"Income from Continuing Operations Before Income Taxes" included the following components:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards. The provision for PPL's deferred income taxes for regulated assets is based upon the ratemaking principles of the applicable jurisdiction. See Notes 1 and 6 for additional information.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the U.S. and certain foreign jurisdictions in which PPL's operations have historically been profitable.

Significant components of PPL's deferred income tax assets and liabilities were as follows:

			2011		2010
Deferred Tax Assets
	Deferred investment tax credits		$	113	$	45
	Regulatory obligations			149		205
	Accrued pension costs			325		316
	Accrued litigation costs			2		31
	Federal loss carryforwards			305		314
	State loss carryforwards			272		269
	Federal tax credit carryforwards			240		169
	Foreign capital loss carryforwards			578		377
	Foreign loss carryforwards			7
	Foreign - pensions			74		87
	Foreign - regulatory obligations			67
	Foreign - other			21		8
	Contributions in aid of construction			133		152
	Domestic - other			227		219
	Valuation allowances			(724)		(464)
		Total deferred tax assets		1,789		1,728

Deferred Tax Liabilities
	Domestic plant - net			3,465		3,010
	Taxes recoverable through future rates			137		105
	Unrealized gain on qualifying derivatives			331		298
	Other regulatory assets			234		321
	Regulatory undercollections					22
	Reacquired debt costs			93		25
	Foreign plant - net			975		526
	Foreign - other			22		36
	Domestic - other			103		95
		Total deferred tax liabilities		5,360		4,438
Net deferred tax liability			$	3,571	$	2,710

		2011		2010		Expiration

Loss carryforwards
	Federal net operating losses (a)	$	876	$	799	2028-2031
	Federal capital losses (a)				155	2011-2014
	State net operating losses (b)		4,537		4,168	2012-2031
	State capital losses (b)		137		181	2011-2015
	Foreign net operating losses		28			Indefinite
	Foreign capital losses (c)		2,311		1,395	Indefinite
Credit carryforwards
	Federal investment tax credit (a)		180		125	2025-2031
	Federal AMT credit (a)		20		20	Indefinite
	Federal foreign tax credit		12			2017-2021
	Federal - other (a)		28		24	2016-2031

(a) 2010 loss and credit carryforwards associated with the acquisition of LKE. LKE's federal capital loss carryforwards were fully utilized in 2011.

(b) 2010 state net operating loss and state capital loss carryforwards associated with the acquisition of LKE are $1.0 billion and $163 million.

Valuation allowances have been established for the amount that, more likely than not, will not be realized. The changes in deferred tax valuation allowances were:

(a) Primarily related to a $101 million valuation allowance that was recorded against certain deferred tax assets as a result of the 2011 acquisition of WPD Midlands. See Note 10 for additional information on the acquisition.

(b) The reduction of the U.K. statutory income tax rate resulted in a $35 million reduction in the valuation allowance. See "Reconciliation of Income Tax Expense" below for more information on the impact of the U.K. Finance Act of 2011.

(c) A valuation allowance was recorded against certain deferred tax assets as a result of the 2010 acquisition of LKE. See Note 10 for additional information on the acquisition.

(d) Resulting from the projected revenue increase in connection with the expiration of the Pennsylvania generation rate caps in 2010, the valuation allowance related to state net operating loss carryforwards over the remaining carryforward period was reduced by $72 million (or $0.17 per share, basic and diluted).

(e) Related to the change in foreign net operating loss carryforwards, including the change in foreign currency exchange rates.

(f) Primarily from the projected revenue increase in connection with the expiration of the Pennsylvania generation rate caps in 2010, the valuation allowance related to a portion of state net operating loss carryforwards was reduced by $13 million.

PPL Global does not pay or record U.S. income taxes on the undistributed earnings of WPD, as management has determined that the earnings are indefinitely reinvested. Historically, dividends paid by WPD have been distributions from current year's earnings. WPD's long-term working capital forecasts and capital expenditure projections for the foreseeable future require reinvestment of WPD's undistributed earnings, and WPD would have to issue debt or access credit facilities to fund any distributions in excess of current earnings. Additionally, U.S. long-term working capital forecasts and capital expenditure projections for the foreseeable future do not require or contemplate distributions from WPD in excess of some portion of future WPD earnings. The cumulative undistributed earnings are included in "Earnings Reinvested" on the Balance Sheets. The amounts considered permanently reinvested at December 31, 2011 and 2010 were $1.2 billion and $837 million. If the WPD earnings were remitted as dividends, PPL Global could be subject to additional U.S. taxes, net of allowable foreign tax credits. It is not practicable to estimate the amount of additional taxes that could be payable on these foreign earnings.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income from Continuing Operations Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

				2011		2010		2009
Income Tax Expense (Benefit)
	Current - Federal			$	54	$	(51)	$	(72)
	Current - State				(20)		43		14
	Current - Foreign				73		20		41
			Total Current Expense (Benefit)		107		12		(17)
	Deferred - Federal				558		358		130
	Deferred - State				127		(82)		(10)
	Deferred - Foreign				(23)		(9)		16
			Total Deferred Expense (Benefit), excluding operating loss carryforwards		662		267		136

	Investment tax credit, net - Federal				(10)		(5)		(14)
	Tax benefit of operating loss carryforwards
		Deferred - Federal			(30)		6
		Deferred - State			(38)		(17)
			Total Tax Benefit of Operating Loss Carryforwards		(68)		(11)
	Total income taxes from continuing operations (a)			$	691	$	263	$	105

	Total income tax expense - Federal			$	572	$	308	$	44
	Total income tax expense - State				69		(56)		4
	Total income tax expense - Foreign				50		11		57
			Total income taxes from continuing operations (a)	$	691	$	263	$	105

(a) Excludes current and deferred federal, state and foreign tax expense (benefit) recorded to Discontinued Operations of $2 million in 2011, $(6) million in 2010 and $46 million in 2009. Excludes realized tax expense (benefits) related to stock-based compensation, recorded as a decrease (increase) to additional paid-in capital of $3 million in 2011 and insignificant amounts in 2010 and 2009. Excludes tax benefits related to the issuance costs of the Purchase Contracts, recorded as an increase to additional paid-in capital in the amount of $5 million in 2011 and $10 million in 2010, offset by an insignificant amount of related valuation allowances for state deferred taxes in 2011. Also excludes federal, state, and foreign tax expense (benefit) recorded to OCI of $(137) million in 2011, $83 million in 2010 and $358 million in 2009, and related valuation allowances for state deferred taxes in the amount of $3 million for 2011.

				2011		2010		2009
Reconciliation of Income Tax Expense
	Federal income tax on Income from Continuing Operations Before Income Taxes at
		statutory tax rate - 35%		$	770	$	434	$	188
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				63		36		10
	State valuation allowance adjustments (a)				36		(65)		(13)
	Impact of lower U.K. income tax rates				(41)		(20)		(23)
	U.S. income tax on foreign earnings - net of foreign tax credit (b)				(26)		34		(16)
	Federal and state tax reserves adjustments (c)				39		(60)		(5)
	Foreign tax reserves adjustments (d)				(141)				17
	Federal and state income tax return adjustments (e)				(17)		(3)		21
	Domestic manufacturing deduction (e) (f)						(11)		(3)
	Health Care Reform (g)						8
	Foreign losses resulting from restructuring (d)						(261)		(46)
	Enactment of the U.K.'s Finance Acts 2011 and 2010 (h)				(69)		(18)
	Federal income tax credits (i)				(13)		(12)		(2)
	Depreciation not normalized (a)				(20)		(3)		(1)
	Foreign valuation allowance adjustments (d)				147		215
	State deferred tax rate change (j)				(26)
	Other				(11)		(11)		(22)
			Total increase (decrease)		(79)		(171)		(83)
Total income taxes from continuing operations				$	691	$	263	$	105
Effective income tax rate					31.4%		21.2%		19.5%

(a) During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for Federal income tax purposes. Due to the decrease in taxable income related to bonus depreciation and a decrease in projected future taxable income, PPL recorded $43 million in state deferred income tax expense related to deferred tax valuation allowances.

Additionally, the 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation.

Pennsylvania H.B. 1531, enacted in October 2009, increased the net operating loss limitation to 20% of taxable income for tax years beginning in 2010. During 2009, based on the projected revenue increase due to the expiration of the Pennsylvania generation rate caps in 2010, PPL recorded a $13 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances for a portion of its Pennsylvania net operating losses. During 2010, PPL recorded an additional $72 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances related to the future projections of taxable income over the remaining carryforward period of the net operating losses.

(b) During 2011, PPL recorded a $28 million federal income tax benefit related to U.K. pension contributions.

During 2010, PPL recorded additional U.S. income tax expense resulting from increased taxable dividends and certain restructuring of U.K. entities.

(c) In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD. PPL filed its tax returns for years subsequent to its 1997 and 1998 claims for refund on the basis that the U.K. WPT was creditable. In September 2010, the U.S. Tax Court (Tax Court) ruled in PPL's favor in a dispute with the IRS, concluding that the U.K. WPT is a creditable tax for U.S. tax purposes. As a result and with the finalization of other issues, PPL recorded a $42 million tax benefit in 2010. In January 2011, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit). In December 2011, the Third Circuit issued its opinion reversing the Tax Court's decision and holding that the U.K. WPT is not a creditable tax. As a result of the Third Circuit's adverse determination, PPL recorded a $39 million expense in 2011. On February 27, 2012, PPL filed with the Third Circuit a petition for rehearing of its opinion on this matter.

In July 2010, the U.S. Tax Court ruled in PPL's favor in a dispute with the IRS, concluding that street lighting assets are depreciable for tax purposes over seven years. As a result, PPL recorded a $7 million tax benefit to federal and state income tax reserves and related deferred income taxes. The IRS did not appeal this decision.

During 2011, 2010 and 2009, PPL recorded a $6 million, $7 million and $6 million tax benefit to federal and state income tax reserves related to stranded cost securitization.

(d) During 2011, WPD reached an agreement with the HM Revenue & Customs, the U.K. tax authority, related to the amount of the capital losses that resulted from prior years' restructuring in the U.K. and recorded a $147 million foreign tax benefit for the reversal of tax reserves related to the capital losses. Additionally, WPD recorded a $147 million valuation allowance for the amount of capital losses that, more likely than not, will not be utilized.

During 2010, PPL recorded a $261 million foreign tax benefit in conjunction with losses resulting from restructuring in the U.K. A portion of these losses offset tax on a deferred gain from a prior year sale of WPD's supply business. WPD recorded a $215 million valuation allowance for the amount of capital losses that, more likely than not, will not be realized.

During 2009, PPL recorded a $46 million foreign tax benefit and a related $46 million tax reserve related to losses resulting from restructuring in the U.K. Additionally, PPL recorded a $29 million foreign tax benefit related to the resolution of a tax dispute and foreign currency exchange losses.

(e) During 2011, PPL recorded $17 million in federal and state tax benefits related to the filing of the 2010 federal and state income tax returns. Of this amount, $7 million in tax benefits relate to an additional domestic manufacturing deduction resulting from revised bonus depreciation amounts and $3 million in tax benefits relate to the flow-through impact of Pennsylvania regulated state tax depreciation.

During 2009, PPL received consent from the IRS to change its method of accounting for certain expenditures for tax purposes. PPL deducted the resulting IRC Sec. 481 adjustment on its 2008 federal income tax return and recorded a $24 million adjustment to federal and state income tax expense resulting from the reduction in federal income tax benefits related to the domestic manufacturing deduction and certain state tax benefits related to state net operating losses and regulated depreciation.

(f) During 2010, PPL recorded an increase in tax benefits related to domestic manufacturing deductions due to an increase in domestic taxable income resulting from the expiration of generation rate caps in 2010. In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property. The increased tax depreciation deduction related to bonus depreciation significantly reduced the tax benefits related to domestic manufacturing deductions during 2010 and eliminated the tax benefit in 2011.

(g) Beginning in 2013, provisions within Health Care Reform eliminated the tax deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D Coverage. As a result, PPL recorded deferred income tax expense during 2010. See Note 13 for additional information.

(h) The U.K.'s Finance Act of 2011, enacted in July 2011, included reductions in the U.K. statutory income tax rate. The statutory income tax rate was reduced from 27% to 26% retroactive to April 1, 2011 and will be reduced from 26% to 25 % effective April 1, 2012. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during 2011 related to both tax rate decreases.

The U.K.'s Finance Act of 2010, enacted in July 2010, included a reduction in the U.K. statutory income tax rate. Effective April 1, 2011, the statutory income tax rate was reduced from 28% to 27%. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit.

(i) During 2011 and 2010, PPL recorded a deferred tax benefit related to investment tax credits on progress expenditures related to hydroelectric plant expansions. See Note 8 for additional information.

(j) During 2011, PPL completed the sale of certain non-core generation facilities. See Note 9 for additional information. Due to changes in state apportionment resulting in the reduction in the future estimated state tax rate, PPL recorded a deferred tax benefit related to its December 31, 2011 state deferred tax liabilities.

See Note 6 for information on a settlement related to PURTA tax that was returned to PPL Electric customers.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the U.S. and certain foreign jurisdictions in which PPL Energy Supply's operations have historically been profitable.

Significant components of PPL Energy Supply's deferred income tax assets and liabilities were as follows:

			2011		2010
Deferred Tax Assets
	Deferred investment tax credits		$	55	$	33
	Accrued pension costs			100		100
	Accrued litigation costs			1		31
	Federal loss carryforwards			1
	Federal tax credit carryforwards			58
	State loss carryforwards			78		111
	Foreign capital loss carryforwards					377
	Foreign - pensions					87
	Foreign - other					8
	Domestic - other			79		84
	Valuation allowances			(72)		(408)
		Total deferred tax assets		300		423

Deferred Tax Liabilities
	Domestic plant - net			1,407		1,246
	Unrealized gain on qualifying derivatives			380		326
	Foreign - plant					526
	Foreign - other					36
	Domestic other			51		52
		Total deferred tax liabilities		1,838		2,186
Net deferred tax liability			$	1,538	$	1,763

(a) During 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Funding. See Note 9 for additional information.

Valuation allowances have been established for the amount that, more likely than not, will not be realized. The changes in deferred tax valuation allowances were:

(a) During 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Funding. See Note 9 for additional information.

(b) Resulting from the projected revenue increase in connection with the expiration of the Pennsylvania generation rate caps in 2010, the valuation allowance related to state net operating loss carryforwards over the remaining carryforward period was reduced by $52 million.

(c) Pennsylvania state legislation, enacted in 2007 and 2009, increased the net operating loss limitation. As a result, the deferred tax asset (and related valuation allowance) associated with certain of its Pennsylvania net operating loss carryforwards for all periods presented were increased to reflect the higher limitation. There was no impact on the net deferred tax asset position as a result of the legislation and related adjustments.

(d) Primarily related to the change in foreign net operating loss carryforwards including the change in currency exchange rates.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income (Loss) from Continuing Operations Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

			2011		2010		2009
Income Tax Expense (Benefit)
	Current - Federal		$	139	$	208	$	(137)
	Current - State			(12)		78		(7)
		Total Current Expense (Benefit)		127		286		(144)
	Deferred - Federal			251		66		128
	Deferred - State			70		(89)		31
		Total Deferred Expense (Benefit)		321		(23)		159
	Investment tax credit, net - federal			(3)		(2)		(12)
		Total income taxes from continuing operations (a)	$	445	$	261	$	3

	Total income tax expense (benefit) - Federal		$	387	$	272	$	(21)
	Total income tax expense (benefit) - State			58		(11)		24
		Total income taxes from continuing operations (a)	$	445	$	261	$	3

(a) Excludes current and deferred federal, state and foreign tax expense (benefit) recorded to Discontinued Operations of $3 million in 2011, $(5) million in 2010 and $66 million in 2009. Also, excludes federal, state and foreign tax expense (benefit) recorded to OCI of $(83) million in 2011, $132 million in 2010 and $338 million in 2009. The deferred tax benefit of operating loss carryforwards was insignificant for 2011, 2010 and 2009.

				2011		2010		2009
Reconciliation of Income Tax Expense
	Federal income tax on Income from Continuing Operations Before Income Taxes at
		statutory tax rate - 35%		$	424	$	308	$	(5)
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				60		41		2
	State valuation allowance adjustments (a)				22		(52)
	State deferred tax rate change (b)				(26)
	Federal and state tax reserves adjustments				2		(11)		(3)
	Domestic manufacturing deduction (c) (d)						(11)		(3)
	Federal and state income tax return adjustments (d)				(22)		(6)		23
	Health Care Reform (e)						5
	Federal income tax credits (f)				(12)		(12)		(2)
	Other				(3)		(1)		(9)
			Total increase (decrease)		21		(47)		8
Total income taxes from continuing operations				$	445	$	261	$	3
Effective income tax rate					36.7%		29.6%		(23.1)%

(a) During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for Federal income tax purposes. Due to the decrease in taxable income related to bonus depreciation and a decrease in projected future taxable income, PPL Energy Supply recorded $22 million state deferred income tax expense related to deferred tax valuation allowances.

Pennsylvania H.B. 1531, enacted in October 2009, increased the net operating loss limitation to 20% of taxable income for tax years beginning in 2010. Based on the projected revenue increase related to the expiration of the generation rate caps, PPL Energy Supply recorded a $52 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances over the remaining carry forward period of the net operating losses.

(b) During 2011, PPL Energy Supply completed the sale of certain non-core generation facilities. See Note 9 for additional information. Due to changes in state apportionment resulting in the reduction in the future estimated state tax rate, PPL Energy Supply recorded a deferred tax benefit related to its December 31, 2011 state deferred tax liabilities.

(c) During 2010, PPL Energy Supply recorded an increase in tax benefits related to domestic manufacturing deductions due to an increase in domestic taxable income resulting from the expiration of Pennsylvania generation rate caps in 2010. In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property. The increased tax depreciation deduction related to bonus depreciation significantly reduced the tax benefits related to domestic manufacturing deductions during 2010 and eliminated the tax benefit in 2011.

(d) During 2011, PPL recorded $22 million in federal and state tax benefits related to the filing of the 2010 federal and state income tax returns. $7 million in tax benefits relate to an additional domestic manufacturing deduction resulting from revised bonus depreciation amounts.

During 2009, PPL Energy Supply received consent from the IRS to change its method of accounting for certain expenditures for tax purposes. PPL Energy Supply deducted the resulting IRC Sec. 481 adjustment on its 2008 federal income tax return and recorded a $21 million adjustment to federal and state income tax expense resulting from the reduction in federal income tax benefits related to the domestic manufacturing deduction and certain state tax benefits related to state net operating losses.

(e) Beginning in 2013, provisions within Health Care Reform eliminated the tax deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D Coverage. As a result, PPL Energy Supply recorded deferred income tax expense during 2010. See Note 13 for additional information.

(f) During 2011 and 2010, PPL Energy Supply recorded a deferred tax benefit related to investment tax credits on progress expenditures related to hydroelectric plant expansions. See Note 8 for additional information.

The provision for PPL Electric's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the PUC and the FERC. The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" on the Balance Sheets.

Significant components of PPL Electric's deferred income tax assets and liabilities were as follows:

			2011		2010
Deferred Tax Assets
	Deferred investment tax credits		$	2	$	3
	Accrued pension costs			93		89
	Contributions in aid of construction			104		103
	Regulatory obligations			25		4
	State loss carryforwards			26		11
	Federal loss carryforwards			3
	Other			30		43
		Total deferred tax assets		283		253

Deferred Tax Liabilities
	Electric utility plant - net			1,078		934
	Taxes recoverable through future rates			120		105
	Reacquired debt costs			32		12
	Regulatory undercollections					22
	Other regulatory assets			114		108
	Other			29		19
		Total deferred tax liabilities		1,373		1,200
Net deferred tax liability			$	1,090	$	947

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

				2011		2010		2009
Income Tax Expense (Benefit)
	Current - Federal			$	(25)	$	(127)	$	80
	Current - State				(13)		(14)		22
			Total Current Expense		(38)		(141)		102
	Deferred - Federal				123		184		(4)
	Deferred - State				25		27		(17)
			Total Deferred Expense		148		211		(21)

	Investment tax credit, net - Federal				(2)		(2)		(2)
	Tax benefit of operating loss carryforwards
		Deferred - Federal			(12)		6
		Deferred - State			(28)		(17)
			Total Tax Benefit of Operating Loss Carryforwards		(40)		(11)
	Total income taxes			$	68	$	57	$	79

	Total income tax expense - Federal			$	84	$	61	$	74
	Total income tax expense - State				(16)		(4)		5
			Total income taxes	$	68	$	57	$	79

			2011		2010		2009
Reconciliation of Income Taxes
	Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	90	$	67	$	77
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit			12		9		10
	Amortization of investment tax credit			(2)		(2)		(2)
	Federal and state tax reserves adjustments (a)			(9)		(12)		(7)
	Federal and state income tax return adjustments (b) (c)			(4)		(1)		4
	Depreciation not normalized (c)			(17)		(3)		(1)
	Other			(2)		(1)		(2)
		Total increase (decrease)		(22)		(10)		2
Total income tax expense			$	68	$	57	$	79
Effective income tax rate				26.5%		29.7%		35.7%

(a) In July 2010, the U.S. Tax Court ruled in PPL Electric's favor in a dispute with the IRS, concluding that street lighting assets are depreciable for tax purposes over seven years. As a result, PPL Electric recorded a $7 million tax benefit to federal and state income tax reserves and related deferred income taxes. The IRS did not appeal this decision.

During 2011, 2010 and 2009 PPL Electric recorded a $6 million, $7 million and $6 million tax benefit to federal and state income tax reserves related to stranded cost securitization.

(b) During 2009, PPL Electric received consent from the IRS to change its method of accounting for certain expenditures for tax purposes. PPL Electric deducted the resulting IRC Sec. 481 amount on its 2008 federal income tax return and recorded a $3 million adjustment to federal and state income tax expense resulting from the reversal of prior years' state income tax benefits related to regulated depreciation.

(c) In February 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for Federal income tax purposes. The 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation.

See Note 6 for information on a settlement related to PURTA tax that was returned to PPL Electric customers.

The provision for LKE's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the KPSC, VSCC, TRA and the FERC. The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory liabilities" on the Balance Sheets.

Significant components of LKE's deferred income tax assets and liabilities were as follows:

			2011		2010
Deferred Tax Assets
	Net operating loss carryforward		$	318	$	319
	Advanced coal and other tax credits			170		169
	Regulatory liabilities and other			154		205
	Accrued pension costs			67		69
	Federal and state capital loss carryforward			5		60
	Income taxes due from customers			30		30
	Deferred investment tax credit (a)			56		10
	Valuation allowances			(5)		(6)
		Total deferred tax assets		795		856

Deferred Tax Liabilities
	Plant - net			986		789
	Regulatory assets and other			205		241
		Total deferred tax liabilities		1,191		1,030
Net deferred tax liability			$	396	$	174

(a) Changes in balance primarily relate to investment tax credits for TC2, which began dispatching electricity in January 2011. See discussion on TC2 below.

LKE expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

(a) A valuation allowance was recorded against deferred tax assets for federal capital loss carryforwards.

(b) A valuation allowance was recorded against deferred tax assets for state capital loss carryforwards.

(d) Related to release of a valuation allowance associated with federal capital loss carryforwards due to the LKE acquisition by PPL.

				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Income Tax Expense (Benefit)
	Current - Federal			$	(71)	$	(31)	$	33	$	36
	Current - State				6		4		11		3
			Total Current Expense		(65)		(27)		44		39
	Deferred - Federal				208		52		62		40
	Deferred - State				16		1		5		6
			Total Deferred Expense		224		53		67		46
	Investment tax credit, net - Federal				(6)		(1)		(2)		(3)
			Total income tax expense from continuing operations (a)	$	153	$	25	$	109	$	82

	Total income tax expense - Federal			$	131	$	20	$	93	$	73
	Total income tax expense - State				22		5		16		9
			Total income tax expense from continuing operations (a)	$	153	$	25	$	109	$	82

(a) Excludes current and deferred federal and state tax expense (benefit) recorded to Discontinued Operations of $(1) million in 2011, $1 million for the
		two month period ended December 31, 2010, $(1) million for the ten month period ended October 31, 2010 and $(116) million in 2009. Excludes
		deferred federal and state tax expense (benefit) recorded to OCI of $(1) million in 2011, $3 million for the two month period ended December 31,
		2010, $(7) million for the ten month period ended October 31, 2010 and $12 million in 2009. Also excludes deferred federal and state tax expense
		recorded to Regulatory assets of $1 million in 2011, $2 million for the two month period ended December 31, 2010, $8 million for the ten month
		period ended October 31, 2010 and $11 million in 2009.


				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Reconciliation of Income Taxes
	Federal income tax on Income Before Income Taxes at
		statutory tax rate - 35%		$	147	$	25	$	105	$	(432)
	State income taxes, net of federal income tax benefit				15		2		9		7
	Goodwill impairment										523
	Amortization of investment tax credit				(5)				(2)		(3)
	Other				(4)		(2)		(3)		(13)
			Total increase (decrease)		6				4		514
Total income tax expense from continuing operations				$	153	$	25	$	109	$	82
Effective income tax rate					36.5%		35.7%		36.3%		(6.6)%


				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Taxes, other than income
	Property and other			$	37	$	2	$	21	$	31
			Total	$	37	$	2	$	21	$	31

The provision for LG&E's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the KPSC and the FERC. The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory liabilities" on the Balance Sheets.

Significant components of LG&E's deferred income tax assets and liabilities were as follows:

(a) Changes in balance primarily relate to investment tax credits for TC2, which began dispatching electricity in January 2011. See discussion on TC2 below.

LG&E expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Income Tax Expense (Benefit)
	Current - Federal			$	12	$	(4)	$	32	$	26
	Current - State				8		1		5		4
			Total Current Expense		20		(3)		37		30
	Deferred - Federal				52		12		21		14
	Deferred - State				2		1		2		2
			Total Deferred Expense		54		13		23		16
	Investment tax credit, net - Federal				(3)				(2)		1
			Total income tax expense (a)	$	71	$	10	$	58	$	47

	Total income tax expense - Federal			$	61	$	8	$	51	$	41
	Total income tax expense - State				10		2		7		6
			Total income tax expense (a)	$	71	$	10	$	58	$	47

(a) Excludes deferred federal and state tax expense recorded to OCI of $7 million for the ten month period ended October 31, 2010 and $2 million in
		2009. Also excludes deferred federal and state tax expense recorded to Regulatory assets of $2 million in 2011, $1 million for the two month period
		ended December 31, 2010, $6 million for the ten month period ended October 31, 2010 and $5 million in 2009.


				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Reconciliation of Income Taxes
	Federal income tax on Income Before Income Taxes at
		statutory tax rate - 35%		$	68	$	10	$	58	$	50
	State income taxes, net of federal income tax benefit				7		1		4		4
	Other				(4)		(1)		(4)		(7)
			Total increase (decrease)		3						(3)
Total income tax expense				$	71	$	10	$	58	$	47
Effective income tax rate					36.4%		34.5%		34.7%		33.1%


				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Taxes, other than income
	Property and other			$	18	$	1	$	12	$	16
			Total	$	18	$	1	$	12	$	16

The provision for KU's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the KPSC, VSCC, TRA and the FERC. The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory liabilities" on the Balance Sheets.

Significant components of KU's deferred income tax assets and liabilities were as follows:

(a) Changes in balance primarily relate to investment tax credits for TC2, which began dispatching electricity in January 2011. See discussion on TC2 below.

KU expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Income Tax Expense (Benefit)
	Current - Federal			$	(8)	$	13	$	46	$	(5)
	Current - State				4		3		9		1
			Total Current Expense		(4)		16		55		(4)
	Deferred - Federal				101		4		20		43
	Deferred - State				10				3		7
			Total Deferred Expense		111		4		23		50
	Investment tax credit, net - Federal				(3)						21
			Total income tax expense (a)	$	104	$	20	$	78	$	67

	Total income tax expense - Federal			$	90	$	17	$	66	$	59
	Total income tax expense - State				14		3		12		8
			Total income tax expense (a)	$	104	$	20	$	78	$	67

(a) Excludes deferred federal and state tax (benefit) recorded to OCI of $(1) million for the ten month period ended October 31, 2010. Also excludes
		deferred federal and state tax expense (benefit) recorded to Regulatory assets of $(1) million in 2011, $1 million for the two month period ended
		December 31, 2010, $2 million for the ten month period ended October 31, 2010 and $7 million in 2009.


				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Reconciliation of Income Taxes
	Federal income tax on Income Before Income Taxes at
		statutory tax rate - 35%		$	99	$	19	$	77	$	70
	State income taxes, net of federal income tax benefit				9		2		8		5
	Other				(4)		(1)		(7)		(8)
			Total increase (decrease)		5		1		1		(3)
Total income tax expense				$	104	$	20	$	78	$	67
Effective income tax rate					36.9%		36.4%		35.8%		33.5%


				Successor				Predecessor
						Two Months		Ten Months
				Year Ended		Ended		Ended		Year Ended
				December 31,		December 31,		October 31,		December 31,
				2011		2010		2010		2009
Taxes, other than income
	Property and other			$	19	$	1	$	9	$	14
			Total	$	19	$	1	$	9	$	14

In June 2006, LG&E and KU filed a joint application with the DOE requesting certification to be eligible for $125 million in investment tax credits ($24 million to LG&E and $101 million to KU) applicable to the construction of TC2. All necessary DOE and IRS approvals were subsequently received. In September 2007, LG&E and KU received an Order from the KPSC approving the accounting of the investment tax credits, which includes full depreciation basis adjustment for the amount of the credits. The income tax impacts from recording the depreciation basis adjustment and from amortizing these credits over the life of the related property began in January 2011, when LKE began dispatching electricity from TC2 to meet customer demand. In 2011, $2 million of net tax benefits were recognized for LG&E and KU.

Unrecognized Tax Benefits (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

		2011		2010
PPL
	Beginning of period	$	251	$	212
	Additions based on tax positions of prior years		40		68
	Reductions based on tax positions of prior years		(160)		(50)
	Additions based on tax positions related to the current year		25		43
	Reductions based on tax positions related to the current year		(4)		(2)
	Settlements				(17)
	Lapse of applicable statute of limitation		(10)		(8)
	Acquisition of LKE				3
	Effects of foreign currency translation		3		2
	End of period	$	145	$	251

PPL Energy Supply
	Beginning of period	$	183	$	124
	Additions based on tax positions of prior years		1		65
	Reductions based on tax positions of prior years				(47)
	Additions based on tax positions related to the current year				43
	Reductions based on tax positions related to the current year		(1)		(3)
	Settlements				(1)
	Derecognize unrecognized tax benefits (a)		(155)
	Effects of foreign currency translation				2
	End of period	$	28	$	183

PPL Electric
	Beginning of period	$	62	$	74
	Additions based on tax positions of prior years				3
	Reductions based on tax positions of prior years				(5)
	Additions based on tax positions related to the current year		22
	Reductions based on tax positions related to the current year		(1)		(2)
	Lapse of applicable statute of limitation		(10)		(8)
	End of period	$	73	$	62

(a) Represents unrecognized tax benefits derecognized as a result of PPL Energy Supply's distribution of its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding. See Note 9 for additional information on the distribution.

LKE's, LG&E's and KU's unrecognized tax benefits and changes in those unrecognized tax benefits are insignificant at December 31, 2011 and December 31, 2010.

At December 31, 2011, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase or decrease by the following amounts. For LKE, LG&E and KU, no significant changes in unrecognized tax benefits are projected over the next 12 months.

These potential changes could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions related to the creditability of foreign taxes, the timing and utilization of foreign tax credits and the related impact on alternative minimum tax and other credits, the timing and/or valuation of certain deductions, intercompany transactions and unitary filing groups. The events that could cause these changes are direct settlements with taxing authorities, litigation, legal or administrative guidance by relevant taxing authorities and the lapse of an applicable statute of limitation.

At December 31, the total unrecognized tax benefits and related indirect effects that, if recognized, would decrease the effective tax rate were as follows. The amounts for LKE, LG&E and KU were insignificant.

At December 31, 2011 and 2010, the following receivable (payable) balances were recorded for interest related to tax positions. The amounts for LKE, LG&E and KU were insignificant.

The following interest expense (benefit) was recognized in income taxes. The amounts for LKE, LG&E and KU were insignificant.

PPL or its subsidiaries file tax returns in five major tax jurisdictions. The income tax provisions for PPL Energy Supply, PPL Electric, LKE, LG&E and KU are calculated in accordance with an intercompany tax sharing policy which provides that taxable income be calculated as if each domestic subsidiary filed a separate consolidated return. Based on this tax sharing agreement, PPL Energy Supply or its subsidiaries indirectly or directly file tax returns in three major tax jurisdictions, PPL Electric or its subsidiaries indirectly or directly file tax returns in two major tax jurisdictions, and LKE, LG&E and KU or their subsidiaries indirectly or directly file tax returns in two major tax jurisdictions. With few exceptions, at December 31, 2011, these jurisdictions, as well as the tax years that are no longer subject to examination, were as follows:

(a) For LKE, LG&E and KU 2008 and 2009, as well as the ten month period ending October 31, 2010, remain open under the standard three year statute of limitations; however, the IRS has completed its audit of these periods under the Compliance Assurance Process, effectively closing them to audit adjustments. No issues remain outstanding.

(b) Through an indirect wholly owned subsidiary, PPL acquired WPD Midlands on April 1, 2011. PPL is obligated for the acquired companies' tax liability commencing with tax year 2011. The acquired companies are no longer subject to audit for 2007 and prior years.

PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year for the Pennsylvania generation, transmission and distribution operations. The same change was made for the Montana generation operations for 2009.

In August 2011, the IRS issued Rev. Procs. 2011-42 and 2011-43. Rev. Proc. 2011-42 provides guidance regarding the use and evaluation of statistical samples and sampling estimates. Rev. Proc. 2011-43 provides a safe harbor method of determining whether the repair expenditures for electric transmission and distribution property can be currently deducted for tax purposes. If PPL adopts the safe harbor method of Rev. Proc. 2011-43, the amount of deductible versus capitalizable expenditures will likely be different from PPL's current method. PPL does not believe any resulting adjustment to unrecognized tax benefits or income tax liabilities will have a significant impact on net income.

The IRS has not issued guidance to provide a safe harbor method for repair expenditures for generation property. The IRS may assert and ultimately conclude that PPL's deduction for generation-related expenditures should be disallowed in whole or in part. PPL believes that it has provided adequate reserves for this issue.