRA complaints against KU in their entirety. OnIn January 26, 2018, the plaintiffs appealed the dismissal Order to the U.S. Court of Appeals for the Sixth Circuit. The case has been briefed and oral argument was presented on August 2, 2018. OnIn September 24, 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 andbut reversing its dismissal of the RCRA claims against KU and remanding the latter to the U.S. District Court. OnIn October 9, 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 these matters and an estimate or range of possible losses cannot be determined.


KU is undertaking extensive remedial measures at the E.W. Brown plant including closure of the former ash pond, implementation of a groundwater remedial action plan and performance of a corrective action plan including aquatic study of adjacent surface waters and risk assessment. The aquatic study and risk assessment are beingwas undertaken pursuant to a 2017 agreed Order with the Kentucky Energy and Environment Cabinet (KEEC). KU conducted sampling of Herrington Lake in late 2017 through mid-2018. A final report of KU’s findings is expected to beand 2018. KU submitted the required aquatic study and risk assessment, conducted by an independent third-party consultant, to the KEEC in 2019. KU believesJune 2019 finding that current and planned measures fordischarges from the E.W. Brown plant including closure of impoundments, cessation of certain discharges,have not had any significant impact on Herrington Lake and deployment of new discharge controls, are sufficient to ensure compliance with applicable requirements.that the water in the lake is safe for recreational use and meets safe drinking water standards. However, until completion of the aquaticKEEC assesses the study and related assessments and issuance ofissues any regulatory determinations, by the KEEC, PPL, LKE and KU are unable to determine whether additional remedial measures will be required at the E.W. Brown plant.


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Regulatory Issues(All Registrants)
 
See Note 7 for information on regulatory matters related to utility rate regulation.


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

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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

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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. 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. The 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 nonattainment. TheIn 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 designations 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.standard. 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, have evaluated the need for further nitrogen oxide reductions from fossil-fueled plants to address interstate impacts. On August 23,In July 2018, Kentucky submitted athe 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. OnIn September 14, 2018, the EPA announced its

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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-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 nonattainment. In July 2013, the EPA finalized nonattainment designations for parts of the country, including part of Jefferson County in Kentucky. 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.


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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 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.

Additionally, the March 2017 Executive Order directed the EPA to review its 2015 greenhouse gas rules 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 the Clean Air Act, including the EPA's Proposed Affordable Clean Energy Rule
In 2015, the EPA finalized rules imposing stringent GHG emission standards for both new and existing power plants based on plant specific energy efficiency upgrades, fuel switching from coal to natural gas, and proposed a federal implementation plan that would apply to any states that failed to submit an acceptable state implementation plan to reduce GHG emissions on a state-by-state basisdeployment of renewable generation (the 2015 EPA Rules)Clean Power Plan).


On August 21, 2018, the EPA proposed the Affordable Clean Energy Act (ACE) Rule as a replacement for the 2015 EPA Rules pertaining to existing sources. The EPA took this action followingFollowing legal challenges to the 2015 EPA Rules,Clean Power Plan, a stay of those rules by the U.S. Supreme Court aand the March 2017 Executive Order requiring the EPA to review those rules and the EPA’sClean Power Plan in October 2017, proposalthe EPA proposed to rescind the rules.Clean Power Plan. In July 2019, the EPA rescinded the Clean Power Plan and finalized the Affordable Clean Energy (ACE) Rule as a replacement with respect to existing sources. The ACE Rule would givegives states broad latitude in establishing emission guidelines providing for plant-specific efficiency upgrades or “heat-rate improvements”"heat-rate improvements" that wouldwill reduce GHG emissions per unit of electricity generated. The ACE Rule proposesprovides a list of “candidate technologies”"candidate technologies" that wouldwill be considered by the states in establishing standards of performance on a case by case basis at individual power plants. The ACE Rule also proposesStates are generally allowed three years to submit state plans establishing standards of performance. While compliance deadlines will be imposed on a plant-specific basis, the EPA anticipates that most facilities will be required to demonstrate compliance within two years of plan approval. In the final rule, the EPA did not finalize its proposed new criteria for determining whether such efficiency projects would trigger New Source Review and thus be subject to more stringent emission controls. Instead, the agency intends to take final action on the proposed New Source Review revisions in a separate final action at a later date.


In April 2014, theThe Kentucky General Assembly passed legislation in April 2014 limiting the measures that the Kentucky Energy and Environment Cabinet may consider in setting performance standards to comply with the 2015 EPA Rules, if enacted.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, rather than renewable energy, end-use energy efficiency, fuel switching and re-dispatch.plant. These statutory restrictions are broadly consistent with the EPA's proposed ACE Rule.


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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 ACE Rule is finalizedClean Power Plan are completed and the state determines implementation measures, PPL, LKE, LG&E and KU cannot predict the potential impact, if any, on plant operations, future capital or operating costs. PPL, LKE, LG&E and KU believe that the costs, which could be significant, would be subject to rate recovery.


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 December 2018.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.

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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. OnIn March 1, 2018, the EPA proposed amendments to the CCR rule primarily relating to impoundment closure and remediation requirements. OnIn July 30, 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 additional amendments to the rule will be proposed in late 2018. Onproposed. In August 21, 2018, the D.C. Circuit Court of Appeals vacated and remanded portions of the CCR 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 relating to CCR matters, effective May 2017,management aimed at reflecting the requirements of the federal CCR rule. In May 2017,As a resident adjacent to LG&E's and KU's Trimble County plant filedresult of a lawsuitsubsequent legal challenge in January 2018, the Franklin County, Kentucky Circuit Court against the Kentucky Energy and Environmental Cabinet and LG&E seeking to invalidate the new rule. On January 31, 2018, the state court issued an opinion invalidating certain procedural elements of the new rule but finding the substantive requirements of the new rule to be consistent with those of the federal CCR rule. This ruling was not appealed by any party to the litigation and is now final. Accordingly, LG&E and KU presently operate their facilities under continuing permits authorized viaunder the former program and do not currently anticipate material impacts as a result of the judicial ruling. Separately, in December 2016, federal legislation was enacted that authorized the EPA to approve equally protective state programs that would operate in lieu of the CCR rule. The Kentucky Energy and Environmental Cabinet has indicatedannounced it mayexpects to propose new state rules under such authority in 2019 aimed at addressing the future.procedural deficiencies identified by the court and providing the regulatory framework necessary for operation of the state CCR program in lieu of the federal CCR Rule, as provided by applicable law.
 
LG&E and KU received KPSC approval for a compliance plan providing for the 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, 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. On January 26, 2018,Since

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2017, LG&E and KU filed an application requestinghave commenced closure of many of the 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 CPCN and approvallonger period may be required to complete closure of amendments to the second phase of its compliance plan for the landfill at the E.W. Brown station.On July 9, 2018, the KPSC granted approval to KU for amendments to the second phase of its compliance plan for the landfill at the E.W. Brown station.some facilities.
 
In connection with the final CCR rule, LG&E and KU recorded adjustments to existing AROs beginning in 2015 and continue to record adjustments as required. See Note 16 below and Note 19 in the Registrants' 20172018 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

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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.


LitigationClean Water Act Jurisdiction

For several years the EPA has been seeking to clarify which discharges are subject to the Clean Water Act. The issue is currently pending in various courts relatingprimarily 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 contaminatedcontaminants to groundwater thatwhich reach surface water via a direct hydrologic connection. CourtsIn 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 have comejurisdictions. On February 19, 2019, the U.S. Supreme Court agreed to contrary conclusionsreview a lower court ruling on the issue. The U.S. Supreme Court’s ruling in that case, likely to be issued in the past. On February 20, 2018, the EPA issued a notice requesting commentfirst half of 2020, is expected to provide additional clarification on the scope of discharges subject to regulation under the Clean Water Act. Specifically, the EPA seeks comments on whether Clean Water Act jurisdiction should cover discharges to groundwater that reach surface water via a direct hydrologic connection.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 developmentsproceedings 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

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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


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. 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 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. Currently, the EPA is planning to undertake the second phase of the rulemaking later in 2018.

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Superfund and Other Remediation
 
PPL Electric, LG&E and KU are potentially responsible for investigating, responding to agency inquiries, implementing various preventative measures, and/or remediating contamination under programs other than those described in the 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 about such additional sites to estimate any potential liability they may have or a range of reasonably possible losses, if any, related to these matters.


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.


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 to 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.


As of September 30, 2018 and December 31, 2017, PPL Electric had a recorded liability of $11 million at June 30, 2019 and $10 millionDecember 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 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 available 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.



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Other


Labor Union Agreements

(LKE and KU)

KU has 68 employees that are represented by the IBEW labor union. In August 2018, KU and the IBEW ratified a three-year labor agreement through August 2021. The agreement includes a wage reopener in 2020. The terms of the new labor agreement are not expected to have a significant impact on the financial results of LKE or KU.


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Separation Benefits

(PPL and PPL Electric)

In June 2018, PPL EU Services announced it was reorganizing its IT organization into the following new areas: planning, operations, data and information management and IT transformation. Organizational plans and staffing selections for the new IT organization were substantially completed in the third quarter of 2018 which reduced the number of contractors and PPL EU Services’ employees in IT. Affected employees had the option of joining a managed services vendor, applying for a newly created position in IT or opting for severance. As a result, for the nine months ended September 30, 2018, estimated charges for separation benefits of $6 million, which were primarily allocated to PPL Electric, relating to 86 displaced PPL EU Services’ IT employees, was recorded in “Other operation and maintenance” on the Statement of Income and in “Other current liabilities” on the Balance Sheet. The separation benefits include cash severance compensation, lump sum COBRA reimbursement payments, outplacement services and accelerated stock award vesting which are expected to be primarily paid out over various dates into 2019.

Guarantees and Other Assurances
 
(All Registrants)


In the normal course of business, the Registrants enter into agreements that provide financial performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of credit issued by financial institutions and surety bonds issued by insurance companies. These agreements are entered into primarily to support or enhance the creditworthiness attributed to a subsidiary on a stand-alone basis or to facilitate the commercial activities in which these subsidiaries engage.
 
(PPL)
 
PPL fully and unconditionally guarantees all of the debt securities of PPL Capital Funding.
 
(All Registrants)
 
The table below details guarantees provided as of SeptemberJune 30, 2018.2019. "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.entities," Thefor which PPL has a total recorded liability of $5 million at SeptemberJune 30, 2018 was2019 and $6 million for PPL and not significant for LKE. The total recorded liability at December 31, 2017 was $17 million for PPL and $11 million for LKE.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, 2018		 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) 2020$10
(b) 2021
WPD guarantee of pension and other obligations of unconsolidated entities81
(c)  79
(c)  
    
PPL Electric        
Guarantee of inventory value15
(d) 202010
(d) 2020
    
LKE        
Indemnification of lease termination and other divestitures200
(e) 2021200
(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.

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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, 2018,2019, 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.

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(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. 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.losses above the amounts recorded.
(f)
Pursuant to the OVEC power purchase contract, LG&E and KU are obligated to pay for their share of OVEC's excess debt service, post-retirement and decommissioning costs, as well as any shortfall from amounts included within a demand charge designed and expected to cover these costs over the term of the contract. LKE's proportionate share of OVEC's outstanding debt was $114$112 million at SeptemberJune 30, 2018,2019, consisting of LG&E's share of $79$77 million and KU's share of $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 20172018 Form 10-K for additional information on the OVEC power purchase contract.


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.
 
11.12. 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 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

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 Three Months Nine Months
 2018 2017 2018 2017
PPL Electric from PPL Services$14
 $43
 $45
 $138
LKE from PPL Services5
 4
 19
 15
PPL Electric from PPL EU Services34
 15
 110
 48
LG&E from LKS36
 38
 113
 120
KU from LKS42
 43
 127
 134


In addition to the charges for services noted above, LKS makes payments on behalf of LG&E and KU for fuel purchases and other costs for products or services provided by third parties. LG&E and KU also provide services to each other and to LKS. Billings between LG&E and KU relate to labor and overheads associated with union and hourly employees performing work for the other company, charges related to jointly-owned generating units and other miscellaneous charges. Tax settlements between LKE and LG&E and KU are reimbursed through LKS.



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Intercompany Borrowings


(PPL Electric)


PPL Energy Funding maintains a $650 million revolving line of credit with a PPL Electric subsidiary. In June 2018, the revolving line of credit was increased by $250 million and the limit as of September 30, 2018 was $650 million. No balance was outstanding at SeptemberJune 30, 20182019 and December 31, 2017.2018. The interest rates on borrowings are equal to one-month LIBOR plus a spread. Interest income is reflected in "Interest Income from Affiliate" on the Income Statement.


(LKE)


LKE maintains a $300$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. In October 2018, the revolving line of credit was increased by $75 million to a limit of $375 million. The interest rates on borrowings are equal to one-month LIBOR plus a spread. At SeptemberJune 30, 20182019 and December 31, 2017, $802018, $203 million and $225$113 million were outstanding and reflected in "Notes payable with affiliates" on the Balance Sheets. The interest rates on the outstanding borrowings at SeptemberJune 30, 20182019 and December 31, 20172018 were 3.61%3.93% and 2.87%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 basedmarket-based rates. No balance was outstanding at SeptemberJune 30, 20182019 and December 31, 2017.2018. The interest rate on the loan is based on the PPL affiliatesaffiliate's credit rating and equal to one-month LIBOR plus a spread.


LKE maintains aten-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, 20182019 and December 31, 2017,2018, the note wasnotes were reflected in "Long-term debt to affiliate" on the Balance Sheets. Interest expense on thisthe $400 million note was $4 million and $11$7 million for the three and ninesix months ending Septemberended June 30, 20182019 and 2017.

In May 2018, LKE borrowed $250$3 million from a PPL affiliate throughand $7 million for the issuance of a 4% ten-year note due 2028 with interest due in Maythree and November. At Septembersix months ended June 30, 2018, the note was reflected in "Long-term debt to affiliate" on the Balance Sheets. The proceeds were used to repay its outstanding notes payable with a PPL Energy Funding subsidiary.2018. Interest expense on thisthe $250 million note was $3 million and $4$5 million for the three and ninesix months ending Septemberended 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 910 for discussions regarding intercompany allocations associated with defined benefits.

See Note 10 for discussions regarding separation benefits.




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12.13. Other Income (Expense) - net
 
(PPL)
 
The details of "Other Income (Expense) - net" for the periods ended SeptemberJune 30, 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

 Three Months Nine Months
 2018 2017 2018 2017
Other Income     
  
Economic foreign currency exchange contracts (Note 14)$40
 $(81) $92
 $(237)
Defined benefit plans - non-service credits (Note 9)61
 41
 195
 123
Interest income3
 1
 5
 2
AFUDC - equity component5
 5
 15
 11
Miscellaneous2
 2
 3
 11
Total Other Income111
 (32) 310
 (90)
Other Expense 
  
  
  
Charitable contributions1
 1
 6
 6
Miscellaneous4
 2
 7
 16
Total Other Expense5
 3
 13
 22
Other Income (Expense) - net$106
 $(35) $297
 $(112)

(PPL Electric)
The details of "Other Income (Expense) - net" for the periods ended September 30, were:
 Three Months Nine Months
 2018 2017 2018 2017
Other Income     
  
AFUDC - equity component$5
 $5
 $15
 $11
Defined benefit plans - non-service credits (Note 9)1
 —
 4
 —
Miscellaneous—
 —
 1
 —
Total Other Income6
 5
 20
 11
Other Expense     
  
Charitable contributions1
 1
 2
 2
Miscellaneous—
 —
 —
 1
Total Other Expense1
 1
 2
 3
Other Income (Expense) - net$5
 $4
 $18
 $8


13.14. 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, 2018 and 2017, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 20172018 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
 —
 —

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September 30, 2018 December 31, 2017June 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$842
 $842
 $—
 $—
 $485
 $485
 $—
 $—
Restricted cash and cash equivalents (a)22
 22
 —
 —
 26
 26
 —
 —
Special use funds (a)63
 63
 —
 —
 —
 —
 —
 —
Price risk management assets (b): 
  
 

 

  
  
  
  
Price risk management assets (c): 
  
 

 

  
  
  
  
Foreign currency contracts174
 —
 174
 —
 163
 —
 163
 —
181
 —
 181
 —
 202
 —
 202
 —
Cross-currency swaps123
 —
 123
 —
 101
 —
 101
 —
161
 —
 161
 —
 135
 —
 135
 —
Total price risk management assets297
 —
 297
 —
 264
 —
 264
 —
342
 —
 342
 —
 337
 —
 337
 —
Total assets$1,224
 $927
 $297
 $—
 $775
 $511
 $264
 $—
$831
 $429
 $342
 $—
 $1,039
 $702
 $337
 $—
                              
Liabilities 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Price risk management liabilities (b): 
  
  
  
  
  
  
  
Price risk management liabilities (c): 
  
  
  
  
  
  
  
Interest rate swaps$19
 $—
 $19
 $—
 $26
 $—
 $26
 $—
$31
 $—
 $31
 $—
 $20
 $—
 $20
 $—
Foreign currency contracts30
 —
 30
 —
 148
 —
 148
 —
—
 —
 —
 —
 2
 —
 2
 —
Total price risk management liabilities$49
 $—
 $49
 $—
 $174
 $—
 $174
 $—
$31
 $—
 $31
 $—
 $22
 $—
 $22
 $—
                              
PPL Electric 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Assets 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Cash and cash equivalents$414
 $414
 $—
 $—
 $49
 $49
 $—
 $—
$20
 $20
 $—
 $—
 $267
 $267
 $—
 $—
Restricted cash and cash equivalents (a)2
 2
 —
 —
 2
 2
 —
 —
2
 2
 —
 —
 2
 2
 —
 —
Total assets$416
 $416
 $—
 $—
 $51
 $51
 $—
 $—
$22
 $22
 $—
 $—
 $269
 $269
 $—
 $—
                              
LKE 
  
  
  
  
  
     
  
  
  
  
  
    
Assets                              
Cash and cash equivalents $29
 $29
 $—
 $—
 $30
 $30
 $—
 $—
$32
 $32
 $—
 $—
 $24
 $24
 $—
 $—
Total assets$29
 $29
 $—
 $—
 $30
 $30
 $—
 $—
$32
 $32
 $—
 $—
 $24
 $24
 $—
 $—
                              
Liabilities 
  
  
  
  
  
     
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
     
  
  
  
  
  
    
Interest rate swaps$19
 $—
 $19
 $—
 $26
 $—
 $26
 $—
$23
 $—
 $23
 $—
 $20
 $—
 $20
 $—
Total price risk management liabilities$19
 $—
 $19
 $—
 $26
 $—
 $26
 $—
$23
 $—
 $23
 $—
 $20
 $—
 $20
 $—
                              
LG&E 
  
  
  
  
  
     
  
  
  
  
  
    
Assets 
  
  
  
  
  
     
  
  
  
  
  
    
Cash and cash equivalents$11
 $11
 $—
 $—
 $15
 $15
 $—
 $—
$9
 $9
 $—
 $—
 $10
 $10
 $—
 $—
Total assets$11
 $11
 $—
 $—
 $15
 $15
 $—
 $—
$9
 $9
 $—
 $—
 $10
 $10
 $—
 $—
                              
Liabilities 
  
  
  
  
  
     
  
  
  
  
  
    
Price risk management liabilities: 
  
  
  
  
  
     
  
  
  
  
  
    
Interest rate swaps$19
 $—
 $19
 $—
 $26
 $—
 $26
 $—
$23
 $—
 $23
 $—
 $20
 $—
 $20
 $—
Total price risk management liabilities$19
 $—
 $19
 $—
 $26
 $—
 $26
 $—
$23
 $—
 $23
 $—
 $20
 $—
 $20
 $—
                              
KU               
Assets               
Cash and cash equivalents$23
 $23
 $—
 $—
 $14
 $14
 $—
 $—
Total assets$23
 $23
 $—
 $—
 $14
 $14
 $—
 $—

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 September 30, 2018 December 31, 2017
 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
KU               
Assets               
Cash and cash equivalents$18
 $18
 $—
 $—
 $15
 $15
 $—
 $—
Total assets$18
 $18
 $—
 $—
 $15
 $15
 $—
 $—


(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.



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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. TheIn 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. 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, 2018 December 31, 2017
 Carrying
Amount (a)		 Fair Value Carrying
Amount (a)		 Fair Value
PPL$20,254
 $23,023
 $20,195
 $23,783
PPL Electric3,693
 3,899
 3,298
 3,769
LKE5,501
 5,783
 5,159
 5,670
LG&E1,808
 1,879
 1,709
 1,865
KU2,320
 2,467
 2,328
 2,605

 
(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.
 

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14.15. 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 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.
 

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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 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.


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.

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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 2017 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.


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.



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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 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 $25$32 million obligation to return cash collateral under master netting arrangements at SeptemberJune 30, 20182019 and a $20$40 million obligation to return cash collateral under master netting arrangements at December 31, 2017.2018.


PPL had no obligation to post cash collateral under master netting arrangements at SeptemberJune 30, 20182019 and December 31, 2017.2018.


LKE, LG&E and KU had no obligation to return cash collateral under master netting arrangements at SeptemberJune 30, 20182019 and December 31, 2017.2018.
 
LKE, LG&E and KU had no obligation to post cash collateral posted under master netting arrangements at SeptemberJune 30, 20182019 and December 31, 2017.2018.


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 portfolios, adjust the duration of the debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under PPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes

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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, 2018,2019, PPL held an aggregate notional value in interest rate swap contracts of £75£250 million (approximately $97$316 million based on spot rates) that mature in 20262031 to hedge the interest payments of WPD plc's October 2018East Midland's anticipated September 2019 debt issuance.


For the three and nine months ended September 30, 2018 and 2017, PPL had no hedge ineffectiveness associated with interest rate derivatives.


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At SeptemberJune 30, 2018,2019, PPL held an aggregate notional value in cross-currency interest rate swap contracts of $702 million that range in maturity from 2021 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, 2018 and 2017, 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, 2019 and 2018, PPL had no cash flow hedges reclassified into earnings associated with discontinued cash flow hedges. For the three and nine months ended September 30, 2017, PPL had an insignificant amount of cash flow hedges reclassified into earnings associated with discontinued cash flow hedges.
 
At SeptemberJune 30, 2018,2019, 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, 2018,2019, 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. There were no contracts outstanding at SeptemberJune 30, 2018.2019.
 
At SeptemberJune 30, 20182019 and December 31, 2017,2018, PPL had $30 million and $22$31 million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI.
 

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Economic Activity
 
PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At SeptemberJune 30, 2018,2019, the total exposure hedged by PPL was approximately £1.8£1.2 billion (approximately $2.5$1.7 billion based on contracted rates). These contracts have termination dates ranging from October 2018July 2019 through OctoberDecember 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 7 for amounts recorded in regulatory assets and regulatory liabilities at SeptemberJune 30, 20182019 and December 31, 2017.2018.
 

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See Note 1 in each Registrant's 20172018 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, 2018 December 31, 2017June 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)$—
 $—
 $—
 $4
 $—
 $—
 $—
 $4
$—
 $8
 $—
 $5
 $—
 $—
 $—
 $4
Cross-currency swaps (b)5
 —
 —
 —
 4
 —
 —
 —
6
 —
 —
 —
 6
 —
 —
 —
Foreign currency contracts—
 —
 86
 22
 —
 —
 45
 67
—
 —
 127
 —
 —
 —
 103
 2
Total current5
 —
 86
 26
 4
 —
 45
 71
6
 8
 127
 5
 6
 —
 103
 6
Noncurrent: 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Price Risk Management 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Assets/Liabilities (a): 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Interest rate swaps (b)—
 —
 —
 15
 —
 —
 —
 22
—
 —
 —
 18
 —
 —
 —
 16
Cross-currency swaps (b)118
 —
 —
 —
 97
 —
 —
 —
155
 —
 —
 —
 129
 —
 —
 —
Foreign currency contracts—
 —
 88
 8
 —
 —
 118
 81
—
 —
 54
 —
 —
 —
 99
 —
Total noncurrent118
 —
 88
 23
 97
 —
 118
 103
155
 —
 54
 18
 129
 —
 99
 16
Total derivatives$123
 $—
 $174
 $49
 $101
 $—
 $163
 $174
$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, 2018.2019.

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       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 $—
 $—
 Interest expense $(2) $—
 $(6) $—
 $(8) $(8) Interest expense $(2) $(4)
Cross-currency swaps 27
 26
 Interest expense 1
 —
 1
 —
 51
 28
 Other income (expense) - net 35
 7
     Other income (expense) - net 18
 —
 30
 —
Total $27
 $26
   $17
 $—
 $25
 $—
 $43
 $20
   $33
 $3
Net Investment Hedges:                 
      
Foreign currency contracts $—
 $11
           $1
 $1
      

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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 $40
 $92
Interest rate swaps Interest expense (1) (4)
  Total $39
 $88
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

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, 2017.
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 $—
 $(2) Interest expense $(2) $—
 $(6) $(1) $—
 $—
 Interest expense $(2) $(4)
Cross-currency swaps 1
 (34) Interest expense 1
 —
 1
 —
 23
 (1) Other income (expense) - net 24
 12
     Other income (expense) - net 2
 —
 (24) —
Total $1
 $(36)   $1
 $—
 $(29) $(1) $23
 $(1)   $22
 $8
Net Investment Hedges:                        
Foreign currency contracts $1
 $1
           $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

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

The following table presents the effect of 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

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(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.

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 September 30, 2018 December 31, 2017
 Assets Liabilities Assets Liabilities
Current:       
Price Risk Management       
Assets/Liabilities:       
Interest rate swaps$—
 $4
 $—
 $4
Total current—
 4
 —
 4
Noncurrent:     
  
Price Risk Management     
  
Assets/Liabilities:     
  
Interest rate swaps—
 15
 —
 22
Total noncurrent—
 15
 —
 22
Total derivatives$—
 $19
 $—
 $26

 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, 2018.2019.
 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 $2
 $7
 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, 2017.2018. 
  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 $(1) $(4)
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Nine Months
Interest rate swaps Regulatory assets - noncurrent $1
 $2

 
(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.


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Assets LiabilitiesAssets Liabilities
  Eligible for Offset     Eligible for Offset    Eligible for Offset     Eligible for Offset  
Gross 
Derivative
Instruments
 
Cash
Collateral
Received
 Net Gross 
Derivative
Instruments
 
Cash
Collateral
Pledged
 NetGross 
Derivative
Instruments
 
Cash
Collateral
Received
 Net Gross 
Derivative
Instruments
 
Cash
Collateral
Pledged
 Net
September 30, 2018               
June 30, 2019               
Treasury Derivatives                              
PPL$297
 $28
 $25
 $244
 $49
 $28
 $—
 $21
$342
 $—
 $32
 $310
 $31
 $—
 $—
 $31
LKE—
 —
 —
 —
 19
 —
 —
 19
—
 —
 —
 —
 23
 —
 —
 23
LG&E—
 —
 —
 —
 19
 —
 —
 19
—
 —
 —
 —
 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
December 31, 2017               
Treasury Derivatives               
PPL$264
 $107
 $20
 $137
 $174
 $107
 $—
 $67
LKE—
 —
 —
 —
 26
 —
 —
 26
LG&E—
 —
 —
 —
 26
 —
 —
 26

 
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, 2018,2019, 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:
PPL LKE LG&EPPL LKE LG&E
Aggregate fair value of derivative instruments in a net liability position with credit risk-related contingent features$8
 $6
 $6
$5
 $5
 $5
Aggregate fair value of collateral posted on these derivative instruments—
 —
 —
—
 —
 —
Aggregate fair value of additional collateral requirements in the event of a credit downgrade below investment grade (a)8
 6
 6
5
 5
 5
 
(a)Includes the effect of net receivables and payables already recorded on the Balance Sheet.



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15.
16. Asset Retirement Obligations


(PPL, LKE, LG&E and KU)


PPL's, LKE's, LG&E's and KU's ARO liabilities are primarily related to CCR closure costs. See Note 1011 for information on the 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 certain CCR projects are amortized to expense 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.


The changes in the carrying amounts of AROs were as 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
 PPL LKE LG&E KU
Balance at December 31, 2017$397
 $356
 $121
 $235
Accretion14
 13
 5
 8
Obligations incurred8
 8
 —
 8
Effect of foreign exchange rates(2) —
 —
 —
Changes in estimated timing or cost(6) (14) (2) (12)
Obligations settled(46) (46) (17) (29)
Balance at September 30, 2018$365
 $317
 $107
 $210

 
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, 2018$(1,223) $(21) $—
 $(7) $(2,244) $(3,495)
Amounts arising during the period(187) 22
 —
 —
 (8) (173)
Reclassifications from AOCI—
 (14) —
 —
 34
 20
Net OCI during the period(187) 8
 —
 —
 26
 (153)
September 30, 2018$(1,410) $(13) $—
 $(7) $(2,218) $(3,648)
            
December 31, 2017$(1,089) $(13) $—
 $(7) $(2,313) $(3,422)
Amounts arising during the period(321) 21
 —
 (1) (9) (310)
Reclassifications from AOCI—
 (21) —
 1
 104
 84
Net OCI during the period(321) —
 —
 —
 95
 (226)
September 30, 2018$(1,410) $(13) $—
 $(7) $(2,218) $(3,648)
            
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)
            



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Foreign
currency
translation
adjustments
 
Unrealized gains (losses)
 on qualifying
derivatives
   Defined benefit plans  
   
Equity
investees'
AOCI
 
Prior
service
costs
 
Actuarial
gain
(loss)
 Total
December 31, 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)
            
LKE 
           
June 30, 2018    $—
 $(8) $(78) $(86)
Reclassifications from AOCI    —
 1
 1
 2
Net OCI during the period    —
 1
 1
 2
September 30, 2018    $—
 $(7) $(77) $(84)
            
December 31, 2017    $—
 $(9) $(79) $(88)
Reclassifications from AOCI    —
 2
 2
 4
Net OCI during the period    —
 2
 2
 4
September 30, 2018    $—
 $(7) $(77) $(84)
            
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)

(PPL)


The following table presents PPL's gains (losses) and related income taxes for reclassifications from AOCI for the periods ended SeptemberJune 30.
  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 2018 2017 2018 2017 Statements of Income
Qualifying derivatives          
Interest rate swaps $(2) $(2) $(6) $(7) Interest Expense
Cross-currency swaps 18
 2
 30
 (24) Other Income (Expense) - net
  1
 1
 1
 1
 Interest Expense
Total Pre-tax 17
 1
 25
 (30)  
Income Taxes (3) (1) (4) 6
  
Total After-tax 14
 —
 21
 (24)  
           

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  Three Months Nine Months Affected Line Item on the
Details about AOCI 2018 2017 2018 2017 Statements of Income
Equity investees' AOCI —
 —
 —
 (1) Other Income (Expense) - net
Total Pre-tax —
 —
 —
 (1)  
Income Taxes —
 —
 —
 —
  
Total After-tax —
 —
 —
 (1)  
           
Defined benefit plans          
Prior service costs (a) (1) (1) (2) (2)  
Net actuarial loss (a) (42) (44) (130) (125)  
Total Pre-tax (43) (45) (132) (127)  
Income Taxes 9
 11
 27
 29
  
Total After-tax (34) (34) (105) (98)  
           
Total reclassifications during the period $(20) $(34) $(84) $(123)  


(a)These AOCI components are included in the computation of net periodic defined benefit cost. See Note 910 for additional information.


17.18. New Accounting Guidance Pending Adoption

(All Registrants)

Accounting for Leases
In February 2016, the Financial Accounting Standards Board (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 method with transition applied either retrospectively to each prior reporting period presented in the financial statements or as of the beginning of the period of adoption. The standard also provides for certain practical expedients. One of these practical expedients allows entities to elect to (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases. In January 2018, the FASB also issued additional guidance that provides for a practical expedient that allows entities to elect to not evaluate land easements as leases that exist or expired before the adoption date and were not previously accounted for as leases under current lease guidance. The Registrants plan to elect these practical expedients.

The Registrants are currently assessing the impact of adopting this guidance and will adopt this standard as of the beginning of the period adopted, which will be January 1, 2019. Key implementation activities in process of being completed include identifying and implementing new controls and processes and compiling the required disclosure information. The Registrants expect an increase in assets and liabilities, which are still being quantified, but do not expect an impact to the Statements of Cash Flows or Statements of Income. Additional qualitative and quantitative disclosures around the nature of the Registrants’ leasing activity and information surrounding the amount, timing and uncertainty of cash flows arising from leases will also be provided upon adoption.

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.

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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 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.
Improvements to Accounting for Hedging Activities

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

For public business entities, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. This standard must be adopted usingon January 1, 2020 with a modified retrospective approach and provides for certain transition elections that must be made priorthrough a cumulative-effect adjustment to retained earnings at the first effectiveness testing date afterof adoption.

The adoption Key implementation activities in process include finalizing the population of financial instruments within the scope of this guidance requires additional disclosures aroundand identifying potential differences between the income statement impactsRegistrants’ current credit loss models and the requirements of hedging activities as well as removing disclosures related to ineffectiveness. Other impacts of adopting this guidance are not expected to be material. The Registrants will adopt this guidance effective January 1, 2019.guidance.


Accounting for Implementation Costs in a Cloud Computing Service Arrangement


In August 2018, the FASB issued accounting guidance that requires 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 arrangement costs are recorded. The guidance also prescribes the financial statement classification of the capitalized implementation costs and cash flows associated with the arrangement. Additional quantitative and qualitative disclosures are also required.


For public business entities, this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. This standard must be applied either retrospectively or prospectively to all implementation costs incurred after the date of 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


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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.


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(PPL and LKE)

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued accounting guidance that gives entities the option to reclassify tax effects stranded within AOCI as a result of the TCJA to retained earnings. The reclassification applies only to those stranded tax effects arising from the TCJA enactment. Certain disclosures related to the stranded tax effects, including a description of the accounting policy for releasing income tax effects from AOCI, are required.

For all entities, this guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized.

The adoption of this guidance will result in PPL and LKE reclassifying $50 million and $18 million of deferred tax effects (primarily related to pension and other post-retirement benefits) stranded in AOCI as a result of the TCJA to retained earnings. The Registrants are assessing the period in which they will adopt this guidance.

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Item 2. Combined Management's Discussion and Analysis of Financial Condition and
Results of Operations
 
(All Registrants)
 
This "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL, PPL Electric, LKE, LG&E and KU. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant. The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures. Within combined disclosures, amounts are disclosed for individual Registrants when significant.
 
The following should be read in conjunction with the Registrants' Condensed Consolidated Financial Statements and the accompanying Notes and with the Registrants' 20172018 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, 20182019 with the same periods in 2017.2018. For PPL, "Results of Operations" also includes "Segment Earnings" and "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 "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 "2018 Outlook" discussion identifies key factors expected to impact 2018 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).
 


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       PPL Corporation*       
              
                  
           
PPL Capital Funding
●Provides financing for the operations of PPL and certain subsidiaries
  
             
                  
                  
 
PPL Global
●Engages in the regulated distribution of electricity in the U.K.
  
LKE*
 
  
PPL Electric*
●Engages in the regulated transmission and distribution of electricity in Pennsylvania
 
                  
                  
    
LG&E*
●Engages in the regulated generation, transmission, distribution and sale of electricity and 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. PPL Global is not a Registrant. 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 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


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a public utility by the KPSC, the VSCC 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 operates seven fully regulated, high-performing utilities. These utilities are located in the U.K., Pennsylvania and Kentucky, in constructive regulatory jurisdictions with distinct regulatory structures and customer classes. PPL believes this business 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 strategy, and that of the other Registrants, is to deliver best-in-sector operational performance, invest in a sustainable energy future, maintain a strong financial foundation, and engage 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 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.


For the U.S. businesses, central to ourPPL's strategy is recovering 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 expenditures 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. RAV growth is expected in the U.K. Regulated segment during the RIIO-ED1 price control period, which ends on March 31, 2023, and to result in earnings growth in 2018 through at least 2020. See "Item 1. Business - Segment Information - U.K. Regulated Segment" in PPL's 2017 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

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commitments to customers, regulators and shareowners, and a commitment to continue to improve our customer service, reliability and operational efficiency.


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Financial and Operational Developments


Equity Forward Contracts (PPL)

In May 2018, PPL completed a registered underwritten public offering of 55 million shares of its common stock. In conjunction with that offering, the underwriters exercised an option to purchase 8.25 million additional shares of PPL common stock solely to cover over-allotments.

In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the 63.25 million shares of PPL common stock. Full settlement of these forward sale agreements will occur no later than November 2019. The forward sale agreements are classified as equity transactions. PPL only receives proceeds and issues shares of common stock upon any settlements of the forward sale agreements. PPL intends to use net proceeds that it receives upon any settlements for general corporate purposes.

In September 2018, PPL settled a portion of the initial forward sale agreements by issuing 20 million shares of PPL common stock, and received net cash proceeds of $520 million. For the unsettled portion of the agreements, the only impact to the financial statements is the inclusion of incremental shares within the calculation of diluted EPS using the Treasury Stock Method.

See Note 8 to the Financial Statements for additional information.

U.S. Tax Reform (All Registrants)


The Registrants recognizedIRS issued proposed regulations for certain provisional amounts relating to the impact of the enactmentprovisions of the TCJA in their December 31, 2017 financial statements, in accordance with SEC guidance. Included in those provisional amounts were estimates of: tax depreciation, deductible executive compensation, accumulated foreign earnings, foreign tax credits,2018, including interest deductibility and deemed dividends from foreign subsidiaries, allGlobal 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 which were basedthe statutory impact of these rules on the interpretation and application of various provisions of the TCJA.

In the third quarter of 2018, PPL filed its consolidated federal income tax return, which was prepared using guidance issued by the U.S. Treasury Department and the IRS since the filing of each Registrant’s 2017 Form 10-K. Accordingly, the Registrants have updated the following provisional amounts and now consider them to be complete: (1) the amount of the deemed dividend and associated foreign tax creditscompany. Proposed regulations relating to the transition tax imposed on accumulated foreign earnings as of December 31, 2017; (2) the amount of accelerated 100% “bonus” depreciation PPL is eligible to claim in its 2017 federal income tax return; and (3) the related impacts on PPL's 2017 consolidated federal net operating loss to be carried forward to future periods. In addition, the Registrants recorded the tax impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on the changes to deferred tax assets and liabilities resulting from the completed provisional amounts. The completed provisional amounts related to the tax rate reduction had an insignificant impact on the net regulatory liabilities of PPL's U.S. regulated operations. See Note 6 to the Financial Statements for the final amounts reported in PPL's 2017 federal income tax return, provisional adjustment amounts for the year ended December 31, 2017, the related measurement period adjustments and the resulting tax impact for the three and nine months ended September 30, 2018.

The Registrants' accounting related to the effects of the TCJA on financial results for the period ended December 31, 2017 is complete as of September 30, 2018 with respect to the three items discussed above. The Registrants continue to analyze the impact of the TCJAlimitation on the deductibility of executive compensation awarded on or beforeinterest expense were issued in November 2, 2017. The2018 and such regulations provide detailed rules implementing the broader statutory provisions. These proposed regulations should not apply to the Registrants do not currently anticipate a material change from what was reflecteduntil the year in which the December 31, 2017 financial statements and expectregulations are issued in final form, which is expected to record the impact, if any, of changes in the deductibility of executive compensationbe in the fourth quarter of 2018.

Kentucky State Tax Reform (All Registrants)

HB 487, which became law2019. It is uncertain what form the final regulations will take and, therefore, the Registrants cannot predict what impact the final regulations will have on April 27, 2018, providesthe 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 significant changestax purposes and such limitation could be significant. PPL expressed its views on these proposed regulations in a comment letter addressed to the Kentucky tax code including (1) adopting mandatory combined reporting for corporate members of unitary business groups for taxable years beginningIRS on or after January 1, 2019 (members of a unitary business group may make an eight-year binding election to file consolidated corporate income tax returns with all members of their federal affiliated group) and (2) a reduction in the Kentucky corporate income tax rate from 6% to 5% for taxable years beginning after December 31, 2017. LKE recognized a deferred tax charge of $9 million

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in the second quarter of 2018 primarily associated with the remeasurement of non-regulated accumulated deferred income tax balances.

As indicated in Note 1 in the Registrants' 2017 Form 10-K, LG&E's and KU's accounting for income taxes is impacted by rate regulation. Therefore, reductions in regulated accumulated deferred income tax balances due to the reduction in the Kentucky corporate income tax rate to 5% under the provisions of HB 487 may result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers in future periods. In the second quarter of 2018, LG&E and KU recorded the impact of the reduced tax rate, related to the remeasurement of deferred income taxes, as an increase in regulatory liabilities of $16 million and $19 million. In a separate regulatory proceeding, LG&E and KU have requested to begin returning state excess deferred income taxes to customers in conjunction with the 2018 Kentucky base rate case, which was filed on September 28, 2018. See Note 7 for additional information related to the rate case proceedings. PPL is evaluating the impact, if any, of unitary or elective consolidated income tax reporting on all its Registrants.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 byBrexit is the European Parliament,potential decline in the European Council and byvalue of the GBP compared to the U.S. dollar, particularly if the U.K. Parliament. There remains significant uncertainty asleaves the EU without a withdrawal agreement. A decline in the value of the GBP compared to the ultimate outcome of the withdrawal negotiations and the related impact on the U.K. economy and the GBP to U.S. dollar exchange rate.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 26, 2018,July 31, 2019, PPL's foreign exchange exposure related to budgeted earnings is 100% hedged for the remainder of 2018 at an average rate of $1.31 per GBP, 100% hedged for 2019 at an average rate of $1.39$1.41 per GBP and 50%63% hedged for 2020 at an average rate of $1.49$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.

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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.


TCJA Impact on LG&E and KU Rates(PPL, LKE, LG&E and KU)


On December 21, 2017, Kentucky Industrial Utility Customers, Inc. submitted a complaint with the KPSC againstThe businesses of LKE, LG&E and KU as well asare subject to extensive federal, state and local environmental laws, rules and regulations, including those pertaining to CCRs, GHG, and ELGs. See Notes 7, 11 and 16 to the Financial Statements for a discussion of these significant environmental matters. These and other utility companies in Kentucky, alleging that their respective rates would no longer be fair, just and reasonable following the enactment of the TCJA reducing the federal corporate tax rate from 35% to 21%. The complaint requested the KPSC to issue an Order requiringstringent environmental requirements led PPL, LKE, LG&E and KU to begin deferring, asretire approximately 1,000 MW of January 1,coal-fired generating plants in Kentucky since 2015.

TCJA Impact on FERC Rates (All Registrants)

In November 2018, the revenue requirement effect of all income tax expense savings resulting fromFERC issued a Policy Statement stating that the federal corporate income tax reduction, including the amortization of excessappropriate ratemaking treatment for changes in accumulated deferred income taxes by recording those savingsas a result of the TCJA would be addressed in a regulatory liability accountNotice 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 establishing a process by which the federal corporateadjust their income tax savings will be passed backallowances by amortized excess or deficient accumulated deferred income taxes. The Notice of Proposed Rulemaking did not prescribe the mechanism companies should use to customers.adjust their formula rates.


On January 29, 2018, LG&E and KU Kentucky Industrial Utility Customers, Inc.are currently assessing the Notice of Proposed Rulemaking and the Office of the Attorney General reached a settlement agreementare continuing to commence returning savings related to the TCJA to their customers through their ECR, DSM and LG&E's GLT rate mechanisms beginning in March 2018 and through a new bill credit mechanism from April 1, 2018 through April 30, 2019 and thereafter until tax-reform related savings are reflected in changes in base rates. The estimated impact of the rate reduction represents approximately $91 million in KU electricity revenues ($70 million through the new bill credit and $21

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million through existing rate mechanisms), $69 million in LG&E electricity revenues ($49 million through the new bill credit and $20 million through existing rate mechanisms) and $17 million in LG&E gas revenues (substantially all through the new bill credit) for the period January 2018 through April 2019.

On March 20, 2018, the KPSCmonitor guidance issued an Order approving, with certain modifications, the settlement agreement reached between LG&E, KU, Kentucky Industrial Utility Customers, Inc. and the Office of the Attorney General. The KPSC estimates that, pursuant to its modifications, electricity revenues would incorporate reductions of approximately $108 million for KU ($87 million through the new bill credit and $21 million through existing rate mechanisms) and $79 million for LG&E ($59 million through the new bill credit and $20 million through existing rate mechanisms). This represents $27 million ($17 million at KU and $10 million at LG&E) in additional reductions from the amounts proposed by the settlement. The KPSC's modifications to the settlement include certain changesFERC. On February 5, 2019, in assumptions or inputs used in assessingconnection with a separate element of federal and Kentucky state tax reform or calculating LG&E's and KU's electricity rates. LG&E gas rate reductions were not modified significantly from the amount included in the settlement agreement.

On March 26, 2018,effects, LG&E and KU filed a petition for reconsideration and request for hearing with the KPSC, taking exceptionFERC to the KPSC's modifications and the process, and also requested certain relief from implementing the amounts represented by the additionalamend their transmission formula rates to incorporate reductions until the matter is fully resolved. On March 28, 2018, the Officeto corporate income tax rates as a result of the Attorney General filed a response to the petitionTCJA and gave notice of its withdrawal from the settlement agreement.

On March 28, 2018, the KPSC issued an Order granting LG&E's and KU'sHB 487. The FERC approved this request for reconsideration and amending its March 20, 2018 Order by suspending the approved rates, allowingeffective June 1, 2019. LG&E and KU on an interim basis, to return savings related to the TCJA at the rates agreed to in the January 29, 2018 settlement.

On September 28, 2018, the KPSC issued an Order on reconsideration, implementing rates reflecting electricity revenue reductions of $101 million for KU ($80 million through the new bill credit and $21 million through existing rate mechanisms), $74 million for LG&E electricity revenues ($54 million through the new bill credit and $20 million through existing rate mechanisms) and $16 million LG&E gas revenues (substantially all through the new bill credit) for the period January 2018 through April 2019. This represents lower revenue reduction amounts than the March 20, 2018 Order of approximately $13 million ($7 million at KU and $6 million at LG&E). LG&E and KU have been implementing interim partial rate reductions since April 2018, as authorized by the KPSC on March 28, 2018, and recording reserves up to the higher reduction amounts originally approved in the March 20, 2018 Order. The September 28, 2018 Order is not expected to have a material adverse impact on LG&E's and KU's financial condition or results of operations.

Additionally, on January 8, 2018, the VSCC ordered KU, as well as other utilities in Virginia, to accrue regulatory liabilities reflecting the Virginia jurisdictional revenue requirement impacts of the reduced federal corporate tax rate. On March 22, 2018, KU reached a settlement agreement regarding its rate case in Virginia. New rates, inclusive of TCJA impacts, were effective June 1, 2018. The settlement also stipulates that actual tax savings for the five month period prior to new rates taking effect would be addressed through KU's annual information filing for calendar year 2018. On May 8, 2018, the VSCC approved the settlement agreement. The TCJA and rate case are not expected to have a significant impact on KU's financial condition or results of operations related to Virginia.

On March 15, 2018, the FERC issued a Notice of Inquiry seeking information on whether and how it should address changes relating to accumulated deferred income taxes and bonus depreciation resulting from passage of the TCJA on FERC-jurisdictional rates. LG&E and KU have not made any submission in response to the Notice of Inquiry, but 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)


TCJA Impact on PPL Electric Rates

On February 12, 2018, the PUC issued a Secretarial Letter requesting certain information from regulated utilities and inviting comment from interested parties on potential revision to customer rates as a result of enactment of the TCJA. PPL Electric submitted its response to the Secretarial Letter on March 9, 2018. On March 15, 2018, the PUC issued a Temporary Rates Order to allow time to determine the manner in which rates could be adjusted in response to the TCJA. The PUC issued another Temporary Rates Order on May 17, 2018 to address the impact of the TCJA and indicated that utilities without a currently pending general rate proceeding would receive a utility specific order. The PUC issued an Order specific to PPL Electric on May 17, 2018 which required PPL Electric to file a tariff or tariff supplement byIn June 15, 2018 to establish (a) temporary rates to include a negative surcharge of 0.56%, which was based on PPL Electric's 2017 taxable income, to be effective July 1, 2018,

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and (b) to record a deferred regulatory liability to reflect the tax savings associated with the TCJA for the period January 1 through June 30, 2018. On June 8, 2018, PPL Electric submitted a petition to the PUC to increase the negative surcharge proposed in the May 17, 2018 Order from 0.56% to 7.05% to reflect the estimated 2018 tax savings associated with the TCJA. The PUC approved PPL Electric's petition on June 14, 2018 and PPL Electric filed a tariff on June 15, 2018 reflecting the increased negative surcharge. The estimated 2018 full year impact of the rate reduction is $72 million in PPL Electric's operating revenues, of which $39 million relates to the period January 1, 2018 through June 30, 2018 and was recorded as a noncurrent regulatory liability in the second quarter of 2018 to be distributed to customers pursuant to a future rate adjustment. The remaining $33 million is the estimated impact for the period July 1, 2018 through December 31, 2018 and is being passed back to customers through the negative surcharge which began on July 1, 2018.

On March 15, 2018, the FERC issued a Notice of Inquiry seeking information on whether and how it should address changes to FERC-jurisdictional rates relating to accumulated deferred income taxes and bonus depreciation resulting from passage of the TCJA. On March 16, 2018, PPL Electric filed a waiver request, pursuant to Rule 207(a)(5) of the Rules of Practice and Procedure of the FERC, to accelerate incorporation of the changes to the federal corporate income tax rate in its transmission formula rate commencing on June 1, 2018 rather than allowing the TCJA tax rate reduction to be initially incorporated in PPL Electric's June 1, 2019 transmission formula rate. The waiver was approved on April 23, 2018 and PPL Electric submitted its transmission formula rate, reflecting the TCJA rate reduction, on April 27, 2018. In addition, on May 21, 2018, PPL Electric, as part of a PJM Transmission Owners joint filing, submitted comments in response to the FERC's March 15, 2018 Notice of Inquiry. The filing requested guidance on how the reduction in accumulated deferred income taxes, resulting from the TCJA reduced federal corporate income tax rate, should be treated for ratemaking purposes. PPL Electric is currently awaiting FERC's decision on this matter. The changes, related to accumulated deferred income taxes impacting the transmission formula rate revenues, have not been significant since the new rate went into effect on June 1, 2018.

Pennsylvania Alternative Ratemaking

On June 28, 2018, Governor Tom Wolf signed House Bill 1782 (now known asinto law Act 58 of 2018 and to be codified(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 iswas August 27, 2018.

Under the new law, a public utility canmay 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, the following: decoupling mechanisms, performance-based rates, formula rates, multiyearmulti-year rate plans, or a combination of those mechanisms or other mechanisms.


The alternative rate mechanisms can include reconcilable surcharges and rates established under current law, including returns on and return

Table of capital investments. Act 58 explicitly provides that it does not invalidate or void any rate mechanisms approved by the PUC prior to the legislation's effective date. Act 58 also specifies customer notice requirements concerning the utility's application for alternative rates or rate mechanisms.Contents




On August 23, 2018,April 25, 2019, the PUC issued a Tentativean Implementation Order seeking comments onadopting its proposed interpretation and implementation of Act 58 Section 1330and establishing the procedures through which utilities may seek PUC approval of the Public Utility Code, 66 Pa. C.S. 1330. PPL Electricalternative rates and various other parties filed comments on October 8, 2018. This matter remains pending before the PUC.rate mechanisms.


PPL Electric views the passage of Act 58 to be a favorable regulatory development that is expected to expand the rate-making mechanisms available to Pennsylvania regulated utility companies.

RIIO-ED2 Review (PPL)

RIIO-ED1 Mid-period Review


In December 2017, Ofgem initiated a consultation on a potential RIIO-ED1 mid-period review (MPR). The RIIO framework allows for an MPR of outputs halfway through the price control. Ofgem was consulting on three potential approaches:
whether to implement an MPR as currently defined;
whether to implement an MPR with an extension for WPD rail electrification; and
whether to implement an MPR with a significant extension of scope to include financial parameters.

Ofgem's initial assessment as set forth in its December 2017 consultation publication was that an MPR as currently defined under RIIO-ED1 was not required. In addition, Ofgem recognized that the U.K. rail electrification program applicable in the WPD distribution areas was outside the scope of the MPR and that implementing an MPR to include financial parameters could

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undermine the stability of the regulatory regime. The consultation, however, requested interested party comments on those conclusions. The period for submission of comments to the consultation closed on February 2, 2018. Formal consultation responses were submitted by PPL and WPD. On April 30, 2018, Ofgem announcedpublished its decision not to conduct an MPR.

RIIO-2 Framework Review

On March 7, 2018, Ofgem issued its consultation document on the overall RIIO-2 framework, which covers all U.K. gas and electricity transmission and distribution price controls. The currentcontrols, 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 price control, RIIO-ED1, continues through March 31, 2023network investment will be required in RIIO-ED2 to achieve the U.K.’s carbon reduction targets and that Ofgem will not be impacted by this RIIO-2 consultation process. Ofgem consulted onneed to design a wide rangeframework that sufficiently incentivizes delivery of issues, including cost of debt and equity methodologies, the length of the price control period, indexation methodologies, innovation, stakeholder engagement in the business planning process and performance incentive mechanisms. The purpose of the RIIO-2 framework consultation was to build on lessons learned from the current price controls while supporting low costs to consumers, improved customer service and reliability, and the U.K.'s continued shift to a low-carbon future. Comments on the RIIO-2 framework were due in May 2018. those objectives.

On July 30, 2018,August 6, 2019, Ofgem published its decision following their RIIO-2 frameworkopen letter consultation after consideration of comments received. Ofgem confirmedofficially commencing the following pointsRIIO-ED2 process. WPD and PPL have been fully engaged in the decision document:
ThereRIIO-2 process and will be a five-year default length for the price control period, comparedresponding to eight years in the current RIIO-ED1 price control.
There is intent to shift the inflation index used for calculating RAV and allowed returns from RPI to CPIH. Ofgem stated overall, consumers and investors as a whole will be neither better nor worse off in net present value terms as a result of the shift to CPIH and a transition period may be required.
There will be no change to the existing depreciation policy of using economic asset lives as the basis for depreciating RAV as part of base revenue calculations. WPD is currently transitioning to 45 year asset lives for new additions in RIIO-ED1 based on Ofgem’s extensive review of asset lives in RIIO-ED1.
Ofgem will retain the option for fast-tracking for electricity distribution companies only. Fast tracking will be furtherconsidered as part of the electricity distribution sector specificthis consultation.
A new enhanced engagement model will be introduced which will require distribution companies to set up a customer engagement group to provide Ofgem with a public report of their views on the companies’ business plans from the perspective of local stakeholders. Ofgem will also establish an independent RIIO-2 challenge group comprised of consumer experts to provide Ofgem with a public report on companies’ business plans.
Ofgem intends to expand the role of competition for projects that are new, separable and high value. WPD does not currently have any planned projects that would meet the high value threshold.
A focus of RIIO-2 will be on whole-system outcomes. Ofgem envisions network companies and system operators working together to ensure the energy system as a whole is efficient and delivers best value to consumers. Ofgem is undertaking further work to clarify the definition of whole-system and the appropriate roles of the network companies in supporting the energy transition.

Ofgem also indicated further work is needed on other price control principles, including but not limited to, cost of equity, cost of debt, financeability and incentives with decisions on these items expected to be made in the sector specific consultations or within the individual company business plan submissions. The promulgation of sector specific price controls is expected to begin with the gas and electricity transmission networks in December 2018, with electricity distribution price control work scheduled to begin in 2020, at which time Ofgem plans to publish its RIIO-ED2 strategy consultation document. Although the electricity distribution consultation does not commence until 2020, WPD is ensuring that they are included in any RIIO-2 related engagement.At this stage, PPL cannot predict the outcome of this process or the long-term impact it or the final RIIO-ED2 regulationsframework 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)


OnIn August 3, 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’sKU'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 seekssought termination of LG&E’s&E's and KU’sKU'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 or Tennessee.Kentucky. The amounts at issue are generally waivers or credits granted to such customers for either LG&E and KU or for MISO transmission charges incurred depending upon the direction of certain transmission service incurred by the municipalities. LG&E and KU estimate that such charges may average approximately $22 million annually, depending upon actual transmission customer and market volumes, structures and prices, with such charges allocated according to LG&E's and KU’s respective transmission system ownership ratio. 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.

Table 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 Contents

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 such expenses inwaivers and credits provided through other rate mechanisms. LG&E

(PPL and KU cannot predictPPL Electric)

In April 2019, PPL Electric filed its annual transmission formula rate update with the outcomeFERC, reflecting a revised revenue requirement, which includes the impact of the proceeding, including any effects on their financial condition or results of operations.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 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. The proposed base rate increases would result in an electricity rate increase of 6.9% at KU and electricity and gas rate increases of 3% and 7.5% at LG&E. As discussed in the "TCJA Impact on LG&E and KU Rates" section below, LG&E’s and KU’s applications seekalso sought to include applicable 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 the new base rates go into effect.

New rates are expected to become effective on May 1, 2019. 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 arewere 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, cannot predictalong with substantially all intervening parties to the outcomeproceeding, filed stipulation and

Table of these proceedings.Contents


(LKE

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 KU)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%.

In September 2017,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%. On March 22, 2018, KU reached a settlement agreement regarding the case, including the impact of the TCJAKU's request is based on an authorized 10.5% return on equity. Subject to regulatory review and approval, new rates resulting in an increase in annual Virginia base electricity revenue by $2 million. This represents an increase of 2.8% with rateswould become effective June 1, 2018. On May 8, 2018, the VSCC issued an Order approving the settlement agreement.April 12, 2020.

Acquisition of Solar Energy Solution Provider (PPL)

During the second quarter of 2018, PPL completed the acquisition of all the outstanding membership interests of Safari Energy, LLC (Safari Energy), a privately held provider of solar energy solutions for commercial customers in the U.S. For its clients, Safari Energy develops highly structured turnkey solutions, managing projects through all phases of development, from inception to financing, design, engineering, permitting, construction, interconnection and asset management. Headquartered in New York City, Safari Energy has completed over 200 solar projects in 19 states, with over 80 projects underway. The acquisition is not material to PPL and the financial results of Safari Energy are reported within Corporate and Other.




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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, 20182019 with the same periods in 2017.2018. The "Segment Earnings" and "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 "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 "2018 Outlook" discussion identifies key factors expected to impact 2018 earnings.


Tables analyzing changes in amounts between periods within "Statement of Income Analysis," "Segment Earnings" and "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.


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(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, 20182019 with the same periods in 2017.2018. The "Earnings" discussion provides a summary of earnings. The "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.


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
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues$1,872
 $1,845
 $27
 $5,846
 $5,521
 $325
$1,803
 $1,848
 $(45) $3,882
 $3,974
 $(92)
Operating Expenses                      
Operation                      
Fuel206
 202
 4
 609
 576
 33
168
 189
 (21) 362
 403
 (41)
Energy purchases149
 143
 6
 538
 494
 44
138
 148
 (10) 388
 389
 (1)
Other operation and maintenance479
 438
 41
 1,453
 1,340
 113
482
 506
 (24) 972
 974
 (2)
Depreciation275
 257
 18
 817
 745
 72
300
 273
 27
 584
 542
 42
Taxes, other than income77
 69
 8
 234
 214
 20
75
 74
 1
 155
 157
 (2)
Total Operating Expenses1,186
 1,109
 77
 3,651
 3,369
 282
1,163
 1,190
 (27) 2,461
 2,465
 (4)
Other Income (Expense) - net106
 (35) 141
 297
 (112) 409
131
 234
 (103) 183
 191
 (8)
Interest Expense244
 230
 14
 718
 669
 49
246
 235
 11
 487
 474
 13
Income Taxes103
 116
 (13) 362
 321
 41
84
 142
 (58) 210
 259
 (49)
Net Income$445
 $355
 $90
 $1,412
 $1,050
 $362
$441
 $515
 $(74) $907
 $967
 $(60)




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Operating Revenues
 
The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Domestic:      
PPL Electric Distribution price (a)$(6) $5
$(7) $2
PPL Electric Distribution volume17
 49
(6) (4)
PPL Electric PLR (b)5
 31
(5) 5
PPL Electric Transmission Formula Rate (c)3
 53
5
 12
PPL Electric TCJA refund (d)(20) (57)17
 (7)
LKE Volumes (e)19
 122
LKE Base rates—
 58
LKE Retail Rates (e)35
 35
LKE ECR5
 18
15
 19
LKE TCJA refund (d)(30) (109)
LKE DSM(2) (13)
LKE Fuel and other energy prices(8) (15)1
 (9)
LKE Volumes (f)(52) (82)
LKE Demand revenue (g)(9) (8)
Other4
 14
4
 20
Total Domestic(13) 156
(2) (17)
U.K.:      
Price19
 19
26
 51
Volume(2) 2
(29) (43)
Foreign currency exchange rates8
 117
(34) (74)
Engineering recharge income18
 37
Other(3) (6)(6) (9)
Total U.K.40
 169
(43) (75)
Total$27
 $325
$(45) $(92)


(a)Distribution price variance isvariances were primarily due to reconcilable cost recovery mechanisms approved by the PUC.
(b)The increases weredecrease for the three months ended June 30, 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 volumes partially offset by lower energy prices.transmission enhancement expenses.
(c)The Transmission Formula Rate revenues include $11 million and $27 million for the impactsthree 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 impact of thereduced U.S. federal corporate income taxtaxes 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 reduction from 35% to 21%, as enacted byfor distribution customers went into effect July 1, 2018, based on the TCJA, effective January 1, 2018. See Note 7 to the Financial Statements for additional information.PUC Order.
(e)IncreasesThe 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 favorable weather in 2018.weather.
(g)The decreases were primarily due to the departure of eight municipal customers effective April 30, 2019.


Fuel


Fuel increased $33 million for the nine months endedSeptember 30, 2018 compared with 2017, primarily due to a $40 million increase in volumes driven by weather in 2018, partially offset by an $8 million decrease in commodity costs.

Energy Purchases

Energy purchases increased $6decreased $21 million for the three months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to a $17$14 million decrease in volumes driven by weather and a $6 million decrease in volumes driven by the 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 volumes 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 volumes driven by weather at LG&E.

Energy purchases decreased $1 million for the six months ended June 30, 2019 compared with 2018, primarily due to a $12 million decrease in transmission enhancement expenses at PPL Electric and a $5 million decrease in volumes driven by weather at LG&E, partially offset by a $16 million increase in PLR volumes partially offset by a $7 million decrease in PLR prices at PPL Electric.


Energy purchases increased $44 million for the nine months ended September 30, 2018 compared with 2017, primarily due to a $42 million increase in PLR volumes, partially offset by a $9 million decrease in PLR prices at PPL Electric and an $18 million increase in natural gas volumes driven by weather in 2018, partially offset by a $6 million decrease in market prices for natural gas at LG&E.


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Other Operation and Maintenance


The increase (decrease) in other operation and maintenance for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:

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 Three Months Six Months
Domestic:   
PPL Electric storm costs$(10) $(1)
PPL Electric contractor-related expenses4
 6
LKE gas distribution maintenance and compliance2
 4
LKE transmission credits3
 7
LKE DSM program costs(4) (7)
Other(18) 4
U.K.:   
Foreign currency exchange rates(7) (14)
Third-party engineering(3) (5)
Other9
 4
Total$(24) $(2)
 Three Months Nine Months
Domestic:   
LKE storm costs$8
 $10
LKE timing and scope of generation maintenance outages—
 7
LKE vegetation management2
 5
LKE gas distribution maintenance and compliance1
 4
PPL Electric vegetation management(1) (11)
PPL Electric storm costs(1) 15
PPL Electric payroll-related costs3
 (11)
PPL Electric Act 129(1) (3)
PPL Electric bad debts2
 9
PPL Electric Act 129 Smart Meter—
 4
Other11
 16
U.K.:   
Foreign currency exchange rates2
 23
Network maintenance2
 6
Third-party engineering14
 29
Other(1) 10
Total$41
 $113


Depreciation
 
Depreciation increased $18 millionThe increase (decrease) in depreciation for the three monthsperiods ended SeptemberJune 30, 20182019 compared with 2017, primarily2018 was due to additional assets placed into service, net of retirements, related to the ongoing efforts to ensure the reliability of the delivery system, the replacement of aging infrastructure as well as the roll-out of the Act 129 Smart Meter program at PPL Electric and additional assets placed into service, net of retirements at LG&E and KU.to:

Depreciation increased $72 million for the nine months ended September 30, 2018 compared with 2017, primarily due to additional assets placed into service, net of retirements, related to the ongoing efforts to ensure the reliability of the delivery system, the replacement of aging infrastructure as well as the roll-out of the Act 129 Smart Meter program at PPL Electric, higher depreciation rates effective July 1, 2017 and additional assets placed into service, net of retirements at LG&E and KU and the impact of foreign currency exchange rates at WPD.
 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)Higher depreciation rates were effective May 1, 2019 at LG&E and KU.

Other Income (Expense) - net
 
OtherThe increase (decrease) in other income (expense) - net increased $141 million for the three monthsperiods ended SeptemberJune 30, 20182019 compared with 2017 primarily2018 was due to higher realized and unrealized gains on foreign currency contracts to economically hedge GBP denominated earnings from WPD of $121 million and an increase in non-service cost credits from defined benefit plans of $20 million.to:

Other income (expense) - net increased $409 million for the nine months ended September 30, 2018 compared with 2017, primarily due to higher realized and unrealized gains on foreign currency contracts to economically hedge GBP denominated earnings from WPD of $329 million and an increase in non-service cost credits from defined benefit plans of $72 million.
 Three Months Six Months
Economic foreign currency exchange contracts (Note 15)$(119) $(40)
Defined benefit plans - non-service credits (Note 10)14
 26
Other2
 6
Total$(103) $(8)
 
Interest Expense


The increase (decrease) in interest expense for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Long-term debt interest expense$11
 $27
$10
 $14
Short-term debt interest expense3
 4
Foreign currency exchange rates2
 19
(6) (12)
Short-term debt interest expense1
 6
Other—
 (3)4
 7
Total$14
 $49
$11
 $13
 


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Income Taxes 


The increase (decrease) in income taxes for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
 Three Months Nine Months
Change in pre-tax income$28
 $136
Reduction in U.S. federal income tax rate (a)(40) (128)
Valuation allowances adjustments1
 8
U.S. income tax on foreign earnings - net of foreign tax credit (b)9
 26
Impact of U.K. Finance Acts(1) 5
Amortization of excess deferred income taxes (a)(11) (30)
Kentucky state tax reform (c)—
 9
Stock-based compensation—
 8
Other1
 7
Total$(13) $41
 Three Months Six Months
Change in pre-tax income$(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)The decreases are related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.
(b)The increases are primarily due to the tax benefit of accelerated pension contributions made in the first quarter of 2017. The related tax benefit was recognized over the annual period as a result of utilizing an estimated annual effective tax rate.
(c)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. See Note 6
(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 valuation allowance of $3 million has been recognized related to the Financial Statements for additional information.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
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
U.K. Regulated$245
 $126
 $119
 $836
 $560
 $276
$284
 $394
 $(110) $548
 $591
 $(43)
Kentucky Regulated122
 125
 (3) 332
 299
 33
97
 77
 20
 214
 210
 4
Pennsylvania Regulated112
 95
 17
 335
 251
 84
94
 75
 19
 215
 223
 (8)
Corporate and Other (a)(34) 9
 (43) (91) (60) (31)(34) (31) (3) (70) (57) (13)
Net Income$445
 $355
 $90
 $1,412
 $1,050
 $362
$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. Income taxes were $25 million and $7 million higherThe decrease for the three and ninesix months ended in 2018June 30, 2019, compared with 2017,2018, was primarily due to the utilization of an estimated tax rate, which required tax benefits realized in the first quarter of 2017 to be recognized over the annual period. Interest expense was $5 millionhigher operation and $13 million higher for the three and nine months ended in 2018 compared with 2017.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:


• 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.

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• 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

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PPL's underlying hedged earnings. See Note 1415 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
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
U.K. Regulated$214
 $163
 $51
 $730
 $682
 $48
$264
 $254
 $10
 $568
 $516
 $52
Kentucky Regulated120
 125
 (5) 339
 300
 39
97
 86
 11
 214
 219
 (5)
Pennsylvania Regulated117
 95
 22
 340
 251
 89
94
 75
 19
 215
 223
 (8)
Corporate and Other(29) 5
 (34) (86) (64) (22)(33) (31) (2) (67) (57) (10)
Earnings from Ongoing Operations$422
 $388
 $34
 $1,323
 $1,169
 $154
$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 59%60% of PPL's Net Income for the ninesix months ended SeptemberJune 30, 20182019 and 39% of PPL's assets at SeptemberJune 30, 2018.2019.
 
Net Income and Earnings from Ongoing Operations for the periods ended SeptemberJune 30 include the following results.
Three Months Nine MonthsThree Months Six Months
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating revenues$517
 $477
 $40
 $1,716

$1,547
 $169
$541
 $584
 $(43) $1,124

$1,199
 $(75)
Other operation and maintenance131
 113
 18
 400
 326
 74
133
 137
 (4) 251
 269
 (18)
Depreciation61
 58
 3
 186
 170
 16
64
 63
 1
 126
 125
 1
Taxes, other than income33
 33
 —
 101
 94
 7
32
 34
 (2) 64
 68
 (4)
Total operating expenses225
 204
 21
 687
 590
 97
229
 234
 (5) 441
 462
 (21)
Other Income (Expense) - net102
 (36) 138
 284
 (105) 389
124
 229
 (105) 169
 182
 (13)
Interest Expense106
 103
 3
 310
 294
 16
96
 97
 (1) 195
 204
 (9)
Income Taxes43
 8
 35
 167
 (2) 169
56
 88
 (32) 109
 124
 (15)
Net Income245

126
 119
 836

560
 276
284

394
 (110) 548

591
 (43)
Less: Special Items31
 (37) 68
 106
 (122) 228
20
 140
 (120) (20) 75
 (95)
Earnings from Ongoing Operations$214
 $163
 $51
 $730
 $682
 $48
$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.
 Income Statement Line Item Three Months Nine Months
  2018 2017 2018 2017
Foreign currency economic hedges, net of tax of ($7), $20, ($27), $66 (a)Other Income (Expense) - net $28
 $(37) $103
 $(122)
U.S. tax reform (b)Income Taxes 3
 —
 3
 —
Total Special Items  $31
 $(37) $106
 $(122)
 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.

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(b)Represents adjustments to certain provisional amounts recognized in the December 31, 2017 StatementSettlement of Income relating to the enactment of the TCJA. See "Tax Cuts and Jobs Act (TCJA)" in Note 6 to the Financial Statements for additional information.a contractual dispute.


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.

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 Three Months Nine Months
U.K. 
  
U.K. Adjusted Gross Margins$21
 $24
Other operation and maintenance(1) (12)
Depreciation(2) (4)
Other Income (Expense) - net16
 46
Interest expense(1) 3
Other(2) (3)
Income taxes1
 (17)
U.S.   
Interest expense and other(3) (6)
Income taxes(1) (47)
Foreign currency exchange, after-tax23
 64
Earnings from Ongoing Operations51
 48
Special items, after-tax68
 228
Net Income$119
 $276


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


Higher other income (expense) - net for the three and ninesix month periods primarily from higher pension income due to an increase in expected returns on higher asset balances.income.


U.S.

Higher income taxes for the nine month period primarily due to a $35 million tax benefit on accelerated pension contributions in the first quarter of 2017 and a $13 million increase from a reduction in tax benefits on interest deductibility due to the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.

Kentucky Regulated Segment
 
The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations of LG&E and KU, as well as LG&E's regulated distribution and sale of natural gas. In addition, certain acquisition-related financing costs are allocated to the Kentucky Regulated segment. The Kentucky Regulated segment represents 24% of PPL's Net Income for the ninesix months ended SeptemberJune 30, 20182019 and 34%35% of PPL's assets at SeptemberJune 30, 2018.2019.
 
Net Income and Earnings from Ongoing Operations for the periods ended SeptemberJune 30 include the following results.

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Three Months Six Months
 2019 2018 $ Change 2019 2018 $ Change
Operating revenues$732
 $743
 $(11) $1,577
 $1,615
 $(38)
Fuel  168
 189
 (21) 362
 403
 (41)
Energy purchases27
 33
 (6) 106
 113
 (7)
Other operation and maintenance208
 211
 (3) 422
 416
 6
Depreciation135
 118
 17
 258
 235
 23
Taxes, other than income18
 18
 —
 36
 35
 1
Total operating expenses556
 569
 (13) 1,184
 1,202
 (18)
Other Income (Expense) - net—
 1
 (1) —
 (2) 2
Interest Expense78
 69
 9
 148
 136
 12
Income Taxes1
 29
 (28) 31
 65
 (34)
Net Income97
 77
 20
 214
 210
 4
Less: Special Items—
 (9) 9
 —
 (9) 9
Earnings from Ongoing Operations$97
 $86
 $11
 $214
 $219
 $(5)


Three Months Nine Months
 2018 2017 $ Change 2018 2017 $ Change
Operating revenues$802
 $818
 $(16) $2,417
 $2,350
 $67
Fuel  206
 202
 4
 609
 576
 33
Energy purchases22
 22
 —
 135
 120
 15
Other operation and maintenance216
 197
 19
 632
 594
 38
Depreciation119
 114
 5
 354
 324
 30
Taxes, other than income18
 17
 1
 53
 49
 4
Total operating expenses581
 552
 29
 1,783
 1,663
 120
Other Income (Expense) - net—
 (1) 1
 (2) (9) 7
Interest Expense69
 65
 4
 205
 196
 9
Income Taxes30
 75
 (45) 95
 183
 (88)
Net Income122
 125
 (3) 332
 299
 33
Less: Special Items2
 —
 2
 (7) (1) (6)
Earnings from Ongoing Operations$120
 $125
 $(5) $339
 $300
 $39


The following after-tax gains (losses), which management considers special items, impacted the Kentucky Regulated segment's results and are excluded from Earnings from Ongoing Operations during the periods ended SeptemberJune 30.
 Income Statement Line Item Three Months Nine Months
  2018 2017 2018 2017
Adjustment to investment, net of tax of $0, $0, $0, $0 (a)Other Income (Expense) - net $—
 $—
 $—
 $(1)
Kentucky state tax reform (b)Income Taxes —
 —
 (9) —
U.S. tax reform (c)Income Taxes 2
 —
 2
 —
Total Special Items  $2
 $—
 $(7) $(1)
 Income Statement Line Item Three Months Six Months
  2019 2018 2019 2018
Kentucky state tax reform (a)Income Taxes $—
 $(9) $—
 $(9)
Total Special Items  $—
 $(9) $—
 $(9)


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(a)KU recorded a write-off of an equity method investment.
(b)
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. See Note 6 to the Financial Statements for additional information.
(c)Represents adjustments to certain provisional amounts recognized in the December 31, 2017 Statement of Income relating to the enactment of the TCJA. See "Tax Cuts and Jobs Act (TCJA)" in 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 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
Kentucky Adjusted Gross Margins$(19) $24
$3
 $(2)
Other operation and maintenance(23) (46)3
 (9)
Depreciation(3) (26)(5) (9)
Taxes, other than income—
 (5)1
 —
Other Income (Expense) - net1
 6
(1) 2
Interest Expense(4) (9)(9) (12)
Income Taxes43
 95
19
 25
Earnings from Ongoing Operations(5) 39
11
 (5)
Special items, after-tax2
 (6)9
 9
Net Income$(3) $33
$20
 $4
 
See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of Kentucky Adjusted Gross Margins.


Higher other operation and maintenance expense for the three month period primarily due to an $8 million increase in storm costs, a $2 million increase in vegetation management expense and increases in other costs that were not individually significant in comparison to the prior year.


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Higher other operation and maintenance expense for the ninesix month period primarily due to a $10 million increase in storm costs, a $7 million increase in costs related to the timing and scope of generation maintenance outages, a $5 million increase in vegetation management expenses, a $4 million increase in costs related to gas distribution maintenance and compliance and increases in othervarious costs that were not individually significant in comparison to the prior year.significant.


Higher depreciation expense for the ninethree month period primarily due to higher depreciation rates effective May 1, 2019.

Higher depreciation expense for the six month period primarily due to a $14$5 million increase related to additional assets placed into service, net of retirements and a $12$4 million increase related to higher depreciation rates effective JulyMay 1, 2017.2019.


Higher interest expense for the ninethree and six month periodperiods due to increased borrowings and higher interest rates and increased borrowings under LG&E's term loan credit facility and KU's commercial paper program.rates.


Lower income taxes for the three month period primarily due to the recording of a $21 million decreasedeferred tax benefit related to the impacta Kentucky recycling credit of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018, an $18 million decrease related to lower pre-tax income.$17 million.


Lower income taxes for the ninesix month period primarily due to the recording of a $60 million decreasedeferred tax benefit related to the impacta Kentucky recycling credit of the U.S. federal corporate$17 million and lower income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018, a $22taxes of $8 million decrease relateddue to lower pre-tax income and a $14 million decrease related to higher amortization of excess deferred income taxes as a result of the TCJA.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, 20182019 and 26% of PPL's assets at SeptemberJune 30, 2018.2019.


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

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 Three Months Nine Months
  
2018 2017 $ Change 2018 2017 $ Change
Operating revenues$548
 $547
 $1
 $1,704
 $1,620
 $84
Energy purchases127
 121
 6
 403
 374
 29
Other operation and maintenance127
 133
 (6) 419
 435
 (16)
Depreciation89
 77
 12
 262
 228
 34
Taxes, other than income27
 27
 —
 81
 79
 2
Total operating expenses370
 358
 12
 1,165
 1,116
 49
Other Income (Expense) - net9
 6
 3
 23
 11
 12
Interest Expense40
 36
 4
 116
 105
 11
Income Taxes35
 64
 (29) 111
 159
 (48)
Net Income112
 95
 17
 335
 251
 84
Less: Special Item(5)
—
 (5) (5)
—
 (5)
Earnings from Ongoing Operations$117
 $95
 $22
 $340
 $251
 $89
The following after-tax gain (loss), which management considers a special item, impacted the Pennsylvania Regulated segment's results and is excluded from Earnings from Ongoing Operations during the periods ended September 30.
 Income Statement Line Item Three Months Nine Months
  2018 2017 2018 2017
IT transformation, net of tax of $2, $0, $2, $0 (a)Other operation and maintenance $(5) $—
 $(5) $—
Total Special Item  $(5) $—
 $(5) $—
 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)In June 2018, PPL EU Services’ IT department announced an internal reorganization which was substantially completed inThere are no items that management considers special for the third quarter of 2018. As a result, $5 million of after-tax costs, which includes separation benefits as well as outside services for strategic consulting to establish the new IT organization, were incurred. See Note 10 to the Financial Statements for additional information on separation benefits.periods presented.


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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 and the item that management considers special on a separate line and not in their respective Statement of Income line items.
Three Months Nine MonthsThree Months Six Months
Pennsylvania Adjusted Gross Margins$(4) $39
$17
 $6
Other operation and maintenance7
 27
17
 5
Depreciation(8) (23)(4) (12)
Taxes, other than income—
 (1)(2) (1)
Other Income (Expense) - net4
 12
(2) (1)
Interest Expense(4) (11)(2) (7)
Income Taxes27
 46
(5) 2
Earnings from Ongoing Operations22
 89
Special Item, after tax(5) (5)
Net Income$17
 $84
$19
 $(8)
 
See "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 $14 million of lower corporate service company costs allocated to PPL Electric, partially offset by $3 million of higher nonrecoverable storm expenses and $2 million of higherlower bad debt expense.

Lower other operation and maintenance expense for the nine month period primarily due to $31 million of lower corporate service costs allocated to PPL Electric, $11 million of lower payroll related expenses and $11 million of lower vegetation management expenses, partially offset by $12 million of higher nonrecoverable storm expenses and $9 million of higher bad debt expense.


Higher depreciation expense for the three and ninesix month periods primarily due to additional assets placed into service, related to the ongoing efforts to ensure the reliability of the delivery system and the replacement of aging infrastructure, net of retirements.


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


LowerHigher income taxes for the three month period primarily due to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018 of $18 million and lower pre-tax income resulting in $7 million of lower income taxes.

Lower income taxes for the nine month period primarily due to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018 of $56 million and $13 million of lower income taxes due to amortization of excess deferred income taxes, partially offset by higher pre-tax income resulting in $14 million of higher income taxes.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.


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2018 Three Months2019 Three Months
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
U.K.
Regulated
 
KY
Regulated
 
PA
Regulated
 
Corporate
and Other
 Total
Net Income$245
 $122
 $112
 $(34) $445
$284
 $97
 $94
 $(34) $441
Less: Special Items (expense) benefit:                  
Foreign currency economic hedges, net of tax of ($7)28
 —
 —
 —
 28
24
 —
 —
 —
 24
U.S. tax reform3
 2
 —
 (5) —
IT transformation, net of tax of $2—
 —
 (5) —
 (5)
Talen litigation costs, net of tax of $1 (a)—
 —
 —
 (1) (1)
Other, net of tax of $1(4) —
 —
 —
 (4)
Total Special Items31
 2
 (5) (5) 23
20
 —
 —
 (1) 19
Earnings from Ongoing Operations$214
 $120
 $117
 $(29) $422
$264
 $97
 $94
 $(33) $422
                  
2017 Three Months2018 Three Months
U.K.
Regulated		 KY
Regulated		 PA
Regulated		 Corporate
and Other		 TotalU.K.
Regulated		 KY
Regulated		 PA
Regulated		 Corporate
and Other		 Total
Net Income$126
 $125
 $95
 $9
 $355
$394
 $77
 $75
 $(31) $515
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
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 $1(4) —
 —
 —
 (4)
Total Special Items$(37) $—
 $—
 $4
 $(33)(20) —
 —
 (3) (23)
Earnings from Ongoing Operations$163
 $125
 $95
 $5
 $388
$568
 $214
 $215
 $(67) $930
                  
2018 Nine Months2018 Six Months
U.K.
Regulated		 KY
Regulated		 PA
Regulated		 Corporate
and Other		 TotalU.K.
Regulated		 KY
Regulated		 PA
Regulated		 Corporate
and Other		 Total
Net Income$836
 $332
 $335
 $(91) $1,412
$591
 $210
 $223
 $(57) $967
Less: Special Items (expense) benefit:                  
Foreign currency economic hedges, net of tax of ($27)103
 —
 —
 —
 103
U.S. tax reform3
 2
 —
 (5) —
Foreign currency economic hedges, net of tax of ($20)75
 —
 —
 —
 75
Kentucky state tax reform—
 (9) —
 —
 (9)—
 (9) —
 —
 (9)
IT transformation, net of tax of $2—
 —
 (5) —
 (5)
Total Special Items106
 (7) (5) (5) 89
75
 (9) —
 —
 66
Earnings from Ongoing Operations$730
 $339
 $340
 $(86) $1,323
$516
 $219
 $223
 $(57) $901
         
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
         
(a) Represents a tax settlement associated with the former Supply segment. Included in "Taxes, and other than income" on the Statement of Income.
(a)PPL incurred legal expenses related to litigation with its former affiliate, Talen Montana, and related cases. See Note 11 to the Financial Statements for additional information.


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

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"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.
 

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"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.
Three Months Nine MonthsThree Months Six Months
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
U.K. Regulated 
  
  
  
  
  
 
  
  
  
  
  
U.K. Adjusted Gross Margins$467
 $441
 $26
 $1,578
 $1,446
 $132
$500
 $538
 $(38) $1,046
 $1,111
 $(65)
Impact of changes in foreign currency exchange rates    5
     108
    (31)     (69)
U.K. Adjusted Gross Margins excluding impact of foreign currency exchange rates    $21
     $24
    $(7)     $4
                      
Kentucky Regulated                      
Kentucky Adjusted Gross Margins                      
LG&E$240
 $245
 $(5) $697
 $678
 $19
$220
 $216
 $4
 $458
 $457
 $1
KU288
 302
 (14) 847
 842
 5
264
 265
 (1) 556
 559
 (3)
Total Kentucky Adjusted Gross Margins$528
 $547
 $(19) $1,544
 $1,520
 $24
$484
 $481
 $3
 $1,014
 $1,016
 $(2)
                      
Pennsylvania Regulated                      
Pennsylvania Adjusted Gross Margins                      
Distribution$225
 $233
 $(8) $695
 $710
 $(15)$204
 $192
 $12
 $464
 $470
 $(6)
Transmission138
 134
 4
 411
 357
 54
142
 137
 5
 285
 273
 12
Total Pennsylvania Adjusted Gross Margins$363
 $367
 $(4) $1,106
 $1,067
 $39
$346
 $329
 $17
 $749
 $743
 $6

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U.K. Adjusted Gross Margins
 
U.K. Adjusted Gross Margins, excluding the impact of changes in foreign currency exchange rates, increaseddecreased for the three months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to $19$29 million of lower volumes, partially offset by $26 million from the April 1, 20182019 price increase.



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U.K. Adjusted Gross Margins, excluding the impact of changes in foreign currency exchange rates, increased for the ninesix months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to $29$51 million from the April 1, 2018 and 2019 price increase,increases, partially offset by $10$43 million from the April 1, 2017 price decrease, driven byof lower true-up mechanisms partially offset by higher base demand revenue.volumes.


Kentucky Adjusted Gross Margins
 
Kentucky Adjusted Gross Margins decreasedincreased for the three months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to $30higher retail rates approved by the KPSC of $35 million of estimated income tax savings owed to customers ($14 million at LG&E and $16$21 million at KU) related to the impact, inclusive of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted bytermination of the TCJA effective January 1, 2018,bill credit mechanism. This was partially offset by $8$26 million of increaseddecreased sales volumes relatedprimarily due to favorable weather in 2018 ($512 million at LG&E and $3$14 million at KU) and returns$8 million of decreased demand revenues at KU primarily due to the departure of eight municipal customers on additional environmental capital investmentsApril 30, 2019.

Kentucky Adjusted Gross Margins decreased for the six months ended June 30, 2019 compared with 2018, primarily due to $36 million of $4 milliondecreased sales volumes primarily due to weather ($216 million at LG&E and $2$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 retail rates approved by the KPSC of $35 million ($14 million at LG&E and $21 million at KU), inclusive of the termination of the TCJA bill credit mechanism.


KentuckyPennsylvania Adjusted Gross Margins

Distribution

Distribution Adjusted Gross Margins increased for the ninethree months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to $59$17 million from the timing of increased sales volumesrecording the regulatory liability related to favorable weatherthe TCJA in 2018 ($21 million at LG&E and $38 million at KU), higher base ratesas a result of $58 million ($32 million at LG&E and $26 million at KU) as new base rates were approved by the KPSC effective July 1, 2017 and returns on additional environmental capital investments of $14 million ($8 million at LG&E and $6 million at KU),PUC Rate Order in May 2018. The increase was partially offset by $109$6 million of estimated income tax savings owedlower electricity sales volumes primarily due to customers ($51 million at LG&E and $58 million at KU) related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.weather.

Pennsylvania Adjusted Gross Margins

Distribution


Distribution Adjusted Gross Margins decreased for the threesix months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to a $17$6 million negative surcharge, which was effective as of July 1, 2018,increased customer refund related to the estimatedreduced U.S. federal corporate income tax savingstaxes as a result of the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA. This decrease was partially offset by $11 million of higher electricity sales volumes primarily due to weather.

Distribution Adjusted Gross Margins decreased for the nine months ended September 30, 2018 compared with 2017, primarily due to a $37 million net of gross receipts tax impact of the estimated income tax savings owed to customers for the period January 1, 2018 through June 30, 2018 and $17 million from the negative surcharge beginning on July 1, 2018, as a result of the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA. These decreases were partially offset by $36 million of higher electricity sales volumes primarily due to weather and $6 million of returns on additional Smart Meter capital investments.


Transmission


Transmission Adjusted Gross Margins increased for the three months ended SeptemberJune 30, 20182019, compared with 2017,2018, primarily due to an increase of $23$17 million from returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability, partially offset by $16$11 million from the impact of the reduced U.S. federal corporate income taxes as a result of the TCJA.TCJA, which affected transmission revenues in the second quarter of 2019.


Transmission Adjusted Gross Margins increased for the ninesix months ended SeptemberJune 30, 20182019, compared with 2017,2018, primarily due to increasesan increase of $49$43 million from returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability, and $25 million as a result of a higher PPL zonal peak load billing factor in the first five months of 2018, partially offset by $22$27 million from the impact of the reduced U.S. federal corporate income taxes as a result of the TCJA.TCJA in the first five months of 2019.

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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.

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2018 Three Months2019 Three Months
U.K.
Adjusted Gross
Margins		 Kentucky
Adjusted Gross
Margins		 Pennsylvania Adjusted 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$508
(c)$802
 $548
 $14
 $1,872
$531
(c)$732
 $521
 $19
 $1,803
Operating Expenses                  
Fuel—
 206
 —
 —
 206
—
 168
 —
 —
 168
Energy purchases—
 22
 127
 —
 149
—
 27
 110
 1
 138
Other operation and maintenance41
 26
 23
 389
 479
31
 23
 31
 397
 482
Depreciation—
 18
 10
 247
 275
—
 29
 12
 259
 300
Taxes, other than income—
 2
 25
 50
 77
—
 1
 22
 52
 75
Total Operating Expenses41
 274
 185
 686
 1,186
31
 248
 175
 709
 1,163
Total $467
 $528
 $363
 $(672) $686
$500
 $484
 $346
 $(690) $640
                  
2017 Three Months2018 Three Months
U.K.
Adjusted Gross
Margins		 Kentucky
Adjusted Gross
Margins		 Pennsylvania Adjusted 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$467
(c)$818
 $547
 $13
 $1,845
$574
(c)$743
 $517
 $14
 $1,848
Operating Expenses                  
Fuel—
 202
 —
 —
 202
—
 189
 —
 —
 189
Energy purchases—
 22
 121
 —
 143
—
 33
 115
 —
 148
Other operation and maintenance26
 30
 29
 353
 438
36
 23
 43
 404
 506
Depreciation—
 16
 5
 236
 257
—
 17
 8
 248
 273
Taxes, other than income—
 1
 25
 43
 69
—
 —
 22
 52
 74
Total Operating Expenses26
 271
 180
 632
 1,109
36
 262
 188
 704
 1,190
Total $441
 $547
 $367
 $(619) $736
$538
 $481
 $329
 $(690) $658
                  
2018 Nine Months2019 Six Months
U.K.
Adjusted Gross
Margins		 Kentucky
Adjusted Gross
Margins		 Pennsylvania Adjusted 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$1,687
(c)$2,417
 $1,704
 $38
 $5,846
$1,105
(c)$1,577
 $1,166
 $34
 $3,882
Operating Expenses                  
Fuel—
 609
 —
 —
 609
—
 362
 —
 —
 362
Energy purchases—
 135
 403
 —
 538
—
 106
 281
 1
 388
Other operation and maintenance109
 74
 92
 1,178
 1,453
59
 45
 62
 806
 972
Depreciation—
 52
 26
 739
 817
—
 48
 22
 514
 584
Taxes, other than income—
 3
 77
 154
 234
—
 2
 52
 101
 155
Total Operating Expenses109
 873
 598
 2,071
 3,651
59
 563
 417
 1,422
 2,461
Total $1,578
 $1,544
 $1,106
 $(2,033) $2,195
$1,046
 $1,014
 $749
 $(1,388) $1,421
                  


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2017 Nine Months2018 Six Months
U.K.
Adjusted Gross
Margins		 Kentucky
Adjusted Gross
Margins		 Pennsylvania Adjusted 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
$1,179
(c)$1,615
 $1,156
 $24
 $3,974
Operating Expenses                  
Fuel—
 576
 —
 —
 576
—
 403
 —
 —
 403
Energy purchases—
 120
 374
 —
 494
—
 113
 276
 —
 389
Other operation and maintenance71
 82
 89
 1,098
 1,340
68
 48
 69
 789
 974
Depreciation—
 48
 14
 683
 745
—
 34
 16
 492
 542
Taxes, other than income—
 4
 76
 134
 214
—
 1
 52
 104
 157
Total Operating Expenses71
 830
 553
 1,915
 3,369
68
 599
 413
 1,385
 2,465
Total $1,446
 $1,520
 $1,067
 $(1,881) $2,152
$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 $8$10 million and $29$19 million for the three and ninesix months ended SeptemberJune 30, 20182019 and $11$10 million and $30$20 million for the three and ninesix months ended SeptemberJune 30, 2017.2018.

2018Outlook

(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)
Higher net income is projected in 2018 compared with 2017. The increase in net income reflects the 2017 unfavorable impact of U.S. tax reform and unrealized losses on foreign currency economic hedges. Excluding these 2017 special items, the increase is expected to be driven primarily by higher assumed GBP exchange rates and higher pension income, partially offset by higher taxes.

(PPL's Kentucky Regulated Segment and LKE, LG&E and KU)
Higher net income is projected in 2018 compared with 2017, which reflects the 2017 unfavorable impact of U.S. tax reform. Excluding this 2017 special item, earnings in 2018 compared with 2017 are projected to be slightly higher, driven by favorable weather and higher base electricity and gas rates effective July 1, 2017, partially offset by higher operation and maintenance expense, higher depreciation expense, higher interest expense and a lower tax shield on holding company interest and expenses.

(PPL's Pennsylvania Regulated Segment and PPL Electric)
Higher net income is projected in 2018 compared with 2017, primarily driven by higher transmission earnings, partially offset by higher depreciation expense and higher interest expense.
(PPL's Corporate and Other Category)
Lower costs are projected in 2018 compared with 2017, which reflects the 2017 unfavorable impact of U.S. tax reform. Excluding this 2017 special item, costs are projected to be higher in 2018 compared to 2017, due to a lower tax shield on holding company interest expense.
(All Registrants)
Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, Notes 7 and 10 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' 2017 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

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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
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues$548
 $547
 $1
 $1,704
 $1,620
 $84
$521
 $517
 $4
 $1,166
 $1,156
 $10
Operating Expenses                      
Operation                      
Energy purchases127
 121
 6
 403
 374
 29
110
 115
 (5) 281
 276
 5
Other operation and maintenance127
 133
 (6) 419
 435
 (16)130
 159
 (29) 280
 292
 (12)
Depreciation89
 77
 12
 262
 228
 34
96
 88
 8
 191
 173
 18
Taxes, other than income27
 27
 —
 81
 79
 2
24
 22
 2
 55
 54
 1
Total Operating Expenses370
 358
 12
 1,165
 1,116
 49
360
 384
 (24) 807
 795
 12
Other Income (Expense) - net5
 4
 1
 18
 8
 10
6
 7
 (1) 11
 13
 (2)
Interest Income from Affiliate4
 2
 2
 5
 3
 2
—
 1
 (1) 2
 1
 1
Interest Expense41
 36
 5
 117
 105
 12
41
 39
 2
 83
 76
 7
Income Taxes35
 64
 (29) 111
 159
 (48)32
 27
 5
 74
 76
 (2)
Net Income$111
 $95
 $16
 $334
 $251
 $83
$94
 $75
 $19
 $215
 $223
 $(8)


Operating Revenues
 
The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Distribution price (a)$(6) $5
$(7) $2
Distribution volume17
 49
(6) (4)
PLR (b)5
 31
(5) 5
Transmission Formula Rate (c)3
 53
5
 12
TCJA refund (d)(20) (57)17
 (7)
Other2
 3
—
 2
Total$1
 $84
$4
 $10


(a)Distribution price variance isvariances were primarily due to reconcilable cost recovery mechanisms approved by the PUC.
(b)The increases weredecrease for three 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 volumes partially offset by lower energy prices as described below.transmission enhancement expenses.

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(c)The Transmission Formula Rate revenues include $11 million and $27 million for the impactsthree 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 impact of thereduced U.S. federal corporate income taxtaxes 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 reduction from 35% to 21%, as enacted byfor distribution customers went into effect July 1, 2018, based on the TCJA, effective January 1, 2018. See Note 7 to the Financial Statements for additional information.PUC Order.


Energy Purchases


Energy purchases increased $6decreased $5 million for the three months ended SeptemberJune 30, 20182019 compared with 2017,2018, 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 $17$16 million, partially offset by lower PLR pricestransmission enhancement expenses of $7$12 million.

Energy purchases increased $29 million for the nine months ended September 30, 2018 compared with 2017, primarily due to higher PLR volumes of $42 million, partially offset by lower PLR prices of $9 million.


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Other Operation and Maintenance


The increase (decrease)decrease in other operation and maintenance for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Corporate service costs$(6) $(23)
Vegetation management(1) (11)
Storm costs(1) 15
$(10) $(1)
Payroll-related costs3
 (11)
Service company costs(6) (4)
Bad debts(3) (3)
Inventory reserve(3) —
Act 129(1) (3)(2) (1)
Bad debts2
 9
Act 129 Smart Meter—
 4
Act 129 Smart Meter Program(1) (3)
Contractor-related expenses4
 6
Other(2) 4
(8) (6)
Total$(6) $(16)$(29) $(12)

Depreciation
 
Depreciation increased $12$8 million and $34$18 million for the three and ninesix months ended SeptemberJune 30, 20182019 compared with 2017,2018, 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.
 
Other Income (Expense) - net
Other income (expense) - net increased $10 million for the nine months ended September 30, 2018 compared with 2017, primarily due to a $4 million increase related to higher AFUDC equity rates and a $4 million increase in non-service cost credits from defined benefit plans.

Interest Expense


Interest expense increased $12$2 million and $7 million for the ninethree and six months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to the May 2017 issuance of $475 million of 3.95% First Mortgage Bonds due 2047 and the June 2018 issuance of $400 million of 4.15% First Mortgage Bonds due 2048.


Income Taxes


The increase (decrease) in income taxes for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Change in pre-tax income$(5) $15
$6
 $(3)
Reduction in U.S. federal income tax rate (a)(18) (56)
Amortization of excess deferred income taxes (a)(5) (13)
Stock-based compensation—
 5
Other(1) 1
(1) 1
Total$(29) $(48)$5
 $(2)


Earnings
 Three Months Ended Six Months Ended
 June 30, June 30,
 2019 2018 2019 2018
Net Income$94
 $75
 $215
 $223
Special Item, gain (loss), after-tax (a)—
 —
 —
 —

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(a)The decreasesThere are related tono items that management considers special for the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.periods presented.


Earnings
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2018 2017 2018 2017
Net Income$111
 $95
 $334
 $251
Special Item, gain (loss), after-tax (a)(5) —
 (5) —

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(a)In June 2018, PPL EU Services’ Information Technology (IT) department announced an internal reorganization which was substantially completed in the third quarter of 2018. As a result, $5 million of after-tax costs, which includes separation benefits as well as outside services for strategic consulting to establish the new IT organization, were incurred. See Note 10 to the Financial Statements for additional information on separation benefits.

Excluding a special item, earnings increased for the three month period in 20182019 compared with 2017,2018, 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, partially offset by lower sales volumes and higher depreciation expense.

Earnings decreased for the six month period in 2019 compared with 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 and higher interest expense, partially offset by returns on additional capital investments in transmission, higher sales volumes primarily due to weather, and lower operation and maintenance expense, partially offset by higher depreciation expense.transmission.

Excluding a special item, earnings increased for the nine month period in 2018 compared with 2017, driven primarily by returns on additional capital investments in transmission, higher sales volumes primarily due to weather, and lower operation and maintenance expense, partially offset by higher depreciation expense and higher interest expense.


The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Pennsylvania Adjusted Gross Margins and the item that management considers special on a separate linesline and not in their respective Statement of Income line items.
Three Months Nine MonthsThree Months Six Months
Pennsylvania Adjusted Gross Margins$(4) $39
$17
 $6
Other operation and maintenance8
 27
17
 5
Depreciation(8) (23)(4) (12)
Taxes, other than income—
 (1)(2) (1)
Other Income (Expense) - net3
 12
(2) (1)
Interest Expense(5) (12)(2) (7)
Income Taxes27
 46
(5) 2
Special Item, gain (loss), after tax (a)(5) (5)
Net Income$16
 $83
$19
 $(8)
(a)See PPL's "Results of Operations - Segment Earnings - Pennsylvania 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 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. 
2018 Three Months 2017 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$548
 $—
 $548
 $547
 $—
 $547
$521
 $—
 $521
 $517
 $—
 $517
Operating Expenses                      
Energy purchases127
 —
 127
 121
 —
 121
110
 —
 110
 115
 —
 115
Other operation and maintenance23
 104
 127
 29
 104
 133
31
 99
 130
 43
 116
 159
Depreciation10
 79
 89
 5
 72
 77
12
 84
 96
 8
 80
 88
Taxes, other than income25
 2
 27
 25
 2
 27
22
 2
 24
 22
 —
 22
Total Operating Expenses185
 185
 370
 180
 178
 358
175
 185
 360
 188
 196
 384
Total $363
 $(185) $178
 $367
 $(178) $189
$346
 $(185) $161
 $329
 $(196) $133
                      


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2018 Nine Months 2017 Nine Months2019 Six Months 2018 Six Months
Adjusted Gross
Margins		 Other (a) 
Operating
Income (b)
  Adjusted 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$1,704
 $—
 $1,704
 $1,620
 $—
 $1,620
$1,166
 $—
 $1,166
 $1,156
 $—
 $1,156
Operating Expenses                      
Energy purchases403
 —
 403
 374
 —
 374
281
 —
 281
 276
 —
 276
Other operation and maintenance92
 327
 419
 89
 346
 435
62
 218
 280
 69
 223
 292
Depreciation26
 236
 262
 14
 214
 228
22
 169
 191
 16
 157
 173
Taxes, other than income77
 4
 81
 76
 3
 79
52
 3
 55
 52
 2
 54
Total Operating Expenses598
 567
 1,165
 553
 563
 1,116
417
 390
 807
 413
 382
 795
Total $1,106
 $(567) $539
 $1,067
 $(563) $504
$749
 $(390) $359
 $743
 $(382) $361


(a)Represents amounts excluded from Adjusted Gross Margins.
(b)As reported on the Statements of Income.
 
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
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues$802
 $818
 $(16) $2,417
 $2,350
 $67
$732
 $743
 $(11) $1,577
 $1,615
 $(38)
Operating Expenses                      
Operation                      
Fuel206
 202
 4
 609
 576
 33
168
 189
 (21) 362
 403
 (41)
Energy purchases22
 22
 —
 135
 120
 15
27
 33
 (6) 106
 113
 (7)
Other operation and maintenance216
 197
 19
 632
 594
 38
208
 211
 (3) 422
 416
 6
Depreciation119
 114
 5
 354
 324
 30
135
 118
 17
 258
 235
 23
Taxes, other than income18
 17
 1
 53
 49
 4
18
 18
 —
 36
 35
 1
Total Operating Expenses581
 552
 29
 1,783
 1,663
 120
556
 569
 (13) 1,184
 1,202
 (18)
Other Income (Expense) - net—
 (1) 1
 (2) (9) 7
—
 1
 (1) —
 (2) 2
Interest Expense52
 49
 3
 154
 148
 6
58
 52
 6
 112
 102
 10
Interest Expense with Affiliate7
 5
 2
 18
 13
 5
9
 6
 3
 16
 11
 5
Income Taxes32
 79
 (47) 102
 195
 (93)3
 31
 (28) 35
 70
 (35)
Net Income$130
 $132
 $(2) $358
 $322
 $36
$106
 $86
 $20
 $230
 $228
 $2


Operating Revenues


The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Volumes (a)$19
 $122
Base rates—
 58
Higher retail rates (a)$35
 $35
ECR5
 18
15
 19
TCJA refund (b)(30) (109)
DSM(2) (13)
Fuel and other energy prices(8) (15)1
 (9)
Volumes (b)(52) (82)
Demand revenue (c)(9) (8)
Other—
 6
(1) 7
Total$(16) $67
$(11) $(38)

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(a)IncreasesThe higher retail rates were primarily due to favorable weather in 2018.higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(b)Represents estimated income tax savings owedThe decreases were primarily due to customers relatedweather.
(c)The decreases were primarily due to the impactdeparture of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA,eight municipal customers effective January 1, 2018. See Note 7 to the Financial Statements for additional information.April 30, 2019.



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Fuel


Fuel increased $33decreased $21 million for the ninethree months endedSeptemberJune 30, 20182019 compared with 20172018, primarily due to a $40$14 million increasedecrease in volumes driven by weather and a $6 million decrease in 2018, partially offsetvolumes driven by the 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 $25 million decrease in volume driven by weather, a $6 million decrease in volumes driven by the departure of eight municipal customers on April 30, 2019 and an $8$11 million decrease in commodity costs.


Energy Purchases

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

Other Operation and Maintenance


The increase (decrease) in other operation and maintenance for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Storm costs$8
 $10
Timing and scope of generation maintenance outages—
 7
Gas distribution maintenance and compliance$2
 $4
Transmission credits3
 7
Vegetation management2
 5
(1) 1
Gas distribution maintenance and compliance1
 4
Administrative and general(2) —
Plant operations and maintenance(2) (2)
DSM program costs(4) (7)
Other8
 12
1
 3
Total$19
 $38
$(3) $6


Depreciation


Depreciation increased $30$17 million for the ninethree months endedSeptember June 30, 20182019 compared with 2017,2018, primarily due to a $15$13 million increase related to higher depreciation rates effective JulyMay 1, 20172019, and a $12$3 million increase related to additional assets placed into service, net of retirements.


Depreciation increased $23 million for the six months ended June 30, 2019 compared with 2018, primarily due to a $13 million increase related to higher depreciation rates effective May 1, 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 SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Reduction in U.S. federal income tax rate (a)$(23) $(64)
Change in pre-tax income(19) (22)$(2) $(8)
Amortization of excess deferred income taxes (a)(3) (14)
Kentucky state tax reform (b)—
 9
Deferred tax impact of Kentucky state tax reform (a)(9) (9)
Kentucky recycling credit, net of federal income tax expense (b)(20) (20)
Valuation allowance adjustments (b)3
 3
Other(2) (2)—
 (1)
Total$(47) $(93)$(28) $(35)



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(a)The decreases are related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018. See Note 6 to the Financial Statements for additional information.
(b)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. See Note 6
(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 the Financial Statements for additional information.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,
2018 2017 2018 20172019 2018 2019 2018
Net Income$130
 $132
 $358
 $322
$106
 $86
 $230
 $228
Special items, gains (losses), after-tax2
 —
 (7) (1)—
 (9) —
 (9)


Excluding special items, earnings increased for the ninethree month period in 20182019 compared with 2017,2018, 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 favorable weather, higher base electricitydepreciation expense and gas rates effective July 1, 2017 and returns on additional environmental capital investments, partially offsethigher interest expense.

Excluding special items, earnings decreased for the six month period in 2019 compared with 2018, primarily due to lower sales volumes driven primarily by weather, higher other operation and maintenance expense, higher depreciation expense and higher interest expense.expense, partially offset by 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.

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The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Adjusted Gross Margins and the items that management considers special on separate lines and not in their respective Statement of Income line items.  
Three Months Nine MonthsThree Months Six Months
Adjusted Gross Margins$(19) $24
$3
 $(2)
Other operation and maintenance(23) (46)3
 (9)
Depreciation(3) (26)(5) (9)
Taxes, other than income—
 (5)1
 —
Other Income (Expense) - net1
 6
(1) 2
Interest Expense(5) (11)(9) (15)
Income Taxes45
 100
19
 26
Special items, gains (losses), after-tax (a)2
 (6)9
 9
Net Income$(2) $36
$20
 $2


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



2018 Three Months 2017 Three Months2019 Three Months 2018 Three Months
Adjusted Gross Margins Other (a) Operating
Income (b)		 Adjusted 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$802
 $—
 $802
 $818
 $—
 $818
$732
 $—
 $732
 $743
 $—
 $743
Operating Expenses                      
Fuel206
 —
 206
 202
 —
 202
168
 —
 168
 189
 —
 189
Energy purchases22
 —
 22
 22
 —
 22
27
 —
 27
 33
 —
 33
Other operation and maintenance26
 190
 216
 30
 167
 197
23
 185
 208
 23
 188
 211
Depreciation18
 101
 119
 16
 98
 114
29
 106
 135
 17
 101
 118
Taxes, other than income2
 16
 18
 1
 16
 17
1
 17
 18
 —
 18
 18
Total Operating Expenses274
 307
 581
 271
 281
 552
248
 308
 556
 262
 307
 569
Total$528
 $(307) $221
 $547
 $(281) $266
$484
 $(308) $176
 $481
 $(307) $174
                      
2018 Nine Months 2017 Nine Months2019 Six Months 2018 Six Months
Adjusted Gross Margins Other (a) Operating
Income (b)		 Adjusted 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$2,417
 $—
 $2,417
 $2,350
 $—
 $2,350
$1,577
 $—
 $1,577
 $1,615
 $—
 $1,615
Operating Expenses                      
Fuel609
 —
 609
 576
 —
 576
362
 —
 362
 403
 —
 403
Energy purchases135
 —
 135
 120
 —
 120
106
 —
 106
 113
 —
 113
Other operation and maintenance74
 558
 632
 82
 512
 594
45
 377
 422
 48
 368
 416
Depreciation52
 302
 354
 48
 276
 324
48
 210
 258
 34
 201
 235
Taxes, other than income3
 50
 53
 4
 45
 49
2
 34
 36
 1
 34
 35
Total Operating Expenses873
 910
 1,783
 830
 833
 1,663
563
 621
 1,184
 599
 603
 1,202
Total$1,544
 $(910) $634
 $1,520
 $(833) $687
$1,014
 $(621) $393
 $1,016
 $(603) $413


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

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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
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues    

     

    

     

Retail and wholesale$357
 $361
 $(4) $1,095
 $1,055
 $40
$328
 $331
 $(3) $725
 $738
 $(13)
Electric revenue from affiliate5
 2
 3
 21
 23
 (2)6
 4
 2
 19
 16
 3
Total Operating Revenues362
 363
 (1) 1,116
 1,078
 38
334
 335
 (1) 744
 754
 (10)
Operating Expenses    

     

    

     

Operation                      
Fuel83
 76
 7
 234
 225
 9
69
 72
 (3) 147
 151
 (4)
Energy purchases17
 18
 (1) 121
 107
 14
22
 28
 (6) 96
 104
 (8)
Energy purchases from affiliate2
 3
 (1) 10
 8
 2
2
 2
 —
 4
 8
 (4)
Other operation and maintenance95
 87
 8
 277
 258
 19
96
 93
 3
 190
 182
 8
Depreciation49
 47
 2
 146
 136
 10
56
 49
 7
 107
 97
 10
Taxes, other than income9
 8
 1
 27
 25
 2
10
 9
 1
 19
 18
 1
Total Operating Expenses255
 239
 16
 815
 759
 56
255
 253
 2
 563
 560
 3
Other Income (Expense) - net(3) (3) —
 (5) (6) 1
(1) (1) —
 (1) (2) 1
Interest Expense20
 17
 3
 57
 53
 4
22
 19
 3
 43
 37
 6
Income Taxes18
 39
 (21) 51
 99
 (48)12
 12
 —
 29
 33
 (4)
Net Income$66
 $65
 $1
 $188
 $161
 $27
$44
 $50
 $(6) $108
 $122
 $(14)

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Operating Revenues


The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Volumes (a)$14
 $58
Base rates—
 32
Higher retail rates (a)$14
 $14
ECR1
 8
7
 9
TCJA refund (b)(14) (51)
Fuel and other energy prices(3) (13)2
 1
DSM(1) (6)
Volumes (b)(21) (36)
Demand revenue(1) (1)
Other2
 10
(2) 3
Total$(1) $38
$(1) $(10)


(a)IncreasesThe higher retail rates were primarily due to favorable weather in 2018.higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(b)Represents estimated income tax savings owedThe decreases were primarily due to customers related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018. See Note 7 to the Financial Statements for additional information.weather.


Fuel


Fuel increased $7decreased $3 million for the three months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to an $8 million increasea decrease in volumes driven by weather in 2018.weather.


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Energy Purchases


Energy purchases increased $14decreased $6 million and $8 million for the ninethree and six months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to an $18 million increasea decrease in natural gas volumes driven by weather in 2018, partially offset by a $6 million decrease in market prices for natural gas.weather.


Other Operation and Maintenance


The increase (decrease) in other operation and maintenance for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Storm costs$4
 $6
Gas distribution maintenance and compliance1
 4
$2
 $4
Timing and scope of generation maintenance outages—
 2
Transmission credits1
 2
Vegetation management1
 2
Plant operations and maintenance1
 2
DSM program costs(2) (4)
Other3
 7
—
 2
Total$8
 $19
$3
 $8


Depreciation


Depreciation increased $7 million for the three months ended June 30, 2019 compared with 2018, primarily due to higher depreciation rates effective May 1, 2019.

Depreciation increased $10 million for the ninesix months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to a $6 million increase related to higher depreciation rates effective May 1, 2019 and a $4 million increase related to additional assets placed into service, net of retirementsretirements.

Interest Expense

Interest expense increased $3 million and a $4$6 million increase related to higher depreciation rates effective July 1, 2017.

Income Taxes

The increase (decrease) in income taxes for the periodsthree and six months ended SeptemberJune 30, 20182019 compared with 2017 was2018, primarily due to:to increased borrowings and higher interest rates.


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 Three Months Nine Months
Reduction in U.S. federal income tax rate (a)$(12) $(33)
Change in pre-tax income(8) (8)
Amortization of excess deferred income taxes (a)(1) (6)
Other—
 (1)
Total$(21) $(48)

(a)The decreases are related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018. See Note 6 to the Financial Statements for additional information.


Earnings
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
2018 2017 2018 20172019 2018 2019 2018
Net Income$66
 $65
 $188
 $161
$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 ninethree and six month periodperiods in 20182019 compared with 2017,2018, primarily due to higherlower sales volumes driven by favorable weather, higher base electricity and gas rates effective July 1, 2017 and returns on additional environmental capital investments, partially offset by higher other operation and maintenance expense, higher depreciation expense and higher depreciation expense.interest expense, partially offset by higher retail rates approved by 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
Adjusted Gross Margins$(5) $19
$4
 $1
Other operation and maintenance(11) (23)(5) (10)
Depreciation(1) (11)(1) (4)
Taxes, other than income—
 (3)(1) —
Other Income (Expense) - net—
 1
—
 1
Interest Expense(3) (4)(3) (6)
Income Taxes21
 48
—
 4
Net Income$1
 $27
$(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.
2018 Three Months 2017 Three Months2019 Three Months 2018 Three Months
Adjusted Gross Margins Other (a) Operating Income (b) Adjusted 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$362
 $—
 $362
 $363
 $—
 $363
$334
 $—
 $334
 $335
 $—
 $335
Operating Expenses                      
Fuel83
 —
 83
 76
 —
 76
69
 —
 69
 72
 —
 72
Energy purchases, including affiliate19
 —
 19
 21
 —
 21
24
 —
 24
 30
 —
 30
Other operation and maintenance10
 85
 95
 13
 74
 87
8
 88
 96
 10
 83
 93
Depreciation8
 41
 49
 7
 40
 47
13
 43
 56
 7
 42
 49
Taxes, other than income2
 7
 9
 1
 7
 8
—
 10
 10
 —
 9
 9
Total Operating Expenses122
 133
 255
 118
 121
 239
114
 141
 255
 119
 134
 253
Total $240
 $(133) $107
 $245
 $(121) $124
$220
 $(141) $79
 $216
 $(134) $82
                      
2018 Nine Months 2017 Nine Months
Adjusted Gross Margins Other (a) Operating Income (b) Adjusted Gross Margins Other (a) Operating Income (b)
Operating Revenues$1,116
 $—
 $1,116
 $1,078
 $—
 $1,078
Operating Expenses           
Fuel234
 —
 234
 225
 —
 225
Energy purchases, including affiliate131
 —
 131
 115
 —
 115
Other operation and maintenance29
 248
 277
 33
 225
 258
Depreciation23
 123
 146
 24
 112
 136
Taxes, other than income2
 25
 27
 3
 22
 25
Total Operating Expenses419
 396
 815
 400
 359
 759
Total $697
 $(396) $301
 $678
 $(359) $319

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 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.



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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
2018 2017 $ Change 2018 2017 $ Change2019 2018 $ Change 2019 2018 $ Change
Operating Revenues                      
Retail and wholesale$445
 $457
 $(12) $1,322
 $1,295
 $27
$404
 $412
 $(8) $852
 $877
 $(25)
Electric revenue from affiliate2
 3
 (1) 10
 8
 2
2
 2
 —
 4
 8
 (4)
Total Operating Revenues447
 460
 (13) 1,332
 1,303
 29
406
 414
 (8) 856
 885
 (29)
Operating Expenses                      
Operation                      
Fuel123
 126
 (3) 375
 351
 24
99
 117
 (18) 215
 252
 (37)
Energy purchases5
 4
 1
 14
 13
 1
5
 5
 —
 10
 9
 1
Energy purchases from affiliate5
 2
 3
 21
 23
 (2)6
 4
 2
 19
 16
 3
Other operation and maintenance114
 104
 10
 331
 312
 19
105
 112
 (7) 213
 217
 (4)
Depreciation70
 67
 3
 208
 188
 20
78
 70
 8
 150
 138
 12
Taxes, other than income9
 9
 —
 26
 24
 2
8
 9
 (1) 17
 17
 —
Total Operating Expenses326
 312
 14
 975
 911
 64
301
 317
 (16) 624
 649
 (25)
Other Income (Expense) - net1
 —
 1
 1
 (4) 5
(2) 3
 (5) —
 —
 —
Interest Expense24
 24
 —
 74
 72
 2
28
 25
 3
 54
 50
 4
Income Taxes21
 47
 (26) 59
 120
 (61)14
 14
 —
 36
 38
 (2)
Net Income$77
 $77
 $—
 $225
 $196
 $29
$61
 $61
 $—
 $142
 $148
 $(6)


Operating Revenues
 
The increase (decrease) in operating revenues for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Volumes (a)$8
 $64
Base rates—
 26
Higher retail rates (a)$21
 $21
ECR4
 10
8
 10
TCJA refund (b)(16) (58)
DSM(1) (7)
Volumes (b)(29) (45)
Demand revenue (c)(8) (7)
Fuel and other energy prices(4) (2)(2) (12)
Other(4) (4)2
 4
Total$(13) $29
$(8) $(29)



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(a)IncreasesThe higher retail rates were primarily due to favorable weather in 2018.higher base rates, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019.
(b)Represents estimated income tax savings owedThe decreases were primarily due to customers relatedweather.
(c)The decreases were primarily due to the impactdeparture of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA,eight municipal customers effective January 1, 2018. See Note 7 to the Financial Statements for additional information.April 30, 2019.


Fuel


Fuel increased $24decreased $18 million for the ninethree months ended SeptemberJune 30, 20182019 compared with 2017,2018, primarily due to a $30an $11 million increasedecrease in volumes driven by weather in 2018, partially offset byand a $6 million decrease in volumes driven by the 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 volumes driven by the departure of eight municipal customers on April 30, 2019 and a $9 million decrease in commodity costs.


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Other Operation and Maintenance


The increase (decrease) in other operation and maintenance for the periods ended SeptemberJune 30, 20182019 compared with 20172018 was due to:
Three Months Nine MonthsThree Months Six Months
Timing and scope of generation maintenance outages$—
 $6
Transmission credits$2
 $5
Plant operations and maintenance(3) (4)
Vegetation management1
 5
(2) (1)
Storm costs5
 4
DSM program costs(2) (3)
Other4
 4
(2) (1)
Total$10
 $19
$(7) $(4)


Depreciation


Depreciation increased $20$8 million for the ninethree months ended September June 30, 20182019 compared with 2017,2018, primarily due to an $11higher 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 $7 million increase related to higher depreciation rates effective JulyMay 1, 20172019 and a $6$4 million increase related to additional assets placed into service, net of retirements.


Income TaxesInterest Expense


The increase (decrease) in income taxesInterest expense increased $3 million for the periodsthree months ended SeptemberJune 30, 20182019 compared with 2017 was2018, primarily due to:to increased borrowings and higher interest rates.

Earnings
 Three Months Nine Months
Reduction in U.S. federal income tax rate (a)$(14) $(40)
Change in pre-tax income(10) (12)
Amortization of excess deferred income taxes (a)(2) (8)
Other—
 (1)
Total$(26) $(61)
 Three Months Ended Six Months Ended
 June 30, June 30,
 2019 2018 2019 2018
Net Income$61
 $61
 $142
 $148
Special items, gains (losses), after-tax (a)—
 —
 —
 —


(a)The decreasesThere are related tono items management considers special for the impact of the U.S. federal corporate income tax rate reduction from 35% to 21%, as enacted by the TCJA, effective January 1, 2018. See Note 6 to the Financial Statements for additional information.periods presented.

Earnings
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2018 2017 2018 2017
Net Income$77
 $77
 $225
 $196
Special items, gains (losses), after-tax—
 —
 —
 (1)


Earnings increaseddecreased for the ninesix month period in 20182019 compared with 2017,2018, primarily due to higherlower sales volumes driven primarily by favorable weather, higher base electricity rates effective July 1, 2017depreciation expense and returns on environmental capital investments,higher interest expense, partially offset by higher retail rates approved by the KPSC, inclusive of the termination of the TCJA bill credit mechanism, effective May 1, 2019, and lower other operation and maintenance expense and higher depreciation 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.
 Three Months Nine Months
Adjusted Gross Margins$(14) $5
Other operation and maintenance(11) (23)
Depreciation(2) (15)
Taxes, other than income—
 (2)
Other Income (Expense) - net1
 4
Interest Expense—
 (2)
Income Taxes26
 61
Special items, gains (losses), after-tax (a)—
 1
Net Income$—
 $29


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(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.
2018 Three Months 2017 Three Months2019 Three Months 2018 Three Months
Adjusted Gross Margins Other (a) Operating
Income (b)		 Adjusted 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$447
 $—
 $447
 $460
 $—
 $460
$406
 $—
 $406
 $414
 $—
 $414
Operating Expenses                      
Fuel123
 —
 123
 126
 —
 126
99
 —
 99
 117
 —
 117
Energy purchases, including affiliate10
 —
 10
 6
 —
 6
11
 —
 11
 9
 —
 9
Other operation and maintenance16
 98
 114
 17
 87
 104
15
 90
 105
 13
 99
 112
Depreciation10
 60
 70
 9
 58
 67
16
 62
 78
 10
 60
 70
Taxes, other than income—
 9
 9
 —
 9
 9
1
 7
 8
 —
 9
 9
Total Operating Expenses159
 167
 326
 158
 154
 312
142
 159
 301
 149
 168
 317
Total$288
 $(167) $121
 $302
 $(154) $148
$264
 $(159) $105
 $265
 $(168) $97
                      
2018 Nine Months 2017 Nine Months2019 Six Months 2018 Six Months
Adjusted Gross Margins Other (a) Operating
Income (b)		 Adjusted 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$1,332
 $—
 $1,332
 $1,303
 $—
 $1,303
$856
 $—
 $856
 $885
 $—
 $885
Operating Expenses                      
Fuel375
 —
 375
 351
 —
 351
215
 —
 215
 252
 —
 252
Energy purchases, including affiliate35
 —
 35
 36
 —
 36
29
 —
 29
 25
 —
 25
Other operation and maintenance45
 286
 331
 49
 263
 312
28
 185
 213
 29
 188
 217
Depreciation29
 179
 208
 24
 164
 188
27
 123
 150
 19
 119
 138
Taxes, other than income1
 25
 26
 1
 23
 24
1
 16
 17
 1
 16
 17
Total Operating Expenses485
 490
 975
 461
 450
 911
300
 324
 624
 326
 323
 649
Total$847
 $(490) $357
 $842
 $(450) $392
$556
 $(324) $232
 $559
 $(323) $236


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




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Financial Condition


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


Liquidity and Capital Resources


(All Registrants)


The Registrants had the following at:
PPL (a) PPL Electric LKE LG&E KUPPL (a) PPL Electric LKE LG&E KU
September 30, 2018         
June 30, 2019         
Cash and cash equivalents$842
 $414
 $29
 $11
 $18
$406
 $20
 $32
 $9
 $23
Short-term debt1,549
 —
 304
 176
 128
1,636
 185
 96
 96
 —
Long-term debt due within one year330
 —
 330
 234
 96
136
 —
 136
 40
 96
Notes payable with affiliates  —
 80
 —
 —
  —
 203
 —
 —
                  
December 31, 2017         
December 31, 2018         
Cash and cash equivalents$485
 $49
 $30
 $15
 $15
$621
 $267
 $24
 $10
 $14
Short-term debt1,080
 —
 244
 199
 45
1,430
 —
 514
 279
 235
Long-term debt due within one year348
 —
 98
 98
 —
530
 —
 530
 434
 96
Notes payable with affiliates  —
 225
 —
 —
  —
 113
 —
 —
 
(a)At SeptemberJune 30, 2018, $572019, $21 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL would not anticipate an incremental U.S. tax cost. See Note 56 to the Financial Statements in PPL's 20172018 Form 10-K for additional information on undistributed earnings of WPD.
 
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
2018         
2019         
Operating activities$2,210
 $650
 $787
 $410
 $485
$1,070
 $314
 $445
 $258
 $270
Investing activities(2,466) (837) (825) (420) (404)(1,479) (530) (530) (224) (305)
Financing activities618
 552
 37
 6
 (78)198
 (31) 93
 (35) 44
2017         
2018         
Operating activities$1,754
 $575
 $920
 $418
 $501
$1,325
 $364
 $440
 $255
 $274
Investing activities(2,168) (858) (575) (293) (289)(1,649) (521) (564) (296) (266)
Financing activities738
 513
 (318) (121) (188)695
 597
 133
 45
 (3)
Change - Cash Provided (Used)                  
Operating activities$456
 $75
 $(133) $(8) $(16)$(255) $(50) $5
 $3
 $(4)
Investing activities(298) 21
 (250) (127) (115)170
 (9) 34
 72
 (39)
Financing activities(120) 39
 355
 127
 110
(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, 20182019 compared with 20172018 were as follows.


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PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)                  
Net income$362
 $83
 $36
 $27
 $29
$(60) $(8) $2
 $(14) $(6)
Non-cash components(386) (39) (88) (44) (69)106
 1
 44
 23
 34
Working capital134
 13
 49
 78
 76
(226) (49) (126) (67) (72)
Defined benefit plan funding274
 (4) (94) (56) (31)(1) 7
 94
 53
 50
Other operating activities72
 22
 (36) (13) (21)(74) (1) (9) 8
 (10)
Total$456
 $75
 $(133) $(8) $(16)$(255) $(50) $5
 $3
 $(4)
 
(PPL)


PPL's cash provided by operating activities in 2018 increased $4562019 decreased $255 million compared with 2017.2018.
Net income increased $362decreased $60 million between the periods and included a decreasean increase in non-cash charges of $386$106 million. The decreaseincrease in non-cash charges was primarily due to an increase in unrealized gainslosses on hedging activities and 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, net of retirements) partially offset by an increase in the U.K. net periodic defined benefit credits (primarily due to an increaselower levels of unrecognized losses being amortized) and a decrease in expected returns on higher asset balances) partially offset by an increase in depreciation expensedeferred income taxes (primarily due to additional assets placed into service, net of retirements, related to the ongoing efforts to ensure the reliability of the delivery system, the replacement of aging infrastructure, the roll-out of the Act 129 Smart Meter program and higher depreciation rates effective July 1, 2017)book versus tax plant timing differences).


The $134$226 million increasedecrease in cash from changes in working capital was primarily due to a decrease in unbilled revenue (primarily due to colder weather in the fourth quarter of 2017), a decreasean increase in net regulatory assets and liabilities (primarily due to an increase in regulatory liabilities 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 accounts payableprepayments (primarily due to timing of payments).


Defined benefit plan funding was $274The $74 million lowerdecrease in 2018. The decreasecash provided by other operating activities was primarily due to the acceleration$65 million transfer of WPD's contributionsexcess benefits funds, in 2018, related to its U.K. pension plans in 2017.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 2018 increased $752019 decreased $50 million compared with 2017.2018.
Net income increased $83decreased $8 million between the periods and included a decreasean increase in non-cash chargescomponents of $39$1 million. The decreaseincrease in non-cash chargescomponents was primarily driven by a decrease in deferred income tax expense (primarily due to book versus tax plant timing differences and net operating losses) partially offset by an $18 million increase in depreciation expense (primarily due to additional assets placed into service, net of retirements, 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) 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 $13$49 million increasedecrease in cash from changes in working capital was primarily due to a decreasean increase in accounts receivable (which was primarily due to tax proceeds from the filing of the 2017 federal income tax return), a decrease in unbilled revenues (primarily due to colder weathertiming of receipts), an increase in the fourth quarter of 2017) and a decrease in materials and supplies within Otherprepayments (primarily due to inventory optimization efforts) partially offset byan increase in the 2019 gross receipts tax prepayment compared to 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 a decreasetiming of payments).

Defined benefit plan funding was $7 million lower in the transmission service charge regulatory liability as a result of the June 1, 2018 Transmission Formula Rate filing, an increase in recoverable storm costs and an increase in recoverable costs related to the Act 129 Smart Meter program).2019.


The $22$1 million increasedecrease in cash provided by other operating activities was primarily due to an increasea decrease in non-current regulatory liabilities (primarily due to thea $37 million TCJA regulatory liability)liability in 2018), partially offset by an increasea decrease in non-current regulatory assets (primarily due(due to recoverabletiming of rate recovery mechanisms, amortization of storm costs)costs incurred in the prior year and $21 million of storm costs incurred in 2018).


(LKE)
 
LKE's cash provided by operating activities in 2018 decreased $1332019 increased $5 million compared with 2017.2018.
Net income increased $36 million between the periods and included a decrease in non-cash charges of $88 million. The decrease in non-cash charges was primarily driven by a decrease in deferred income tax expense (primarily due to book versus tax plant timing differences and the impacts of federal and state tax reform), partially offset by an increase


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•
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).
in depreciation expense (primarily due to higher depreciation rates effective July 1, 2017 and additional assets placed into service, net of retirements).


The increasedecrease in cash from changes in working capital was primarily driven by a decrease in other current liabilities (primarily due to timing of payments), a decreasean 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) and a decrease in unbilled revenues (primarily due to colder weather in the fourth quarter of 2017), partially offset by a decreasean increase in taxes payableother current liabilities (primarily due to timing of payments), and an increase in fuel inventory (primarily due to timing of fuel purchases and payments).


•
Defined benefit plan funding was $94 million lower in 2019.
Defined benefit plan funding was $94 million higher in 2018.


The decrease in cash from LKE's other operating activities was primarily driven by an increase in ARO expenditures.


(LG&E)
 
LG&E's cash provided by operating activities in 2018 decreased $82019 increased $3 million compared with 2017.2018.
•
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).
Net income increased $27 million between the periods and included a decrease in non-cash charges of $44 million. The decrease in non-cash charges was primarily driven by a decrease in deferred income tax expense (primarily due to book versus tax plant timing differences and the impacts of federal and state tax reform), partially offset by an increase in depreciation expense (primarily due to higher depreciation rates effective July 1, 2017 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 accounts payablenet regulatory assets and liabilities (primarily due to the impact of the TCJA and the timing of payments), arate recovery mechanisms) and an increase in unbilled revenues (primarily due to weather and higher retail rates effective May 1, 2019).

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

(KU)
KU's cash provided by operating activities in 2019 decreased $4 million compared with 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 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 the timing of rate recovery mechanisms), an increase in taxesunbilled 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 unbilled revenuesaccounts receivable (primarily due to colder weather in the fourth quarter of 2017), partially offset by a decrease in other current liabilities (primarily due to timing of payments)weather).

Defined benefit plan funding was $56 million higher in 2018.

(KU)
KU's cash provided by operating activities in 2018 decreased $16 million compared with 2017.
Net income increased $29 million between the periods and included a decrease in non-cash charges of $69 million. The decrease in non-cash charges was primarily driven by a decrease in deferred income tax expense (primarily due to book versus tax plant timing differences and the impacts of federal and state tax reform), partially offset by an increase in depreciation expense (primarily due to higher depreciation rates effective July 1, 2017 and additional assets placed into service, net of retirements).

The increase in cash from changes in working capital was primarily driven by a decrease in net regulatory assets and liabilities (primarily due to the impact of the TCJA and the timing of rate recovery mechanisms), an increase in taxes payable (primarily due to timing of payments), a decrease in unbilled revenues (primarily due to colder weather in the fourth quarter of 2017), partially offset by an increase in fuel inventory (primarily due to timing of fuel purchases and payments).


Defined benefit plan funding was $31$50 million higherlower in 2018.2019.


The decrease in cash from KU's other operating activities was primarily driven by an increase in 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, 20182019 compared with 20172018 was as follows.


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 PPL PPL Electric LKE LG&E KU
Decrease (Increase)$(192) $16
 $(247) $(127) $(122)
 PPL PPL Electric LKE LG&E KU
Decrease (Increase)$53
 $(15) $34
 $72
 $(39)


For PPL, the increasedecrease in expenditures was due to higher project expenditures at LKE, LG&E and KU partially offset by lower project expenditures at WPD, LKE and PPL Electric. The increase in expenditures for LKE, LG&E, partially offset by higher project expenditures at PPL Electric and KU was primarily due to increased spending for environmental water projects at LG&E's Mill Creek and Trimble County plants and increased spending for environmental water projects at KU's Ghent plant.KU. The decrease in expenditures at WPD was primarily due to a decrease in expenditures to enhance system reliability partially offset by an increaseand 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'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 timing differences onan increase in capital spending projects related to the ongoing efforts to improve reliability and replace aging 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, 20182019 compared with 20172018 were as follows.
PPL PPL Electric LKE LG&E KUPPL PPL Electric LKE LG&E KU
Change - Cash Provided (Used)                  
Debt issuance/retirement, net$(703) $(72) $91
 $100
 $(9)$235
 $(398) $405
 $99
 $306
Debt issuance/retirement with affiliate, net  —
 250
 —
 —
—
 —
 (250) —
 —
Stock issuances/redemptions, net403
 —
 —
 —
 —
(112) —
 —
 —
 —
Dividends(46) (40) —
 37
 (25)(36) 7
 —
 10
 45
Capital contributions/distributions, net  (146) 99
 43
 45
—
 (425) 87
 (18) 23
Change in short-term debt, net212
 295
 55
 (44) 99
(582) 185
 (490) (167) (323)
Notes payable with affiliate  —
 (141) (10) —
—
 —
 216
 —
 —
Other financing activities14
 2
 1
 1
 —
(2) 3
 (8) (4) (4)
Total$(120) $39
 $355
 $127
 $110
$(497) $(628) $(40) $(80) $47
 
See Note 8 to the Financial Statements in this Form 10-Q for information on 20182019 short-term and long-term debt activity, equity transactions and PPL dividends. See Note 78 to the Financial Statements in the Registrants' 20172018 Form 10-K for information on 20172018 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 except for borrowings under LG&E's term loan agreement which are reflected in "Long-term debt" on the Balance Sheets. At SeptemberJune 30, 2018,2019, the total committed borrowing capacity under credit facilities and the borrowings under these facilities were:
 

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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$1,350
 $—
 $711
 $639
$1,550
 $—
 $1,029
 $521
PPL Electric Credit Facility650
 —
 1
 649
650
 —
 186
 464
              
LKE Credit Facility75
 —
 —
 75
LG&E Credit Facility700
 200
 176
 324
LG&E Credit Facilities500
 —
 96
 404
KU Credit Facilities598
 —
 326
 272
598
 —
 198
 400
Total LKE1,373
 200
 502
 671
1,098
 —
 294
 804
Total U.S. Credit Facilities (a)$3,373
 $200
 $1,214
 $1,959
$3,298
 $—
 $1,509
 $1,789
Total U.K. Credit Facilities (b)£1,185
 £427
 £—
 £756
£1,055
 £272
 £—
 £783
 

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(a)The commitments under the U.S. credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than the following percentages of the total committed capacity: PPL - 10%, PPL Electric - 7%6%, LKE - 18%22%, LG&E - 33%7% and KU - 37%.
(b)The amounts borrowed at SeptemberJune 30, 20182019 were a USD-denominated borrowing of $200 million and GBP-denominated borrowings of £114 which equated to $354$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, 2018,2019, 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 17%13% of the total committed capacity.
 
See Note 8 to the Financial Statements for further discussion of the Registrants' credit facilities.


Intercompany (LKE, LG&E and KU)
Committed
Capacity
 Borrowed 
Non-affiliate Used
Capacity
 
Unused
Capacity
Committed
Capacity
 Borrowed 
Non-affiliate Used
Capacity
 
Unused
Capacity
LKE Credit Facility$300
 $80
 $—
 $220
$375
 $203
 $—
 $172
LG&E Money Pool (a)500
 —
 176
 324
500
 —
 96
 404
KU Money Pool (a)500
 —
 128
 372
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 1112 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, 2018:2019:
Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
Capacity 
Commercial
Paper
Issuances
 
Unused
Capacity
PPL Capital Funding$1,000
 $691
 $309
$1,500
 $1,014
 $486
PPL Electric650
 —
 650
650
 185
 465
          
LG&E350
 176
 174
350
 96
 254
KU350
 128
 222
350
 —
 350
Total LKE700
 304
 396
700
 96
 604
Total PPL$2,350
 $995
 $1,355
$2,850
 $1,295
 $1,555


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Long-term Debt (All Registrants)


See Note 8 to the Financial Statements for information regarding the Registrants’ long-term debt activities.


(PPL)


Equity Securities Activities


Equity Forward ContractsATM


In MayFebruary 2018, PPL completed a registered underwritten public offeringentered into an equity distribution agreement, pursuant to which PPL may sell, from time to time, up to an aggregate of 55 million shares$1.0 billion of its common stock. In connection with thatstock through an at-the-market offering program; including a forward sales component. The compensation paid to the underwriters exercised an optionselling agents by PPL may be up to purchase 8.25 million additional shares of PPL common stock solely to cover over-allotments.

In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the 63.25 million shares of PPL common stock. Full settlement of these forward sale agreements will occur no later than November 2019. PPL only receives proceeds and issues shares of common stock upon any settlements2% of the forward sale agreements. PPL intends to use netgross offering proceeds that it receives upon any settlement for general corporate purposes.

In September 2018, PPL settled a portion of the initial forward sale agreements by issuing 20 million shares of PPL common stock, resulting in net cash proceeds of $520 million.

See Note 8 toshares. There were no issuances under the Financial StatementsATM program for additional information.

ATM Program
For the ninethree and six months ended SeptemberJune 30, 2018, PPL issued 4.2 million shares2019.

Table of common stock and received proceeds of $119 million. See Note 8 to the Financial Statements for further discussion of the ATM program.Contents





Common Stock Dividends (PPL)
 
In August 2018,May 2019, PPL declared a quarterly common stock dividend, payable OctoberJuly 1, 2018,2019, of 41.041.25 cents per share (equivalent to $1.64$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 2018:2019:



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


In March 2018, Moody's and S&P assigned ratings of Baa1 and A- to WPD (South Wales)'s £30 million 0.01% Index-linked Senior Notes due 2036.

In May 2018, Moody's and S&P assigned ratings of Baa1 and A- to WPD (West Midlands)'s £30 million 0.01% Index-linked Senior Notes due 2028.

In October 2018, Moody's and S&P assigned ratings of Baa3 and BBB+ to WPD plc's £350 million 3.5% Senior Notes due 2026.

(PPL and PPL Electric)

In June 2018, Moody's2019, Moody’s and S&P assigned ratings of A1 and A to PPL Electric'sLG&E’s $400 million 4.15%4.25% First Mortgage Bonds due 2048.2049. The bonds were issued April 1, 2019.


In 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 assigned a rating of A to LG&E's $31 million 1.65% Series A Environmental Facilities Revenue Refunding Bonds 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 B Environmental Facilities Revenue Refunding Bonds due 2033. The bonds were remarketed June 1, 2019.

(PPL, LKE and LG&E)KU)


In February 2018,March 2019, Moody’s assigned a rating of A1 and S&P confirmed its rating of A to the County of Trimble, Kentucky's $28KU’s $300 million 2.30% Pollution Control Revenue4.375% First Mortgage Bonds 2001 Series A (Louisville Gas and Electric Company Project) due 2026, previously2045. The bonds were issued on behalf of LG&E.April 1, 2019.

In April 2018, Moody's assigned a rating of A1 and S&P confirmed its rating of A to the County of Trimble, Kentucky's $35 million 2.55% Pollution Control Revenue Bonds, 2001 Series B (Louisville Gas and Electric Company Project) due 2027, previously issued on behalf of LG&E.

In April 2018, Moody's assigned a rating of A1 and S&P confirmed its rating of A to the County of Jefferson, Kentucky's $35 million 2.55% Pollution Control Revenue Bonds, 2001 Series B (Louisville Gas and Electric Company Project) due 2027, previously issued on behalf of LG&E.


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 1415 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, 2018.2019.
 

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(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' 20172018 Form 10-K.


Risk Management
 
Market Risk
 
(All Registrants)
 
See Notes 1314 and 1415 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

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precise indicators of expected future losses, but are rather only indicators of possible losses under normal market conditions at a given confidence level.
 
Interest Rate Risk
 
The Registrants and their subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. The Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of their debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolios due to changes in the absolute level of interest rates. In addition, the interest rate risk of certain subsidiaries is potentially mitigated as a result of the existing regulatory framework or the timing of rate cases.


The following interest rate hedges were outstanding at SeptemberJune 30, 2018.2019.
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)$97
 $—
 $(1) 2026$316
 $(8) $(4) 2031
Cross-currency swaps (c)702
 125
 (78) 2028702
 163
 (18) 2028
Economic hedges              
Interest rate swaps (d)147
 (19) (2) 2033147
 (24) (1) 2033
LKE              
Economic hedges 
  
  
   
  
  
  
Interest rate swaps (d)147
 (19) (2) 2033147
 (24) (1) 2033
LG&E 
  
  
   
  
  
  
Economic hedges 
  
  
   
  
  
  
Interest rate swaps (d)147
 (19) (2) 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, 20182019 was insignificant for

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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, 20182019 is shown below.
10% Adverse
Movement
in Rates
10% Adverse
Movement
in Rates
PPL$647
$672
PPL Electric190
180
LKE176
205
LG&E63
87
KU92
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

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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, 2018.2019.
 
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)£1,783
 $144
 $(216) 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.
(b)To economically hedge the translation risk of expected earnings denominated in GBP.


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


•
PPL Electric is 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 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.


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 regulations, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2017 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 1314 and 1415 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' 20172018 Form 10-K for additional information.
 
Foreign Currency Translation(PPL)
 
The value of the British pound sterling fluctuates in relation to the U.S. dollar. Changes in this exchange rate resulted in a foreign currency translation loss of $330$84 million for the ninesix months ended SeptemberJune 30, 2018,2019, which primarily reflected a $549$125 million decrease to PP&E, and a $110$23 million decrease to goodwill and an $9 million decrease to other net assets, partially offset by a $319$73 million decrease to long-term debt and a $10 decrease to other net liabilities.debt. Changes in this exchange rate resulted in a foreign currency translation gainloss of $194$143 million for the ninesix months ended SeptemberJune 30, 2017,2018, which primarily reflected a $345$227 million increasedecrease to PP&E, a $45 million decrease to goodwill and a $75 million increase to goodwill partially offset by a $203 million increase to long-term debt and a $23$2 million increase to other net liabilities.liabilities, partially offset by a $131 million decrease to long-term 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.

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See Note 1112 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' 2017 Form 10-K for information on the more significant activities.serve their load.


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. 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 1011 to the Financial Statements for a discussion of other significant environmental matters including Legal Matters, NAAQS, Climate Change, and ELGs. Additionally, see "Item 1. Business - Environmental Matters" in the Registrants' 20172018 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’sEPA's CCR Rule. Although LG&E and KU have identified compliance

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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’sEPA's review of the current program, the EPA is in the process of undertaking significant revisions to the CCR Rule. OnIn July 30, 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 late 2018. Onproposed. In August 21, 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’sEPA'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’sEPA'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 16 and Note 19 to the Financial Statements in the Registrants’ 20172018 Form 10-K for additional information on 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-plantplant 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 NoteNotes 2 and 1718 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

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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' 20172018 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 LiabilitiesX X X X X
Price Risk ManagementX        
Goodwill ImpairmentX   X X X
AROsX   X X X
Revenue Recognition - Unbilled Revenue     X X X

Income Taxes (All Registrants)

The Registrants recognized certain provisional amounts relating to the impact of the enactment of the TCJA in their December 31, 2017 financial statements, in accordance with SEC guidance. Included in those provisional amounts were estimates of: tax depreciation, deductible executive compensation, accumulated foreign earnings, foreign tax credits, and deemed dividends from foreign subsidiaries, all of which were based on the interpretation and application of various provisions of the TCJA.

In the third quarter of 2018, PPL filed its consolidated federal income tax return, which was prepared using guidance issued by the U.S. Treasury Department and the IRS since the filing of each Registrant’s 2017 Form 10-K. Accordingly, the Registrants have updated the following provisional amounts and now consider them to be complete: (1) the amount of the deemed dividend and associated foreign tax credits relating to the transition tax imposed on accumulated foreign earnings as of December 31, 2017; (2) the amount of accelerated 100% “bonus” depreciation PPL is eligible to claim in its 2017 federal income tax return; and (3) the related impacts on PPL's 2017 consolidated federal net operating loss to be carried forward to future periods. In addition, the Registrants recorded the tax impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on the changes to deferred tax assets and liabilities resulting from the completed provisional amounts. The completed provisional amounts related to the tax rate reduction had an insignificant impact on the net regulatory liabilities of PPL's U.S. regulated operations. See Note 6 to the Financial Statements for the final amounts reported in PPL's 2017 federal income tax return, provisional adjustment amounts for the year ended December 31, 2017, the related measurement period adjustments and the resulting tax impact for the three and nine months ended September 30, 2018.

The Registrants' accounting related to the effects of the TCJA on financial results for the period ended December 31, 2017 is complete as of September 30, 2018 with respect to the three items discussed above. The Registrants continue to analyze the impact of the TCJA on the deductibility of executive compensation awarded on or before November 2, 2017. The Registrants do not currently anticipate a material change from what was reflected in the December 31, 2017 financial statements and expect to record the impact, if any, of changes in the deductibility of executive compensation in the fourth quarter of 2018.









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


Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Reference is made to "Risk Management" in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations."
 
Item 4. Controls and Procedures
 
(a) Evaluation of disclosure controls and procedures.
 
The Registrants' principal executive officers and principal financial officers, based on their evaluation of the Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of SeptemberJune 30, 2018,2019, 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 legal, tax, regulatory, environmental or other administrative proceedings that became reportable events or were pending in the thirdsecond quarter of 2018, which information is incorporated by reference into this Part II,2019 see:
 
"Item 3. Legal Proceedings" in each Registrant's 20172018 Form 10-K; and
Notes 6, 7 and 1011 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' 20172018 Form 10-K.


Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
Effective October 25, 2018, the Compensation, Governance and Nominating Committee approved amendments of the 2012 Amended and Restated Stock Incentive Plan and the Incentive Compensation Plan for Key Employees. The amendments add a one-year minimum vesting requirement for equity awards with the exception of change-in-control events; death, retirement and disability; and additional awards issued in the aggregate up to 5% of the authorized shares that can be issued under the respective equity plan.


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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.
*4(a)10(a)
-Supplemental Indenture No. 6, dated as of August 1, 2018, to Indenture, dated as of October 1, 2010, between Kentucky Utilities Company and The Bank of New York Mellon, as Trustee
*4(b)
-2018 Series A Carroll County Loan£50,000,000 Facility Agreement dated as of August 1, 2018, by and between Kentucky Utilities Company and County of Carroll, Kentucky
*4(c)
-Amended and Restated Trust Deed, dated August 14, 2018, by andJune 7, 2019, among 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 as Issuers, and HSBC Corporate Trustee Company (UK) Limited as Note Trustee
*4(d)
-Trust Deed, dated October 16, 2018, between Western Power Distribution plc, as Issuer,the Borrower, National Westminster Bank plc as Original Lender, and HSBC Corporate Trustee Company (UK) LimitedNational Westminster Bank plc as Trustee
*[_]10(a)
-Amended and Restated Incentive Compensation Plan for Key Employees, effective October 25, 2018
*[_]10(b)
-PPL Corporation Amended and Restated 2012 Stock Incentive Plan, effective October 25, 2018
*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 ChargesAgent
   
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended SeptemberJune 30, 2018,2019, 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, 2018,2019, 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

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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.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.
 
  PPL Corporation
  (Registrant) 
    
    
    
Date:November 1, 2018August 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, 2018August 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, 2018August 6, 2019/s/  Kent W. Blake 
  
Kent W. Blake
Chief Financial Officer
 
  (Principal Financial Officer and Principal Accounting Officer) 














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