10-Q 1 form10q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 
FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2016
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

 

 

 

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

 

  PPL Corporation Yes  X    No          
  PPL Electric Utilities Corporation Yes  X    No          
  LG&E and KU Energy LLC Yes  X    No          
  Louisville Gas and Electric Company Yes  X   No          
  Kentucky Utilities Company Yes  X    No          

 

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files).

 

  PPL Corporation Yes  X    No          
  PPL Electric Utilities Corporation Yes  X    No          
  LG&E and KU Energy LLC Yes  X    No          
  Louisville Gas and Electric Company Yes  X    No          
  Kentucky Utilities Company Yes  X    No          

 

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

   

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 ] [     ]

 

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

 

  PPL Corporation Yes         No  X     
  PPL Electric Utilities Corporation Yes         No  X     
  LG&E and KU Energy LLC Yes         No  X     
  Louisville Gas and Electric Company Yes         No  X     
  Kentucky Utilities Company Yes         No  X     

 

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

 

  PPL Corporation Common stock, $0.01 par value, 676,945,176 shares outstanding at April 22, 2016.
     
  PPL Electric Utilities Corporation Common stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at April 22, 2016.
     
  LG&E and KU Energy LLC PPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
     
  Louisville Gas and Electric Company Common stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at April 22, 2016.
     
  Kentucky Utilities Company Common stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at April 22, 2016.

 

This document is available free of charge at the Investors section of PPL Corporation's website at www.pplweb.com. However, information on this website does not constitute a part of this Form 10-Q.

 

 

PPL CORPORATION

PPL ELECTRIC UTILITIES CORPORATION

LG&E and KU Energy LLC

Louisville Gas and Electric Company

Kentucky Utilities Company

 

FORM 10-Q

FOR THE QUARTER ENDED March 31, 2016

 

Table of Contents

 

This combined Form 10-Q is separately filed by the following Registrants in their individual capacity: PPL Corporation, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant, except that information under "Forward-Looking Information" relating to subsidiaries of PPL Corporation is also attributed to PPL Corporation and information relating to the subsidiaries of LG&E and KU Energy LLC is also attributed to LG&E and KU Energy LLC.

 

Unless otherwise specified, references in this Report, individually, to PPL Corporation, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company are references to such entities directly or to one or more of their subsidiaries, as the case may be, the financial results of which subsidiaries are consolidated into such Registrants in accordance with GAAP. This presentation has been applied where identification of particular subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis.

    Page
GLOSSARY OF TERMS AND ABBREVIATIONS
FORWARD-LOOKING INFORMATION 1
PART I.  FINANCIAL INFORMATION  
  Item 1.  Financial Statements  
    PPL Corporation and Subsidiaries  
      Condensed Consolidated Statements of Income 3
      Condensed Consolidated Statements of Comprehensive Income 4
      Condensed Consolidated Statements of Cash Flows 5
      Condensed Consolidated Balance Sheets 6
      Condensed Consolidated Statements of Equity 8
    PPL Electric Utilities Corporation and Subsidiaries  
      Condensed Consolidated Statements of Income 10
      Condensed Consolidated Statements of Cash Flows 11
      Condensed Consolidated Balance Sheets 12
      Condensed Consolidated Statements of Equity 14
    LG&E and KU Energy LLC and Subsidiaries  
      Condensed Consolidated Statements of Income 16
      Condensed Consolidated Statements of Cash Flows 17
      Condensed Consolidated Balance Sheets 18
      Condensed Consolidated Statements of Equity 20
    Louisville Gas and Electric Company  
      Condensed Statements of Income 22
      Condensed Statements of Cash Flows 23
      Condensed Balance Sheets 24
      Condensed Statements of Equity 26
    Kentucky Utilities Company  
      Condensed Statements of Income 28
      Condensed Statements of Cash Flows 29
      Condensed Balance Sheets 30
      Condensed Statements of Equity 32
           

 

 

 

 

  Combined Notes to Condensed Financial Statements (Unaudited)  
    1.   Interim Financial Statements 33
    2.   Summary of Significant Accounting Policies 33
    3.   Segment and Related Information 34
    4.   Earnings Per Share 35
    5.   Income Taxes 36
    6.   Utility Rate Regulation 37
    7.   Financing Activities 40
    8.   Acquisitions, Development and Divestitures 42
    9.   Defined Benefits 43
    10. Commitments and Contingencies 44
    11. Related Party Transactions 53
    12. Other Income (Expense) - net 54
    13. Fair Value Measurements 55
    14. Derivative Instruments and Hedging Activities 56
    15. Goodwill 63
    16. Asset Retirement Obligations 64
    17. Accumulated Other Comprehensive Income (Loss) 64
    18. New Accounting Guidance Pending Adoption 65
  Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations  
    Overview 66
      Introduction 66
      Business Strategy 68
      Financial and Operational Developments 69
        PPL Corporation and Subsidiaries - Earnings 69
        2016 Outlook 69
        Other Financial and Operational Developments 70
    Results of Operations 71
      PPL Corporation and Subsidiaries - Segment Earnings, Non-GAAP Financial Measures and Statement of Income Analysis 72
      PPL Electric Utilities Corporation and Subsidiaries - Earnings, Margins and Statement of Income
   Analysis
79
      LG&E and KU Energy LLC and Subsidiaries - Earnings, Margins and Statement of Income Analysis 81
      Louisville Gas and Electric Company - Earnings, Margins and Statement of Income Analysis 82
      Kentucky Utilities Company - Earnings, Margins and Statement of Income Analysis 84
    Financial Condition 85
      Liquidity and Capital Resources 85
      Risk Management 90
      Foreign Currency Translation 92
      Related Party Transactions 92
      Acquisitions, Development and Divestitures 92
      Environmental Matters 93
    New Accounting Guidance 93
    Application of Critical Accounting Policies 93
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk 94
  Item 4.  Controls and Procedures 94
PART II.  OTHER INFORMATION  
  Item 1.  Legal Proceedings 94
  Item 1A.  Risk Factors 94
  Item 4.  Mine Safety Disclosures 94
  Item 6.  Exhibits 94
     
             

 

 

 

SIGNATURES 96
COMPUTATIONS OF RATIO OF EARNINGS TO FIXED CHARGES 97
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER  
     PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 102
CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER  
     PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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GLOSSARY OF TERMS AND ABBREVIATIONS

 

PPL Corporation and its subsidiaries

 

KU - Kentucky Utilities Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky.

 

LG&E - Louisville Gas and Electric Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas in Kentucky.

 

LKE - LG&E and KU Energy LLC, a subsidiary of PPL and the parent of LG&E, KU and other subsidiaries.

 

LKS - LG&E and KU Services Company, a subsidiary of LKE that provides services to LKE and its subsidiaries.

 

PPL - PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding, PPL Capital Funding, LKE and other subsidiaries.

 

PPL Capital Funding - PPL Capital Funding, Inc., a financing subsidiary of PPL that provides financing for the operations of PPL and certain subsidiaries. Debt issued by PPL Capital Funding is guaranteed as to payment by PPL.

 

PPL Electric - PPL Electric Utilities Corporation, a public utility subsidiary of PPL engaged in the regulated transmission and distribution of electricity in its Pennsylvania service area and that provides electricity supply to its retail customers in this area as a PLR.

 

PPL Energy Funding - PPL Energy Funding Corporation, a subsidiary of PPL and the parent holding company of PPL Global and other subsidiaries.

 

PPL EU Services - PPL EU Services Corporation, a subsidiary of PPL that, beginning in 2015, provides support services and corporate functions such as financial, supply chain, human resources and facilities management services primarily to PPL Electric and its affiliates.

 

PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Funding that, primarily through its subsidiaries, owns and operates WPD, PPL's regulated electricity distribution businesses in the U.K.

 

PPL Services - PPL Services Corporation, a subsidiary of PPL that provides administrative, management and support services to PPL and its subsidiaries.

 

PPL WPD Limited - an indirect U.K. subsidiary of PPL Global and parent to WPD plc.

 

WPD - refers to PPL WPD Limited and its subsidiaries.

 

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

 

WPD plc - Western Power Distribution plc, a direct U.K. subsidiary of PPL WPD Limited. Its principal indirectly owned subsidiaries are WPD (East Midlands), WPD (South Wales), WPD (South West) and WPD (West Midlands).

 

WPD Midlands - refers to WPD (East Midlands) and WPD (West Midlands), collectively.

 

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

 

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

 

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

 

i 

 

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

 

 

Other terms and abbreviations

 

£ - British pound sterling.

 

2015 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2015.

 

2001 Mortgage Indenture - PPL Electric's Indenture, dated as of August 1, 2001, to the Bank of New York Mellon (as successor to JPMorgan Chase Bank), as trustee, as supplemented.

 

Act 11 - Act 11 of 2012 that became effective on April 16, 2012. The Pennsylvania legislation authorizes the PUC to approve two specific ratemaking mechanisms: the use of a fully projected future test year in base rate proceedings and, subject to certain conditions, a DSIC.

 

Act 129 - Act 129 of 2008 that became effective in October 2008. The law amends the Pennsylvania Public Utility Code and creates an energy efficiency and conservation program and smart metering technology requirements, adopts new PLR electricity supply procurement rules, provides remedies for market misconduct and changes to the Alternative Energy Portfolio Standard (AEPS).

 

AOCI - accumulated other comprehensive income or loss.

 

ARO - asset retirement obligation.

 

ATM Program - At-the-Market stock offering program.

 

BSER - Best System of Emission Reduction. The degree of emission reduction that EPA determines has been adequately demonstrated when taking into account the cost of achieving such reduction and any non-air quality health and environmental impact and energy requirements. 

 

CCR(s) - Coal Combustion Residual(s). CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.

 

Clean Air Act - federal legislation enacted to address certain environmental issues related to air emissions, including acid rain, ozone and toxic air emissions.

 

Clean Water Act - federal legislation enacted to address certain environmental issues relating to water quality including effluent discharges, cooling water intake, and dredge and fill activities.

 

CPCN - Certificate of Public Convenience and Necessity. Authority granted by the KPSC pursuant to Kentucky Revised Statute 278.020 to provide utility service to or for the public or the construction of certain plant, equipment, property or facility for furnishing of utility service to the public.

 

Customer Choice Act - the Pennsylvania Electricity Generation Customer Choice and Competition Act, legislation enacted to restructure the state's electric utility industry to create retail access to a competitive market for generation of electricity.

 

DNO - Distribution Network Operator in the U.K.

 

DPCR4 - Distribution Price Control Review 4, the U.K. five-year rate review period applicable to WPD that commenced April 1, 2005.

 

DPCR5 - Distribution Price Control Review 5, the U.K. five-year rate review period applicable to WPD that commenced April 1, 2010.

 

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

 

ii 

 

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

 

DSM - Demand Side Management. Pursuant to Kentucky Revised Statute 278.285, the KPSC may determine the reasonableness of DSM plans proposed by any utility under its jurisdiction. Proposed DSM mechanisms may seek full recovery of costs and revenues lost by implementing DSM programs and/or incentives designed to provide financial rewards to the utility for implementing cost-effective DSM programs. The cost of such programs shall be assigned only to the class or classes of customers which benefit from the programs.

 

Earnings from Ongoing Operations - A non-GAAP financial measure of earnings adjusted for the impact of special items and used in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A). See "Non-GAAP Financial Measures" within the MD&A for additional details.

 

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

 

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

 

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

 

FERC - Federal Energy Regulatory Commission, the U.S. federal agency that regulates, among other things, interstate transmission and wholesale sales of electricity, hydroelectric power projects and related matters.

 

GAAP - Generally Accepted Accounting Principles in the U.S.

 

GBP - British pound sterling.

 

GLT - Gas Line Tracker. The KPSC approved mechanism for LG&E's recovery of costs associated with gas service lines, gas risers, leak mitigation, and gas main replacements. Rate recovery became effective on January 1, 2013.

 

Gross Margins - A non-GAAP financial measure of performance used in "Item 2. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A). See "Non-GAAP Financial Measures" within the MD&A for additional details.

 

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

 

LCIDA - Lehigh County Industrial Development Authority.

 

LIBOR - London Interbank Offered Rate.

 

MATS - Mercury and Air Toxics Standards, regulations promulgated by the EPA.

 

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

 

MW - megawatt, one thousand kilowatts.

 

NAAQS - National Ambient Air Quality Standards periodically adopted pursuant to the Clean Air Act.

 

NERC - North American Electric Reliability Corporation.

 

NGCC - Natural gas-fired combined-cycle generating plant.

 

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.

 

iii 

 

NSR - The new source review provisions of the Clean Air Act that impose stringent emission control requirements on new and modified sources of air emissions that result in emission increases beyond thresholds allowed by the Clean Air Act.

 

OCI - other comprehensive income or loss.

 

Ofgem - Office of Gas and Electricity Markets, the British agency that regulates transmission, distribution and wholesale sales of electricity and related matters.

 

OVEC - Ohio Valley Electric Corporation, located in Piketon, Ohio, an entity in which LKE indirectly owns an 8.13% interest (consists of LG&E's 5.63% and KU's 2.50% interests), which is accounted for as a cost-method investment. OVEC owns and operates two coal-fired power plants, the Kyger Creek plant in Ohio and the Clifty Creek plant in Indiana, with combined summer rating capacities of 2,120 MW.

 

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

 

PP&E - property, plant and equipment.

 

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

 

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

 

PUC - Pennsylvania Public Utility Commission, the state agency that regulates certain ratemaking, services, accounting and operations of Pennsylvania utilities.

 

RAV - regulatory asset value. This term, used within the U.K. regulatory environment, is also commonly known as RAB or regulatory asset base. RAV is based on historical investment costs at time of privatization, plus subsequent allowed additions less annual regulatory depreciation, and represents the value on which DNOs earn a return in accordance with the regulatory cost of capital. RAV is indexed to Retail Price Index (RPI) in order to allow for the effects of inflation. Since the beginning of DPCR5 in April 2010, RAV additions have been based on a percentage of annual total expenditures, which have continued from April 2015 under RIIO-ED1. RAV is intended to represent expenditures that have a long-term benefit to WPD (similar to capital projects for the U.S. regulated businesses that are generally included in rate base).

 

RCRA - Resource Conservation and Recovery Act of 1976.

 

Registrant(s) - refers to the Registrants named on the cover of this Report (each a "Registrant" and collectively, the "Registrants").

 

Regulation S-X - SEC regulation governing the form and content of and requirements for financial statements required to be filed pursuant to the federal securities laws.

 

RFC - ReliabilityFirst Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the reliability of the bulk power systems throughout North America.

 

RIIO-ED1 - RIIO represents "Revenues = Incentive + Innovation + Outputs." RIIO-ED1 refers to the initial eight-year rate review period applicable to WPD which commenced April 1, 2015.

 

Riverstone - Riverstone Holdings LLC, a Delaware limited liability company and ultimate parent company of the entities that own the competitive power generation business contributed to Talen Energy other than the competitive power generation business contributed by virtue of the spinoff of a newly formed parent of PPL Energy Supply.

 

RPI - Retail Price Index, is a measure of inflation in the United Kingdom published monthly by the Office for National Statistics.

 

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

iv 

 

 

S&P - Standard & Poor's Ratings Services, a credit rating agency.

 

Sarbanes-Oxley - Sarbanes-Oxley Act of 2002, which sets requirements for management's assessment of internal controls for financial reporting. It also requires an independent auditor to make its own assessment.

 

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

 

SEC - the U.S. Securities and Exchange Commission, a U.S. government agency primarily responsible to protect investors and maintain the integrity of the securities markets.

 

SERC - SERC Reliability Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the reliability of the bulk power systems throughout North America.

 

Smart meter - an electric meter that utilizes smart metering technology.

 

Smart metering technology - technology that can measure, among other things, time of electricity consumption to permit offering rate incentives for usage during lower cost or demand intervals. The use of this technology also has the potential to strengthen network reliability.

 

Subsidiary Registrant(s) - PPL Electric, LKE, LG&E and KU.

 

Superfund - federal environmental statute that addresses remediation of contaminated sites; states also have similar statutes.

 

Talen Energy - Talen Energy Corporation, the Delaware corporation formed to be the publicly traded company and owner of the competitive generation assets of PPL Energy Supply and certain affiliates of Riverstone.

 

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

 

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.

 

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

v 

 

Forward-looking Information

 

Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical fact are "forward-looking statements" within the meaning of the federal securities laws. Although the Registrants believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct. Forward-looking statements are subject to many risks and uncertainties, and actual results may differ materially from the results discussed in forward-looking statements. In addition to the specific factors discussed in each Registrant's 2015 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.

 

·challenges by intervenors to the return on equity granted in existing rate structures;
·fuel supply and cost;
·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 transmission and distribution operations, and customer energy use;
·availability and operating costs of existing generation facilities;
·the duration of and cost associated with outages at our generating facilities;
·generation, transmission and distribution system conditions, and operating costs;
·expansion of alternative and distributed sources of electricity generation and storage;
·collective labor bargaining negotiations;
·laws or regulations to reduce emissions of "greenhouse" gases or physical effects of climate change;
·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;
·market prices of commodity inputs for ongoing capital expenditures or key operational needs;
·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;
·defaults by counterparties or suppliers for energy, capacity, coal, natural gas or key commodities, goods or services;
·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;
·the effect of changes in RPI on WPD's revenues and index linked debt;
·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;
·the effect of the outcome of the June 2016 referendum in the U.K. relating to its membership in the European Union;
·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 achievement of performance targets set by Ofgem;
·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

1 

 

·business dispositions or acquisitions and our ability to realize expected benefits from such business transactions.

 

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

 

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

2 

 

 

PART I.  FINANCIAL INFORMATION
ITEM 1. Financial Statements
                   
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, except share data)
                   
                   
          Three Months Ended March 31,
          2016   2015
             
Operating Revenues   $ 2,011   $ 2,230
                   
Operating Expenses            
  Operation            
    Fuel     197     253
    Energy purchases     233     329
    Other operation and maintenance     450     456
  Depreciation     229     216
  Taxes, other than income     79     86
  Total Operating Expenses     1,188     1,340
                   
Operating Income     823     890
                   
Other Income (Expense) - net     61     88
           
Interest Expense     224     209
                   
Income from Continuing Operations Before Income Taxes     660     769
                   
Income Taxes     179     217
                   
Income from Continuing Operations After Income Taxes     481     552
                   
Income (Loss) from Discontinued Operations (net of income taxes)           95
                   
Net Income   $ 481   $ 647
                   
                   
Earnings Per Share of Common Stock:            
  Income from Continuing Operations After Income Taxes:    
    Basic   $ 0.71   $ 0.83
    Diluted   $ 0.71   $ 0.82
  Net Income:            
    Basic   $ 0.71   $ 0.97
    Diluted   $ 0.71   $ 0.96
                   
Dividends Declared Per Share of Common Stock   $ 0.38   $ 0.3725
                   
Weighted-Average Shares of Common Stock Outstanding (in thousands)            
    Basic     675,441     666,974
    Diluted     678,817     668,732

 

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

3 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
                   
          Three Months Ended March 31,
          2016   2015
                   
Net income   $ 481   $ 647
                   
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), ($5)     (464)     (66)
    Available-for-sale securities, net of tax of $0, ($6)           5
    Qualifying derivatives, net of tax of ($15), $4     80     6
    Defined benefit plans:            
      Net actuarial gain (loss), net of tax of $0, $0           (1)
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):            
    Available-for-sale securities, net of tax of $0, $1           (1)
    Qualifying derivatives, net of tax of $19, $4     (78)     (17)
    Equity investees' other comprehensive (income) loss, net of tax of $0, $1           (1)
    Defined benefit plans:            
      Net actuarial loss, net of tax of ($9), ($13)     31     38
Total other comprehensive income (loss)     (431)     (37)
                   
Comprehensive income (loss)   $ 50   $ 610

 

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

4 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          Three Months Ended March 31,
          2016   2015
Cash Flows from Operating Activities            
  Net income   $ 481   $ 647
  (Income) loss from discontinued operations (net of income taxes)           (95)
  Income from continuing operations (net of income taxes)     481     552
  Adjustments to reconcile Income from continuing operations (net of taxes) to net cash provided by operating activities - continuing operations            
    Depreciation     229     216
    Amortization     18     11
    Defined benefit plans - expense (income)     (13)     16
    Deferred income taxes and investment tax credits     162     111
    Unrealized (gains) losses on derivatives, and other hedging activities     (34)     (52)
    Stock-based compensation expense     13     14
    Other     (5)     (3)
  Change in current assets and current liabilities            
    Accounts receivable     (62)     (128)
    Accounts payable     (43)     (49)
    Unbilled revenues     18     34
    Fuel, materials and supplies     25     76
    Prepayments     (86)     (115)
    Taxes payable     15     14
    Other current liabilities     (66)     (124)
    Other     18     33
  Other operating activities            
    Defined benefit plans - funding     (123)     (197)
    Other assets     (5)     (6)
    Other liabilities     15     49
      Net cash provided by operating activities - continuing operations     557     452
  Net cash provided by operating activities - discontinued operations           221
      Net cash provided by operating activities     557     673
Cash Flows from Investing Activities            
  Expenditures for property, plant and equipment     (656)     (833)
  Expenditures for intangible assets     (6)     (10)
  Purchase of other investments           (15)
  Other investing activities     1     (2)
      Net cash provided by (used in) investing activities - continuing operations     (661)     (860)
  Net cash provided by (used in) investing activities - discontinued operations           (130)
      Net cash provided by (used in) investing activities     (661)     (990)
Cash Flows from Financing Activities            
  Issuance of long-term debt     224      
  Retirement of long-term debt     (224)      
  Issuance of common stock     42     35
  Payment of common stock dividends     (255)     (250)
  Net increase (decrease) in short-term debt     351     163
  Other financing activities     (23)     (14)
      Net cash provided by (used in) financing activities - continuing operations     115     (66)
  Net cash provided by (used in) financing activities - discontinued operations           (222)
  Net cash distributions to parent from discontinued operations           191
      Net cash provided by (used in) financing activities     115     (97)
Effect of Exchange Rates on Cash and Cash Equivalents     (33)     (2)
Net (Increase) Decrease in Cash and Cash Equivalents included in Discontinued Operations           131
Net Increase (Decrease) in Cash and Cash Equivalents     (22)     (285)
Cash and Cash Equivalents at Beginning of Period     836     1,399
Cash and Cash Equivalents at End of Period   $ 814   $ 1,114
           

 

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

5 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
          March 31,   December 31,
          2016   2015
Assets            
                   
Current Assets            
  Cash and cash equivalents   $ 814   $ 836
  Accounts receivable (less reserve:  2016, $48; 2015, $41)            
    Customer     727     673
    Other     50     59
  Unbilled revenues     419     453
  Fuel, materials and supplies     332     357
  Prepayments     150     66
  Price risk management assets     183     139
  Other current assets     38     63
  Total Current Assets     2,713     2,646
                   
Property, Plant and Equipment            
  Regulated utility plant     33,849     34,399
  Less:  accumulated depreciation - regulated utility plant     5,731     5,683
    Regulated utility plant, net     28,118     28,716
  Non-regulated property, plant and equipment     476     516
  Less:  accumulated depreciation - non-regulated property, plant and equipment     144     165
    Non-regulated property, plant and equipment, net     332     351
  Construction work in progress     1,382     1,315
  Property, Plant and Equipment, net     29,832     30,382
                   
Other Noncurrent Assets            
  Regulatory assets     1,747     1,733
  Goodwill     3,336     3,550
  Other intangibles     667     679
  Price risk management assets     254     156
  Other noncurrent assets     160     155
  Total Other Noncurrent Assets     6,164     6,273
                   
Total Assets   $ 38,709   $ 39,301

 

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

6 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
          March 31,   December 31,
          2016   2015
Liabilities and Equity            
                   
Current Liabilities            
  Short-term debt   $ 1,265   $ 916
  Long-term debt due within one year     485     485
  Accounts payable     707     812
  Taxes     96     85
  Interest     315     303
  Dividends     257     255
  Customer deposits     306     326
  Regulatory liabilities     119     145
  Other current liabilities     516     549
  Total Current Liabilities     4,066     3,876
                   
Long-term Debt     18,074     18,563
                   
Deferred Credits and Other Noncurrent Liabilities            
  Deferred income taxes     3,560     3,440
  Investment tax credits     127     128
  Accrued pension obligations     1,183     1,405
  Asset retirement obligations     517     536
  Regulatory liabilities     942     945
  Other deferred credits and noncurrent liabilities     478     489
  Total Deferred Credits and Other Noncurrent Liabilities     6,807     6,943
                   
Commitments and Contingent Liabilities (Notes 6 and 10)            
                   
Equity            
  Common stock - $0.01 par value (a)     7     7
  Additional paid-in capital     9,729     9,687
  Earnings reinvested     3,185     2,953
  Accumulated other comprehensive loss     (3,159)     (2,728)
  Total Equity     9,762     9,919
                   
Total Liabilities and Equity   $ 38,709   $ 39,301

 

(a)780,000 shares authorized; 676,384 and 673,857 shares issued and outstanding at March 31, 2016 and December 31, 2015.

 

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

7 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)   
               
        Common                              
         stock                       Accumulated      
        shares           Additional           other      
        outstanding     Common     paid-in     Earnings     comprehensive      
        (a)     stock     capital     reinvested     loss     Total
                             
December 31, 2015   673,857   $ 7   $ 9,687   $ 2,953   $ (2,728)   $ 9,919
Common stock issued   2,527           70                 70
Stock-based compensation               (28)                 (28)
Net income                     481           481
Dividends and dividend equivalents                     (256)           (256)
Other comprehensive income (loss)                           (431)     (431)
Adoption of stock-based compensation                                  
  guidance cumulative effect adjustment                                  
  (Note 2)                     7           7
March 31, 2016   676,384   $ 7   $ 9,729   $ 3,185   $ (3,159)   $ 9,762
                                   
December 31, 2014   665,849   $ 7   $ 9,433   $ 6,462   $ (2,274)   $ 13,628
Common stock issued   1,864           54                 54
Stock-based compensation               (7)                 (7)
Net income                     647           647
Dividends and dividend equivalents                     (249)           (249)
Other comprehensive income (loss)                           (37)     (37)
March 31, 2015   667,713   $ 7   $ 9,480   $ 6,860   $ (2,311)   $ 14,036

 

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

 

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

8 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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9 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)            
(Millions of Dollars)          
                 
                 
        Three Months Ended March 31,
        2016   2015
             
Operating Revenues   $ 585   $ 630
                 
Operating Expenses            
  Operation            
    Energy purchases     167     227
    Energy purchases from affiliate           9
    Other operation and maintenance     150     133
  Depreciation     59     51
  Taxes, other than income     29     35
  Total Operating Expenses     405     455
                 
Operating Income     180     175
                 
Other Income (Expense) - net     3     2
                 
Interest Expense     33     31
                 
Income Before Income Taxes     150     146
                 
Income Taxes     56     59
                 
Net Income (a)   $ 94   $ 87

 

(a)Net income equals comprehensive income.

 

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

10 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
                   
          Three Months Ended
          March 31,
          2016   2015
Cash Flows from Operating Activities            
  Net income   $ 94   $ 87
  Adjustments to reconcile net income to net cash provided by operating activities            
    Depreciation     59     51
    Amortization     7     6
    Deferred income taxes and investment tax credits     65     5
    Other     (3)     1
  Change in current assets and current liabilities            
    Accounts receivable     (43)     (73)
    Accounts payable     (2)     (39)
    Prepayments     (21)     (60)
    Regulatory assets and liabilities     (21)     18
    Taxes payable     (8)     5
    Other     (7)     (29)
  Other operating activities            
    Defined benefit plans - funding           (33)
    Other assets     3     (1)
    Other liabilities     1     17
      Net cash provided by (used in) operating activities     124     (45)
                 
Cash Flows from Investing Activities            
  Expenditures for property, plant and equipment     (214)     (224)
  Other investing activities     (1)     (1)
      Net cash provided by (used in) investing activities     (215)     (225)
                 
Cash Flows from Financing Activities            
  Issuance of long-term debt     224      
  Retirement of long-term debt     (224)      
  Contributions from parent           50
  Payment of common stock dividends to parent     (45)     (44)
  Net increase (decrease) in short-term debt     125     85
  Other financing activities     (2)      
      Net cash provided by (used in) financing activities     78     91
                 
Net Increase (Decrease) in Cash and Cash Equivalents     (13)     (179)
Cash and Cash Equivalents at Beginning of Period     47     214
Cash and Cash Equivalents at End of Period   $ 34   $ 35

 

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

11 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
                   
          March 31,   December 31,
          2016   2015
Assets            
                   
Current Assets            
  Cash and cash equivalents   $ 34   $ 47
  Accounts receivable (less reserve: 2016, $21; 2015, $16)            
    Customer     318     286
    Other     14     10
  Accounts receivable from affiliates     7      
  Unbilled revenues     86     91
  Materials and supplies     31     34
  Prepayments     87     66
  Other current assets     13     21
  Total Current Assets     590     555
                   
Property, Plant and Equipment            
  Regulated utility plant     8,889     8,734
  Less: accumulated depreciation - regulated utility plant     2,616     2,573
    Regulated utility plant, net     6,273     6,161
  Construction work in progress     591     530
  Property, Plant and Equipment, net     6,864     6,691
                   
Other Noncurrent Assets            
  Regulatory assets     1,003     1,006
  Intangibles     245     244
  Other noncurrent assets     18     15
  Total Other Noncurrent Assets     1,266     1,265
                   
Total Assets   $ 8,720   $ 8,511

 

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

12 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
                   
          March 31,   December 31,
          2016   2015
Liabilities and Equity            
                   
Current Liabilities            
  Short-term debt   $ 125      
  Accounts payable     300   $ 288
  Accounts payable to affiliates     38     35
  Taxes     16     24
  Interest     31     37
  Regulatory liabilities     89     113
  Customer deposits     22     31
  Other current liabilities     73     77
  Total Current Liabilities     694     605
                   
Long-term Debt     2,829     2,828
                   
Deferred Credits and Other Noncurrent Liabilities            
  Deferred income taxes     1,731     1,663
  Accrued pension obligations     184     183
  Regulatory liabilities     25     22
  Other deferred credits and noncurrent liabilities     89     91
  Total Deferred Credits and Other Noncurrent Liabilities     2,029     1,959
                   
Commitments and Contingent Liabilities (Notes 6 and 10)            
                   
Equity            
  Common stock - no par value (a)     364     364
  Additional paid-in capital     1,934     1,934
  Earnings reinvested     870     821
  Total Equity     3,168     3,119
                   
Total Liabilities and Equity   $ 8,720   $ 8,511

 

(a)170,000 shares authorized; 66,368 shares issued and outstanding at March 31, 2016 and December 31, 2015.

 

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

13 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
                         
        Common                
        stock                
        shares       Additional        
        outstanding   Common    paid-in   Earnings    
         (a)    stock    capital    reinvested   Total
                                 
December 31, 2015   66,368   $ 364   $ 1,934   $ 821   $ 3,119
Net income                     94     94
Dividends declared on common stock                     (45)     (45)
March 31, 2016   66,368   $ 364   $ 1,934   $ 870   $ 3,168
                           
December 31, 2014   66,368   $ 364   $ 1,603   $ 750   $ 2,717
Net income                     87     87
Capital contributions from PPL               50           50
Dividends declared on common stock                     (44)     (44)
March 31, 2015   66,368   $ 364   $ 1,653   $ 793   $ 2,810

 

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

 

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

14 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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15 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)            
(Millions of Dollars)          
                   
          Three Months Ended March 31,
            2016     2015
             
Operating Revenues   $ 826   $ 899
             
Operating Expenses            
  Operation            
    Fuel     198     253
    Energy purchases     66     92
    Other operation and maintenance     202     209
  Depreciation     99     95
  Taxes, other than income     15     14
  Total Operating Expenses     580     663
                   
Operating Income     246     236
                   
Other Income (Expense) - net     (1)     (1)
           
Interest Expense     49     42
           
Interest Expense with Affiliate     4      
                   
Income Before Income Taxes     192     193
                   
Income Taxes     72     76
                   
Net Income (a)   $ 120   $ 117

 

(a)Net income approximates comprehensive income.

 

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

16 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
                     
          Three Months Ended March 31,
          2016     2015
Cash Flows from Operating Activities              
  Net income   $ 120     $ 117
  Adjustments to reconcile net income to net cash provided by operating activities              
    Depreciation     99       95
    Amortization     7       6
    Defined benefit plans - expense     7       11
    Deferred income taxes and investment tax credits     68       75
    Other             17
  Change in current assets and current liabilities              
    Accounts receivable     (15)       (39)
    Accounts payable     25       (18)
    Accounts payable to affiliates     5       1
    Unbilled revenues     8       32
    Fuel, materials and supplies     21       71
    Income tax receivable             134
    Taxes payable     (25)       (11)
    Accrued interest     42       37
    Other     (24)       (22)
  Other operating activities              
    Defined benefit plans - funding     (33)       (53)
    Other assets             (6)
    Other liabilities     (2)       4
      Net cash provided by operating activities     303       451
Cash Flows from Investing Activities              
  Expenditures for property, plant and equipment     (219)       (321)
  Other investing activities             4
      Net cash provided by (used in) investing activities     (219)       (317)
Cash Flows from Financing Activities              
  Net increase (decrease) in notes payable with affiliate     93       (1)
  Net increase (decrease) in short-term debt     (149)       (91)
  Debt issuance and credit facility costs     (1)        
  Distributions to member     (29)       (23)
      Net cash provided by (used in) financing activities     (86)       (115)
Net Increase (Decrease) in Cash and Cash Equivalents     (2)       19
Cash and Cash Equivalents at Beginning of Period     30       21
Cash and Cash Equivalents at End of Period   $ 28     $ 40

 

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

17 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
                   
          March 31,   December 31,
          2016   2015
Assets            
                   
Current Assets            
  Cash and cash equivalents   $ 28   $ 30
  Accounts receivable (less reserve: 2016, $24; 2015, $23)            
    Customer     225     209
    Other     10     16
  Unbilled revenues     139     147
  Fuel, materials and supplies     277     298
  Prepayments     26     23
  Regulatory assets     17     35
  Other current assets     5     7
  Total Current Assets     727     765
                   
Property, Plant and Equipment            
  Regulated utility plant     12,040     11,906
  Less: accumulated depreciation - regulated utility plant     1,260     1,163
    Regulated utility plant, net     10,780     10,743
  Construction work in progress     669     660
  Property, Plant and Equipment, net     11,449     11,403
                   
Other Noncurrent Assets            
  Regulatory assets     744     727
  Goodwill     996     996
  Other intangibles     117     123
  Other noncurrent assets     78     76
  Total Other Noncurrent Assets     1,935     1,922
                   
Total Assets   $ 14,111   $ 14,090

 

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

18 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          March 31,   December 31,
          2016   2015
Liabilities and Equity            
                   
Current Liabilities            
  Short-term debt   $ 116   $ 265
  Long-term debt due within one year     25     25
  Notes payable with affiliate     147     54
  Accounts payable     232     266
  Accounts payable to affiliates     10     5
  Customer deposits     53     52
  Taxes     21     46
  Price risk management liabilities     6     5
  Regulatory liabilities     30     32
  Interest     74     32
  Asset retirement obligations     70     50
  Other current liabilities     90     135
  Total Current Liabilities     874     967
                   
Long-term Debt            
  Long-term debt     4,663     4,663
  Long-term debt to affiliate     400     400
  Total Long-term Debt     5,063     5,063
                   
Deferred Credits and Other Noncurrent Liabilities            
  Deferred income taxes     1,532     1,463
  Investment tax credits     127     128
  Accrued pension obligations     267     296
  Asset retirement obligations     470     485
  Regulatory liabilities     917     923
  Price risk management liabilities     47     42
  Other deferred credits and noncurrent liabilities     205     206
  Total Deferred Credits and Other Noncurrent Liabilities     3,565     3,543
                   
Commitments and Contingent Liabilities (Notes 6 and 10)            
                   
Member's equity     4,609     4,517
                   
Total Liabilities and Equity   $ 14,111   $ 14,090

 

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

19 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
       
      Member's
      Equity
       
December 31, 2015   $ 4,517
Net income     120
Distributions to member     (29)
Other comprehensive income (loss)     1
March 31, 2016   $ 4,609
       
December 31, 2014   $ 4,248
Net income     117
Distributions to member     (23)
March 31, 2015   $ 4,342

 

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

20 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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21 

 

 

CONDENSED STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Unaudited)            
(Millions of Dollars)          
                   
          Three Months Ended March 31,
          2016   2015
Operating Revenues            
  Retail and wholesale   $ 375   $ 417
  Electric revenue from affiliate     11     22
  Total Operating Revenues     386     439
                   
Operating Expenses            
  Operation            
    Fuel     78     103
    Energy purchases     62     88
    Energy purchases from affiliate     2     3
    Other operation and maintenance     87     96
  Depreciation     41     42
  Taxes, other than income     8     7
  Total Operating Expenses     278     339
                   
Operating Income     108     100
                   
Other Income (Expense) - net           (1)
                   
Interest Expense     17     13
           
Income Before Income Taxes     91     86
                   
Income Taxes     35     33
                   
Net Income (a)   $ 56   $ 53

 

(a)Net income equals comprehensive income.

 

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

22 

 

 

CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)
                     
          Three Months Ended March 31,
          2016     2015
Cash Flows from Operating Activities              
  Net income   $ 56     $ 53
  Adjustments to reconcile net income to net cash provided by operating activities              
    Depreciation     41       42
    Amortization     3       3
    Defined benefit plans - expense     3       4
    Deferred income taxes and investment tax credits     37       31
    Other             14
  Change in current assets and current liabilities              
    Accounts receivable     (6)       (16)
    Accounts receivable from affiliates     (4)       11
    Accounts payable     5       (15)
    Unbilled revenues     7       18
    Fuel, materials and supplies     31       56
    Income tax receivable     1       74
    Taxes payable     (9)       (7)
    Accrued interest     13       9
    Other     (9)       (3)
  Other operating activities              
    Defined benefit plans - funding     (13)       (22)
    Other assets             (1)
    Other liabilities     1        
      Net cash provided by operating activities     157       251
Cash Flows from Investing Activities              
  Expenditures for property, plant and equipment     (109)       (173)
      Net cash provided by (used in) investing activities     (109)       (173)
Cash Flows from Financing Activities              
  Net increase (decrease) in short-term debt     (60)       (48)
  Debt issuance and credit facility costs     (1)        
  Payment of common stock dividends to parent     (25)       (23)
  Contributions from parent     30        
      Net cash provided by (used in) financing activities     (56)       (71)
Net Increase (Decrease) in Cash and Cash Equivalents     (8)       7
Cash and Cash Equivalents at Beginning of Period     19       10
Cash and Cash Equivalents at End of Period   $ 11     $ 17

 

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

23 

 

 

CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
                   
          March 31,   December 31,
          2016   2015
Assets            
                   
Current Assets            
  Cash and cash equivalents   $ 11   $ 19
  Accounts receivable (less reserve: 2016, $1; 2015, $1)            
    Customer     97     92
    Other     6     7
  Accounts receivable from affiliates     16     12
  Unbilled revenues     60     67
  Fuel, materials and supplies     120     151
  Prepayments     8     5
  Income taxes receivable     3     4
  Regulatory assets     7     16
  Other current assets     2     2
  Total Current Assets     330     375
                   
Property, Plant and Equipment            
  Regulated utility plant     4,889     4,804
  Less: accumulated depreciation - regulated utility plant     441     404
    Regulated utility plant, net     4,448     4,400
  Construction work in progress     379     390
  Property, Plant and Equipment, net     4,827     4,790
                   
Other Noncurrent Assets            
  Regulatory assets     430     424
  Goodwill     389     389
  Other intangibles     70     73
  Other noncurrent assets     18     17
  Total Other Noncurrent Assets     907     903
                   
Total Assets   $ 6,064   $ 6,068

 

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

24 

 

 

CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          March 31,   December 31,
          2016   2015
Liabilities and Equity            
                   
Current Liabilities            
  Short-term debt   $ 82   $ 142
  Long-term debt due within one year     25     25
  Accounts payable     137     157
  Accounts payable to affiliates     25     25
  Customer deposits     26     26
  Taxes     11     20
  Price risk management liabilities     6     5
  Regulatory liabilities     8     13
  Interest     24     11
  Asset retirement obligations     40     25
  Other current liabilities     27     39
  Total Current Liabilities     411     488
                   
Long-term Debt     1,617     1,617
             
Deferred Credits and Other Noncurrent Liabilities            
  Deferred income taxes     867     829
  Investment tax credits     34     35
  Accrued pension obligations     43     56
  Asset retirement obligations     136     149
  Regulatory liabilities     428     431
  Price risk management liabilities     47     42
  Other deferred credits and noncurrent liabilities     90     91
  Total Deferred Credits and Other Noncurrent Liabilities     1,645     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     1,641     1,611
  Earnings reinvested     326     295
  Total Equity     2,391     2,330
                   
Total Liabilities and Equity   $ 6,064   $ 6,068

 

(a)75,000 shares authorized; 21,294 shares issued and outstanding at March 31, 2016 and December 31, 2015.

 

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

25 

 

 

CONDENSED STATEMENTS OF EQUITY
Louisville Gas and Electric Company                        
(Unaudited)                        
(Millions of Dollars)                        
                                 
        Common                        
        stock                        
        shares           Additional            
        outstanding     Common     paid-in     Earnings      
        (a)     stock     capital     reinvested     Total
                                 
December 31, 2015   21,294   $ 424   $ 1,611   $ 295   $ 2,330
Net income                     56     56
Capital contributions from LKE               30           30
Cash dividends declared on common stock                     (25)     (25)
March 31, 2016   21,294   $ 424   $ 1,641   $ 326   $ 2,391
                                 
December 31, 2014   21,294   $ 424   $ 1,521   $ 229   $ 2,174
Net income                     53     53
Cash dividends declared on common stock                     (23)     (23)
March 31, 2015   21,294   $ 424   $ 1,521   $ 259   $ 2,204

 

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

 

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

26 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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27 

 

 

CONDENSED STATEMENTS OF INCOME
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)
                   
          Three Months Ended March 31,
          2016   2015
Operating Revenues            
  Retail and wholesale   $ 451   $ 482
  Electric revenue from affiliate     2     3
  Total Operating Revenues     453     485
                   
Operating Expenses            
  Operation            
    Fuel     120     150
    Energy purchases     4     4
    Energy purchases from affiliate     11     22
    Other operation and maintenance     106     104
  Depreciation     58     53
  Taxes, other than income     7     7
  Total Operating Expenses     306     340
                   
Operating Income     147     145
                   
Other Income (Expense) - net     (2)     (1)
                   
Interest Expense     24     19
                   
Income Before Income Taxes     121     125
                   
Income Taxes     46     47
                   
Net Income (a)   $ 75   $ 78

 

(a)Net income approximates comprehensive income.

 

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

28 

 

 

CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)
                     
          Three Months Ended March 31,
          2016     2015
Cash Flows from Operating Activities              
  Net income   $ 75     $ 78
  Adjustments to reconcile net income to net cash provided by operating activities              
    Depreciation     58       53
    Amortization     4       3
    Defined benefit plans - expense     2       3
    Deferred income taxes and investment tax credits     44       43
    Other             2
  Change in current assets and current liabilities              
    Accounts receivable     (8)       (25)
    Accounts payable     23       1
    Accounts payable to affiliates     2       (14)
    Unbilled revenues     1       14
    Fuel, materials and supplies     (10)       15
    Income tax receivable             60
    Taxes payable     (8)       (1)
    Accrued interest     22       19
    Other     1       (5)
  Other operating activities              
    Defined benefit plans - funding     (10)       (15)
    Other assets             (3)
    Other liabilities     (1)       1
      Net cash provided by operating activities     195       229
Cash Flows from Investing Activities              
  Expenditures for property, plant and equipment     (110)       (148)
  Other investing activities             4
      Net cash provided by (used in) investing activities     (110)       (144)
Cash Flows from Financing Activities              
  Net increase (decrease) in short-term debt     (14)       (43)
  Debt issuance and credit facility costs     (1)        
  Payment of common stock dividends to parent     (64)       (30)
      Net cash provided by (used in) financing activities     (79)       (73)
Net Increase (Decrease) in Cash and Cash Equivalents     6       12
Cash and Cash Equivalents at Beginning of Period     11       11
Cash and Cash Equivalents at End of Period   $ 17     $ 23

 

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

29 

 

 

CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
                   
          March 31,   December 31,
          2016   2015
Assets            
                   
Current Assets            
  Cash and cash equivalents   $ 17   $ 11
  Accounts receivable (less reserve: 2016, $2; 2015, $2)            
    Customer     128     117
    Other     3     8
  Accounts receivable from affiliates           1
  Unbilled revenues     79     80
  Fuel, materials and supplies     157     147
  Prepayments     8     8
  Regulatory assets     10     19
  Other current assets     3     5
  Total Current Assets     405     396
                   
Property, Plant and Equipment            
  Regulated utility plant     7,148     7,099
  Less: accumulated depreciation - regulated utility plant     819     759
    Regulated utility plant, net     6,329     6,340
  Construction work in progress     286     267
  Property, Plant and Equipment, net     6,615     6,607
                   
Other Noncurrent Assets            
  Regulatory assets     314     303
  Goodwill     607     607
  Other intangibles     47     50
  Other noncurrent assets     50     48
  Total Other Noncurrent Assets     1,018     1,008
                   
Total Assets   $ 8,038   $ 8,011

 

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

30 

 

 

CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
          March 31,   December 31,
          2016   2015
Liabilities and Equity            
                   
Current Liabilities            
  Short-term debt   $ 34   $ 48
  Accounts payable     77     88
  Accounts payable to affiliates     42     39
  Customer deposits     27     26
  Taxes     12     20
  Regulatory liabilities     22     19
  Interest     38     16
  Asset retirement obligations     30     25
  Other current liabilities     28     44
  Total Current Liabilities     310     325
                   
Long-term Debt     2,326     2,326
                   
Deferred Credits and Other Noncurrent Liabilities            
  Deferred income taxes     1,091     1,046
  Investment tax credits     93     93
  Accrued pension obligations     37     46
  Asset retirement obligations     334     336
  Regulatory liabilities     489     492
  Other deferred credits and noncurrent liabilities     60     60
  Total Deferred Credits and Other Noncurrent Liabilities     2,104     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     2,596     2,596
  Earnings reinvested     394     383
  Total Equity     3,298     3,287
                   
Total Liabilities and Equity   $ 8,038   $ 8,011

 

(a)80,000 shares authorized; 37,818 shares issued and outstanding at March 31, 2016 and December 31, 2015.

 

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

31 

 

 

CONDENSED STATEMENTS OF EQUITY
Kentucky Utilities Company                        
(Unaudited)                        
(Millions of Dollars)                        
                                   
    Common                     Accumulated      
    stock                     other      
    shares         Additional         comprehensive      
    outstanding   Common   paid-in   Earnings   income      
    (a)   stock   capital   reinvested   (loss)   Total
                                   
December 31, 2015   37,818   $ 308   $ 2,596   $ 383         $ 3,287
Net income                     75           75
Cash dividends declared on common stock                     (64)           (64)
March 31, 2016   37,818   $ 308   $ 2,596   $ 394         $ 3,298
                                   
December 31, 2014   37,818   $ 308   $ 2,596   $ 302         $ 3,206
Net income                     78           78
Cash dividends declared on common stock                     (30)           (30)
Other comprehensive income (loss)                         $ (1)     (1)
March 31, 2015   37,818   $ 308   $ 2,596   $ 350   $ (1)   $ 3,253

 

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

 

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

32 

 

 

 

Combined Notes to Condensed Financial Statements (Unaudited)

 

 

1. Interim Financial Statements

 

(All Registrants)

 

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

 

The accompanying unaudited condensed financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation in accordance with GAAP are reflected in the condensed financial statements. All adjustments are of a normal recurring nature, except as otherwise disclosed. Each Registrant's Balance Sheet at December 31, 2015 is derived from that Registrant's 2015 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 2015 Form 10-K. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016 or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.

 

The classification of certain prior period amounts has been changed to conform to the presentation in the March 31, 2016 financial statements.

 

(PPL)

 

"Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income includes the activities of PPL Energy Supply, substantially representing PPL's former Supply segment, which was spun off and distributed to PPL shareowners on June 1, 2015. In addition, the Statement of Cash Flows for the three months ended March 31, 2015 separately reports the cash flows of the discontinued operations. See Note 8 for additional information.

 

2. Summary of Significant Accounting Policies

 

(All Registrants)

 

The following accounting policy disclosures represent updates to Note 1 to each indicated Registrant's 2015 Form 10-K and should be read in conjunction with those disclosures.

 

Accounts Receivable (PPL and PPL Electric)

 

In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative electricity suppliers at a discount, which reflects a provision for uncollectible accounts. The alternative electricity suppliers have no continuing involvement or interest in the purchased accounts receivable. The purchased accounts receivable are initially recorded at fair value using a market approach based on the purchase price paid and are classified as Level 2 in the fair value hierarchy. During the three months ended March 31, 2016, PPL Electric purchased $382 million of accounts receivable from unaffiliated third parties. During the three months ended March 31, 2015, PPL Electric purchased $331 million of accounts receivable from unaffiliated third parties and $93 million from PPL EnergyPlus. 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.

33 

 

 

 

Discount Rate Change for U.K. Pension Plans (PPL)

 

In selecting the discount rate for its U.K. pension plans, WPD historically used a single weighted-average discount rate in the calculation of net periodic defined benefit cost. Effective January 1, 2016, WPD began using individual spot rates to measure service cost and interest cost to calculate net periodic defined benefit cost. For the three months ended March 31, 2016, this change in discount rate resulted in lower net periodic defined benefit costs recognized on the Statement of Income of $11 million ($9 million after-tax or $0.01 per share).

 

New Accounting Guidance Adopted (All Registrants)

 

Accounting for Stock-Based Compensation

 

Effective January 1, 2016, the Registrants adopted accounting guidance to simplify the accounting for share-based payment transactions. The guidance requires excess tax benefits and tax deficiencies to be recorded as income tax benefit or expense on the statement of income, eliminates the requirement that excess tax benefits be realized before companies can recognize them and changes the threshold for statutory income tax withholding requirements to qualify for equity classification to the maximum statutory tax rates in the applicable jurisdictions. This guidance also changes the classification of excess tax benefits to an operating activity and employee taxes paid when shares are withheld to satisfy the employer's statutory income tax withholding obligation to a financing activity on the statement of cash flows and allows entities to make a policy election to either estimate forfeitures or recognize them when they occur. The adoption of this guidance had the following impacts:

 

·Using the required prospective method of transition, PPL recorded a tax benefit of $8 million ($0.01 per share) and PPL Electric recorded a tax benefit of $5 million related to excess tax benefits for awards that were exercised and vested for the period ending March 31, 2016. These amounts were recorded to Income taxes on the Statements of Income and Deferred income taxes on the Balance Sheets. The impact on LKE was not significant.

 

·PPL elected to use the prospective method of transition for classifying excess tax benefits as an Operating activity on the Statement of Cash Flows. The amounts classified as Financing activities in the prior periods were not significant.

 

·Using the required modified retrospective method of transition, PPL recorded a cumulative effect adjustment of $7 million to increase Earnings reinvested and decrease Deferred income taxes on the Balance Sheet related to prior period unrecognized excess tax benefits.

 

·PPL has historically presented employee taxes paid for net settled awards as a Financing activity on the Statement of Cash Flows. Therefore, there is no transition impact for this requirement.

 

·PPL has elected to recognize forfeitures when they occur. Due to past experience of insignificant forfeitures there is no transition impact of this policy election.

 

3. Segment and Related Information

 

(PPL)

 

See Note 2 in PPL's 2015 Form 10-K for a discussion of reportable segments and related information.

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Financial data for the segments and reconciliation to PPL's consolidated results for the periods ended March 31 are:

 

                Three Months
            2016   2015
Income Statement Data                        
Revenues from external customers                        
  U.K. Regulated               $ 595   $ 697
  Kentucky Regulated                 826     899
  Pennsylvania Regulated                 585     630
  Corporate and Other                 5     4
Total               $ 2,011   $ 2,230
                                 
Net Income                        
  U.K. Regulated (a)               $ 289   $ 375
  Kentucky Regulated                 112     109
  Pennsylvania Regulated                 94     87
  Corporate and Other                 (14)     (19)
  Discontinued Operations (b)                       95
Total               $ 481   $ 647

 

      March 31,   December 31,
      2016   2015
Balance Sheet Data            
Assets            
  U.K. Regulated (c)   $ 15,802   $ 16,669
  Kentucky Regulated     13,777     13,756
  Pennsylvania Regulated     8,720     8,511
  Corporate and Other (d)     410     365
Total assets   $ 38,709   $ 39,301

 

(a)Includes unrealized gains and losses from hedging foreign-currency related economic activity. See Note 14 for additional information.
(b)See Note 8 for additional information.
(c)Includes $11.4 billion and $12.2 billion of net PP&E as of March 31, 2016 and December 31, 2015. WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.
(d)Primarily consists of unallocated items, including cash, PP&E and the elimination of inter-segment transactions.

 

4. Earnings Per Share

 

(PPL)

 

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

 

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

 

              Three Months
                  2016   2015
Income (Numerator)                        
Income from continuing operations after income taxes   $ 481   $ 552
Less amounts allocated to participating securities                 2     3
Income from continuing operations after income taxes available to PPL common shareowners - Basic and Diluted   $ 479   $ 549
                               
Income (loss) from discontinued operations (net of income taxes) available to PPL common shareowners - Basic            
and Diluted         $ 95
                               
Net income               $ 481   $ 647
Less amounts allocated to participating securities                 2     3
Net income available to PPL common shareowners - Basic and Diluted               $ 479   $ 644
                               

 

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              Three Months
                  2016   2015
Shares of Common Stock (Denominator)                        
Weighted-average shares - Basic EPS                 675,441     666,974
Add incremental non-participating securities:                        
    Share-based payment awards                 3,376     1,758
Weighted-average shares - Diluted EPS                 678,817     668,732
                               
Basic EPS                        
Available to PPL common shareowners:                        
    Income from continuing operations after income taxes               $ 0.71   $ 0.83
    Income (loss) from discontinued operations (net of income taxes)                       0.14
    Net Income               $ 0.71   $ 0.97
                               
Diluted EPS                        
Available to PPL common shareowners:                        
    Income from continuing operations after income taxes               $ 0.71   $ 0.82
    Income (loss) from discontinued operations (net of income taxes)                       0.14
    Net Income               $ 0.71   $ 0.96

 

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

 

        Three Months
                2016   2015
                             
Stock-based compensation plans (a)                 2,125     1,445
DRIP                 402     419

 

(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.

 

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

 

        Three Months
            2016   2015
                         
Stock options                 696     1,473
Performance units                       146

 

5. Income Taxes

 

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

 

(PPL)
                                 
                Three Months
                    2016   2015
                         
Federal income tax on Income from Continuing Operations Before                        
  Income Taxes at statutory tax rate - 35%               $ 231   $ 269
Increase (decrease) due to:                        
    State income taxes, net of federal income tax benefit                 13     14
    Valuation allowance adjustments                 6     9
    Impact of lower U.K. income tax rates                 (54)     (62)
    Interest benefit on U.K. financing entities                 (5)     (7)
    Stock-based compensation (a)                 (8)      
    Other                 (4)     (6)
      Total increase (decrease)                 (52)     (52)
Total income taxes               $ 179   $ 217

 

(a)During the three months ended March 31, 2016, PPL recorded an $8 million tax benefit related to the application of new stock-based compensation accounting guidance. See Note 2 for additional information.

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(PPL Electric)                        
                         
                Three Months
                    2016   2015
                                 
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%               $ 53   $ 51
Increase (decrease) due to:                        
    State income taxes, net of federal income tax benefit                 9     10
    Stock-based compensation (a)                 (5)      
    Other                 (1)     (2)
      Total increase (decrease)                 3     8
Total income taxes               $ 56   $ 59

 

(a)During the three months ended March 31, 2016, PPL Electric recorded a $5 million tax benefit related to the application of new stock-based compensation accounting guidance. See Note 2 for additional information.

 

(LKE)                          
                                 
                Three Months
                    2016   2015
                         
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%               $ 67   $ 68
Increase (decrease) due to:                        
    State income taxes, net of federal income tax benefit                 7     7
    Valuation allowance adjustments                       3
    Stock-based compensation                 (1)      
    Other                 (1)     (2)
      Total increase (decrease)                 5     8
Total income taxes               $ 72   $ 76

 

(LG&E)                        
                                 
                Three Months
                    2016   2015
                         
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%               $ 32   $ 30
Increase (decrease) due to:                        
    State income taxes, net of federal income tax benefit                 3     3
      Total increase (decrease)                 3     3
Total income taxes               $ 35   $ 33

 

(KU)                        
                                 
                Three Months
                    2016   2015
                         
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%               $ 42   $ 44
Increase (decrease) due to:                        
    State income taxes, net of federal income tax benefit                 4     4
    Other                       (1)
      Total increase (decrease)                 4     3
Total income taxes               $ 46   $ 47

 

6. Utility Rate Regulation

 

(All Registrants)

 

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

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      PPL   PPL Electric
      March 31,   December 31,   March 31,   December 31,
      2016   2015   2016   2015
                           
Current Regulatory Assets:                        
  Environmental cost recovery   $ 6   $ 24            
  Transmission service charge     7     10   $ 7   $ 10
  Other     13     14     2     3
Total current regulatory assets (a)   $ 26   $ 48   $ 9   $ 13
                           
Noncurrent Regulatory Assets:                        
  Defined benefit plans   $ 801   $ 809   $ 465   $ 469
  Taxes recoverable through future rates     328     326     328     326
  Storm costs     84     93     26     30
  Unamortized loss on debt     68     68     43     42
  Interest rate swaps     145     141            
  Accumulated cost of removal of utility plant     139     137     139     137
  AROs     165     143            
  Other     17     16     2     2
Total noncurrent regulatory assets   $ 1,747   $ 1,733   $ 1,003   $ 1,006

 

Current Regulatory Liabilities:                        
  Generation supply charge   $ 30   $ 41   $ 30   $ 41
  Demand side management     11     8            
  Gas supply clause           6            
  Universal service rider     6     5     6     5
  Transmission formula rate     37     48     37     48
  Fuel adjustment clause     16     14            
  Storm damage expense     15     16     15     16
  Other     4     7     1     3
Total current regulatory liabilities   $ 119   $ 145   $ 89   $ 113
                           
Noncurrent Regulatory Liabilities:                        
  Accumulated cost of removal of utility plant   $ 693   $ 691            
  Coal contracts (b)     14     17            
  Power purchase agreement - OVEC (b)     82     83            
  Net deferred tax assets     22     23            
  Act 129 compliance rider     25     22   $ 25   $ 22
  Defined benefit plans     24     24            
  Interest rate swaps     79     82            
  Other     3     3            
Total noncurrent regulatory liabilities   $ 942   $ 945   $ 25   $ 22

 

        LKE   LG&E   KU
        March 31,   December 31,   March 31,   December 31,   March 31,   December 31,
        2016   2015   2016   2015   2016   2015
Current Regulatory Assets:                                    
  Environmental cost recovery   $ 6   $ 24   $ 6   $ 13         $ 11
  Gas supply clause           1           1            
  Gas line tracker     1     1     1     1            
  Other     10     9           1   $ 10     8
Total current regulatory assets   $ 17   $ 35   $ 7   $ 16   $ 10   $ 19
                                         
Noncurrent Regulatory Assets:                                    
  Defined benefit plans   $ 336   $ 340   $ 211   $ 215   $ 125   $ 125
  Storm costs     58     63     32     35     26     28
  Unamortized loss on debt     25     26     16     17     9     9
  Interest rate swaps     145     141     103     98     42     43
  AROs     165     143     64     57     101     86
  Plant retirement costs     6     6                 6     6
  Other     9     8     4     2     5     6
Total noncurrent regulatory assets   $ 744   $ 727   $ 430   $ 424   $ 314   $ 303

 

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    LKE   LG&E   KU
    March 31   December 31,   March 31,   December 31,   March 31,   December 31,
    2016   2015   2016   2015   2016   2015
Current Regulatory Liabilities:                                    
  Demand side management   $ 11   $ 8   $ 5   $ 4   $ 6   $ 4
  Gas supply clause           6           6            
  Fuel adjustment clause     16     14     3     2     13     12
  Other     3     4           1     3     3
Total current regulatory liabilities   $ 30   $ 32   $ 8   $ 13   $ 22   $ 19
                                         
Noncurrent Regulatory Liabilities:                                    
  Accumulated cost of removal                                    
    of utility plant   $ 693   $ 691   $ 303   $ 301   $ 390   $ 390
  Coal contracts (b)     14     17     6     7     8     10
  Power purchase agreement - OVEC (b)     82     83     57     57     25     26
  Net deferred tax assets     22     23     22     23            
  Defined benefit plans     24     24                 24     24
  Interest rate swaps     79     82     39     41     40     41
  Other     3     3     1     2     2     1
Total noncurrent regulatory liabilities   $ 917   $ 923   $ 428   $ 431   $ 489   $ 492

  

(a)These amounts are included in "Other current assets" on the Balance Sheets.
(b)These liabilities were recorded as offsets to certain intangible assets that were recorded at fair value upon the acquisition of LKE by PPL.

 

Regulatory Matters

 

U.K. Activities (PPL)

 

Ofgem Review of Line Loss Calculation

 

In 2014, Ofgem issued its final decision on the DPCR4 line loss incentives and penalties mechanism. WPD began refunding its liability for over-recovery of line losses to customers on April 1, 2015 and will continue through March 31, 2019. The liability at March 31, 2016 was $45 million.

 

Kentucky Activities

 

CPCN and ECR Filings (PPL, LKE, LG&E and KU)

 

On January 29, 2016, LG&E and KU submitted applications to the KPSC for CPCNs and for ECR rate treatment regarding upcoming environmental construction projects relating to the EPA's regulations addressing the handling of coal combustion byproducts and MATS. The construction projects are expected to begin in 2016 and continue through 2023 and are estimated to cost approximately $316 million at LG&E and $678 million at KU. The applications request an authorized 10% return on equity with respect to LG&E's and KU's ECR mechanisms consistent with the 2014 Kentucky rate case approved in June 2015. Two parties have been granted intervenor status in the proceedings.

 

Gas Franchise (LKE and LG&E)

 

LG&E's existing gas franchise agreement for the Louisville/Jefferson County service area expired on March 31, 2016. Pursuant to Kentucky law, upon expiration of a franchise, LG&E retains a revocable license to own and operate its facilities and to provide service. LG&E and city representatives are negotiating regarding a new franchise agreement and, in the interim, LG&E continues to provide gas service to customers in this service area at existing rates, but without collecting the prior franchise fee. LG&E cannot predict the outcome of this matter but does not anticipate that it will have a material effect on its financial condition or results of operation.

 

Pennsylvania Activities (PPL and PPL Electric)

 

Act 129

 

Act 129 requires Pennsylvania Electric Distribution Companies (EDCs) to meet specified goals for reduction in customer electricity usage and peak demand by specified dates. EDCs not meeting the requirements of Act 129 are subject to significant penalties. In November 2015, PPL Electric filed with the PUC its Act 129 Phase III Energy Efficiency and Conservation Plan for the period June 1, 2016 through May 31, 2021. In January 2016, PPL Electric and the other parties

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reached a settlement of all major issues in the case and filed that settlement with the Administrative Law Judge. In March 2016, the PUC issued an Order approving PPL Electric's Phase III Plan as modified by the settlement, allowing PPL Electric to recover a maximum $313 million in program cost over the five-year period June 1, 2016 through May 31, 2021 through the Act 129 compliance rider.     

 

Act 129 also requires Default Service Providers (DSP) to provide electricity generation supply service to customers pursuant to a PUC-approved default service procurement plan through auctions, requests for proposal and bilateral contracts at the sole discretion of the DSP. Act 129 requires a mix of spot market purchases, short-term contracts and long-term contracts (4 to 20 years), with long-term contracts limited to 25% of load unless otherwise approved by the PUC. A DSP is able to recover the costs associated with its default service procurement plan.

 

PPL Electric has received PUC approval of biannual DSP procurement plans for all periods required under Act 129. In January 2016, PPL Electric filed a Petition for Approval of a new DSP procurement plan with the PUC for the period June 1, 2017 through May 31, 2021. Hearings are scheduled for June 2016. This proceeding remains pending before the PUC. PPL Electric cannot predict the outcome of this proceeding.

 

7. Financing Activities

 

Credit Arrangements and Short-term Debt

 

(All Registrants)

 

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

 

              March 31, 2016   December 31, 2015
                                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   Jan. 2021   £ 210   £ 144         £ 72   £ 133      
  WPD (South West)                                        
    Syndicated Credit Facility   July 2020     245                 245            
  WPD (East Midlands)                                        
    Syndicated Credit Facility   July 2020     300     37           263            
  WPD (West Midlands)                                        
    Syndicated Credit Facility   July 2020     300                 300            
  Uncommitted Credit Facilities         40         £ 4     36         £ 4
      Total U.K. Credit Facilities (a)       £ 1,095   £ 181   £ 4   £ 916   £ 133   £ 4
                                                     
U.S.                                        
  PPL Capital Funding                                        
    Syndicated Credit Facility   Jan. 2021   $ 700         $ 700               $ 151
    Syndicated Credit Facility   Nov. 2018     300           73   $ 227           300
    Bilateral Credit Facility   Mar. 2017     150           17     133           20
      Total PPL Capital Funding Credit Facilities   $ 1,150         $ 790   $ 360         $ 471
                                                     
PPL Electric                                        
  Syndicated Credit Facility   Jan. 2021   $ 400         $ 126   $ 274         $ 1
                                                     
LKE                                        
  Syndicated Credit Facility (b)   Oct. 2018   $ 75               $ 75   $ 75      
                                                     

 

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              March 31, 2016   December 31, 2015
                                Letters of             Letters of
                                Credit               Credit
                                and               and
                                Commercial               Commercial
              Expiration             Paper   Unused       Paper
               Date   Capacity   Borrowed   Issued   Capacity   Borrowed   Issued
LG&E                                        
  Syndicated Credit Facility   Dec. 2020   $ 500         $ 82   $ 418         $ 142
                                                     
KU                                        
  Syndicated Credit Facility   Dec. 2020   $ 400         $ 34   $ 366         $ 48
  Letter of Credit Facility   Oct. 2017     198           198                 198
      Total KU Credit Facilities       $ 598         $ 232   $ 366         $ 246

 

(a) WPD plc's amounts borrowed at March 31, 2016 and December 31, 2015 were USD-denominated borrowings of $200 million for both periods, which bore interest at 1.26% and 1.83%. The unused capacity reflects the amount borrowed in GBP of £138 million as of the date borrowed. WPD (East Midlands) amount borrowed at March 31, 2016 was a GBP-denominated borrowing which equated to $51 million and bore interest at 0.91%. At March 31, 2016, the unused capacity under the U.K. credit facilities was approximately $1.3 billion.

(b)LKE's interest rate on outstanding borrowings at December 31, 2015 was 1.68%.

 

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

 

              March 31, 2016   December 31, 2015
              Weighted -         Commercial       Weighted -   Commercial
              Average         Paper   Unused   Average   Paper
              Interest Rate   Capacity   Issuances   Capacity   Interest Rate   Issuances
                                               
  PPL Capital Funding   0.85%   $ 1,000   $ 773   $ 227     0.78%   $ 451
  PPL Electric   0.72%     400     125     275            
  LG&E   0.79%     350     82     268     0.71%     142
  KU   0.64%     350     34     316     0.72%     48
      Total       $ 2,100   $ 1,014   $ 1,086         $ 641

 

(LKE)

 

See Note 11 for discussion of intercompany borrowings.

 

Long-term Debt

 

(PPL and PPL Electric)

 

In March 2016, the LCIDA issued $116 million of Pollution Control Revenue Refunding Bonds, Series 2016A due 2029 and $108 million of Pollution Control Revenue Refunding Bonds, Series 2016B due 2027 on behalf of PPL Electric. The bonds were issued bearing interest at an initial term rate of 0.90% through their mandatory purchase dates of September 1, 2017 and August 15, 2017. The proceeds of the bonds were used to redeem $116 million of 4.70% Pollution Control Revenue Refunding Bonds, 2005 Series A due 2029 and $108 million of 4.75% Pollution Control Revenue Refunding Bonds, 2005 Series B due 2027 previously issued by the LCIDA on behalf of PPL Electric.

 

In connection with the issuance of each of these new series of LCIDA bonds, PPL Electric entered into a loan agreement with the LCIDA pursuant to which the LCIDA has loaned to PPL Electric the proceeds of the LCIDA bonds on payment terms that correspond to the LCIDA bonds. In order to secure its obligations under the loan agreement, PPL Electric issued $224 million of First Mortgage Bonds under its 2001 Mortgage Indenture, which also have payment terms that correspond to the LCIDA bonds.

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(PPL)

 

ATM Program

 

In February 2015, PPL filed a registration statement with the SEC and entered into two separate equity distribution agreements, pursuant to which PPL may sell, from time to time, up to an aggregate of $500 million of its common stock. For the periods ended March 31, 2016 and 2015, PPL did not issue any shares under the agreements.

 

Distributions

 

In February 2016, PPL declared a quarterly common stock dividend, payable April 1, 2016, of 38 cents per share (equivalent to $1.52 per annum). Future dividends, declared at the discretion of the Board of Directors, will depend upon future earnings, cash flows, financial and legal requirements and other factors.

 

8. Acquisitions, Development and Divestitures

 

(All Registrants)

 

The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with, modify or terminate the projects. Any resulting transactions may impact future financial results. See Note 8 in the Registrants' 2015 Form 10-K for additional information.

 

(PPL)

 

Discontinued Operations

 

Spinoff of PPL Energy Supply

 

In June 2015, PPL and PPL Energy Supply completed the spinoff of PPL Energy Supply which combined its competitive power generation businesses with those of Riverstone to form a new, stand-alone, publicly traded company named Talen Energy.

 

Following completion of the spinoff, PPL shareowners owned 65% of Talen Energy and affiliates of Riverstone owned 35%. The spinoff had no effect on the number of PPL common shares owned by PPL shareowners or the number of shares of PPL common stock outstanding. The transaction is intended to be tax-free to PPL and its shareowners for U.S. federal income tax purposes.

 

PPL has no continuing ownership interest in or control of Talen Energy and Talen Energy Supply (formerly PPL Energy Supply). See Note 8 in PPL's 2015 Form 10-K for additional information.

 

Continuing Involvement (PPL and PPL Electric)

 

As a result of the spinoff, PPL and PPL Energy Supply entered into a Transition Services Agreement (TSA) that terminates no later than two years after the spinoff. Pursuant to the TSA, PPL is providing Talen Energy certain information technology, financial and accounting, human resource and other specified services. For the three months ended March 31, 2016, the amounts PPL billed Talen Energy for these services were $10 million. In general, the fees for the transition services allow the provider to recover its cost of the services, including overheads, but without margin or profit.

 

Additionally, prior to the spinoff, through the annual competitive solicitation process, PPL EnergyPlus was awarded supply contracts for a portion of the PLR generation supply for PPL Electric, which were retained by Talen Energy Marketing as part of the spinoff. PPL Electric's supply contracts with Talen Energy Marketing extend through November 2016. Energy purchases from PPL EnergyPlus were previously included in PPL Electric's Statements of Income as "Energy purchases from affiliate" but were eliminated in PPL's Consolidated Statements of Income.

 

For the three months ended March 31, 2016, PPL Electric's energy purchases from Talen Energy Marketing were $54 million and are no longer considered affiliate transactions.

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Summarized Results of Discontinued Operations (PPL)

 

The operations of the Supply segment prior to the spinoff on June 1, 2015 are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income. Following are the components of Discontinued Operations in the Statement of Income for the period ended March 31, 2015:

 

Operating revenues                     $ 944
Operating expenses                       767
Other Income (Expense) - net                       7
Interest expense (a)                       38
Income (loss) before income taxes                       146
Income tax expense (benefit)                       51
Income (Loss) from Discontinued Operations (net of income taxes)                     $ 95

 

(a)Includes interest associated with the Supply Segment with no additional allocation as the Supply segment was sufficiently capitalized.

 

Development

 

Regional Transmission Line Expansion Plan (PPL and PPL Electric)

 

Northeast/Pocono

 

In October 2012, the FERC issued an order in response to PPL Electric's December 2011 request for ratemaking incentives for the Northeast/Pocono Reliability project (a new 58-mile, 230 kV transmission line that includes three new substations and upgrades to adjacent facilities). The FERC granted the incentive for inclusion in rate base of all prudently incurred construction work in progress costs but denied the requested incentive for a 100 basis point adder to the return on equity.

 

In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project. In January 2014, the PUC issued a Final Order approving the application. The line was energized in April 2016, completing the $350 million project which includes additional substation security enhancements. Costs related to the project were capitalized and are included on the Balance Sheets, primarily in "Regulated utility plant."

 

9. Defined Benefits

 

(PPL, LKE and LG&E)

 

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

 

        Pension Benefits   Other Postretirement Benefits
        U.S.   U.K.    
        2016   2015   2016 (b)   2015   2016   2015
PPL                                    
Service cost   $ 17   $ 30   $ 18   $ 20   $ 2   $ 4
Interest cost     43     57     62     79     6     7
Expected return on plan assets     (56)     (75)     (133)     (131)     (5)     (7)
Amortization of:                                    
    Prior service cost     1     2                        
    Actuarial (gain) loss     15     24     37     39            
Net periodic defined benefit costs (credits) (a)   $ 20   $ 38   $ (16)   $ 7   $ 3   $ 4
LKE                                        
Service cost   $ 6   $ 7               $ 1   $ 1
Interest cost     17     17                 2     2
Expected return on plan assets     (21)     (22)                 (2)     (1)
Amortization of:                                    
    Prior service cost     1     2                 1     1
    Actuarial (gain) loss     5     8                        
Net periodic defined benefit costs (credits)   $ 8   $ 12