PPL PPL Corporation

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2017
OR
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

Commission File Number	Registrant; State of Incorporation; Address and Telephone Number	IRS Employer Identification No.
1-11459	PPL Corporation (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101-1179 (610) 774-5151	23-2758192
1-905	PPL Electric Utilities Corporation (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101-1179 (610) 774-5151	23-0959590
333-173665	LG&E and KU Energy LLC (Exact name of Registrant as specified in its charter) (Kentucky) 220 West Main Street Louisville, KY 40202-1377 (502) 627-2000	20-0523163
1-2893	Louisville Gas and Electric Company (Exact name of Registrant as specified in its charter) (Kentucky) 220 West Main Street Louisville, KY 40202-1377 (502) 627-2000	61-0264150
1-3464	Kentucky Utilities Company (Exact name of Registrant as specified in its charter) (Kentucky and Virginia) One Quality Street Lexington, KY 40507-1462 (502) 627-2000	61-0247570

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		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 ]	[     ]	[     ]

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	PPL Corporation	Common stock, $0.01 par value, 683,174,778 shares outstanding at April 27, 2017.
	PPL Electric Utilities Corporation	Common stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at April 27, 2017.
	LG&E and KU Energy LLC	PPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
	Louisville Gas and Electric Company	Common stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at April 27, 2017.
	Kentucky Utilities Company	Common stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at April 27, 2017.

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•	the outcome of rate cases or other cost recovery or revenue filings;

•	changes in U.S. or U.K. tax laws or regulations;

•	effects of cyber-based intrusions or natural disasters, threatened or actual terrorism, war or other hostilities;

•	significant decreases in demand for electricity in the U.S.;

•	expansion of alternative and distributed sources of electricity generation and storage;

•	changes in foreign currency exchange rates for British pound sterling and the related impact on unrealized gains and losses on PPL's foreign currency economic hedges;

•	the effectiveness of our risk management programs, including foreign currency and interest rate hedging;

•	non-achievement by WPD of performance targets set by Ofgem;

•	the effect of changes in RPI on WPD's revenues and index linked debt;

•	the March 29, 2017 notification by the U.K. to the European Council of the European Union of the U.K.'s intent to withdraw from the European Union and any actions in response thereto;

•	defaults by counterparties or suppliers for energy, capacity, coal, natural gas or key commodities, goods or services;

•	capital market conditions, including the availability of capital or credit, changes in interest rates and certain economic indices, and decisions regarding capital structure;

•	a material decline in the market value of PPL's equity;

•	significant decreases in the fair value of debt and equity securities and its impact on the value of assets in defined benefit plans, and the potential cash funding requirements if fair value declines;

•	interest rates and their effect on pension and retiree medical liabilities, ARO liabilities and interest payable on certain debt securities;

•	volatility in or the impact of other changes in financial markets and economic conditions;

•	the potential impact of any unrecorded commitments and liabilities of the Registrants and their subsidiaries;

•	new accounting requirements or new interpretations or applications of existing requirements;

•	changes in securities and credit ratings;

•	any requirement to record impairment charges pursuant to GAAP with respect to any of our significant investments;

•	laws or regulations to reduce emissions of "greenhouse" gases or the physical effects of climate change;

•	continuing ability to recover fuel costs and environmental expenditures in a timely manner at LG&E and KU, and natural gas supply costs at LG&E;

•	fuel supply for LG&E and KU;

•	weather and other conditions affecting generation, transmission and distribution operations, operating costs and customer energy use;

•	changes in political, regulatory or economic conditions in states, regions or countries where the Registrants or their subsidiaries conduct business;

•	receipt of necessary governmental permits and approvals;

•	new state, federal or foreign legislation or regulatory developments;

•	the impact of any state, federal or foreign investigations applicable to the Registrants and their subsidiaries and the energy industry;

•	our ability to attract and retain qualified employees;

•	the effect of any business or industry restructuring;

•	development of new projects, markets and technologies;

•	performance of new ventures;

•	business dispositions or acquisitions and our ability to realize expected benefits from such business transactions;

•	collective labor bargaining negotiations; and

•	the outcome of litigation against the Registrants and their subsidiaries.

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

PPL Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars, except share data)

	Three Months Ended March 31,
	2017				2016
Operating Revenues	$	1,951			$	2,011
Operating Expenses
Operation
Fuel	191				197
Energy purchases	215				233
Other operation and maintenance	432				450
Depreciation	242				229
Taxes, other than income	75				79
Total Operating Expenses	1,155				1,188
Operating Income	796				823
Other Income (Expense) - net	(47		)		61
Interest Expense	217				224
Income Before Income Taxes	532				660
Income Taxes	129				179
Net Income	$	403			$	481
Earnings Per Share of Common Stock:
Net Income Available to PPL Common Shareowners:
Basic	$	0.59			$	0.71
Diluted	$	0.59			$	0.71
Dividends Declared Per Share of Common Stock	$	0.3950			$	0.38
Weighted-Average Shares of Common Stock Outstanding (in thousands)
Basic	680,882				675,441
Diluted	683,084				678,817

 

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 March 31,
	2017				2016
Net income	$	403			$	481
Other comprehensive income (loss):
Amounts arising during the period - gains (losses), net of tax (expense) benefit:
Foreign currency translation adjustments, net of tax of ($1), ($2)	(24		)		(464		)
Qualifying derivatives, net of tax of $2, ($15)	(6		)		80
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):
Qualifying derivatives, net of tax of $0, $19	(1		)		(78		)
Defined benefit plans:
Net actuarial (gain) loss, net of tax of ($9), ($9)	32				31
Total other comprehensive income (loss)	1				(431		)
Comprehensive income	$	404			$	50

 

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

PPL Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Cash Flows from Operating Activities
Net income	$	403			$	481
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	242				229
Amortization	23				18
Defined benefit plans - expense (income)	(19		)		(13		)
Deferred income taxes and investment tax credits	161				162
Unrealized (gains) losses on derivatives, and other hedging activities	35				(34		)
Stock-based compensation expense	19				13
Other	(1		)		(5		)
Change in current assets and current liabilities
Accounts receivable	(43		)		(62		)
Accounts payable	(84		)		(43		)
Unbilled revenues	52				18
Fuel, materials and supplies	44				25
Prepayments	(110		)		(86		)
Taxes payable	(21		)		15
Other current liabilities	(60		)		(66		)
Other	5				18
Other operating activities
Defined benefit plans - funding	(520		)		(123		)
Other assets	5				(5		)
Other liabilities	4				15
Net cash provided by operating activities	135				557
Cash Flows from Investing Activities
Expenditures for property, plant and equipment	(677		)		(656		)
Expenditures for intangible assets	(3		)		(6		)
Net (increase) decrease in restricted cash and cash equivalents	2				—
Other investing activities	1				1
Net cash used in investing activities	(677		)		(661		)
Cash Flows from Financing Activities
Issuance of long-term debt	64				224
Retirement of long-term debt	—				(224		)
Issuance of common stock	73				42
Payment of common stock dividends	(258		)		(255		)
Net increase (decrease) in short-term debt	744				351
Other financing activities	(16		)		(23		)
Net cash provided by (used in) financing activities	607				115
Effect of Exchange Rates on Cash and Cash Equivalents	3				(33		)
Net Increase (Decrease) in Cash and Cash Equivalents	68				(22		)
Cash and Cash Equivalents at Beginning of Period	341				836
Cash and Cash Equivalents at End of Period	$	409			$	814
Supplemental Disclosures of Cash Flow Information
Significant non-cash transactions:
Accrued expenditures for property, plant and equipment at March 31,	$	236			$	279
Accrued expenditures for intangible assets at March 31,	$	62			$	64

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

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CONDENSED CONSOLIDATED BALANCE SHEETS

PPL Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars, shares in thousands)

	March 31, 2017				December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	409			$	341
Accounts receivable (less reserve: 2017, $53; 2016, $54)
Customer	702				666
Other	58				46
Unbilled revenues	427				480
Fuel, materials and supplies	312				356
Prepayments	173				63
Price risk management assets	95				63
Other current assets	51				52
Total Current Assets	2,227				2,067
Property, Plant and Equipment
Regulated utility plant	35,229				34,674
Less:  accumulated depreciation - regulated utility plant	6,197				6,013
Regulated utility plant, net	29,032				28,661
Non-regulated property, plant and equipment	413				413
Less:  accumulated depreciation - non-regulated property, plant and equipment	137				134
Non-regulated property, plant and equipment, net	276				279
Construction work in progress	1,099				1,134
Property, Plant and Equipment, net	30,407				30,074
Other Noncurrent Assets
Regulatory assets	1,908				1,918
Goodwill	3,050				3,060
Other intangibles	644				700
Pension benefit asset	363				9
Price risk management assets	284				336
Other noncurrent assets	151				151
Total Other Noncurrent Assets	6,400				6,174
Total Assets	$	39,034			$	38,315

 

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)

	March 31, 2017				December 31, 2016
Liabilities and Equity
Current Liabilities
Short-term debt	$	1,666			$	923
Long-term debt due within one year	417				518
Accounts payable	700				820
Taxes	80				101
Interest	299				270
Dividends	270				259
Customer deposits	277				276
Regulatory liabilities	82				101
Other current liabilities	465				569
Total Current Liabilities	4,256				3,837
Long-term Debt	17,958				17,808
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes	4,055				3,889
Investment tax credits	132				132
Accrued pension obligations	776				1,001
Asset retirement obligations	429				428
Regulatory liabilities	897				899
Other deferred credits and noncurrent liabilities	422				422
Total Deferred Credits and Other Noncurrent Liabilities	6,711				6,771
Commitments and Contingent Liabilities (Notes 6 and 9)
Equity
Common stock - $0.01 par value (a)	7				7
Additional paid-in capital	9,917				9,841
Earnings reinvested	3,962				3,829
Accumulated other comprehensive loss	(3,777		)		(3,778		)
Total Equity	10,109				9,899
Total Liabilities and Equity	$	39,034			$	38,315

 

(a)	1,560,000 shares authorized; 682,427 and 679,731 shares issued and outstanding at March 31, 2017 and December 31, 2016 .

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
December 31, 2016	679,731			$	7			$	9,841			$	3,829			$	(3,778	)		$	9,899
Common stock issued	2,696							97												97
Stock-based compensation								(21		)										(21		)
Net income												403								403
Dividends and dividend equivalents												(270		)						(270		)
Other comprehensive income (loss)																1				1
March 31, 2017	682,427			$	7			$	9,917			$	3,962			$	(3,777	)		$	10,109
December 31, 2015	673,857			$	7			$	9,687			$	2,953			$	(2,728	)		$	9,919
Common stock issued	2,527							70												70
Stock-based compensation								(28		)										(28		)
Net income												481								481
Dividends and dividend equivalents												(256		)						(256		)
Other comprehensive income (loss)																(431		)		(431		)
Adoption of stock-based compensation guidance cumulative effect adjustment												7								7
March 31, 2016	676,384			$	7			$	9,729			$	3,185			$	(3,159	)		$	9,762

(a)	Shares in thousands. Each share entitles the holder to one vote on any question presented at any shareowners' meeting.

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

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

PPL Electric Utilities Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Operating Revenues	$	573			$	585
Operating Expenses
Operation
Energy purchases	146				167
Other operation and maintenance	164				150
Depreciation	75				59
Taxes, other than income	29				29
Total Operating Expenses	414				405
Operating Income	159				180
Other Income (Expense) - net	1				3
Interest Expense	33				33
Income Before Income Taxes	127				150
Income Taxes	48				56
Net Income (a)	$	79			$	94

 

(a)	Net income equals comprehensive income.

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 Electric Utilities Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Cash Flows from Operating Activities
Net income	$	79			$	94
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	75				59
Amortization	8				7
Defined benefit plans - expense	5				2
Deferred income taxes and investment tax credits	41				65
Other	—				(5		)
Change in current assets and current liabilities
Accounts receivable	(27		)		(43		)
Accounts payable	(18		)		(2		)
Unbilled revenue	12				5
Prepayments	(75		)		(21		)
Regulatory assets and liabilities	(11		)		(21		)
Taxes payable	—				(8		)
Other	(14		)		(12		)
Other operating activities
Defined benefit plans - funding	(24		)		—
Other assets	5				3
Other liabilities	(1		)		1
Net cash provided by operating activities	55				124
Cash Flows from Investing Activities
Expenditures for property, plant and equipment	(274		)		(214		)
Expenditures for intangible assets	(2		)		(1		)
Net cash used in investing activities	(276		)		(215		)
Cash Flows from Financing Activities
Issuance of long-term debt	—				224
Retirement of long-term debt	—				(224		)
Contributions from parent	100				—
Payment of common stock dividends to parent	(76		)		(45		)
Net increase (decrease) in short-term debt	204				125
Other financing activities	—				(2		)
Net cash provided by (used in) financing activities	228				78
Net Increase (Decrease) in Cash and Cash Equivalents	7				(13		)
Cash and Cash Equivalents at Beginning of Period	13				47
Cash and Cash Equivalents at End of Period	$	20			$	34
Supplemental Disclosure of Cash Flow Information
Significant non-cash transactions:
Accrued expenditures for property, plant and equipment at March 31,	$	122			$	115

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

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CONDENSED CONSOLIDATED BALANCE SHEETS

PPL Electric Utilities Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars, shares in thousands)

	March 31, 2017				December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	20			$	13
Accounts receivable (less reserve: 2017, $27; 2016, $28)
Customer	304				272
Other	16				21
Unbilled revenues	102				114
Materials and supplies	31				32
Prepayments	84				9
Regulatory assets	13				19
Other current assets	6				8
Total Current Assets	576				488
Property, Plant and Equipment
Regulated utility plant	9,987				9,654
Less: accumulated depreciation - regulated utility plant	2,767				2,714
Regulated utility plant, net	7,220				6,940
Construction work in progress	557				641
Property, Plant and Equipment, net	7,777				7,581
Other Noncurrent Assets
Regulatory assets	1,080				1,094
Intangibles	252				251
Other noncurrent assets	14				12
Total Other Noncurrent Assets	1,346				1,357
Total Assets	$	9,699			$	9,426

 

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

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CONDENSED CONSOLIDATED BALANCE SHEETS

PPL Electric Utilities Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars, shares in thousands)

	March 31, 2017				December 31, 2016
Liabilities and Equity
Current Liabilities
Short-term debt	$	499			$	295
Long-term debt due within one year	224				224
Accounts payable	329				367
Accounts payable to affiliates	58				42
Taxes	12				12
Interest	31				34
Regulatory liabilities	66				83
Other current liabilities	88				101
Total Current Liabilities	1,307				1,158
Long-term Debt	2,608				2,607
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes	1,942				1,899
Accrued pension obligations	258				281
Other deferred credits and noncurrent liabilities	90				90
Total Deferred Credits and Other Noncurrent Liabilities	2,290				2,270
Commitments and Contingent Liabilities (Notes 6 and 9)
Equity
Common stock - no par value (a)	364				364
Additional paid-in capital	2,254				2,154
Earnings reinvested	876				873
Total Equity	3,494				3,391
Total Liabilities and Equity	$	9,699			$	9,426

 

(a)	170,000 shares authorized; 66,368 shares issued and outstanding at March 31, 2017 and December 31, 2016 .

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 Electric Utilities Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

	Common stock shares outstanding (a)			Common stock				Additional paid-in capital				Earnings reinvested				Total
December 31, 2016	66,368			$	364			$	2,154			$	873			$	3,391
Net income												79				79
Capital contributions from PPL								100								100
Dividends declared on common stock												(76		)		(76		)
March 31, 2017	66,368			$	364			$	2,254			$	876			$	3,494
December 31, 2015	66,368			$	364			$	1,934			$	821			$	3,119
Net income												94				94
Dividends declared on common stock												(45		)		(45		)
March 31, 2016	66,368			$	364			$	1,934			$	870			$	3,168

 

(a)	Shares in thousands. All common shares of PPL Electric stock are owned by PPL.

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

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

LG&E and KU Energy LLC and Subsidiaries

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Operating Revenues	$	809			$	826
Operating Expenses
Operation
Fuel	191				198
Energy purchases	69				66
Other operation and maintenance	207				202
Depreciation	105				99
Taxes, other than income	16				15
Total Operating Expenses	588				580
Operating Income	221				246
Other Income (Expense) - net	(2		)		(1		)
Interest Expense	49				49
Interest Expense with Affiliate	4				4
Income Before Income Taxes	166				192
Income Taxes	63				72
Net Income (a)	$	103			$	120

 

(a)	Net income approximates comprehensive income.

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

LG&E and KU Energy LLC and Subsidiaries

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Cash Flows from Operating Activities
Net income	$	103			$	120
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	105				99
Amortization	7				7
Defined benefit plans - expense	8				7
Deferred income taxes and investment tax credits	48				68
Change in current assets and current liabilities
Accounts receivable	21				(15		)
Accounts payable	(28		)		25
Accounts payable to affiliates	7				5
Unbilled revenues	22				8
Fuel, materials and supplies	41				21
Taxes payable	(2		)		(25		)
Accrued interest	42				42
Other	(38		)		(24		)
Other operating activities
Defined benefit plans - funding	(22		)		(33		)
Expenditures for asset retirement obligations	(6		)		(2		)
Other assets	1				—
Other liabilities	3				—
Net cash provided by operating activities	312				303
Cash Flows from Investing Activities
Expenditures for property, plant and equipment	(184		)		(219		)
Net cash provided by (used in) investing activities	(184		)		(219		)
Cash Flows from Financing Activities
Net increase (decrease) in notes payable with affiliate	(81		)		93
Net increase (decrease) in short-term debt	58				(149		)
Debt issuance and credit facility costs	(1		)		(1		)
Distributions to member	(102		)		(29		)
Net cash provided by (used in) financing activities	(126		)		(86		)
Net Increase (Decrease) in Cash and Cash Equivalents	2				(2		)
Cash and Cash Equivalents at Beginning of Period	13				30
Cash and Cash Equivalents at End of Period	$	15			$	28
Supplemental Disclosure of Cash Flow Information
Significant non-cash transactions:
Accrued expenditures for property, plant and equipment at March 31,	$	75			$	117

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

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CONDENSED CONSOLIDATED BALANCE SHEETS

LG&E and KU Energy LLC and Subsidiaries

(Unaudited)

(Millions of Dollars)

	March 31, 2017				December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	15			$	13
Accounts receivable (less reserve: 2017, $24; 2016, $24)
Customer	215				235
Other	24				17
Unbilled revenues	148				170
Fuel, materials and supplies	256				297
Prepayments	25				24
Regulatory assets	23				20
Other current assets	7				4
Total Current Assets	713				780
Property, Plant and Equipment
Regulated utility plant	12,810				12,746
Less: accumulated depreciation - regulated utility plant	1,550				1,465
Regulated utility plant, net	11,260				11,281
Construction work in progress	376				317
Property, Plant and Equipment, net	11,636				11,598
Other Noncurrent Assets
Regulatory assets	828				824
Goodwill	996				996
Other intangibles	93				95
Other noncurrent assets	78				78
Total Other Noncurrent Assets	1,995				1,993
Total Assets	$	14,344			$	14,371

 

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

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CONDENSED CONSOLIDATED BALANCE SHEETS

LG&E and KU Energy LLC and Subsidiaries

(Unaudited)

(Millions of Dollars)

	March 31, 2017				December 31, 2016
Liabilities and Equity
Current Liabilities
Short-term debt	$	243			$	185
Long-term debt due within one year	94				194
Notes payable with affiliate	82				163
Accounts payable	204				251
Accounts payable to affiliates	13				6
Customer deposits	56				56
Taxes	37				39
Price risk management liabilities	4				4
Regulatory liabilities	16				18
Interest	74				32
Asset retirement obligations	58				60
Other current liabilities	88				119
Total Current Liabilities	969				1,127
Long-term Debt
Long-term debt	4,572				4,471
Long-term debt to affiliate	400				400
Total Long-term Debt	4,972				4,871
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes	1,786				1,735
Investment tax credits	131				132
Accrued pension obligations	332				350
Asset retirement obligations	374				373
Regulatory liabilities	897				899
Price risk management liabilities	25				27
Other deferred credits and noncurrent liabilities	188				190
Total Deferred Credits and Other Noncurrent Liabilities	3,733				3,706
Commitments and Contingent Liabilities (Notes 6 and 9)
Member's Equity	4,670				4,667
Total Liabilities and Equity	$	14,344			$	14,371

 

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

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

LG&E and KU Energy LLC and Subsidiaries

(Unaudited)

(Millions of Dollars)

	Member's Equity
December 31, 2016	$	4,667
Net income	103
Distributions to member	(102		)
Other comprehensive income	2
March 31, 2017	$	4,670
December 31, 2015	$	4,517
Net income	120
Distributions to member	(29		)
Other comprehensive income	1
March 31, 2016	$	4,609

 

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

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CONDENSED STATEMENTS OF INCOME

Louisville Gas and Electric Company

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Operating Revenues
Retail and wholesale	$	374			$	375
Electric revenue from affiliate	17				11
Total Operating Revenues	391				386
Operating Expenses
Operation
Fuel	80				78
Energy purchases	64				62
Energy purchases from affiliate	2				2
Other operation and maintenance	87				87
Depreciation	44				41
Taxes, other than income	8				8
Total Operating Expenses	285				278
Operating Income	106				108
Other Income (Expense) - net	(2		)		—
Interest Expense	17				17
Income Before Income Taxes	87				91
Income Taxes	33				35
Net Income (a)	$	54			$	56

 

(a)	Net income equals comprehensive income.

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

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CONDENSED STATEMENTS OF CASH FLOWS

Louisville Gas and Electric Company

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Cash Flows from Operating Activities
Net income	$	54			$	56
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	44				41
Amortization	3				3
Defined benefit plans - expense	2				3
Deferred income taxes and investment tax credits	31				37
Change in current assets and current liabilities
Accounts receivable	13				(5		)
Accounts receivable from affiliates	1				(4		)
Accounts payable	(12		)		5
Accounts payable to affiliates	(4		)		—
Unbilled revenues	9				7
Fuel, materials and supplies	33				31
Taxes payable	(28		)		(9		)
Accrued interest	13				13
Other	(11		)		(9		)
Other operating activities
Defined benefit plans - funding	(1		)		(13		)
Expenditures for asset retirement obligations	(4		)		(1		)
Other assets	2				—
Other liabilities	(3		)		2
Net cash provided by operating activities	142				157
Cash Flows from Investing Activities
Expenditures for property, plant and equipment	(94		)		(109		)
Net cash provided by (used in) investing activities	(94		)		(109		)
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt	38				(60		)
Debt issuance and credit facility costs	—				(1		)
Payment of common stock dividends to parent	(87		)		(25		)
Contributions from parent	—				30
Net cash provided by (used in) financing activities	(49		)		(56		)
Net Increase (Decrease) in Cash and Cash Equivalents	(1		)		(8		)
Cash and Cash Equivalents at Beginning of Period	5				19
Cash and Cash Equivalents at End of Period	$	4			$	11
Supplemental Disclosure of Cash Flow Information
Significant non-cash transactions:
Accrued expenditures for property, plant and equipment at March 31,	$	34			$	77

 

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

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CONDENSED BALANCE SHEETS

Louisville Gas and Electric Company

(Unaudited)

(Millions of Dollars, shares in thousands)

	March 31, 2017				December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	4			$	5
Accounts receivable (less reserve: 2017, $2; 2016, $2)
Customer	97				109
Other	10				11
Accounts receivable from affiliates	27				28
Unbilled revenues	66				75
Fuel, materials and supplies	110				143
Prepayments	12				12
Regulatory assets	12				9
Other current assets	2				1
Total Current Assets	340				393
Property, Plant and Equipment
Regulated utility plant	5,396				5,357
Less: accumulated depreciation - regulated utility plant	534				498
Regulated utility plant, net	4,862				4,859
Construction work in progress	156				133
Property, Plant and Equipment, net	5,018				4,992
Other Noncurrent Assets
Regulatory assets	448				450
Goodwill	389				389
Other intangibles	57				59
Other noncurrent assets	16				17
Total Other Noncurrent Assets	910				915
Total Assets	$	6,268			$	6,300

 

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)

	March 31, 2017				December 31, 2016
Liabilities and Equity
Current Liabilities
Short-term debt	$	207			$	169
Long-term debt due within one year	94				194
Accounts payable	115				148
Accounts payable to affiliates	22				26
Customer deposits	27				27
Taxes	12				40
Price risk management liabilities	4				4
Regulatory liabilities	5				5
Interest	24				11
Asset retirement obligations	29				41
Other current liabilities	27				36
Total Current Liabilities	566				701
Long-term Debt	1,524				1,423
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes	1,006				974
Investment tax credits	36				36
Accrued pension obligations	50				53
Asset retirement obligations	114				104
Regulatory liabilities	419				419
Price risk management liabilities	25				27
Other deferred credits and noncurrent liabilities	85				87
Total Deferred Credits and Other Noncurrent Liabilities	1,735				1,700
Commitments and Contingent Liabilities (Notes 6 and 9)
Stockholder's Equity
Common stock - no par value (a)	424				424
Additional paid-in capital	1,682				1,682
Earnings reinvested	337				370
Total Equity	2,443				2,476
Total Liabilities and Equity	$	6,268			$	6,300

 

(a)	75,000 shares authorized; 21,294 shares issued and outstanding at March 31, 2017 and December 31, 2016 .

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

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CONDENSED STATEMENTS OF EQUITY

Louisville Gas and Electric Company

(Unaudited)

(Millions of Dollars)

	Common stock shares outstanding (a)			Common stock				Additional paid-in capital				Earnings reinvested				Total
December 31, 2016	21,294			$	424			$	1,682			$	370			$	2,476
Net income												54				54
Cash dividends declared on common stock												(87		)		(87		)
March 31, 2017	21,294			$	424			$	1,682			$	337			$	2,443
December 31, 2015	21,294			$	424			$	1,611			$	295			$	2,330
Net income												56				56
Capital contributions from LKE								30								30
Cash dividends declared on common stock												(25		)		(25		)
March 31, 2016	21,294			$	424			$	1,641			$	326			$	2,391

 

(a)	Shares in thousands. All common shares of LG&E stock are owned by LKE.

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

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CONDENSED STATEMENTS OF INCOME

Kentucky Utilities Company

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Operating Revenues
Retail and wholesale	$	435			$	451
Electric revenue from affiliate	2				2
Total Operating Revenues	437				453
Operating Expenses
Operation
Fuel	111				120
Energy purchases	5				4
Energy purchases from affiliate	17				11
Other operation and maintenance	109				106
Depreciation	60				58
Taxes, other than income	8				7
Total Operating Expenses	310				306
Operating Income	127				147
Other Income (Expense) - net	(1		)		(2		)
Interest Expense	24				24
Income Before Income Taxes	102				121
Income Taxes	39				46
Net Income (a)	$	63			$	75

 

(a)	Net income approximates comprehensive income.

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

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CONDENSED STATEMENTS OF CASH FLOWS

Kentucky Utilities Company

(Unaudited)

(Millions of Dollars)

	Three Months Ended March 31,
	2017				2016
Cash Flows from Operating Activities
Net income	$	63			$	75
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	60				58
Amortization	4				4
Defined benefit plans - expense	2				2
Deferred income taxes and investment tax credits	37				44
Change in current assets and current liabilities
Accounts receivable	8				(8		)
Accounts payable	(4		)		23
Accounts payable to affiliates	(7		)		2
Unbilled revenues	13				1
Fuel, materials and supplies	8				(10		)
Taxes payable	(34		)		(8		)
Accrued interest	22				22
Other	(12		)		1
Other operating activities
Defined benefit plans - funding	(19		)		(10		)
Expenditures for asset retirement obligations	(2		)		(1		)
Other assets	(1		)		—
Other liabilities	1				—
Net cash provided by operating activities	139				195
Cash Flows from Investing Activities
Expenditures for property, plant and equipment	(89		)		(110		)
Net cash provided by (used in) investing activities	(89		)		(110		)
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt	20				(14		)
Debt issuance and credit facility costs	—				(1		)
Payment of common stock dividends to parent	(70		)		(64		)
Net cash provided by (used in) financing activities	(50		)		(79		)
Net Increase (Decrease) in Cash and Cash Equivalents	—				6
Cash and Cash Equivalents at Beginning of Period	7				11
Cash and Cash Equivalents at End of Period	$	7			$	17
Supplemental Disclosure of Cash Flow Information
Significant non-cash transactions:
Accrued expenditures for property, plant and equipment at March 31,	$	41			$	40

 

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

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CONDENSED BALANCE SHEETS

Kentucky Utilities Company

(Unaudited)

(Millions of Dollars, shares in thousands)

	March 31, 2017				December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	7			$	7
Accounts receivable (less reserve: 2017, $1; 2016, $2)
Customer	118				126
Other	13				5
Unbilled revenues	82				95
Fuel, materials and supplies	146				154
Prepayments	12				12
Regulatory assets	11				11
Other current assets	5				3
Total Current Assets	394				413
Property, Plant and Equipment
Regulated utility plant	7,405				7,382
Less: accumulated depreciation - regulated utility plant	1,014				965
Regulated utility plant, net	6,391				6,417
Construction work in progress	219				181
Property, Plant and Equipment, net	6,610				6,598
Other Noncurrent Assets
Regulatory assets	380				374
Goodwill	607				607
Other intangibles	36				36
Other noncurrent assets	59				57
Total Other Noncurrent Assets	1,082				1,074
Total Assets	$	8,086			$	8,085

 

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

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CONDENSED BALANCE SHEETS

Kentucky Utilities Company

(Unaudited)

(Millions of Dollars, shares in thousands)

	March 31, 2017				December 31, 2016
Liabilities and Equity
Current Liabilities
Short-term debt	$	36			$	16
Accounts payable	76				78
Accounts payable to affiliates	50				56
Customer deposits	29				29
Taxes	11				45
Regulatory liabilities	11				13
Interest	38				16
Asset retirement obligations	29				19
Other current liabilities	27				36
Total Current Liabilities	307				308
Long-term Debt	2,327				2,327
Deferred Credits and Other Noncurrent Liabilities
Deferred income taxes	1,208				1,170
Investment tax credits	95				96
Accrued pension obligations	44				62
Asset retirement obligations	260				269
Regulatory liabilities	478				480
Other deferred credits and noncurrent liabilities	50				50
Total Deferred Credits and Other Noncurrent Liabilities	2,135				2,127
Commitments and Contingent Liabilities (Notes 6 and 9)
Stockholder's Equity
Common stock - no par value (a)	308				308
Additional paid-in capital	2,616				2,616
Accumulated other comprehensive loss	—				(1		)
Earnings reinvested	393				400
Total Equity	3,317				3,323
Total Liabilities and Equity	$	8,086			$	8,085

 

(a)	80,000 shares authorized; 37,818 shares issued and outstanding at March 31, 2017 and December 31, 2016 .

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

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CONDENSED STATEMENTS OF EQUITY

Kentucky Utilities Company

(Unaudited)

(Millions of Dollars)

	Common stock shares outstanding (a)			Common stock				Additional paid-in capital				Earnings reinvested				Accumulated other comprehensive loss				Total
December 31, 2016	37,818			$	308			$	2,616			$	400			$	(1	)		$	3,323
Net income												63								63
Cash dividends declared on common stock												(70		)						(70		)
Other comprehensive income																1				1
March 31, 2017	37,818			$	308			$	2,616			$	393			$	—			$	3,317
December 31, 2015	37,818			$	308			$	2,596			$	383			$	—			$	3,287
Net income												75								75
Cash dividends declared on common stock												(64		)						(64		)
March 31, 2016	37,818			$	308			$	2,596			$	394			$	—			$	3,298

 

(a)	Shares in thousands. All common shares of KU stock are owned by LKE.

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

 

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Combined Notes to Condensed Financial Statements (Unaudited)

 

1. Interim Financial Statements

 

(All Registrants)

 

Capitalized terms and abbreviations appearing in the unaudited combined notes to condensed financial statements are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted. The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrants' related activities and disclosures. Within combined disclosures, amounts are disclosed for any Registrant when significant.

 

The accompanying unaudited condensed financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation in accordance with GAAP are reflected in the condensed financial statements. All adjustments are of a normal recurring nature, except as otherwise disclosed. Each Registrant's Balance Sheet at December 31, 2016 is derived from that Registrant's 2016 audited Balance Sheet. The financial statements and notes thereto should be read in conjunction with the financial statements and notes contained in each Registrant's 2016 Form 10-K. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017 or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.

 

The classification of certain prior period amounts has been changed to conform to the presentation in the March 31, 2017 financial statements.

 

2. Summary of Significant Accounting Policies

 

(All Registrants)

 

The following accounting policy disclosures represent updates to Note 1 in each indicated Registrant's 2016 Form 10-K and should be read in conjunction with those disclosures.

 

Accounts Receivable (PPL and PPL Electric)

 

In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative electricity suppliers at a discount, which reflects a provision for uncollectible accounts. The alternative electricity suppliers have no continuing involvement or interest in the purchased accounts receivable. Accounts receivable that are acquired are initially recorded at fair value on the date of acquisition. During the three months ended March 31, 2017 and 2016 , PPL Electric purchased $356 million and $382 million of accounts receivable from alternative electricity suppliers.

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3. Segment and Related Information

 

(PPL)

 

See Note 2 in PPL's 2016 Form 10-K for a discussion of reportable segments and related information.

Income Statement data for the segments and reconciliation to PPL's consolidated results for the periods ended March 31 are as follows:

	Three Months
	2017				2016
Income Statement Data
Revenues from external customers
U.K. Regulated	$	568			$	595
Kentucky Regulated	809				826
Pennsylvania Regulated	573				585
Corporate and Other	1				5
Total	$	1,951			$	2,011
Net Income
U.K. Regulated (a)	$	286			$	289
Kentucky Regulated	95				112
Pennsylvania Regulated	79				94
Corporate and Other	(57		)		(14		)
Total	$	403			$	481

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

Balance Sheet data for the segments and reconciliation to PPL's consolidated results as of:

	March 31, 2017				December 31, 2016
Balance Sheet Data
Assets
U.K. Regulated (a)	$	15,039			$	14,537
Kentucky Regulated	14,010				14,037
Pennsylvania Regulated	9,699				9,426
Corporate and Other (b)	286				315
Total	$	39,034			$	38,315

 

(a)	Includes $10.9 billion and $10.8 billion of net PP&E as of March 31, 2017 and December 31, 2016 . WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.

(b)	Primarily consists of unallocated items, including cash, PP&E and the elimination of inter-segment transactions.

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

 

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

4. Earnings Per Share

 

(PPL)

 

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

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

	Three Months
	2017				2016
Income (Numerator)
Net income	$	403			$	481
Less amounts allocated to participating securities	1				2
Net income available to PPL common shareowners - Basic and Diluted	$	402			$	479
Shares of Common Stock (Denominator)
Weighted-average shares - Basic EPS	680,882				675,441
Add incremental non-participating securities:
Share-based payment awards	2,202				3,376
Weighted-average shares - Diluted EPS	683,084				678,817
Basic EPS
Net Income available to PPL common shareowners	$	0.59			$	0.71
Diluted EPS
Net Income available to PPL common shareowners	$	0.59			$	0.71

 

For the periods ended March 31 , PPL issued common stock related to stock-based compensation plans and the DRIP as follows (in thousands):

	Three Months
	2017			2016
Stock-based compensation plans (a)	887			2,125
DRIP	445			402

 

(a)	Includes stock options exercised, vesting of performance units, vesting of restricted stock and restricted stock units and conversion of stock units granted to directors.

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

For the periods ended March 31 , the following shares (in thousands) were excluded from the computations of diluted EPS because the effect would have been antidilutive.

	Three Months
	2017			2016
Stock options	696			696

 

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5. Income Taxes

 

Reconciliations of income taxes for the periods ended March 31 are as follows.

(PPL)
	Three Months
	2017				2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%	$	186			$	231
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	13				13
Valuation allowance adjustments	5				6
Impact of lower U.K. income tax rates	(48		)		(54		)
U.S. income tax on foreign earnings - net of foreign tax credit	(9		)		(2		)
Impact of the U.K. Finance Acts	(3		)		—
Depreciation not normalized	(3		)		(1		)
Interest benefit on U.K. financing entities	(4		)		(5		)
Stock-based compensation	(3		)		(8		)
Other	(5		)		(1		)
Total increase (decrease)	(57		)		(52		)
Total income taxes	$	129			$	179

(PPL Electric)
	Three Months
	2017				2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%	$	44			$	53
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	8				9
Depreciation not normalized	(2		)		(1		)
Stock-based compensation	(2		)		(5		)
Total increase (decrease)	4				3
Total income taxes	$	48			$	56

(LKE)
	Three Months
	2017				2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%	$	58			$	67
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	6				7
Other	(1		)		(2		)
Total increase (decrease)	5				5
Total income taxes	$	63			$	72

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

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(KU)
	Three Months
	2017				2016
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%	$	36			$	42
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	4				4
Other	(1		)		—
Total increase (decrease)	3				4
Total income taxes	$	39			$	46

6. Utility Rate Regulation

 

(All Registrants)

 

The following table provides information about the regulatory assets and liabilities of cost-based rate-regulated utility operations.

	PPL								PPL Electric
	March 31, 2017				December 31, 2016				March 31, 2017				December 31, 2016
Current Regulatory Assets:
Environmental cost recovery	$	6			$	6			$	—			$	—
Generation formula rate	11				11				—				—
Transmission service charge	—				7				—				7
Smart meter rider	8				6				8				6
Storm costs	4				5				4				5
Other	7				4				1				1
Total current regulatory assets (a)	$	36			$	39			$	13			$	19
Noncurrent Regulatory Assets:
Defined benefit plans	$	936			$	947			$	543			$	549
Taxes recoverable through future rates	343				340				343				340
Storm costs	44				57				—				9
Unamortized loss on debt	58				61				34				36
Interest rate swaps	126				129				—				—
Accumulated cost of removal of utility plant	160				159				160				159
AROs	228				211				—				—
Other	13				14				—				1
Total noncurrent regulatory assets	$	1,908			$	1,918			$	1,080			$	1,094

Current Regulatory Liabilities:
Generation supply charge	$	19			$	23			$	19			$	23
Transmission service charge	5				—				5				—
Demand side management	2				3				—				—
Universal service rider	14				14				14				14
Transmission formula rate	6				15				6				15
Fuel adjustment clause	13				11				—				—
Act 129 compliance rider	16				17				16				17
Storm damage expense	5				13				5				13
Other	2				5				1				1
Total current regulatory liabilities	$	82			$	101			$	66			$	83

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	PPL								PPL Electric
	March 31, 2017				December 31, 2016				March 31, 2017				December 31, 2016
Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	701			$	700			$	—			$	—
Power purchase agreement - OVEC (b)	74				75				—				—
Net deferred tax assets	22				23				—				—
Defined benefit plans	23				23				—				—
Interest rate swaps	76				78				—				—
Other	1				—				—				—
Total noncurrent regulatory liabilities	$	897			$	899			$	—			$	—

	LKE								LG&E								KU
	March 31, 2017				December 31, 2016				March 31, 2017				December 31, 2016				March 31, 2017				December 31, 2016
Current Regulatory Assets:
Environmental cost recovery	$	6			$	6			$	6			$	6			$	—			$	—
Generation formula rate	11				11				—				—				11				11
Other	6				3				6				3				—				—
Total current regulatory assets	$	23			$	20			$	12			$	9			$	11			$	11
Noncurrent Regulatory Assets:
Defined benefit plans	$	393			$	398			$	242			$	246			$	151			$	152
Storm costs	44				48				24				26				20				22
Unamortized loss on debt	24				25				15				16				9				9
Interest rate swaps	126				129				86				88				40				41
AROs	228				211				77				70				151				141
Plant retirement costs	3				4				—				—				3				4
Other	10				9				4				4				6				5
Total noncurrent regulatory assets	$	828			$	824			$	448			$	450			$	380			$	374

Current Regulatory Liabilities:
Demand side management	$	2			$	3			$	1			$	2			$	1			$	1
Fuel adjustment clause	13				11				4				2				9				9
Other	1				4				—				1				1				3
Total current regulatory liabilities	$	16			$	18			$	5			$	5			$	11			$	13
Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant	$	701			$	700			$	308			$	305			$	393			$	395
Power purchase agreement - OVEC (b)	74				75				51				52				23				23
Net deferred tax assets	22				23				22				23				—				—
Defined benefit plans	23				23				—				—				23				23
Interest rate swaps	76				78				38				39				38				39
Other	1				—				—				—				1				—
Total noncurrent regulatory liabilities	$	897			$	899			$	419			$	419			$	478			$	480

  

(a)	For PPL, these amounts are included in "Other current assets" on the Balance Sheets.

(b)	This liability was recorded as an offset to an intangible asset that was recorded at fair value upon the acquisition of LKE by PPL.

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Regulatory Matters

 

Kentucky Activities

 

Rate Case Proceedings (PPL, LKE, LG&E and KU)

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

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

Gas Franchise (LKE and LG&E)

 

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

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

Pennsylvania Activities ( PPL and PPL Electric )

 

Act 129

 

Act 129 requires Pennsylvania Electric Distribution Companies (EDCs) to meet, by specified dates, specified goals for reduction in customer electricity usage and peak demand. EDCs not meeting the requirements of Act 129 are subject to significant penalties. In November 2015, PPL Electric filed with the PUC its Act 129 Phase III Energy Efficiency and Conservation Plan for the period June 1, 2016 through May 31, 2021. In January 2016, PPL Electric and the other parties to the case reached a settlement of all major issues and filed that settlement with the Administrative Law Judge. In June 2016, the PUC issued a final order approving PPL Electric's Phase III Plan as modified by the settlement, allowing PPL Electric to recover, through the Act 129 compliance rider, a maximum $313 million in program cost over the five -year period June 1, 2016 through May 31, 2021.     

 

Act 129 also requires Default Service Providers (DSP) to provide electricity generation supply service to customers pursuant to a PUC-approved default service procurement plan through auctions, requests for proposal and bilateral contracts at the sole discretion of the DSP. Act 129 requires a mix of spot market purchases, short-term contracts and long-term contracts ( 4 to 20

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years ), with long-term contracts limited to 25% of load unless otherwise approved by the PUC. A DSP is able to recover the costs associated with its default service procurement plan.

 

PPL Electric has received PUC approval of its biannual DSP procurement plans for all prior periods required under Act 129. In January 2016, PPL Electric filed a Petition for Approval of a new DSP procurement plan with the PUC for the period June 1, 2017 through May 31, 2021. The parties to the proceeding reached a settlement on all but one issue and a partial settlement agreement and briefs on the open issue were submitted to the Administrative Law Judge (ALJ) in July 2016. In August 2016, the ALJ issued an initial decision, and certain parties filed exceptions and reply exceptions. In October 2016, the PUC issued an order approving the partial settlement agreement and adopting the initial decision with minor modifications. In November 2016, Retail Electric Supply Association (RESA) filed a Petition for Reconsideration of the portion of the October 2016 order that approved the Customer Assistance Program Standard Offer Referral Program (CAP-SOP). In January 2017, the PUC issued an order denying RESA's Petition for Reconsideration and closing the record. In February 2017, RESA filed a Petition for Review with the Commonwealth Court of Pennsylvania regarding the CAP-SOP. This matter remains pending before the court.

7. Financing Activities

 

Credit Arrangements and Short-term Debt

 

(All Registrants)

 

The Registrants maintain credit facilities to enhance liquidity, provide credit support and provide a backstop to commercial paper programs. For reporting purposes, on a consolidated basis, the credit facilities and commercial paper programs of PPL Electric, LKE, LG&E and KU also apply to PPL and the credit facilities and commercial paper programs of LG&E and KU also apply to LKE. The amounts borrowed below are recorded as "Short-term debt" on the Balance Sheets. The following credit facilities were in place at: 

	March 31, 2017																		December 31, 2016
	Expiration Date		Capacity				Borrowed				Letters of Credit and Commercial Paper Issued				Unused Capacity				Borrowed				Letters of Credit and Commercial Paper Issued
PPL
U.K.
WPD plc
Syndicated Credit Facility (a)	Jan. 2022		£	210			£	161			£	—			£	49			£	160			£	—
Term Loan Facility (b)	Dec. 2017		230				230				—				—				—				—
WPD (South West)
Syndicated Credit Facility (c)	July 2021		245				72				—				173				110				—
WPD (East Midlands)
Syndicated Credit Facility (d)	July 2021		300				128				—				172				9				—
WPD (West Midlands)
Syndicated Credit Facility	July 2021		300				—				—				300				—				—
Uncommitted Credit Facilities (e)			90				—				4				86				60				4
Total U.K. Credit Facilities (f)			£	1,375			£	591			£	4			£	780			£	339			£	4
U.S.
PPL Capital Funding
Syndicated Credit Facility	Jan. 2022		$	950			$	—			$	189			$	761			$	—			$	20
Syndicated Credit Facility	Nov. 2018		300				—				—				300				—				—
Bilateral Credit Facility	Mar. 2018		150				—				17				133				—				17
Total PPL Capital Funding Credit Facilities			$	1,400			$	—			$	206			$	1,194			$	—			$	37

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	March 31, 2017																		December 31, 2016
	Expiration Date		Capacity				Borrowed				Letters of Credit and Commercial Paper Issued				Unused Capacity				Borrowed				Letters of Credit and Commercial Paper Issued
PPL Electric
Syndicated Credit Facility	Jan. 2022		$	650			$	—			$	500			$	150			$	—			$	296
LKE
Syndicated Credit Facility	Oct. 2018		$	75			$	—			$	—			$	75			$	—			$	—
LG&E
Syndicated Credit Facility	Jan. 2022		$	500			$	—			$	207			$	293			$	—			$	169
KU
Syndicated Credit Facility	Jan. 2022		$	400			$	—			$	36			$	364			$	—			$	16
Letter of Credit Facility	Oct. 2017		198				—				198				—				—				198
Total KU Credit Facilities			$	598			$	—			$	234			$	364			$	—			$	214

 

(a)	The amounts borrowed at March 31, 2017 and December 31, 2016 were USD-denominated borrowings of $200 million for both periods, which bore interest at 1.61% and 1.43% . The unused capacity reflects the amount borrowed in GBP of £161 million as of the date borrowed.

(b)	The amount borrowed at March 31, 2017 was a GBP-denominated borrowing which equated to $286 million and bore interest at 1.51% .

(c)	The amounts borrowed at March 31, 2017 and December 31, 2016 were GBP-denominated borrowings which equated to $90 million and $137 million and bore interest at 0.66% for both periods.

(d)	The amounts borrowed at March 31, 2017 and December 31, 2016 were GBP-denominated borrowings which equated to $159 million and $11 million and bore interest at 0.66% for both periods.

(e)	The amount borrowed at December 31, 2016 was a GBP-denominated borrowing which equated to $75 million and bore interest at 1.26% .

(f)	At March 31, 2017 , the unused capacity under the U.K. credit facilities was $972 million .

PPL, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as necessary. Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's Syndicated Credit Facility. The following commercial paper programs were in place at: 

	March 31, 2017														December 31, 2016
	Weighted - Average Interest Rate		Capacity				Commercial Paper Issuances				Unused Capacity				Weighted - Average Interest Rate		Commercial Paper Issuances
PPL Capital Funding	1.25%		$	1,000			$	189			$	811			1.10%		$	20
PPL Electric	1.26%		650				499				151				1.05%		295
LG&E	1.19%		350				207				143				0.94%		169
KU	1.18%		350				36				314				0.87%		16
Total			$	2,350			$	931			$	1,419					$	500

 

(LKE)

 

See Note 10 for discussion of intercompany borrowings.

Long-term Debt

(PPL)

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

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(PPL, LKE and LG&E)

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

(PPL)

 

ATM Program

 

In February 2015, PPL entered into two separate equity distribution agreements, pursuant to which PPL may sell, from time to time, up to an aggregate of $500 million of its common stock. For the periods ended March 31 , PPL issued the following:

	Three Months
	2017				2016
Number of shares (in thousands)	1,364				—
Average share price	$	36.66			$	—
Net Proceeds	$	50			$	—

 

Distributions

 

In February 2017 , PPL declared a quarterly common stock dividend, payable April 3, 2017 , of 39.5 cents per share (equivalent to $1.58 per annum). Future dividends, declared at the discretion of the Board of Directors, will depend upon future earnings, cash flows, financial and legal requirements and other factors.

8. Defined Benefits

 

(PPL, LKE and LG&E)

 

Certain net periodic defined benefit costs are applied to accounts that are further distributed among capital, expense and regulatory assets, including certain costs allocated to applicable subsidiaries for plans sponsored by PPL Services and LKE. Following are the net periodic defined benefit costs (credits) of the plans sponsored by PPL and its subsidiaries, LKE and its subsidiaries and LG&E for the periods ended March 31 :

	Pension Benefits
	Three Months
	U.S.								U.K.
	2017				2016				2017				2016
PPL
Service cost	$	17			$	17			$	19			$	18
Interest cost	42				43				43				62
Expected return on plan assets	(57		)		(56		)		(125		)		(133		)
Amortization of:
Prior service cost	2				1				—				—
Actuarial loss	20				15				35				37
Net periodic defined benefit costs (credits) before special termination benefits	24				20				(28		)		(16		)
Special termination benefits (a)	2				—				—				—
Net periodic defined benefit costs (credits)	$	26			$	20			$	(28	)		$	(16	)

(a)	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
	2017				2016
LKE
Service cost	$	7			$	6
Interest cost	16				17
Expected return on plan assets	(22		)		(21		)
Amortization of:
Prior service cost	2				1
Actuarial loss	11				5
Net periodic defined benefit costs	$	14			$	8
LG&E
Interest cost	$	3			$	3
Expected return on plan assets	(5		)		(5		)
Amortization of:
Prior service cost	1				1
Actuarial loss	3				2
Net periodic defined benefit costs	$	2			$	1

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

   

(PPL Electric, LG&E and KU)

 

In addition to the specific plans it sponsors, LG&E is allocated costs of defined benefit plans sponsored by LKE. PPL Electric and KU do not directly sponsor any defined benefit plans. PPL Electric is allocated costs of defined benefit plans sponsored by PPL Services and KU is allocated costs of defined benefit plans sponsored by LKE. These allocations are based on participation in those plans, which management believes are reasonable. For the periods ended March 31 , PPL Services allocated the following net periodic defined benefit costs to PPL Electric, and LKE allocated the following net periodic defined benefit costs to LG&E and KU:

	Three Months
	2017				2016
PPL Electric	$	8			$	6
LG&E	3				2
KU	4				3

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Expected Cash Flows - U.K. Pension Plans

(PPL)

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

9. Commitments and Contingencies

 

Legal Matters

 

(All Registrants)

 

PPL and its subsidiaries are involved in legal proceedings, claims and litigation in the ordinary course of business. PPL and its subsidiaries cannot predict the outcome of such matters, or whether such matters may result in material liabilities, unless otherwise noted.

 

WKE Indemnification (PPL and LKE)

 

See footnote (e) to the table in "Guarantees and Other Assurances" below for information on an LKE indemnity relating to its former WKE lease, including related legal proceedings.

 

Cane Run Environmental Claims (PPL, LKE and LG&E)

 

In December 2013, six residents, on behalf of themselves and others similarly situated, filed a class action complaint against LG&E and PPL in the U.S. District Court for the Western District of Kentucky alleging violations of the Clean Air Act and RCRA. In addition, these plaintiffs assert common law claims of nuisance, trespass and negligence. These plaintiffs seek injunctive relief and civil penalties, plus costs and attorney fees, for the alleged statutory violations. Under the common law claims, these plaintiffs seek monetary compensation and punitive damages for property damage and diminished property values for a class consisting of residents within four miles of the Cane Run plant. In their individual capacities, these plaintiffs sought compensation for alleged adverse health effects. In response to a motion to dismiss filed by PPL and LG&E, in July 2014, the court dismissed the plaintiffs' RCRA claims and all but one Clean Air Act claim, but declined to dismiss the common law tort claims. In November 2016, plaintiffs filed an amended complaint removing the personal injury claims and removing certain previously named plaintiffs. In February 2017, the District Court issued an order dismissing PPL as a defendant and dismissing the final federal claim against LG&E under the Clean Air Act, and directed the parties to submit briefs regarding whether the court should continue to exercise supplemental jurisdiction regarding the remaining state law-only claims. On April 13, 2017, the District Court issued an order declining to exercise supplemental jurisdiction and dismissing the case in its entirety, subject to certain federal appeals or state court re-filing rights of the parties. PPL, LKE and LG&E cannot predict the outcome of this matter. LG&E retired one coal-fired unit at the Cane Run plant in March 2015 and the remaining two coal-fired units at the plant in June 2015.

 

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

 

In October 2015, KU received a notice of intent from Earthjustice and the Sierra Club informing certain federal and state agencies of the Sierra Club's intent to file a citizen suit, following expiration of the mandatory 60 -day notification period, for alleged violations of the Clean Water Act. The claimants allege discharges at the E.W. Brown plant in violation of applicable rules and the plant's water discharge permit. The claimants assert that, unless the alleged discharges are promptly brought into compliance, it intends to seek civil penalties, injunctive relief and attorney's fees. In November 2015, the claimants submitted an amended notice of intent to add the Kentucky Waterways Alliance as a claimant. In October 2016, the claimants submitted an additional notice of intent alleging management of waste in a manner that may present an imminent and substantial endangerment under the RCRA. PPL, LKE and KU cannot predict the outcome of this matter or the potential impact on the operations of the E.W. Brown plant, including increased capital or operating costs, if any.

Trimble County Water Discharge Permit (PPL, LKE, LG&E and KU)

 

In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet (KEEC) challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010,

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

 

Regulatory Issues ( All Registrants)

 

See Note 6 for information on regulatory matters related to utility rate regulation.

Electricity - Reliability Standards

 

The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk electric system in North America. The FERC oversees this process and independently enforces the Reliability Standards.

 

The Reliability Standards have the force and effect of law and apply to certain users of the bulk electric system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties for certain violations.

 

PPL Electric, LG&E and KU monitor their compliance with the Reliability Standards and self-report or self-log potential violations of applicable reliability requirements whenever identified, and submit accompanying mitigation plans, as required. The resolution of a small number of potential violations is pending. Penalties incurred to date have not been significant. Any Regional Reliability Entity (including RFC or SERC) determination concerning the resolution of violations of the Reliability Standards remains subject to the approval of the NERC and the FERC.

 

In the course of implementing their programs to ensure compliance with the Reliability Standards by those PPL affiliates subject to the standards, certain other instances of potential non-compliance may be identified from time to time. The Registrants cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.

 

Environmental Matters

 

(All Registrants)

 

Due to the environmental issues discussed below or other environmental matters, it may be necessary for the Registrants to modify, curtail, replace or cease operation of certain facilities or performance of certain operations to comply with statutes, regulations and other requirements of regulatory bodies or courts. In addition, legal challenges to new environmental permits or rules add to the uncertainty of estimating the future cost of these permits and rules. Finally, the regulatory reviews specified in the President's March 2017 Executive Order (the March 2017 Executive Order) promoting energy independence and economic growth could result in future regulatory changes and additional uncertainty.

WPD's distribution businesses are subject to certain statutory and regulatory environmental requirements. It may be necessary for WPD to incur significant compliance costs, which costs may be recoverable through rates subject to the approval of Ofgem. PPL believes that WPD has taken and continues to take measures to comply with all applicable environmental laws and regulations.

 

LG&E and KU are entitled to recover, through the ECR mechanism, certain costs of complying with the Clean Air Act, as amended, and those federal, state or local environmental requirements applicable to coal combustion wastes and by-products from facilities that generate electricity from coal in accordance with approved compliance plans. Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before the companies' respective state regulatory authorities, or the FERC, if applicable. Because neither WPD nor PPL Electric owns any generating plants, their exposure to related environmental compliance costs is reduced. PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.

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Air

(PPL, LKE, LG&E and KU)

 

The Clean Air Act, which regulates air pollutants from mobile and stationary sources in the United States, has a significant impact on the operation of fossil fuel plants. The Clean Air Act requires the EPA periodically to review and establish concentration levels in the ambient air for six criteria pollutants to protect public health and welfare. These concentration levels are known as NAAQS. The six criteria pollutants are carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter and sulfur dioxide.

 

Federal environmental regulations of these criteria pollutants require states to adopt implementation plans, known as state implementation plans, for certain pollutants, which detail how the state will attain the standards that are mandated by the relevant law or regulation. Each state identifies the areas within its boundaries that meet the NAAQS (attainment areas) and those that do not (non-attainment areas), and must develop a state implementation plan both to bring non-attainment areas into compliance with the NAAQS and to maintain good air quality in attainment areas. In addition, for attainment of ozone and fine particulates standards, states in the eastern portion of the country, including Kentucky, are subject to a regional program developed by the EPA known as the Cross-State Air Pollution Rule. The NAAQS, future revisions to the NAAQS and state implementation plans, or future revisions to regional programs, may require installation of additional pollution controls, the costs of which PPL, LKE, LG&E and KU believe are subject to cost recovery.

Although PPL, LKE, LG&E and KU do not anticipate significant costs to comply with these programs, changes in market or operating conditions could result in different costs than anticipated.

 

National Ambient Air Quality Standards (NAAQS)

 

Under the Clean Air Act, the EPA is required to reassess the NAAQS for certain air pollutants on a five-year schedule. In 2008, the EPA revised the NAAQS for ozone and proposed to further strengthen the standard in November 2014. The EPA released a new ozone standard on October 1, 2015. The states and the EPA will determine attainment with the new ozone standard through review of relevant ambient air monitoring data, with attainment or nonattainment designations scheduled no later than October 2017. States are also obligated to address interstate transport issues associated with new ozone standards through the establishment of "good neighbor" state implementation plans for those states that are found to contribute significantly to another state's non-attainment. States that are not in the ozone transport region, including Kentucky, worked together to evaluate the need for further nitrogen oxide reductions from fossil-fueled plants with SCRs. Based on regulatory developments to date, PPL, LKE, LG&E and KU do not anticipate requirements for nitrogen oxide reductions beyond those currently required under the Cross State Air Pollution Rule.

 

In 2010, the EPA finalized revised NAAQS for sulfur dioxide and required states to identify areas that meet those standards and areas that are in "non-attainment". In July 2013, the EPA finalized non-attainment designations for parts of the country, including part of Jefferson County in Kentucky. Attainment must be achieved by 2018. Based on regulatory developments to date, PPL, LKE, LG&E and KU expect that certain previously required compliance measures, such as upgraded or new sulfur dioxide Scrubbers and additional sulfur dioxide limits at certain plants and the retirement of coal-fired generating units at LG&E's Cane Run plant and KU's Green River plant, are sufficient to achieve compliance with the new sulfur dioxide and ozone standards.

 

Mercury and Air Toxics Standards (MATS)

 

In February 2012, the EPA finalized the MATS rule requiring reductions of mercury and other hazardous air pollutants from fossil-fuel fired power plants, with an effective date of April 16, 2012. In a subsequent judicial challenge, the U.S. Supreme Court held that the EPA failed to properly consider costs when deciding to regulate hazardous air emissions from power plants under MATS. The U.S. Supreme Court remanded the matter to the D.C. Circuit Court which, in December 2015, remanded the rule to the EPA without vacating it. The EPA has proposed a supplemental finding regarding costs of the rule. The EPA's MATS rule remains in effect during the pendency of the ongoing proceedings.

 

LG&E and KU have installed significant controls in response to the MATS rule and in conjunction with compliance with other environmental requirements, including fabric-filter baghouses, upgraded Scrubbers or chemical additive systems for which appropriate KPSC authorization and/or ECR treatment has been received. LG&E and KU have received KPSC approval for a compliance plan providing for installation of additional MATS-related controls; however, the estimated cost of these controls is not expected to be significant for either LG&E or KU.

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New Source Review (NSR)

 

The NSR litigation brought by the EPA, states and environmental groups against coal-fired generating plants in past years continues to proceed through the courts. Although none of this litigation directly involves PPL, LKE, LG&E or KU, it can influence the permitting of large capital projects at LG&E's and KU's power plants, the costs of which cannot presently be determined but could be significant.

 

Climate Change

 

There is continuing world-wide attention focused on issues related to climate change. In June 2016, the President announced that the United States, Canada and Mexico have established the North American Climate, Clean Energy, and Environment Partnership Plan, which specifies actions to promote clean energy, address climate change and protect the environment. The plan includes a goal to provide 50% of the energy used in North America from clean energy sources by 2025. The plan does not impose any nation-specific requirements.

In December 2015, 195 nations, including the U.S., signed the Paris Agreement on Climate, which establishes a comprehensive framework for the reduction of greenhouse gas (GHG) emissions from both developed and developing nations. Although the agreement does not establish binding reduction requirements, it requires each nation to prepare, communicate, and maintain GHG reduction commitments. Reductions can be achieved in a variety of ways, including energy conservation, power plant efficiency improvements, reduced utilization of coal-fired generation or replacing coal-fired generation with natural gas or renewable generation. Based on the EPA's Clean Power Plan described below, the U.S. has committed to an initial reduction target of 26% to 28% below 2005 levels by 2025. The March 2017 Executive Order directed the EPA to review proposed and final rules relating to greenhouse gas reductions for consistency with certain policy directives and suspend, revise, or rescind those rules as appropriate. Additionally, the March 2017 Executive Order directs rescission of specified guidance, directives, and prior Presidential actions regarding climate change. PPL, LKE, LG&E and KU cannot predict the outcome of such regulatory actions or the impact, if any, on plant operations, rate treatment or future capital or operating needs.

The U.K. has enacted binding carbon reduction requirements that are applicable to WPD. Under the U.K. law, WPD must purchase carbon allowances to offset emissions associated with WPD's operations. The cost of these allowances is included in WPD's current operating expenses.

 

The EPA's Rules under Section 111 of the Clean Air Act

 

As further described below, the EPA finalized rules imposing GHG emission standards for both new and existing power plants. The EPA has also issued a proposed federal implementation plan that would apply to any states that fail to submit an acceptable state implementation plan under these rules. The EPA's authority to promulgate these regulations under Section 111 of the Clean Air Act has been challenged in the D.C. Circuit Court by several states and industry groups. On February 9, 2016, the U.S. Supreme Court stayed the rule for existing plants (the Clean Power Plan) pending the D.C. Circuit Court's review and subsequent review by the U.S. Supreme Court if a writ of certiorari is filed and granted.

 

The EPA's rule for new power plants imposes separate emission standards for coal and natural gas units based on the application of different technologies. The coal standard is based on the application of partial carbon capture and sequestration technology, but because this technology is not presently commercially viable, the rule effectively precludes the construction of new coal-fired plants. The standard for NGCC power plants is the same as what the EPA proposed in 2012 and is not continuously achievable. The preclusion of new coal-fired plants and the compliance difficulties posed for new natural gas-fired plants could have a significant industry-wide impact.

The President's March 2017 Executive Order requires the EPA to review the rules for new and existing power plants and suspend, revise or rescind them as appropriate.

 

The EPA's Clean Power Plan

 

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

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the states as to how their compliance plans can be crafted, including the option to use a rate-based approach (limit emissions per megawatt hour) or a mass-based approach (limit total tons of emissions per year), and the option to demonstrate compliance through emissions trading and multi-state collaborations. Under the rate-based approach, Kentucky would need to make a 41% reduction from its 2012 emissions rate and under a mass-based approach it would need to make a 36% reduction. These reductions are significantly greater than initially proposed and present significant challenges to the state. If the Clean Power Plan is ultimately upheld and Kentucky fails to develop an approvable implementation plan by the applicable deadline, the EPA may impose a federal implementation plan that could be more stringent than what the state plan might provide. Depending on the provisions of the Kentucky implementation plan, LG&E and KU may need to modify their current portfolio of generating assets during the next decade and/or participate in an allowance trading program.

 

LG&E and KU are monitoring developments at the state and federal level. Various states, industry groups and individual companies including LKE have filed petitions for reconsideration with EPA and petitions for review with the D.C. Circuit Court challenging the Clean Power Plan. In February 2016, the U.S. Supreme Court stayed the rule pending the D.C. Circuit Court's review. In light of the President's March 2017 Executive Order the next steps in this litigation are unclear. Additionally, the EPA has commenced review of the Clean Power Plan and related actions, as directed by the President's March 2017 Executive Order, to determine whether various rules should be suspended, revised or rescinded. PPL, LKE, LG&E and KU cannot predict the outcome of the pending litigation, any changes in regulations, interpretations, or litigation positions that may be implemented by the U.S. presidential administration or the potential impact, if any, on plant operations, or future capital or operating costs. PPL, LKE, LG&E and KU believe that the costs, which could be significant, would be subject to cost recovery.

 

In April 2014, the Kentucky General Assembly passed legislation limiting the measures that the Kentucky Energy and Environment Cabinet may consider in setting performance standards to comply with the EPA's regulations governing GHG emissions from existing sources, if enacted. The legislation provides that such state GHG performance standards shall be based on emission reductions, efficiency measures and other improvements available at each power plant, rather than renewable energy, end-use energy efficiency, fuel switching and re-dispatch. These statutory restrictions may make it more difficult for Kentucky to achieve the GHG reduction levels that the EPA has established for Kentucky, if enacted.

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

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

Water/Waste

(PPL, LKE, LG&E and KU)

 

Coal Combustion Residuals (CCRs)

 

In April 2015, the EPA published its final rule regulating CCRs. CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes. The rule became effective in October 2015. It imposes extensive new requirements, including location restrictions, design and operating standards, groundwater monitoring and corrective action requirements, and closure and post-closure care requirements on CCR impoundments and landfills that are located on active power plants in the United States and not closed. Under the rule, CCRs are regulated as non-hazardous under Subtitle D of RCRA and beneficial use of CCRs is allowed, with some restrictions. The rule's requirements for covered CCR impoundments and landfills include implementation of groundwater monitoring and commencement or completion of closure activities generally between three and ten years from certain triggering events. The rule requires posting of compliance documentation on a publicly accessible website. Industry groups, environmental groups, individual companies and others have filed legal challenges to the final rule, which are pending before the D.C. Circuit Court of Appeals.

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

 

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LG&E and KU have received KPSC approval for a compliance plan providing for construction of additional landfill capacity at the E.W. Brown station, closure of impoundments at the Mill Creek, Trimble County, E.W. Brown, and Ghent stations, and construction of process water management facilities at those plants. In addition to the foregoing measures required for compliance with federal CCR rule requirements, LG&E and KU also received KPSC approval for their plans to close impoundments at the retired Green River, Pineville and Tyrone plants to comply with applicable state law requirements. See Note 6 for additional information.

 

In connection with the final CCR rule, LG&E and KU recorded adjustments to existing AROs during 2015 and 2016. See Note 19 in the Registrants' 2016 Form 10-K for additional information. Further changes to AROs, current capital plans or operating costs may be required as estimates are refined based on closure developments, groundwater monitoring results, and regulatory or legal proceedings. Costs relating to this rule are subject to rate recovery.

 

Clean Water Act

 

Regulations under the federal Clean Water Act dictate permitting and mitigation requirements for facilities and construction projects in the United States. Many of those requirements relate to power plant operations, including requirements related to the treatment of pollutants in effluents prior to discharge, the temperature of effluent discharges and the location, design and construction of cooling water intake structures at generating facilities, standards intended to protect aquatic organisms that become trapped at or pulled through cooling water intake structures at generating facilities. The requirements could impose significant costs for LG&E and KU, which are subject to rate recovery.

 

Effluent Limitations Guidelines (ELGs)

 

In September 2015, the EPA released its final ELGs for wastewater discharge permits for new and existing steam electric generating facilities. The rule provides strict technology-based discharge limitations for control of pollutants in scrubber wastewater, fly ash and bottom ash transport water, mercury control wastewater, gasification wastewater and combustion residual leachate. The new guidelines require deployment of additional control technologies providing physical, chemical and biological treatment of wastewaters. The guidelines also mandate operational changes including "no discharge" requirements for fly ash and bottom ash transport waters and mercury control wastewaters. The implementation date for individual generating stations will be determined by the states on a case-by-case basis according to criteria provided by the EPA, but the requirements of the rule must be fully implemented no later than 2023. 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. LG&E and KU are developing compliance strategies and schedules. PPL, LKE, LG&E and KU are unable to fully estimate compliance costs or timing at this time, although certain preliminary estimates are included in current capital forecasts for applicable periods. Costs to comply with ELGs or other discharge limits, which are expected to be significant, are subject to rate recovery.

Seepages and Groundwater Infiltration

Seepages or groundwater infiltration have been detected at active and retired wastewater basins and landfills at various LG&E and KU plants. LG&E and KU have completed, or are completing, assessments of seepages or groundwater infiltration at various facilities and have completed, or are working with agencies to implement, further testing, monitoring or abatement measures, where applicable. A range of reasonable possible losses cannot currently be estimated. Depending on the circumstances in each case, certain costs, which may be subject to rate recovery, could be significant.

(All Registrants)

 

Waters of the United States (WOTUS)

 

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

 

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Other Issues

 

On June 22, 2016, the "Frank Lautenberg Chemical Safety Act" took effect as an amendment to the Toxic Substance Control Act (TSCA). The Act made no changes to the pre-existing TSCA rules as it pertains to polychlorinated biphenyls (PCB). The EPA continues to reassess its PCB regulations as part of the 2010 Advanced Notice of Proposed Rulemaking (ANPRM). The EPA's ANPRM rulemaking is to occur in two phases. Only the second part of the rule, currently scheduled for November 2017, is applicable to PPL operations. This part of the rule relates to the use of PCBs in electrical equipment and natural gas pipelines, as well as continued use of PCB-contaminated porous surfaces. Although the first rulemaking will not directly affect the Registrants' operations, it may indicate certain approaches or principles to occur in the later rulemaking which may affect Registrants' facilities in the United States, including phase-out of some or all equipment containing PCBs. Should such a phase-out be required, the costs, which are subject to rate recovery, could be significant.

 

Superfund and Other Remediation (All Registrants)

 

PPL Electric is potentially responsible for a share of the costs at several sites listed by the EPA under the federal Superfund program, including the Columbia Gas Plant site and the Brodhead site. Clean-up actions have been or are being undertaken at all of these sites, the costs of which have not been, and are not expected to be, significant to PPL Electric.

 

PPL Electric, LG&E and KU are investigating, responding to agency inquiries, remediating, or have completed the remediation of, several sites that were not addressed under a regulatory program such as Superfund, but for which PPL Electric, LG&E and KU may be liable for remediation. These include a number of former coal gas manufacturing plants in Pennsylvania and Kentucky previously owned or operated or currently owned by predecessors or affiliates of PPL Electric, LG&E and KU. To date, the costs of these sites have not been significant.

 

There are additional sites, formerly owned or operated by PPL Electric, LG&E and KU predecessors or affiliates. PPL Electric, LG&E and KU lack information on the condition of such additional sites and are therefore unable to estimate any potential liability they may have or a range of reasonably possible losses, if any, related to these matters.

At March 31, 2017 and December 31, 2016, PPL Electric had a recorded liability of $10 million representing its best estimate of the probable loss incurred to remediate the sites noted above. Depending on the outcome of investigations at sites where investigations have not begun or been completed, or developments at sites for which information is incomplete, additional costs of remediation could be incurred; however, such costs are not expected to be significant.

 

The EPA is evaluating the risks associated with polycyclic aromatic hydrocarbons and naphthalene, chemical by-products of coal gas manufacturing. As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil cleanup. This could require several PPL subsidiaries to take more extensive assessment and remedial actions at former coal gas manufacturing plants. PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.

 

From time to time, PPL's subsidiaries in the United States undertake testing, monitoring or remedial action in response to notices of violations, spills or other releases at various on-site and off-site locations, negotiate with the EPA and state and local agencies regarding actions necessary for compliance with applicable requirements, negotiate with property owners and other third parties alleging impacts from PPL's operations and undertake similar actions necessary to resolve environmental matters that arise in the course of normal operations. Based on analyses to date, resolution of these environmental matters is not expected to have a significant adverse impact on the operations of PPL Electric, LG&E and KU.

 

Future cleanup or remediation work at sites under review, or at sites not yet identified, may result in significant additional costs for PPL, PPL Electric, LKE, LG&E and KU. Insurance policies maintained by LKE, LG&E and KU may be applicable to certain of the costs or other obligations related to these matters but the amount of insurance coverage or reimbursement cannot be estimated or assured.

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Other

Labor Union Agreements

(PPL and PPL Electric)

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

Guarantees and Other Assurances

 

(All Registrants)

In the normal course of business, the Registrants enter into agreements that provide financial performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of credit issued by financial institutions and surety bonds issued by insurance companies. These agreements are entered into primarily to support or enhance the creditworthiness attributed to a subsidiary on a stand-alone basis or to facilitate the commercial activities in which these subsidiaries engage.

 

(PPL)

 

PPL fully and unconditionally guarantees all of the debt securities of PPL Capital Funding.

 

(All Registrants)

 

The table below details guarantees provided as of March 31, 2017 . "Exposure" represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee. The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures." The total recorded liability at March 31, 2017 and December 31, 2016 was $22 million for PPL and $17 million for LKE. For reporting purposes, on a consolidated basis, all guarantees of PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.

	Exposure at March 31, 2017					Expiration Date
PPL
Indemnifications related to the WPD Midlands acquisition				(a)
WPD indemnifications for entities in liquidation and sales of assets	$	10		(b)		2019
WPD guarantee of pension and other obligations of unconsolidated entities	105			(c)
PPL Electric
Guarantee of inventory value	17			(d)		2018
LKE
Indemnification of lease termination and other divestitures	301			(e)		2021 - 2023
LG&E and KU
LG&E and KU guarantee of shortfall related to OVEC				(f)

(a)

Indemnifications related to certain liabilities, including a specific unresolved tax issue and those relating to properties and assets owned by the seller that were transferred to WPD Midlands in connection with the acquisition. A cross indemnity has been received from the seller on the tax issue. The maximum exposure and expiration of these indemnifications cannot be estimated because the maximum potential liability is not capped and the expiration date is not specified in the transaction documents.

(b)

Indemnification to the liquidators and certain others for existing liabilities or expenses or liabilities arising during the liquidation process. The indemnifications are limited to distributions made from the subsidiary to its parent either prior or subsequent to liquidation or are not explicitly stated in the agreements. The indemnifications generally expire two to seven years subsequent to the date of dissolution of the entities. The exposure noted only includes those cases where the agreements provide for specific limits.

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In connection with their sales of various businesses, WPD and its affiliates have provided the purchasers with indemnifications that are standard for such transactions, including indemnifications for certain pre-existing liabilities and environmental and tax matters or have agreed to continue their obligations under existing third-party guarantees, either for a set period of time following the transactions or upon the condition that the purchasers make reasonable efforts to terminate the guarantees. Additionally, WPD and its affiliates remain secondarily responsible for lease payments under certain leases that they have assigned to third parties.

(c)

Relates to certain obligations of discontinued or modified electric associations that were guaranteed at the time of privatization by the participating members. Costs are allocated to the members and can be reallocated if an existing member becomes insolvent. At March 31, 2017 , WPD has recorded an estimated discounted liability for which the expected payment/performance is probable. Neither the expiration date nor the maximum amount of potential payments for certain obligations is explicitly stated in the related agreements, and as a result, the exposure has been estimated.

(d)	A third party logistics firm provides inventory procurement and fulfillment services. The logistics firm has title to the inventory, however, upon termination of the contracts, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold.

(e)

LKE provides certain indemnifications covering the due and punctual payment, performance and discharge by each party of its respective obligations. The most comprehensive of these guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under a 2009 Transaction Termination Agreement. This guarantee has a term of 12 years ending July 2021, and a maximum exposure of $200 million , exclusive of certain items such as government fines and penalties that may exceed the maximum. Another WKE-related LKE guarantee covers other indemnifications related to the purchase price of excess power, has a term expiring in 2023, and a maximum exposure of $100 million . In May 2012, LKE's indemnitee received an unfavorable arbitration panel's decision interpreting this matter. In October 2014, LKE's indemnitee filed a motion for discretionary review with the Kentucky Supreme Court seeking to overturn the arbitration decision, and such motion was denied by the court in September 2015. In September 2015, the counterparty issued a demand letter to LKE's indemnitee. In February 2016, the counterparty filed a complaint in Henderson, Kentucky Circuit Court, seeking an award of damages in the matter. The proceeding is currently in the discovery phase. LKE does not believe appropriate contractual, legal or commercial grounds exist for the claim made. LKE believes its indemnification obligations in the WKE matter remain subject to various uncertainties, including additional legal and contractual developments, as well as future prices, availability and demand for the subject excess power. Although the parties have also conducted certain settlement discussions, the ultimate outcomes of the WKE termination-related indemnifications cannot be predicted at this time. Additionally, LKE has indemnified various third parties related to historical obligations for other divested subsidiaries and affiliates. The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum. LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party. LKE cannot predict the ultimate outcomes of the various indemnification scenarios, but does not expect such outcomes to result in significant losses above the amounts recorded.

(f)

Pursuant to the OVEC power purchase contract, LG&E and KU are obligated to pay for their share of OVEC's excess debt service, post-retirement and decommissioning costs, as well as any shortfall from amounts included within a demand charge designed and expected to cover these costs over the term of the contract. LKE's proportionate share of OVEC's outstanding debt was $120 million at March 31, 2017 , consisting of LG&E's share of $83 million and KU's share of $37 million . The maximum exposure and the expiration date of these potential obligations are not presently determinable. See "Energy Purchase Commitments" in Note 13 in PPL's, LKE's, LG&E's and KU's 2016 Form 10-K for additional information on the OVEC power purchase contract. In connection with recent credit market related developments at OVEC or certain of its sponsors, such parties, including LG&E and KU, are analyzing certain potential additional credit support actions to preserve OVEC's access to credit markets or mitigate risks or adverse impacts relating thereto, including increased interest costs and accelerated maturities of OVEC's existing short and long-term debt. The ultimate outcome of these matters, including any potential impact on LG&E's and KU's obligations relating to OVEC debt under the power purchase contract cannot be predicted.

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

 

PPL, on behalf of itself and certain of its subsidiaries, maintains insurance that covers liability assumed under contract for bodily injury and property damage. The coverage provides maximum aggregate coverage of $225 million . This insurance may be applicable to obligations under certain of these contractual arrangements.

 

10. Related Party Transactions

 

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

 

PPL Services, PPL EU Services and LKS provide PPL, PPL Electric, LKE, their respective subsidiaries, including LG&E and KU, and each other, as applicable, with administrative, management and support services. For all service companies, the costs of these services are charged to the respective recipients as direct support costs. General costs that cannot be directly attributed to a specific entity are allocated and charged to the respective recipients as indirect support costs. PPL Services and PPL EU Services use a three-factor methodology that includes the applicable recipients' invested capital, operation and maintenance expenses and number of employees to allocate indirect costs. LKS bases its indirect allocations on the subsidiaries' number of employees, total assets, revenues, number of customers and/or other statistical information. PPL Services, PPL EU Services and LKS charged the following amounts for the periods ended March 31 , 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.

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	Three Months
	2017				2016
PPL Electric from PPL Services	$	51			$	37
LKE from PPL Services	6				5
PPL Electric from PPL EU Services	18				17
LG&E from LKS	44				47
KU from LKS	44				56

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

 

Intercompany Borrowings (LKE)

 

LKE maintains a $225 million revolving line of credit with a PPL Energy Funding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates. The interest rates on borrowings are equal to one-month LIBOR plus a spread. At March 31, 2017 and December 31, 2016 , $82 million and $163 million were outstanding and reflected in "Notes payable with affiliate" on the Balance Sheets. The interest rates on the outstanding borrowing at March 31, 2017 and December 31, 2016 were 2.29% and 2.12% .

 

In November 2015, LKE entered into a $400 million ten -year note with a PPL affiliate with an interest rate of 3.5% . At March 31, 2017 and December 31, 2016 , the note was reflected in "Long-term debt to affiliate" on the Balance Sheets. Interest expense on this note was not significant at March 31, 2017 and 2016.

Other (PPL Electric, LG&E and KU)

 

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

 

11. Other Income (Expense) - net

 

(PPL)

 

"Other Income (Expense) - net" for the three months ended March 31, 2017 and 2016 consisted primarily of gains (losses) on foreign currency contracts to economically hedge PPL's translation risk related to its GBP denominated earnings in the U.K. See Note 13 for additional information on these derivatives.

12. Fair Value Measurements

 

(All Registrants)

 

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

 

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

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	March 31, 2017																December 31, 2016
	Total				Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3
PPL
Assets
Cash and cash equivalents	$	409			$	409			$	—			$	—			$	341			$	341			$	—			$	—
Restricted cash and cash equivalents (a)	25				25				—				—				26				26				—				—
Price risk management assets (b):
Foreign currency contracts	200				—				200				—				211				—				211				—
Cross-currency swaps	179				—				179				—				188				—				188				—
Total price risk management assets	379				—				379				—				399				—				399				—
Total assets	$	813			$	434			$	379			$	—			$	766			$	367			$	399			$	—
Liabilities
Price risk management liabilities (b):
Interest rate swaps	$	29			$	—			$	29			$	—			$	31			$	—			$	31			$	—
Foreign currency contracts	50				—				50				—				27				—				27				—
Total price risk management liabilities	$	79			$	—			$	79			$	—			$	58			$	—			$	58			$	—
PPL Electric
Assets
Cash and cash equivalents	$	20			$	20			$	—			$	—			$	13			$	13			$	—			$	—
Restricted cash and cash equivalents (a)	2				2				—				—				2				2				—				—
Total assets	$	22			$	22			$	—			$	—			$	15			$	15			$	—			$	—
LKE
Assets
Cash and cash equivalents	$	15			$	15			$	—			$	—			$	13			$	13			$	—			$	—
Cash collateral posted to counterparties (c)	2				2				—				—				3				3				—				—
Total assets	$	17			$	17			$	—			$	—			$	16			$	16			$	—			$	—
Liabilities
Price risk management liabilities:
Interest rate swaps	$	29			$	—			$	29			$	—			$	31			$	—			$	31			$	—
Total price risk management liabilities	$	29			$	—			$	29			$	—			$	31			$	—			$	31			$	—
LG&E
Assets
Cash and cash equivalents	$	4			$	4			$	—			$	—			$	5			$	5			$	—			$	—
Cash collateral posted to counterparties (c)	2				2				—				—				3				3				—				—
Total assets	$	6			$	6			$	—			$	—			$	8			$	8			$	—			$	—
Liabilities
Price risk management liabilities:
Interest rate swaps	$	29			$	—			$	29			$	—			$	31			$	—			$	31			$	—
Total price risk management liabilities	$	29			$	—			$	29			$	—			$	31			$	—			$	31			$	—

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	March 31, 2017																December 31, 2016
	Total				Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3
KU
Assets
Cash and cash equivalents	$	7			$	7			$	—			$	—			$	7			$	7			$	—			$	—
Total assets	$	7			$	7			$	—			$	—			$	7			$	7			$	—			$	—

(a)	Current portion is included in "Other current assets" and long-term portion is included in "Other noncurrent assets" on the Balance Sheets.

(b)	Current portion is included in "Price risk management assets" and "Other current liabilities" and noncurrent portion is included in "Price risk management assets" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets.

(c)	Included in "Other noncurrent assets" on the Balance Sheets. Represents cash collateral posted to offset the exposure with counterparties related to certain interest rate swaps under master netting arrangements that are not offset.

Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Contracts/Cross-Currency Swaps ( PPL, LKE, LG&E and KU)

 

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

Financial Instruments Not Recorded at Fair Value (All Registrants)

 

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

	March 31, 2017								December 31, 2016
	Carrying Amount (a)				Fair Value				Carrying Amount (a)				Fair Value
PPL	$	18,375			$	21,646			$	18,326			$	21,355
PPL Electric	2,832				3,141				2,831				3,148
LKE	5,066				5,472				5,065				5,439
LG&E	1,618				1,720				1,617				1,710
KU	2,327				2,532				2,327				2,514

 

(a)	Amounts are net of debt issuance costs.

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

 

13. Derivative Instruments and Hedging Activities

 

Risk Management Objectives

 

(All Registrants)

 

PPL has a risk management policy approved by the Board of Directors to manage market risk associated with commodities, interest rates on debt issuances and foreign exchange (including price, liquidity and volumetric risk) and credit risk (including non-performance risk and payment default risk). The Risk Management Committee, comprised of senior management and chaired by the Senior Director-Risk Management, oversees the risk management function. Key risk control activities designed

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to ensure compliance with the risk policy and detailed programs include, but are not limited to, credit review and approval, validation of transactions, verification of risk and transaction limits, value-at-risk analyses (VaR, a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level) and the coordination and reporting of the Enterprise Risk Management program.

 

Market Risk

 

Market risk includes the potential loss that may be incurred as a result of price changes associated with a particular financial or commodity instrument as well as market liquidity and volumetric risks. Forward contracts, futures contracts, options, swaps and structured transactions are utilized as part of risk management strategies to minimize unanticipated fluctuations in earnings caused by changes in commodity prices, interest rates and foreign currency exchange rates. Many of the contracts meet the definition of a derivative. All derivatives are recognized on the Balance Sheets at their fair value, unless NPNS is elected.

 

The following summarizes the market risks that affect PPL and its subsidiaries.

 

Interest rate risk

 

•

PPL and its subsidiaries are exposed to interest rate risk associated with forecasted fixed-rate and existing floating-rate debt issuances. PPL and WPD hold over-the-counter cross currency swaps to limit exposure to market fluctuations on interest and principal payments from changes in foreign currency exchange rates and interest rates. PPL, LKE and LG&E utilize over-the-counter interest rate swaps to limit exposure to market fluctuations on floating-rate debt. PPL, LKE, LG&E and KU utilize forward starting interest rate swaps to hedge changes in benchmark interest rates, when appropriate, in connection with future debt issuances.

•	PPL and its subsidiaries are exposed to interest rate risk associated with debt securities and derivatives held by defined benefit plans. This risk is significantly mitigated to the extent that the plans are sponsored at, or sponsored on behalf of, the regulated domestic utilities and for certain plans at WPD due to the recovery mechanisms in place.

Foreign currency risk

 

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

Commodity price risk

 

PPL is exposed to commodity price risk through its domestic subsidiaries as described below.

 

•

PPL Electric is exposed to commodity price risk from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to this risk. PPL Electric also mitigates its exposure to commodity price risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the commodity price risk associated with the PLR obligation to the energy suppliers.

•	LG&E's and KU's rates include certain mechanisms for fuel and fuel-related expenses. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.

Volumetric risk

 

PPL is exposed to volumetric risk through its subsidiaries as described below.

 

•	WPD is exposed to volumetric risk which is significantly mitigated as a result of the method of regulation in the U.K. Under the RIIO-ED1 price control period, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2016 Form 10-K for additional information on revenue recognition under RIIO-ED1.

•	PPL Electric, LG&E and KU are exposed to volumetric risk on retail sales, mainly due to weather and other economic conditions for which there is limited mitigation between rate cases.

Equity securities price risk

 

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

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

Credit Risk

 

Credit risk is the potential loss that may be incurred due to a counterparty's non-performance.

 

PPL is exposed to credit risk from "in-the-money" interest rate and foreign currency derivatives with financial institutions, as well as additional credit risk through certain of its subsidiaries, as discussed below.

 

In the event a supplier of LG&E, KU or PPL Electric defaults on its obligation, those entities would be required to seek replacement power or replacement fuel in the market. In general, subject to regulatory review or other processes, appropriate incremental costs incurred by these entities would be recoverable from customers through applicable rate mechanisms, thus mitigating the financial risk for these entities.

 

PPL and its subsidiaries have credit policies in place to manage credit risk, including the use of an established credit approval process, daily monitoring of counterparty positions and the use of master netting agreements or provisions. These agreements generally include credit mitigation provisions, such as margin, prepayment or collateral requirements. PPL and its subsidiaries may request additional credit assurance, in certain circumstances, in the event that the counterparties' credit ratings fall below investment grade, their tangible net worth falls below specified percentages or their exposures exceed an established credit limit.

 

Master Netting Arrangements

 

Net derivative positions on the balance sheets are not offset against the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.

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

LKE and LG&E had no obligation to return cash collateral under master netting arrangements at March 31, 2017  and  December 31, 2016 .

 

PPL, LKE and LG&E posted $2 million of cash collateral under master netting arrangements at March 31, 2017 and $3 million of cash collateral under master netting arrangements at December 31, 2016 .

 

See "Offsetting Derivative Instruments" below for a summary of derivative positions presented in the balance sheets where a right of setoff exists under these arrangements.

 

Interest Rate Risk

 

(All Registrants)

 

PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. Various financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolio, adjust the duration of the debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under PPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolio due to changes in benchmark interest rates. In addition, the interest rate risk of certain subsidiaries is potentially mitigated as a result of the existing regulatory framework or the timing of rate cases.

Cash Flow Hedges

 

(PPL)

 

Interest rate risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financings. Financial interest rate swap contracts that qualify as cash flow hedges may be entered into to hedge floating interest rate risk associated with both existing and anticipated debt issuances. PPL held no such contracts at March 31, 2017 .

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For the three months ended March 31, 2017 and 2016 , PPL had no hedge ineffectiveness associated with interest rate derivatives.

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

For the three months ended March 31, 2017 and 2016 , PPL had no hedge ineffectiveness associated with cross-currency interest rate swap derivatives.

Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time period and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedged transaction is not probable of occurring.

For the three months ended March 31, 2017 and 2016, PPL had an insignificant amount of cash flow hedges reclassified into earnings associated with discontinued cash flow hedges.

 

At March 31, 2017 , the amount of accumulated net unrecognized after-tax gains (losses) on qualifying derivatives expected to be reclassified into earnings during the next 12 months is insignificant . Amounts are reclassified as the hedged interest expense is recorded.

 

Economic Activity (PPL, LKE and LG&E)

 

LG&E enters into interest rate swap contracts that economically hedge interest payments on variable rate debt. Because realized gains and losses from the swaps, including a terminated swap contract, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense. Realized gains and losses are recognized in "Interest Expense" on the Statements of Income at the time the underlying hedged interest expense is recorded. At March 31, 2017 , LG&E held contracts with a notional amount of $147 million that range in maturity through 2033 .

 

Foreign Currency Risk

 

(PPL)

 

PPL is exposed to foreign currency risk, primarily through investments in and earnings of U.K. affiliates. PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactions and net investments. In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected GBP earnings.

 

Net Investment Hedges

 

PPL enters into foreign currency contracts on behalf of a subsidiary to protect the value of a portion of its net investment in WPD. There were no such contracts outstanding at March 31, 2017 .

 

At March 31, 2017 and December 31, 2016 , PPL had $21 million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI.

 

Economic Activity

 

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At March 31, 2017 , the total exposure hedged by PPL was approximately £2.8 billion (approximately $3.8 billion based on contracted rates). These contracts had termination dates ranging from April 2017 through December 2019 .

 

Accounting and Reporting

 

(All Registrants)

 

All derivative instruments are recorded at fair value on the Balance Sheet as an asset or liability unless NPNS is elected. NPNS contracts for PPL and PPL Electric include certain full-requirement purchase contracts and other physical purchase contracts.

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Changes in the fair value of derivatives not designated as NPNS are recognized in earnings unless specific hedge accounting criteria are met and designated as such, except for the changes in fair values of LG&E's and KU's interest rate swaps that are recognized as regulatory assets or regulatory liabilities. See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at March 31, 2017 and December 31, 2016 .

 

See Notes 1 and 17 in each Registrant's 2016 Form 10-K for additional information on accounting policies related to derivative instruments.

 

(PPL)

 

The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.

	March 31, 2017																December 31, 2016
	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				Liabilities
Current:
Price Risk Management
Assets/Liabilities (a):
Interest rate swaps (b)	$	—			$	—			$	—			$	4			$	—			$	—			$	—			$	4
Cross-currency swaps (b)	32				—				—				—				32				—				—				—
Foreign currency contracts	—				—				63				43				—				—				31				21
Total current	32				—				63				47				32				—				31				25
Noncurrent:
Price Risk Management
Assets/Liabilities (a):
Interest rate swaps (b)	—				—				—				25				—				—				—				27
Cross-currency swaps (b)	147				—				—				—				156				—				—				—
Foreign currency contracts	—				—				137				7				—				—				180				6
Total noncurrent	147				—				137				32				156				—				180				33
Total derivatives	$	179			$	—			$	200			$	79			$	188			$	—			$	211			$	58

 

(a)	Current portion is included in "Price risk management assets" and "Other current liabilities" and noncurrent portion is included in "Price risk management assets" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets.

(b)	Excludes accrued interest, if applicable.

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

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								Three Months
Derivative Relationships		Derivative Gain (Loss) Recognized in OCI (Effective Portion)				Location of Gain (Loss) Recognized in Income on Derivative		Gain (Loss) Reclassified from AOCI into Income (Effective Portion)				Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
		Three Months
Cash Flow Hedges:
Interest rate swaps		$	—			Interest expense		$	(2	)		$	(1	)
Cross-currency swaps		(8		)		Interest expense		1				—
						Other income (expense) - net		3				—
Total		$	(8	)				$	2			$	(1	)
Net Investment Hedges:
Foreign currency contracts		$	—

Derivatives Not Designated as		Location of Gain (Loss) Recognized in
Hedging Instruments		Income on Derivative		Three Months
Foreign currency contracts		Other income (expense) - net		$	(43	)
Interest rate swaps		Interest expense		(2		)
		Total		$	(45	)
Derivatives Not Designated as		Location of Gain (Loss) Recognized as
Hedging Instruments		Regulatory Liabilities/Assets		Three Months
Interest rate swaps		Regulatory assets - noncurrent		$	2

 

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

								Three Months
Derivative Relationships		Derivative Gain (Loss) Recognized in OCI (Effective Portion)				Location of Gain (Loss) Recognized in Income on Derivative		Gain (Loss) Reclassified from AOCI into Income (Effective Portion)				Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
		Three Months
Cash Flow Hedges:
Interest rate swaps		$	(18	)		Interest expense		$	(1	)		$	—
Cross-currency swaps		113				Interest expense		1				—
						Other income (expense) - net		97				—
Total		$	95					$	97			$	—
Net Investment Hedges:
Foreign currency contracts		$	3

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

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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.

	March 31, 2017							December 31, 2016
	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	—				25				—				27
Total noncurrent	—				25				—				27
Total derivatives	$	—			$	29			$	—			$	31

 

The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets for the periods ended March 31, 2017 .

		Location of Gain (Loss) Recognized in
Derivative Instruments		Income on Derivatives		Three Months
Interest rate swaps		Interest expense		$	(2	)
		Location of Gain (Loss) Recognized in
Derivative Instruments		Regulatory Assets		Three Months
Interest rate swaps		Regulatory assets - noncurrent		$	2

The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets for the periods ended March 31, 2016 . 

		Location of Gain (Loss) Recognized in
Derivative Instruments		Income on Derivatives		Three Months
Interest rate swaps		Interest expense		$	(2	)
		Location of Gain (Loss) Recognized in
Derivative Instruments		Regulatory Assets		Three Months
Interest rate swaps		Regulatory assets - noncurrent		$	(6	)

 

(PPL, LKE, LG&E and KU)

 

Offsetting Derivative Instruments

 

PPL, LKE, LG&E and KU or certain of their subsidiaries have master netting arrangements in place and also enter into agreements pursuant to which they purchase or sell certain energy and other products. Under the agreements, upon termination of the agreement as a result of a default or other termination event, the non-defaulting party typically would have a right to set off amounts owed under the agreement against any other obligations arising between the two parties (whether under the agreement or not), whether matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation.

 

PPL, LKE, LG&E and KU have elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivatives agreements. The table below summarizes the derivative positions presented in the balance sheets where a right of setoff exists under these arrangements and related cash collateral received or pledged.

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	Assets																Liabilities
					Eligible for Offset																Eligible for Offset
	Gross				Derivative Instruments				Cash Collateral Received				Net				Gross				Derivative Instruments				Cash Collateral Pledged				Net
March 31, 2017
Treasury Derivatives
PPL	$	379			$	49			$	13			$	317			$	79			$	49			$	2			$	28
LKE	—				—				—				—				29				—				2				27
LG&E	—				—				—				—				29				—				2				27

December 31, 2016
Treasury Derivatives
PPL	$	399			$	27			$	19			$	353			$	58			$	27			$	3			$	28
LKE	—				—				—				—				31				—				3				28
LG&E	—				—				—				—				31				—				3				28

 

Credit Risk-Related Contingent Features

 

Certain derivative contracts contain credit risk-related contingent features which, when in a net liability position, would permit the counterparties to require the transfer of additional collateral upon a decrease in the credit ratings of PPL, LKE, LG&E and KU or certain of their subsidiaries. Most of these features would require the transfer of additional collateral or permit the counterparty to terminate the contract if the applicable credit rating were to fall below investment grade. Some of these features also would allow the counterparty to require additional collateral upon each downgrade in credit rating at levels that remain above investment grade. In either case, if the applicable credit rating were to fall below investment grade, and assuming no assignment to an investment grade affiliate were allowed, most of these credit contingent features require either immediate payment of the net liability as a termination payment or immediate and ongoing full collateralization on derivative instruments in net liability positions.

 

Additionally, certain derivative contracts contain credit risk-related contingent features that require adequate assurance of performance be provided if the other party has reasonable concerns regarding the performance of PPL's, LKE's, LG&E's and KU's obligations under the contracts. A counterparty demanding adequate assurance could require a transfer of additional collateral or other security, including letters of credit, cash and guarantees from a creditworthy entity. This would typically involve negotiations among the parties. However, amounts disclosed below represent assumed immediate payment or immediate and ongoing full collateralization for derivative instruments in net liability positions with "adequate assurance" features.

 

(PPL, LKE and LG&E)

At March 31, 2017 , derivative contracts in a net liability position that contain credit risk-related contingent features, collateral posted on those positions and the related effect of a decrease in credit ratings below investment grade are summarized as follows:

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

 

(a)	Includes the effect of net receivables and payables already recorded on the Balance Sheet.

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14. Goodwill and Other Intangible Assets

 

(PPL)

 

The change in the carrying amount of goodwill for the three months ended March 31, 2017 was due to the effect of foreign currency exchange rates on the U.K. Regulated segment.

The change in the carrying amount of other intangible assets for the three months ended March 31, 2017 was primarily due to a change in WPD’s approach in acquiring rights-of-way relating to WPD equipment impacting landowners' property. A shorter term agreement at a lower cost is now being offered which has also reduced the estimated liability for claims not yet settled.

15. Asset Retirement Obligations

(PPL, LKE, LG&E and KU)

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

	PPL				LKE				LG&E				KU
Balance at December 31, 2016	$	488			$	433			$	145			$	288
Accretion	5				5				2				3
Obligations settled	(6		)		(6		)		(4		)		(2		)
Balance at March 31, 2017	$	487			$	432			$	143			$	289

 

PPL's, LKE's, LG&E's and KU's ARO liabilities are primarily related to CCR closure costs. See Note 9 for information on the final CCR rule. For LKE, LG&E and KU, all ARO accretion and depreciation expenses are reclassified as a regulatory asset. ARO regulatory assets associated with approved ECR projects for CCRs are amortized to expense over a period of 10 to 25 years based on retirement expenditures made related to the obligation. For other AROs, at the time of retirement, the related ARO regulatory asset is offset against the associated cost of removal regulatory liability, PP&E and ARO liability.

16. Accumulated Other Comprehensive Income (Loss)

 

(PPL)

 

The after-tax changes in AOCI by component for the periods ended March 31 were as follows.

	Foreign currency translation adjustments				Unrealized gains (losses)  on qualifying derivatives								Defined benefit plans
									Equity investees' AOCI				Prior service costs				Actuarial gain (loss)				Total
PPL
December 31, 2016	$	(1,627	)		$	(7	)		$	(1	)		$	(8	)		$	(2,135	)		$	(3,778	)
Amounts arising during the period	(24		)		(6		)		—				—				—				(30		)
Reclassifications from AOCI	—				(1		)		—				—				32				31
Net OCI during the period	(24		)		(7		)		—				—				32				1
March 31, 2017	$	(1,651	)		$	(14	)		$	(1	)		$	(8	)		$	(2,103	)		$	(3,777	)
December 31, 2015	$	(520	)		$	(7	)		$	—			$	(6	)		$	(2,195	)		$	(2,728	)
Amounts arising during the period	(464		)		80				—				—				—				(384		)
Reclassifications from AOCI	—				(78		)		—				—				31				(47		)
Net OCI during the period	(464		)		2				—				—				31				(431		)
March 31, 2016	$	(984	)		$	(5	)		$	—			$	(6	)		$	(2,164	)		$	(3,159	)

 

(PPL)

 

The following table presents the gains (losses) and related income taxes for reclassifications from AOCI for the periods ended March 31 . The defined benefit plan components of AOCI are not reflected in their entirety in the Statement of Income during

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the periods; rather, they are included in the computation of net periodic defined benefit costs (credits) and subject to capitalization. See Note 8 for additional information.

		Three Months								Affected Line Item on the
Details about AOCI		2017				2016				Statements of Income
Qualifying derivatives
Interest rate swaps		$	(3	)		$	(1	)		Interest Expense
Cross-currency swaps		3				97				Other Income (Expense) - net
		1				1				Interest Expense
Total Pre-tax		1				97
Income Taxes		—				(19		)
Total After-tax		1				78
Defined benefit plans
Net actuarial loss		(41		)		(40		)
Total Pre-tax		(41		)		(40		)
Income Taxes		9				9
Total After-tax		(32		)		(31		)
Total reclassifications during the period		$	(31	)		$	47

17. New Accounting Guidance Pending Adoption

 

(All Registrants)

 

Accounting for Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board (FASB) issued accounting guidance that establishes a comprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

For public business entities, this guidance can be applied using either a full retrospective or modified retrospective transition method, beginning in annual reporting periods after December 15, 2017 and interim periods within those years. The Registrants will adopt this guidance effective January 1, 2018.

 

The Registrants have performed an assessment of a significant portion of their revenue under this new guidance to determine its effect on their current revenue recognition policies, and at this time they do not believe it will have a material impact. However, the Registrants will continue to monitor the development of industry specific application guidance which could have an impact on their assessments. The Registrants are currently assessing the disclosure requirements included in the standard, which will result in increased information being provided to enable the users of the financial statements to understand the nature, amount, timing and uncertainty of revenue arising from contracts with customers. The Registrants will determine the transition method they will apply after the industry specific application guidance is final and the implications of using either the full retrospective or modified retrospective transition methods are known.

Accounting for Leases

 

In February 2016, the FASB issued accounting guidance for leases. This new guidance requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). For income statement purposes, the FASB retained a dual model for lessees, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines.

 

Lessor accounting under the new guidance is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Similar to current practice, lessors will classify leases as operating, direct financing, or sales-type.

 

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

 

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

Accounting for Financial Instrument Credit Losses

 

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

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

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

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

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

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

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

(PPL, LKE, LG&E and KU)

Simplifying the Test for Goodwill Impairment

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

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

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

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Item 2. Combined Management's Discussion and Analysis of Financial Condition and

Results of Operations

 

(All Registrants)

 

This "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL, PPL Electric, LKE, LG&E and KU. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant. The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures. Within combined disclosures, amounts are disclosed for individual Registrants when significant.

 

The following should be read in conjunction with the Registrants' Condensed Consolidated Financial Statements and the accompanying Notes and with the Registrants' 2016 Form 10-K. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted.

 

"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:

 

•	"Overview" provides a description of each Registrant's business strategy and a discussion of important financial and operational developments.

•

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

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

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

Overview

 

Introduction

 

(PPL)

 

PPL, headquartered in Allentown, Pennsylvania, is a utility holding company. PPL, through its regulated utility subsidiaries, delivers electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia and Tennessee; delivers natural gas to customers in Kentucky; and generates electricity from power plants in Kentucky.

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

 

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PPL Corporation*

PPL Capital Funding ●   Provides financing for the operations of PPL and certain subsidiaries

PPL Global ●   Engages in the regulated distribution of electricity in the U.K.

LKE*

PPL Electric* ●   Engages in the regulated transmission and distribution of electricity in Pennsylvania

LG&E* ●   Engages in the regulated generation, transmission, distribution and sale of electricity and distribution and sale of natural gas in Kentucky

KU* ●   Engages in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky

U.K. Regulated Segment

Kentucky Regulated Segment

Pennsylvania Regulated Segment

 

PPL's reportable segments' results primarily represent the results of PPL Global, LKE and PPL Electric, except that the reportable segments are also allocated certain corporate level financing and other costs that are not included in the results of PPL Global, LKE and PPL Electric. Although PPL Global is not a Registrant, unaudited annual consolidated financial statements for the U.K. Regulated Segment are furnished on a Form 8-K with the SEC.

 

In addition to PPL, the other Registrants included in this filing are as follows.

 

(PPL Electric)

 

PPL Electric, headquartered in Allentown, Pennsylvania, is a direct wholly owned subsidiary of PPL and a regulated public utility that is an electricity transmission and distribution service provider in eastern and central Pennsylvania. PPL Electric is subject to regulation as a public utility by the PUC, and certain of its transmission activities are subject to the jurisdiction of the FERC under the Federal Power Act. PPL Electric delivers electricity in its Pennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.

 

(LKE)

 

LKE, headquartered in Louisville, Kentucky, is a wholly owned subsidiary of PPL and a holding company that owns regulated utility operations through its subsidiaries, LG&E and KU, which constitute substantially all of LKE's assets. LG&E and KU are engaged in the generation, transmission, distribution and sale of electricity. LG&E also engages in the distribution and sale of natural gas. LG&E and KU maintain separate corporate identities and serve customers in Kentucky under their respective names. KU also serves customers in Virginia under the Old Dominion Power name and in Tennessee under the KU name.

 

(LG&E)

 

LG&E, headquartered in Louisville, Kentucky, is a wholly owned subsidiary of LKE and a regulated utility engaged in the generation, transmission, distribution and sale of electricity and distribution and sale of natural gas in Kentucky. LG&E is subject to regulation as a public utility by the KPSC, and certain of its transmission activities are subject to the jurisdiction of the FERC under the Federal Power Act.

 

(KU)

 

KU, headquartered in Lexington, Kentucky, is a wholly owned subsidiary of LKE and a regulated utility engaged in the generation, transmission, distribution and sale of electricity in Kentucky, Virginia and Tennessee. KU is subject to regulation as

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a public utility by the KPSC, the VSCC and the Tennessee Regulatory Authority, and certain of its transmission and wholesale power activities are subject to the jurisdiction of the FERC under the Federal Power Act. KU serves its Virginia customers under the Old Dominion Power name and its Kentucky and Tennessee customers under the KU name.

 

Business Strategy

 

(All Registrants)

 

PPL is a fully regulated business consisting of seven diverse, high-performing utilities. These utilities are located in the U.K., Pennsylvania and Kentucky and each jurisdiction has different regulatory structures and customer classes. The Company believes this diverse portfolio provides strong earnings and dividend growth potential that will create significant value for its shareowners and positions PPL well for continued growth and success.

 

PPL's businesses of WPD, PPL Electric, LG&E and KU plan to achieve growth by providing efficient, reliable and safe operations and strong customer service, maintaining constructive regulatory relationships and achieving timely recovery of costs. These businesses are expected to achieve strong, long-term growth in rate base and RAV, as applicable, driven by planned significant capital expenditures to maintain existing assets and improve system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to coal-fired electricity generation facilities. Additionally, significant transmission rate base growth is expected through at least 2020 at PPL Electric.

 

For the U.S. businesses, our strategy is to recover capital project costs efficiently through various rate-making mechanisms, including periodic base rate case proceedings using forward test years, annual FERC formula rate mechanisms and other regulatory agency-approved recovery mechanisms designed to limit regulatory lag. In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on construction work-in-progress) that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. In addition, the KPSC requires a utility to obtain a CPCN prior to constructing a facility, unless the construction is an ordinary extension of existing facilities in the usual course of business or does not involve sufficient capital outlay to materially affect the utility's financial condition. Although such KPSC proceedings do not directly address cost recovery issues, the KPSC, in awarding a CPCN, concludes that the public convenience and necessity require the construction of the facility on the basis that the facility is the lowest reasonable cost alternative to address the need. In Pennsylvania, the FERC transmission formula rate, DSIC mechanism, Smart Meter Rider and other recovery mechanisms are in place to reduce regulatory lag and provide for timely recovery of and a return on prudently incurred costs.

 

Rate base growth in the domestic utilities is expected to result in earnings growth for the foreseeable future. In 2017, earnings from the U.K. Regulated segment are expected to decline mainly due to the unfavorable impact of lower GBP to U.S. dollar exchange rates. RAV growth is expected in the U.K. Regulated segment through the RIIO-ED1 price control period which ends on March 31, 2023 and to result in earnings growth after 2017. See "Item 1. Business - Segment Information - U.K. Regulated Segment" of PPL's 2016 Form 10-K for additional information on RIIO-ED1.

 

To manage financing costs and access to credit markets, and to fund capital expenditures, a key objective of the Registrants is to maintain their investment grade credit ratings and adequate liquidity positions. In addition, the Registrants have financial and operational risk management programs that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility, as applicable, related to changes in interest rates, foreign currency exchange rates and counterparty credit quality. To manage these risks, PPL generally uses contracts such as forwards, options and swaps. See "Financial Condition - Risk Management" below for further information.

Earnings generated by PPL's U.K. subsidiaries are subject to foreign currency translation risk. Because WPD's earnings represent such a significant portion of PPL's consolidated earnings, PPL enters into foreign currency contracts to economically hedge the value of the GBP versus the U.S. dollar. These hedges do not receive hedge accounting treatment under GAAP.

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

 

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

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Financial and Operational Developments

   

U.S. Tax Reform (All Registrants)

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

U.K. Membership in European Union (PPL)

On March 29, 2017, the U.K. formally notified the European Council of the European Union (EU) of its intent to withdraw from the EU, thereby commencing the negotiation of the terms of that withdrawal under Article 50 of the Lisbon Treaty. Article 50 specifies that if a member state decides to withdraw from the EU, it must notify the European Council of its intention to leave the EU, negotiate the terms of withdrawal and establish the legal grounds for its future relationship with the EU. Article 50 provides two years from the date of the Article 50 notification to conclude negotiations. Failure to complete negotiations within two years, unless negotiations are extended, would result in the treaties governing the EU no longer being applicable to the U.K. with there being no agreement in place governing the U.K.'s relationship with the EU. Under the terms of Article 50, negotiations can only be extended beyond two years if all of the 27 remaining EU states agree to an extension. Any withdrawal agreement will need to be approved by both the European Council and the European Parliament. There remains significant uncertainty as to the ultimate outcome of the withdrawal negotiations and the related impact on the U.K. economy and the GBP to U.S. dollar exchange rate.

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

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

Regulatory Requirements

( All Registrants)

 

The Registrants cannot predict the impact that future regulatory requirements may have on their financial condition or results of operations.

 

( PPL, LKE, LG&E and KU)

 

The businesses of LKE, LG&E and KU are subject to extensive federal, state and local environmental laws, rules and regulations, including those pertaining to CCRs, GHGs, ELGs, and MATS. See Note 9 to the Financial Statements for a discussion of the other significant environmental matters.

Rate Case Proceedings

(PPL, LKE, LG&E and KU)

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

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

 

( PPL, LKE and KU)

 

On October 31, 2016, KU filed a request with the FERC to modify its formula rates to provide for the recovery of CCR impoundment closure costs from its departing municipal customers. On December 30, 2016, the FERC accepted the revised rate schedules providing recovery of the costs effective December 31, 2016, subject to refund, and established limited hearing and settlement judge procedures relating to determining the applicable amortization period. In March 2017, the parties reached a settlement in principle regarding a suitable amortization period.

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 months ended March 31, 2017 with the same period in 2016. The "Segment Earnings" and "Margins" discussions for PPL provide a review of results by reportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "Margins," and provide explanations of the non-GAAP financial measures and a reconciliation of those measures to the most comparable GAAP measure. The "2017 Outlook" discussion identifies key factors expected to impact 2017 earnings.

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

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

 

A "Statement of Income Analysis, Earnings and Margins" is presented separately for PPL Electric, LKE, LG&E and KU.

The "Statement of Income Analysis" discussion below describes significant changes in principal line items on the Statements of Income comparing the three months ended March 31, 2017 with the same period in 2016. The "Earnings" discussion provides a summary of earnings. The "Margins" discussion includes a reconciliation of non-GAAP financial measures to "Operating Income."

 

(All Registrants)

 

The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations. As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.

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PPL: Statement of Income Analysis, Segment Earnings and Margins

Statement of Income Analysis

 

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

	Three Months
	2017				2016				$ Change
Operating Revenues	$	1,951			$	2,011			$	(60	)
Operating Expenses
Operation
Fuel	191				197				(6		)
Energy purchases	215				233				(18		)
Other operation and maintenance	432				450				(18		)
Depreciation	242				229				13
Taxes, other than income	75				79				(4		)
Total Operating Expenses	1,155				1,188				(33		)
Other Income (Expense) - net	(47		)		61				(108		)
Interest Expense	217				224				(7		)
Income Taxes	129				179				(50		)
Net Income	$	403			$	481			$	(78	)

Operating Revenues

 

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

	Three Months
Domestic:
PPL Electric Distribution price (a)	$	12
PPL Electric Distribution volume	(3		)
PPL Electric PLR Revenue (b)	(21		)
PPL Electric Transmission Formula Rate	1
LKE Volumes	(37		)
LKE Fuel and other energy prices (c)	11
LKE DSM	5
Other	(1		)
Total Domestic	(33		)
U.K.:
Price	58
Volume	9
Foreign currency exchange rates	(96		)
Other	2
Total U.K.	(27		)
Total	$	(60	)

(a)	Distribution rider prices resulted in increases of $12 million for the three months ended March 31, 2017 .

(b)	Decreased primarily due to lower energy purchase prices at PPL Electric.

(c)	Increased due to higher recoveries of fuel and energy purchases primarily as a result of higher commodity costs at LKE.

Energy Purchases

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

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Other Operation and Maintenance

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

	Three Months
Domestic:
PPL Electric Act 129	$	5
PPL Electric payroll-related costs	2
PPL Electric bad debts	(3		)
Stock compensation expense	6
Other	5
U.K.:
Network maintenance	(7		)
Foreign currency exchange rates	(8		)
Pension (a)	(17		)
Other	(1		)
Total	$	(18	)

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

Depreciation

 

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

 

Other Income (Expense) - net

 

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

 

Interest Expense

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

	Three Months
Long-term debt interest expense	$	4
Foreign currency exchange rates	(15		)
Other	4
Total	$	(7	)

 

Income Taxes 

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

	Three Months
Change in pre-tax income at current period tax rates	$	(39	)
U.S. income tax on foreign earnings - net of foreign tax credit	(7		)
Impact of U.K. Finance Acts	(3		)
Depreciation not normalized	(2		)
Stock-based compensation	5
Other	(4		)
Total	$	(50	)

 

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Segment Earnings

 

PPL's net income by reportable segments for the period s ended March 31 were as follows:

	Three Months
	2017				2016				$ Change
U.K. Regulated	$	286			$	289			$	(3	)
Kentucky Regulated	95				112				(17		)
Pennsylvania Regulated	79				94				(15		)
Corporate and Other (a)	(57		)		(14		)		(43		)
Net Income	$	403			$	481			$	(78	)

 

(a)

Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results. The change in 2017 compared with 2016 is primarily due to the utilization of an estimated annual effective tax rate, which requires the tax benefits realized in the current period to be recognized over the annual period. This impact is expected to reverse through the remainder of the year.

Earnings from Ongoing Operations

 

Management utilizes "Earnings from Ongoing Operations" as a non-GAAP financial measure that should not be considered as an alternative to net income, an indicator of operating performance determined in accordance with GAAP. PPL believes that Earnings from Ongoing Operations is useful and meaningful to investors because it provides management's view of PPL's earnings performance as another criterion in making investment decisions. In addition, PPL's management uses Earnings from Ongoing Operations in measuring achievement of certain corporate performance goals, including targets for certain executive incentive compensation. Other companies may use different measures to present financial performance. 

 

Earnings from Ongoing Operations is adjusted for the impact of special items. Special items are presented in the financial tables on an after-tax basis with the related income taxes on special items separately disclosed. Income taxes on special items, when applicable, are calculated based on the effective tax rate of the entity where the activity is recorded. Special items include:

• Unrealized gains or losses on foreign currency-related economic hedges (as discussed below).

• Gains and losses on sales of assets not in the ordinary course of business.

• Impairment charges. 

• Significant workforce reduction and other restructuring effects.

• Acquisition and divestiture-related adjustments.

• Other charges or credits that are, in management's view, non-recurring or otherwise not reflective of the company's ongoing operations.

 

Unrealized gains or losses on foreign currency economic hedges include the changes in fair value of foreign currency contracts used to hedge GBP-denominated anticipated earnings. The changes in fair value of these contracts are recognized immediately within GAAP earnings. Management believes that excluding these amounts from Earnings from Ongoing Operations until settlement of the contracts provides a better matching of the financial impacts of those contracts with the economic value of PPL's underlying hedged earnings.  See Note 13 to the Financial Statements and "Risk Management" below for additional information on foreign currency-related economic activity.

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

	Three Months
	2017				2016				$ Change
U.K. Regulated	$	307			$	265			$	42
Kentucky Regulated	96				112				(16		)
Pennsylvania Regulated	79				94				(15		)
Corporate and Other	(57		)		(13		)		(44		)
Earnings from Ongoing Operations	$	425			$	458			$	(33	)

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

 

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U.K. Regulated Segment

 

The U.K. Regulated segment consists of PPL Global, which primarily includes WPD's regulated electricity distribution operations, the results of hedging the translation of WPD's earnings from GBP into U.S. dollars, and certain costs, such as U.S. income taxes, administrative costs and certain acquisition-related financing costs. The U.K. Regulated segment represents 71% of PPL's Net Income for the three months ended March 31, 2017 and 39% of PPL's assets at March 31, 2017 .

 

Net Income and Earnings from Ongoing Operations for the periods ended March 31 include the following results.

	Three Months
	2017				2016				$ Change
Operating revenues	$	568			$	595			$	(27	)
Other operation and maintenance	64				97				(33		)
Depreciation	55				60				(5		)
Taxes, other than income	31				35				(4		)
Total operating expenses	150				192				(42		)
Other Income (Expense) - net	(43		)		61				(104		)
Interest Expense	94				106				(12		)
Income Taxes	(5		)		69				(74		)
Net Income	286				289				(3		)
Less: Special Items	(21		)		24				(45		)
Earnings from Ongoing Operations	$	307			$	265			$	42

 

The following after-tax gains (losses), which management considers special items, impacted the U.K. Regulated segment's results and are excluded from Earnings from Ongoing Operations during the periods ended March 31 .

	Income Statement Line Item		Three Months
			2017				2016
Foreign currency-related economic hedges, net of tax of $12, ($13) (a)	Other Income (Expense) - net		$	(21	)		$	24
Total Special Items			$	(21	)		$	24

 

(a)	Represents unrealized gains (losses) on contracts that economically hedge anticipated GBP-denominated earnings.

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

	Three Months
U.K.
Gross margins	$	70
Other operation and maintenance	24
Depreciation	(5		)
Interest expense	(2		)
Other	(2		)
Income taxes	(5		)
U.S.
Interest expense and other	(1		)
Income taxes	34
Foreign currency exchange, after-tax	(71		)
Earnings from Ongoing Operations	42
Special items, after-tax	(45		)
Net Income	$	(3	)

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U.K.

 

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

•	Lower other operation and maintenance expense primarily due to $17 million from lower pension expense due to an increase in expected returns on higher asset balances and lower interest costs due to a lower discount rate and $7 million from lower network maintenance expense.

•	Higher income taxes primarily due to an increase of $17 million from higher pre-tax income partially offset by a decrease of $10 million primarily related to accelerated tax deductions.

U.S.

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

Kentucky Regulated Segment

 

The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations of LG&E and KU, as well as LG&E's regulated distribution and sale of natural gas. In addition, certain acquisition-related financing costs are allocated to the Kentucky Regulated segment. The Kentucky Regulated segment represents 24% of PPL's Net Income for the three months ended March 31, 2017 and 36% of PPL's assets at March 31, 2017 .

 

Net Income and Earnings from Ongoing Operations for the periods ended March 31 include the following results.

	Three Months
	2017				2016				$ Change
Operating revenues	$	809			$	826			$	(17	)
Fuel	191				198				(7		)
Energy purchases	69				66				3
Other operation and maintenance	207				202				5
Depreciation	105				99				6
Taxes, other than income	16				15				1
Total operating expenses	588				580				8
Other Income (Expense) - net	(2		)		(1		)		(1		)
Interest Expense	65				65				—
Income Taxes	59				68				(9		)
Net Income	95				112				(17		)
Less: Special Items	(1		)		—				(1		)
Earnings from Ongoing Operations	$	96			$	112			$	(16	)

The following after-tax gains (losses), which management considers special items, impacted the Kentucky Regulated segment's results and are excluded from Earnings from Ongoing Operations during the periods ended March 31 .

	Income Statement Line Item		Three Months
			2017				2016
Adjustment to investment, net of tax of $0, $0 (a)	Other Income (Expense) - net		$	(1	)		$	—
Total Special Items			$	(1	)		$	—

(a)	KU recorded a write-off of an equity method investment.

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

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	Three Months
Kentucky Gross Margins	$	(18	)
Other operation and maintenance	(3		)
Depreciation	(2		)
Taxes, other than income	(2		)
Income Taxes	9
Earnings from Ongoing Operations	(16		)
Special items, after-tax	(1		)
Net Income	$	(17	)

 

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

•	Lower income taxes primarily due to lower pre-tax income.

 

Pennsylvania Regulated Segment

 

The Pennsylvania Regulated segment includes the regulated electricity transmission and distribution operations of PPL Electric. In addition, certain costs are allocated to the Pennsylvania Regulated segment. The Pennsylvania Regulated segment represents 20% of PPL's Net Income for the three months ended March 31, 2017 and 25% of PPL's assets at March 31, 2017 .

Net Income and Earnings from Ongoing Operations for the periods ended March 31 include the following results.

	Three Months
	2017				2016				$ Change
Operating revenues	$	573			$	585			$	(12	)
Energy purchases	146				167				(21		)
Other operation and maintenance	164				150				14
Depreciation	75				59				16
Taxes, other than income	29				29				—
Total operating expenses	414				405				9
Other Income (Expense) - net	1				3				(2		)
Interest Expense	33				33				—
Income Taxes	48				56				(8		)
Net Income	79				94				(15		)
Less: Special Items (a)	—				—				—
Earnings from Ongoing Operations	$	79			$	94			$	(15	)

 

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

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

	Three Months
Pennsylvania Gross Margins	$	1
Other operation and maintenance	(10		)
Depreciation	(12		)
Other Income (Expense) - net	(2		)
Income Taxes	8
Net Income	$	(15	)

 

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

•	Higher other operation and maintenance expense primarily due to $8 million of higher corporate service costs allocated to PPL Electric.

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

 

•	Lower income taxes primarily due to lower pre-tax income.

Reconciliation of Earnings from Ongoing Operations

 

The following tables contain after-tax gains (losses), in total, which management considers special items, that are excluded from Earnings from Ongoing Operations and a reconciliation to PPL's "Net Income" for the periods ended March 31 .

	2017 Three Months
	U.K. Regulated				KY Regulated				PA Regulated				Corporate and Other				Total
Net Income	$	286			$	95			$	79			$	(57	)		$	403
Less: Special Items (expense) benefit:
Foreign currency-related economic hedges, net of tax of $12	(21		)		—				—				—				(21		)
Adjustment to investment, net of tax of $0	—				(1		)		—				—				(1		)
Total Special Items	(21		)		(1		)		—				—				(22		)
Earnings from Ongoing Operations	$	307			$	96			$	79			$	(57	)		$	425

	2016 Three Months
	U.K. Regulated				KY Regulated				PA Regulated				Corporate and Other				Total
Net Income	$	289			$	112			$	94			$	(14	)		$	481
Less: Special Items (expense) benefit:
Foreign currency-related economic hedges, net of tax of ($13)	24				—				—				—				24
Spinoff of the Supply segment, net of tax of $1	—				—				—				(1		)		(1		)
Total Special Items	24				—				—				(1		)		23
Earnings from Ongoing Operations	$	265			$	112			$	94			$	(13	)		$	458

Margins

 

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

 

•

"U.K. Gross Margins" is a single financial performance measure of the electricity distribution operations of the U.K. Regulated segment. In calculating this measure, direct costs such as connection charges from National Grid, which owns and manages the electricity transmission network in England and Wales, and Ofgem license fees (recorded in "Other operation and maintenance" on the Statements of Income) are deducted from operating revenues, as they are costs passed through to customers. As a result, this measure represents the net revenues from the delivery of electricity across WPD's distribution network in the U.K. and directly related activities.

 

•

"Kentucky Gross Margins" is a single financial performance measure of the electricity generation, transmission and distribution operations of the Kentucky Regulated segment, LKE, LG&E and KU, as well as the Kentucky Regulated segment's, LKE's and LG&E's distribution and sale of natural gas. In calculating this measure, fuel, energy purchases and certain variable costs of production (recorded in "Other operation and maintenance" on the Statements of Income) are deducted from operating revenues. In addition, certain other expenses, recorded in "Other operation and maintenance", "Depreciation" and "Taxes, other than income" on the Statements of Income, associated with approved cost recovery mechanisms are offset against the recovery of those expenses, which are included in revenues. These mechanisms allow for direct recovery of these expenses and, in some cases, returns on capital investments and performance incentives. As a result, this measure represents the net revenues from electricity and gas operations.

•

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

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related to the Smart Meter program) and "Taxes, other than income," (which is primarily gross receipts tax) on the Statements of Income. This measure represents the net revenues from the Pennsylvania Regulated segment's and PPL Electric's electricity delivery operations.

These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and report their results of operations. Management believes these measures provide additional useful criteria to make investment decisions. These performance measures are used, in conjunction with other information, by senior management and PPL's Board of Directors to manage operations and analyze actual results compared with budget.

 

Changes in Margins

 

The following table shows Margins by PPL's reportable segment and by component, as applicable, for the periods ended March 31 as well as the change between periods. The factors that gave rise to the changes are described following the table.

	Three Months
	2017				2016				$ Change
U.K. Regulated
U.K. Gross Margins	$	536			$	557			$	(21	)
Impact of changes in foreign currency exchange rates									(91		)
U.K. Gross Margins excluding impact of foreign currency exchange rates									$	70
Kentucky Regulated
Kentucky Gross Margins
LG&E	$	226			$	228			$	(2	)
KU	281				297				(16		)
Total Kentucky Gross Margins	$	507			$	525			$	(18	)
Pennsylvania Regulated
Pennsylvania Gross Margins
Distribution	$	258			$	258			$	—
Transmission	108				107				1
Total Pennsylvania Gross Margins	$	366			$	365			$	1

U.K. Gross Margins

 

U.K. Gross Margins, excluding the impact of changes in foreign currency exchange rates, increased primarily due to $58 million from the April 1, 2016 price increase, which includes $14 million of the recovery of prior customer rebates, and $9 million of higher volumes.

Kentucky Gross Margins

 

Kentucky Gross Margins decreased primarily due to $22 million of lower electricity sales volumes driven by milder weather in the first quarter of 2017 ($5 million at LG&E and $17 million at KU).

Pennsylvania Gross Margins

 

Pennsylvania Gross Margins increased primarily due to an increase of $11 million primarily from returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability, partially offset by a $10 million decrease as a result of a lower peak transmission system load in 2016 which negatively affected transmission revenue for the first quarter of 2017.

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Reconciliation of Margins

 

The following tables contain the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the periods ended March 31 .

	2017 Three Months
	U.K. Gross Margins				Kentucky Gross Margins				PA Gross Margins				Other (a)				Operating Income (b)
Operating Revenues	$	559		(c)	$	809			$	573			$	10			$	1,951
Operating Expenses
Fuel	—				191				—				—				191
Energy purchases	—				69				146				—				215
Other operation and maintenance	23				26				29				354				432
Depreciation	—				16				4				222				242
Taxes, other than income	—				—				28				47				75
Total Operating Expenses	23				302				207				623				1,155
Total	$	536			$	507			$	366			$	(613	)		$	796

	2016 Three Months
	U.K. Gross Margins				Kentucky Gross Margins				PA Gross Margins				Other (a)				Operating Income (b)
Operating Revenues	$	584		(c)	$	826			$	585			$	16			$	2,011
Operating Expenses
Fuel	—				198				—				(1		)		197
Energy purchases	—				66				167				—				233
Other operation and maintenance	27				24				25				374				450
Depreciation	—				12				—				217				229
Taxes, other than income	—				1				28				50				79
Total Operating Expenses	27				301				220				640				1,188
Total	$	557			$	525			$	365			$	(624	)		$	823

 

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

(c)	Excludes ancillary revenues of $9 million and $11 million for the three months ended March 31, 2017 and 2016 .

2017 Outlook

 

(PPL)

 

The following projections and factors underlying these projections (on an after-tax basis) are provided for PPL's segments and the Corporate and Other category and the related Registrants.

(PPL's U.K. Regulated Segment)

 

Lower net income is projected in 2017 compared with 2016 due to a lower assumed GBP exchange rate in 2017 , lower incentive revenues, higher interest expense and higher depreciation expense, partially offset by lower operation and maintenance expense, including pension expense, and higher revenues from the April 1, 2017 price increase.

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

 

Relatively flat net income is projected in 2017 compared with 2016 primarily driven by electricity and gas base rate increases, offset by higher operation and maintenance expense and higher depreciation expense.

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(PPL's Pennsylvania Regulated Segment and PPL Electric)

 

Relatively flat net income is projected in 2017 compared with 2016 primarily driven by higher transmission earnings and lower operation and maintenance expense, offset by higher depreciation expense, higher interest expense and higher income taxes.

 

(PPL's Corporate and Other Category)

 

Relatively flat costs are projected in 2017 compared with 2016 .

 

(All Registrants)

 

Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, Notes 6 and 9 to the Financial Statements and "Item 1A. Risk Factors" in this Form 10-Q (as applicable) and "Item 1. Business" and "Item 1A. Risk Factors" in the Registrants' 2016 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

 

PPL Electric: Statement of Income Analysis, Earnings and Margins

Statement of Income Analysis

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

	Three Months
	2017				2016				$ Change
Operating Revenues	$	573			$	585			$	(12	)
Operating Expenses
Operation
Energy purchases	146				167				(21		)
Other operation and maintenance	164				150				14
Depreciation	75				59				16
Taxes, other than income	29				29				—
Total Operating Expenses	414				405				9
Other Income (Expense) - net	1				3				(2		)
Interest Expense	33				33				—
Income Taxes	48				56				(8		)
Net Income	$	79			$	94			$	(15	)

Operating Revenues

 

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

	Three Months
Distribution Price (a)	$	12
Distribution volume	(3		)
PLR (b)	(21		)
Transmission Formula Rate	1
Other	(1		)
Total	$	(12	)

(a)	Distribution rider prices resulted in increases of $12 million for the three months ended March 31, 2017 .

(b)	Decrease primarily due to lower energy prices as described below.

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Energy Purchases

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

Other Operation and Maintenance

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

	Three Months
Corporate service costs	$	8
Contractor-related expenses	2
Payroll-related costs	2
Act 129	5
Bad debts	(3		)
Total	$	14

 

Depreciation

 

Depreciation increased $ 16 million for the three months ended March 31, 2017 compared with 2016 , primarily due to additional assets placed into service, related to the ongoing efforts to ensure the reliability of the delivery system and the replacement of aging infrastructure, net of retirements.

 

Income Taxes

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

	Three Months
Change in pre-tax income at current period tax rates	$	(10	)
Depreciation not normalized	(1		)
Stock-based compensation	3
Total	$	(8	)

Earnings

	Three Months Ended
	March 31,
	2017				2016
Net Income	$	79			$	94
Special items, gains (losses), after-tax (a)	—				—

 

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

Earnings decreased for the three month period in 2017 compared with 2016 primarily due to higher other operation and maintenance expense, primarily due to higher corporate service costs, and higher depreciation expense, primarily due to transmission and distribution additions placed into service related to the ongoing efforts to improve reliability and replace aging infrastructure, net of retirements. Higher transmission margins due to additional capital investments were offset by lower peak transmission demand.

 

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

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	Three Months
Pennsylvania Gross Margins	$	1
Other operation and maintenance	(10		)
Depreciation	(12		)
Other Income (Expense) - net	(2		)
Income Taxes	8
Net Income	$	(15	)

 

Margins

 

"Pennsylvania Gross Delivery Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended March 31 . 

	2017 Three Months												2016 Three Months
	PA Gross Delivery Margins				Other (a)				Operating Income (b)				PA Gross Delivery Margins				Other (a)				Operating Income (b)
Operating Revenues	$	573			$	—			$	573			$	585			$	—			$	585
Operating Expenses
Energy purchases	146				—				146				167				—				167
Other operation and maintenance	29				135				164				25				125				150
Depreciation	4				71				75				—				59				59
Taxes, other than income	28				1				29				28				1				29
Total Operating Expenses	207				207				414				220				185				405
Total	$	366			$	(207	)		$	159			$	365			$	(185	)		$	180

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

 

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LKE: Statement of Income Analysis, Earnings and Margins

 

Statement of Income Analysis

 

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

	Three Months
	2017				2016				$ Change
Operating Revenues	$	809			$	826			$	(17	)
Operating Expenses
Operation
Fuel	191				198				(7		)
Energy purchases	69				66				3
Other operation and maintenance	207				202				5
Depreciation	105				99				6
Taxes, other than income	16				15				1
Total Operating Expenses	588				580				8
Other Income (Expense) - net	(2		)		(1		)		(1		)
Interest Expense	49				49				—
Interest Expense with Affiliate	4				4				—
Income Taxes	63				72				(9		)
Net Income	$	103			$	120			$	(17	)

Operating Revenues

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

	Three Months
Volumes	$	(37	)
Fuel and other energy prices (a)	11
DSM	5
Other	4
Total	$	(17	)

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

Fuel

Fuel decreased $7 million for the three months ended March 31, 2017 compared with 2016 primarily due to a $12 million decrease in volumes, driven by milder weather, partially offset by a $5 million increase in fuel prices.

Income Taxes

Income taxes decreased $9 million for the three months ended March 31, 2017 compared with 2016 primarily due to lower pre-tax income.

Earnings

	Three Months Ended
	March 31,
	2017				2016
Net Income	$	103			$	120
Special items, gains (losses), after-tax	(1		)		—

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Earnings decreased for the three month period in 2017 compared with 2016 primarily due to lower electricity sales volumes driven by milder weather.

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

	Three Months
Margins	$	(18	)
Other operation and maintenance	(3		)
Depreciation	(2		)
Taxes, other than income	(2		)
Income Taxes	9
Special items, gains (losses), after-tax (a)	(1		)
Net Income	$	(17	)

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

Margins

 

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the factors underlying changes between periods. Within PPL's discussion, LKE's Margins are referred to as "Kentucky Gross Margins."

 

The following table contains the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended March 31 .

	2017 Three Months												2016 Three Months
	Margins				Other (a)				Operating Income (b)				Margins				Other (a)				Operating Income (b)
Operating Revenues	$	809			$	—			$	809			$	826			$	—			$	826
Operating Expenses
Fuel	191				—				191				198				—				198
Energy purchases	69				—				69				66				—				66
Other operation and maintenance	26				181				207				24				178				202
Depreciation	16				89				105				12				87				99
Taxes, other than income	—				16				16				1				14				15
Total Operating Expenses	302				286				588				301				279				580
Total	$	507			$	(286	)		$	221			$	525			$	(279	)		$	246

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

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

 

Statement of Income Analysis

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

	Three Months
	2017				2016				$ Change
Operating Revenues
Retail and wholesale	$	374			$	375			$	(1	)
Electric revenue from affiliate	17				11				6
Total Operating Revenues	391				386				5
Operating Expenses
Operation
Fuel	80				78				2
Energy purchases	64				62				2
Energy purchases from affiliate	2				2				—
Other operation and maintenance	87				87				—
Depreciation	44				41				3
Taxes, other than income	8				8				—
Total Operating Expenses	285				278				7
Other Income (Expense) - net	(2		)		—				(2		)
Interest Expense	17				17				—
Income Taxes	33				35				(2		)
Net Income	$	54			$	56			$	(2	)

 

Operating Revenues

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

	Three Months
Volumes	$	(5	)
Fuel and other energy prices	4
DSM	3
Other	3
Total	$	5

Earnings

	Three Months Ended
	March 31,
	2017				2016
Net Income	$	54			$	56
Special items, gains (losses), after-tax (a)	—				—

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

 

Earnings decreased for the three month period in 2017 compared with 2016 primarily due to higher depreciation expense, fuel costs and energy purchases, partially offset by higher native load sales to KU due to timing of plant outages.

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

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	Three Months
Margins	$	(2	)
Other operation and maintenance	1
Taxes, other than income	(1		)
Other Income (Expense) - net	(2		)
Income Taxes	2
Net Income	$	(2	)

 

Margins

 

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the factors underlying changes between periods. Within PPL's discussion, LG&E's Margins are included in "Kentucky Gross Margins."

 

The following table contains the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended March 31 .

	2017 Three Months												2016 Three Months
	Margins				Other (a)				Operating Income (b)				Margins				Other (a)				Operating Income (b)
Operating Revenues	$	391			$	—			$	391			$	386			$	—			$	386
Operating Expenses
Fuel	80				—				80				78				—				78
Energy purchases, including affiliate	66				—				66				64				—				64
Other operation and maintenance	10				77				87				9				78				87
Depreciation	9				35				44				6				35				41
Taxes, other than income	—				8				8				1				7				8
Total Operating Expenses	165				120				285				158				120				278
Total	$	226			$	(120	)		$	106			$	228			$	(120	)		$	108

 

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

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KU: Statement of Income Analysis, Earnings and Margins

Statement of Income Analysis

 

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

	Three Months
	2017				2016				$ Change
Operating Revenues
Retail and wholesale	$	435			$	451			$	(16	)
Electric revenue from affiliate	2				2				—
Total Operating Revenues	437				453				(16		)
Operating Expenses
Operation
Fuel	111				120				(9		)
Energy purchases	5				4				1
Energy purchases from affiliate	17				11				6
Other operation and maintenance	109				106				3
Depreciation	60				58				2
Taxes, other than income	8				7				1
Total Operating Expenses	310				306				4
Other Income (Expense) - net	(1		)		(2		)		1
Interest Expense	24				24				—
Income Taxes	39				46				(7		)
Net Income	$	63			$	75			$	(12	)

Operating Revenue

 

The increase (decrease) in operating revenue for the period ended March 31, 2017 compared with 2016 was due to:

	Three Months
Volumes	$	(24	)
Fuel and other energy prices (a)	6
DSM	2
Total	$	(16	)

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

Fuel

 

Fuel decreased $ 9 million for the three months ended March 31, 2017 compared with 2016 primarily due to a $16 million decrease in volumes, driven by milder weather, partially offset by a $7 million increase in fuel prices.

Energy purchases from affiliate

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

Income Taxes

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

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Earnings

	Three Months Ended
	March 31,
	2017				2016
Net Income	$	63			$	75
Special items, gains (losses), after-tax	(1		)		—

Earnings decreased for the three month period in 2017 compared with 2016 primarily due to lower sales volumes driven by milder weather and higher energy purchases from affiliate, partially offset by lower fuel expense and lower income taxes.

 

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

	Three Months
Margins	$	(16	)
Other operation and maintenance	(2		)
Depreciation	(1		)
Taxes, other than income	(1		)
Other Income (Expense) - net	2
Income Taxes	7
Special items, gains (losses), after-tax (a)	(1		)
Net Income	$	(12	)

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

 

Margins

 

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the factors underlying changes between periods. Within PPL's discussion, KU's Margins are included in "Kentucky Gross Margins."

 

The following table contains the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended March 31 .

	2017 Three Months												2016 Three Months
	Margins				Other (a)				Operating Income (b)				Margins				Other (a)				Operating Income (b)
Operating Revenues	$	437			$	—			$	437			$	453			$	—			$	453
Operating Expenses
Fuel	111				—				111				120				—				120
Energy purchases, including affiliate	22				—				22				15				—				15
Other operation and maintenance	16				93				109				15				91				106
Depreciation	7				53				60				6				52				58
Taxes, other than income	—				8				8				—				7				7
Total Operating Expenses	156				154				310				156				150				306
Total	$	281			$	(154	)		$	127			$	297			$	(150	)		$	147

(a)	Represents amounts excluded from 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				KU
March 31, 2017
Cash and cash equivalents	$	409			$	20			$	15			$	4			$	7
Short-term debt	1,666				499				243				207				36
Notes payable with affiliate					—				82				—				—
December 31, 2016
Cash and cash equivalents	$	341			$	13			$	13			$	5			$	7
Short-term debt	923				295				185				169				16
Notes payable with affiliate					—				163				—				—

 

(a)

At March 31, 2017 , $51 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL would not anticipate a material incremental U.S. tax cost. Historically, dividends paid by foreign subsidiaries have been limited to distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 2016 Form 10-K for additional information on undistributed earnings of WPD.

 

(All Registrants)

 

Net cash provided by (used in) operating, investing and financing activities for the three month period ended March 31 , and the changes between periods, were as follows.

	PPL				PPL Electric				LKE				LG&E				KU
2017
Operating activities	$	135			$	55			$	312			$	142			$	139
Investing activities	(677		)		(276		)		(184		)		(94		)		(89		)
Financing activities	607				228				(126		)		(49		)		(50		)
2016
Operating activities	$	557			$	124			$	303			$	157			$	195
Investing activities	(661		)		(215		)		(219		)		(109		)		(110		)
Financing activities	115				78				(86		)		(56		)		(79		)
Change  - Cash Provided (Used)
Operating activities	$	(422	)		$	(69	)		$	9			$	(15	)		$	(56	)
Investing activities	(16		)		(61		)		35				15				21
Financing activities	492				150				(40		)		7				29

 

Operating Activities

 

The components of the change in cash provided by (used in) operating activities for the three months ended March 31, 2017 compared with 2016 were as follows.

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	PPL				PPL Electric				LKE				LG&E				KU
Change - Cash Provided (Used)
Net income	$	(78	)		$	(15	)		$	(17	)		$	(2	)		$	(12	)
Non-cash components	90				1				(13		)		(4		)		(5		)
Working capital	(36		)		(31		)		28				(15		)		(29		)
Defined benefit plan funding	(397		)		(24		)		11				12				(9		)
Other operating activities	(1		)		—				—				(6		)		(1		)
Total	$	(422	)		$	(69	)		$	9			$	(15	)		$	(56	)

 

(PPL)

PPL's cash provided by operating activities in 2017 decreased $422 million compared with 2016 .

•	The $90 million increase in net non-cash components was primarily due to an increase in unrealized losses on derivatives.

•

The $36 million decrease in cash from changes in working capital was primarily due to a decrease in accounts payable (primarily due to timing of payments), a decrease in taxes payable (primarily due to an increase in current income tax benefit in 2017) and an increase in prepayments (primarily due to higher tax payments) partially offset by a decrease in unbilled revenue and accounts receivable (primarily due to less favorable weather in 2017 compared to 2016) and a decrease in fuel, materials and supplies (primarily due to a decrease in volumes due to less favorable weather in 2017 compared to 2016).

•	Defined benefit plan funding was $397 million higher in 2017. The increase was primarily due to the acceleration of WPD's contributions to its U.K. pension plans. See Note 8 to the Financial Statements for additional information.

(PPL Electric)

 

PPL Electric's cash provided by operating activities in 2017 decreased $69 million compared with 2016 .

•

The $31 million decrease in cash from changes in working capital was primarily due to an increase in prepayments (primarily due to higher tax payments) and a decrease in accounts payable (primarily due to timing of payments) partially offset by a decrease in accounts receivable (primarily due to unfavorable weather in 2017), a net decrease in current regulatory assets and regulatory liabilities (due to the timing of rate recovery mechanisms) and an increase in taxes payable (primarily due to a decrease in income tax expense in 2017).

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

(LKE)

 

LKE's cash provided by operating activities in 2017 increased $9 million compared with 2016 .

•	The increase in cash from changes in working capital was primarily driven by decreases in accounts receivable and unbilled revenues due to less favorable weather in 2017 compared to 2016 and an increase in taxes payable due to timing of payments, partially offset by a decrease in accounts payable due to timing of fuel purchases and payments.

(LG&E)

 

LG&E's cash provided by operating activities in 2017 decreased $15 million compared with 2016 .

•	The decrease in cash from changes in working capital was primarily driven by decreases in taxes payable due to timing of payments and accounts payable due to timing of fuel purchases and payments, partially offset by decreases in accounts receivable and unbilled revenues due to less favorable weather in 2017 compared to 2016.

(KU)

 

KU's cash provided by operating activities in 2017 decreased $56 million compared with 2016 .

•

The decrease in cash from changes in working capital was primarily driven by decreases in taxes payable due to timing of payments, accounts payable due to timing of fuel purchases and payments and accounts payable to affiliates due to higher intercompany settlements associated with operational expenses and inventory, partially offset by decreases in accounts receivable and unbilled revenues due to less favorable weather in 2017 compared to 2016.

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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 three months ended March 31, 2017 compared with 2016 was as follows. 

	PPL				PPL Electric				LKE				LG&E				KU
Decrease (Increase)	$	(21	)		$	(60	)		$	35			$	15			$	21

For PPL, the increase in expenditures was due to higher project expenditures at WPD and PPL Electric partially offset by lower project expenditures at LG&E and KU and a decrease in foreign currency exchange rates. The increase in project expenditures for WPD was primarily due to an increase in expenditures to enhance system reliability. The increase in expenditures for PPL Electric was primarily due to the smart meter implementation project and various enhancement reliability projects. The decrease in expenditures for LG&E was primarily due to reduced spending for environmental air projects at LG&E's Mill Creek plant. The decrease in expenditures for KU was primarily due to reduced spending for environmental air projects at KU's Ghent plant.

 

Financing Activities

 

(All Registrants)

 

The components of the change in cash provided by (used in) financing activities for the three months ended March 31, 2017 compared with 2016 were as follows.

	PPL				PPL Electric				LKE				LG&E				KU
Change - Cash Provided (Used)
Debt issuance/retirement, net	$	64			$	—			$	—			$	—			$	—
Stock issuances/redemptions, net	31				—				—				—				—
Dividends	(3		)		(31		)		—				(62		)		(6		)
Capital contributions/distributions, net	—				100				(73		)		(30		)		—
Change in short-term debt, net	393				79				207				98				34
Notes payable with affiliate	—				—				(174		)		—				—
Other financing activities	7				2				—				1				1
Total	$	492			$	150			$	(40	)		$	7			$	29

 

See Note 7 to the Financial Statements in this Form 10-Q for information on 2017 short and long-term debt activity, equity transactions and PPL dividends. See the Registrants' 2016 Form 10-K for information on 2016 activity.

 

Credit Facilities

 

The Registrants maintain credit facilities to enhance liquidity, provide credit support and provide a backstop to commercial paper programs. Amounts borrowed under these credit facilities are reflected in "Short-term debt" on the Balance Sheets. At March 31, 2017 , the total committed borrowing capacity and the use of that capacity under these credit facilities was as follows:

 

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External  

	Committed Capacity				Borrowed				Letters of Credit and Commercial Paper Issued				Unused Capacity
PPL Capital Funding Credit Facilities	$	1,400			$	—			$	206			$	1,194
PPL Electric Credit Facility	650				—				500				150
LKE Credit Facility	75				—				—				75
LG&E Credit Facility	500				—				207				293
KU Credit Facilities	598				—				234				364
Total LKE	1,173				—				441				732
Total U.S. Credit Facilities (a)	$	3,223			$	—			$	1,147			$	2,076
Total U.K. Credit Facilities (b)	£	1,285			£	591			£	—			£	694

 

(a)	The commitments under the U.S. credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than the following percentages of the total committed capacity: PPL - 10%, PPL Electric - 7%, LKE - 21%, LG&E - 7% and KU - 37%.

(b)	The amounts borrowed at March 31, 2017 were a USD-denominated borrowing of $200 million and GBP-denominated borrowings which equated to $535 million. At March 31, 2017 , the USD equivalent of unused capacity under the U.K. committed credit facilities was $864 million.

The commitments under the U.K. credit facilities are provided by a diverse bank group, with no one bank providing more than 20% of the total committed capacity.

 

See Note 7 to the Financial Statements for further discussion of the Registrants' credit facilities.

Intercompany (LKE, LG&E and KU)

	Committed Capacity				Borrowed				Other Used Capacity				Unused Capacity
LKE Credit Facility	$	225			$	82			$	—			$	143
LG&E Money Pool (a)	500				—				207				293
KU Money Pool (a)	500				—				36				464

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

See Note 10 to the Financial Statements for further discussion of intercompany credit facilities.

 

Commercial Paper (All Registrants)

 

PPL, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as necessary. Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's Syndicated Credit Facility. The following commercial paper programs were in place at March 31, 2017 :

	Capacity				Commercial Paper Issuances				Unused Capacity
PPL Capital Funding	$	1,000			$	189			$	811
PPL Electric	650				499				151
LG&E	350				207				143
KU	350				36				314
Total LKE	700				243				457
Total PPL	$	2,350			$	931			$	1,419

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Long-term Debt

(PPL)

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

(PPL, LKE and LG&E)

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

(PPL)

 

ATM Program

 

For the period ended March 31, 2017 , PPL issued the following:

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

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

Common Stock Dividends

 

In February 2017 , PPL declared a quarterly common stock dividend, payable April 3, 2017 , of 39.5 cents per share (equivalent to $1.58 per annum). Future dividends, declared at the discretion of the Board of Directors, will depend upon future earnings, cash flows, financial and legal requirements and other factors.

Rating Agency Actions

 

(All Registrants)

 

Moody's and S&P have periodically reviewed the credit ratings of the debt of the Registrants and their subsidiaries. Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

 

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

 

The rating agencies have taken the following actions related to the Registrants and their subsidiaries during 2017 :

(PPL Electric)

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

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(LG&E)

In March 2017, Moody's and S&P confirmed ratings of A1 and A to LG&E's 2003 Series A Pollution Control Revenue Bonds.

Ratings Triggers

 

(PPL, LKE, LG&E and KU)

 

Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, interest rate and foreign currency instruments (for PPL), contain provisions that require the posting of additional collateral or permit the counterparty to terminate the contract, if PPL's, LKE's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade. See Note 13 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral requirements for PPL, LKE and LG&E for derivative contracts in a net liability position at March 31, 2017 .

 

(All Registrants)

 

For additional information on the Registrants' liquidity and capital resources, see "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Registrants' 2016 Form 10-K.

Risk Management

 

Market Risk

 

(All Registrants)

 

See Notes 12 and 13 to the Financial Statements for information about the Registrants' risk management objectives, valuation techniques and accounting designations.

 

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions. Actual future results may differ materially from those presented. These are not precise indicators of expected future losses, but are rather only indicators of possible losses under normal market conditions at a given confidence level.

 

Interest Rate Risk

 

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

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The following interest rate hedges were outstanding at March 31, 2017 .

	Exposure Hedged				Fair Value, Net - Asset (Liability) (a)				Effect of a 10% Adverse Movement in Rates (b)				Maturities Ranging Through
PPL
Cash flow hedges
Cross-currency swaps (c)	$	802			$	182			$	(90	)		2028
Economic hedges
Interest rate swaps (d)	147				(30		)		(2		)		2033
LKE
Economic hedges
Interest rate swaps (d)	147				(30		)		(2		)		2033
LG&E
Economic hedges
Interest rate swaps (d)	147				(30		)		(2		)		2033

 

(a)	Includes accrued interest, if applicable.

(b)	Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes a 10% adverse movement in foreign currency exchange rates.

(c)	Cross-currency swaps are utilized to hedge the principal and interest payments of WPD's U.S. dollar-denominated senior notes. Changes in the fair value of these instruments are recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.

(d)	Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in the fair value of these derivatives are included in regulatory assets or regulatory liabilities.

The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios. The estimated impact of a 10% adverse movement in interest rates on interest expense at March 31, 2017 was insignificant for PPL, PPL Electric, LKE, LG&E and KU. The estimated impact of a 10% adverse movement in interest rates on the fair value of debt at March 31, 2017 is shown below.

	10% Adverse Movement in Rates
PPL	$	563
PPL Electric	137
LKE	180
LG&E	66
KU	99

 

Foreign Currency Risk (PPL)

 

PPL is exposed to foreign currency risk primarily through investments in U.K. affiliates. Under its risk management program, PPL may enter into financial instruments to hedge certain foreign currency exposures, including translation risk of expected earnings, firm commitments, recognized assets or liabilities, anticipated transactions and net investments.

 

The following foreign currency hedges were outstanding at March 31, 2017 .

	Exposure Hedged				Fair Value, Net - Asset (Liability)				Effect of a 10% Adverse Movement in Foreign Currency Exchange Rates (a)				Maturities Ranging Through
Economic hedges (b)	£	2,840			$	150			$	(333	)		2019

 

(a)	Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.

(b)	To economically hedge the translation risk of expected earnings denominated in GBP.

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(All Registrants)

 

Commodity Price Risk

 

PPL is exposed to commodity price risk through its domestic subsidiaries as described below.

•

PPL Electric is exposed to commodity price risk from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to this risk. PPL Electric also mitigates its exposure to commodity price risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the commodity price risk associated with the PLR obligation to the energy suppliers.

•	LG&E's and KU's rates include certain mechanisms for fuel and fuel-related expenses. In addition, LG&E's rates include a mechanism for natural gas supply expenses. These mechanisms generally provide for timely recovery of market price fluctuations associated with these expenses.

Volumetric Risk

 

PPL is exposed to volumetric risk through its subsidiaries as described below.

 

•	WPD is exposed to volumetric risk which is significantly mitigated as a result of the method of regulation in the U.K. Under the RIIO-ED1 price control period, recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2016 Form 10-K for additional information on revenue recognition under RIIO-ED1.

•	PPL Electric, LG&E and KU are exposed to volumetric risk on retail sales, mainly due to weather and other economic conditions for which there is limited mitigation between rate cases.

Credit Risk (All Registrants)

 

See Notes 12 and 13 to the Financial Statements in this Form 10-Q and "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Risk Management - Credit Risk" in the Registrants' 2016 Form 10-K for additional information.

 

Foreign Currency Translation (PPL)

 

The value of the British pound sterling fluctuates in relation to the U.S. dollar. Changes in this exchange rate resulted in a foreign currency translation loss of $24 million for the three months ended March 31, 2017 , which primarily reflected a $46 million decrease to PP&E and a $10 million decrease to goodwill partially offset by a $28 million decrease to long-term debt and a $4 million decrease to other net liabilities. Changes in this exchange rate resulted in a foreign currency translation loss of $466 million for the three months ended March 31, 2016 , which primarily reflected a $909 million decrease to PP&E and a $214 million decrease to goodwill partially offset by a $557 million decrease to long-term debt and a $100 million decrease to other net liabilities. The impact of foreign currency translation is recorded in AOCI.

 

Related Party Transactions (All Registrants)

 

The Registrants are not aware of any material ownership interests or operating responsibility by senior management in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with the Registrants. See Note 10 to the Financial Statements for additional information on related party transactions for PPL Electric, LKE, LG&E and KU.

 

Acquisitions, Development and Divestitures (All Registrants)

 

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

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

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Registrants' businesses. The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be significant. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed. Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions. In addition, the regulatory reviews specified in the President's March 2017 Executive Order promoting energy independence and economic growth could result in future regulatory changes and additional uncertainty. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the cost for their products or their demand for the Registrants' services. Increased capital and operating costs are subject to rate recovery. PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.

 

See Note 9 to the Financial Statements for a discussion of the more significant environmental matters including:

•	Legal Matters,

•	Climate Change,

•	Coal Combustion Residuals,

•	Effluent Limitations Guidelines, and

•	National Ambient Air Quality Standards.

Additionally, see "Item 1. Business - Environmental Matters" in the Registrants' 2016 Form 10-K for additional information on environmental matters.

 

New Accounting Guidance (All Registrants)

 

See Note 17 to the Financial Statements for a discussion of new accounting guidance pending adoption.

 

Application of Critical Accounting Policies (All Registrants )

 

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following table summarizes the accounting policies by Registrant that are particularly important to an understanding of the reported financial condition or results of operations, and require management to make estimates or other judgments of matters that are inherently uncertain. See "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrants' 2016 Form 10-K for a discussion of each critical accounting policy.

PPL

PPL

Electric

LKE

LG&E

KU

Defined Benefits

X

X

X

X

X

Income Taxes

X

X

X

X

X

Goodwill Impairment

X

X

X

X

AROs

X

X

X

X

Price Risk Management

X

Regulatory Assets and Liabilities

X

X

X

X

X

Revenue Recognition - Unbilled Revenue

X

X

X

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PPL Corporation

PPL Electric Utilities Corporation

LG&E and KU Energy LLC

Louisville Gas and Electric Company

Kentucky Utilities Company

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Reference is made to "Risk Management" in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations."

 

Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures.

 

The Registrants' principal executive officers and principal financial officers, based on their evaluation of the Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of March 31, 2017 , the Registrants' disclosure controls and procedures are effective to ensure that material information relating to the Registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared. The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.

 

(b) Change in internal controls over financial reporting.

 

The Registrants' principal executive officers and principal financial officers have concluded that there were no changes in the Registrants' internal control over financial reporting during the Registrants' first fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrants' internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

 

For information regarding pending administrative and judicial proceedings involving regulatory, environmental and other matters, which information is incorporated by reference into this Part II, see:

 

•	"Item 3. Legal Proceedings" in each Registrant's 2016 Form 10-K; and

•	Notes 6 and 9 to the Financial Statements.

Item 1A. Risk Factors

 

There have been no material changes in the Registrants' risk factors from those disclosed in "Item 1A. Risk Factors" of the Registrants' 2016 Form 10-K.

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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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 are incorporated herein by reference. Exhibits indicated by a [_] are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

*10(a)	-	Third Amendment to Revolving Credit Agreement, dated as of March 17, 2017, to the Existing Credit Agreement, dated as of March 26, 2014, between PPL Capital Funding, Inc., the Borrower, PPL Corporation, the Guarantor, The Bank of Nova Scotia, as the Administrative Agent, Sole Lead Arranger and Sole Bookrunner, and each Lender
10(b)	-	£230,000,000 Term Loan Agreement, dated March 28, 2017, between Western Power Distribution plc and HSBC Bank, PLC and Mizuho Bank, Ltd., as Mandated Lead Arrangers, and Mizuho Bank, Ltd., as Facility Agent (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 5, 2017)
*12(a)	-	PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(b)	-	PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(c)	-	LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
*12(d)	-	Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
*12(e)	-	Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended March 31, 2017, filed by the following officers for the following companies:
*31(a)	-	PPL Corporation's principal executive officer
*31(b)	-	PPL Corporation's principal financial officer
*31(c)	-	PPL Electric Utilities Corporation's principal executive officer
*31(d)	-	PPL Electric Utilities Corporation's principal financial officer
*31(e)	-	LG&E and KU Energy LLC's principal executive officer
*31(f)	-	LG&E and KU Energy LLC's principal financial officer
*31(g)	-	Louisville Gas and Electric Company's principal executive officer
*31(h)	-	Louisville Gas and Electric Company's principal financial officer
*31(i)	-	Kentucky Utilities Company's principal executive officer
*31(j)	-	Kentucky Utilities Company's principal financial officer
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended March 31, 2017, furnished by the following officers for the following companies:
*32(a)	-	PPL Corporation's principal executive officer and principal financial officer
*32(b)	-	PPL Electric Utilities Corporation's principal executive officer and principal financial officer
*32(c)	-	LG&E and KU Energy LLC's principal executive officer and principal financial officer
*32(d)	-	Louisville Gas and Electric Company's principal executive officer and principal financial officer
*32(e)	-	Kentucky Utilities Company's principal executive officer and principal financial officer
101.INS	-	XBRL Instance Document
101.SCH	-	XBRL Taxonomy Extension Schema
101.CAL	-	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	-	XBRL Taxonomy Extension Definition Linkbase
101.LAB	-	XBRL Taxonomy Extension Label Linkbase
101.PRE	-	XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.

 

		PPL Corporation
		(Registrant)
Date:	May 4, 2017	/s/  Stephen K. Breininger
		Stephen K. Breininger Vice President and Controller
		(Principal Accounting Officer)
		PPL Electric Utilities Corporation
		(Registrant)
Date:	May 4, 2017	/s/  Marlene C. Beers
		Marlene C. Beers Controller
		(Principal Financial Officer and Principal Accounting Officer)

 

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

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