6. Income Taxes

(All Registrants)

Tax Cuts and Jobs Act (TCJA)

The Registrants recognized certain provisional amounts relating to the impact of the enactment of the TCJA in their December 31, 2017 financial statements, in accordance with SEC guidance. Included in those provisional amounts were estimates of: tax depreciation, deductible executive compensation, accumulated foreign earnings, foreign tax credits, and deemed dividends from foreign subsidiaries, all of which were based on the interpretation and application of various provisions of the TCJA.

In the third quarter of 2018, PPL filed its consolidated federal income tax return, which was prepared using guidance issued by the U.S. Treasury Department and the IRS since the filing of each Registrant’s 2017 Form 10-K. Accordingly, the Registrants have updated the following provisional amounts and now consider them to be complete: (1) the amount of the deemed dividend and associated foreign tax credits relating to the transition tax imposed on accumulated foreign earnings as of December 31, 2017; (2) the amount of accelerated 100% “bonus” depreciation PPL is eligible to claim in its 2017 federal income tax return; and (3) the related impacts on PPL’s 2017 consolidated federal net operating loss to be carried forward to future periods. In addition, the Registrants recorded the tax impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on the changes to deferred tax assets and liabilities resulting from the completed provisional amounts. The completed provisional amounts related to the tax rate reduction had an insignificant impact on the net regulatory liabilities of PPL's U.S. regulated operations. The final amounts reported in PPL’s 2017 federal income tax return, provisional adjustment amounts for the year ended December 31, 2017, the related measurement period adjustments and the resulting tax impact for the three and nine months ended September 30, 2018 are as follows.



	Taxable Income (Loss) (a)
	Adjustments per 2017 Tax Return			Adjustments per 2017 Tax Provision			September 30, 2018 Adjustment
PPL
Deemed Dividend	$	397		$	462		$	(65	)
Bonus Depreciation (b)	(67		)	—			(67		)
Consolidated Federal Net Operating Loss due to the TCJA(c)	(330		)	(462		)	132
Total	$	—		$	—		$	—

PPL Electric
Bonus Depreciation (b)	$	(39	)	$	—		$	(39	)
Consolidated Federal Net Operating Loss reallocated due to the TCJA (c)	(68		)	(105		)	37
Total	$	(107	)	$	(105	)	$	(2	)

LKE
Bonus Depreciation (b)	$	(28	)	$	—		$	(28	)
Consolidated Federal Net Operating Loss reallocated due to the TCJA (c)	(32		)	(45		)	13
Total	$	(60	)	$	(45	)	$	(15	)

LG&E
Bonus Depreciation (b)	$	(17	)	$	—		$	(17	)
Consolidated Federal Net Operating Loss reallocated due to the TCJA (c)	17			—			17
Total	$	—		$	—		$	—

KU
Bonus Depreciation (b)	$	(11	)	$	—		$	(11	)
Consolidated Federal Net Operating Loss reallocated due to the TCJA (c)	11			—			11
Total	$	—		$	—		$	—


(a)	The above table reflects, for each item, the amount subject to change as a result of the TCJA and does not reflect the total amount of each item included in the return and the provision.


(b)	The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Increases in tax depreciation reduce the Registrants' taxes payable and increase net deferred tax liabilities with no impact to “Income Taxes” on the Statements of Income.


(c)	An increase in the consolidated federal net operating loss reduces net deferred tax liabilities with the opposite effect if there is a decrease in the consolidated federal net operating loss. These increases or decreases have no impact to “Income Taxes” on the Statements of Income.



	Income Tax Expense (Benefit)
	Adjustments per 2017 Tax Return			Adjustments per 2017 Tax Provision			September 30, 2018 Adjustment
PPL
Deemed Dividend	$	139		$	161		$	(22	)
Foreign Tax Credits	(157		)	(205		)	48
Valuation of Foreign Tax Credit Carryforward	110			145			(35		)
Reduction in U.S. federal income tax rate (a)	229			220			9
Total	$	321		$	321		$	—



	Income Tax Expense (Benefit)
	Adjustments per 2017 Tax Return			Adjustments per 2017 Tax Provision			September 30, 2018 Adjustment
PPL Electric
Reduction in U.S. federal income tax rate (a)	$	(13	)	$	(13	)	$	—

LKE
Reduction in U.S. federal income tax rate (a)	$	110		$	112		$	(2	)


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.

The Registrants' accounting related to the effects of the TCJA on financial results for the period ended December 31, 2017 is complete as of September 30, 2018 with respect to the three items discussed above. The Registrants continue to analyze the impact of the TCJA on the deductibility of executive compensation awarded on or before November 2, 2017. The Registrants do not currently anticipate a material change from what was reflected in the December 31, 2017 financial statements and expect to record the impact, if any, of changes in the deductibility of executive compensation in the fourth quarter of 2018.

Reconciliations of income taxes for the periods ended September 30 are as follows.



(PPL)
	Three Months						Nine Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	115		$	165		$	373		$	480
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	9			14			34			37
Valuation allowance adjustments	5			4			17			9
Impact of lower U.K. income tax rates relative to U.S. income tax rates (a)	(7		)	(45		)	(20		)	(133		)
U.S. income tax on foreign earnings - net of foreign tax credit (a) (b)	1			(8		)	2			(24		)
Federal and state tax reserve adjustments	—			—			3			—
Impact of the U.K. Finance Acts	(4		)	(3		)	(7		)	(12		)
Depreciation and other items not normalized	(1		)	(2		)	(4		)	(7		)
Amortization of excess deferred income taxes (a)	(11		)	—			(30		)	—
Deferred tax impact of state tax reform (c)	—			—			9			—
Interest benefit on U.K. financing entities	(4		)	(4		)	(13		)	(12		)
Stock-based compensation	—			—			1			(7		)
Other	—			(5		)	(3		)	(10		)
Total increase (decrease)	(12		)	(49		)	(11		)	(159		)
Total income taxes	$	103		$	116		$	362		$	321


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.


(b)	Lower income taxes in 2017 primarily due to the tax benefit of accelerated pension contributions made in the first quarter of 2017. The related tax benefit was recognized over the annual period as a result of utilizing an estimated annual effective tax rate.


(c)	During the second quarter of 2018, LKE recorded deferred income tax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax rate reduction from 6% to 5%, as enacted by HB 487, effective January 1, 2018.



(PPL Electric)
	Three Months						Nine Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	30		$	56		$	93		$	144
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	12			9			35			26
Depreciation and other items not normalized	(1		)	(1		)	(4		)	(5		)
Amortization of excess deferred income taxes (a)	(5		)	—			(13		)	—
Stock-based compensation	—			—			—			(5		)
Other	(1		)	—			—			(1		)
Total increase (decrease)	5			8			18			15
Total income taxes	$	35		$	64		$	111		$	159


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.



(LKE)
	Three Months						Nine Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	34		$	74		$	97		$	181
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (b)	6			8			17			19
Amortization of investment tax credit	(1		)	(1		)	(3		)	(2		)
Deferred tax impact of U.S. tax reform (a)	(2		)	—			(2		)	—
Deferred tax impact of state tax reform (c)	—			—			9			—
Amortization of excess deferred income taxes (a)	(3		)	—			(14		)	—
Other	(2		)	(2		)	(2		)	(3		)
Total increase (decrease)	(2		)	5			5			14
Total income taxes	$	32		$	79		$	102		$	195


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.


(b)	The Kentucky corporate income tax rate was reduced from 6% to 5%, as enacted by HB 487, effective January 1, 2018.


(c)	During the second quarter of 2018, LKE recorded deferred income tax expense, primarily associated with LKE's non-regulated entities, due to the Kentucky corporate income tax rate reduction from 6% to 5%, as enacted by HB 487, effective January 1, 2018.



(LG&E)
	Three Months						Nine Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	18		$	36		$	50		$	91
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (b)	3			4			9			10
Amortization of excess deferred income taxes (a)	(1		)	—			(6		)	—
Other	(2		)	(1		)	(2		)	(2		)
Total increase (decrease)	—			3			1			8
Total income taxes	$	18		$	39		$	51		$	99


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.


(b)	The Kentucky corporate income tax rate was reduced from 6% to 5%, as enacted by HB 487, effective January 1, 2018.



(KU)
	Three Months						Nine Months
	2018			2017			2018			2017
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	21		$	43		$	60		$	111
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (b)	3			5			10			11
Amortization of excess deferred income taxes (a)	(2		)	—			(8		)	—
Other	(1		)	(1		)	(3		)	(2		)
Total increase (decrease)	—			4			(1		)	9
Total income taxes	$	21		$	47		$	59		$	120


(a)	The U.S. federal corporate income tax rate was reduced from 35% to 21%, as enacted by the TCJA, effective January 1, 2018.


(b)	The Kentucky corporate income tax rate was reduced from 6% to 5%, as enacted by HB 487, effective January 1, 2018.

Kentucky State Tax Reform (All Registrants)

HB 487, which became law on April 27, 2018, provides for significant changes to the Kentucky tax code including (1) adopting mandatory combined reporting for corporate members of unitary business groups for taxable years beginning on or after January 1, 2019 (members of a unitary business group may make an eight-year binding election to file consolidated corporate income tax returns with all members of their federal affiliated group) and (2) a reduction in the Kentucky corporate income tax rate from 6% to 5% for taxable years beginning after December 31, 2017. LKE recognized a deferred tax charge of $9 million in the second quarter of 2018 primarily associated with the remeasurement of non-regulated accumulated deferred income tax balances.

As indicated in Note 1 in the Registrants' 2017 Form 10-K, LG&E's and KU's accounting for income taxes is impacted by rate regulation. Therefore, reductions in regulated accumulated deferred income tax balances due to the reduction in the Kentucky corporate income tax rate to 5% under the provisions of HB 487 may result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers in future periods. In the second quarter of 2018, LG&E and KU recorded the impact of the reduced tax rate, related to the remeasurement of deferred income taxes, as an increase in regulatory liabilities of $16 million and $19 million. In a separate regulatory proceeding, LG&E and KU have requested to begin returning state excess deferred income taxes to customers in conjunction with the 2018 Kentucky base rate case, which was filed on September 28, 2018. See Note 7 for additional information related to the rate case proceedings. PPL is evaluating the impact, if any, of unitary or elective consolidated income tax reporting on all its Registrants.