UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 | |
| FORM 10-Q | |
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, |
| 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 |
| PPL Corporation | Yes X | No | ||
| PPL Electric Utilities Corporation | Yes X | No | ||
| LG&E and KU Energy LLC | Yes X | No | ||
| Louisville Gas and Electric Company | Yes X | No | ||
| Kentucky Utilities Company | Yes X | No | ||
| PPL Corporation | Yes X | No | ||
| PPL Electric Utilities Corporation | Yes X | No | ||
| LG&E and KU Energy LLC | Yes X | No | ||
| Louisville Gas and Electric Company | Yes X | No | ||
| Kentucky Utilities Company | Yes X | No | ||
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting 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 ] | [ ] | |
| PPL Corporation | Yes | No X | ||
| PPL Electric Utilities Corporation | Yes | No X | ||
| LG&E and KU Energy LLC | Yes | No X | ||
| Louisville Gas and Electric Company | Yes | No X | ||
| Kentucky Utilities Company | Yes | No X | ||
| PPL Corporation | Common stock, $0.01 par value, | |
| PPL Electric Utilities Corporation | Common stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at October | |
| 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 October | |
| Kentucky Utilities Company | Common stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at October | |
Louisville Gas and Electric Company
Kentucky Utilities Company
2016
| Page | ||||
| PART I. FINANCIAL INFORMATION | ||||
| Item 1. Financial Statements | ||||
| PPL Corporation and Subsidiaries | ||||
| PPL Electric Utilities Corporation and Subsidiaries | ||||
| LG&E and KU Energy LLC and Subsidiaries | ||||
| Louisville Gas and Electric Company | ||||
| Kentucky Utilities Company | ||||
| Combined Notes to Condensed Financial Statements (Unaudited) | ||||||||||
| Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||||
| PART II. OTHER INFORMATION | ||||||||||
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Registrant(s) - refers to the Registrants named on the cover of this Report (each a "Registrant" and collectively, the "Registrants").
Subsidiary Registrant(s)- Registrants that are direct or indirect wholly owned subsidiaries of PPL: PPL Electric, LKE, LG&E and KU.
WPD - refers to WPD plc and its subsidiaries together with a sister company PPL WPD Limited.
subsidiaries.
i
2015.
software upgrades and requests to provide meter readings in real time.
CCR(s) - Coal Combustion Residual(s). CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.
COBRA -Consolidated Omnibus Budget Reconciliation Act, which provides individuals the option to temporarily continue employer group health insurance coverage after termination of employment.
ii
DPCR4 - Distribution Price Control Review 4, the U.K. five-year rate review period applicable to WPD that commenced April 1, 2005.
ELG(s)-Effluent Limitation Guidelines, regulations promulgated by the EPA.
Equity Unit(s) - a PPL equity unit, issued in April 2011, consisting of a Purchase Contract and, initially, a 5.0% undivided beneficial ownership interest in $1,000 principal amount of PPL Capital Funding 4.32% Junior Subordinated Notes due 2019.
E.W. Brown- a generating station in Kentucky with capacity of 1,594 MW.
FERC - Federal Energy Regulatory Commission, the U.S. federal agency that regulates, among other things, interstate transmission and wholesale sales of electricity, hydroelectric power projects and related matters.
Fitch- Fitch, Inc., a credit rating agency.
GAAP - Generally Accepted Accounting Principles in the U.S.
GHG - greenhouse gas(es).
iii
If-Converted Method- A method applied to calculate diluted EPS for a company with outstanding convertible debt. The method is applied as follows: Interest charges (after-tax) applicable to the convertible debt are added back to net income and the convertible debt is assumed to have been converted to equity at the beginning of the period, and the resulting common shares are treated as outstanding shares. Both adjustments are made only for purposes of calculating diluted EPS. This method was applied to PPL's Equity Units prior to settlement.
IRS- Internal Revenue Service, a U.S. government agency.
NPNS - the normal purchases and normal sales exception as permitted by derivative accounting rules. Derivatives that qualify for this exception may receive accrual accounting treatment.
NSR - The new source review provisions of the Clean Air Act that impose stringent emission control requirements on new and modified sources of air emissions that result in emission increases beyond thresholds allowed by the Clean Air Act.
iv
PUC- Pennsylvania Public Utility Commission, the state agency that regulates certain ratemaking, services, accounting and operations of Pennsylvania utilities.
nitrogen oxide from exhaust gas.
S&P - Standard & Poor's Ratings Services, a credit rating agency.
Scrubber - an air pollution control device that can remove particulates and/or gases (primarily sulfur dioxide) from exhaust gases.
v
Treasury Stock Method - A method applied to calculate diluted EPS that assumes any proceeds that could be obtained upon exercise of options and warrants (and their equivalents) would be used to purchase common stock at the average market price during the relevant period.
Volumetric risk - the risk that the actual load volumes provided under full-requirement sales contracts could vary significantly from forecasted volumes.
VSCC- Virginia State Corporation Commission, the state agency that has jurisdiction over the regulation of Virginia corporations, including utilities.
vi
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20142015 Form 10-K and in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements.·fuel supply;·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;·weather conditions affecting customer energy use;·availability of existing generation facilities;·the duration of and cost associated with unscheduled outages at our generating facilities;·transmission and distribution system conditions and operating costs;·expansion of alternative and distributed sources of electricity generation and storage;·collective labor bargaining negotiations;·the outcome of litigation against the Registrants and their subsidiaries;·potential effects of threatened or actual terrorism, war or other hostilities, cyber-based intrusions or natural disasters;·the commitments and liabilities of the Registrants and their subsidiaries;·the effectiveness of our risk management programs, including foreign currency and interest rate hedging;·our ability to attract and retain qualified employees;·volatility in demand for electricity and prices for energy and transmission services;·competition in retail and wholesale power and natural gas markets;·market prices of commodity inputs for ongoing capital expenditures;·capital market conditions, including the availability of capital or credit, changes in interest rates and certain economic indices, and decisions regarding capital structure;·stock price performance of PPL;·volatility 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 and interest payable on certain debt securities;·volatility in or the impact of other changes in financial markets and economic conditions;·new accounting requirements or new interpretations or applications of existing requirements;·changes in securities and credit ratings;·changes in foreign currency exchange rates for British pound sterling;·current and future environmental conditions, regulations and other requirements and the related costs of compliance, including environmental capital expenditures, emission allowance costs and other expenses;·changes in political, regulatory or economic conditions in states, regions or countries where the Registrants or their subsidiaries conduct business;·receipt of necessary governmental permits, approvals and rate relief;·new state, federal or foreign legislation or regulatory developments;·the outcome of any rate cases or other cost recovery or revenue filings by PPL Electric, LG&E, KU or WPD;·the impact of any state, federal or foreign investigations applicable to the Registrants and their subsidiaries and the energy industry;·the effect of any business or industry restructuring;·development of new projects, markets and technologies;·performance of new ventures; and·business dispositions or acquisitions and our ability to realize expected benefits from such business transactions.
1
2
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Operating Revenues | $ | 1,889 | $ | 1,878 | $ | 5,685 | $ | 5,889 | |||||||
| Operating Expenses | |||||||||||||||
| Operation | |||||||||||||||
| Fuel | 227 | 228 | 607 | 695 | |||||||||||
| Energy purchases | 151 | 177 | 531 | 676 | |||||||||||
| Other operation and maintenance | 417 | 482 | 1,292 | 1,405 | |||||||||||
| Depreciation | 232 | 226 | 692 | 658 | |||||||||||
| Taxes, other than income | 76 | 79 | 229 | 241 | |||||||||||
| Total Operating Expenses | 1,103 | 1,192 | 3,351 | 3,675 | |||||||||||
| Operating Income | 786 | 686 | 2,334 | 2,214 | |||||||||||
| Other Income (Expense) - net | 49 | 75 | 284 | 61 | |||||||||||
| Interest Expense | 223 | 221 | 671 | 645 | |||||||||||
| Income from Continuing Operations Before Income Taxes | 612 | 540 | 1,947 | 1,630 | |||||||||||
| Income Taxes | 139 | 144 | 510 | 432 | |||||||||||
| Income from Continuing Operations After Income Taxes | 473 | 396 | 1,437 | 1,198 | |||||||||||
| Income (Loss) from Discontinued Operations (net of income taxes) (Note 8) | — | (3 | ) | — | (915 | ) | |||||||||
| Net Income | $ | 473 | $ | 393 | $ | 1,437 | $ | 283 | |||||||
| Earnings Per Share of Common Stock: | |||||||||||||||
| Income from Continuing Operations After Income Taxes: | |||||||||||||||
| Basic | $ | 0.70 | $ | 0.59 | $ | 2.12 | $ | 1.78 | |||||||
| Diluted | $ | 0.69 | $ | 0.59 | $ | 2.11 | $ | 1.78 | |||||||
| Net Income: | |||||||||||||||
| Basic | $ | 0.70 | $ | 0.58 | $ | 2.12 | $ | 0.42 | |||||||
| Diluted | $ | 0.69 | $ | 0.58 | $ | 2.11 | $ | 0.42 | |||||||
| Dividends Declared Per Share of Common Stock | $ | 0.38 | $ | 0.3775 | $ | 1.14 | $ | 1.1225 | |||||||
| Weighted-Average Shares of Common Stock Outstanding (in thousands) | |||||||||||||||
| Basic | 678,114 | 670,763 | 676,905 | 668,731 | |||||||||||
| Diluted | 680,348 | 673,702 | 679,969 | 671,254 | |||||||||||
3
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Net income | $ | 473 | $ | 393 | $ | 1,437 | $ | 283 | |||||||
| Other comprehensive income (loss): | |||||||||||||||
| Amounts arising during the period - gains (losses), net of tax (expense) benefit: | |||||||||||||||
| Foreign currency translation adjustments, net of tax of ($2), ($3), ($4), ($2) | (641 | ) | 52 | (837 | ) | (97 | ) | ||||||||
| Available-for-sale securities, net of tax of $0, $0, $0, ($9) | — | — | — | 7 | |||||||||||
| Qualifying derivatives, net of tax of ($16), $11, ($9), $4 | 62 | (19 | ) | 57 | 8 | ||||||||||
| Defined benefit plans: | |||||||||||||||
| Prior service costs, net of tax of $0, $0, $0, $4 | — | — | — | (6 | ) | ||||||||||
| Net actuarial gain (loss), net of tax of $4, $0, $3, ($36) | (6 | ) | — | (4 | ) | 52 | |||||||||
| Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): | |||||||||||||||
| Available-for-sale securities, net of tax of $0, $0, $0, $2 | — | — | — | (2 | ) | ||||||||||
| Qualifying derivatives, net of tax of $17, ($3), $15, ($23) | (69 | ) | 10 | (62 | ) | 20 | |||||||||
| Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $1 | — | — | (1 | ) | (1 | ) | |||||||||
| Defined benefit plans: | |||||||||||||||
| Prior service costs, net of tax of ($1), $0, ($1), $0 | — | — | 1 | — | |||||||||||
| Net actuarial loss, net of tax of ($10), ($10), ($27), ($35) | 31 | 35 | 94 | 111 | |||||||||||
| Total other comprehensive income (loss) | (623 | ) | 78 | (752 | ) | 92 | |||||||||
| Comprehensive income (loss) | $ | (150 | ) | $ | 471 | $ | 685 | $ | 375 | ||||||
4
| Nine Months Ended September 30, | |||||||
| 2016 | 2015 | ||||||
| Cash Flows from Operating Activities | |||||||
| Net income | $ | 1,437 | $ | 283 | |||
| (Income) Loss from discontinued operations (net of income taxes) | — | 915 | |||||
| Income from continuing operations (net of income taxes) | 1,437 | 1,198 | |||||
| Adjustments to reconcile Income from continuing operations (net of taxes) to net cash provided by operating activities - continuing operations | |||||||
| Depreciation | 692 | 658 | |||||
| Amortization | 54 | 46 | |||||
| Defined benefit plans - expense (income) | (29 | ) | 44 | ||||
| Deferred income taxes and investment tax credits | 436 | 359 | |||||
| Unrealized (gains) losses on derivatives, and other hedging activities | 107 | (17 | ) | ||||
| Stock-based compensation expense | 23 | 26 | |||||
| Other | (12 | ) | 9 | ||||
| Change in current assets and current liabilities | |||||||
| Accounts receivable | (29 | ) | (5 | ) | |||
| Accounts payable | (40 | ) | (180 | ) | |||
| Unbilled revenues | 32 | 91 | |||||
| Fuel, materials and supplies | 8 | 60 | |||||
| Prepayments | (34 | ) | (43 | ) | |||
| Taxes payable | 40 | (142 | ) | ||||
| Regulatory assets and liabilities, net | (32 | ) | 46 | ||||
| Other | (21 | ) | (5 | ) | |||
| Other operating activities | |||||||
| Defined benefit plans - funding | (345 | ) | (396 | ) | |||
| Settlement of interest rate swaps | — | (88 | ) | ||||
| Other assets | 18 | (42 | ) | ||||
| Other liabilities | (75 | ) | 69 | ||||
| Net cash provided by operating activities - continuing operations | 2,230 | 1,688 | |||||
| Net cash provided by operating activities - discontinued operations | — | 343 | |||||
| Net cash provided by operating activities | 2,230 | 2,031 | |||||
| Cash Flows from Investing Activities | |||||||
| Expenditures for property, plant and equipment | (2,073 | ) | (2,560 | ) | |||
| Expenditures for intangible assets | (23 | ) | (32 | ) | |||
| Proceeds from the sale of other investments | 2 | 136 | |||||
| Other investing activities | 28 | (7 | ) | ||||
| Net cash provided by (used in) investing activities - continuing operations | (2,066 | ) | (2,463 | ) | |||
| Net cash provided by (used in) investing activities - discontinued operations | — | (149 | ) | ||||
| Net cash provided by (used in) investing activities | (2,066 | ) | (2,612 | ) | |||
| Cash Flows from Financing Activities | |||||||
| Issuance of long-term debt | 1,241 | 1,137 | |||||
| Retirement of long-term debt | (905 | ) | — | ||||
| Settlement of cross-currency swaps | 46 | — | |||||
| Issuance of common stock | 133 | 145 | |||||
| Payment of common stock dividends | (772 | ) | (750 | ) | |||
| Net increase (decrease) in short-term debt | (268 | ) | (271 | ) | |||
| Other financing activities | (33 | ) | (30 | ) | |||
| Net cash provided by (used in) financing activities - continuing operations | (558 | ) | 231 | ||||
| Net cash provided by (used in) financing activities - discontinued operations | — | (546 | ) | ||||
| Net cash distributions to parent from discontinued operations | — | 132 | |||||
| Net cash provided by (used in) financing activities | (558 | ) | (183 | ) | |||
| Effect of Exchange Rates on Cash and Cash Equivalents | (26 | ) | (6 | ) | |||
| Net (Increase) Decrease in Cash and Cash Equivalents included in Discontinued Operations | — | 352 | |||||
| Net Increase (Decrease) in Cash and Cash Equivalents | (420 | ) | (418 | ) | |||
| Cash and Cash Equivalents at Beginning of Period | 836 | 1,399 | |||||
| Cash and Cash Equivalents at End of Period | $ | 416 | $ | 981 | |||
5
| September 30, 2016 | December 31, 2015 | ||||||
| Assets | |||||||
| Current Assets | |||||||
| Cash and cash equivalents | $ | 416 | $ | 836 | |||
| Accounts receivable (less reserve: 2016, $48; 2015, $41) | |||||||
| Customer | 687 | 673 | |||||
| Other | 45 | 59 | |||||
| Unbilled revenues | 393 | 453 | |||||
| Fuel, materials and supplies | 346 | 357 | |||||
| Prepayments | 97 | 66 | |||||
| Price risk management assets | 78 | 139 | |||||
| Other current assets | 37 | 63 | |||||
| Total Current Assets | 2,099 | 2,646 | |||||
| Property, Plant and Equipment | |||||||
| Regulated utility plant | 34,427 | 34,399 | |||||
| Less: accumulated depreciation - regulated utility plant | 5,938 | 5,683 | |||||
| Regulated utility plant, net | 28,489 | 28,716 | |||||
| Non-regulated property, plant and equipment | 451 | 516 | |||||
| Less: accumulated depreciation - non-regulated property, plant and equipment | 155 | 165 | |||||
| Non-regulated property, plant and equipment, net | 296 | 351 | |||||
| Construction work in progress | 1,184 | 1,315 | |||||
| Property, Plant and Equipment, net | 29,969 | 30,382 | |||||
| Other Noncurrent Assets | |||||||
| Regulatory assets | 1,765 | 1,733 | |||||
| Goodwill | 3,175 | 3,550 | |||||
| Other intangibles | 693 | 679 | |||||
| Price risk management assets | 185 | 156 | |||||
| Other noncurrent assets | 152 | 155 | |||||
| Total Other Noncurrent Assets | 5,970 | 6,273 | |||||
| Total Assets | $ | 38,038 | $ | 39,301 | |||
6
| CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||
| PPL Corporation and Subsidiaries | |||||||||
| (Unaudited) | |||||||||
| (Millions of Dollars, shares in thousands) | |||||||||
| September 30, | December 31, | ||||||||
| 2015 | 2014 | ||||||||
| Liabilities and Equity | |||||||||
| Current Liabilities | |||||||||
| Short-term debt | $ | 557 | $ | 836 | |||||
| Long-term debt due within one year | 1,460 | 1,000 | |||||||
| Accounts payable | 808 | 995 | |||||||
| Taxes | 118 | 263 | |||||||
| Interest | 300 | 298 | |||||||
| Dividends | 254 | 249 | |||||||
| Customer deposits | 312 | 304 | |||||||
| Regulatory liabilities | 151 | 91 | |||||||
| Other current liabilities | 508 | 632 | |||||||
| Current liabilities of discontinued operations | 2,775 | ||||||||
| Total Current Liabilities | 4,468 | 7,443 | |||||||
| Long-term Debt | 17,745 | 17,173 | |||||||
| Deferred Credits and Other Noncurrent Liabilities | |||||||||
| Deferred income taxes | 3,736 | 3,227 | |||||||
| Investment tax credits | 129 | 132 | |||||||
| Accrued pension obligations | 963 | 1,457 | |||||||
| Asset retirement obligations | 539 | 324 | |||||||
| Regulatory liabilities | 962 | 992 | |||||||
| Other deferred credits and noncurrent liabilities | 482 | 525 | |||||||
| Noncurrent liabilities of discontinued operations | 3,963 | ||||||||
| Total Deferred Credits and Other Noncurrent Liabilities | 6,811 | 10,620 | |||||||
| Commitments and Contingent Liabilities (Notes 6 and 10) | |||||||||
| Equity | |||||||||
| Common stock - $0.01 par value (a) | 7 | 7 | |||||||
| Additional paid-in capital | 9,630 | 9,433 | |||||||
| Earnings reinvested | 2,791 | 6,462 | |||||||
| Accumulated other comprehensive loss | (2,206) | (2,274) | |||||||
| Total Equity | 10,222 | 13,628 | |||||||
| Total Liabilities and Equity | $ | 39,246 | $ | 48,864 | |||||
| September 30, 2016 | December 31, 2015 | ||||||
| Liabilities and Equity | |||||||
| Current Liabilities | |||||||
| Short-term debt | $ | 636 | $ | 916 | |||
| Long-term debt due within one year | 443 | 485 | |||||
| Accounts payable | 741 | 812 | |||||
| Taxes | 117 | 85 | |||||
| Interest | 315 | 303 | |||||
| Dividends | 259 | 255 | |||||
| Customer deposits | 302 | 326 | |||||
| Regulatory liabilities | 120 | 145 | |||||
| Other current liabilities | 479 | 549 | |||||
| Total Current Liabilities | 3,412 | 3,876 | |||||
| Long-term Debt | 18,069 | 18,563 | |||||
| Deferred Credits and Other Noncurrent Liabilities | |||||||
| Deferred income taxes | 3,810 | 3,440 | |||||
| Investment tax credits | 133 | 128 | |||||
| Accrued pension obligations | 878 | 1,405 | |||||
| Asset retirement obligations | 413 | 536 | |||||
| Regulatory liabilities | 911 | 945 | |||||
| Other deferred credits and noncurrent liabilities | 437 | 489 | |||||
| Total Deferred Credits and Other Noncurrent Liabilities | 6,582 | 6,943 | |||||
| Commitments and Contingent Liabilities (Notes 6 and 10) | |||||||
| Equity | |||||||
| Common stock - $0.01 par value (a) | 7 | 7 | |||||
| Additional paid-in capital | 9,824 | 9,687 | |||||
| Earnings reinvested | 3,624 | 2,953 | |||||
| Accumulated other comprehensive loss | (3,480 | ) | (2,728 | ) | |||
| Total Equity | 9,975 | 9,919 | |||||
| Total Liabilities and Equity | $ | 38,038 | $ | 39,301 | |||
7 Common
stock
shares
outstanding (a) Additional
paid-in
capital Earnings
reinvested Total December 31, 2015 673,857 $ 7 $ 9,687 $ 2,953 $ (2,728 ) $ 9,919 Common stock issued 5,411 168 168 Stock-based compensation (31 ) (31 ) Net income 1,437 1,437 Dividends and dividend equivalents (773 ) (773 ) Other comprehensive income (loss) (752 ) (752 ) Adoption of stock-based compensation guidance cumulative effect adjustment (Note 2) 7 7 September 30, 2016 679,268 $ 7 $ 9,824 $ 3,624 $ (3,480 ) $ 9,975 December 31, 2014 665,849 $ 7 $ 9,433 $ 6,462 $ (2,274 ) $ 13,628 Common stock issued 5,943 183 183 Stock-based compensation 14 14 Net income 283 283 Dividends and dividend equivalents (754 ) (754 ) Distribution of PPL Energy Supply (Note 8) (3,200 ) (24 ) (3,224 ) Other comprehensive income (loss) 92 92 September 30, 2015 671,792 $ 7 $ 9,630 $ 2,791 $ (2,206 ) $ 10,222 (a) Shares in thousands. Each share entitles the holder to one vote on any question presented at any shareowners' meeting.
8
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9
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Operating Revenues | $ | 539 | $ | 519 | $ | 1,619 | $ | 1,625 | |||||||
| Operating Expenses | |||||||||||||||
| Operation | |||||||||||||||
| Energy purchases | 129 | 154 | 414 | 519 | |||||||||||
| Energy purchases from affiliate | — | — | — | 14 | |||||||||||
| Other operation and maintenance | 144 | 162 | 431 | 435 | |||||||||||
| Depreciation | 64 | 55 | 185 | 158 | |||||||||||
| Taxes, other than income | 26 | 27 | 79 | 87 | |||||||||||
| Total Operating Expenses | 363 | 398 | 1,109 | 1,213 | |||||||||||
| Operating Income | 176 | 121 | 510 | 412 | |||||||||||
| Other Income (Expense) - net | 4 | 1 | 12 | 5 | |||||||||||
| Interest Expense | 32 | 32 | 97 | 96 | |||||||||||
| Income Before Income Taxes | 148 | 90 | 425 | 321 | |||||||||||
| Income Taxes | 58 | 35 | 162 | 130 | |||||||||||
| Net Income (a) | $ | 90 | $ | 55 | $ | 263 | $ | 191 | |||||||
| (a) | Net income |
10 Nine Months Ended September 30, 2016 2015 Cash Flows from Operating Activities Net income $ 263 $ 191 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 185 158 Amortization 19 19 Defined benefit plans - expense 9 13 Deferred income taxes and investment tax credits 151 127 Other (14 ) (9 ) Change in current assets and current liabilities Accounts receivable (6 ) 18 Accounts payable (1 ) (140 ) Unbilled revenue 10 28 Prepayments 29 (17 ) Regulatory assets and liabilities (41 ) 46 Taxes payable (6 ) (50 ) Other (13 ) 13 Other operating activities Defined benefit plans - funding — (33 ) Other assets 15 (6 ) Other liabilities (5 ) 15 Net cash provided by operating activities 595 373 Cash Flows from Investing Activities Expenditures for property, plant and equipment (739 ) (758 ) Expenditures for intangible assets — (9 ) Other investing activities (1 ) 3 Net cash provided by (used in) investing activities (740 ) (764 ) Cash Flows from Financing Activities Issuance of long-term debt 224 — Retirement of long-term debt (224 ) — Contributions from parent 200 275 Payment of common stock dividends to parent (193 ) (140 ) Net increase (decrease) in short-term debt 130 68 Other financing activities (3 ) — Net cash provided by (used in) financing activities 134 203 Net Increase (Decrease) in Cash and Cash Equivalents (11 ) (188 ) Cash and Cash Equivalents at Beginning of Period 47 214 Cash and Cash Equivalents at End of Period $ 36 $ 26 11 September 30,
2016 December 31,
2015Assets Current Assets Cash and cash equivalents $ 36 $ 47 Accounts receivable (less reserve: 2016, $22; 2015, $16) Customer 290 286 Other 12 10 Unbilled revenues 81 91 Materials and supplies 28 34 Prepayments 37 66 Other current assets 15 21 Total Current Assets 499 555 Property, Plant and Equipment Regulated utility plant 9,360 8,734 Less: accumulated depreciation - regulated utility plant 2,698 2,573 Regulated utility plant, net 6,662 6,161 Construction work in progress 657 530 Property, Plant and Equipment, net 7,319 6,691 Other Noncurrent Assets Regulatory assets 991 1,006 Intangibles 247 244 Other noncurrent assets 14 15 Total Other Noncurrent Assets 1,252 1,265 Total Assets $ 9,070 $ 8,511 12CONDENSED CONSOLIDATED BALANCE SHEETS PPL Electric Utilities Corporation and Subsidiaries (Unaudited) (Millions of Dollars, shares in thousands) September 30, December 31, 2015 2014 Liabilities and Equity Current Liabilities Short-term debt $ 68 Long term debt due within one year 100 $ 100 Accounts payable 315 325 Accounts payable to affiliates 36 70 Taxes 35 85 Interest 26 34 Regulatory liabilities 120 76 Other current liabilities 114 103 Total Current Liabilities 814 793 Long-term Debt 2,503 2,502 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 1,655 1,483 Accrued pension obligations 149 212 Regulatory liabilities 25 18 Other deferred credits and noncurrent liabilities 69 60 Total Deferred Credits and Other Noncurrent Liabilities 1,898 1,773 Commitments and Contingent Liabilities (Notes 6 and 10) Equity Common stock - no par value (a) 364 364 Additional paid-in capital 1,925 1,603 Earnings reinvested 801 750 Total Equity 3,090 2,717 Total Liabilities and Equity $ 8,305 $ 7,785 September 30,
2016 December 31,
2015Liabilities and Equity Current Liabilities Short-term debt $ 130 $ — Long-term debt due within one year 224 — Accounts payable 357 288 Accounts payable to affiliates 33 35 Taxes 18 24 Interest 31 37 Regulatory liabilities 94 113 Customer deposits 22 31 Other current liabilities 69 77 Total Current Liabilities 978 605 Long-term Debt 2,607 2,828 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 1,823 1,663 Accrued pension obligations 185 183 Regulatory liabilities — 22 Other deferred credits and noncurrent liabilities 88 91 Total Deferred Credits and Other Noncurrent Liabilities 2,096 1,959 Commitments and Contingent Liabilities (Notes 6 and 10) Equity Common stock - no par value (a) 364 364 Additional paid-in capital 2,134 1,934 Earnings reinvested 891 821 Total Equity 3,389 3,119 Total Liabilities and Equity $ 9,070 $ 8,511 (a) 170,000 shares authorized; 66,368 shares issued and outstanding at September 30, 20152016 and December 31, 2014.2015.
13 Total December 31, 2015 66,368 $ 364 $ 1,934 $ 821 $ 3,119 Net income 263 263 Capital contributions from PPL 200 200 Dividends declared on common stock (193 ) (193 ) September 30, 2016 66,368 $ 364 $ 2,134 $ 891 $ 3,389 December 31, 2014 66,368 $ 364 $ 1,603 $ 750 $ 2,717 Net income 191 191 Capital contributions from PPL (b) 322 322 Dividends declared on common stock (140 ) (140 ) September 30, 2015 66,368 $ 364 $ 1,925 $ 801 $ 3,090 (a) Shares in thousands. All common shares of PPL Electric stock are owned by PPL. (b) Includes non-cash contributions of $47 million.
14 Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015 Operating Revenues $ 835 $ 801 $ 2,382 $ 2,414 Operating Expenses Operation Fuel 227 228 607 695 Energy purchases 24 23 118 143 Other operation and maintenance 197 202 603 625 Depreciation 102 97 301 286 Taxes, other than income 16 14 46 43 Total Operating Expenses 566 564 1,675 1,792 Operating Income 269 237 707 622 Other Income (Expense) - net (3 ) (1 ) (9 ) (3 ) Interest Expense 50 43 147 127 Interest Expense with Affiliate 4 — 12 1 Income Before Income Taxes 212 193 539 491 Income Taxes 79 73 202 194 Net Income $ 133 $ 120 $ 337 $ 297 15Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015 Net income $ 133 $ 120 $ 337 $ 297 Other comprehensive income (loss): Amounts arising during the period - gains (losses), net of tax (expense) benefit: Defined benefit plans: Net actuarial gain (loss), net of tax of $0, $0, ($1), $5 — — 1 (8 ) Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0, $1 — — (1 ) (1 ) Defined benefit plans: Prior service costs, net of tax of ($1), $0, ($1), $0 — — 1 1 Net actuarial loss, net of tax of $0, $0, ($1), ($1) 1 1 3 2 Total other comprehensive income (loss) 1 1 4 (6 ) Comprehensive income (loss) $ 134 $ 121 $ 341 $ 291 16 Nine Months Ended September 30, 2016 2015 Cash Flows from Operating Activities Net income $ 337 $ 297 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 301 286 Amortization 21 18 Defined benefit plans - expense 20 29 Deferred income taxes and investment tax credits 212 199 Other — 29 Change in current assets and current liabilities Accounts receivable (43 ) (1 ) Accounts payable 7 (34 ) Accounts payable to affiliates 4 (7 ) Unbilled revenues 6 19 Fuel, materials and supplies 7 43 Income tax receivable — 132 Accrued interest 42 37 Other (4 ) (2 ) Other operating activities Defined benefit plans - funding (82 ) (66 ) Expenditures for asset retirement obligations (15 ) (5 ) Settlement of interest rate swaps — (88 ) Other assets 1 (4 ) Other liabilities 2 13 Net cash provided by operating activities 816 895 Cash Flows from Investing Activities Expenditures for property, plant and equipment (600 ) (928 ) Other investing activities 1 7 Net cash provided by (used in) investing activities (599 ) (921 ) Cash Flows from Financing Activities Net increase (decrease) in notes payable with affiliate 84 21 Issuance of long-term debt 221 1,050 Retirement of long-term debt (221 ) — Net increase (decrease) in short-term debt (130 ) (500 ) Debt issuance and credit facility costs (3 ) (9 ) Distributions to member (224 ) (157 ) Contributions from member 37 55 Net cash provided by (used in) financing activities (236 ) 460 Net Increase (Decrease) in Cash and Cash Equivalents (19 ) 434 Cash and Cash Equivalents at Beginning of Period 30 21 Cash and Cash Equivalents at End of Period $ 11 $ 455 17 September 30,
2016 December 31,
2015Assets Current Assets Cash and cash equivalents $ 11 $ 30 Accounts receivable (less reserve: 2016, $24; 2015, $23) Customer 250 209 Other 13 17 Unbilled revenues 141 147 Fuel, materials and supplies 292 298 Prepayments 31 23 Regulatory assets 18 35 Other current assets 1 6 Total Current Assets 757 765 Property, Plant and Equipment Regulated utility plant 12,510 11,906 Less: accumulated depreciation - regulated utility plant 1,382 1,163 Regulated utility plant, net 11,128 10,743 Construction work in progress 349 660 Property, Plant and Equipment, net 11,477 11,403 Other Noncurrent Assets Regulatory assets 774 727 Goodwill 996 996 Other intangibles 103 123 Other noncurrent assets 80 76 Total Other Noncurrent Assets 1,953 1,922 Total Assets $ 14,187 $ 14,090 18CONDENSED CONSOLIDATED BALANCE SHEETS LG&E and KU Energy LLC and Subsidiaries (Unaudited) (Millions of Dollars) September 30, December 31, 2015 2014 Liabilities and Equity Current Liabilities Short-term debt $ 75 $ 575 Long-term debt due within one year 900 900 Notes payable with affiliates 62 41 Accounts payable 284 399 Accounts payable to affiliates 1 2 Customer deposits 51 52 Taxes 36 36 Price risk management liabilities 5 5 Price risk management liabilities with affiliates 66 Regulatory liabilities 31 15 Interest 60 23 Other current liabilities 142 131 Total Current Liabilities 1,647 2,245 Long-term Debt 4,717 3,667 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 1,489 1,241 Investment tax credits 128 131 Accrued pension obligations 275 305 Asset retirement obligations 488 274 Regulatory liabilities 937 974 Price risk management liabilities 45 43 Other deferred credits and noncurrent liabilities 214 268 Total Deferred Credits and Other Noncurrent Liabilities 3,576 3,236 Commitments and Contingent Liabilities (Notes 6 and 10) Member's equity 4,437 4,248 Total Liabilities and Equity $ 14,377 $ 13,396 September 30,
2016 December 31,
2015Liabilities and Equity Current Liabilities Short-term debt $ 135 $ 265 Long-term debt due within one year 219 25 Notes payable with affiliate 138 54 Accounts payable 216 266 Accounts payable to affiliates 9 5 Customer deposits 55 52 Taxes 49 46 Price risk management liabilities 6 5 Regulatory liabilities 26 32 Interest 74 32 Asset retirement obligations 54 50 Other current liabilities 111 135 Total Current Liabilities 1,092 967 Long-term Debt Long-term debt 4,470 4,663 Long-term debt to affiliate 400 400 Total Long-term Debt 4,870 5,063 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 1,673 1,463 Investment tax credits 132 128 Accrued pension obligations 242 296 Asset retirement obligations 368 485 Regulatory liabilities 911 923 Price risk management liabilities 48 42 Other deferred credits and noncurrent liabilities 180 206 Total Deferred Credits and Other Noncurrent Liabilities 3,554 3,543 Commitments and Contingent Liabilities (Notes 6 and 10) Member's equity 4,671 4,517 Total Liabilities and Equity $ 14,187 $ 14,090 19 December 31, 2015 $ 4,517 Net income 337 Contributions from member 37 Distributions to member (224 ) Other comprehensive income (loss) 4 September 30, 2016 $ 4,671 December 31, 2014 $ 4,248 Net income 297 Contributions from member 55 Distributions to member (157 ) Other comprehensive income (loss) (6 ) September 30, 2015 $ 4,437
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Operating Revenues | |||||||||||||||
| Retail and wholesale | $ | 366 | $ | 349 | $ | 1,058 | $ | 1,089 | |||||||
| Electric revenue from affiliate | 2 | 2 | 19 | 32 | |||||||||||
| Total Operating Revenues | 368 | 351 | 1,077 | 1,121 | |||||||||||
| Operating Expenses | |||||||||||||||
| Operation | |||||||||||||||
| Fuel | 86 | 82 | 233 | 267 | |||||||||||
| Energy purchases | 19 | 18 | 104 | 129 | |||||||||||
| Energy purchases from affiliate | 5 | 9 | 10 | 17 | |||||||||||
| Other operation and maintenance | 85 | 87 | 264 | 286 | |||||||||||
| Depreciation | 43 | 40 | 126 | 122 | |||||||||||
| Taxes, other than income | 9 | 7 | 24 | 21 | |||||||||||
| Total Operating Expenses | 247 | 243 | 761 | 842 | |||||||||||
| Operating Income | 121 | 108 | 316 | 279 | |||||||||||
| Other Income (Expense) - net | (1 | ) | (1 | ) | (6 | ) | (3 | ) | |||||||
| Interest Expense | 18 | 13 | 53 | 39 | |||||||||||
| Income Before Income Taxes | 102 | 94 | 257 | 237 | |||||||||||
| Income Taxes | 39 | 36 | 98 | 91 | |||||||||||
| Net Income (a) | $ | 63 | $ | 58 | $ | 159 | $ | 146 | |||||||
| (a) | Net income equals comprehensive income. |
22 Nine Months Ended September 30, 2016 2015 Cash Flows from Operating Activities Net income $ 159 $ 146 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 126 122 Amortization 10 9 Defined benefit plans - expense 6 10 Deferred income taxes and investment tax credits 117 93 Other — 25 Change in current assets and current liabilities Accounts receivable (19 ) 10 Accounts receivable from affiliates (11 ) 4 Accounts payable 24 (14 ) Accounts payable to affiliates (6 ) (1 ) Unbilled revenues 10 13 Fuel, materials and supplies 11 21 Income tax receivable 2 74 Accrued interest 13 9 Other 1 8 Other operating activities Defined benefit plans - funding (45 ) (25 ) Expenditures for asset retirement obligations (11 ) (4 ) Settlement of interest rate swaps — (44 ) Other assets (3 ) 10 Other liabilities (1 ) 3 Net cash provided by operating activities 383 469 Cash Flows from Investing Activities Expenditures for property, plant and equipment (343 ) (519 ) Net cash provided by (used in) investing activities (343 ) (519 ) Cash Flows from Financing Activities Issuance of long-term debt 125 550 Retirement of long-term debt (125 ) — Net increase (decrease) in short-term debt (14 ) (264 ) Debt issuance and credit facility costs (1 ) (5 ) Payment of common stock dividends to parent (87 ) (81 ) Contributions from parent 47 20 Net cash provided by (used in) financing activities (55 ) 220 Net Increase (Decrease) in Cash and Cash Equivalents (15 ) 170 Cash and Cash Equivalents at Beginning of Period 19 10 Cash and Cash Equivalents at End of Period $ 4 $ 180 23 September 30,
2016 December 31,
2015Assets Current Assets Cash and cash equivalents $ 4 $ 19 Accounts receivable (less reserve: 2016, $1; 2015, $1) Customer 109 92 Other 11 11 Accounts receivable from affiliates 23 12 Unbilled revenues 57 67 Fuel, materials and supplies 140 151 Prepayments 14 5 Regulatory assets 6 16 Other current assets — 2 Total Current Assets 364 375 Property, Plant and Equipment Regulated utility plant 5,234 4,804 Less: accumulated depreciation - regulated utility plant 468 404 Regulated utility plant, net 4,766 4,400 Construction work in progress 155 390 Property, Plant and Equipment, net 4,921 4,790 Other Noncurrent Assets Regulatory assets 437 424 Goodwill 389 389 Other intangibles 63 73 Other noncurrent assets 21 17 Total Other Noncurrent Assets 910 903 Total Assets $ 6,195 $ 6,068 24CONDENSED BALANCE SHEETS Louisville Gas and Electric Company (Unaudited) (Millions of Dollars, shares in thousands) September 30, December 31, 2015 2014 Liabilities and Equity Current Liabilities Short-term debt $ 264 Long-term debt due within one year $ 250 250 Accounts payable 191 240 Accounts payable to affiliates 20 20 Customer deposits 25 25 Taxes 18 19 Price risk management liabilities 5 5 Price risk management liabilities with affiliates 33 Regulatory liabilities 15 10 Interest 15 6 Other current liabilities 50 42 Total Current Liabilities 589 914 Long-term Debt 1,653 1,103 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 818 700 Investment tax credits 35 36 Accrued pension obligations 34 57 Asset retirement obligations 147 66 Regulatory liabilities 439 458 Price risk management liabilities 45 43 Other deferred credits and noncurrent liabilities 97 111 Total Deferred Credits and Other Noncurrent Liabilities 1,615 1,471 Commitments and Contingent Liabilities (Notes 6 and 10) Stockholder's Equity Common stock - no par value (a) 424 424 Additional paid-in capital 1,541 1,521 Earnings reinvested 294 229 Total Equity 2,259 2,174 Total Liabilities and Equity $ 6,116 $ 5,662 September 30,
2016 December 31,
2015Liabilities and Equity Current Liabilities Short-term debt $ 128 $ 142 Long-term debt due within one year 219 25 Accounts payable 133 157 Accounts payable to affiliates 19 25 Customer deposits 26 26 Taxes 23 20 Price risk management liabilities 6 5 Regulatory liabilities 7 13 Interest 24 11 Asset retirement obligations 39 25 Other current liabilities 36 39 Total Current Liabilities 660 488 Long-term Debt 1,423 1,617 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 944 829 Investment tax credits 37 35 Accrued pension obligations 18 56 Asset retirement obligations 107 149 Regulatory liabilities 424 431 Price risk management liabilities 48 42 Other deferred credits and noncurrent liabilities 85 91 Total Deferred Credits and Other Noncurrent Liabilities 1,663 1,633 Commitments and Contingent Liabilities (Notes 6 and 10) Stockholder's Equity Common stock - no par value (a) 424 424 Additional paid-in capital 1,658 1,611 Earnings reinvested 367 295 Total Equity 2,449 2,330 Total Liabilities and Equity $ 6,195 $ 6,068 (a) 75,000 shares authorized; 21,294 shares issued and outstanding at September 30, 20152016 and December 31, 2014.2015.
25
stock
shares
(a) Additional
paid-in
capital Earnings
reinvested Total December 31, 2015 21,294 $ 424 $ 1,611 $ 295 $ 2,330 Net income 159 159 Capital contributions from LKE 47 47 Cash dividends declared on common stock (87 ) (87 ) September 30, 2016 21,294 $ 424 $ 1,658 $ 367 $ 2,449 December 31, 2014 21,294 $ 424 $ 1,521 $ 229 $ 2,174 Net income 146 146 Capital contributions from LKE 20 20 Cash dividends declared on common stock (81 ) (81 ) September 30, 2015 21,294 $ 424 $ 1,541 $ 294 $ 2,259 (a) Shares in thousands. All common shares of LG&E stock are owned by LKE.
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27
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Operating Revenues | |||||||||||||||
| Retail and wholesale | $ | 469 | $ | 452 | $ | 1,324 | $ | 1,325 | |||||||
| Electric revenue from affiliate | 5 | 9 | 10 | 17 | |||||||||||
| Total Operating Revenues | 474 | 461 | 1,334 | 1,342 | |||||||||||
| Operating Expenses | |||||||||||||||
| Operation | |||||||||||||||
| Fuel | 141 | 146 | 374 | 428 | |||||||||||
| Energy purchases | 5 | 5 | 14 | 14 | |||||||||||
| Energy purchases from affiliate | 2 | 2 | 19 | 32 | |||||||||||
| Other operation and maintenance | 107 | 108 | 320 | 321 | |||||||||||
| Depreciation | 59 | 57 | 175 | 164 | |||||||||||
| Taxes, other than income | 7 | 7 | 22 | 22 | |||||||||||
| Total Operating Expenses | 321 | 325 | 924 | 981 | |||||||||||
| Operating Income | 153 | 136 | 410 | 361 | |||||||||||
| Other Income (Expense) - net | (3 | ) | — | (4 | ) | 1 | |||||||||
| Interest Expense | 24 | 20 | 71 | 58 | |||||||||||
| Income Before Income Taxes | 126 | 116 | 335 | 304 | |||||||||||
| Income Taxes | 48 | 44 | 128 | 115 | |||||||||||
| Net Income (a) | $ | 78 | $ | 72 | $ | 207 | $ | 189 | |||||||
| (a) | Net income approximates comprehensive income. |
28 Nine Months Ended September 30, 2016 2015 Cash Flows from Operating Activities Net income $ 207 $ 189 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 175 164 Amortization 10 8 Defined benefit plans - expense 4 9 Deferred income taxes and investment tax credits 122 132 Other (1 ) 4 Change in current assets and current liabilities Accounts receivable (24 ) (11 ) Accounts payable (11 ) (18 ) Accounts payable to affiliates 2 (7 ) Unbilled revenues (4 ) 6 Fuel, materials and supplies (4 ) 22 Income tax receivable — 60 Accrued interest 22 19 Other 2 6 Other operating activities Defined benefit plans - funding (19 ) (20 ) Expenditures for asset retirement obligations (4 ) (1 ) Settlement of interest rate swaps — (44 ) Other assets (4 ) (9 ) Other liabilities (4 ) 1 Net cash provided by operating activities 469 510 Cash Flows from Investing Activities Expenditures for property, plant and equipment (255 ) (407 ) Other investing activities 1 7 Net cash provided by (used in) investing activities (254 ) (400 ) Cash Flows from Financing Activities Issuance of long-term debt 96 500 Retirement of long-term debt (96 ) — Net increase (decrease) in short-term debt (41 ) (236 ) Debt issuance and credit facility costs (1 ) (4 ) Payment of common stock dividends to parent (197 ) (106 ) Contributions from parent 20 — Net cash provided by (used in) financing activities (219 ) 154 Net Increase (Decrease) in Cash and Cash Equivalents (4 ) 264 Cash and Cash Equivalents at Beginning of Period 11 11 Cash and Cash Equivalents at End of Period $ 7 $ 275 29 September 30,
2016 December 31,
2015Assets Current Assets Cash and cash equivalents $ 7 $ 11 Accounts receivable (less reserve: 2016, $2; 2015, $2) Customer 141 117 Other 3 9 Accounts receivable from affiliates 1 1 Unbilled revenues 84 80 Fuel, materials and supplies 152 147 Prepayments 16 8 Regulatory assets 12 19 Other current assets 1 4 Total Current Assets 417 396 Property, Plant and Equipment Regulated utility plant 7,270 7,099 Less: accumulated depreciation - regulated utility plant 913 759 Regulated utility plant, net 6,357 6,340 Construction work in progress 192 267 Property, Plant and Equipment, net 6,549 6,607 Other Noncurrent Assets Regulatory assets 337 303 Goodwill 607 607 Other intangibles 40 50 Other noncurrent assets 56 48 Total Other Noncurrent Assets 1,040 1,008 Total Assets $ 8,006 $ 8,011 30CONDENSED BALANCE SHEETS Kentucky Utilities Company (Unaudited) (Millions of Dollars, shares in thousands) September 30, December 31, 2015 2014 Liabilities and Equity Current Liabilities Short-term debt $ 236 Long-term debt due within one year $ 250 250 Accounts payable 77 141 Accounts payable to affiliates 41 47 Customer deposits 26 27 Taxes 23 14 Price risk management liabilities with affiliates 33 Regulatory liabilities 16 5 Interest 30 11 Other current liabilities 53 41 Total Current Liabilities 516 805 Long-term Debt 2,341 1,841 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 1,048 884 Investment tax credits 93 95 Accrued pension obligations 44 59 Asset retirement obligations 341 208 Regulatory liabilities 498 516 Other deferred credits and noncurrent liabilities 63 101 Total Deferred Credits and Other Noncurrent Liabilities 2,087 1,863 Commitments and Contingent Liabilities (Notes 6 and 10) Stockholder's Equity Common stock - no par value (a) 308 308 Additional paid-in capital 2,596 2,596 Accumulated other comprehensive income (loss) (1) Earnings reinvested 385 302 Total Equity 3,288 3,206 Total Liabilities and Equity $ 8,232 $ 7,715 September 30,
2016 December 31,
2015Liabilities and Equity Current Liabilities Short-term debt $ 7 $ 48 Accounts payable 67 88 Accounts payable to affiliates 42 39 Customer deposits 29 26 Taxes 23 20 Regulatory liabilities 19 19 Interest 38 16 Asset retirement obligations 15 25 Other current liabilities 35 44 Total Current Liabilities 275 325 Long-term Debt 2,327 2,326 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes 1,166 1,046 Investment tax credits 95 93 Accrued pension obligations 33 46 Asset retirement obligations 261 336 Regulatory liabilities 487 492 Other deferred credits and noncurrent liabilities 46 60 Total Deferred Credits and Other Noncurrent Liabilities 2,088 2,073 Commitments and Contingent Liabilities (Notes 6 and 10) Stockholder's Equity Common stock - no par value (a) 308 308 Additional paid-in capital 2,616 2,596 Accumulated other comprehensive loss (1 ) — Earnings reinvested 393 383 Total Equity 3,316 3,287 Total Liabilities and Equity $ 8,006 $ 8,011 (a) 80,000 shares authorized; 37,818 shares issued and outstanding at September 30, 20152016 and December 31, 2014.2015.
31 Common
stock
shares
outstanding
(a) Additional
paid-in
capital Earnings
reinvested Total December 31, 2015 37,818 $ 308 $ 2,596 $ 383 $ — $ 3,287 Capital contributions from LKE 20 20 Net income 207 207 Cash dividends declared on common stock (197 ) (197 ) Other comprehensive income (loss) (1 ) (1 ) September 30, 2016 37,818 $ 308 $ 2,616 $ 393 $ (1 ) $ 3,316 December 31, 2014 37,818 $ 308 $ 2,596 $ 302 $ — $ 3,206 Net income 189 189 Cash dividends declared on common stock (106 ) (106 ) Other comprehensive income (loss) (1 ) (1 ) September 30, 2015 37,818 $ 308 $ 2,596 $ 385 $ (1 ) $ 3,288 (a) Shares in thousands. All common shares of KU stock are owned by LKE.
longer an affiliate of PPL Electric. PPL Electric's purchases from Talen Energy Marketing subsequent to May 31, 2015 are included as purchases from an unaffiliated third party.3220142015 is derived from that Registrant's 20142015 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 20142015 Form 10-K. The results of operations for the three and nine months ended September 30, 20152016 are not necessarily indicative of the results to be expected for the full year ending December 31, 20152016 or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.20152016 financial statements.PPL Energy Supply's assets and liabilities have been reclassified on the Balance Sheet at December 31, 2014 to assets and liabilities of discontinued operations. The assets and liabilities were distributed and removed from PPL's Balance Sheets in the second quarter of 2015. In addition, the StatementsStatement of Cash Flows for the nine months ended September 30, 2015 separately reportreports the cash flows of the discontinued operations. See Note 8 for additional information.20142015 Form 10-K and should be read in conjunction with those disclosures.During the three and nine months ended September 30, 2014, PPL Electric purchased $260 million and $874 million of accounts receivable from unaffiliated third parties and $77 million and $261 million from PPL EnergyPlus. PPL Electric's purchases from PPL EnergyPlus for the nine months ended September 30, 2015 were $146 million and include purchases through May 31, 2015, which is the period during which PPL Electric and PPL EnergyPlus were affiliated entities.million. As a result of the June 1, 2015 spinoff of PPL Energy Supply and creation of Talen Energy, PPL EnergyPlus (renamed Talen Energy Marketing) is no33DepreciationDiscount Rate Change for U.K. Pension Plans(PPL)Effective January 1, 2015, after completingreviewsingle weighted-average discount rate in the calculation of net periodic defined benefit cost. WPD began using individual spot rates to measure service cost and interest cost for the useful livescalculation of its distribution network assets, WPD extended the weighted average useful lives of these assets to 69 years from 55 years.net periodic defined benefit cost in 2016. For the three and nine months ended September 30, 2015,2016, this
Reporting of Discontinued Operations
As a result of the spinoff on June 1, 2015, PPL Energy Supply has been reportednet settled awards as a discontinued operation underFinancing activity on the new discontinued operations guidance. See Note 8Statement of Cash Flows. Therefore, there is no transition impact for additional information.
On June 1, 2015, PPL completed the spinoff of PPL Energy Supply, which substantially represented PPL's Supply segment. As a result of this transaction, PPL no longer has a Supply segment. See Note 8 for additional information.
| Three Months | Nine Months | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Income Statement Data | ||||||||||||||||
| Revenues from external customers | ||||||||||||||||
| U.K. Regulated | $ | 552 | $ | 644 | $ | 1,836 | $ | 1,964 | ||||||||
| Kentucky Regulated | 801 | 753 | 2,414 | 2,409 | ||||||||||||
| Pennsylvania Regulated | 519 | 477 | 1,625 | 1,516 | ||||||||||||
| Corporate and Other | 6 | 5 | 14 | 17 | ||||||||||||
| Total | $ | 1,878 | $ | 1,879 | $ | 5,889 | $ | 5,906 | ||||||||
| Net Income | ||||||||||||||||
| U.K. Regulated (a) | $ | 249 | $ | 295 | $ | 814 | $ | 688 | ||||||||
| Kentucky Regulated | 111 | 82 | 267 | 247 | ||||||||||||
| Pennsylvania Regulated | 55 | 57 | 191 | 194 | ||||||||||||
| Corporate and Other (b) | (19) | (24) | (74) | (100) | ||||||||||||
| Discontinued Operations (c) | (3) | 87 | (915) | 13 | ||||||||||||
| Total | $ | 393 | $ | 497 | $ | 283 | $ | 1,042 | ||||||||
34
| September 30, | December 31, | ||||||
| 2015 | 2014 | ||||||
| Balance Sheet Data | |||||||
| Assets | |||||||
| U.K. Regulated | $ | 16,382 | $ | 16,005 | |||
| Kentucky Regulated | 14,043 | 13,062 | |||||
| Pennsylvania Regulated | 8,305 | 7,785 | |||||
| Corporate and Other (d) | 516 | 1,095 | |||||
| Discontinued Operations (c) | 10,917 | ||||||
| Total assets | $ | 39,246 | $ | 48,864 | |||
| Three Months | Nine Months | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Income Statement Data | |||||||||||||||
| Revenues from external customers | |||||||||||||||
| U.K. Regulated | $ | 515 | $ | 552 | $ | 1,673 | $ | 1,836 | |||||||
| Kentucky Regulated | 835 | 801 | 2,382 | 2,414 | |||||||||||
| Pennsylvania Regulated | 539 | 519 | 1,619 | 1,625 | |||||||||||
| Corporate and Other | — | 6 | 11 | 14 | |||||||||||
| Total | $ | 1,889 | $ | 1,878 | $ | 5,685 | $ | 5,889 | |||||||
| Net Income | |||||||||||||||
| U.K. Regulated (a) | $ | 281 | $ | 249 | $ | 915 | $ | 814 | |||||||
| Kentucky Regulated | 126 | 111 | 314 | 267 | |||||||||||
| Pennsylvania Regulated | 91 | 55 | 263 | 191 | |||||||||||
| Corporate and Other (b) | (25 | ) | (19 | ) | (55 | ) | (74 | ) | |||||||
| Discontinued Operations (c) | — | (3 | ) | — | (915 | ) | |||||||||
| Total | $ | 473 | $ | 393 | $ | 1,437 | $ | 283 | |||||||
| September 30, 2016 | December 31, 2015 | ||||||
| Balance Sheet Data | |||||||
| Assets | |||||||
| U.K. Regulated (d) | $ | 15,014 | $ | 16,669 | |||
| Kentucky Regulated | 13,853 | 13,756 | |||||
| Pennsylvania Regulated | 9,070 | 8,511 | |||||
| Corporate and Other (e) | 101 | 365 | |||||
| Total assets | $ | 38,038 | $ | 39,301 | |||
| (a) | Includes unrealized gains and losses from hedging foreign-currency related economic activity. See Note 14 for additional information. |
| (c) | See Note 8 for additional information. |
| (e) | Primarily consists of unallocated items, including cash, PP&E and the elimination of inter-segment transactions. |
Method or the If-Converted Method, as applicable.Method. Incremental non-participating securities that have a dilutive impact are detailed in the table below. Three Months Nine Months 2015 2014 2015 2014 Income (Numerator) Income from continuing operations after income taxes $ 396 $ 410 $ 1,198 $ 1,029 Less amounts allocated to participating securities 2 2 5 5 Income from continuing operations after income taxes available to PPL common shareowners - Basic 394 408 1,193 1,024 Plus interest charges (net of tax) related to Equity Units (a) 9 Income from continuing operations after income taxes available to PPL common shareowners - Diluted $ 394 $ 408 $ 1,193 $ 1,033 Income (loss) from discontinued operations (net of income taxes) available to PPL common shareowners - Basic and Diluted $ (3) $ 87 $ (915) $ 13 Net income $ 393 $ 497 $ 283 $ 1,042 Less amounts allocated to participating securities 2 2 1 5 Net income available to PPL common shareowners - Basic 391 495 282 1,037 Plus interest charges (net of tax) related to Equity Units (a) 9 Net income available to PPL common shareowners - Diluted $ 391 $ 495 $ 282 $ 1,046 Shares of Common Stock (Denominator) Weighted-average shares - Basic EPS 670,763 664,432 668,731 649,561 Add incremental non-participating securities: Share-based payment awards 2,939 1,970 2,523 1,860 Equity Units (a) 14,080 Weighted-average shares - Diluted EPS 673,702 666,402 671,254 665,501 Basic EPS Available to PPL common shareowners: Income from continuing operations after income taxes $ 0.59 $ 0.61 $ 1.78 $ 1.58 Income (loss) from discontinued operations (net of income taxes) (0.01) 0.13 (1.36) 0.02 Net Income Available to PPL common shareowners $ 0.58 $ 0.74 $ 0.42 $ 1.60 Diluted EPS Available to PPL common shareowners: Income from continuing operations after income taxes $ 0.59 $ 0.61 $ 1.78 $ 1.55 Income (loss) from discontinued operations (net of income taxes) (0.01) 0.13 (1.36) 0.02 Net Income Available to PPL common shareowners $ 0.58 $ 0.74 $ 0.42 $ 1.57 35(a)In 2014, the If-Converted Method was applied to the Equity Units prior to the March 2014 settlement. Three Months Nine Months 2016 2015 2016 2015 Income (Numerator) Income from continuing operations after income taxes $ 473 $ 396 $ 1,437 $ 1,198 Less amounts allocated to participating securities 1 2 4 5 Income from continuing operations after income taxes available to PPL common shareowners - Basic and Diluted $ 472 $ 394 $ 1,433 $ 1,193 Income (loss) from discontinued operations (net of income taxes) available to PPL common shareowners - Basic and Diluted $ — $ (3 ) $ — $ (915 ) Net income $ 473 $ 393 $ 1,437 $ 283 Less amounts allocated to participating securities 1 2 4 1 Net income available to PPL common shareowners - Basic and Diluted $ 472 $ 391 $ 1,433 $ 282 Shares of Common Stock (Denominator) Weighted-average shares - Basic EPS 678,114 670,763 676,905 668,731 Add incremental non-participating securities: Share-based payment awards 2,234 2,939 3,064 2,523 Weighted-average shares - Diluted EPS 680,348 673,702 679,969 671,254 Basic EPS Available to PPL common shareowners: Income from continuing operations after income taxes $ 0.70 $ 0.59 $ 2.12 $ 1.78 Income (loss) from discontinued operations (net of income taxes) — (0.01 ) — (1.36 ) Net Income $ 0.70 $ 0.58 $ 2.12 $ 0.42 Diluted EPS Available to PPL common shareowners: Income from continuing operations after income taxes $ 0.69 $ 0.59 $ 2.11 $ 1.78 Income (loss) from discontinued operations (net of income taxes) — (0.01 ) — (1.36 ) Net Income $ 0.69 $ 0.58 $ 2.11 $ 0.42 Three Months Nine Months 2015 2014 2015 2014 Stock-based compensation plans (a) 1,368 210 3,805 2,228 DRIP 475 425 1,318 425 Three Months Nine Months 2016 2015 2016 2015 Stock-based compensation plans (a) 248 1,368 3,168 3,805 DRIP 761 475 1,533 1,318 (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.
| Three Months | Nine Months | |||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||
| Stock options | 1,484 | 527 | 1,218 | 1,901 | ||||||||
| Performance units | 49 | |||||||||||
| Restricted stock units | 41 | |||||||||||
| Three Months | Nine Months | ||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||
| Stock options | 696 | 1,484 | 696 | 1,218 | |||||||
| Performance units | 316 | — | 210 | 49 | |||||||
| (PPL) | ||||||||||||||||
| Three Months | Nine Months | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Federal income tax on Income from Continuing Operations Before | ||||||||||||||||
| Income Taxes at statutory tax rate - 35% | $ | 189 | $ | 214 | $ | 571 | $ | 547 | ||||||||
| Increase (decrease) due to: | ||||||||||||||||
| State income taxes, net of federal income tax benefit | 15 | 13 | 44 | 28 | ||||||||||||
| Valuation allowance adjustments (a) | 3 | 8 | 49 | |||||||||||||
| Impact of lower U.K. income tax rates | (40) | (48) | (138) | (124) | ||||||||||||
| U.S. income tax on foreign earnings - net of foreign tax credit (b) | 26 | (1) | 47 | |||||||||||||
| Federal and state tax reserve adjustments (c) | (9) | (21) | ||||||||||||||
| Foreign income tax return adjustments | (4) | |||||||||||||||
| Amortization of investment tax credit | (1) | 1 | (3) | (3) | ||||||||||||
| Depreciation not normalized | (1) | (3) | (4) | (7) | ||||||||||||
| Intercompany interest on U.K. financing entities | (4) | (15) | (4) | |||||||||||||
| Other | (5) | (5) | (5) | 1 | ||||||||||||
| Total increase (decrease) | (45) | (13) | (139) | (13) | ||||||||||||
| Total income taxes | $ | 144 | $ | 201 | $ | 432 | $ | 534 | ||||||||
| (PPL) | |||||||||||||||
| Three Months | Nine Months | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
Federal income tax on Income from Continuing Operations Before Income Taxes at statutory tax rate - 35% | $ | 214 | $ | 189 | $ | 681 | $ | 571 | |||||||
| Increase (decrease) due to: | |||||||||||||||
| State income taxes, net of federal income tax benefit | 13 | 15 | 37 | 44 | |||||||||||
| Valuation allowance adjustments | 4 | — | 13 | 8 | |||||||||||
| Impact of lower U.K. income tax rates | (37 | ) | (40 | ) | (136 | ) | (138 | ) | |||||||
| Federal and state tax reserve adjustments (a) | — | (9 | ) | — | (21 | ) | |||||||||
| Enactment of the U.K. Finance Act 2016 (b) | (42 | ) | — | (42 | ) | — | |||||||||
| Depreciation not normalized | — | — | (6 | ) | (4 | ) | |||||||||
| Interest benefit on U.K. financing entities | (4 | ) | (4 | ) | (13 | ) | (15 | ) | |||||||
| Stock-based compensation (c) | (1 | ) | — | (12 | ) | — | |||||||||
| Other | (8 | ) | (7 | ) | (12 | ) | (13 | ) | |||||||
| Total increase (decrease) | (75 | ) | (45 | ) | (171 | ) | (139 | ) | |||||||
| Total income taxes | $ | 139 | $ | 144 | $ | 510 | $ | 432 | |||||||
| During the three and nine months ended September 30, 2015, PPL recorded a $9 million tax benefit related to a planned amendment of a prior period tax return. |
| (b) | The U.K. Finance Act 2016, enacted in September 2016, reduces the U.K. statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during the three and nine months ended September 30, 2016. |
| (c) | During the three and nine months ended September 30, 2016, PPL recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 for additional information. |
| (PPL Electric) | |||||||||||||||
| Three Months | Nine Months | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Federal income tax on Income Before Income Taxes at statutory tax rate - 35% | $ | 52 | $ | 32 | $ | 149 | $ | 112 | |||||||
| Increase (decrease) due to: | |||||||||||||||
| State income taxes, net of federal income tax benefit | 9 | 7 | 27 | 21 | |||||||||||
| Depreciation not normalized | (2 | ) | (1 | ) | (5 | ) | (3 | ) | |||||||
| Stock-based compensation (a) | — | — | (7 | ) | — | ||||||||||
| Other | (1 | ) | (3 | ) | (2 | ) | — | ||||||||
| Total increase (decrease) | 6 | 3 | 13 | 18 | |||||||||||
| Total income taxes | $ | 58 | $ | 35 | $ | 162 | $ | 130 | |||||||
| (a) | During the nine months ended September 30, |
36
| (PPL Electric) | ||||||||||||||||
| Three Months | Nine Months | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Federal income tax on Income Before Income Taxes at statutory | ||||||||||||||||
| tax rate - 35% | $ | 32 | $ | 33 | $ | 112 | $ | 110 | ||||||||
| Increase (decrease) due to: | ||||||||||||||||
| State income taxes, net of federal income tax benefit | 7 | 5 | 21 | 17 | ||||||||||||
| Depreciation not normalized | (1) | (2) | (3) | (5) | ||||||||||||
| Other | (3) | 1 | (1) | |||||||||||||
| Total increase (decrease) | 3 | 4 | 18 | 11 | ||||||||||||
| Total income taxes | $ | 35 | $ | 37 | $ | 130 | $ | 121 | ||||||||
| (LKE) | ||||||||||||||||
| Three Months | Nine Months | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Federal income tax on Income from Continuing Operations Before | ||||||||||||||||
| Income Taxes at statutory tax rate - 35% | $ | 68 | $ | 51 | $ | 172 | $ | 153 | ||||||||
| Increase (decrease) due to: | ||||||||||||||||
| State income taxes, net of federal income tax benefit | 7 | 6 | 18 | 16 | ||||||||||||
| Amortization of investment tax credit | (1) | (1) | (2) | (3) | ||||||||||||
| Valuation allowance adjustment (a) | 8 | |||||||||||||||
| Other | (1) | (1) | (2) | (1) | ||||||||||||
| Total increase (decrease) | 5 | 4 | 22 | 12 | ||||||||||||
| Total income taxes | $ | 73 | $ | 55 | $ | 194 | $ | 165 | ||||||||
| (LKE) | |||||||||||||||
| Three Months | Nine Months | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Federal income tax on Income Before Income Taxes at statutory tax rate - 35% | $ | 74 | $ | 68 | $ | 189 | $ | 172 | |||||||
| Increase (decrease) due to: | |||||||||||||||
| State income taxes, net of federal income tax benefit | 8 | 7 | 20 | 18 | |||||||||||
| Amortization of investment tax credit | (1 | ) | (1 | ) | (2 | ) | (2 | ) | |||||||
| Valuation allowance adjustments (a) | — | — | — | 8 | |||||||||||
| Stock-based compensation | (1 | ) | — | (2 | ) | — | |||||||||
| Other | (1 | ) | (1 | ) | (3 | ) | (2 | ) | |||||||
| Total increase (decrease) | 5 | 5 | 13 | 22 | |||||||||||
| Total income taxes | $ | 79 | $ | 73 | $ | 202 | $ | 194 | |||||||
| (a) | Represents a valuation allowance against tax credits expiring in 2016 and 2017 that are more likely than not to expire before being utilized. |
| (LG&E) | ||||||||||||||||
| Three Months | Nine Months | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Federal income tax on Income Before Income Taxes at statutory | ||||||||||||||||
| tax rate - 35% | $ | 33 | $ | 26 | $ | 83 | $ | 74 | ||||||||
| Increase (decrease) due to: | ||||||||||||||||
| State income taxes, net of federal income tax benefit | 4 | 3 | 9 | 8 | ||||||||||||
| Other | (1) | (2) | (1) | (4) | ||||||||||||
| Total increase (decrease) | 3 | 1 | 8 | 4 | ||||||||||||
| Total income taxes | $ | 36 | $ | 27 | $ | 91 | $ | 78 | ||||||||
| (KU) | ||||||||||||||||
| Three Months | Nine Months | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Federal income tax on Income Before Income Taxes at statutory | ||||||||||||||||
| tax rate - 35% | $ | 41 | $ | 32 | $ | 106 | $ | 98 | ||||||||
| Increase (decrease) due to: | ||||||||||||||||
| State income taxes, net of federal income tax benefit | 4 | 3 | 11 | 10 | ||||||||||||
| Other | (1) | (1) | (2) | (2) | ||||||||||||
| Total increase (decrease) | 3 | 2 | 9 | 8 | ||||||||||||
| Total income taxes | $ | 44 | $ | 34 | $ | 115 | $ | 106 | ||||||||
Unrecognized Tax Benefits(PPL)
Changes to unrecognized tax benefits for the periods ended September 30 are as follows.
| Three Months | Nine Months | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||
| PPL | |||||||||||||
| Beginning of period | $ | 5 | $ | 21 | $ | 20 | $ | 22 | |||||
| Additions based on tax positions of prior years | 1 | ||||||||||||
| Reductions based on tax positions of prior years | (2) | ||||||||||||
| Settlements | (15) | ||||||||||||
| End of period | $ | 5 | $ | 21 | $ | 5 | $ | 21 | |||||
37
| (LG&E) | |||||||||||||||
| Three Months | Nine Months | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Federal income tax on Income Before Income Taxes at statutory tax rate - 35% | $ | 36 | $ | 33 | $ | 90 | $ | 83 | |||||||
| Increase (decrease) due to: | |||||||||||||||
| State income taxes, net of federal income tax benefit | 4 | 4 | 10 | 9 | |||||||||||
| Other | (1 | ) | (1 | ) | (2 | ) | (1 | ) | |||||||
| Total increase (decrease) | 3 | 3 | 8 | 8 | |||||||||||
| Total income taxes | $ | 39 | $ | 36 | $ | 98 | $ | 91 | |||||||
PPL finalized the settlement of interest in the second quarter of 2016 and recorded an additional $3 million tax benefit.(KU) Three Months Nine Months 2016 2015 2016 2015 Federal income tax on Income Before Income Taxes at statutory tax rate - 35% $ 44 $ 41 $ 117 $ 106 Increase (decrease) due to: State income taxes, net of federal income tax benefit 5 4 12 11 Other (1 ) (1 ) (1 ) (2 ) Total increase (decrease) 4 3 11 9 Total income taxes $ 48 $ 44 $ 128 $ 115 divisionDivision reached a settlement on the amount of PPL's refund from its open audits for the years 1998 - 2011. In April 2015, PPL was notified that the Joint Committee on Taxation approved PPL's settlement. For the nine months ended September 30, 2015, PPL recorded a tax benefit of $24 million. Of this amount, $12 million iswas reflected in continuing operations. PPL PPL Electric September 30, December 31, September 30, December 31, 2015 2014 2015 2014 Current Regulatory Assets: Environmental cost recovery $ 19 $ 5 Gas supply clause 1 15 Transmission service charge 7 6 $ 7 $ 6 Other 10 11 3 6 Total current regulatory assets (a) $ 37 $ 37 $ 10 $ 12 Noncurrent Regulatory Assets: Defined benefit plans (b) $ 734 $ 720 $ 411 $ 372 Taxes recoverable through future rates 323 316 323 316 Storm costs 101 124 34 46 Unamortized loss on debt 70 77 44 49 Interest rate swaps (c) 146 122 Accumulated cost of removal of utility plant 130 114 130 114 AROs 109 79 Other 14 10 Total noncurrent regulatory assets $ 1,627 $ 1,562 $ 942 $ 897 Current Regulatory Liabilities: Generation supply charge $ 41 $ 28 $ 41 $ 28 Demand side management 12 2 Gas supply clause 9 6 Transmission formula rate 61 42 61 42 Storm damage expense 13 3 13 3 Other 15 10 5 3 Total current regulatory liabilities $ 151 $ 91 $ 120 $ 76 Noncurrent Regulatory Liabilities: Accumulated cost of removal of utility plant $ 695 $ 693 Coal contracts (d) 28 59 Power purchase agreement - OVEC (d) 86 92 Net deferred tax assets 23 26 Act 129 compliance rider 25 18 $ 25 $ 18 Defined benefit plans 22 16 Interest rate swaps 82 84 Other 1 4 Total noncurrent regulatory liabilities $ 962 $ 992 $ 25 $ 18 38 LKE LG&E KU September 30, December 31, September 30, December 31, September 30, December 31, 2015 2014 2015 2014 2015 2014 Current Regulatory Assets: Environmental cost recovery $ 19 $ 5 $ 10 $ 4 $ 9 $ 1 Gas supply clause �� 1 15 1 15 Fuel adjustment clause 4 2 2 Other 7 1 7 1 Total current regulatory assets $ 27 $ 25 $ 11 $ 21 $ 16 $ 4 Noncurrent Regulatory Assets: Defined benefit plans (b) $ 323 $ 348 $ 200 $ 215 $ 123 $ 133 Storm costs 67 78 37 43 30 35 Unamortized loss on debt 26 28 17 18 9 10 Interest rate swaps (c) 146 122 102 89 44 33 AROs 109 79 38 28 71 51 Plant retirement costs (e) 6 6 Other 8 10 2 4 6 6 Total noncurrent regulatory assets $ 685 $ 665 $ 396 $ 397 $ 289 $ 268 Current Regulatory Liabilities: Demand side management $ 12 $ 2 $ 6 $ 1 $ 6 $ 1 Gas supply clause 9 6 9 6 Fuel adjustment clause 8 8 Gas line tracker 3 3 Other 2 4 2 4 Total current regulatory liabilities $ 31 $ 15 $ 15 $ 10 $ 16 $ 5 Noncurrent Regulatory Liabilities: Accumulated cost of removal of utility plant $ 695 $ 693 $ 304 $ 302 $ 391 $ 391 Coal contracts (d) 28 59 12 25 16 34 Power purchase agreement - OVEC (d) 86 92 59 63 27 29 Net deferred tax assets 23 26 23 24 2 Defined benefit plans 22 16 22 16 Interest rate swaps 82 84 41 42 41 42 Other 1 4 2 1 2 Total noncurrent regulatory liabilities $ 937 $ 974 $ 439 $ 458 $ 498 $ 516 PPL PPL Electric September 30,
2016 December 31,
2015 September 30,
2016 December 31,
2015Current Regulatory Assets: Environmental cost recovery $ 4 $ 24 $ — $ — Generation formula rate 12 7 — — Transmission service charge 8 10 8 10 Other 6 7 4 3 Total current regulatory assets (a) $ 30 $ 48 $ 12 $ 13 Noncurrent Regulatory Assets: Defined benefit plans $ 791 $ 809 $ 456 $ 469 Taxes recoverable through future rates 333 326 333 326 Storm costs 71 93 19 30 Unamortized loss on debt 62 68 39 42 Interest rate swaps 143 141 — — Accumulated cost of removal of utility plant 143 137 143 137 AROs 208 143 — — Other 14 16 1 2 Total noncurrent regulatory assets $ 1,765 $ 1,733 $ 991 $ 1,006 Current Regulatory Liabilities: Generation supply charge $ 22 $ 41 $ 22 $ 41 Demand side management 6 8 — — Gas supply clause — 6 — — Universal service rider 10 5 10 5 Transmission formula rate 25 48 25 48 Fuel adjustment clause 14 14 — — Act 129 compliance rider 22 — 22 — Storm damage expense 13 16 13 16 Other 8 7 2 3 Total current regulatory liabilities $ 120 $ 145 $ 94 $ 113 Noncurrent Regulatory Liabilities: Accumulated cost of removal of utility plant $ 698 $ 691 $ — $ — Coal contracts (b) 3 17 — — Power purchase agreement - OVEC (b) 77 83 — — Net deferred tax assets 23 23 — — Act 129 compliance rider — 22 — 22 Defined benefit plans 27 24 — — Interest rate swaps 80 82 — — Other 3 3 — — Total noncurrent regulatory liabilities $ 911 $ 945 $ — $ 22 LKE LG&E KU September 30,
2016 December 31,
2015 September 30,
2016 December 31,
2015 September 30,
2016 December 31,
2015Current Regulatory Assets: Environmental cost recovery $ 4 $ 24 $ 4 $ 13 $ — $ 11 Generation formula rate 12 7 — — 12 7 Other 2 4 2 3 — 1 Total current regulatory assets $ 18 $ 35 $ 6 $ 16 $ 12 $ 19 Noncurrent Regulatory Assets: Defined benefit plans $ 335 $ 340 $ 211 $ 215 $ 124 $ 125 Storm costs 52 63 29 35 23 28 Unamortized loss on debt 23 26 16 17 7 9 Interest rate swaps 143 141 102 98 41 43 AROs 208 143 77 57 131 86 Plant retirement costs 4 6 — — 4 6 Other 9 8 2 2 7 6 Total noncurrent regulatory assets $ 774 $ 727 $ 437 $ 424 $ 337 $ 303 Current Regulatory Liabilities: Demand side management $ 6 $ 8 $ 4 $ 4 $ 2 $ 4 Gas supply clause — 6 — 6 — — Fuel adjustment clause 14 14 2 2 12 12 Other 6 4 1 1 5 3 Total current regulatory liabilities $ 26 $ 32 $ 7 $ 13 $ 19 $ 19 Noncurrent Regulatory Liabilities: $ 698 $ 691 $ 306 $ 301 $ 392 $ 390 Coal contracts (b) 3 17 1 7 2 10 Power purchase agreement - OVEC (b) 77 83 53 57 24 26 Net deferred tax assets 23 23 23 23 — — Defined benefit plans 27 24 — — 27 24 Interest rate swaps 80 82 40 41 40 41 Other 3 3 1 2 2 1 Total noncurrent regulatory liabilities $ 911 $ 923 $ 424 $ 431 $ 487 $ 492 (a) For PPL, theseThese amounts are included in "Other current assets" on the Balance Sheets.(d)These liabilities were recorded as offsets to certain intangible assets that were recorded at fair value upon the acquisition of LKE by PPL.
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. Judge. In DSP. Act 129 requires RIIO-ED1On April 1, 2015, the RIIO-ED1 eight-year price control period commenced for WPD's four DNOs. See "Item 1. Business - Segment Information - U. K. Regulated Segment" of PPL's 2014 Form 10-K for additional information on RIIO-ED1. March 2014, Ofgem issued its final decision on the DPCR4 line loss incentives and penalties mechanism. As a result, during the first quarter of 2014 WPD increasedbegan refunding its liability by $65 million for over-recovery of line losses with a reduction to "Operating Revenues" on the Statement of Income. WPD began refunding the liability to customers on April 1, 2015, andwhich will continue through March 31, 2019. The liability at September 30, 20152016 was $75$31 million.39Rate Case ProceedingsJune 30, 2015,November 1, 2016, LG&E and KU announced that on November 23, 2016, they anticipate filing requests with the KPSC approved a rate case settlement agreement providing for increases in the annual revenue requirements associated with KU base electricity rates of $125approximately $103 million at KU and LG&Ean increase in annual base electricity and gas rates of $7 million.approximately $94 million and $14 million at LG&E. The annual revenue requirement associated withproposed base rate increases to be requested are an electricity ratesrate increase of 6.4% at KU and electricity and gas rate increases of 8.5% and 4.2% at LG&E was not changed. Although the settlement did not establish a specific return on equity with respect to the base rates, an authorized 10% return on equity will be utilizedand would become effective in the ECR and GLT mechanisms. The settlement agreement provides for deferred recovery of costs associated with Green River Units 3 and 4 through their retirement. The new regulatory asset will be amortized over three years. The settlement also provides regulatory asset treatment for the difference between pension expense calculated in accordance withJuly 2017. LG&E&E's and KU's pension accounting policyapplications include requests for CPCNs for implementing an Advanced Metering System program and pension expense using a 15Distribution Automation program. The applications are to be based on a forecasted test year amortization period for actuarial gains and losses. The new rates and all elements of the settlement became effective July 1, 2015.KPSC Landfill ProceedingsOn May 22, 2015,2017 through June 30, 2018 and a requested return-on-equity of 10.23%. LG&E and KU cannot predict the outcome of these proceedings.within a KPSC proceeding to review and rule upon the recoverability of the franchise fee.for a declaratoryissued an order that the existing CPCNrejecting Louisville/Jefferson County's complaint and ECR approvals regarding the initial phases of construction and rate recovery of the landfill for management of CCRs at the Trimbleprovided Louisville/Jefferson County Station remain in effect. The current design of the proposed landfill provides for construction in substantially the same location as originally proposed with approximately the same storage capacity and expected useful life. On May 20 2015, the owner ofdays to file an underground limestone mine filed a complaint withamended complaint. Until the KPSC requesting it to revoke the CPCN for the Trimble County landfill and limit recovery of costs for the Ghent Station landfill on the grounds that, as a result of cost increases, the proposed landfill no longer constitutes the least cost alternative for CCR management. The KPSC has initiated its own investigation, consolidated theissues orders in these proceedings, and ordered an accelerated procedural schedule. The KPSC conducted a hearing on the matter in September 2015 and LG&E and KU are awaiting a ruling. Although the companies continue to believe that the landfills at the Trimble County and Ghent stations are the least cost options and the CPCN and prior KPSC determinations provide the necessary regulatory authority to proceed with construction of the landfill and obtain cost recovery, LG&E and KU are currently unable tocannot predict the outcome of this matter but does not anticipate that it will have a material effect on its financial condition or impactresults of the pending proceedings.11 authorizes129PUC to approve two specific ratemaking mechanisms: the userequirements of a fully projected future test year in base rate proceedings and,Act 129 are subject to certain conditions, the use of a Distribution System Improvement Charge (DSIC). Such alternative ratemaking procedures and mechanisms provide opportunity for accelerated cost-recovery and, therefore, are important to PPL Electric as it is in a period of significant capital investment to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets.Rate Case ProceedingOn March 31, 2015, PPL Electric filed a request with the PUC for an increase in its annual distribution revenue requirement of approximately $167.5 million. The application was based on a fully projected future test year of January 1, 2016 through December 31, 2016. On September 3,penalties. In November 2015, PPL Electric filed with the PUC Administrative Law Judge a petitionits Act 129 Phase III Energy Efficiency and Conservation Plan for approval ofthe period June 1, 2016 through May 31, 2021. In January 2016, PPL Electric and the other parties to the case reached a settlement agreement under which PPL Electric would be permitted to increase its annual distribution rates by $124 million, effective January 1, 2016. On October 5, 2015,of all major issues and filed that settlement with the Administrative Law Judge issued a recommended decision approving the settlement agreement. The PUC is expected to issue its final order in December 2015. PPL Electric cannot predict the outcome of this proceeding.Distribution System Improvement Charge (DSIC)On March 31, 2015, PPL Electric filed a petition requesting a waiver of the DSIC cap of 5% of billed revenues and approval to increase the maximum allowable DSIC from 5% to 7.5% for service rendered after January 1, 2016. PPL Electric filed the petition concurrently with its 2015 rate case and the Administrative Law Judge granted PPL Electric's request to consolidate these two proceedings. Under the terms of the settlement agreement discussed above, PPL Electric agreed to withdraw the petition without prejudice to re-file it at a later date.40Storm Damage Expense Rider (SDER)its December 28, 2012 final rate case order, the PUC directed PPL Electric to file a proposed SDER. The SDER is a reconcilable automatic adjustment clause under which PPL Electric annually will compare actual storm costs to storm costs allowed in base rates and refund or recoup any differences from customers. In March 2013, PPL Electric filed its proposed SDER with the PUC and, as part of that filing, requested recovery of the 2012 qualifying storm costs related to Hurricane Sandy. PPL Electric proposed that the SDER become effective January 1, 2013 at a zero rate with qualifying storm costs incurred in 2013 and the 2012 Hurricane Sandy costs included in rates effective January 1, 2014. In April 2014,June 2016, the PUC issued a final order approving PPL Electric's Phase III Plan as modified by the SDER with a January 1, 2015 effective date and initially including actual storm costs compared to collections for December 2013 through November 2014. As a result, PPL Electric reduced its regulatory liability by $12 million in March 2014. Also, as part of the April 2014 order, PPL Electric was authorized to recover Hurricane Sandy storm damage costs through the SDER of $29 million over a three-year period beginning January 1, 2015.On June 20, 2014, the Office of Consumer Advocate (OCA) filed a petition with the Commonwealth Court of Pennsylvania requesting that the Court reverse and remand the April 2014 order permittingsettlement, allowing PPL Electric to establishrecover, through the SDER. This matter remains pending beforeAct 129 compliance rider, a maximum $313 million in program cost over the Commonwealth Court. On January 15, 2015, the PUC issued a final order closing an investigation relatedfive-year period June 1, 2016 through May 31, 2021. separate OCA complaint concerning PPL Electric's October 2014 preliminary SDER calculationPUC-approved default service procurement plan through auctions, requests for proposal and modifiedbilateral contracts at the effective datesole discretion of the SDER to February 1, 2015.Smart Meter Rider (SMR)installationa mix of smart meters for new construction, uponspot market purchases, short-term contracts and long-term contracts (4 to 20 years), with long-term contracts limited to 25% of load unless otherwise approved by the request of consumers and at their cost, or on a depreciation schedule not exceeding 15 years. Under Act 129, EDCs arePUC. A DSP is able to recover the costs associated with its default service procurement plan.providing smart metering technology. All of PPL Electric's metered customers currently have advanced meters installed at their service locations capable of many of the functionsits biannual DSP procurement plans for all prior periods required under Act 129. PPL Electric conducted pilot projects and technical evaluations of its current advanced metering technology and concluded that the current technology does not meet all of the requirements of Act 129. PPL Electric recovered the cost of its pilot programs and evaluations through a cost recovery mechanism, the Smart Meter Rider. In August 2013,January 2016, PPL Electric filed a Petition for Approval of a new DSP procurement plan with the PUC an annual report describingfor the actions it was taking under its Smart Meter Plan during 2013period June 1, 2017 through May 31, 2021. The parties to the proceeding reached a settlement on all but one issue and its planned actions for 2014. PPL Electric alsoa partial settlement agreement and briefs on the open issue were submitted revised SMR charges that became effective January 1, 2014. In June 2014, PPL Electric filed its final Smart Meter Plan with the PUC. In that plan, PPL Electric proposes by the end of 2019 to replace all of its current meters with new meters that meet the Act 129 requirements. The total cost of the project is estimated to be approximately $450 million, of which approximately $328 million is expected to be capital. PPL Electric proposes to recover these costs through the SMR which the PUC previously approved for recovery of such costs. On April 30, 2015, the Administrative Law Judge assigned by(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 to review PPL Electric's Smart Meter Plan issued a recommended decision approving the plan with minor modifications. On September 3, 2015, the PUC entered a finalan order approving the Smart Meter Planpartial settlement agreement and adopting the initial decision with minor modifications.Federal Matters(PPL, LKE and KU)FERC Wholesale Formula RatesIn September 2013, KU filed an application with the FERC to adjust the formula rate under which KU provides wholesale requirements power sales to 12 municipal customers. Among other changes, the application requests an amended formula whereby KU would charge cost-based rates with a subsequent true-up to actual costs, replacing the current formula which does not include a true-up. KU's application proposed an authorized return on equity of 10.7%. Certain elements, including the new formula rate, became effective April 23, 2014, subject to refund. In April 2014, nine municipalities submitted notices of termination, under the original notice period provisions, to cease taking power under the wholesale requirements contracts. Such terminations are to be effective in 2019, except in the case of one municipality with a 2017 effective date. In addition, a tenth municipality has become a transmission-only customer as of June 2015. In July 2014, KU agreed on settlement terms with the two municipal customers that did not provide termination notices and filed the settlement proposal with the FERC for its approval. In August 2014, the FERC issued an order on the interim settlement agreement allowing the proposed rates to become effective pending a final order. If approved, the settlement agreement will resolve the rate case with respect to these two municipalities, including approval of the formula rate with a true-up provision and authorizing a return on equity of 10% or the return on equity awarded to other parties in this case, whichever is lower. In August 2015, KU filed a partial settlement agreement with the nine terminating municipalities, which, if approved by FERC, would resolve all but one open matter with one municipality, including providing for certain refunds, approving the formula rate with a true-up provision, and authorizing a 10.25% return on equity. A single remaining unresolved issue with one terminating municipality41is in FERC litigation proceedings. KU cannot predict the ultimate outcome of these FERC proceedings regarding its wholesale power agreements with the municipalities, but does not currently anticipate significant remaining refunds beyond amounts already recorded.Sheets.TheSheets. The following credit facilities were in place at: September 30, 2015 December 31, 2014 Letters of Letters of Credit Credit and and Commercial Commercial Expiration Paper Unused Paper Date Capacity Borrowed Issued Capacity Borrowed Issued PPL U.K. WPD plc Syndicated Credit Facility Dec. 2016 £ 210 £ 127 £ 83 £ 103 WPD (South West) Syndicated Credit Facility July 2020 245 245 WPD (East Midlands) Syndicated Credit Facility July 2020 300 139 161 64 WPD (West Midlands) Syndicated Credit Facility July 2020 300 300 Uncommitted Credit Facilities 65 £ 4 61 £ 5 Total U.K. Credit Facilities (a) £ 1,120 £ 266 £ 4 £ 850 £ 167 £ 5 U.S. PPL Capital Funding Syndicated Credit Facility July 2019 $ 300 $ 300 Syndicated Credit Facility Nov. 2018 300 300 Bilateral Credit Facility Mar. 2016 150 $ 20 130 $ 21 Total PPL Capital Funding Credit Facilities $ 750 $ 20 $ 730 $ 21 PPL Electric Syndicated Credit Facility July 2019 $ 300 $ 69 $ 231 $ 1 LKE Syndicated Credit Facility (b) Oct. 2018 $ 75 $ 75 $ $ 75 LG&E Syndicated Credit Facility July 2019 $ 500 $ 500 $ 264 KU Syndicated Credit Facility July 2019 $ 400 $ 400 $ 236 Letter of Credit Facility Oct. 2017 198 $ 198 198 Total KU Credit Facilities $ 598 $ 198 $ 400 $ 434 September 30, 2016 December 31, 2015 Capacity Borrowed Borrowed PPL U.K. WPD plc Syndicated Credit Facility Jan 2021 £ 210 £ 153 £ — £ 57 £ 133 £ — WPD (South West) Syndicated Credit Facility July 2021 245 100 — 145 — — WPD (East Midlands) Syndicated Credit Facility July 2021 300 31 — 269 — — WPD (West Midlands) Syndicated Credit Facility July 2021 300 — — 300 — — Uncommitted Credit Facilities 40 — 4 36 — 4 Total U.K. Credit Facilities (a) £ 1,095 £ 284 £ 4 £ 807 £ 133 £ 4 U.S. PPL Capital Funding Syndicated Credit Facility Jan 2021 $ 700 $ — $ — $ 700 $ — $ 151 Syndicated Credit Facility Nov 2018 300 — — 300 — 300 Bilateral Credit Facility Mar 2017 150 — 17 133 — 20 Total PPL Capital Funding Credit Facilities $ 1,150 $ — $ 17 $ 1,133 $ — $ 471 PPL Electric Syndicated Credit Facility Jan 2021 $ 400 $ — $ 131 $ 269 $ — $ 1 LKE Syndicated Credit Facility (b) Oct 2018 $ 75 $ — $ — $ 75 $ 75 $ — LG&E Syndicated Credit Facility Dec 2020 $ 500 $ — $ 128 $ 372 $ — $ 142 KU Syndicated Credit Facility Dec 2020 $ 400 $ — $ 7 $ 393 $ — $ 48 Letter of Credit Facility Oct 2017 198 — 198 — — 198 Total KU Credit Facilities $ 598 $ — $ 205 $ 393 $ — $ 246 (b) LKE's interest ratesrate on outstanding borrowings at September 30, 2015 and December 31, 2014 were 1.45% and 1.67%2015 was 1.68%.
42
supported by the respective Registrant's Syndicated Credit Facility.The following commercial paper programs were in place at:
| September 30, 2015 | December 31, 2014 | ||||||||||||||||||||||
| Weighted - | Commercial | Weighted - | Commercial | ||||||||||||||||||||
| Average | Paper | Unused | Average | Paper | |||||||||||||||||||
| Interest Rate | Capacity | Issuances | Capacity | Interest Rate | Issuances | ||||||||||||||||||
| PPL Electric | 0.41% | $ | 300 | $ | 68 | $ | 232 | ||||||||||||||||
| LG&E | 350 | 350 | 0.42% | $ | 264 | ||||||||||||||||||
| KU | 350 | 350 | 0.49% | 236 | |||||||||||||||||||
| Total | $ | 1,000 | $ | 68 | $ | 932 | $ | 500 | |||||||||||||||
In October 2015, PPL Capital Funding established a commercial paper program for up to $600 million to provide an additional financing source to fund its short-term liquidity needs from time to time. Commercial paper issuances will be supported by PPL Capital Funding's Syndicated Credit Facilities. PPL guarantees PPL Capital Funding's payment obligations on the commercial paper notes.
| September 30, 2016 | December 31, 2015 | ||||||||||||||||||
Weighted - Average Interest Rate | Capacity | Commercial Paper Issuances | Unused Capacity | Weighted - Average Interest Rate | Commercial Paper Issuances | ||||||||||||||
| PPL Capital Funding | $ | 1,000 | $ | — | $ | 1,000 | 0.78% | $ | 451 | ||||||||||
| PPL Electric | 0.74% | 400 | 130 | 270 | — | ||||||||||||||
| LG&E | 0.73% | 350 | 128 | 222 | 0.71% | 142 | |||||||||||||
| KU | 0.66% | 350 | 7 | 343 | 0.72% | 48 | |||||||||||||
| Total | $ | 2,100 | $ | 265 | $ | 1,835 | $ | 641 | |||||||||||
(
In September 2015, LG&ECapital Funding issued $300$650 million of 3.30% First Mortgage Bonds3.10% Senior Notes due 2025 and $250 million of 4.375% First Mortgage Bonds due 2045. LG&E2026. PPL Capital Funding received proceeds of $298 million and $248 million, net of discounts and underwriting fees, which were used to repay short-term debt and additionally will be used for the repayment of First Mortgage Bonds maturing in November 2015, and for general corporate purposes.
(PPL, LKE and KU)
In September 2015, KU issued $250 million of 3.30% First Mortgage Bonds due 2025 and $250 million of 4.375% First Mortgage Bonds due 2045. KU received proceeds of $248 million for each issuance, net of discounts and underwriting fees, which were used to repay short-term debt and additionally will be used for the repayment of First Mortgage Bonds maturing in November 2015, and for general corporate purposes.
(PPL and PPL Electric)
In October 2015, PPL Electric issued $350 million of 4.150% First Mortgage Bonds due 2045. PPL Electric received proceeds of $345$645 million, net of a discount and underwriting fees, which will be used to invest in or make loans to subsidiaries of PPL, to repay short-term debt and for general corporate purposes.
| Three Months | Nine Months | |||||
| Number of shares | 435,800 | 857,500 | ||||
| Average share price | $ | 32.95 | $ | 33.33 | ||
| Net proceeds | 14 | 28 | ||||
| Three Months | Nine Months | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Number of shares (in thousands) | 710 | 436 | 710 | 858 | |||||||||||
| Average share price | $ | 35.23 | $ | 32.95 | $ | 35.23 | $ | 33.33 | |||||||
| Net Proceeds | $ | 25 | $ | 14 | $ | 25 | $ | 28 | |||||||
43
upon future earnings, cash flows, financial and legal requirements and other factors. See Note 8 for information regarding the June 1, 2015 distribution to PPL's shareowners of a newly formed entity, Holdco, which at closing owned all of the membership interests of PPL Energy Supply and all of the common stock of Talen Energy.
Immediately following the spinoff on June 1, 2015, Holdco merged with a special purpose subsidiary of Talen Energy, with Holdco continuing as the surviving company to the merger and as a wholly owned subsidiary of Talen Energy and the sole owner of PPL Energy Supply. Substantially contemporaneous with the spinoff and merger, RJS Power was contributed by its owners to become a subsidiary of Talen Energy. PPL shareowners received approximately 0.1249 shares of Talen Energy common stock for each share of PPL common stock they owned on May 20, 2015.
See Note 8 in PPL's 2015 Form 10-K for additional information.
44
| Weighted | ||||||
| Fair Value | ||||||
| Approach | Weighting | (in billions) | ||||
| Talen Energy Market Value | 50% | $ | 1.4 | |||
| Income/Discounted Cash Flow | 30% | 1.1 | ||||
| Alternative Market (Comparable Company) | 20% | 0.7 | ||||
| Estimated Fair Value | $ | 3.2 | ||||
| Approach | Weighting | Weighted Fair Value (in billions) | ||||
| Talen Energy Market Value | 50% | $ | 1.4 | |||
| Income/Discounted Cash Flow | 30% | 1.1 | ||||
| Alternative Market (Comparable Company) | 20% | 0.7 | ||||
| Estimated Fair Value | $ | 3.2 | ||||
Following the announcement of the transaction to form Talen Energy, efforts were initiated to identify the appropriate staffing for Talen Energy and for PPL and its subsidiaries following completion of the spinoff. Organizational plans were substantially completed in 2014. The new organizational plans identified the need to resize and restructure the organizations and as a result, in 2014, estimated charges for employee separation benefits were recorded. See Note 8
Additional employee-related costs incurred primarily include accelerated stock-based compensation and proratedpro-rated performance-based cash incentive and stock-based compensation awards, primarily for PPL Energy Supply employees and for PPL Services employees who became PPL Energy Supply employees in connection with the transaction. PPL Energy Supply recognized $24 million of these costs at the spinoff closing date, which are reflected in discontinued operations.
As the vesting for all
45
PPLalso recorded $44 million of third-party costs related to this transaction during the nine months ended September 30, 2015. Of these costs, $31 million were primarily for bank advisory, legal and accounting fees to facilitate the transaction, and are reflected in discontinued operations. An additional $13 million of consulting and other costs were incurred duringto prepare the nine months ended September 30, 2015, related to the formation of thenew Talen Energy organization for the spinoff and to reconfigure the remaining PPL service functions. These costs are primarily recorded in "Other operation and maintenance" on the Statement of Income. No significant additional third-party costs are expected to be incurred. PPL recorded $5 million and $21 million of third-party costs related to this transaction during the three and nine months ended September 30, 2014.
As a result ofoperations for the spinoff announcement in June 2014, PPL recorded $3 million and $49 million of deferred income tax expense during the three and nine months ended September 30, 2014, to adjust valuation allowances on deferred tax assets primarily for state net operating loss carryforwards that were previously supported by the future earnings of PPL Energy Supply.
2015.
Subsequent to
| Three Months | Nine Months | ||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||
| Operating revenues | $ | 1,623 | $ | 1,427 | $ | 1,741 | |||||
| Operating expenses | 1,429 | 1,328 | 1,593 | ||||||||
| Other Income (Expense) - net | 8 | (22) | 6 | ||||||||
| Interest Expense (a) | 47 | 150 | 145 | ||||||||
| Income (loss) before income taxes | 155 | (73) | 9 | ||||||||
| Income tax expense (benefit) | $ | 3 | 68 | (37) | (4) | ||||||
| Loss on spinoff | (879) | ||||||||||
| Income (Loss) from Discontinued Operations (net of income taxes) | $ | (3) | $ | 87 | $ | (915) | $ | 13 | |||
| Three Months | Nine Months | ||||||
| Operating revenues | $ | — | $ | 1,427 | |||
| Operating expenses | — | 1,328 | |||||
| Other Income (Expense) - net | — | (22 | ) | ||||
| Interest expense (a) | — | 150 | |||||
| Income (loss) before income taxes | — | (73 | ) | ||||
| Income tax expense (benefit) | 3 | (37 | ) | ||||
| Loss on spinoff | — | (879 | ) | ||||
| Income (Loss) from Discontinued Operations (net of income taxes) | $ | (3 | ) | $ | (915 | ) | |
| (a) | Includes interest associated with the Supply |
"Regulated utility plant."Summarized AssetsLiabilitiesPPL Electric)Discontinued OperationsThe assets and liabilities of PPL's Supply segmentall prudently incurred construction work in progress costs but denied the requested incentive for all periods priora 100 basis point adder to the spinoff are includedreturn on equity."Current assets of discontinued operations", "Noncurrent assets of discontinued operations", "Current liabilities of discontinued operations" and "Noncurrent liabilities of discontinued operations" on PPL's Balance Sheet. Net assets, after recognition ofApril 2016, completing the loss on46spinoff, of $3.2 billion were distributed to PPL shareowners on June 1, 2015, as a result of the completion of the spinoff of PPL Energy Supply.The following major classes of assets and liabilities were distributed and removed from PPL's Balance Sheet on June 1, 2015. Additionally, the following major classes of assets and liabilities were reclassified to discontinued operations as of December 31, 2014: Discontinued Distribution on Operations at June 1, December 31, 2015 2014 Cash and cash equivalents (a) $ 371 $ 352 Restricted cash and cash equivalents 156 176 Accounts receivable and unbilled revenues 325 504 Fuels, materials and supplies 415 455 Price risk management assets 784 1,079 Other current assets 65 34 Total Current Assets 2,116 2,600 Investments 999 980 PP&E, net 6,384 6,428 Goodwill 338 338 Other intangibles 260 257 Price risk management assets 244 239 Other noncurrent assets 78 75 Total Noncurrent Assets 8,303 8,317 Total assets $ 10,419 $ 10,917 Short-term debt and long-term debt due within one year $ 885 $ 1,165 Accounts payable 252 361 Price risk management liabilities 763 1,024 Other current liabilities 229 225 Total Current Liabilities 2,129 2,775 Long-term debt (excluding current portion) 1,932 1,683 Deferred income taxes 1,259 1,223 Price risk management liabilities 206 193 Accrued pension obligations 244 299 Asset retirement obligations 443 415 Other deferred credits and noncurrent liabilities 103 150 Total Noncurrent Liabilities 4,187 3,963 Total liabilities $ 6,316 $ 6,738 Adjustment for loss on spinoff 879 Net assets distributed $ 3,224 Montana Hydro SaleIn November 2014, PPL Montana completed the sale to NorthWestern of 633 MW of hydroelectric generating facilities located in Montana for approximately $900$350 million in cash. The proceeds from the sale remained with PPL and did not transfer to Talen Energy as a result of the spinoff of PPL Energy Supply. The sale included 11 hydroelectric power facilities and related assets, included in the Supply segment.As the Montana hydroelectric power facilities were previously reported as a component of PPL Energy Supply and the Supply Segment, the components of discontinued operations for these facilities contained in the Statements of Income are included in the disclosure above.47DevelopmentFuture Capacity Needs(PPL, LKE, LG&E and KU)The Cane Run Unit 7 NGCC was put into commercial operation on June 19, 2015. As a result and to meet more stringent EPA regulations, LG&E retired one coal-fired generating unit at the Cane Run plant in March 2015 and retired the remaining two coal-fired generating units at the plant in June 2015. Additionally, KU retired the remaining two coal-fired generating units at the Green River plant on September 30, 2015. LG&E and KU incurred costs of $11 million and $6 million, respectively, directly related to these retirements including inventory write-downs and separation benefits. However, there were no gains or losses on the retirement of these units. See Note 6 for more informationproject which includes additional substation security enhancements. Costs related to the regulatory recovery ofproject are included on the costs associated with the retirement of the Green River units.In October 2013, LG&E and KU announced plans for a 10 MW solar generation facility to be operationalBalance Sheets, primarily in 2016 at a cost of approximately $36 million. In December 2014, a final order was issued by the KPSC approving the request to construct the solar generating facility at E.W. Brown.(PPL)PPL performed a remeasurement of the assets and the obligations for the PPL Retirement Plan and PPL Postretirement Benefit plans as of May 31, 2015 to allow for separation of those plans for PPL and Talen Energy as required in accordance with the spinoff transaction agreements. The net pension obligations for all active PPL Energy Supply employees and for individuals who terminated employment from PPL Energy Supply on or after July 1, 2000 were distributed and removed from PPL's Balance Sheet. The net other postretirement benefit obligations for all active PPL Energy Supply employees were distributed and removed from PPL's Balance Sheet. In addition, the net nonqualified pension plan obligations for all PPL Energy Supply active and inactive employees were retained by PPL. As a result, PPL distributed and removed from its Balance Sheet $244 million of net accrued pension obligations and $7 million of other postretirement benefit obligations. See Note 8 for additional information on the spinoff of PPL Energy Supply.betweenamong capital, expense and expense,regulatory assets, including certain costs allocated to applicable subsidiaries for plans sponsored by PPL Services and LKE.Additionally, as a result of the LG&E and KU rate case settlement that became effective July 1, 2015, the difference between pension cost calculated in accordance with LG&E and KU's pension accounting policy and pension cost calculated using a 15 year amortization period for actuarial gains and losses is recorded as a regulatory asset. See Note 6 for further information. Following are the net periodic defined benefit costs (credits) of the plans sponsored by PPL and its subsidiaries, LKE and its subsidiaries and LG&E for the periods ended September 30: Pension Benefits Three Months Nine Months U.S. U.K. U.S. U.K. 2015 2014 (c) 2015 2014 2015 (b) 2014 (c) 2015 2014 PPL Service cost $ 20 $ 24 $ 21 $ 18 $ 76 $ 73 $ 60 $ 54 Interest cost 42 56 80 90 152 168 236 268 Expected return on plan assets (56) (72) (133) (133) (201) (216) (393) (395) Amortization of: Prior service cost 1 5 5 15 Actuarial (gain) loss 18 8 39 34 65 22 118 100 Net periodic defined benefit costs (credits) prior to termination benefits 25 21 7 9 97 62 21 27 Termination benefits (a) (7) 13 Net periodic defined benefit costs (credits) $ 25 $ 14 $ 7 $ 9 $ 97 $ 75 $ 21 $ 27 48Table of Contents Pension Benefits Three Months Nine Months 2015 2014 2015 2014 LKE Service cost $ 7 $ 5 $ 20 $ 16 Interest cost 17 17 51 50 Expected return on plan assets (22) (21) (66) (62) Amortization of: Prior service cost 1 1 5 3 Actuarial (gain) loss 9 4 26 10 Net periodic defined benefit costs (credits) $ 12 $ 6 $ 36 $ 17 LG&E Service cost $ 1 $ 1 Interest cost $ 3 $ 4 10 11 Expected return on plan assets (5) (4) (15) (14) Amortization of: Prior service cost 1 1 2 2 Actuarial (gain) loss 3 1 9 4 Net periodic defined benefit costs (credits) $ 2 $ 2 $ 7 $ 4 Pension Benefits Three Months Nine Months U.S. U.K. U.S. U.K. 2016 2015 2016 (a) 2015 2016 2015 2016 (a) 2015 PPL Service cost $ 16 $ 20 $ 17 $ 21 $ 49 $ 76 $ 53 $ 60 Interest cost 44 42 58 80 131 152 182 236 Expected return on plan assets (57 ) (56 ) (124 ) (133 ) (171 ) (201 ) (389 ) (393 ) Amortization of: Prior service cost 2 1 — — 6 5 — — Actuarial loss 12 18 34 39 37 65 107 118 Net periodic defined benefit costs (credits) before settlements 17 25 (15 ) 7 52 97 (47 ) 21 Settlements 3 — — — 3 — — — Net periodic defined benefit costs (credits) (b) $ 20 $ 25 $ (15 ) $ 7 $ 55 $ 97 $ (47 ) $ 21 Pension Benefits Three Months Nine Months U.S. U.K. U.S. U.K. 2016 2015 2016 (a) 2015 2016 2015 2016 (a) 2015 LKE Service cost $ 6 $ 7 $ 18 $ 20 Interest cost 18 17 53 51 Expected return on plan assets (23 ) (22 ) (68 ) (66 ) Amortization of: Prior service cost 2 1 6 5 Actuarial loss 5 9 15 26 Net periodic defined benefit costs $ 8 $ 12 $ 24 $ 36 LG&E Service cost $ — $ — $ 1 $ 1 Interest cost 4 3 11 10 Expected return on plan assets (5 ) (5 ) (15 ) (15 ) Amortization of: Prior service cost 1 1 3 2 Actuarial loss 2 3 5 9 Net periodic defined benefit costs $ 2 $ 2 $ 5 $ 7
| Other Postretirement Benefits | |||||||||||||
| Three Months | Nine Months | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||
| PPL | |||||||||||||
| Service cost | $ | 2 | $ | 3 | $ | 9 | $ | 9 | |||||
| Interest cost | 6 | 7 | 20 | 23 | |||||||||
| Expected return on plan assets | (6) | (6) | (20) | (19) | |||||||||
| Net periodic defined benefit costs (credits) | $ | 2 | $ | 4 | $ | 9 | $ | 13 | |||||
| LKE | |||||||||||||
| Service cost | $ | 1 | $ | 1 | $ | 4 | $ | 3 | |||||
| Interest cost | 2 | 2 | 7 | 7 | |||||||||
| Expected return on plan assets | (1) | (1) | (4) | (4) | |||||||||
| Amortization of: | |||||||||||||
| Prior service cost | 1 | 1 | 2 | 2 | |||||||||
| Net periodic defined benefit costs (credits) | $ | 3 | $ | 3 | $ | 9 | $ | 8 | |||||
(PPL, LKE and LG&E) amounts previously recorded. Trimble County Unit 2 Air Permit the allowance requirements. On February 9, 2016, the 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 Supreme Court if a writ of certiorari is filed and granted. were calculated from 2012 data by applying the EPA's broad interpretation and definition of the BSER, resulting in the most stringent targets to be met in 2030, with interim targets to be met beginning in 2022. The EPA believes it has offered some flexibility to the states as to how their compliance plans can be crafted, including the option to use a rate-based approach (limit emissions per megawatt hour) or a mass-based approach (limit total tons of emissions per year), and the option to demonstrate compliance through emissions trading and multi-state collaborations. Under the rate-based approach, Kentucky would need to make a 41% reduction from its 2012 emissions rate and under a mass-based approach it would need to make a 36% reduction. These reductions are significantly greater than initially proposed and present significant challenges to the state. If the Clean Power Plan is ultimately upheld and Kentucky fails to develop an approvable implementation plan by KU) comply with applicable state law requirements. See Note 6 for additional information. States. The ultimate outcome of the court's review of the rule remains uncertain. operations. have or a range of reasonably possible losses, if any, related to these sites. At September 30, 2016 and December 31, 2015, PPL Electric had a recorded liability of $10 million representing its best estimate of the probable loss incurred to remediate additional sites previously owned or operated by PPL Electric predecessors or affiliates. Depending on the outcome of investigations at sites where investigations have not begun or been completed, or developments at sites for which may be as much as approximately $30 million. 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. Other Postretirement Benefits Three Months Nine Months 2016 2015 2016 2015 PPL Service cost $ 2 $ 2 $ 6 $ 9 Interest cost 6 6 19 20 Expected return on plan assets (6 ) (6 ) (17 ) (20 ) Amortization of actuarial loss 1 — 1 — Net periodic defined benefit costs $ 3 $ 2 $ 9 $ 9 LKE Service cost $ 1 $ 1 $ 3 $ 4 Interest cost 2 2 7 7 Expected return on plan assets (2 ) (1 ) (5 ) (4 ) Amortization of prior service cost 1 1 2 2 Net periodic defined benefit costs $ 2 $ 3 $ 7 $ 9 LKE based on its participation in those plans, which management believes are reasonable.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 LKELKE. These allocations are based on their participation in those plans, which management believes are reasonable.For the periods ended September 30, PPL Services allocated the following net periodic defined benefit costs to PPL Electric, and LKE allocated the following net periodic defined benefit costs to LG&E and KU. Three Months Nine Months 2015 2014 2015 2014 PPL Electric (a) $ 8 $ 3 $ 24 $ 18 LG&E 3 2 10 6 KU 4 2 13 6 49 Three Months Nine Months 2016 2015 2016 2015 PPL Electric $ 6 $ 8 $ 17 $ 24 LG&E 2 3 7 10 KU 2 4 8 13 All commitments, contingencies and guarantees associated with PPL Energy Supply and its subsidiaries were retained by Talen Energy Supply and its subsidiaries at the spinoff date without recourse to PPL.(PPL, LKE, LG&E and KU)matter and such issues as may appropriately be presented by the parties and determined by the court.matter. Oral argument before the Sixth Circuit was held in August 2015. In November 2015, but athe Sixth Circuit issued an opinion affirming the District Court's ruling hasthat plaintiffs' state law claims are not yet been issuedpreempted by the Court.Clean Air Act and remanding the matter to the District Court for further proceedings. The District Court has issued an order setting a discovery schedule through the second quarter of 2017. 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.allegesalleged that various discharges at the Mill Creek plant constituteconstituted violations of the plant's water discharge permit. The Sierra Club seekssought civil penalties, injunctive relief, costs and attorney's fees. In August 2015,The parties reached a proposed settlement in the Court denied cross-motions for summary judgment filedmatter on September 27, 2016, which has been submitted toboth partiesLG&E and directeddoes not involve fines or civil penalties. The U.S. Department of Justice has 45 days to review the parties to proceed with discovery.settlement before the court can approve. PPL, LKE and LG&E cannot predict the ultimate outcome of this matter, but do not presently expect the matter to have a material effect on plant operation, capital expenditures or operating costs, or to result in significant charges beyond the potential impact on the operations of the Mill Creek plant but believe the plant is operating in compliance with the permits.claimant allegesclaimants allege discharges at the E.W. Brown plant in violation of applicable rules and the plant's water discharge permit. The claimant assertsclaimants 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. On October 26, 2016, the claimants submitted an additional notice of intent alleging management of waste in a manner that may present an imminent and substantial endangerment under the RCRA. PPL, LKE and KU cannot predict the outcome of this matter or the potential impact on the operations of the E. W. Brown plant.50Regulatory Issues(All Registrants)See Note 6 for information on regulatory matters related to utility rate regulation.Electricity - Reliability StandardsThe NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system. 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 power electricity system,plant, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.PPL, LG&E, KU and PPL Electric monitor their compliance with the Reliability Standards and continue to self-reportincreased capital or self-log potential violations of certain applicable reliability requirements and submit accompanying mitigation plans, as required. The resolution of a small number of potential violations is pending. 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,operating costs, if any.In October 2012, the FERC initiated its consideration of proposed changes to Reliability Standards to address the impacts of geomagnetic disturbances on the reliable operation of the bulk-power system, which might, among other things, lead to a requirement to install equipment that blocks geomagnetically induced currents on implicated transformers. In May 2013, FERC issued Order No. 779, requiring NERC to submit two types of Reliability Standards for FERC's approval. The first type would require certain owners and operators of the nation's electricity infrastructure, such as the Registrants, to develop and implement operational procedures to mitigate the effects of geomagnetic disturbances on the bulk-power system. This NERC-proposed standard was approved by FERC in June 2014. These requirements do not impose significant costs on the Registrants. The second type is to require owners and operators of the bulk-power system to assess certain geomagnetic disturbance events and develop and implement plans to protect the bulk-power system from those events. FERC issued a notice of proposed rulemaking on this second type of Reliability Standard on May 14, 2015. The Registrants do not presently anticipate significant costs to comply with the requirements if finalized as proposed.Environmental Matters - Domestic(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.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 PPL Electric does not own any generating plants, its 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.AirThe Clean Air Act, which regulates air pollutants from mobile and stationary sources, has a significant impact on the operation of fossil fuel plants. The Clean Air Act requires the EPA periodically to review and establish concentration levels51in 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 SO2.Federal environmental regulations of these criteria pollutants require states to adopt implementation plans, known as SIPs, 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 SIP 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 SIPs implementing them, 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 currently 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 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 states' non-attainment. States that are not in the ozone transport region, including Kentucky, are working together to evaluate further nitrogen oxide reductions from fossil-fueled plants with SCRs. The nature and timing of any additional reductions resulting from these evaluations cannot be predicted at this time.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. PPL, LKE, LG&E and KU anticipate that certain previously required compliance measures, such as upgraded or new sulfur dioxide scrubbers at certain plants and the retirement of coal-fired generating units at LG&E's Cane Run plant and KU's Green River and Tyrone plants, will help to achieve compliance with the new sulfur dioxide and ozone standards. If additional reductions are required, the costs could be significant.Mercury and Air Toxics Standards (MATS)In February 2012, the EPA finalized the MATS rule requiring reductions of mercury and other hazardous air pollutants from fossil-fuel fired power plants, with an effective date of April 16, 2012. The MATS rule was challenged by industry groups and states and was upheld by the U.S. Court of Appeals for the D.C. Circuit Court (D.C. Circuit Court) in April 2014. A group of states subsequently petitioned the U.S. Supreme Court (Supreme Court) to review this decision and on June 29, 2015, the Supreme Court held that the EPA failed to properly consider costs when deciding to regulate hazardous air emissions from power plants under MATS. The Court remanded the matter to the D.C. Circuit Court. EPA's MATS rule remains in effect pending action by the D.C. Circuit Court. It is uncertain whether the D.C. Circuit Court will vacate the MATS rule, remand the rule to the EPA, or require further proceedings or actions. LG&E and KU have installed significant controls in connection with the MATS rule and in conjunction with compliance with other environmental requirements, including fabric-filter baghouses, upgraded FGDs or chemical additive systems for which appropriate KPSC authorization and/or ECR treatment has been received. PPL, LKE, LG&E and KU cannot predict the outcome of this matter or the potential impact, if any, on plant operations, rate treatment or future capital or operating needs.New Source Review (NSR)The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants. The EPA has asserted that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR52requirements under the Clean Air Act. PPL, LKE, LG&E and KU received various EPA information requests in 2007 and 2009, but have received no further communications from the EPA related to those requests since providing their responses. States and environmental groups also have commenced litigation alleging violations of the NSR regulations by coal-fired generating plants across the nation. PPL, LKE, LG&E and KU cannot predict the outcome of these matters, and cannot estimate the impact, if any.If LG&E or KU is found to have triggered the applicability of NSR regulations by increasing pollutants beyond allowable thresholds through a plant modification, the company could, among other things, be required to meet substantially more stringent permit limits. The costs to meet such limits, including installation of technology at certain units, could be significant. operations, including increased capital or operating costs, if any.Climate ChangeAuthorityRegulate Carbon Dioxide EmissionsThe EPA issuedthe 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 in 2014 regulating carbon dioxide emissions from stationary sources underadd to the NSRuncertainty of estimating the future cost of these permits and Title V operating permit provisionsrules.Act. 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.EPA's rules wereClean 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.court and, in June 2014,April 2014. A group of states subsequently petitioned the U.S. Supreme Court ruled(Supreme Court) to review this decision and, in June 2015, the Supreme Court held that the EPA has authorityfailed to properly consider costs when deciding to regulate hazardous air emissions from power plants under MATS. The Supreme Court remanded the matter to the D.C. Circuit Court, which in December 2015 remanded the rule to the EPA without vacating it. The EPA has proposed a supplemental finding regarding costs of the rule and has announced that it intends to make a final determination in 2016. The EPA's MATS rule remains in effect during the pendency of the ongoing proceedings.dioxidereduction requirements that are applicable to WPD. Under the U.K. law, WPD must purchase carbon allowances to offset emissions under the Clean Air Act but only for stationary sources that would otherwise have been subjectassociated with WPD’s operations. The cost of these allowances is included in WPD’s current operating expenses. WPD expects these expenses to these provisions due to significant increases in emissions of other pollutants. Asdecrease as a result any newof energy efficiency measures and the removal of 18 fuel sources or major modifications to an existing GHG source causing a net significant increasepreviously included in carbon dioxide emissions must comply with permit limits for carbon dioxide, but only if it would otherwise be subject to limits on new or modified sources due to significant increases in other pollutants. in August 2015, the EPA finalized rules imposing greenhouse gasGHG emission standards for both new and existing power plants.plants in the United States. The EPA has also issued a proposed federal implementation plan whichthat 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.available,viable, the rule effectively precludes the construction of new coal-fired plants. The standard for NGCC power plants is the same as 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.(PPL, LKE, LG&E and KU)RuleClean 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 goals53September 2016 (with the possibility of an extension until 2018),applicable deadline, the EPA willwould 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.levellevel. Various states, industry groups and individual companies including LKE have filed petitions for reconsideration with EPA and petitions for review with the D.C. Circuit Court challenging the Clean Power Plan. In February 2016, the U.S. Supreme Court stayed the rule pending the D.C. Circuit Court's review. A ruling from the D.C. Circuit Court may occur in an effort to provide input into the statelate 2016 or federal implementation plan that will govern reductions in Kentucky.early 2017. PPL, LKE, LG&E and KU cannot predict the outcome of this matter or the potential impact, if any, on plant operations, or future capital or operating needs.costs. PPL, LKE, LG&E and KU believe that the costs, which could be significant, would be subject to costrate recovery.which limitslimiting 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. 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.A number of lawsuits have been filed asserting common law claims including nuisance, trespassnegligence against various companies with GHG emitting plants and, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims. LG&E)2011,2016, the U.S. Supreme Court in the caseEPA issued a notice of AEP v. Connecticut ruled that federal common law claims against five utility companies for allegedly causing a public nuisance as a result of their emissions of GHGs were displaced byviolation 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 regulatory actionscausing 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 thisEPA. In addition, in Comer v. Murphy Oil (Comer case), the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) upheld a district court ruling that plaintiffs did not have standing to pursue state common law claims against companies that emit GHGs. The plaintiffs in the Comer case later filed a substantially similar complaint against a larger group of companies which was subsequently dismissed by the U.S. District Court for the Southern District of Mississippi. The lower court's ruling was affirmed by the Fifth Circuit in May 2013. Additional litigation in federalMill Creek plant, including increased capital or operating costs, and state courts over such issues is continuing. potential civil penalties or remedial measures, if any.KU cannot predict the outcome of these matters.Water/WasteOn 17, 2015, the EPA published its final rule regulating CCRs. CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes. The rule became effective onin October 19, 2015. It imposes extensive new requirements, including location restrictions, design and operating standards, groundwater monitoring and corrective action requirements, and closure and post-closure care requirements on CCR impoundments and landfills that are located on active power plants in the United States and not closed. Under the rule, the EPA will regulate CCRs as non-hazardous under Subtitle D of RCRA and allow beneficial use of CCRs, with some restrictions. The rule's requirements for covered CCR impoundments and landfills include implementation of groundwater monitoring and commencement or completion of closure activities generally between three and ten years from certain triggering events. This self-implementing rule requires posting of compliance documentation on a publicly accessible website and is enforceable solely through citizen suits. LG&E's&E and KU's plants using surfaceKU are also subject to state rules applicable to CCR management which may potentially be modified to reflect some or all requirements of the federal rule. 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.management and disposal of CCRs will be most impacted by this rule. The rule'scompliance with federal CCR rule requirements, for covered CCR impoundments and landfills include commencement or completion of closure activities generally between three and ten years from certain triggering events. PPL, LKE, LG&E and KU also anticipate incurring capital or operationreceived KPSC approval for their plans to close impoundments at the retired Green River, Pineville and maintenance costs priorTyrone plants to that time to address other provisions of the rule, such as groundwater monitoring and disposal facility modifications or closings, or to implement various compliance strategies.increasesadjustments to existing AROs during the three2015 and nine months ending September 30, 2015.2016. See Note 16 for additional information. Further increaseschanges to AROs, or changes to current capital plans or to 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.54Trimble County LandfillIn May 2011, LG&E submitted an application for a special waste landfill permit to handle CCRs generated at the Trimble County plant. In May 2013, the Kentucky Division of Waste Management denied the permit application on the grounds that the proposed facility would violate the Kentucky Cave Protection Act. In January 2014, LG&E submitted to the Kentucky Division of Waste Management a landfill permit application for an alternate site adjacent to the plant. LG&E has also applied for other necessary regulatory approvals including a dredge and fill permit from the U.S. Army Corps of Engineers. LG&E and KU have responded to comments on the permit application submitted by EPA and other parties. PPL, LKE, LG&E and KU are unable to determine the potential impact of this matter until all permits are issued and any resulting legal challenges are concluded. See Note 6 for additional information on Kentucky Public Service Commission proceedings relating to the Trimble County Landfill.many of LG&E'sfacilities and KU's construction projects.projects in the United States. Many of those requirements relate to power plant operations, including requirements related to the treatment of pollutants in effluents prior to discharge, the temperature of effluent discharges and the location, design and construction of cooling water intake structures at generating facilities, standards intended to protect aquatic organisms by reducing capture in the screens attached to cooling water intake structures (impingement) at generating facilities and the water volume brought into the facilities (entrainment). The requirements could impose significant costs for LG&E and KU which are subject to rate recovery.On 30, 2015, the EPA released its final effluent limitations guidelines for wastewater discharge permits for new and existing steam electricelectricity generating facilities. The rule provides strict technology-based discharge limitations for control of pollutants in scrubber wastewater, fly ash and bottom ash transport water, mercury control wastewater, gasification wastewater and combustion residual leachate. The new guidelines require deployment of additional control technologies providing physical, chemical and biological treatment of wastewaters. The guidelines also mandate operational changes including "no discharge" requirements for fly ash and bottom ash transport waters and mercury control wastewaters. The implementation date for individual generating stations will be determined by the states on a case-by-case basis according to criteria provided by the EPA, but the requirements of the rule must be fully implemented no later than 2023. It ishas not currently knownbeen decided how Kentucky intends to integrate the ELGs into its ongoingroutine permit renewal process. Industry groups, environmental groups, individual companies and others have filed legal challenges to the final rule which have been consolidated before the United States Fifth Circuit Court of Appeals. LG&E and KU continue to assess the requirements of this complex rule to determine availableare developing compliance strategies.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(PPL, LKE and LG&E)the only unit expected to be impacted.incur capital costs. PPL, LKE, LG&E and LG&EKU are evaluating compliance strategies but do not presently expect the compliance costs, which are subject to rate recovery, to be significant.currently in effect anywhere in the United55TheBecause of the strict permitting programs already in place in Kentucky and Pennsylvania, the Registrants haddo not expectedexpect the rule to have a significant impact on their operations, but were unable to predict the impact of the rule in light of the ongoing litigation, particularly in Pennsylvania where the rule could have resulted in significant project delays and added costs, as permits and other regulatory requirements could have been imposed for many activities not otherwise covered by permitting requirements (including vegetation management for transmission lines and activities affecting storm water conveyances and wetlands).currently allow certain PCB articles to remainwas significantly updated in use.June 2016. In April 2010, the EPA issued an Advanced Notice of Proposed Rulemaking for changes to these regulations. ThisThe rulemaking, which could lead to a phase-out in the United States of all or some PCB-containing equipment.equipment containing PCBs, is not likely to be affected by the revisions to the Toxic Substances Control Act. The EPA has postponed the release of the revised regulationsrevisions to March 2016.its proposed rulemaking. The Registrants cannot predict at this time the outcome of thesethe proposed EPA regulationsrulemaking and what impact, if any, theyit would have on their facilities, but the costs could be significant.(PPL, LKE, LG&E and KU)In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet (KEEC) challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010, which covers water discharges from the Trimble County plant. In November 2010, the KEEC issued a final order upholding the permit which was subsequently appealed by the environmental groups. In September 2013, the Franklin Circuit Court reversed the KEEC order upholding the permit and remanded the permit to the agency for further proceedings. LG&E and the KEEC appealed the order to the Kentucky Court of Appeals. In July 2015, the Court of Appeals upheld the lower court ruling. LG&E and the KEEC have moved for discretionary review by the Kentucky Supreme Court. PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or the potential impact, if any, on plant operations or future capital or operating needs. site, the Metal Bank 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 significant to PPL Electric. Should the EPA require different or additional measures in the future, however, or should PPL Electric's share of costs at multi-party sites increase substantially more than currently expected, the costs could be significant.affiliates, for which PPL Electric,affiliates. LG&E and KU lack information on current site conditionsthe condition of such additional sites and are therefore unable to predict what, ifestimate any potential liability they may have.PPL Electric, LG&E and KU currently lack information is incomplete, the costs of remediation and other liabilities could be significant. PPL, PPL Electric, LKE, LG&Esignificant and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.56currently under review, or at sites not currentlyyet identified, may result in significant additional costs for PPL, PPL Electric, LKE, LG&E and KU.Environmental Matters - WPD 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.distribution businessescreosote-treated wood poles would need to be replaced with an acceptable alternative at the time of routine replacement. Although the aggregate cost to replace poles could be significant, it would be incurred as poles are replaced in the ordinary course and would be subject to environmental regulatory and statutory requirements. PPL believes thatrate recovery. WPD has taken and continues1.4 million wood poles in its system. There are currently no alternative wood preservatives available that are acceptable to take measures to comply with the applicable laws and governmental regulations for the protection of the environment.2015.2016. "Exposure" represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee. The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures." The total recorded liability at September 30, 2015 and December 31, 2014,2016, was $24 million and $26$22 million for PPL and $19$17 million for LKELKE. The total recorded liability at December 31, 2015, was $25 million for both periods.PPL and $18 million for LKE. For reporting purposes, on a consolidated basis, all guarantees of PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE. Exposure at Expiration September 30, 2015 Date PPL Indemnifications related to the WPD Midlands acquisition (a) WPD indemnifications for entities in liquidation and sales of assets $ 11 (b) 2018 WPD guarantee of pension and other obligations of unconsolidated entities 116 (c) PPL Electric Guarantee of inventory value 36 (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) Exposure at
September 30, 2016 Expiration
DatePPL 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 109 (c) PPL Electric Guarantee of inventory value 15 (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)
57
PLR Contracts/Purchase of Accounts Receivable(PPL Electric)
PPL Electric holds competitive solicitations for PLR generation supply. PPL EnergyPlus was awarded a portion of the PLR generation supply through these competitive solicitations. The purchases from PPL EnergyPlus are included in PPL Electric's Statements of Income as "Energy purchases from affiliate" through May 31, 2015, the period through which PPL Electric and PPL EnergyPlus were affiliated entities. As a result of the June 1, 2015 spinoff of PPL Energy Supply and creation of Talen Energy, PPL EnergyPlus (renamed Talen Energy Marketing) is no longer an affiliate of PPL Electric. PPL Electric's purchases from Talen Energy Marketing subsequent to May 31, 2015 are included as purchases from an unaffiliated third party.
Under the standard Default Service Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits. Wholesale suppliers are required to post collateral with PPL Electric when: (a) the market price of electricity to be delivered by the wholesale suppliers exceeds the contract price for the forecasted quantity of electricity to be delivered; and (b) this market price exposure exceeds a contractual credit limit. In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.
PPL Electric's customers may choose an alternative supplier for their generation supply. See Note 2 for additional information regarding PPL Electric's purchases of accounts receivable from alternative suppliers, including Talen Energy Marketing. See Note 8 for additional information regarding the spinoff of PPL Energy Supply.
58
expense on the books of the recipients, based on methods that are believed to be reasonable.In 2015, PPL EU Services was formed to provideprovides the majority of financial, supply chain, human resources and facilities management services primarily to PPL Electric. PPL Services will continue to provideprovides certain corporate functions.functions to PPL Electric. For all service companies, the costs of these services are charged to the respective recipients as direct support costs. General costs that cannot be directly attributed to a specific entity are allocated and charged to the respective recipients as indirect support costs. PPL Services and PPL EU Services use a three-factor methodology that includes the applicable recipients' invested capital, operation and maintenance expenses and number of employees to allocate indirect costs. LKS bases its indirect allocations on the subsidiaries' number of employees, total assets, revenues, number of customers and/or other statistical information.PPL Services, PPL EU Services and LKS expensedcharged the following amounts for the periods ended September 30, and believe these amounts are reasonable, including amounts applied to accounts that are further distributed between capital and expense. Three Months Nine Months 2015 2014 2015 2014 PPL Electric from PPL Services $ 35 $ 34 $ 90 $ 113 LKE from PPL Services 4 3 12 11 PPL Electric from PPL EU Services 12 44 LG&E from LKS 36 36 107 103 KU from LKS 43 43 127 120 Three Months Nine Months 2016 2015 2016 2015 PPL Electric from PPL Services $ 33 $ 35 $ 98 $ 90 LKE from PPL Services 4 4 13 12 PPL Electric from PPL EU Services 17 12 50 44 LG&E from LKS 40 36 128 107 KU from LKS 46 43 151 127 20152016 and December 31, 2014, $622015, $138 million and $41$54 million were outstanding and were reflected in "Notes payable with affiliates"affiliate" on the consolidated Balance Sheets. The interest rate on borrowings is equal to one-month LIBOR plus a spread. The interest rates on the outstanding borrowing at September 30, 20152016 and December 31, 20142015 were 1.70%2.02% and 1.65%1.74%.InterestAt September 30, 2016 and December 31, 2015, the note was reflected in "Long-term debt to affiliate" on the revolving line of credit was not significant for the three and nine months ended September 30, 2015 and 2014.Intercompany Derivatives(LKE, LG&E and KU)Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL. These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties. See Note 14 for additional information on intercompany derivatives.20152016 and 20142015 consisted primarily of gains on foreign currency exchange contracts to economically hedge the earningsPPL's translation risk of WPD'srelated to its GBP denominated earnings denominated in British pound sterling.the U.K. See Note 14 for additional information on these derivatives.59, 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.Transfersbasis. Transfers between levels are recognized at end-of-reporting-period values. During the three and nine months ended September 30, 20152016 and 2014,2015, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 20142015 Form 10-K for information on the levels in the fair value hierarchy.excluding assets and liabilities of discontinued operations at December 31, 2014, were: September 30, 2015 December 31, 2014 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 PPL Assets Cash and cash equivalents $ 981 $ 981 $ 1,399 $ 1,399 Short-term investments 120 120 Restricted cash and cash equivalents (a) 36 36 31 31 Price risk management assets (b): Interest rate swaps 1 $ 1 Foreign currency contracts 169 169 130 $ 130 Cross-currency swaps 61 61 29 28 $ 1 Total price risk management assets 231 231 159 158 1 Auction rate securities (c) 1 $ 1 2 2 Total assets $ 1,249 $ 1,017 $ 231 $ 1 $ 1,711 $ 1,550 $ 158 $ 3 Liabilities Price risk management liabilities (b): Interest rate swaps $ 82 $ 82 $ 156 �� $ 156 Foreign currency contracts 7 7 2 2 Cross-currency swaps 3 3 Total price risk management liabilities $ 89 $ 89 $ 161 $ 161 PPL Electric Assets Cash and cash equivalents $ 26 $ 26 $ 214 $ 214 Restricted cash and cash equivalents (a) 2 2 3 3 Total assets $ 28 $ 28 $ 217 $ 217 LKE Assets Cash and cash equivalents $ 455 $ 455 $ 21 $ 21 Cash collateral posted to counterparties (d) 10 10 21 21 Total assets $ 465 $ 465 $ 42 $ 42 Liabilities Price risk management liabilities: Interest rate swaps $ 50 $ 50 $ 114 $ 114 Total price risk management liabilities $ 50 $ 50 $ 114 $ 114 60 September 30, 2015 December 31, 2014 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 LG&E Assets Cash and cash equivalents $ 180 $ 180 $ 10 $ 10 Cash collateral posted to counterparties (d) 10 10 21 21 Total assets $ 190 $ 190 $ 31 $ 31 Liabilities Price risk management liabilities: Interest rate swaps $ 50 $ 50 $ 81 $ 81 Total price risk management liabilities $ 50 $ 50 $ 81 $ 81 KU Assets Cash and cash equivalents $ 275 $ 275 $ 11 $ 11 Total assets $ 275 $ 275 $ 11 $ 11 Liabilities Price risk management liabilities: Interest rate swaps $ 33 $ 33 Total price risk management liabilities $ 33 $ 33 September 30, 2016 December 31, 2015 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 PPL Assets Cash and cash equivalents $ 416 $ 416 $ — $ — $ 836 $ 836 $ — $ — Restricted cash and cash equivalents (a) 29 29 — — 33 33 — — Price risk management assets (b): Foreign currency contracts 110 — 110 — 209 — 209 — Cross-currency swaps 153 — 153 — 86 — 86 — Total price risk management assets 263 — 263 — 295 — 295 — Auction rate securities (c) — — — — 2 — — 2 Total assets $ 708 $ 445 $ 263 $ — $ 1,166 $ 869 $ 295 $ 2 Liabilities Price risk management liabilities (b): Interest rate swaps $ 54 $ — $ 54 $ — $ 71 $ — $ 71 $ — Foreign currency contracts 14 — 14 — 1 — 1 — Total price risk management liabilities $ 68 $ — $ 68 $ — $ 72 $ — $ 72 $ — PPL Electric Assets Cash and cash equivalents $ 36 $ 36 $ — $ — $ 47 $ 47 $ — $ — Restricted cash and cash equivalents (a) 2 2 — — 2 2 — — Total assets $ 38 $ 38 $ — $ — $ 49 $ 49 $ — $ — LKE Assets Cash and cash equivalents $ 11 $ 11 $ — $ — $ 30 $ 30 $ — $ — Cash collateral posted to counterparties (d) 8 8 — — 9 9 — — Total assets $ 19 $ 19 $ — $ — $ 39 $ 39 $ — $ — September 30, 2016 December 31, 2015 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Liabilities Price risk management liabilities: Interest rate swaps $ 54 $ — $ 54 $ — $ 47 $ — $ 47 $ — Total price risk management liabilities $ 54 $ — $ 54 $ — $ 47 $ — $ 47 $ — LG&E Assets Cash and cash equivalents $ 4 $ 4 $ — $ — $ 19 $ 19 $ — $ — Cash collateral posted to counterparties (d) 8 8 — — 9 9 — — Total assets $ 12 $ 12 $ — $ — $ 28 $ 28 $ — $ — Liabilities Price risk management liabilities: Interest rate swaps $ 54 $ — $ 54 $ — $ 47 $ — $ 47 $ — Total price risk management liabilities $ 54 $ — $ 54 $ — $ 47 $ — $ 47 $ — KU Assets Cash and cash equivalents $ 7 $ 7 $ — $ — $ 11 $ 11 $ — $ — Total assets $ 7 $ 7 $ — $ — $ 11 $ 11 $ — $ — (a) Current portion is included in "Other current assets" and long-term portion is included in "Other noncurrent assets" on the Balance Sheets. (c) Included in "Other noncurrent assets" on the Balance Sheets.
(PPL) exchange risk, PPL uses foreign currency contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency contracts. An income approach is used to measure the fair value of these contracts, utilizing readily observable inputs, such as forward interest rates (e.g., LIBOR and government security rates) and forward foreign currency exchange rates (e.g., GBP), as well as inputs that may not be observable, such as credit valuation adjustments. In certain cases, market information cannot practicably be obtained to value credit risk and therefore internal models are relied upon. These models use projected probabilities of default and estimated recovery rates based on historical observances. When the credit valuation adjustment is significant to the overall valuation, the contracts are classified as Level 3. Cross-currency swaps are valued by PPL's Treasury department, which reports to the Chief Financial Officer (CFO). Accounting personnel, who also report to the CFO, interpret analysis quarterly to classify the contracts in the fair value hierarchy. Valuation techniques are evaluated periodically.(PPL)below, excluding long-term debt of discontinued operations at December 31, 2014.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.61 September 30, 2016 December 31, 2015 Fair Value Fair Value PPL $ 18,512 $ 23,180 $ 19,048 $ 21,218 PPL Electric 2,831 3,372 2,828 3,088 LKE 5,089 5,832 5,088 5,384 LG&E 1,642 1,852 1,642 1,704 KU 2,327 2,701 2,326 2,467 Table(a) Amounts are net of Contentsdebt issuance costs.
| September 30, 2015 | December 31, 2014 | ||||||||||||
| Carrying | Carrying | ||||||||||||
| Amount | Fair Value | Amount | Fair Value | ||||||||||
| PPL | $ | 19,205 | $ | 21,184 | $ | 18,173 | $ | 20,466 | |||||
| PPL Electric | 2,603 | 2,882 | 2,602 | 2,990 | |||||||||
| LKE | 5,617 | 5,927 | 4,567 | 4,946 | |||||||||
| LG&E | 1,903 | 1,978 | 1,353 | 1,455 | |||||||||
| KU | 2,591 | 2,763 | 2,091 | 2,313 | |||||||||
62
2015.
2015.
2015.
63
All Registrants) 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. swap contracts, which largely offset a loss recorded on the revaluation of U.S. dollar-denominated senior notes. 2015. 2015. PPL, LKE, LG&E and KU)2015, outstanding interest rate swaps contracts range in maturity through 2026 for WPD and through 2016, for PPL's domestic interest rate swaps. These swaps held an aggregate notional value of $792 million, of which £320 million (approximately $492 million based on spot rates) was related to WPD.At September 30, 2015, PPL held an aggregate notional value in cross-currency interest rate swap contracts of $1.3 billion$802 million that range in maturity from 20162017 through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.For the three months ended September 30, 2015, PPL had an insignificant amount In May 2016, $460 million of hedge ineffectiveness associated withWPD's U.S. dollar-denominated senior notes were repaid upon maturity and $460 million notional value of cross-currency interest rate derivatives and no hedge ineffectiveness forswap contracts matured. PPL recorded a $46 million gain upon settlement of the three months ended September 30, 2014. For the nine months ended September 30, 2015 and 2014, PPL had an insignificant amount of hedge ineffectiveness associated withcross-currency interest rate derivatives.not occurring.of 2015 and reflected in discontinued operations for the nine months ended September 30, 2015. See Note 8 for additional information.For PPL's remaining cash flow hedges, for the three months ended September 30, 2015 and 2014 and the nine months ended September 30, 2015, PPL had no cash flow hedges reclassified into earnings associated with discontinued cash flow hedges. For the nine months ended September 30, 2014, PPL had an insignificant amount reclassified into earnings associated with discontinued cash flow hedges.2015,2016, the accumulated net unrecognized after-tax gains (losses) on qualifying derivatives that are expected to be reclassified into earnings during the next 12 months were insignificant. Amounts are reclassified as the hedged interest expense is recorded.Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL that have terms identical to forward-starting swaps entered into by PPL with third parties. It is probable that realized gains and losses on all of these swaps will be recoverable through regulated rates; as such, any gains and losses on these derivatives are included in regulatory assets or liabilities and will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt at the time the underlying hedged interest expense is recorded. In September 2015, first mortgage bonds totaling $1.05 billion were issued (LG&E issued $550 million and KU issued $500 million) and all outstanding forward-starting interest rate swaps were terminated. Net cash settlements of $88 million were paid on the swaps that were terminated (LG&E and KU each paid $44 million). The settlements are included in "Regulatory assets" (noncurrent) on the Balance Sheets and "Cash Flows from Operating Activities" on the Statements of Cash Flows.642015,2016, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033.TheThere were no such contracts outstanding at September 30, 2015 had a notional amount of £134 million (approximately $221 million based on contracted rates). The settlement dates of these contracts range from November 2015 through June 2016.2015,2016, PPL had $18$22 million of accumulated net investment hedge after tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI, compared to $14$19 million at December 31, 2014.2015,2016, the total exposure hedged by PPL was approximately £1.7£1.8 billion (approximately $2.7$2.4 billion based on contracted rates). These contracts had termination dates ranging from October 20152016 through December 2017. currently in earnings unless specific hedge accounting criteria are met and designated as such, except for the changes in fair values of LG&E's and KU's interest rate swaps that are recognized as regulatory assets or regulatory liabilities. See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at September 30, 20152016 and December 31, 2014.20142015 Form 10-K for additional information on accounting policies related to derivative instruments.Sheets, excluding derivative instruments of discontinued operations.65 September 30, 2015 December 31, 2014 Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated hedging instruments as hedging instruments hedging instruments as hedging instruments Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Current: Price Risk Management Assets/Liabilities (a): Interest rate swaps (b) $ 1 $ 31 $ 5 $ 94 $ 5 Cross-currency swaps (b) 26 3 Foreign currency contracts 19 $ 76 6 $ 12 $ 67 Total current 46 31 76 11 12 97 67 5 Noncurrent: Price Risk Management Assets/Liabilities (a): Interest rate swaps (b) 1 45 14 43 Cross-currency swaps (b) 35 29 Foreign currency contracts 74 1 5 46 2 Total noncurrent 35 1 74 46 34 14 46 45 Total derivatives $ 81 $ 32 $ 150 $ 57 $ 46 $ 111 $ 113 $ 50 September 30, 2016 December 31, 2015 Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Current: Price Risk Management Assets/Liabilities (a): Interest rate swaps (b) $ — $ — $ — $ 6 $ — $ 24 $ — $ 5 Cross-currency swaps (b) 6 — — — 35 — — — Foreign currency contracts — — 72 2 10 — 94 1 Total current 6 — 72 8 45 24 94 6 Noncurrent: Price Risk Management Assets/Liabilities (a): Interest rate swaps (b) — — — 48 — — — 42 Cross-currency swaps (b) 147 — — — 51 — — — Foreign currency contracts — — 38 12 — — 105 — Total noncurrent 147 — 38 60 51 — 105 42 Total derivatives $ 153 $ — $ 110 $ 68 $ 96 $ 24 $ 199 $ 48 (b) Excludes accrued interest, if applicable.
| Three Months | Nine Months | |||||||||||||||||||||||||
| Derivative Relationships | Derivative Gain (Loss) Recognized in OCI (Effective Portion) | Location of Gain (Loss) Recognized in Income on Derivative | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||||||||||||||
| Three Months | Nine Months | |||||||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | (21 | ) | Interest expense | $ | (2 | ) | $ | — | $ | (5 | ) | $ | — | ||||||||||
| Cross-currency swaps | 78 | 87 | Interest expense | 2 | — | 2 | — | |||||||||||||||||||
| Other income (expense) - net | 86 | — | 80 | — | ||||||||||||||||||||||
| Total | $ | 78 | $ | 66 | $ | 86 | $ | — | $ | 77 | $ | — | ||||||||||||||
| Net Investment Hedges: | ||||||||||||||||||||||||||
| Foreign currency contracts | $ | — | $ | 4 | ||||||||||||||||||||||
| Derivatives Not Designated as | Location of Gain (Loss) Recognized in | |||||||||
| Hedging Instruments | Income on Derivative | Three Months | Nine Months | |||||||
| Foreign currency contracts | Other income (expense) - net | $ | 49 | $ | 280 | |||||
| Interest rate swaps | Interest expense | (2 | ) | (6 | ) | |||||
| Total | $ | 47 | $ | 274 | ||||||
| Derivatives Not Designated as | Location of Gain (Loss) Recognized as | |||||||||
| Hedging Instruments | Regulatory Liabilities/Assets | Three Months | Nine Months | |||||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | 2 | $ | (7 | ) | ||||
| Three Months | Nine Months | |||||||||||||||||||||||
| Gain (Loss) | Gain (Loss) | |||||||||||||||||||||||
| Recognized | Recognized | |||||||||||||||||||||||
| in Income | in Income | |||||||||||||||||||||||
| on Derivative | Gain (Loss) | on Derivative | ||||||||||||||||||||||
| Gain (Loss) | (Ineffective | Reclassified | (Ineffective | |||||||||||||||||||||
| Location of | Reclassified | Portion and | from AOCI | Portion and | ||||||||||||||||||||
| Derivative Gain | Gain (Loss) | from AOCI | Amount | into | Amount | |||||||||||||||||||
| (Loss) Recognized in | Recognized | into Income | Excluded from | Income | Excluded from | |||||||||||||||||||
| Derivative | OCI (Effective Portion) | in Income | (Effective | Effectiveness | (Effective | Effectiveness | ||||||||||||||||||
| Relationships | Three Months | Nine Months | on Derivative | Portion) | Testing) | Portion) | Testing) | |||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||
| Interest rate swaps | $ | (27) | $ | (29) | Interest expense | $ | (2) | $ | (9) | |||||||||||||||
| Discontinued | ||||||||||||||||||||||||
| operations | $ | (77) | ||||||||||||||||||||||
| Cross-currency swaps | (3) | 33 | Interest expense | (1) | 1 | |||||||||||||||||||
| Other income | ||||||||||||||||||||||||
| (expense) - net | (10) | 22 | ||||||||||||||||||||||
| Commodity contracts | Discontinued | |||||||||||||||||||||||
| operations | 13 | 7 | ||||||||||||||||||||||
| Total | $ | (30) | $ | 4 | $ | (13) | $ | 27 | $ | (70) | ||||||||||||||
| Net Investment Hedges: | ||||||||||||||||||||||||
| Foreign currency contracts | $ | 7 | $ | 6 | ||||||||||||||||||||
| Derivatives Not Designated as | Location of Gain (Loss) Recognized in | |||||||
| Hedging Instruments | Income on Derivative | Three Months | Nine Months | |||||
| Foreign currency contracts | Other income (expense) - net | $ | 78 | $ | 64 | |||
| Interest rate swaps | Interest expense | (2) | (6) | |||||
| Total | $ | 76 | $ | 58 | ||||
| Derivatives Not Designated as | Location of Gain (Loss) Recognized as | |||||||
| Hedging Instruments | Regulatory Liabilities/Assets | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (5) | $ | (2) | |||
66
| Derivatives Designated as | Location of Gain (Loss) Recognized as | |||||||
| Hedging Instruments | Regulatory Liabilities/Assets | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (42) | $ | (22) | |||
The following tables present the pre-tax effect of derivative instruments recognized in income, OCI, or regulatory assets and regulatory liabilities for the periods ended September 30, 2014.
| Three Months | Nine Months | |||||||||||||||||||||||
| Gain (Loss) | Gain (Loss) | |||||||||||||||||||||||
| Recognized | Recognized | |||||||||||||||||||||||
| in Income | in Income | |||||||||||||||||||||||
| on Derivative | Gain (Loss) | on Derivative | ||||||||||||||||||||||
| Gain (Loss) | (Ineffective | Reclassified | (Ineffective | |||||||||||||||||||||
| Location of | Reclassified | Portion and | from AOCI | Portion and | ||||||||||||||||||||
| Derivative Gain | Gain (Loss) | from AOCI | Amount | into | Amount | |||||||||||||||||||
| (Loss) Recognized in | Recognized | into Income | Excluded from | Income | Excluded from | |||||||||||||||||||
| Derivative | OCI (Effective Portion) | in Income | (Effective | Effectiveness | (Effective | Effectiveness | ||||||||||||||||||
| Relationships | Three Months | Nine Months | on Derivative | Portion) | Testing) | Portion) | Testing) | |||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||
| Interest rate swaps | $ | (5) | $ | (65) | Interest expense | $ | (5) | $ | (14) | $ | 2 | |||||||||||||
| Cross-currency swaps | (2) | (18) | Interest expense | 1 | ||||||||||||||||||||
| Other income | ||||||||||||||||||||||||
| (expense) - net | 12 | (17) | ||||||||||||||||||||||
| Commodity contracts | Discontinued | |||||||||||||||||||||||
| operations | 8 | 30 | ||||||||||||||||||||||
| Total | $ | (7) | $ | (83) | $ | 15 | $ | $ | 2 | |||||||||||||||
| Net Investment Hedges: | ||||||||||||||||||||||||
| Foreign currency contracts | $ | 25 | $ | 7 | ||||||||||||||||||||
| Derivatives Not Designated as | Location of Gain (Loss) Recognized in | |||||||
| Hedging Instruments | Income on Derivative | Three Months | Nine Months | |||||
| Foreign currency contracts | Other income (expense) - net | $ | 134 | $ | 38 | |||
| Interest rate swaps | Interest expense | (2) | (6) | |||||
| Total | $ | 132 | $ | 32 | ||||
| Derivatives Not Designated as | Location of Gain (Loss) Recognized as | |||||||
| Hedging Instruments | Regulatory Liabilities/Assets | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (6) | |||||
| Derivatives Designated as | Location of Gain (Loss) Recognized as | |||||||
| Hedging Instruments | Regulatory Liabilities/Assets | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (4) | $ | (4) | |||
| Regulatory liabilities - noncurrent | $ | 6 | $ | 6 | ||||
The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.
| September 30, 2015 | December 31, 2014 | |||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||
| Current: | ||||||||||||||||||
| Price Risk Management | ||||||||||||||||||
| Assets/Liabilities (a): | ||||||||||||||||||
| Interest rate swaps | $ | 66 | ||||||||||||||||
67
| Three Months | Nine Months | |||||||||||||||||||||||||
| Derivative Relationships | Derivative Gain (Loss) Recognized in OCI (Effective Portion) | Location of Gain (Loss) Recognized in Income on Derivative | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | ||||||||||||||||||||
| Three Months | Nine Months | |||||||||||||||||||||||||
| Cash Flow Hedges: | ||||||||||||||||||||||||||
| Interest rate swaps | $ | (27 | ) | $ | (29 | ) | Interest expense | $ | (2 | ) | $ | — | $ | (9 | ) | $ | — | |||||||||
| Discontinued operations | — | — | — | (77 | ) | |||||||||||||||||||||
| Cross-currency swaps | (3 | ) | 33 | Interest expense | (1 | ) | — | 1 | — | |||||||||||||||||
| Other income (expense) - net | (10 | ) | — | 22 | — | |||||||||||||||||||||
| Commodity contracts | — | — | Discontinued operations | — | — | 13 | 7 | |||||||||||||||||||
| Total | $ | (30 | ) | $ | 4 | $ | (13 | ) | $ | — | $ | 27 | $ | (70 | ) | |||||||||||
| Net Investment Hedges: | ||||||||||||||||||||||||||
| Foreign currency contracts | $ | 7 | $ | 6 | ||||||||||||||||||||||
| Derivatives Not Designated as | Location of Gain (Loss) Recognized in | |||||||||
| Hedging Instruments | Income on Derivative | Three Months | Nine Months | |||||||
| Foreign currency contracts | Other income (expense) - net | $ | 78 | $ | 64 | |||||
| Interest rate swaps | Interest expense | (2 | ) | (6 | ) | |||||
| Total | $ | 76 | $ | 58 | ||||||
| Derivatives Designated as | Location of Gain (Loss) Recognized as | |||||||||
| Hedging Instruments | Regulatory Liabilities/Assets | Three Months | Nine Months | |||||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (42 | ) | $ | (22 | ) | |||
| Derivatives Not Designated as | Location of Gain (Loss) Recognized as | |||||||||
| Hedging Instruments | Regulatory Liabilities/Assets | Three Months | Nine Months | |||||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (5 | ) | $ | (2 | ) | |||
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (42) | $ | (22) | |||
The following table presents the pre-tax effect of All derivative instruments designated as cash flow hedges that are recognizedwere terminated in regulatory assets2015 and liabilities forthere is no activity in the periods ended September 30, 2014.
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (4) | $ | (4) | |||
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory liabilities - noncurrent | $ | 6 | $ | 6 | |||
| Location of Gain (Loss) Recognized in | ||||||||||
| Derivative Instruments | Regulatory Assets | Three Months | Nine Months | |||||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (42 | ) | $ | (22 | ) | |||
The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.
| September 30, 2015 | December 31, 2014 | |||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||
| Current: | ||||||||||||||||||
| Price Risk Management | ||||||||||||||||||
| Assets/Liabilities (a): | ||||||||||||||||||
| Interest rate swaps | $ | 33 | ||||||||||||||||
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (21) | $ | (11) | |||
The following table presents the pre-tax effect of All derivative instruments designated as cash flow hedges that are recognizedwere terminated in regulatory assets2015 and liabilities forthere is no activity in the periods ended September 30, 2014.
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (2) | $ | (2) | |||
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory liabilities - noncurrent | $ | 3 | $ | 3 | |||
The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.
| September 30, 2015 | December 31, 2014 | |||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||
| Current: | ||||||||||||||||||
| Price Risk Management | ||||||||||||||||||
| Assets/Liabilities (a): | ||||||||||||||||||
| Interest rate swaps | $ | 33 | ||||||||||||||||
68
| Location of Gain (Loss) Recognized in | ||||||||||
| Derivative Instruments | Regulatory Assets | Three Months | Nine Months | |||||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (21 | ) | $ | (11 | ) | |||
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (21) | $ | (11) | |||
The following table presents the pre-tax effect of All derivative instruments designated as cash flow hedges that are recognizedwere terminated in regulatory assets2015 and liabilities forthere is no activity in the periods ended September 30, 2014.
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (2) | $ | (2) | |||
| Derivative Instruments | Location of Gain (Loss) | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory liabilities - noncurrent | $ | 3 | $ | 3 | |||
| Location of Gain (Loss) Recognized in | ||||||||||
| Derivative Instruments | Regulatory Assets | Three Months | Nine Months | |||||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (21 | ) | $ | (11 | ) | |||
| September 30, 2015 | December 31, 2014 | |||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||
| Current: | ||||||||||||||||||
| Price Risk Management | ||||||||||||||||||
| Assets/Liabilities (a): | ||||||||||||||||||
| Interest rate swaps | $ | 5 | $ | 5 | ||||||||||||||
| Total current | 5 | 5 | ||||||||||||||||
| Noncurrent: | ||||||||||||||||||
| Price Risk Management | ||||||||||||||||||
| Assets/Liabilities (a): | ||||||||||||||||||
| Interest rate swaps | 45 | 43 | ||||||||||||||||
| Total noncurrent | 45 | 43 | ||||||||||||||||
| Total derivatives | $ | 50 | $ | 48 | ||||||||||||||
| September 30, 2016 | December 31, 2015 | ||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||
| Current: | |||||||||||||||
| Price Risk Management | |||||||||||||||
| Assets/Liabilities: | |||||||||||||||
| Interest rate swaps | $ | — | $ | 6 | $ | — | $ | 5 | |||||||
| Total current | — | 6 | — | 5 | |||||||||||
| Noncurrent: | |||||||||||||||
| Price Risk Management | |||||||||||||||
| Assets/Liabilities: | |||||||||||||||
| Interest rate swaps | — | 48 | — | 42 | |||||||||||
| Total noncurrent | — | 48 | — | 42 | |||||||||||
| Total derivatives | $ | — | $ | 54 | $ | — | $ | 47 | |||||||
| Location of Gain (Loss) Recognized in | ||||||||||
| Derivative Instruments | Income on Derivatives | Three Months | Nine Months | |||||||
| Interest rate swaps | Interest expense | $ | (2 | ) | $ | (6 | ) | |||
| Location of Gain (Loss) Recognized in | ||||||||||
| Derivative Instruments | Regulatory Assets | Three Months | Nine Months | |||||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | 2 | $ | (7 | ) | ||||
| Location of Gain (Loss) Recognized in | ||||||||
| Derivative Instruments | Income on Derivatives | Three Months | Nine Months | |||||
| Interest rate swaps | Interest expense | $ | (2) | $ | (6) | |||
| Location of Gain (Loss) Recognized in | ||||||||
| Derivative Instruments | Regulatory Assets | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (5) | $ | (2) | |||
The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets for the periods ended September 30, 2014.
| Location of Gain (Loss) Recognized in | ||||||||
| Derivative Instruments | Income on Derivatives | Three Months | Nine Months | |||||
| Interest rate swaps | Interest expense | $ | (2) | $ | (6) | |||
| Location of Gain (Loss) Recognized in | ||||||||
| Derivative Instruments | Regulatory Assets | Three Months | Nine Months | |||||
| Interest rate swaps | Regulatory assets - noncurrent | $ | (6) | |||||
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Location of Gain (Loss) Recognized in Derivative Instruments Income on Derivatives Three Months Nine Months Interest rate swaps Interest expense $ (2 ) $ (6 ) Location of Gain (Loss) Recognized in Derivative Instruments Regulatory Assets Three Months Nine Months Interest rate swaps Regulatory assets - noncurrent $ (5 ) $ (2 ) Assets Liabilities Eligible for Offset Eligible for Offset Cash Cash Derivative Collateral Derivative Collateral Gross Instruments Received Net Gross Instruments Pledged Net September 30, 2015 Treasury Derivatives PPL $ 231 $ 33 $ 198 $ 89 $ 33 $ 10 $ 46 LKE 50 10 40 LG&E 50 10 40 December 31, 2014 Treasury Derivatives PPL $ 159 $ 65 $ 94 $ 161 $ 65 $ 21 $ 75 LKE 114 20 94 LG&E 81 20 61 KU 33 33 Assets Liabilities Eligible for Offset Eligible for Offset Gross Net Gross Net September 30, 2016 Treasury Derivatives PPL $ 263 $ 14 $ — $ 249 $ 68 $ 14 $ 8 $ 46 LKE — — — — 54 — 8 46 LG&E — — — — 54 — 8 46 December 31, 2015 Treasury Derivatives PPL $ 295 $ 25 $ — $ 270 $ 72 $ 25 $ 9 $ 38 LKE — — — — 47 — 9 38 LG&E — — — — 47 — 9 38
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| PPL | LKE | LG&E | |||||||||
| Aggregate fair value of derivative instruments in a net liability position with credit risk-related | |||||||||||
| contingent features | $ | 32 | $ | 30 | $ | 30 | |||||
| Aggregate fair value of collateral posted on these derivative instruments | 10 | 10 | 10 | ||||||||
| Aggregate fair value of additional collateral requirements in the event of | |||||||||||
| a credit downgrade below investment grade (a) | 22 | 20 | 20 | ||||||||
| PPL | LKE | LG&E | |||||||||
| Aggregate fair value of derivative instruments in a net liability position with credit risk-related contingent features | $ | 29 | $ | 29 | $ | 29 | |||||
| Aggregate fair value of collateral posted on these derivative instruments | 7 | 7 | 7 | ||||||||
Aggregate fair value of additional collateral requirements in the event of a credit downgrade below investment grade (a) | 22 | 22 | 22 | ||||||||
| (a) | Includes the effect of net receivables and payables already recorded on the Balance Sheet. |
and Other Intangible Assets20152016 was due to the effect of foreign currency exchange rates on the U.K. Regulated segment.ARO balances are classified as noncurrent atother intangible assets for the nine months ended September 30, 20152016 was primarily due to an increase in the gross carrying amount of indefinite lived intangibles at WPD attributable to new easements of $73 million, partially offset by the effect of foreign currency exchange rates.December 31, 2014.In connection withKU)final CCR rule, carrying amounts of AROs were as follows. PPL LKE LG&E KU Balance at December 31, 2015 $ 586 $ 535 $ 175 $ 360 Accretion 20 18 6 12 Effect of foreign currency exchange rates (7 ) — — — Changes in estimated timing or cost (116 ) (116 ) (24 ) (92 ) Obligations settled (15 ) (15 ) (11 ) (4 ) Balance at September 30, 2016 $ 468 $ 422 $ 146 $ 276
rule and Note 6 for information on the rate recovery applications with the KPSC. LG&E's and KU's accretion and ARO-related depreciation expense are recorded as a regulatory asset, such that there is no net earnings impact.
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| Foreign | Unrealized gains (losses) | Defined benefit plans | ||||||||||||||||||||||
| currency | Available- | Equity | Prior | Actuarial | Transition | |||||||||||||||||||
| translation | for-sale | Qualifying | investees' | service | gain | asset | ||||||||||||||||||
| adjustments | securities | derivatives | AOCI | costs | (loss) | (obligation) | Total | |||||||||||||||||
| PPL | ||||||||||||||||||||||||
| June 30, 2015 | $ | (435) | $ | 2 | $ | (3) | $ | (1,849) | $ | 1 | $ | (2,284) | ||||||||||||
| Amounts arising during the period | 52 | (19) | 33 | |||||||||||||||||||||
| Reclassifications from AOCI | 10 | 35 | 45 | |||||||||||||||||||||
| Net OCI during the period | 52 | (9) | 35 | 78 | ||||||||||||||||||||
| September 30, 2015 | $ | (383) | $ | (7) | $ | (3) | $ | (1,814) | $ | 1 | $ | (2,206) | ||||||||||||
| December 31, 2014 | $ | (286) | $ | 202 | $ | 20 | $ | 1 | $ | 3 | $ | (2,215) | $ | 1 | $ | (2,274) | ||||||||
| Amounts arising during the period | (97) | 7 | 8 | (6) | 52 | (36) | ||||||||||||||||||
| Reclassifications from AOCI | (2) | 20 | (1) | 111 | 128 | |||||||||||||||||||
| Net OCI during the period | (97) | 5 | 28 | (1) | (6) | 163 | 92 | |||||||||||||||||
| Distribution of PPL Energy | ||||||||||||||||||||||||
| Supply (Note 8) | (207) | (55) | 238 | (24) | ||||||||||||||||||||
| September 30, 2015 | $ | (383) | $ | $ | (7) | $ | $ | (3) | $ | (1,814) | $ | 1 | $ | (2,206) | ||||||||||
| June 30, 2014 | $ | 117 | $ | 190 | $ | 61 | $ | 1 | $ | (4) | $ | (1,764) | $ | 1 | $ | (1,398) | ||||||||
| Amounts arising during the period | (48) | (1) | (5) | (1) | (55) | |||||||||||||||||||
| Reclassifications from AOCI | (3) | (12) | 1 | 29 | 15 | |||||||||||||||||||
| Net OCI during the period | (48) | (4) | (17) | 1 | 28 | (40) | ||||||||||||||||||
| September 30, 2014 | $ | 69 | $ | 186 | $ | 44 | $ | 1 | $ | (3) | $ | (1,736) | $ | 1 | $ | (1,438) | ||||||||
| December 31, 2013 | $ | (11) | $ | 173 | $ | 94 | $ | 1 | $ | (6) | $ | (1,817) | $ | 1 | $ | (1,565) | ||||||||
| Amounts arising during the period | 80 | 18 | (52) | (3) | 43 | |||||||||||||||||||
| Reclassifications from AOCI | (5) | 2 | 3 | 84 | 84 | |||||||||||||||||||
| Net OCI during the period | 80 | 13 | (50) | 3 | 81 | 127 | ||||||||||||||||||
| September 30, 2014 | $ | 69 | $ | 186 | $ | 44 | $ | 1 | $ | (3) | $ | (1,736) | $ | 1 | $ | (1,438) | ||||||||
| LKE | ||||||||||||||||||||||||
| June 30, 2015 | $ | (1) | $ | (7) | $ | (44) | $ | (52) | ||||||||||||||||
| Reclassifications from AOCI | 1 | 1 | ||||||||||||||||||||||
| Net OCI during the period | 1 | 1 | ||||||||||||||||||||||
| September 30, 2015 | $ | (1) | $ | (7) | $ | (43) | $ | (51) | ||||||||||||||||
| December 31, 2014 | $ | (8) | $ | (37) | $ | (45) | ||||||||||||||||||
| Amounts arising during the period | (8) | (8) | ||||||||||||||||||||||
| Reclassifications from AOCI | $ | (1) | 1 | 2 | 2 | |||||||||||||||||||
| Net OCI during the period | (1) | 1 | (6) | (6) | ||||||||||||||||||||
| September 30, 2015 | $ | (1) | $ | (7) | $ | (43) | $ | (51) | ||||||||||||||||
| June 30, 2014 | $ | (2) | $ | 12 | $ | 10 | ||||||||||||||||||
| Net OCI during the period | ||||||||||||||||||||||||
| September 30, 2014 | $ | (2) | $ | 12 | $ | 10 | ||||||||||||||||||
| December 31, 2013 | $ | 1 | $ | (2) | $ | 14 | $ | 13 | ||||||||||||||||
| Amounts arising during the period | (2) | (2) | ||||||||||||||||||||||
| Reclassifications from AOCI | (1) | (1) | ||||||||||||||||||||||
| Net OCI during the period | (1) | (2) | (3) | |||||||||||||||||||||
| September 30, 2014 | $ | $ | (2) | $ | 12 | $ | 10 | |||||||||||||||||
Unrealized gains (losses) Defined benefit plans Total PPL June 30, 2016 $ (716 ) $ — $ (5 ) $ (1 ) $ (5 ) $ (2,130 ) $ (2,857 ) Amounts arising during the period (641 ) — 62 — — (6 ) (585 ) Reclassifications from AOCI — — (69 ) — — 31 (38 ) Net OCI during the period (641 ) — (7 ) — — 25 (623 ) September 30, 2016 $ (1,357 ) $ — $ (12 ) $ (1 ) $ (5 ) $ (2,105 ) $ (3,480 ) December 31, 2015 $ (520 ) $ — $ (7 ) $ — $ (6 ) $ (2,195 ) $ (2,728 ) Amounts arising during the period (837 ) — 57 — — (4 ) (784 ) Reclassifications from AOCI — — (62 ) (1 ) 1 94 32 Net OCI during the period (837 ) — (5 ) (1 ) 1 90 (752 ) September 30, 2016 $ (1,357 ) $ — $ (12 ) $ (1 ) $ (5 ) $ (2,105 ) $ (3,480 ) June 30, 2015 $ (435 ) $ — $ 2 $ — $ (3 ) $ (1,848 ) $ (2,284 ) Amounts arising during the period 52 — (19 ) — — — 33 Reclassifications from AOCI — — 10 — — 35 45 Net OCI during the period 52 — (9 ) — — 35 78 September 30, 2015 $ (383 ) $ — $ (7 ) $ — $ (3 ) $ (1,813 ) $ (2,206 ) December 31, 2014 $ (286 ) $ 202 $ 20 $ 1 $ 3 $ (2,214 ) $ (2,274 ) Amounts arising during the period (97 ) 7 8 — (6 ) 52 (36 ) Reclassifications from AOCI — (2 ) 20 (1 ) — 111 128 Net OCI during the period (97 ) 5 28 (1 ) (6 ) 163 92 Distribution of PPL Energy Supply (Note 8) — (207 ) (55 ) — — 238 (24 ) September 30, 2015 $ (383 ) $ — $ (7 ) $ — $ (3 ) $ (1,813 ) $ (2,206 ) LKE June 30, 2016 $ (1 ) $ (9 ) $ (33 ) $ (43 ) Amounts arising during the period — — — — Reclassifications from AOCI — — 1 1 Net OCI during the period — — 1 1 September 30, 2016 $ (1 ) $ (9 ) $ (32 ) $ (42 )
Foreign currency translation adjustments | Unrealized gains (losses) | Defined benefit plans | |||||||||||||||||||||||||
Available- for-sale securities | Qualifying derivatives | Equity investees' AOCI | Prior service costs | Actuarial gain (loss) | Total | ||||||||||||||||||||||
| December 31, 2015 | $ | — | $ | (10 | ) | $ | (36 | ) | $ | (46 | ) | ||||||||||||||||
| Amounts arising during the period | — | — | 1 | 1 | |||||||||||||||||||||||
| Reclassifications from AOCI | (1 | ) | 1 | 3 | 3 | ||||||||||||||||||||||
| Net OCI during the period | (1 | ) | 1 | 4 | 4 | ||||||||||||||||||||||
| September 30, 2016 | $ | (1 | ) | $ | (9 | ) | $ | (32 | ) | $ | (42 | ) | |||||||||||||||
| June 30, 2015 | $ | (1 | ) | $ | (7 | ) | $ | (44 | ) | $ | (52 | ) | |||||||||||||||
| Amounts arising during the period | — | — | — | — | |||||||||||||||||||||||
| Reclassifications from AOCI | — | — | 1 | 1 | |||||||||||||||||||||||
| Net OCI during the period | — | — | 1 | 1 | |||||||||||||||||||||||
| September 30, 2015 | $ | (1 | ) | $ | (7 | ) | $ | (43 | ) | $ | (51 | ) | |||||||||||||||
| December 31, 2014 | $ | — | $ | (8 | ) | $ | (37 | ) | $ | (45 | ) | ||||||||||||||||
| Amounts arising during the period | — | — | (8 | ) | (8 | ) | |||||||||||||||||||||
| Reclassifications from AOCI | (1 | ) | 1 | 2 | 2 | ||||||||||||||||||||||
| Net OCI during the period | (1 | ) | 1 | (6 | ) | (6 | ) | ||||||||||||||||||||
| September 30, 2015 | $ | (1 | ) | $ | (7 | ) | $ | (43 | ) | $ | (51 | ) | |||||||||||||||
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| Three Months | Nine Months | Affected Line Item on the | |||||||||||||
| Details about AOCI | 2015 | 2014 | 2015 | 2014 | Statements of Income | ||||||||||
| Available-for-sale securities | $ | 7 | $ | 4 | $ | 11 | Other Income (Expense) - net | ||||||||
| Total Pre-tax | 7 | 4 | 11 | ||||||||||||
| Income Taxes | (4) | (2) | (6) | ||||||||||||
| Total After-tax | 3 | 2 | 5 | ||||||||||||
| Qualifying derivatives | |||||||||||||||
| Interest rate swaps | $ | (2) | (5) | (9) | (12) | Interest Expense | |||||||||
| (77) | Discontinued operations | ||||||||||||||
| Cross-currency swaps | (10) | 12 | 22 | (17) | Other Income (Expense) - net | ||||||||||
| (1) | 1 | 1 | Interest Expense | ||||||||||||
| Energy commodities | 8 | 20 | 30 | Discontinued operations | |||||||||||
| Total Pre-tax | (13) | 15 | (43) | 2 | |||||||||||
| Income Taxes | 3 | (3) | 23 | (4) | |||||||||||
| Total After-tax | (10) | 12 | (20) | (2) | |||||||||||
| Equity investees' AOCI | 2 | Other Income (Expense) - net | |||||||||||||
| Total Pre-tax | 2 | ||||||||||||||
| Income Taxes | (1) | ||||||||||||||
| Total After-tax | 1 | ||||||||||||||
| Defined benefit plans | |||||||||||||||
| Prior service costs | (2) | (6) | |||||||||||||
| Net actuarial loss | (45) | (38) | (146) | (110) | |||||||||||
| Total Pre-tax | (45) | (40) | (146) | (116) | |||||||||||
| Income Taxes | 10 | 10 | 35 | 29 | |||||||||||
| Total After-tax | (35) | (30) | (111) | (87) | |||||||||||
| Total reclassifications during the period | $ | (45) | $ | (15) | $ | (128) | $ | (84) | |||||||
Three Months Nine Months Affected Line Item on the Details about AOCI 2016 2015 2016 2015 Statements of Income Available-for-sale securities $ — $ — $ — $ 4 Other Income (Expense) - net Total Pre-tax — — — 4 Income Taxes — — — (2 ) Total After-tax — — — 2 Qualifying derivatives Interest rate swaps (2 ) (2 ) (5 ) (9 ) Interest Expense — — — (77 ) Discontinued operations Cross-currency swaps 86 (10 ) 80 22 Other Income (Expense) - net 2 (1 ) 2 1 Interest Expense Commodity contracts — — — 20 Discontinued operations Total Pre-tax 86 (13 ) 77 (43 ) Income Taxes (17 ) 3 (15 ) 23 Total After-tax 69 (10 ) 62 (20 )
| Three Months | Nine Months | Affected Line Item on the | ||||||||||||||||
| Details about AOCI | 2016 | 2015 | 2016 | 2015 | Statements of Income | |||||||||||||
| Equity investees' AOCI | — | — | 1 | 2 | Other Income (Expense) - net | |||||||||||||
| Total Pre-tax | — | — | 1 | 2 | ||||||||||||||
| Income Taxes | — | — | — | (1 | ) | |||||||||||||
| Total After-tax | — | — | 1 | 1 | ||||||||||||||
| Defined benefit plans | ||||||||||||||||||
| Prior service costs | (1 | ) | — | (2 | ) | — | ||||||||||||
| Net actuarial loss | (41 | ) | (45 | ) | (121 | ) | (146 | ) | ||||||||||
| Total Pre-tax | (42 | ) | (45 | ) | (123 | ) | (146 | ) | ||||||||||
| Income Taxes | 11 | 10 | 28 | 35 | ||||||||||||||
| Total After-tax | (31 | ) | (35 | ) | (95 | ) | (111 | ) | ||||||||||
| Total reclassifications during the period | $ | 38 | $ | (45 | ) | $ | (32 | ) | $ | (128 | ) | |||||||
Reporting Uncertainties about an Entity's Ability to Continue as a Going Concern
use, and are monitoring the development of industry specific application guidance which could impact those assessments.
When management identifies conditions or events that raise substantial doubt about an entity's ability to continue as a going concern, managementnew guidance is required to disclose information that enables users of the financial statements to understand the principal conditions or events that raised substantial doubt about the entity's ability to continue as a going concern and management's evaluation of the significance of those conditions or events. If substantial doubt about the entity's ability to
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continue as a going concern has been alleviated as a result of management's plan, the entity should disclose information that allows the users of the financial statements to understand those plans. If the substantial doubt about the entity's ability to continue as a going concern is not alleviated by management's plans, management's plans to mitigate the conditions or events that gave risesimilar to the substantial doubt aboutcurrent model, but updated to align with certain changes to the entity's abilitylessee model and the new revenue recognition standard. Similar to continuecurrent practice, lessors will classify leases as a going concern should be disclosed, as well as a statement that thereoperating, direct financing, or sales-type.
For all entities, this guidance should be applied prospectively within the annual periods ending after December 15, 2016, andeffective for annual periods and interim periods thereafter. Early adoption is permitted.
The Registrants will adopt this guidance for the annual period ending December 31, 2016. The adoption of this guidance is not expected to have a significant impact on the Registrants.
Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
In November 2014, the FASB issued guidance that clarifies how current accounting guidance should be interpreted when evaluating the economic characteristics and risks of a host contract of a hybrid financial instrument issued in the form of a share. This guidance does not change the current criteria for determining whether separation of an embedded derivative feature from a hybrid financial instrument is required. Entities are still required to evaluate whether the economic risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria.
An entity should consider the substantive terms and features of the entire hybrid financial instrument, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract to determine whether the host contract is more akin to a debt instrument or more akin to an equity instrument. An entity should assess the relative strength of the debt-like and equity-like terms and features when determining how to weight those terms and features.
For public business entities, this guidance is effectivecompanies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 20152018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and shouldprovides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.
The Registrants will adopt this guidance on January 1, 2016. The adoption of this guidance is not expected to have a significant impact on the Registrants.
Income Statement Presentation of Extraordinaryapproach and Unusual Items
In January 2015, the FASB issued accounting guidance that eliminates the concept of extraordinary items, which requires an entity to separately classify, present in the income statement and disclose material events and transactions that are both unusual and occur infrequently. The requirement to report material events or transactions that are unusual or infrequent as a separate component of income from continuing operations has been retained, as has the requirement to separately present the nature and financial effects of each event or transaction in the income statement as a separate component of continuing operations or disclose them within the notes to the financial statements. The scope of these requirements has been expanded to include items that are both unusual and occur infrequently.
For all entities, this guidance is effective for fiscal years beginning after December 15, 2015,2019, and interim periods within those fiscal years. Early adoption is permitted provided that an entity applies the guidance from the beginning of the fiscal year of adoption. The guidanceAll entities may be applied either retrospectively or prospectively.
The Registrants willearly adopt this guidance on January 1, 2016. The adoption of this guidance is not expected to have a significant impact on the Registrants.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued accounting guidance to simplify the presentation of debt issuance costs by requiring that they be presented on the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with the presentation of debt discounts. For debt issuance costs associated with line of credit arrangements, the guidance was subsequently updated to reflect a speech by the SEC which noted that it would not object to an entity deferring and
74
presenting debt issuance costs as an asset and subsequently amortizing the debt issuance costs ratably over the term of the line of credit arrangement.
For public business entities, this guidance should be applied retrospectively for financial statements issued for fiscal years beginning after December 15, 2015 and2018, including interim periods within those fiscal years. Early adoption is permitted.
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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 | |||||||||||||||
SEC.
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See "Financial Condition - Risk Management" below for further information.strategyCompany believes this diverse portfolio provides strong earnings and dividend growth potential that will create significant value for the regulatedits shareowners and positions PPL well for continued growth and success.isplan to provideachieve growth by providing efficient, reliable and safe operations and strong customer service, maintainmaintaining constructive regulatory relationships and achieveachieving timely recovery of costs. These regulated businesses are expected to achieve stable,strong, long-term growth in rate base and RAV, as applicable, asdriven by planned significant capital expenditures are planned to maintain existing assets and to 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. ThisAdditionally, significant transmission rate base growth in the domestic utilities is expected to result in stable earnings growth for the foreseeable future. However, we are not expecting significant earnings growth from the U.K. Regulated segment as WPD is transitioning to the RIIO-ED1 price control period, which began on April 1, 2015. U.K. revenues are expected to significantly decline from 2014 to 2015 resulting from revenue profiling in the prior price control period (DPCR5) and a lower return on regulatory equity, partially offset by the fast-track bonus. In addition, starting in 2017, the amount of incentive revenues WPD is able to earn is expected to decline as a result of tighter reliability and customer service targets set by Ofgem under RIIO-ED1. Despite these factors negatively impacting revenues in the U.K., management is focused on maintaining relatively flat earnings per share for the U.K. Regulated segment from 2015 to 2018.In addition, for the U.K. regulated businesses, effective April 1, 2015 under the RIIO-ED1 price control period, 80% of network related expenditures are added to the RAV and, together with adjustments for inflation as measured by Retail Price Index (RPI) and a return on RAV, recovered through allowed revenue with the remaining 20% of expenditures being recovered in the current regulatory year. RAV is intended to represent expenditures that have a long-term benefit to WPD (similar to capital projects for2020 at PPL Electric.regulated businesses). The RAV balance at March 31, 2015 will continuebusinesses, our strategy is to be recovered over 20 years and additions after April 1, 2023 will be recovered over 45 years. A transitional arrangement will gradually increase the applicable recoverable life during the current RIIO-ED1 eight-year price control period, resulting in an expected average useful life of 35 years for RAV additions in that period. See "Financial and Operational Developments - Other Financial and Operational Developments - RIIO-ED1" below for additional information.For the U. S. regulated businesses, recovery ofrecover capital project costs is achievedefficiently 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.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 certain construction work-in-progress)work in progress) that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. In addition, the KPSC requires a utility to obtain a CPCN prior to constructing a facility, unless the construction is an ordinary extension of existing facilities in the usual course of business or does not involve sufficient capital outlay to materially affect the utility's financial condition. Although such KPSC proceedings do not directly address cost recovery issues, the KPSC, in awarding a CPCN, concludes that the public convenience and necessity require the construction of the facility on the basis that the facility is the lowest reasonable cost alternative to address the need. In Pennsylvania, the FERC transmission formula rate, DSIC mechanism, SMRSmart 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.(PPL)cross currencycross-currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts.Following
Following the spinoff, PPL's focus is on its regulated utility businessesEU. 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., Kentucky 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 Pennsylvania, serving more than 10 million customers. PPL intendsthe European Parliament. There remains significant uncertainty as to maintain a strong balance sheet and manage its finances consistent with maintaining investment grade credit ratings and providing a competitive total shareowner return, including an attractive dividend. Followingwhether the spinoff transaction, PPL expectsevents referred to reduce annual ongoing corporate support costs resulting fromin the 2014 corporate restructuring effortsPrime Minister's announcement will occur within the times suggested as well as ongoing cost efficiency initiatives.
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See "Financial and Operational Developments - Other Financial and Operational Developments - Coststhe ultimate outcome of Spinoff" and "Loss on Spinoff" below for additional information.
Financial and Operational Developments
PPL's earnings by reportable segments for the periods ended September 30 were as follows:
| Three Months | Nine Months | ||||||||||||||||||
| 2015 | 2014 | $ Change | 2015 | 2014 | $ Change | ||||||||||||||
| U.K. Regulated | $ | 249 | $ | 295 | $ | (46) | $ | 814 | $ | 688 | $ | 126 | |||||||
| Kentucky Regulated | 111 | 82 | 29 | 267 | 247 | 20 | |||||||||||||
| Pennsylvania Regulated | 55 | 57 | (2) | 191 | 194 | (3) | |||||||||||||
| Corporate and Other (a) | (19) | (24) | 5 | (74) | (100) | 26 | |||||||||||||
| Income from Continuing Operations | |||||||||||||||||||
| After Income Taxes | 396 | 410 | (14) | 1,198 | 1,029 | 169 | |||||||||||||
| Discontinued Operations (b) | (3) | 87 | (90) | (915) | 13 | (928) | |||||||||||||
| Net Income (Loss) | $ | 393 | $ | 497 | $ | (104) | $ | 283 | $ | 1,042 | $ | (759) | |||||||
| Income from Continuing Operations | |||||||||||||||||||
| After Income Taxes | |||||||||||||||||||
| EPS - basic | $ | 0.59 | $ | 0.61 | $ | (0.02) | $ | 1.78 | $ | 1.58 | $ | 0.20 | |||||||
| EPS - diluted (c) | $ | 0.59 | $ | 0.61 | $ | (0.02) | $ | 1.78 | $ | 1.55 | $ | 0.23 | |||||||
| Net Income (Loss) | |||||||||||||||||||
| EPS - basic | $ | 0.58 | $ | 0.74 | $ | (0.16) | $ | 0.42 | $ | 1.60 | $ | (1.18) | |||||||
| EPS - diluted (c) | $ | 0.58 | $ | 0.74 | $ | (0.16) | $ | 0.42 | $ | 1.57 | $ | (1.15) | |||||||
The following after-tax gains (losses), in total, which management considers special items, impacted PPL's results for the periods ended September 30. See PPL's "Results of Operations - Segment Earnings" for details of each segment's special items.
| Three Months | Nine Months | ||||||||||||||||||
| 2015 | 2014 | $ Change | 2015 | 2014 | $ Change | ||||||||||||||
| U.K. Regulated | $ | 54 | $ | 111 | $ | (57) | $ | 40 | $ | 20 | $ | 20 | |||||||
| Kentucky Regulated | (1) | (1) | (13) | (13) | |||||||||||||||
| Pennsylvania Regulated | 2 | (2) | (2) | 2 | |||||||||||||||
| Corporate and Other (a) | (3) | (18) | 15 | (23) | (70) | 47 | |||||||||||||
| Discontinued Operations (b) | (4) | 87 | (91) | (916) | 13 | (929) | |||||||||||||
| Total PPL | $ | 46 | $ | 181 | $ | (135) | $ | (912) | $ | (39) | $ | (873) | |||||||
(PPL)
Excluding special items, higher earnings are expected in 2015 compared with 2014, after adjusting 2014 to reflect the impact of dissynergies in the Corporate and Other category related to the spinoff of PPL Energy Supply. This increase is primarily attributable to increases in the U.K. Regulated and Kentucky Regulated segments and lower Corporate and Other charges.
79
The following projections and factors underlying these projections (on an after-tax basis) are provided for PPL's segments and the Corporate and Other categorywithdrawal negotiations and the related Registrants.
(PPL'simpact on the U.K. Regulated Segment)
Excluding special items, higher earnings are projected in 2015 compared with 2014, primarily driven by lower income taxeseconomy and lower depreciation expense, partially offset by lower utility revenue from a price decrease duethe GBP to U.S. dollar exchange rate.
(GBP, 94% hedged for 2017 at an average rate of $1.25 per GBP and 93% hedged for 2018 at an average rate of $1.42 per GBP.
Excluding special items, higher earnings are projected in 2015 compared with 2014, primarily drivenfinancial condition that may be experienced as a result of any actions that may be taken by electric and gas base rate increases effective July 1, 2015, and returns on additional environmental capital investments, partially offset by higher operation and maintenance expense, higher depreciation and higher financing costs.
(PPL's Pennsylvania Regulated Segment and PPL Electric)
Excluding special items, lower earnings are projected in 2015 compared with 2014, primarily driven by higher operation and maintenance expense and higher depreciation expense, partially offset by higher transmission and distribution margins.
(PPL's Corporate and Other Category)
Excluding special items, lower costs are projected in 2015 compared with 2014, after adjusting 2014the U.K. government to reflectwithdraw from the EU, although such impacts could be significant.
operations.
Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, Notes 6 and 10 to the Financial Statements and "Item 1A. Risk Factors" in this Form 10-Q (as applicable) and "Item 1. Business" and "Item 1A. Risk Factors" in the Registrants' 2014 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.
Other Financial and Operational Developments
Regulatory Requirements
Also as a result of the environmental requirements discussed above, LKE projects $2.2 billion ($1.1 billion each at LG&E and KU) in environmental capital investment over the next five years.
(All Registrants)
The Registrants cannot predict the impact that future regulatory requirements may have on their financial condition or results of operations.
80
(PPL)
Spinoff of PPL EnergyPPL's Supply
In June 2014, PPL and PPL Energy Supply executed definitive agreements with affiliates of Riverstone segment prior to spin off PPL Energy Supply and immediately combine it with Riverstone's competitive power generation businesses to form a new, stand-alone, publicly traded company named Talen Energy. In June 2015, the spinoff was completed. See Note 8 to the Financial Statements for additional information relating to the transaction.
Loss on Spinoff
In conjunction with the accounting for the spinoff, PPL evaluated whether the fair value of the Supply segment's net assets was less than the carrying value as of theits June 1, 2015, spinoff date.PPL considered several valuation methodologies to derive a fair value estimate of its Supply segment at the spinoff date. These methodologies included considering the closing "when-issued" Talen Energy market value on June 1, 2015 (the spinoff date), adjusted for the proportional share of the equity value attributable to the Supply segment, as well as the valuation methods consistently used in PPL's goodwill impairment assessments - an income approach using a discounted cash flow analysis of the Supply segment and an alternative market approach considering market multiples of comparable companies.
Although the market value of Talen Energy approach utilized the most observable inputs of the three approaches, PPL considered certain limitations of the "when-issued" trading market for the spinoff transaction including the short trading duration, lack of liquidity in the market and anticipated initial Talen stock ownership base selling pressure, among other factors, and concluded that these factors limit this input being solely determinative of the fair value of the Supply segment. As such, PPL also considered the other valuation approaches in estimating the overall fair value, but ultimately assigned the highest weighting to the Talen Energy market value approach.
The following table summarizes PPL's fair value analysis:
| Weighted | |||||||
| Fair Value | |||||||
| Approach | Weighting | (in billions) | |||||
| Talen Energy Market Value | 50% | $ | 1.4 | ||||
| Income/Discounted Cash Flow | 30% | 1.1 | |||||
| Alternative Market (Comparable Company) | 20% | 0.7 | |||||
| Estimated Fair Value | $ | 3.2 |
A key assumption included in the fair value estimate is the application of a control premium of 25% in the two market approaches. PPL concluded it was appropriate to apply a control premium in these approaches as the goodwill impairment testing guidance was followed in determining the estimated fair value of the Supply segment which has historically been a reporting unit for PPL. This guidance provides that the market price of an individual security (and thus the market capitalization of a reporting unit with publically traded equity securities) may not be representative of the fair value of the reporting unit. This guidance also indicates that substantial value may arise to a controlling shareholder from the ability to take advantage of synergies and other benefits that arise from control over another entity, and that the market price of a Company's individual share of stock does not reflect this additional value to a controlling shareholder. Therefore, the quoted market price need not be the sole measurement basis for determining the fair value, and including a control premium is appropriate in measuring the fair value of a reporting unit.
In determining the control premium, PPL reviewed premiums received during the last five years in market sales transactions obtained from observable independent power producer and hybrid utility transactions greater than $1 billion. Premiums for these transactions ranged from 5% to 42% with a median of approximately 25%. Given these metrics, PPL concluded a control premium of 25% to be reasonable for both of the market valuation approaches used.
Assumptions used in the discounted cash flow analysis included forward energy prices, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the Energy Supply portion of the recent Talen Energy business planning process and a market participant discount rate.
Using these methodologies and weightings, PPL determined the estimated fair value of the Supply segment (classified as Level 3) was below its carrying value of $4.1 billion and recorded a loss on the spinoff of $879 million in the second quarter
81
of 2015, which is reflected in discontinued operations and is nondeductible for tax purposes. This amount served to reduce the basis of the net assets accounted for as a dividend at the June 1, 2015 spinoff date.
Costs of Spinoff
Following the announcement of the transaction to form Talen Energy as discussed in "Business Strategy" above, efforts were initiated to identify the appropriate staffing for Talen Energy and for PPL and its subsidiaries following completion of the spinoff. Organizational plans were substantially completed in 2014. The new organizational plans identified the need to resize and restructure the organizations and as a result, in 2014, estimated charges for employee separation benefits were recorded. See Note 8 in the 2014 Form 10-K for additional information. The separation benefits include cash severance compensation, lump sum COBRA reimbursement payments and outplacement services. Most separations and payment of separation benefits are expected to be completed by the end of 2015. At September 30, 2015 and December 31, 2014, the recorded liabilities related to the separation benefits were $11 million and $21 million, which are included in "Other current liabilities" on the Balance Sheets.
Additional employee-related costs incurred primarily include accelerated stock-based compensation and prorated performance-based cash incentive and stock-based compensation awards, primarily for PPL Energy Supply employees and for PPL Services employees who became PPL Energy Supply employees in connection with the transaction. PPL Energy Supply recognized $24 million of these costs at the spinoff closing date which are reflected in discontinued operations.
PPL recorded $44 million of third-party costs related to this transaction during the nine months ended September 30, 2015. Of these costs, $31 million were primarily for bank advisory, legal and accounting fees to facilitate the transaction, and are reflected in discontinued operations. An additional $13 million of consulting and other costs were incurred during the nine months ended September 30, 2015 related to the formation of the Talen Energy organization and to reconfigure the remaining PPL service functions. These costs are primarily recorded in "Other operation and maintenance" on the Statement of Income. No significant additional third-party costs are expected to be incurred. PPL recorded $5 million and $21 million of third-party costs related to this transaction during the three and nine months ended September 30, 2014.
At the close of the transaction, $72 million ($42million after-tax) of cash flow hedges, primarily unamortized losses on PPL interest rate swaps recorded in AOCI and designated as cash flow hedges of PPL Energy Supply's future interest payments, were reclassified into earnings and reflected in discontinued operations.
As a result of the spinoff announcement in June 2014, PPL recorded $3 million and $49 million of deferred income tax expense during the three and nine months ended September 30, 2014, to adjust valuation allowances on deferred tax assets primarily for state net operating loss carryforwards that were previously supported by the future earnings of PPL Energy Supply.
Discontinued Operations
The operations of the Supply segment are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the September 2015 Statements of Income.
The assets and liabilities of PPL's Supply segment for all periods prior
Net assets, after recognition of the loss on spinoff, of $3.2 billion were distributedFinancial Statements for additional information related to PPL shareowners on June 1, 2015, as a result of the completion of the spinoff of PPL Energy Supply.
RIIO-ED1
OnSupply, including the components of Discontinued Operations.
82
Depreciation
Effective January 1, 2015, after completing
IRS Audits2016. See "Application of Critical Accounting Policies-Defined Benefits" in PPL's 2015 Form 10-K for 1998 - 2011
In February 2015, PPL and the IRS Appeals division reached a settlement on the amount of PPL's refund from its open audits for the years 1998 - 2011. In April 2015, PPL was notified that the Joint Committee on Taxation approved PPL's settlement. For the nine months ended September 30, 2015, PPL recorded a tax benefit of $24 million. Of this amount, $12 million is reflected in continuing operations.
(PPL and PPL Electric)
additional information.
Concurrently, PPL Electric filed a petition requesting a waiver of the DSIC cap of 5% of billed revenues and approval to increase the maximum allowable DSIC from 5% to 7.5% for service rendered after January 1, 2016. PPL Electric filed the petition concurrently with its 2015 rate case and the Administrative Law Judge granted PPL Electric's request to consolidate these two proceedings. Under the terms of the settlement agreement discussed above, PPL Electric agreed to withdraw its DSIC waiver petition without prejudice to filing it at a later date.
(PPL, LKE and KU)
FERC Wholesale Formula Rates
In September 2013, KU filed an application with the FERC to adjust the formula rate under which KU provides wholesale requirements power sales to 12 municipal customers. Among other changes, the application requests an amended formula whereby KU would charge cost-based rates with a subsequent true-up to actual costs, replacing the current formula which does not include a true-up. KU's application proposed an authorized return on equity of 10.7%. Certain elements, including the new formula rate, became effective April 23, 2014, subject to refund. In April 2014, nine municipalities submitted notices of termination, under the original notice period provisions, to cease taking power under the wholesale requirements contracts. Such terminations are to be effective in 2019, except in the case of one municipality with a 2017 effective date. In addition, a tenth municipality has become a transmission-only customer as of June 2015. In July 2014, KU agreed on settlement terms with the two municipal customers that did not provide termination notices and filed the settlement proposal with the FERC for its approval. In August 2014, the FERC issued an order on the interim settlement agreement allowing the proposed rates to become effective pending a final order. If approved, the settlement agreement will resolve the rate case with respect to these two municipalities, including approval of the formula rate with a true-up provision and authorizing a return on equity of 10% or the return on equity awarded to other parties in this case, whichever is lower. In August 2015, KU filed a partial settlement agreement with the nine terminating municipalities, which, if approved by FERC, would resolve all but one open matter with one municipality, including providing for certain refunds, approving the formula rate with a true-up provision, and authorizing a 10.25% return on equity. A single remaining unresolved issue with one terminating municipality is in FERC litigation proceedings. KU cannot predict the ultimate outcome of these FERC proceedings regarding its wholesale power agreements with the municipalities, but does not currently anticipate significant remaining refunds beyond amounts already recorded.
83
(PPL, LKE, LG&E and KU)
Rate Case Proceedings
On June 30, 2015, the KPSC approved a rate case settlement agreement providing for increases in the annual revenue requirements associated with KU base electricity rates of $125 million and LG&E base gas rates of $7 million. The annual revenue requirement associated with base electricity rates at LG&E was not changed. Although the settlement did not establish a specific return on equity with respect to the base rates, an authorized 10% return on equity will be utilized in the ECR and GLT mechanisms. The settlement agreement provides for deferred recovery of costs associated with Green River Units 3 and 4 through their retirement. The new regulatory asset will be amortized over three years. The settlement also provides regulatory asset treatment for the difference between pension expense calculated in accordance with LG&E and KU's pension accounting policy and pension expense using a 15 year amortization period for actuarial gains and losses. The new rates and all elements of the settlement became effective July 1, 2015.
(LKE and KU)
On June 30, 2015, KU filed an application with the VSCC2017. The filing is not expected to increase annual Virginia base electricity revenue by approximately $7.2 million, representing an increase of 10.1%. KU's application is basedhave a material impact on an authorized 10.5% return on equity. Public meetings were held during September 2015 and a hearing in the matter may be held during 2015. Subject to regulatory review and approval, new rates would become effective April 1, 2016.
KU.
The discussion for PPL provides a review of results by reportable segment. The "Margins" discussion provides explanations of non-GAAP financial measures (Kentucky Gross Margins and Pennsylvania Gross Delivery Margins) and a reconciliation of non-GAAP financial measures to "Operating Income."
the non-GAAP financial measures and a reconciliation of those measures to the most comparable GAAP measure.
The discussion for each of PPL Electric, LKE, LG&E and KU provides a summaryKU)
earnings. The "Margins" discussion includes a reconciliation of non-GAAP financial measures to "Operating Income."
84
Segment Earnings
and Margins
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| Operating Revenues | $ | 1,889 | $ | 1,878 | $ | 11 | $ | 5,685 | $ | 5,889 | $ | (204 | ) | ||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Operation | |||||||||||||||||||||||
| Fuel | 227 | 228 | (1 | ) | 607 | 695 | (88 | ) | |||||||||||||||
| Energy purchases | 151 | 177 | (26 | ) | 531 | 676 | (145 | ) | |||||||||||||||
| Other operation and maintenance | 417 | 482 | (65 | ) | 1,292 | 1,405 | (113 | ) | |||||||||||||||
| Depreciation | 232 | 226 | 6 | 692 | 658 | 34 | |||||||||||||||||
| Taxes, other than income | 76 | 79 | (3 | ) | 229 | 241 | (12 | ) | |||||||||||||||
| Total Operating Expenses | 1,103 | 1,192 | (89 | ) | 3,351 | 3,675 | (324 | ) | |||||||||||||||
| Other Income (Expense) - net | 49 | 75 | (26 | ) | 284 | 61 | 223 | ||||||||||||||||
| Interest Expense | 223 | 221 | 2 | 671 | 645 | 26 | |||||||||||||||||
| Income Taxes | 139 | 144 | (5 | ) | 510 | 432 | 78 | ||||||||||||||||
| Income from Continuing Operations After Income Taxes | 473 | 396 | 77 | 1,437 | 1,198 | 239 | |||||||||||||||||
| Income (Loss) from Discontinued Operations (net of income taxes) | — | (3 | ) | 3 | — | (915 | ) | 915 | |||||||||||||||
| Net Income | $ | 473 | $ | 393 | $ | 80 | $ | 1,437 | $ | 283 | $ | 1,154 | |||||||||||
| Three Months | Nine Months | ||||||
| Domestic: | |||||||
| PPL Electric Distribution price (a) | $ | 23 | $ | 97 | |||
| PPL Electric Distribution volume | 11 | (23 | ) | ||||
| PPL Electric PLR Revenue (b) | (21 | ) | (125 | ) | |||
| PPL Electric Transmission Formula Rate | 12 | 47 | |||||
| LKE Base rates | — | 68 | |||||
| LKE Volumes | 32 | (38 | ) | ||||
| LKE Fuel and other energy prices (b) | (11 | ) | (85 | ) | |||
| LKE ECR | 8 | 30 | |||||
| Other | (6 | ) | (12 | ) | |||
| Total Domestic | 48 | (41 | ) | ||||
| U.K.: | |||||||
| Price | 59 | 29 | |||||
| Volume | (16 | ) | (37 | ) | |||
| Foreign currency exchange rates | (77 | ) | (139 | ) | |||
| Other | (3 | ) | (16 | ) | |||
| Total U.K. | (37 | ) | (163 | ) | |||
| Total | $ | 11 | $ | (204 | ) | ||
| (a) | Distribution rate case effective January 1, 2016, resulted in increases of $41 million and $121 million for the three and nine months ended September 30, 2016. |
| (b) | Decreases due to lower recoveries of fuel and energy purchases due to lower commodity costs at LKE and lower recoveries of energy purchases at PPL Electric. |
| Three Months | Nine Months | ||||||
| Domestic: | |||||||
| LKE coal plant operations and maintenance (a) | $ | 2 | $ | (12 | ) | ||
| LKE pension expense (b) | (2 | ) | (10 | ) | |||
| PPL Electric Act 129 costs incurred | (7 | ) | (14 | ) | |||
| PPL Electric vegetation management | (5 | ) | 1 | ||||
| PPL Electric payroll-related costs | (7 | ) | (19 | ) | |||
| PPL Electric storm costs | 1 | 7 | |||||
| PPL Electric bad debts | (5 | ) | (6 | ) | |||
| Corporate costs previously included in discontinued operations (c) | 1 | 10 | |||||
| Other | (3 | ) | 5 | ||||
| U.K.: | |||||||
| Network maintenance | (2 | ) | 13 | ||||
| Foreign currency exchange rates | (10 | ) | (19 | ) | |||
| Pension (d) | (21 | ) | (64 | ) | |||
| Other | (7 | ) | (5 | ) | |||
| Total | $ | (65 | ) | $ | (113 | ) | |
| (a) | The decrease for the nine month period was primarily due to a reduction of costs associated with the 2015 retirement of units at the Cane Run and Green River plants, partially offset by Cane Run 7 operations. |
| (b) | The decrease for the nine month period was primarily due to higher discount rates and deferred amortization of actuarial losses. |
| (c) | The increase for the nine month period was due to corporate costs allocated to PPL Energy Supply (and included in discontinued operations) prior to the June 2015 spinoff. As a result of the spinoff on June 1, 2015, these corporate costs now remain in continuing operations. |
| (d) | The decreases were primarily due to an increase in estimated returns on higher asset balances and lower interest costs due to a change in the discount rate methodology. |
| Three Months | Nine Months | ||||||
| Long-term debt interest expense (a) | $ | 17 | $ | 58 | |||
| Foreign currency exchange rates | (14 | ) | (25 | ) | |||
| Other | (1 | ) | (7 | ) | |||
| Total | $ | 2 | $ | 26 | |||
| (a) | The increase in both periods was primarily due to debt issuances at WPD in November 2015, LG&E and KU in September 2015 and PPL Capital Funding in May 2016 as well as higher interest rates on bonds refinanced in September 2015 at LG&E and KU. |
| Three Months | Nine Months | ||||||
| Change in pre-tax income at current period tax rates | $ | 23 | $ | 103 | |||
| Valuation allowances adjustments | 4 | 5 | |||||
| Impact of U.K. income tax rates | 3 | 2 | |||||
| Federal and state tax reserve adjustments (a) | 9 | 21 | |||||
| U.K. Finance Act 2016 adjustment (b) | (42 | ) | (42 | ) | |||
| Stock-based compensation (c) | (1 | ) | (12 | ) | |||
| Other | (1 | ) | 1 | ||||
| Total | $ | (5 | ) | $ | 78 | ||
| (a) | During the three and nine months ended September 30, 2015, PPL recorded a $9 million tax benefit related to a planned amendment of a prior period tax return. |
| (b) | The U.K. Finance Act 2016, enacted in September 2016, reduces the U.K. statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during the three and nine months ended September 30, 2016. |
| (c) | During the three and nine months ended September 30, 2016, PPL recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 2 to the Financial Statements for additional information. |
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| U.K. Regulated | $ | 281 | $ | 249 | $ | 32 | $ | 915 | $ | 814 | $ | 101 | |||||||||||
| Kentucky Regulated | 126 | 111 | 15 | 314 | 267 | 47 | |||||||||||||||||
| Pennsylvania Regulated | 91 | 55 | 36 | 263 | 191 | 72 | |||||||||||||||||
| Corporate and Other (a) | (25 | ) | (19 | ) | (6 | ) | (55 | ) | (74 | ) | 19 | ||||||||||||
| Discontinued Operations (b) | — | (3 | ) | 3 | — | (915 | ) | 915 | |||||||||||||||
| Net Income | $ | 473 | $ | 393 | $ | 80 | $ | 1,437 | $ | 283 | $ | 1,154 | |||||||||||
| (a) | Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results. The nine months ended September 30, 2015 also includes certain costs related to the spinoff of PPL Energy Supply. See Note 8 to the Financial Statements for additional information. |
| (b) | As a result of the spinoff of PPL Energy Supply, substantially representing PPL's former Supply segment, the earnings of the Supply segment prior to the spinoff are included in Discontinued Operations. The nine months ended September 30, 2015 includes an $879 million charge reflecting the difference between PPL's recorded value for the Supply segment and its estimated fair value as of the spinoff date, determined in accordance with applicable accounting rules under GAAP. See Note 8 to the Financial Statements for additional information. |
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| U.K. Regulated | $ | 235 | $ | 195 | $ | 40 | $ | 741 | $ | 774 | $ | (33 | ) | ||||||||||
| Kentucky Regulated | 126 | 112 | 14 | 314 | 280 | 34 | |||||||||||||||||
| Pennsylvania Regulated | 91 | 55 | 36 | 263 | 191 | 72 | |||||||||||||||||
| Corporate and Other | (25 | ) | (15 | ) | (10 | ) | (53 | ) | (50 | ) | (3 | ) | |||||||||||
| Earnings from Ongoing Operations | $ | 427 | $ | 347 | $ | 80 | $ | 1,265 | $ | 1,195 | $ | 70 | |||||||||||
2016.
| Three Months | Nine Months | ||||||||||||||||||
| 2015 | 2014 | $ Change | 2015 | 2014 | $ Change | ||||||||||||||
| Operating revenues | $ | 552 | $ | 644 | $ | (92) | $ | 1,836 | $ | 1,964 | $ | (128) | |||||||
| Other operation and maintenance | 118 | 118 | 332 | 358 | (26) | ||||||||||||||
| Depreciation | 63 | 86 | (23) | 181 | 256 | (75) | |||||||||||||
| Taxes, other than income | 38 | 41 | (3) | 111 | 119 | (8) | |||||||||||||
| Total operating expenses | 219 | 245 | (26) | 624 | 733 | (109) | |||||||||||||
| Other Income (Expense) - net | 77 | 136 | (59) | 65 | 40 | 25 | |||||||||||||
| Interest Expense | 109 | 115 | (6) | 312 | 352 | (40) | |||||||||||||
| Income Taxes | 52 | 125 | (73) | 151 | 231 | (80) | |||||||||||||
| Net Income | $ | 249 | $ | 295 | $ | (46) | $ | 814 | $ | 688 | $ | 126 | |||||||
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| Operating revenues | $ | 515 | $ | 552 | $ | (37 | ) | $ | 1,673 | $ | 1,836 | $ | (163 | ) | |||||||||
| Other operation and maintenance | 78 | 118 | (40 | ) | 260 | 332 | (72 | ) | |||||||||||||||
| Depreciation | 58 | 63 | (5 | ) | 178 | 181 | (3 | ) | |||||||||||||||
| Taxes, other than income | 34 | 38 | (4 | ) | 104 | 111 | (7 | ) | |||||||||||||||
| Total operating expenses | 170 | 219 | (49 | ) | 542 | 624 | (82 | ) | |||||||||||||||
| Other Income (Expense) - net | 50 | 77 | (27 | ) | 283 | 65 | 218 | ||||||||||||||||
| Interest Expense | 100 | 109 | (9 | ) | 310 | 312 | (2 | ) | |||||||||||||||
| Income Taxes | 14 | 52 | (38 | ) | 189 | 151 | 38 | ||||||||||||||||
| Net Income | 281 | 249 | 32 | 915 | 814 | 101 | |||||||||||||||||
| Less: Special Items | 46 | 54 | (8 | ) | 174 | 40 | 134 | ||||||||||||||||
| Earnings from Ongoing Operations | $ | 235 | $ | 195 | $ | 40 | $ | 741 | $ | 774 | $ | (33 | ) | ||||||||||
| Income Statement Line Item | Three Months | Nine Months | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| Foreign currency-related economic hedges, net of tax of $103, ($29), $34, ($10) (a) | Other Income (Expense) - net | $ | (193 | ) | $ | 54 | $ | (65 | ) | $ | 20 | ||||||
| Settlement of foreign currency contracts, net of tax of ($108), $0, ($108), $0 (b) | Other Income (Expense) - net | 202 | — | 202 | — | ||||||||||||
| Change in U.K. tax rate (c) | Income Taxes | 37 | — | 37 | — | ||||||||||||
| WPD Midlands acquisition-related adjustment, net of tax of $0, $0, $0, ($1) | Other operation and maintenance | — | — | — | 2 | ||||||||||||
| Settlement of certain income tax positions (d) | Income Taxes | — | — | — | 18 | ||||||||||||
| Total special items | $ | 46 | $ | 54 | $ | 174 | $ | 40 | |||||||||
| (a) | Represents unrealized gains (losses) on contracts that economically hedge anticipated GBP-denominated earnings. The three and nine months ended September 30, 2016 include the reversal of $310 million ($202 million after-tax) of unrealized gains related to the settlement of 2017 and 2018 contracts. |
| (b) | In the third quarter of 2016, PPL settled 2017 and 2018 foreign currency contracts, resulting in $310 million of cash received ($202 million after-tax). The settlement did not have a material impact on net income as the contracts were previously marked to fair value and recognized in "Other Income (Expense)-net" on the Statement of Income. |
| (c) | The U.K. Finance Act 2016, enacted in September 2016, reduces the U.K. statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result of this change, PPL reduced its net deferred tax liabilities and recognized an income tax benefit of $42 million in the third quarter of 2016. Of this amount, $37 million relates to deferred taxes recorded in prior years and was treated as a special item. |
| (d) | Relates to the April 2015 settlement of the IRS audit for the tax years 1998-2011. See Note 5 to the Financial Statements for additional information. |
| Three Months | Nine Months | ||||||
| U.K. | |||||||
| Gross margins | $ | 45 | $ | (11 | ) | ||
| Other operation and maintenance | 26 | 49 | |||||
| Depreciation | (3 | ) | (12 | ) | |||
| Interest expense | (5 | ) | (23 | ) | |||
| Other | (1 | ) | (3 | ) | |||
| Income taxes | (5 | ) | 13 | ||||
| U.S. | |||||||
| Interest expense and other | 2 | (3 | ) | ||||
| Income taxes | (10 | ) | (5 | ) | |||
| Foreign currency exchange, after-tax | (9 | ) | (38 | ) | |||
| Earnings from Ongoing Operations | 40 | (33 | ) | ||||
| Special items, after-tax | (8 | ) | 134 | ||||
| Net Income | $ | 32 | $ | 101 | |||
| Three Months | Nine Months | ||||||
| U.K. | |||||||
| Utility revenues | $ | (46) | $ | (33) | |||
| Other operation and maintenance | (12) | (5) | |||||
| Depreciation | 17 | 59 | |||||
| Interest expense | (2) | 4 | |||||
| Other | 1 | ||||||
| Income taxes | 13 | 13 | |||||
| U.S. | |||||||
| Interest expense and other | 1 | 13 | |||||
| Income taxes | 35 | 54 | |||||
| Foreign currency exchange, after-tax | 4 | 1 | |||||
| Special items, after-tax | (57) | 20 | |||||
| Total | $ | (46) | $ | 126 | |||
U.K.
85
Lower other operation and maintenance expense for |
U.S.
The following after-tax gains (losses), which management considers special items, also impacted the U.K. Regulated segment's results duringnine month period primarily due to $64 million from lower pension expense due to an increase in estimated returns on higher asset balances and lower interest costs due to a change in the periods ended September 30.
| Income Statement | Three Months | Nine Months | |||||||||||||
| Line Item | 2015 | 2014 | 2015 | 2014 | |||||||||||
| Other Income | |||||||||||||||
| Foreign currency-related economic hedges, net of tax of ($29), ($60), ($10), ($39) (a) | (Expense)-net | $ | 54 | $ | 111 | $ | 20 | $ | 72 | ||||||
| Other operation | |||||||||||||||
| WPD Midlands acquisition-related adjustment, net of tax of $0, $0, ($1), $0 | and maintenance | 2 | |||||||||||||
| Change in WPD line loss accrual, net of tax of $0, $0, $0, $13(b) | Operating Revenues | (52) | |||||||||||||
| Settlement of certain income tax positions (c) | Income Taxes | 18 | |||||||||||||
| Total | $ | 54 | $ | 111 | $ | 40 | $ | 20 | |||||||
discount rate methodology, partially offset by $13 million from higher network maintenance expense.
2016.
| Three Months | Nine Months | ||||||||||||||||||
| 2015 | 2014 | $ Change | 2015 | 2014 | $ Change | ||||||||||||||
| Operating revenues | $ | 801 | $ | 753 | $ | 48 | $ | 2,414 | $ | 2,409 | $ | 5 | |||||||
| Fuel | 228 | 240 | (12) | 695 | 748 | (53) | |||||||||||||
| Energy purchases | 23 | 24 | (1) | 143 | 184 | (41) | |||||||||||||
| Other operation and maintenance | 202 | 197 | 5 | 625 | 609 | 16 | |||||||||||||
| Depreciation | 97 | 89 | 8 | 286 | 262 | 24 | |||||||||||||
| Taxes, other than income | 14 | 13 | 1 | 43 | 39 | 4 | |||||||||||||
| Total operating expenses | 564 | 563 | 1 | 1,792 | 1,842 | (50) | |||||||||||||
| Other Income (Expense) - net | (2) | (2) | (8) | (6) | (2) | ||||||||||||||
| Interest Expense | 56 | 56 | 167 | 164 | 3 | ||||||||||||||
| Income Taxes | 68 | 50 | 18 | 180 | 150 | 30 | |||||||||||||
| Net Income | $ | 111 | $ | 82 | $ | 29 | $ | 267 | $ | 247 | $ | 20 | |||||||
The changes in the results of the Kentucky Regulated segment between these periods were due to the factors set forth below, which reflect amounts classified as Kentucky Gross Margins and certain items that management considers special on separate lines within the table and not in their respective Statement of Income line items. See below for additional detail of the special items.
| Three Months | Nine Months | |||||
| Kentucky Gross Margins | $ | 50 | $ | 75 | ||
| Other operation and maintenance | (4) | (14) | ||||
| Depreciation | 1 | (4) | ||||
| Taxes, other than income | (2) | |||||
| Other income (expense) - net | 3 | |||||
| Interest expense | (3) | |||||
| Income taxes | (18) | (22) | ||||
| Special items | (13) | |||||
| Total | $ | 29 | $ | 20 | ||
86
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| Operating revenues | $ | 835 | $ | 801 | $ | 34 | $ | 2,382 | $ | 2,414 | $ | (32 | ) | ||||||||||
| Fuel | 227 | 228 | (1 | ) | 607 | 695 | (88 | ) | |||||||||||||||
| Energy purchases | 24 | 23 | 1 | 118 | 143 | (25 | ) | ||||||||||||||||
| Other operation and maintenance | 197 | 202 | (5 | ) | 603 | 625 | (22 | ) | |||||||||||||||
| Depreciation | 102 | 97 | 5 | 301 | 286 | 15 | |||||||||||||||||
| Taxes, other than income | 16 | 14 | 2 | 46 | 43 | 3 | |||||||||||||||||
| Total operating expenses | 566 | 564 | 2 | 1,675 | 1,792 | (117 | ) | ||||||||||||||||
| Other Income (Expense) - net | (3 | ) | (2 | ) | (1 | ) | (9 | ) | (8 | ) | (1 | ) | |||||||||||
| Interest Expense | 65 | 56 | 9 | 194 | 167 | 27 | |||||||||||||||||
| Income Taxes | 75 | 68 | 7 | 190 | 180 | 10 | |||||||||||||||||
| Net Income | 126 | 111 | 15 | 314 | 267 | 47 | |||||||||||||||||
| Less: Special Items | — | (1 | ) | 1 | — | (13 | ) | 13 | |||||||||||||||
| Earnings from Ongoing Operations | $ | 126 | $ | 112 | $ | 14 | $ | 314 | $ | 280 | $ | 34 | |||||||||||
segment's results and are excluded from Earnings from Ongoing Operations during the periods ended September 30.
| Income Statement | Three Months | Nine Months | |||||||||||||
| Line Item | 2015 | 2014 | 2015 | 2014 | |||||||||||
| EEI adjustments, net of tax of $0, $0, $0, $0 (a) | Other Income (Expense)-net | $ | (1) | ||||||||||||
| LKE acquisition-related adjustment (b) | Other Income (Expense)-net | $ | (1) | $ | (5) | ||||||||||
| Certain valuation allowances (c) | Income Taxes | (8) | |||||||||||||
| Total | $ | (1) | $ | (1) | $ | (13) | |||||||||
| Income Statement Line Item | Three Months | Nine Months | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||||
| LKE acquisition-related adjustment, net of tax of $0, $0, $0, $0 (a) | Other Income (Expense) - net | $ | — | $ | (1 | ) | $ | — | $ | (5 | ) | ||||||
| Certain valuation allowances, net of tax of $0, $0, $0, $0 (b) | Income Taxes | — | — | — | (8 | ) | |||||||||||
| Total Special Items | $ | — | $ | (1 | ) | $ | — | $ | (13 | ) | |||||||
| Recorded at PPL and allocated to the Kentucky Regulated segment. The amount represents a settlement between E.ON AG (a German corporation and the indirect parent of E.ON US Investments Corp., the former parent of LKE) and PPL for a tax matter. |
| (b) | Recorded at LKE and represents a valuation allowance against tax credits expiring in 2016 and 2017 that are more likely than not to expire before being utilized. |
2016. businesses: Margins 2016. milder winter weather. Three Months Nine Months Kentucky Gross Margins $ 27 $ 63 Other operation and maintenance 10 26 Depreciation (2 ) (1 ) Taxes, other than income (3 ) (3 ) Other Income (Expense) - net (2 ) (6 ) Interest Expense (9 ) (27 ) Income Taxes (7 ) (18 ) Special items, after-tax 1 13 Net Income $ 15 $ 47 16%18% of PPL's Net Income from Continuing Operations After Income Taxes for the nine months ended September 30, 20152016 and 21%24% of PPL's assets at September 30, 2015.includesinclude the following results. Three Months Nine Months 2015 2014 $ Change 2015 2014 $ Change Operating revenues $ 519 $ 477 $ 42 $ 1,625 $ 1,518 $ 107 Energy purchases External 154 128 26 519 431 88 Intersegment 20 (20) 14 68 (54) Other operation and maintenance 162 133 29 435 402 33 Depreciation 55 47 8 158 137 21 Taxes, other than income 27 25 2 87 80 7 Total operating expenses 398 353 45 1,213 1,118 95 Other Income (Expense) - net 1 3 (2) 5 6 (1) Interest Expense 32 33 (1) 96 91 5 Income Taxes 35 37 (2) 130 121 9 Net Income $ 55 $ 57 $ (2) $ 191 $ 194 $ (3) Three Months Nine Months 2016 2015 $ Change 2016 2015 $ Change Operating revenues $ 539 $ 519 $ 20 $ 1,619 $ 1,625 $ (6 ) Energy purchases External 129 154 (25 ) 414 519 (105 ) Intersegment — — — — 14 (14 ) Other operation and maintenance 143 162 (19 ) 431 435 (4 ) Depreciation 64 55 9 185 158 27 Taxes, other than income 26 27 (1 ) 79 87 (8 ) Total operating expenses 362 398 (36 ) 1,109 1,213 (104 ) Other Income (Expense) - net 4 1 3 12 5 7 Interest Expense 32 32 — 97 96 1 Income Taxes 58 35 23 162 130 32 Net Income 91 55 36 263 191 72 Less: Special Items (a) — — — — — — Earnings from Ongoing Operations $ 91 $ 55 $ 36 $ 263 $ 191 $ 72 (a) There are no items that management considers special for the periods presented. andon a certain item that management considers special on separate linesline and not in their respective Statement of Income line items. Three Months Nine Months Pennsylvania Gross Delivery Margins $ 52 $ 126 Other operation and maintenance 12 (3 ) Depreciation (9 ) (27 ) Taxes, other than income 1 2 Other Income (Expense) - net 3 7 Interest Expense — (1 ) Income Taxes (23 ) (32 ) Net Income $ 36 $ 72 below"Margins - Changes in Margins" for an explanation of Pennsylvania Gross Delivery Margins.detailwork done by outside vendors, offset by $19 million of lower payroll related costs.special items. Three Months Nine Months Pennsylvania Gross Delivery Margins $ 30 $ 56 Other operation and maintenance (19) (25) Depreciation (8) (21) Interest expense 1 (5) Taxes other than income (2) (1) Other income (expense) - net (3) (1) Income taxes 1 (8) Special item, after-tax (2) 2 Total $ (2) $ (3) 87·See "Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania Gross Delivery Margins.·Higher other operation and maintenance expense for the three month period primarily due to $10 million of higher corporate service costs and $5 million of higher bad debt expenses.·Higher other operation and maintenance expense for the nine month period primarily due to $19 million of higher corporate service costs and $7 million of higher bad debt expenses, partially offset by $7 million of lower storm costs.·Higher depreciation expense for the three and nine month periods primarily due to PP&E additions, net, related to the ongoing efforts to ensure the reliability of the delivery system and the replacement of aging infrastructure.(loss)gains (losses), in total, which management considers special items, that are excluded from Earnings from Ongoing Operations and a special item, also impacted the Pennsylvania Regulated segment's results duringreconciliation to PPL's "Net Income" for the periods ended September 30. Income Statement Three Months Nine Months Line Item 2015 2014 2015 2014 Other operation Separation benefits, net of tax of $0, ($1), $0, $1 (a) and maintenance $ 2 $ (2) (a)In June 2014, PPL Electric's largest IBEW local ratified a new three-year labor agreement. In connection with the new agreement, bargaining unit one-time voluntary retirement benefits were recorded in the second quarter of 2014 and adjusted in the third quarter of 2014. 2016 Three Months Total Net Income $ 281 $ 126 $ 91 $ (25 ) $ — $ 473 Less: Special Items (expense) benefit: Foreign currency-related economic hedges, net of tax of $103 (193 ) — — — — (193 ) Other: Settlement of foreign currency contracts, net of tax of ($108) 202 — — — — 202 Change in U.K. tax rate 37 — — — — 37 Total Special Items 46 — — — — 46 Earnings from Ongoing Operations $ 235 $ 126 $ 91 $ (25 ) $ — $ 427 2015 Three Months Total Net Income $ 249 $ 111 $ 55 $ (18 ) $ (4 ) $ 393 Less: Special Items (expense) benefit: Foreign currency-related economic hedges, net of tax of ($29) 54 — — — — 54 Spinoff of the Supply segment: Discontinued operations, net of tax of ($3) — — — — (4 ) (4 ) Transition and transaction costs, net of tax of $1 — — — (1 ) — (1 ) Employee transitional services, net of tax of $1 — — — (1 ) — (1 ) Separation benefits, net of tax of $0 — — — (1 ) — (1 ) Other: LKE acquisition-related adjustment, net of tax of $0 — (1 ) — — — (1 ) Total Special Items 54 (1 ) — (3 ) (4 ) 46 Earnings from Ongoing Operations $ 195 $ 112 $ 55 $ (15 ) $ — $ 347 2016 Nine Months Total Net Income $ 915 $ 314 $ 263 $ (55 ) $ — $ 1,437 Less: Special Items (expense) benefit: Foreign currency-related economic hedges, net of tax of $34 (65 ) — — — — (65 ) Spinoff of the Supply segment, net of tax of $2 — — — (2 ) — (2 ) Other: Settlement of foreign currency contracts, net of tax of ($108) 202 — — — — 202 Change in U.K. tax rate 37 — — — — 37 Total Special Items 174 — — (2 ) — 172 Earnings from Ongoing Operations $ 741 $ 314 $ 263 $ (53 ) $ — $ 1,265 2015 Nine Months Total Net Income $ 814 $ 267 $ 191 $ (73 ) $ (916 ) $ 283 Less: Special Items (expense) benefit: Foreign currency-related economic hedges, net of tax of ($10) 20 — — — — 20 Spinoff of the Supply segment: Discontinued operations, net of tax of $37 — — — — (916 ) (916 ) Transition and transaction costs, net of tax of $0 — — — (16 ) — (16 ) Employee transitional services, net of tax of $2 — — — (4 ) — (4 ) Separation benefits, net of tax of $1 — — — (3 ) — (3 ) Other: WPD Midlands acquisition-related adjustment, net of tax of ($1) 2 — — — — 2 Settlement of certain income tax positions 18 — — — — 18 Certain valuation allowances, net of tax of $0 — (8 ) — — — (8 ) LKE acquisition-related adjustment, net of tax of $0 — (5 ) — — — (5 ) Total Special Items 40 (13 ) — (23 ) (916 ) (912 ) Earnings from Ongoing Operations $ 774 $ 280 $ 191 $ (50 ) $ — $ 1,195 Non-GAAP Financial Measuresbusinesses.·"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 as "Other operation and maintenance" on the Statements of Income) are deducted from revenues. In addition, certain other expenses, recorded as "Other operation and maintenance", "Depreciation" and "Taxes, other than income" on the Statements of Income, associated with approved cost recovery mechanisms are offset against the recovery of those expenses, which are included in revenues. These mechanisms allow for direct recovery of these expenses and, in some cases, returns on capital investments and performance incentives. As a result, this measure represents the net revenues from electricity and gas operations.·"Pennsylvania Gross Delivery Margins" is a single financial performance measure of the electricity delivery operations of the Pennsylvania Regulated segment and PPL Electric, which includes transmission and distribution activities. 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 is primarily Act 129 costs, and "Taxes, other than income," which is primarily gross receipts tax. This performance measure includes PLR energy purchases by PPL Electric from PPL EnergyPlus, which are reflected in "Energy purchases from affiliate" in the reconciliation tables. As a result of the spinoff of PPL Energy Supply and creation of Talen Energy on June 1, 2015, PPL EnergyPlus (renamed Talen Energy Marketing) is no longer an affiliate of PPL Electric. PPL Electric's purchases from Talen Energy Marketing subsequent to May 31, 2015 are reflected in "Energy Purchases" in the reconciliation tables. This measure represents the net revenues from the Pennsylvania Regulated segment's and PPL Electric's electricity delivery operations.the operations and analyze actual results compared with budget.88Reconciliation of Non-GAAP Financial MeasuresThe following table contains the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the periods ended September 30. 2015 Three Months 2014 Three Months Kentucky PA Gross Kentucky PA Gross Gross Delivery Operating Gross Delivery Operating Margins Margins Other (a) Income (b) Margins Margins Other (a) Income (b) Operating Revenues $ 801 $ 519 $ 558 (c) $ 1,878 $ 753 $ 477 $ 649 (c) $ 1,879 Operating Expenses Fuel 228 228 240 240 Energy purchases 23 154 177 24 128 21 173 Energy purchases from affiliate 20 (20) Other operation and maintenance 28 31 423 482 27 25 415 467 Depreciation 11 215 226 2 231 233 Taxes, other than income 1 25 53 79 25 53 78 Total Operating Expenses 291 210 691 1,192 293 198 700 1,191 Total $ 510 $ 309 $ (133) $ 686 $ 460 $ 279 $ (51) $ 688 2015 Nine Months 2014 Nine Months Kentucky PA Gross Kentucky PA Gross Gross Delivery Operating Gross Delivery Operating Margins Margins Other (a) Income (b) Margins Margins Other (a) Income (b) Operating Revenues $ 2,414 $ 1,625 $ 1,850 (c) $ 5,889 $ 2,409 $ 1,518 $ 1,979 (c) $ 5,906 Operating Expenses Fuel 695 695 748 748 Energy purchases 143 519 14 676 184 431 68 683 Energy purchases from affiliate 14 (14) 68 (68) Other operation and maintenance 77 84 1,244 1,405 75 74 1,233 1,382 Depreciation 26 632 658 6 682 688 Taxes, other than income 3 81 157 241 1 74 163 238 Total Operating Expenses 944 698 2,033 3,675 1,014 647 2,078 3,739 Total $ 1,470 $ 927 $ (183) $ 2,214 $ 1,395 $ 871 $ (99) $ 2,167 (a)Represents amounts excluded from Margins.(b)As reported on the Statements of Income.(c)Primarily represents WPD's operating revenue.Non-GAAP Financial Measuresthe non-GAAP financial measuresMargins by PPL's reportable segment and by component, as applicable, for the periods ended September 30 as well as the change between periods. The factors that gave rise to the changes are described following the table. Three Months Nine Months 2015 2014 $ Change 2015 2014 $ Change Kentucky Regulated Kentucky Gross Margins LG&E $ 225 $ 212 $ 13 $ 661 $ 633 $ 28 KU 285 248 37 809 762 47 LKE $ 510 $ 460 $ 50 $ 1,470 $ 1,395 $ 75 Pennsylvania Regulated Pennsylvania Gross Delivery Margins Distribution $ 207 $ 194 $ 13 $ 642 $ 631 $ 11 Transmission 102 85 17 285 240 45 Total $ 309 $ 279 $ 30 $ 927 $ 871 $ 56 89 Three Months Nine Months 2016 2015 $ Change 2016 2015 $ Change U.K. U.K. Gross Margins $ 476 $ 505 $ (29 ) $ 1,566 $ 1,709 $ (143 ) Impact of changes in foreign currency exchange rates (74 ) (132 ) Change in U.K. Gross Margins excluding impact of foreign currency exchange rates $ 45 $ (11 ) Kentucky Regulated Kentucky Gross Margins LG&E $ 237 $ 225 $ 12 $ 676 $ 661 $ 15 KU 300 285 15 857 809 48 LKE $ 537 $ 510 $ 27 $ 1,533 $ 1,470 $ 63 Pennsylvania Regulated Pennsylvania Gross Delivery Margins Distribution $ 246 $ 207 $ 39 $ 721 $ 642 $ 79 Transmission 115 102 13 332 285 47 Total $ 361 $ 309 $ 52 $ 1,053 $ 927 $ 126 20152016 compared with 20142015 primarily due to $22 million of increased sales volumes ($9 million at LG&E and $13 million at KU) driven by warmer weather.$28$68 million ($27 million at KU and $14 million at LG&E)&E and $64 million at KU) and returns on additional environmental capital investments of $14 million ($10$11 million at LG&E and $4 million at KU).&E. The increase in base rates was the result of new rates approved by the KPSC effective July 1, 2015.Kentucky Gross Margins increased for the nine months ended September 30, 2015 compared with 2014 primarily due to returns on additional environmental capital investments These increases were partially offset by lower sales volumes of $44$10 million ($292 million at LG&E and $15$8 million at KU) and higher base ratesdriven by milder weather in the first quarter of $28 million ($27 million at KU and $1 million at LG&E). The increase in base rates was the result of new rates approved by the KPSC effective July 1, 2015.20152016 compared with 2014,2015 primarily due to returns on additional distribution improvement capital investments$30 million of $5higher base rates, effective January 1, 2016 as a result of the 2015 rate case combined with a $12 million and a $4 millionfavorable impact of favorablewarmer summer weather.20152016 compared with 2014,2015 primarily due to returns on additional distribution improvement capital investments$93 million of $13 million and an $11 million impact of favorable weather,higher base rates, effective January 1, 2016, partially offset by a $12$13 million benefit recorded in the first quarterunfavorable impact of 2014 as a result of a change in estimate of a regulatory liability.20152016 compared with 20142015 primarily due to increasedreturns on additional capital investments.Statement of Income Analysis -- Operating Revenues The increase (decrease) in operating revenues for the periods ended September 30, 2015 compared with 2014 was due to: Three Months Nine Months Domestic: PPL Electric (a) $ 44 $ 109 LKE (b) 48 5 Other (1) (3) Total Domestic 91 111 U.K.: Price (c) (54) (45) Foreign currency exchange rates (d) (48) (158) Volume 6 7 Line loss accrual adjustments (e) 65 Other 4 3 Total U.K. (92) (128) Total $ (1) $ (17) 2016 Three Months 2015 Three Months Other (a) Other (a) Operating Revenues $ 504 (c) $ 835 $ 539 $ 11 $ 1,889 $ 540 (c) $ 801 $ 519 $ 18 $ 1,878 Operating Expenses Fuel — 227 — — 227 — 228 — — 228 Energy purchases — 24 129 (2 ) 151 — 23 154 — 177 Other operation and maintenance 28 33 24 332 417 35 28 31 388 482 Depreciation — 14 — 218 232 — 11 — 215 226 Taxes, other than income — — 25 51 76 — 1 25 53 79 Total Operating Expenses 28 298 178 599 1,103 35 291 210 656 1,192 Total $ 476 $ 537 $ 361 $ (588 ) $ 786 $ 505 $ 510 $ 309 $ (638 ) $ 686 2016 Nine Months 2015 Nine Months Other (a) Other (a) Operating Revenues $ 1,641 (c) $ 2,382 $ 1,619 $ 43 $ 5,685 $ 1,801 (c) $ 2,414 $ 1,625 $ 49 $ 5,889 Operating Expenses Fuel — 607 — — 607 — 695 — — 695 Energy purchases — 118 414 (1 ) 531 — 143 519 14 676 Energy purchases from affiliate — — — — — — — 14 (14 ) — Other operation and maintenance 75 81 77 1,059 1,292 92 77 84 1,152 1,405 Depreciation — 40 — 652 692 — 26 — 632 658 Taxes, other than income — 3 75 151 229 — 3 81 157 241 Total Operating Expenses 75 849 566 1,861 3,351 92 944 698 1,941 3,675 Total $ 1,566 $ 1,533 $ 1,053 $ (1,818 ) $ 2,334 $ 1,709 $ 1,470 $ 927 $ (1,892 ) $ 2,214 (a) See "Pennsylvania Gross Delivery Margins" for further information.Represents amounts excluded from Margins.(b) As reported on the Statements of Income. (b)See "Kentucky Gross Margins" for further information.(c) The decreaseExcludes ancillary revenues of $11 million and $32 million for the three month period was primarily due to a price decrease effective April 1, 2015 resulting from the commencement of RIIO-ED1. The decreaseand nine months ended September 30, 2016 and $12 million and $35 million for the three and nine month period was due to a price decrease effective April 1, 2015, partially offset by a price increase effective April 1, 2014.months ended September 30, 2015.(d)The offsetting impacts from foreign currency hedging instruments are recorded in "Other Income (Expense)-net."(e)The increase for the nine month period was due to unfavorable accrual adjustments in 2014 based on Ofgem's final decision on the DPCR4 line loss incentives and penalties. See Note 6 to the Financial Statements for additional information.
Certain Operating Revenues
The following2016 compared with 2015. Lower Earnings from Ongoing Operations are projected in 2016 compared with 2015 due to the unfavorable impact of lower GBP exchange rates, higher interest expense and depreciation, partially offset by higher revenues and lower operation and maintenance expense, including pension expense.
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| Operating Revenues | $ | 539 | $ | 519 | $ | 20 | $ | 1,619 | $ | 1,625 | $ | (6 | ) | ||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Operation | |||||||||||||||||||||||
| Energy purchases | 129 | 154 | (25 | ) | 414 | 519 | (105 | ) | |||||||||||||||
| Energy purchases from affiliate | — | — | — | — | 14 | (14 | ) | ||||||||||||||||
| Other operation and maintenance | 144 | 162 | (18 | ) | 431 | 435 | (4 | ) | |||||||||||||||
| Depreciation | 64 | 55 | 9 | 185 | 158 | 27 | |||||||||||||||||
| Taxes, other than income | 26 | 27 | (1 | ) | 79 | 87 | (8 | ) | |||||||||||||||
| Total Operating Expenses | 363 | 398 | (35 | ) | 1,109 | 1,213 | (104 | ) | |||||||||||||||
| Other Income (Expense) - net | 4 | 1 | 3 | 12 | 5 | 7 | |||||||||||||||||
| Interest Expense | 32 | 32 | — | 97 | 96 | 1 | |||||||||||||||||
| Income Taxes | 58 | 35 | 23 | 162 | 130 | 32 | |||||||||||||||||
| Net Income | $ | 90 | $ | 55 | $ | 35 | $ | 263 | $ | 191 | $ | 72 | |||||||||||
90
| Three Months | Nine Months | ||||||
| Fuel | $ | (12) | $ | (53) | |||
| Energy purchases | 4 | (7) | |||||
| Other Operation and Maintenance | |||||||
| The increase (decrease) in other operation and maintenance for the periods ended September 30, 2015 compared with 2014 was due to: | |||||||
| Three Months | Nine Months | ||||||
| Domestic: | |||||||
| Cane Run retired units | $ | 11 | |||||
| Pension | $ | 2 | 11 | ||||
| Bad Debts | 6 | 10 | |||||
| Act 129 | 5 | 8 | |||||
| Other | (1) | 7 | |||||
| U.K.: | |||||||
| Network maintenance | (15) | ||||||
| Foreign currency exchange rates (a) | (9) | (26) | |||||
| National Grid exit charges | 6 | 10 | |||||
| Pension | (3) | (10) | |||||
| Engineering management | 3 | 12 | |||||
| Other | 6 | 5 | |||||
| Total | $ | 15 | $ | 23 | |||
| Three Months | Nine Months | ||||||
| Distribution Price (a) | $ | 23 | $ | 97 | |||
| Distribution volume | 11 | (23 | ) | ||||
| PLR (b) | (21 | ) | (125 | ) | |||
| Transmission Formula Rate | 12 | 47 | |||||
| Other | (5 | ) | (2 | ) | |||
| Total | $ | 20 | $ | (6 | ) | ||
| (a) |
Depreciation
Depreciation
| (b) | Decreases due to lower recoveries of energy purchases as described below. |
| Three Months | Nine Months | ||||||
| Corporate service costs | $ | 1 | $ | 10 | |||
| Contractor-related expenses | 6 | 12 | |||||
| Vegetation management | (5 | ) | 1 | ||||
| Storm costs | 1 | 7 | |||||
| Payroll-related costs | (7 | ) | (19 | ) | |||
| Act 129 | (7 | ) | (14 | ) | |||
| Universal service programs | — | 3 | |||||
| Bad Debts | (5 | ) | (6 | ) | |||
| Other | (2 | ) | 2 | ||||
| Total | $ | (18 | ) | $ | (4 | ) | |
Other retirements.
OtherTaxes
| Interest Expense | |||||||
| The increase (decrease) in interest expense for the periods ended September 30, 2015 compared with 2014 was due to: | |||||||
| Three Months | Nine Months | ||||||
| Long-term debt interest expense (a) | $ | 10 | $ | 38 | |||
| Loss on extinguishment of debt (b) | (9) | ||||||
| Capitalized interest and debt component of AFUDC | 6 | 4 | |||||
| Foreign currency exchange rates (c) | (8) | (25) | |||||
| Total | $ | 8 | $ | 8 | |||
91
| Three Months | Nine Months | ||||||
| Change in pre-tax income at current period tax rates | $ | (14) | $ | 32 | |||
| Valuation allowance adjustments (a) | (3) | (41) | |||||
| Federal and state tax reserve adjustments (b) | (9) | (21) | |||||
| U.S. income tax on foreign earnings net of foreign tax credit (c) | (26) | (48) | |||||
| Foreign tax return adjustments | (4) | ||||||
| Intercompany interest on U.K. financing entities | (4) | (11) | |||||
| Reduction in U.K. income tax rates | (2) | (8) | |||||
| Other | 1 | (1) | |||||
| Total | $ | (57) | $ | (102) | |||
| Three Months | Nine Months | ||||||
| Change in pre-tax income at current period tax rates | $ | 22 | $ | 43 | |||
| Stock-based compensation (a) | — | (7 | ) | ||||
| Other | 1 | (4 | ) | ||||
| Total | $ | 23 | $ | 32 | |||
| (a) | During the nine months ended September 30, |
Income (Loss)
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Net Income | $ | 90 | $ | 55 | $ | 263 | $ | 191 | |||||||
| Special item, gains (losses), after-tax (a) | — | — | — | — | |||||||||||
| (a) | There are no items management considers special for the periods presented. |
Income (Loss) from Discontinued Operations (net of income taxes) includes the results of operations of PPL Energy Supply, which was spun off from PPL on June 1, 2015additional capital investments, and substantially represents PPL's former Supply segment. See "Discontinued Operations" in Note 8 to the Financial Statements for additional information.
PPL Electric: lower other operation and maintenance expense, partially offset by higher depreciation.
| Earnings | |||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||
| Net Income | $ | 55 | $ | 57 | $ | 191 | $ | 194 | |||||
| Special item, gains (losses), after-tax | 2 | (2) | |||||||||||
Excluding a special item, earnings decreasedincreased for the nine month period in 20152016 compared with 20142015 primarily due to higher depreciation expense, higher operation and maintenance expensebase electricity rates for distribution effective January 1, 2016, and higher income tax expense,transmission margins, partially offset by higher transmission and distribution margins.
depreciation.
| Three Months | Nine Months | |||||
| Pennsylvania Gross Delivery Margins | $ | 30 | $ | 56 | ||
| Other operation and maintenance | (19) | (25) | ||||
| Depreciation | (8) | (21) | ||||
| Interest expense | 1 | (5) | ||||
| Taxes other than income | (2) | (1) | ||||
| Other income (expense) - net | (3) | (1) | ||||
| Income taxes | 1 | (8) | ||||
| Special item, after-tax (a) | (2) | 2 | ||||
| Total | $ | (2) | $ | (3) | ||
92
| Three Months | Nine Months | ||||||
| Pennsylvania Gross Delivery Margins | $ | 52 | $ | 126 | |||
| Other operation and maintenance | 11 | (3 | ) | ||||
| Depreciation | (9 | ) | (27 | ) | |||
| Taxes, other than income | 1 | 2 | |||||
| Other Income (Expense) - net | 3 | 7 | |||||
| Interest Expense | — | (1 | ) | ||||
| Income Taxes | (23 | ) | (32 | ) | |||
| Net Income | $ | 35 | $ | 72 | |||
| 2015 Three Months | 2014 Three Months | ||||||||||||||||||||
| PA Gross | PA Gross | ||||||||||||||||||||
| Delivery | Operating | Delivery | Operating | ||||||||||||||||||
| Margins | Other (a) | Income (b) | Margins | Other (a) | Income (b) | ||||||||||||||||
| Operating Revenues | $ | 519 | $ | 519 | $ | 477 | $ | 477 | |||||||||||||
| Operating Expenses | |||||||||||||||||||||
| Energy purchases | 154 | 154 | 128 | 128 | |||||||||||||||||
| Energy purchases from affiliate | 20 | 20 | |||||||||||||||||||
| Other operation and maintenance | 31 | $ | 131 | 162 | 25 | $ | 108 | 133 | |||||||||||||
| Depreciation | 55 | 55 | 47 | 47 | |||||||||||||||||
| Taxes, other than income | 25 | 2 | 27 | 25 | 25 | ||||||||||||||||
| Total Operating Expenses | 210 | 188 | 398 | 198 | 155 | 353 | |||||||||||||||
| Total | $ | 309 | $ | (188) | $ | 121 | $ | 279 | $ | (155) | $ | 124 | |||||||||
| 2015 Nine Months | 2014 Nine Months | ||||||||||||||||||||
| PA Gross | PA Gross | ||||||||||||||||||||
| Delivery | Operating | Delivery | Operating | ||||||||||||||||||
| Margins | Other (a) | Income (b) | Margins | Other (a) | Income (b) | ||||||||||||||||
| Operating Revenues | $ | 1,625 | $ | 1,625 | $ | 1,518 | $ | 1,518 | |||||||||||||
| Operating Expenses | |||||||||||||||||||||
| Energy purchases | 519 | 519 | 431 | 431 | |||||||||||||||||
| Energy purchases from affiliate | 14 | 14 | 68 | 68 | |||||||||||||||||
| Other operation and maintenance | 84 | $ | 351 | 435 | 74 | $ | 328 | 402 | |||||||||||||
| Depreciation | 158 | 158 | 137 | 137 | |||||||||||||||||
| Taxes, other than income | 81 | 6 | 87 | 74 | 6 | 80 | |||||||||||||||
| Total Operating Expenses | 698 | 515 | 1,213 | 647 | 471 | 1,118 | |||||||||||||||
| Total | $ | 927 | $ | (515) | $ | 412 | $ | 871 | $ | (471) | $ | 400 | |||||||||
| 2016 Three Months | 2015 Three Months | ||||||||||||||||||||||
PA Gross Delivery Margins | Other (a) | Operating Income (b) | PA Gross Delivery Margins | Other (a) | Operating Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 539 | $ | — | $ | 539 | $ | 519 | $ | — | $ | 519 | |||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Energy purchases | 129 | — | 129 | 154 | — | 154 | |||||||||||||||||
| Other operation and maintenance | 24 | 120 | 144 | 31 | 131 | 162 | |||||||||||||||||
| Depreciation | — | 64 | 64 | — | 55 | 55 | |||||||||||||||||
| Taxes, other than income | 25 | 1 | 26 | 25 | 2 | 27 | |||||||||||||||||
| Total Operating Expenses | 178 | 185 | 363 | 210 | 188 | 398 | |||||||||||||||||
| Total | $ | 361 | $ | (185 | ) | $ | 176 | $ | 309 | $ | (188 | ) | $ | 121 | |||||||||
| 2016 Nine Months | 2015 Nine Months | ||||||||||||||||||||||
PA Gross Delivery Margins | Other (a) | Operating Income (b) | PA Gross Delivery Margins | Other (a) | Operating Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 1,619 | $ | — | $ | 1,619 | $ | 1,625 | $ | — | $ | 1,625 | |||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Energy purchases | 414 | — | 414 | 519 | — | 519 | |||||||||||||||||
| Energy purchases from affiliate | — | — | — | 14 | — | 14 | |||||||||||||||||
| Other operation and maintenance | 77 | 354 | 431 | 84 | 351 | 435 | |||||||||||||||||
| Depreciation | — | 185 | 185 | — | 158 | 158 | |||||||||||||||||
| Taxes, other than income | 75 | 4 | 79 | 81 | 6 | 87 | |||||||||||||||||
| Total Operating Expenses | 566 | 543 | 1,109 | 698 | 515 | 1,213 | |||||||||||||||||
| Total | $ | 1,053 | $ | (543 | ) | $ | 510 | $ | 927 | $ | (515 | ) | $ | 412 | |||||||||
| (a) | Represents amounts excluded from Margins. |
| (b) | As reported on the Statements of Income. |
Certain Operating RevenuesEarnings and Expenses Included in "Margins"
The following Margins
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| Operating Revenues | $ | 835 | $ | 801 | $ | 34 | $ | 2,382 | $ | 2,414 | $ | (32 | ) | ||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Operation | |||||||||||||||||||||||
| Fuel | 227 | 228 | (1 | ) | 607 | 695 | (88 | ) | |||||||||||||||
| Energy purchases | 24 | 23 | 1 | 118 | 143 | (25 | ) | ||||||||||||||||
| Other operation and maintenance | 197 | 202 | (5 | ) | 603 | 625 | (22 | ) | |||||||||||||||
| Depreciation | 102 | 97 | 5 | 301 | 286 | 15 | |||||||||||||||||
| Taxes, other than income | 16 | 14 | 2 | 46 | 43 | 3 | |||||||||||||||||
| Total Operating Expenses | 566 | 564 | 2 | 1,675 | 1,792 | (117 | ) | ||||||||||||||||
| Other Income (Expense) - net | (3 | ) | (1 | ) | (2 | ) | (9 | ) | (3 | ) | (6 | ) | |||||||||||
| Interest Expense | 50 | 43 | 7 | 147 | 127 | 20 | |||||||||||||||||
| Interest Expense with Affiliate | 4 | — | 4 | 12 | 1 | 11 | |||||||||||||||||
| Income Taxes | 79 | 73 | 6 | 202 | 194 | 8 | |||||||||||||||||
| Net Income | $ | 133 | $ | 120 | $ | 13 | $ | 337 | $ | 297 | $ | 40 | |||||||||||
| Three Months | Nine Months | ||||||
| Operating revenues | $ | 42 | $ | 107 | |||
| Energy purchases | 26 | 88 | |||||
| Energy purchases from affiliate | (20) | (54) | |||||
| Three Months | Nine Months | ||||||
| Base rates | $ | — | $ | 68 | |||
| Volumes | 32 | (38 | ) | ||||
| Fuel and other energy prices (a) | (11 | ) | (85 | ) | |||
| ECR | 8 | 30 | |||||
| Other | 5 | (7 | ) | ||||
| Total | $ | 34 | $ | (32 | ) | ||
| (a) | The decrease for the nine month period was due to lower recoveries of fuel and energy purchases due to lower commodity costs as described below. |
| Three Months | Nine Months | ||||||
| Coal plant operations and maintenance (a) | $ | 2 | $ | (12 | ) | ||
| Pension (b) | (2 | ) | (10 | ) | |||
| Other | (5 | ) | — | ||||
| Total | $ | (5 | ) | $ | (22 | ) | |
| (a) | The |
| (b) | The decrease for the nine month period was primarily due to higher discount rates and deferred amortization of actuarial losses. |
93
| Three Months | Nine Months | |||||
| Vegetation management | $ | 4 | $ | 2 | ||
| Storm costs | (4) | (12) | ||||
| Act 129 | 5 | 8 | ||||
| Bad debts | 8 | 14 | ||||
| Corporate service costs | 10 | 19 | ||||
| Bargaining unit one-time voluntary retirement benefits | 3 | (3) | ||||
| Other | 3 | 5 | ||||
| Total | $ | 29 | $ | 33 | ||
Depreciation
Taxes, Other Than Income
Taxes, other than incomeperiods ended September 30, 2016 compared with 2015 was due to:
| Three Months | Nine Months | ||||||
| Change in pre-tax income at current period tax rates | $ | 7 | $ | 19 | |||
| Certain valuation allowances (a) | — | (8 | ) | ||||
| Other | (1 | ) | (3 | ) | |||
| Total | $ | 6 | $ | 8 | |||
| (a) | The decrease for the nine month period represents a valuation allowance, established in 2015, against tax credits expiring in 2016 and 2017 that are more likely than not to expire before being utilized. |
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Net Income | $ | 133 | $ | 120 | $ | 337 | $ | 297 | |||||||
| Special items, gains (losses), after-tax | — | — | — | (8 | ) | ||||||||||
Interest Expense
Interest expense increasedpartially offset by $5 million for the nine months ended September 30, 2015 compared with 2014, primarily due to the issuance of first mortgage bonds in June 2014.
| Income Taxes | ||||||
| The increase in income taxes for the periods ended September 30, 2015 compared with 2014 was due to: | ||||||
| Three Months | Nine Months | |||||
| Change in pre-tax income at current period tax rates | $ | (1) | $ | 6 | ||
| Federal and state tax reserve adjustments | 3 | |||||
| Other | (1) | |||||
| Total | $ | (2) | $ | 9 | ||
See Note 5to the Financial Statements for additional information.
LKE: Earnings, Margins and Statement of Income Analysis
| Earnings | |||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||
| Net Income | $ | 120 | $ | 91 | $ | 297 | $ | 271 | |||||
| Special items, gains (losses), after-tax | (1) | (8) | |||||||||||
higher interest expense.
lower sales volumes driven by milder weather in the first quarter of 2016.
94
| Three Months | Nine Months | |||||
| Margins | $ | 50 | $ | 75 | ||
| Other operation and maintenance | (4) | (14) | ||||
| Depreciation | 1 | (4) | ||||
| Taxes, other than income | (2) | |||||
| Other income (expense)- net | 3 | |||||
| Interest expense | (1) | (3) | ||||
| Income taxes | (18) | (21) | ||||
| Special items, after-tax (a) | 1 | (8) | ||||
| Total | $ | 29 | $ | 26 | ||
| Three Months | Nine Months | ||||||
| Margins | $ | 27 | $ | 63 | |||
| Other operation and maintenance | 10 | 26 | |||||
| Depreciation | (2 | ) | (1 | ) | |||
| Taxes, other than income | (3 | ) | (3 | ) | |||
| Other Income (Expense) - net | (2 | ) | (6 | ) | |||
| Interest Expense | (11 | ) | (31 | ) | |||
| Income Taxes | (6 | ) | (16 | ) | |||
| Special items, gains (losses), after-tax | — | 8 | |||||
| Net Income | $ | 13 | $ | 40 | |||
| (a) | See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated Segment" for details of the special |
| 2015 Three Months | 2014 Three Months | ||||||||||||||||||||||
| Operating | Operating | ||||||||||||||||||||||
| Margins | Other (a) | Income (b) | Margins | Other (a) | Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 801 | $ | 801 | $ | 753 | $ | 753 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 228 | 228 | 240 | 240 | |||||||||||||||||||
| Energy purchases | 23 | 23 | 24 | 24 | |||||||||||||||||||
| Other operation and maintenance | 28 | $ | 174 | 202 | 27 | $ | 170 | 197 | |||||||||||||||
| Depreciation | 11 | 86 | 97 | 2 | 87 | 89 | |||||||||||||||||
| Taxes, other than income | 1 | 13 | 14 | 13 | 13 | ||||||||||||||||||
| Total Operating Expenses | 291 | 273 | 564 | 293 | 270 | 563 | |||||||||||||||||
| Total | $ | 510 | $ | (273) | $ | 237 | $ | 460 | $ | (270) | $ | 190 | |||||||||||
| 2015 Nine Months | 2014 Nine Months | ||||||||||||||||||||||
| Operating | Operating | ||||||||||||||||||||||
| Margins | Other (a) | Income (b) | Margins | Other (a) | Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 2,414 | $ | 2,414 | $ | 2,409 | $ | 2,409 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 695 | 695 | 748 | 748 | |||||||||||||||||||
| Energy purchases | 143 | 143 | 184 | 184 | |||||||||||||||||||
| Other operation and maintenance | 77 | $ | 548 | 625 | 75 | $ | 534 | 609 | |||||||||||||||
| Depreciation | 26 | 260 | 286 | 6 | 256 | 262 | |||||||||||||||||
| Taxes, other than income | 3 | 40 | 43 | 1 | 38 | 39 | |||||||||||||||||
| Total Operating Expenses | 944 | 848 | 1,792 | 1,014 | 828 | 1,842 | |||||||||||||||||
| Total | $ | 1,470 | $ | (848) | $ | 622 | $ | 1,395 | $ | (828) | $ | 567 | |||||||||||
| 2016 Three Months | 2015 Three Months | ||||||||||||||||||||||
| Margins | Other (a) | Operating Income (b) | Margins | Other (a) | Operating Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 835 | $ | — | $ | 835 | $ | 801 | $ | — | $ | 801 | |||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 227 | — | 227 | 228 | — | 228 | |||||||||||||||||
| Energy purchases | 24 | — | 24 | 23 | — | 23 | |||||||||||||||||
| Other operation and maintenance | 33 | 164 | 197 | 28 | 174 | 202 | |||||||||||||||||
| Depreciation | 14 | 88 | 102 | 11 | 86 | 97 | |||||||||||||||||
| Taxes, other than income | — | 16 | 16 | 1 | 13 | 14 | |||||||||||||||||
| Total Operating Expenses | 298 | 268 | 566 | 291 | 273 | 564 | |||||||||||||||||
| Total | $ | 537 | $ | (268 | ) | $ | 269 | $ | 510 | $ | (273 | ) | $ | 237 | |||||||||
| 2016 Nine Months | 2015 Nine Months | ||||||||||||||||||||||
| Margins | Other (a) | Operating Income (b) | Margins | Other (a) | Operating Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 2,382 | $ | — | $ | 2,382 | $ | 2,414 | $ | — | $ | 2,414 | |||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 607 | — | 607 | 695 | — | 695 | |||||||||||||||||
| Energy purchases | 118 | — | 118 | 143 | — | 143 | |||||||||||||||||
| Other operation and maintenance | 81 | 522 | 603 | 77 | 548 | 625 | |||||||||||||||||
| Depreciation | 40 | 261 | 301 | 26 | 260 | 286 | |||||||||||||||||
| Taxes, other than income | 3 | 43 | 46 | 3 | 40 | 43 | |||||||||||||||||
| Total Operating Expenses | 849 | 826 | 1,675 | 944 | 848 | 1,792 | |||||||||||||||||
| Total | $ | 1,533 | $ | (826 | ) | $ | 707 | $ | 1,470 | $ | (848 | ) | $ | 622 | |||||||||
| (a) | Represents amounts excluded from Margins. |
| (b) | As reported on the Statements of Income. |
Certain Operating RevenuesEarnings and Expenses included in "Margins"
The following Margins
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||
| Retail and wholesale | $ | 366 | $ | 349 | $ | 17 | $ | 1,058 | $ | 1,089 | $ | (31 | ) | ||||||||||
| Electric revenue from affiliate | 2 | 2 | — | 19 | 32 | (13 | ) | ||||||||||||||||
| Total Operating Revenues | 368 | 351 | 17 | 1,077 | 1,121 | (44 | ) | ||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Operation | |||||||||||||||||||||||
| Fuel | 86 | 82 | 4 | 233 | 267 | (34 | ) | ||||||||||||||||
| Energy purchases | 19 | 18 | 1 | 104 | 129 | (25 | ) | ||||||||||||||||
| Energy purchases from affiliate | 5 | 9 | (4 | ) | 10 | 17 | (7 | ) | |||||||||||||||
| Other operation and maintenance | 85 | 87 | (2 | ) | 264 | 286 | (22 | ) | |||||||||||||||
| Depreciation | 43 | 40 | 3 | 126 | 122 | 4 | |||||||||||||||||
| Taxes, other than income | 9 | 7 | 2 | 24 | 21 | 3 | |||||||||||||||||
| Total Operating Expenses | 247 | 243 | 4 | 761 | 842 | (81 | ) | ||||||||||||||||
| Other Income (Expense) - net | (1 | ) | (1 | ) | — | (6 | ) | (3 | ) | (3 | ) | ||||||||||||
| Interest Expense | 18 | 13 | 5 | 53 | 39 | 14 | |||||||||||||||||
| Income Taxes | 39 | 36 | 3 | 98 | 91 | 7 | |||||||||||||||||
| Net Income | $ | 63 | $ | 58 | $ | 5 | $ | 159 | $ | 146 | $ | 13 | |||||||||||
| Three Months | Nine Months | ||||||
| Base rates | $ | — | $ | 4 | |||
| Volumes | 15 | (30 | ) | ||||
| Fuel and other energy prices (a) | (4 | ) | (36 | ) | |||
| ECR | 5 | 21 | |||||
| Other | 1 | (3 | ) | ||||
| Total | $ | 17 | $ | (44 | ) | ||
| (a) | The decrease for the three and nine month periods was due to lower recoveries of fuel and energy purchases due to lower commodity costs, as described below. |
95
| Three Months | Nine Months | ||||||
| Coal plant operations and maintenance (a) | $ | (1 | ) | $ | (13 | ) | |
| Pension (b) | — | (6 | ) | ||||
| Other | (1 | ) | (3 | ) | |||
| Total | $ | (2 | ) | $ | (22 | ) | |
| (a) | The decrease for the nine month period was primarily due to a reduction of |
| (b) | The decrease for the nine month period was primarily due to higher discount rates and deferred amortization of actuarial losses. |
| Three Months | Nine Months | |||||
| Operating revenues | $ | 48 | $ | 5 | ||
| Fuel | (12) | (53) | ||||
| Energy purchases | (1) | (41) | ||||
| Other Operation and Maintenance | ||||||
| The increase in other operation and maintenance expense for the periods ended September 30, 2015 compared with 2014 was due to: | ||||||
| Three Months | Nine Months | |||||
| Cane Run retired units | $ | 11 | ||||
| Pension | $ | 2 | 11 | |||
| Storm costs | 3 | (7) | ||||
| Bad debts | (2) | (4) | ||||
| Coal plant operations | (1) | (3) | ||||
| Other | 3 | 8 | ||||
| Total | $ | 5 | $ | 16 | ||
Depreciation
Depreciation
| Income Taxes | |||||||
| The increase in income taxes for the periods ended September 30, 2015, compared with 2014, was due to: | |||||||
| Three Months | Nine Months | ||||||
| Higher pre-tax book income at current period tax rates | $ | 18 | $ | 21 | |||
| Certain Valuation Allowances | 8 | ||||||
| Total | $ | 18 | $ | 29 | |||
LG&E: Earnings, Margins and Statementretire the same amount of Income Analysis
| Earnings | |||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||
| Net Income | $ | 58 | $ | 46 | $ | 146 | $ | 133 | |||||
First Mortgage Bonds in November 2015.
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Net Income | $ | 63 | $ | 58 | $ | 159 | $ | 146 | |||||||
| Special items, gains (losses), after-tax (a) | — | — | — | — | |||||||||||
| (a) | There are no items management considers special for the periods presented. |
investments and lower other operation and maintenance expense, partially offset by higher interest expense.
| Three Months | Nine Months | |||||
| Margins | $ | 13 | $ | 28 | ||
| Other operation and maintenance | 6 | (4) | ||||
| Depreciation | 3 | 4 | ||||
| Other income (expense) - net | (1) | |||||
| Interest expense | (2) | |||||
| Income taxes | (9) | (13) | ||||
| Total | $ | 12 | $ | 13 | ||
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
96
and the underlying drivers of the changes between periods. Within PPL's discussion, LG&E's Margins are included in "Kentucky Gross Margins."
The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.
| 2015 Three Months | 2014 Three Months | ||||||||||||||||||||||
| Operating | Operating | ||||||||||||||||||||||
| Margins | Other (a) | Income (b) | Margins | Other (a) | Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 351 | $ | 351 | $ | 347 | $ | 347 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 82 | 82 | 99 | 99 | |||||||||||||||||||
| Energy purchases, including affiliate | 27 | 27 | 23 | 23 | |||||||||||||||||||
| Other operation and maintenance | 11 | $ | 76 | 87 | 12 | $ | 82 | 94 | |||||||||||||||
| Depreciation | 5 | 35 | 40 | 1 | 38 | 39 | |||||||||||||||||
| Taxes, other than income | 1 | 6 | 7 | 6 | 6 | ||||||||||||||||||
| Total Operating Expenses | 126 | 117 | 243 | 135 | 126 | 261 | |||||||||||||||||
| Total | $ | 225 | $ | (117) | $ | 108 | $ | 212 | $ | (126) | $ | 86 | |||||||||||
| 2015 Nine Months | 2014 Nine Months | ||||||||||||||||||||||
| Operating | Operating | ||||||||||||||||||||||
| Margins | Other (a) | Income (b) | Margins | Other (a) | Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 1,121 | $ | 1,121 | $ | 1,170 | $ | 1,170 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 267 | 267 | 320 | 320 | |||||||||||||||||||
| Energy purchases, including affiliate | 146 | 146 | 178 | 178 | |||||||||||||||||||
| Other operation and maintenance | 33 | $ | 253 | 286 | 37 | $ | 249 | 286 | |||||||||||||||
| Depreciation | 12 | 110 | 122 | 2 | 114 | 116 | |||||||||||||||||
| Taxes, other than income | 2 | 19 | 21 | 19 | 19 | ||||||||||||||||||
| Total Operating Expenses | 460 | 382 | 842 | 537 | 382 | 919 | |||||||||||||||||
| Total | $ | 661 | $ | (382) | $ | 279 | $ | 633 | $ | (382) | $ | 251 | |||||||||||
Statement of Income Analysis --
Certain Operating Revenues and Expenses included in "Margins"
The following Statement of Income line items and their related increase (decrease) during the periods ended September 30, 2015 compared with 2014 are included above within "Margins" and are not discussed separately.
| Three Months | Nine Months | ||||||
| Retail and wholesale | $ | 15 | $ | (7) | |||
| Electric revenue from affiliate | (11) | (42) | |||||
| Fuel | (17) | (53) | |||||
| Energy purchases | (2) | (38) | |||||
| Energy purchases from affiliate | 6 | 6 | |||||
| Three Months | Nine Months | |||||
| Cane Run retired units | $ | 11 | ||||
| Pension | 5 | |||||
| Storm costs | $ | 1 | (4) | |||
| Coal plant operations | (2) | (5) | ||||
| Bad debts | (1) | (2) | ||||
| Other | (5) | (5) | ||||
| Total | $ | (7) | $ | |||
| Three Months | Nine Months | ||||||
| Margins | $ | 12 | $ | 15 | |||
| Other operation and maintenance | 4 | 21 | |||||
| Depreciation | — | 4 | |||||
| Taxes, other than income | (3 | ) | (3 | ) | |||
| Other Income (Expense) - net | — | (3 | ) | ||||
| Interest Expense | (5 | ) | (14 | ) | |||
| Income Taxes | (3 | ) | (7 | ) | |||
| Net Income | $ | 5 | $ | 13 | |||
97
Depreciation
Depreciation increased by $6 million for the nine months ended September 30, 2015 compared with 2014 primarily due to additions to PP&E, net.
Income Taxes
Income taxes increased by $9 million and $13 million for the three and nine months ended September 30, 2015 compared with 2014 primarily due to the change in pre-tax income at current period tax rates.
KU: Earnings, Margins and Statement of Income Analysis
| Earnings | |||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2015 | 2014 | 2015 | 2014 | ||||||||||
| Net Income | $ | 72 | $ | 56 | $ | 189 | $ | 173 | |||||
| Special item, gain (loss), after-tax | (1) | ||||||||||||
Excluding a special item, earnings increased for the three and nine month periods in 2015 compared with 2014 primarily due to higher returns on additional environmental capital investments and higher base electricity rates effective July 1, 2015, partially offset by higher other operation and maintenance expense.
The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins and a certain item that management considers special on separate lines within the table and not in their respective Statement of Income line items.
| Three Months | Nine Months | |||||
| Margins | $ | 37 | $ | 47 | ||
| Other operation and maintenance | (8) | (13) | ||||
| Depreciation | (3) | (9) | ||||
| Taxes, other than income | (2) | |||||
| Other income (expense)- net | 2 | |||||
| Interest expense | (1) | |||||
| Income taxes | (10) | (9) | ||||
| Special item, after-tax | 1 | |||||
| Total | $ | 16 | $ | 16 | ||
Margins
| 2015 Three Months | 2014 Three Months | ||||||||||||||||||||||
| Operating | Operating | ||||||||||||||||||||||
| Margins | Other (a) | Income (b) | Margins | Other (a) | Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 461 | $ | 461 | $ | 422 | $ | 422 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 146 | 146 | 141 | 141 | |||||||||||||||||||
| Energy purchases, including affiliate | 7 | 7 | 17 | 17 | |||||||||||||||||||
| Other operation and maintenance | 17 | $ | 91 | 108 | 14 | $ | 83 | 97 | |||||||||||||||
| Depreciation | 6 | 51 | 57 | 2 | 48 | 50 | |||||||||||||||||
| Taxes, other than income | 7 | 7 | 7 | 7 | |||||||||||||||||||
| Total Operating Expenses | 176 | 149 | 325 | 174 | 138 | 312 | |||||||||||||||||
| Total | $ | 285 | $ | (149) | $ | 136 | $ | 248 | $ | (138) | $ | 110 | |||||||||||
98
| 2015 Nine Months | 2014 Nine Months | ||||||||||||||||||||||
| Operating | Operating | ||||||||||||||||||||||
| Margins | Other (a) | Income (b) | Margins | Other (a) | Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 1,342 | $ | 1,342 | $ | 1,324 | $ | 1,324 | |||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 428 | 428 | 428 | 428 | |||||||||||||||||||
| Energy purchases, including affiliate | 46 | 46 | 91 | 91 | |||||||||||||||||||
| Other operation and maintenance | 44 | $ | 277 | 321 | 38 | $ | 264 | 302 | |||||||||||||||
| Depreciation | 14 | 150 | 164 | 4 | 141 | 145 | |||||||||||||||||
| Taxes, other than income | 1 | 21 | 22 | 1 | 19 | 20 | |||||||||||||||||
| Total Operating Expenses | 533 | 448 | 981 | 562 | 424 | 986 | |||||||||||||||||
| Total | $ | 809 | $ | (448) | $ | 361 | $ | 762 | $ | (424) | $ | 338 | |||||||||||
| 2016 Three Months | 2015 Three Months | ||||||||||||||||||||||
| Margins | Other (a) | Operating Income (b) | Margins | Other (a) | Operating Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 368 | $ | — | $ | 368 | $ | 351 | $ | — | $ | 351 | |||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 86 | — | 86 | 82 | — | 82 | |||||||||||||||||
| Energy purchases, including affiliate | 24 | — | 24 | 27 | — | 27 | |||||||||||||||||
| Other operation and maintenance | 13 | 72 | 85 | 11 | 76 | 87 | |||||||||||||||||
| Depreciation | 8 | 35 | 43 | 5 | 35 | 40 | |||||||||||||||||
| Taxes, other than income | — | 9 | 9 | 1 | 6 | 7 | |||||||||||||||||
| Total Operating Expenses | 131 | 116 | 247 | 126 | 117 | 243 | |||||||||||||||||
| Total | $ | 237 | $ | (116 | ) | $ | 121 | $ | 225 | $ | (117 | ) | $ | 108 | |||||||||
| 2016 Nine Months | 2015 Nine Months | ||||||||||||||||||||||
| Margins | Other (a) | Operating Income (b) | Margins | Other (a) | Operating Income (b) | ||||||||||||||||||
| Operating Revenues | 1,077 | $ | — | $ | 1,077 | $ | 1,121 | $ | — | $ | 1,121 | ||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 233 | — | 233 | 267 | — | 267 | |||||||||||||||||
| Energy purchases, including affiliate | 114 | — | 114 | 146 | — | 146 | |||||||||||||||||
| Other operation and maintenance | 32 | 232 | 264 | 33 | 253 | 286 | |||||||||||||||||
| Depreciation | 20 | 106 | 126 | 12 | 110 | 122 | |||||||||||||||||
| Taxes, other than income | 2 | 22 | 24 | 2 | 19 | 21 | |||||||||||||||||
| Total Operating Expenses | 401 | 360 | 761 | 460 | 382 | 842 | |||||||||||||||||
| Total | 676 | $ | (360 | ) | $ | 316 | $ | 661 | $ | (382 | ) | $ | 279 | ||||||||||
| (a) | Represents amounts excluded from Margins. |
| (b) | As reported on the Statements of Income. |
Certain Operating RevenuesEarnings and Expenses included in "Margins"
The following Margins
| Three Months | Nine Months | ||||||||||||||||||||||
| 2016 | 2015 | $ Change | 2016 | 2015 | $ Change | ||||||||||||||||||
| Operating Revenues | |||||||||||||||||||||||
| Retail and wholesale | $ | 469 | $ | 452 | $ | 17 | $ | 1,324 | $ | 1,325 | $ | (1 | ) | ||||||||||
| Electric revenue from affiliate | 5 | 9 | (4 | ) | 10 | 17 | (7 | ) | |||||||||||||||
| Total Operating Revenues | 474 | 461 | 13 | 1,334 | 1,342 | (8 | ) | ||||||||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Operation | |||||||||||||||||||||||
| Fuel | 141 | 146 | (5 | ) | 374 | 428 | (54 | ) | |||||||||||||||
| Energy purchases | 5 | 5 | — | 14 | 14 | — | |||||||||||||||||
| Energy purchases from affiliate | 2 | 2 | — | 19 | 32 | (13 | ) | ||||||||||||||||
| Other operation and maintenance | 107 | 108 | (1 | ) | 320 | 321 | (1 | ) | |||||||||||||||
| Depreciation | 59 | 57 | 2 | 175 | 164 | 11 | |||||||||||||||||
| Taxes, other than income | 7 | 7 | — | 22 | 22 | — | |||||||||||||||||
| Total Operating Expenses | 321 | 325 | (4 | ) | 924 | 981 | (57 | ) | |||||||||||||||
| Other Income (Expense) - net | (3 | ) | — | (3 | ) | (4 | ) | 1 | (5 | ) | |||||||||||||
| Interest Expense | 24 | 20 | 4 | 71 | 58 | 13 | |||||||||||||||||
| Income Taxes | 48 | 44 | 4 | 128 | 115 | 13 | |||||||||||||||||
| Net Income | $ | 78 | $ | 72 | $ | 6 | $ | 207 | $ | 189 | $ | 18 | |||||||||||
| Three Months | Nine Months | ||||||
| Retail and wholesale | $ | 33 | $ | 12 | |||
| Electric revenue from affiliate | 6 | 6 | |||||
| Fuel | 5 | ||||||
| Energy purchases | 1 | (3) | |||||
| Energy purchases from affiliate | (11) | (42) | |||||
| Other Operation and Maintenance | ||||||
| The increase in other operation and maintenance expense for the periods ended September 30, 2015 compared with 2014 was due to: | ||||||
| Three Months | Nine Months | |||||
| Pension | $ | 3 | $ | 9 | ||
| Cane Run 7 operations | 2 | 3 | ||||
| Storm costs | 2 | (3) | ||||
| Coal plant operations | 1 | 2 | ||||
| Other | 3 | 8 | ||||
| Total | $ | 11 | $ | 19 | ||
Depreciation
Depreciation increased by $7 million and $192015 was due to:
| Three Months | Nine Months | ||||||
| Base rates | $ | — | $ | 64 | |||
| Volumes | 13 | (27 | ) | ||||
| Fuel and other energy prices (a) | (6 | ) | (50 | ) | |||
| ECR | 3 | 8 | |||||
| Other | 3 | (3 | ) | ||||
| Total | $ | 13 | $ | (8 | ) | ||
| (a) | The decrease for the three and nine month periods was due to lower recoveries of fuel and energy purchases due to lower commodity costs as described below. |
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Net Income | $ | 78 | $ | 72 | $ | 207 | $ | 189 | |||||||
| Special items, gains (losses), after-tax (a) | — | — | — | — | |||||||||||
| (a) | There are no items management considers special for the periods presented. |
Income Taxes
Income taxeshigher sales volumes, driven by warmer weather, and lower other operation and maintenance expense, partially offset by higher interest expense.
99
| Three Months | Nine Months | ||||||
| Margins | $ | 15 | $ | 48 | |||
| Other operation and maintenance | 4 | 6 | |||||
| Depreciation | (2 | ) | (5 | ) | |||
| Other Income (Expense) - net | (3 | ) | (5 | ) | |||
| Interest Expense | (4 | ) | (13 | ) | |||
| Income Taxes | (4 | ) | (13 | ) | |||
| Net Income | $ | 6 | $ | 18 | |||
| 2016 Three Months | 2015 Three Months | ||||||||||||||||||||||
| Margins | Other (a) | Operating Income (b) | Margins | Other (a) | Operating Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 474 | $ | — | $ | 474 | $ | 461 | $ | — | $ | 461 | |||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 141 | — | 141 | 146 | — | 146 | |||||||||||||||||
| Energy purchases, including affiliate | 7 | — | 7 | 7 | — | 7 | |||||||||||||||||
| Other operation and maintenance | 20 | 87 | 107 | 17 | 91 | 108 | |||||||||||||||||
| Depreciation | 6 | 53 | 59 | 6 | 51 | 57 | |||||||||||||||||
| Taxes, other than income | — | 7 | 7 | — | 7 | 7 | |||||||||||||||||
| Total Operating Expenses | 174 | 147 | 321 | 176 | 149 | 325 | |||||||||||||||||
| Total | $ | 300 | $ | (147 | ) | $ | 153 | $ | 285 | $ | (149 | ) | $ | 136 | |||||||||
| 2016 Nine Months | 2015 Nine Months | ||||||||||||||||||||||
| Margins | Other (a) | Operating Income (b) | Margins | Other (a) | Operating Income (b) | ||||||||||||||||||
| Operating Revenues | $ | 1,334 | $ | — | $ | 1,334 | $ | 1,342 | $ | — | $ | 1,342 | |||||||||||
| Operating Expenses | |||||||||||||||||||||||
| Fuel | 374 | — | 374 | 428 | — | 428 | |||||||||||||||||
| Energy purchases, including affiliate | 33 | — | 33 | 46 | — | 46 | |||||||||||||||||
| Other operation and maintenance | 49 | 271 | 320 | 44 | 277 | 321 | |||||||||||||||||
| Depreciation | 20 | 155 | 175 | 14 | 150 | 164 | |||||||||||||||||
| Taxes, other than income | 1 | 21 | 22 | 1 | 21 | 22 | |||||||||||||||||
| Total Operating Expenses | 477 | 447 | 924 | 533 | 448 | 981 | |||||||||||||||||
| Total | $ | 857 | $ | (447 | ) | $ | 410 | $ | 809 | $ | (448 | ) | $ | 361 | |||||||||
| (a) | Represents amounts excluded from Margins. |
| (b) | As reported on the Statements of |
| PPL (a) | PPL Electric | LKE | LG&E | KU | |||||||||||||||
| September 30, 2016 | |||||||||||||||||||
| Cash and cash equivalents | $ | 416 | $ | 36 | $ | 11 | $ | 4 | $ | 7 | |||||||||
| Short-term debt | 636 | 130 | 135 | 128 | 7 | ||||||||||||||
| Notes payable with affiliate | — | 138 | — | — | |||||||||||||||
| December 31, 2015 | |||||||||||||||||||
| Cash and cash equivalents | $ | 836 | $ | 47 | $ | 30 | $ | 19 | $ | 11 | |||||||||
| Short-term debt | 916 | — | 265 | 142 | 48 | ||||||||||||||
| Notes payable with affiliate | — | 54 | — | — | |||||||||||||||
| (a) | At September 30, |
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||
| 2015 | |||||||||||||||
| Operating activities | $ | 1,688 | $ | 373 | $ | 895 | $ | 469 | $ | 510 | |||||
| Investing activities | (2,463) | (764) | (921) | (519) | (400) | ||||||||||
| Financing activities | 231 | 203 | 460 | 220 | 154 | ||||||||||
| 2014 | |||||||||||||||
| Operating activities | $ | 2,163 | $ | 412 | $ | 851 | $ | 327 | $ | 486 | |||||
| Investing activities | (2,630) | (562) | (773) | (422) | (418) | ||||||||||
| Financing activities | 137 | 236 | (66) | 112 | (67) | ||||||||||
| Change - Cash Provided (Used) | |||||||||||||||
| Operating activities | $ | (475) | $ | (39) | $ | 44 | $ | 142 | $ | 24 | |||||
| Investing activities | 167 | (202) | (148) | (97) | 18 | ||||||||||
| Financing activities | 94 | (33) | 526 | 108 | 221 | ||||||||||
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||||||
| 2016 | |||||||||||||||||||
| Operating activities | $ | 2,230 | $ | 595 | $ | 816 | $ | 383 | $ | 469 | |||||||||
| Investing activities | (2,066 | ) | (740 | ) | (599 | ) | (343 | ) | (254 | ) | |||||||||
| Financing activities | (558 | ) | 134 | (236 | ) | (55 | ) | (219 | ) | ||||||||||
| 2015 | |||||||||||||||||||
| Operating activities | $ | 1,688 | $ | 373 | $ | 895 | $ | 469 | $ | 510 | |||||||||
| Investing activities | (2,463 | ) | (764 | ) | (921 | ) | (519 | ) | (400 | ) | |||||||||
| Financing activities | 231 | 203 | 460 | 220 | 154 | ||||||||||||||
| Change - Cash Provided (Used) | |||||||||||||||||||
| Operating activities | $ | 542 | $ | 222 | $ | (79 | ) | $ | (86 | ) | $ | (41 | ) | ||||||
| Investing activities | 397 | 24 | 322 | 176 | 146 | ||||||||||||||
| Financing activities | (789 | ) | (69 | ) | (696 | ) | (275 | ) | (373 | ) | |||||||||
| PPL | PPL Electric | LKE | LG&E | KU | ||||||||||||||
| Change - Cash Provided (Used) | ||||||||||||||||||
| Net income | $ | 169 | $ | (3) | $ | 26 | $ | 13 | $ | 16 | ||||||||
| Non-cash components | (56) | 103 | 1 | 98 | 20 | |||||||||||||
| Working capital | (368) | (121) | 129 | 76 | 59 | |||||||||||||
| Defined benefit plan funding | (106) | (13) | (23) | (13) | (16) | |||||||||||||
| Other operating activities | (114) | (5) | (89) | (32) | (55) | |||||||||||||
| Total | $ | (475) | $ | (39) | $ | 44 | $ | 142 | $ | 24 | ||||||||
100
2015. PPL PPL Electric LKE LG&E KU Change - Cash Provided (Used) Net income $ 239 $ 72 $ 40 $ 13 $ 18 Non-cash components 146 42 (7 ) — (7 ) Working capital 102 74 (168 ) (99 ) (94 ) Defined benefit plan funding 51 33 (16 ) (20 ) 1 Other operating activities 4 1 72 20 41 Total $ 542 $ 222 $ (79 ) $ (86 ) $ (41 ) PPL had a $475 million decrease in20152016 increased $542 million in 2016 compared with 2014.·Income from continuing operations improved by $169 million between the periods. This was offset by $56 million less net non-cash expenses. The net $113 million increase from net income and non-cash components in 2015 compared with 2014 reflects higher margins in the Pennsylvania and Kentucky regulated segments and lower income taxes.·The $368 million decrease in cash from changes in working capital was primarily due to a decrease in taxes payable, primarily due to higher income tax payments in 2015 and a decrease in accounts payable due to timing of payments.·Defined benefit plan funding was $106 million higher in 2015.·The decrease in cash from other operating activities was primarily due to payments of $88 million for the settlement of interest rate swaps.
(LKE)
LKE had a $442015.
· LKE's non-cash components of net income included a $24 million increase in depreciation expense due to additional assets in service since the third quarter of 2014, and a $15 million increase associated with current regulatory assets net of current regulatory liabilities due to the timing of rate recovery mechanisms, partially offset by a $52 million decrease in deferred income taxes. 2015.
· The increase in cash from working capital was driven primarily by a decrease in incomelower tax receivable as a result of receiving paymentpayments received from PPL for the use of prior year excess tax depreciation deductionsdeductions. Other decreases in 2014, a decrease in coal purchases as a result of plant retirementscash were related to accounts receivable and Cane Run Unit 7 going in service, and a decrease in natural gas stored undergroundunbilled revenues due to lower weather volatility during the measurement periods in 2016, and coal and natural gas prices,inventories due to milder weather in the first quarter of 2016, partially offset by lower payments on accounts payable due to lower fuel purchases.
101
recovery mechanisms,The decrease in cash from working capital was driven primarily by lower tax payments received from LKE for the use of prior year excess tax depreciation deductions. Other decreases in cash were related to accounts receivable and a $6 millionunbilled revenues due to lower weather volatility during the measurement periods in 2016, coal and natural gas inventories due to milder weather in the first quarter of 2016, and accounts receivable from affiliates due to lower intercompany settlements associated with capital expenditures, partially offset by lower payments on accounts payable due to lower fuel purchases.
2016.
KU had a $24 million increase in
· KU's non-cash components2015.
2015 which did not occur in 2016.
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||
| (Increase) Decrease | $ | 42 | $ | (58) | $ | (85) | $ | (97) | $ | 11 | |||||
| PPL | PPL Electric | LKE | LG&E | KU | |||||||||||||||
| Decrease | $ | 487 | $ | 19 | $ | 328 | $ | 176 | $ | 152 | |||||||||
102
Other Significant Changes in Components of Investing Activities
(PPL)
PPL received $136 million during the nine months ended September 30, 2015 from the sale of short-term investments.
(PPL Electric)
PPL Electric received $150 million during the nine months ended September 30, 2014 on notes receivable from affiliates.
from continuing operations for the nine months ended September 30, 20152016 compared with 20142015 was as follows. PPL PPL Electric LKE LG&E KU Change - Cash Provided (Used) Long-term debt issuances/retirements, net $ 1,078 $ (286) $ 1,050 $ 550 $ 500 Stock issuances/redemptions, net (892) Dividends (32) (19) 2 6 Capital contributions/distributions, net 180 86 (53) (66) Change in short-term debt, net (79) 88 (603) (387) (216) Other financing activities 19 4 (7) (4) (3) Total $ 94 $ (33) $ 526 $ 108 $ 221 For the nine months ended September 30, 2015, PPL received $94 million more cash from financing activities primarily due to the LG&E and KU long-term debt issuances in September 2015, partially offset by lower common stock issuances in 2015. The proceeds of the long-term debt issuances were used to repay short-term debt and additionally will be used for repayment of First Mortgage Bonds maturing in November 2015, and for general corporate purposes PPL PPL Electric LKE LG&E KU Change - Cash Provided (Used) Debt issuance/retirement, net $ (801 ) $ — $ (1,050 ) $ (550 ) $ (500 ) Settlement of cross-currency swaps 46 — — — — Stock issuances/redemptions, net (12 ) — — — — Dividends (22 ) (53 ) — (6 ) (91 ) Capital contributions/distributions, net — (75 ) (85 ) 27 20 Change in short-term debt, net 3 62 370 250 195 Notes payable with affiliate — — 63 — — Other financing activities (3 ) (3 ) 6 4 3 Total $ (789 ) $ (69 ) $ (696 ) $ (275 ) $ (373 ) 20152016 short and long-term debt activity, equity transactions and PPL dividends. See the Registrants' 20142015 Form 10-K for information on 20142015 activity.2015,2016, the total committed borrowing capacity and the use of that capacity under these credit facilities was as follows:External (All Registrants) Letters of Credit and Committed Commercial Unused Capacity Borrowed Paper Issued Capacity PPL Capital Funding Credit Facilities $ 750 $ 20 $ 730 PPL Electric Credit Facility 300 69 231 LKE Credit Facility 75 $ 75 LG&E Credit Facility 500 500 KU Credit Facilities 598 198 400 Total LKE 1,173 75 198 900 Total U.S. Credit Facilities (a) $ 2,223 $ 75 $ 287 $ 1,861 Total U.K. Credit Facilities (b) £ 1,055 £ 266 £ 789 103 Borrowed PPL Capital Funding Credit Facilities $ 1,150 $ — $ 17 $ 1,133 PPL Electric Credit Facility 400 — 131 269 LKE Credit Facility 75 — — 75 LG&E Credit Facility 500 — 128 372 KU Credit Facilities 598 — 205 393 Total LKE 1,173 — 333 840 Total U.S. Credit Facilities (a) $ 2,723 $ — $ 481 $ 2,242 Total U.K. Credit Facilities (b) £ 1,055 £ 284 £ — £ 771 (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 - 13%11%, PPL Electric - 12%7%, LKE - 21%, LG&E - 12%7% and KU - 37%.(b) The amounts borrowed at September 30, 20152016 were a USD-denominated borrowingsborrowing of $200 million and GPB-denominatedGBP-denominated borrowings which equated to $214$171 million. The unused capacity reflects the USD-denominated borrowing amount borrowed in GBP of £153 million as of the date borrowed. At September 30, 2015,2016, the USD equivalent of unused capacity under the U.K. committed credit facilities was $1.2$1 billion.
| Committed | Other Used | Unused | ||||||||||
| Capacity | Borrowed | Capacity | Capacity | |||||||||
| LKE Credit Facility | $ | 225 | $ | 62 | $ | 163 | ||||||
| LG&E Money Pool (a) | 500 | 500 | ||||||||||
| KU Money Pool (a) | 500 | 500 | ||||||||||
Committed Capacity | Borrowed | Other Used Capacity | Unused Capacity | ||||||||||||
| LKE Credit Facility | $ | 225 | $ | 138 | $ | — | $ | 87 | |||||||
| LG&E Money Pool (a) | 500 | — | 128 | 372 | |||||||||||
| KU Money Pool (a) | 500 | — | 7 | 493 | |||||||||||
| (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 short-term debt limit for each utility at $500 million from any source. |
| Commercial | ||||||||||
| Paper | Unused | |||||||||
| Capacity | Issuances | Capacity | ||||||||
| PPL Electric | $ | 300 | $ | 68 | $ | 232 | ||||
| LG&E | 350 | 350 | ||||||||
| KU | 350 | 350 | ||||||||
| Total LKE | 700 | 700 | ||||||||
| Total PPL | $ | 1,000 | $ | 68 | $ | 932 | ||||
2016:
| Capacity | Commercial Paper Issuances | Unused Capacity | |||||||||
| PPL Capital Funding | $ | 1,000 | $ | — | $ | 1,000 | |||||
| PPL Electric | 400 | 130 | 270 | ||||||||
| LG&E | 350 | 128 | 222 | ||||||||
| KU | 350 | 7 | 343 | ||||||||
| Total LKE | 700 | 135 | 565 | ||||||||
| Total PPL | $ | 2,100 | $ | 265 | $ | 1,835 | |||||
Long-term Debt
(PPL, LKE and LG&E)
In September 2015, LG&E issued $300 million of 3.30% First Mortgage Bonds due 2025 and $250 million of 4.375% First Mortgage Bonds due 2045. LG&EFunding received proceeds of $298 million and $248 million, net of discounts and underwriting fees, which were used to repay short-term debt and additionally will be used for the repayment of First Mortgage Bonds maturing in November 2015, and for general corporate purposes.
(PPL, LKE and KU)
In September 2015, KU issued $250 million of 3.30% First Mortgage Bonds due 2025 and $250 million of 4.375% First Mortgage Bonds due 2045. KU received proceeds of $248 million for each issuance, net of discounts and underwriting fees,
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which were used to repay short-term debt and additionally will be used for the repayment of First Mortgage Bonds maturing in November 2015, and for general corporate purposes.
(PPL and PPL Electric)
In October 2015, PPL Electric issued $350 million of 4.150% First Mortgage Bonds due 2045. PPL Electric received proceeds of $345$645 million, net of a discount and underwriting fees, which will be used to invest in or make loans to subsidiaries of PPL, to repay short-term debt and for general corporate purposes.
| Three Months | Nine Months | |||||
| Number of shares | 435,800 | 857,500 | ||||
| Average share price | $ | 32.95 | $ | 33.33 | ||
| Net proceeds | 14 | 28 | ||||
See Note 7 to the Financial Statements for additional information.
| Three Months | Nine Months | ||||||||||||||
| 2016 | 2015 | 2016 | 2015 | ||||||||||||
| Number of shares (in thousands) | 710 | 436 | 710 | 858 | |||||||||||
| Average share price | $ | 35.23 | $ | 32.95 | $ | 35.23 | $ | 33.33 | |||||||
| Net Proceeds | $ | 25 | $ | 14 | $ | 25 | $ | 28 | |||||||
| Total | 2016 | 2017 - 2018 | 2019 - 2020 | After 2020 | ||||||||||||||||
| Total Change in Contractual Cash Obligations | $ | (2,003 | ) | $ | (36 | ) | $ | (100 | ) | $ | (121 | ) | $ | (1,746 | ) | |||||
2016:
(PPL)
Funding's $1.0 billion commercial paper program.
In May 2015, Fitch affirmed and withdrew its ratings for PPL UK Distribution Holdings Limited (formerly known as PPL WW), WPD (South Wales) and WPD (South West).
In June 2015, S&P upgraded the following ratings with a stable outlook:
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In June 2015, S&P affirmed the short-term issuer ratings for WPD plc, WPD (East Midlands), WPD (West Midlands), WPD (South Wales) and WPD (South West). S&P also upgraded the following ratings with a stable outlook:
In August 2015, S&P affirmed its ratings with a stable outlook for WPD plc, WPD (East Midlands), WPD (West Midlands), WPD (South Wales) and WPD (South West).
In October 2015,2016, Moody's and S&P assigned ratings of P-2Baa2 and A-2, respectively,BBB+ to PPL Capital Funding's $600$650 million commercial paper program.3.10% Senior Notes due 2026.
PPL Capital Funding.
In May 2015, Moody'sS&P affirmed itstheir commercial paper ratings and revised its outlook to positive for PPL Electric.
In June 2015, S&P affirmed itsElectric's $400 million commercial paper rating and upgraded the following ratings with a stable outlook for PPL Electric:
program.
In September 2015,February 2016, Moody's and S&P assigned ratings of A1 and A to PPL Electric's $350LCIDA's $116 million 4.15% First Mortgage Bonds due 2045.
(PPL, LKE, LG&E and KU)
In May 2015, Moody's upgraded the following ratings with a stable outlook for LKE:
In June 2015, S&P affirmed its commercial paper ratings for LG&E and KU. S&P also upgraded the following ratings with a stable outlook:
In June 2015, S&P upgraded its ratings from AA+ to AAA for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds, KU's 2004 Series A and 2008 Series A Environmental Facilities Revenue Bonds and KU's 2006 Series B Environmental Facilities0.90% Pollution Control Revenue Refunding Bonds due 2029 and removed them from CreditWatch with positive implications.
$108 million 0.90% Pollution Control Revenue Refunding Bonds due 2027, issued on behalf of PPL Electric.
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2016.
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.
| Effect of a | ||||||||||||
| Fair Value, | 10% Adverse | Maturities | ||||||||||
| Exposure | Net - Asset | Movement | Ranging | |||||||||
| Hedged | (Liability) (a) | in Rates (b) | Through | |||||||||
| PPL | ||||||||||||
| Cash flow hedges | ||||||||||||
| Interest rate swaps (c) | $ | 792 | $ | (31) | $ | (12) | 2026 | |||||
| Cross-currency swaps (d) | 1,262 | 61 | (158) | 2028 | ||||||||
| Economic hedges | ||||||||||||
| Interest rate swaps (e) | 179 | (51) | (2) | 2033 | ||||||||
| LKE | ||||||||||||
| Economic hedges | ||||||||||||
| Interest rate swaps (e) | 179 | (51) | (2) | 2033 | ||||||||
| LG&E | ||||||||||||
| Economic hedges | ||||||||||||
| Interest rate swaps (e) | 179 | (51) | (2) | 2033 | ||||||||
Exposure Hedged | Fair Value, Net - Asset (Liability) (a) | Effect of a 10% Adverse Movement in Rates (b) | Maturities Ranging Through | ||||||||||
| PPL | |||||||||||||
| Cash flow hedges | |||||||||||||
| Cross-currency swaps (c) | $ | 802 | $ | 155 | $ | (96 | ) | 2028 | |||||
| Economic hedges | |||||||||||||
| Interest rate swaps (d) | 179 | (54 | ) | (2 | ) | 2033 | |||||||
| LKE | |||||||||||||
| Economic hedges | |||||||||||||
| Interest rate swaps (d) | 179 | (54 | ) | (2 | ) | 2033 | |||||||
| LG&E | |||||||||||||
| Economic hedges | |||||||||||||
| Interest rate swaps (d) | 179 | (54 | ) | (2 | ) | 2033 | |||||||
| (a) | Includes accrued interest, if applicable. |
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| (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. |
| 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. |
| 10% Adverse | ||||||||||||||||
| Movement | ||||||||||||||||
| in Rates | ||||||||||||||||
| PPL | $ | 685 | ||||||||||||||
| PPL Electric | 129 | |||||||||||||||
| LKE | 185 | |||||||||||||||
| LG&E | 69 | |||||||||||||||
| KU | 105 | |||||||||||||||
10% Adverse Movement in Rates | |||
| PPL | $ | 543 | |
| PPL Electric | 136 | ||
| LKE | 175 | ||
| LG&E | 65 | ||
| KU | 98 | ||
| �� | Effect of a | |||||||||||
| 10% | ||||||||||||
| Adverse | ||||||||||||
| Movement | ||||||||||||
| in Foreign | ||||||||||||
| Fair Value, | Currency | Maturities | ||||||||||
| Exposure | Net - Asset | Exchange | Ranging | |||||||||
| Hedged | (Liability) | Rates (a) | Through | |||||||||
| Net investment hedges (b) | £ | 134 | $ | 19 | $ | (20) | 2016 | |||||
| Economic hedges (c) | 1,676 | 143 | (235) | 2017 | ||||||||
Exposure Hedged | Fair Value, Net - Asset (Liability) | Effect of a 10% Adverse Movement in Foreign Currency Exchange Rates (a) | Maturities Ranging Through | ||||||||||
| Economic hedges (b) | £ | 1,791 | $ | 96 | $ | (214 | ) | 2018 | |||||
| (a) | Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. |
| To economically hedge the translation risk of expected earnings denominated in GBP. |
PPL Electric is exposed to also mitigates its exposure to (All Registrants) (All Registrants) (Non-trading)(LKE, LG&E and KU)LG&E's and KU's retail electric rates, LG&E's natural gas rates and KU's municipal wholesale electric rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers. As a result, LG&E and KU are subjectis exposed to commodity price risk for only a small portion of their business operations. LG&E and KU sell excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers. See Note 14through its domestic subsidiaries as described below.to the Financial Statements for additional information.(PPL and PPL Electric)marketcommodity price and volumetric risksrisk from its obligation as a PLR. The PUC has approved a cost recovery mechanism that allows PPL Electric to pass through to customers the cost associated with fulfillingPLR; however, its PLR obligation. ThisPUC-approved cost recovery mechanism substantially eliminates PPL Electric'sits exposure to market pricethis risk. PPL Electric108volumetriccommodity price risk by entering into full-requirement energy supply contracts for the majority ofagreements to serve its PLR obligations.customers. These supply contractsagreements transfer the volumetriccommodity price risk associated with the PLR obligation to the energy suppliers.20142015 Form 10-K for additional information.$263$209 million decrease to PP&E and $54 million decrease to goodwill partially offset by a $131 million decrease of $162to long-term debt and a $31 million decrease to net liabilities. Changes in this exchange rate resulted in a foreign currency translation gain of $75 million for the nine months ended September 30, 2014, which primarily reflected a $193 million increase to PP&E and goodwill offset by an increase of $118 million toother net liabilities. The impact of foreign currency translation is recorded in AOCI.(PPL)See Note 8 to the Financial Statements for information on the spinoff of PPL Energy Supply.·Climate Change,·Waters of the United States,·Coal Combustion Residuals,·Effluent Limitations Guidelines,109
Legal Matters,Table of Contents·Mercury and Air Toxics Standards, and·National Ambient Air Quality Standards. Note 13 to the Financial Statements and "Item 1. Business - Environmental Matters" in the Registrants' 20142015 Form 10-K for additional information on environmental matters.(PPL, LKE, LG&E and KU)Coal Combustion Residuals (CCRs)On October 19, 2015, the EPA's final rule regulating CCRs became effective. In connection with the final CCR rule, LG&E and KU recorded increases to existing AROs of $57 million and $219 million during the three and nine months ended September 30, 2015.See Note 16 to the Financial Statements for additional information. Further increases to AROs or changes to current capital plans or to 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. (All(All Registrants)20142015 Form 10-K for a discussion of each critical accounting policy. PPL PPL PPLElectric ElectricLKE LKELG&E LG&EKU Defined Benefits X X X X X Loss Accruals X X X X X Income Taxes X X X X X Asset Impairments (Excluding Investments)Goodwill Impairment X X X X AROs X X X X Price Risk Management X X X XRegulatory Assets and Liabilities X X X X X Revenue Recognition - unbilled revenueUnbilled Revenue X X X X 1102015,2016, 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.PPL CorporationFollowing the announcement of the transaction to spin off PPL Energy Supply, LLC to form Talen Energy, management determined the appropriate staffing for Talen Energy and for PPL and its subsidiaries. During the nine months ended September 30, 2015, staffing changes, including the consolidation of certain positions and transition of responsibilities, resulted in changes in certain individuals responsible for executing internal controls. However, changes to system applications, business processes and the associated internal controls were not significant. Management has taken steps to minimize the risk from the changes in individuals executing internal controls.·"Item 3. Legal Proceedings" in each Registrant's 2014 Form 10-K; and·Notes 6 and 10 to the Financial Statements.20142015 Form 10-K and Form 10-Q for the period ending June 30, 2016 except thatthe following:1, 2015 spinoff by PPL of PPL Energy Supply,23, 2016 referendum in the risk factors disclosed underU.K. to withdraw from the heading "Risks Related to Supply Segment" at pages 26 through 31European Union.Registrants' 2014 Form 10-K are no longer applicable.111Item 5. Other InformationPPL Electric Utilities CorporationOn October 27, 2015, PPL Electric amended and restated its By-laws to provide that the number of directors constituting the Company's board of directors shall be as determined from time to time by the directors.*3(a)-Bylaws of PPL Electric Utilities Corporation, effective as of October 27, 20154(a) - Supplemental Indenture No. 4,Loan Agreement dated as of SeptemberAugust 1, 2015,2016 between Kentucky Utilities Company and the County of Louisville Gas and Electric Company to The Bank of New York Mellon, as TrusteeCarroll, Kentucky (Exhibit 4(a) to Louisville Gas and ElectricKentucky Utilities Company Form 8-K Report (File No. 1-2893)1-3464) dated September 28, 2015)August 26, 2016)4(b) - Supplemental Indenture No. 4,5, dated as of SeptemberAugust 1, 2015,2016, of Kentucky Utilities Company to The Bank of New York Mellon, as Trustee (Exhibit 4(b) to Kentucky Utilities Company Form 8-K Report (File No. 1-3464) dated September 28, 2015)August 26, 2016)4(c) - Loan Agreement dated as of September 1, 2016 between Louisville Gas and Electric Company and the County of Trimble, Kentucky (Exhibit 4(a) to Louisville Gas and Electric Company Form 8-K Report (File No. 1-2893) dated September 15, 2016) 4(d) - Supplemental Indenture No. 17,5, dated as of OctoberSeptember 1, 2015,2016, of PPLLouisville Gas and Electric Utilities CorporationCompany to The Bank of New York Mellon, as Trustee (Exhibit 4(a)4(b) to PPLLouisville Gas and Electric Utilities CorporationCompany Form 8-K Report (File No. 1-905)1-2893) dated October 1, 2015)September 15, 2016)- - PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends - PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends - LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges - Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges - Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended September 30, 2015,2016, filed by the following officers for the following companies: - PPL Corporation's principal executive officer - PPL Corporation's principal financial officer - PPL Electric Utilities Corporation's principal executive officer - PPL Electric Utilities Corporation's principal financial officer - LG&E and KU Energy LLC's principal executive officer - LG&E and KU Energy LLC's principal financial officer - Louisville Gas and Electric Company's principal executive officer - Louisville Gas and Electric Company's principal financial officer - Kentucky Utilities Company's principal executive officer - Kentucky Utilities Company's principal financial officer 112
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PPL Corporation (Registrant) Date: October 30, 2015November 1, 2016 /s/ Stephen K. Breininger Vice President and Controller (Principal Accounting Officer) PPL Electric Utilities Corporation (Registrant) Date: October 30, 2015November 1, 2016 /s/ Stephen K. BreiningerMarlene C. Beers Stephen K. Breininger Vice President and Controller (Principal Financial Officer and Principal Accounting Officer) LG&E and KU Energy LLC (Registrant) Louisville Gas and Electric Company (Registrant) Kentucky Utilities Company (Registrant) Date: October 30, 2015November 1, 2016 /s/ Kent W. Blake (Principal Financial Officer and Principal Accounting Officer)