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Income and Other Taxes (Tables)

12 Months Ended

Dec. 31, 2011

Components of Income (Loss) From Continuing Operations Before Income Taxes

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

		2011		2010		2009

Domestic income		$	1,715	$	952	$	207
Foreign income			486		287		331
	Total	$	2,201	$	1,239	$	538

Components of Deferred Tax Assets and Liabilities

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

Summary of Operating Loss Carryforwards and Tax Credit Carryforwards

PPL had the following loss and tax credit carryforwards.

		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.

Schedule of Valuation and Qualifying Accounts of Deferred Tax Assets

The changes in deferred tax valuation allowances were:

			Additions
	Balance at				Charged to						Balance
	Beginning		Charged		Other						at End
	of Period		to Income		Accounts			Deductions			of Period

2011	$	464	$	190	$	112	(a)	$	42	(b)	$	724
2010		312		221		6	(c)		75	(d)		464
2009		285		24		17	(e)		14	(f)		312

(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.

Components of Income Tax Expense (Benefit) From Continuing Operations

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.

Reconciliation of Income Tax Expense Derived From Stattory Tax Rates

				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.

Details of Taxes Other Than Income

		2011		2010		2009
Taxes, other than income
	State gross receipts	$	140	$	145	$	187
	State utility realty		(9)		5		5
	State capital stock		18		6		6
	Foreign property		113		52		57
	Domestic property and other		64		30		25
	Total	$	326	$	238	$	280

Unrecognized Tax Benefits

Changes to unrecognized tax benefits were as follows:

		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

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.

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.

	2011		2010		2009

PPL	$	27	$	(39)	$	1
PPL Energy Supply		6		(30)		(1)
PPL Electric		(5)		(8)		(2)

Summary of Income Tax Examinations

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:

PPL

Energy Supply

PPL Electric

LKE

LG&E

U.S. (federal) (a)

1997 and prior

10/31/2010 and prior

Pennsylvania (state)

2004 and prior

Kentucky (state)

2006 and prior

Montana (state)

2008 and prior

U.K. (foreign) (b)

2009 and prior

(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 Energy Supply

PPL Electric