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Income and Other Taxes

12 Months Ended

Dec. 31, 2019

(PPL)

"Income Before Income Taxes" included the following:



	2019		2018		2017
Domestic income	$	964	$	1,127	$	874
Foreign income	1,191		1,158		1,038
Total	$	2,155	$	2,285	$	1,912

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 and liabilities is based upon the ratemaking principles of the applicable jurisdiction. See Notes 1 and 7 for additional information.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the U.S. and the U.K.

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



	2019			2018
Deferred Tax Assets
Deferred investment tax credits	$	31		$	31
Regulatory liabilities	75			87
Income taxes due to customer	462			479
Accrued pension and postretirement costs	211			277
Federal loss carryforwards	324			325
State loss carryforwards	432			419
Federal and state tax credit carryforwards	402			392
Foreign capital loss carryforwards	320			313
Foreign - other	8			10
Contributions in aid of construction	112			139
Domestic - other	99			88
Valuation allowances	(834		)	(808		)
Total deferred tax assets	1,642			1,752

Deferred Tax Liabilities
Domestic plant - net	3,546			3,359
Regulatory assets	262			314
Foreign plant - net	765			724
Foreign - pensions	72			83
Domestic - other	61			40
Total deferred tax liabilities	4,706			4,520
Net deferred tax liability	$	3,064		$	2,768

State deferred taxes are determined by entity and by jurisdiction. As a result, $24 million and $28 million of net deferred tax assets are shown as "Other noncurrent assets" on the Balance Sheets for 2019 and 2018.

At December 31, 2019, PPL had the following loss and tax credit carryforwards, related deferred tax assets and valuation allowances recorded against the deferred tax assets:



	Gross		Deferred Tax Asset		Valuation Allowance			Expiration
Loss carryforwards
Federal net operating losses	$	1,499	$	315	$	—		2032-2037
Federal charitable contributions	42		9		—			2020-2024
State net operating losses	5,879		432		(393		)	2021-2039
State charitable contributions	1		—		—			2020-2024
Foreign net operating losses	3		—		—			Indefinite
Foreign capital losses	1,880		320		(320		)	Indefinite
Federal - Other	7		1		—			Indefinite



Credit carryforwards
Federal investment tax credit	133	—		2025-2039
Federal alternative minimum tax credit (a)	8	—		Indefinite
Federal foreign tax credits (b)	218	(113	)	2024-2027
Federal - other	24	(6	)	2020-2039
State Recycling Credit	18	—		2028
State - other	1	—		Indefinite


(a)	The TCJA repealed the corporate alternative minimum tax (AMT) for tax years beginning after December 31, 2017. The existing indefinite carryforward period for AMT credits was retained.


(b)	Includes $62 million of foreign tax credits carried forward from 2016 and $156 million of additional foreign tax credits from 2017 related to the taxable deemed dividend associated with the TCJA.

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 as follows:



			Additions
	Balance at Beginning of Period		Charged to Income			Charged to Other Accounts		Deductions			Balance at End of Period
2019	$	808	$	31		$	—	$	5		$	834
2018	838		26			—		56		(a)	808
2017	593		256		(b)	—		11			838


(a)	Decrease in the valuation allowance of approximately $35 million due to the change in the total foreign tax credits available after finalization of the deemed dividend calculation required by the TCJA in 2017. In addition, the deferred tax assets and corresponding valuation allowances were reduced in 2018 by approximately $19 million due to the effect of foreign currency exchange rates.


(b)	Increase in valuation allowance of approximately $145 million related to expected future utilization of both 2017 foreign tax credits and pre-2017 foreign tax credits carried forward. For additional information, see the "Reconciliation of Income Tax Expense" and associated notes below.

In addition, the reduction of the U.S. federal corporate income tax rate enacted by the TCJA in 2017 resulted in a $62 million increase in federal deferred tax assets and a corresponding valuation allowance related to the federal tax benefits of state net operating losses.

PPL Global does not record U.S. income taxes on the unremitted earnings of WPD, as management has determined that such earnings are indefinitely reinvested. Current year distributions from WPD to the U.S. are sourced from a portion of the current year’s earnings of the WPD group. There have been no material changes to the facts underlying PPL’s assertion that historically reinvested earnings of WPD as well as some portion of current year earnings will continue to be indefinitely reinvested. WPD's long-term working capital forecasts and capital expenditure projections for the foreseeable future require reinvestment of WPD's undistributed earnings. Additionally, U.S. long-term working capital forecasts and capital expenditure projections for the foreseeable future do not require or contemplate annual distributions from WPD in excess of some portion of WPD's future annual earnings. The cumulative undistributed earnings are included in "Earnings reinvested" on the Balance Sheets. The amount considered indefinitely reinvested at December 31, 2019 was $7.5 billion. The foregoing is not impacted by U.S. tax reform and the associated conversion from a worldwide to a participation exemption system. It is not practicable to estimate the amount of additional taxes that could be payable on these foreign earnings in the event of repatriation to the U.S.

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 as follows:



	2019			2018			2017
Income Tax Expense (Benefit)
Current - Federal	$	(10	)	$	(19	)	$	6
Current - State	19			17			25
Current - Foreign	91			104			45
Total Current Expense (Benefit)	100			102			76
Deferred - Federal (a)	139			203			532
Deferred - State	76			100			88
Deferred - Foreign	123			107			133
Total Deferred Expense (Benefit), excluding operating loss carryforwards	338			410			753

Amortization of investment tax credit	(3		)	(3		)	(3		)
Tax expense (benefit) of operating loss carryforwards
Deferred - Federal	7			(20		)	(16		)
Deferred - State	(33		)	(31		)	(26		)
Total Tax Expense (Benefit) of Operating Loss Carryforwards	(26		)	(51		)	(42		)
Total income tax expense (benefit)	$	409		$	458		$	784

Total income tax expense (benefit) - Federal	$	133		$	161		$	519
Total income tax expense (benefit) - State	62			86			87
Total income tax expense (benefit) - Foreign	214			211			178
Total income tax expense (benefit)	$	409		$	458		$	784


(a)	Due to the enactment of the TCJA, PPL recorded the following in 2017:


•	$220 million of deferred income tax expense related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on deferred tax assets and liabilities;


•	$162 million of deferred tax expense related to the utilization of current year losses resulting from the taxable deemed dividend; partially offset by,

$60 million of deferred tax benefits related to the $205 million of 2017 foreign tax credits partially offset by $145 million of valuation allowances.

In the table above, the following income tax expense (benefit) are excluded from income taxes:



	2019			2018			2017
Other comprehensive income	$	(93	)	$	(6	)	$	(34	)
Valuation allowance on state deferred taxes recorded to other comprehensive income	—			—			(1		)
Total	$	(93	)	$	(6	)	$	(35	)



	2019			2018			2017
Reconciliation of Income Tax Expense (Benefit)
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	453		$	480		$	669
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (a)	45			40			46
Valuation allowance adjustments (b)	22			21			36
Impact of lower U.K. income tax rates (c)	(25		)	(25		)	(176		)
U.S. income tax on foreign earnings - net of foreign tax credit (a)(d)	2			3			47
Foreign income return adjustments	—			—			(8		)
Impact of the U.K. Finance Act on deferred tax balances (e)	(14		)	(13		)	(16		)
Depreciation and other items not normalized	(10		)	(11		)	(10		)
Amortization of excess deferred federal and state income taxes (f)	(40		)	(37		)	—
Interest benefit on U.K. financing entities	(12		)	(17		)	(16		)
Deferred tax impact of U.S. tax reform (g)	—			—			220
Deferred tax impact of Kentucky tax reform (h)	—			9			—
Kentucky recycling credit, net of federal income tax expense (i)	(18		)	—			—
Other	6			8			(8		)
Total increase (decrease)	(44		)	(22		)	115
Total income tax expense (benefit)	$	409		$	458		$	784
Effective income tax rate	19.0		%	20.0		%	41.0		%


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


(b)	In 2017, PPL recorded an increase in valuation allowances of $23 million primarily related to foreign tax credits recorded in 2016. The future utilization of these credits is expected to be lower as a result of the TCJA.

In 2019, 2018 and 2017, PPL recorded deferred income tax expense of $25 million, $24 million and $16 million for valuation allowances primarily related to increased Pennsylvania net operating loss carryforwards expected to be unutilized.


(c)	The reduction in the U.S. federal corporate income tax rate from 35% to 21% significantly reduced the difference between the U.K. and U.S. income tax rates in 2019 and 2018 compared with 2017.


(d)	In 2017, PPL recorded a federal income tax benefit of $35 million primarily attributable to U.K. pension contributions.

In 2017, PPL recorded deferred income tax expense of $83 million primarily related to enactment of the TCJA. The enacted tax law included a conversion from a worldwide tax system to a territorial tax system, effective January 1, 2018. In the transition to the territorial regime, a one-time transition tax was imposed on PPL’s unrepatriated accumulated foreign earnings in 2017. These earnings were treated as a taxable deemed dividend to PPL of approximately $462 million, including $205 million of foreign tax credits. As the PPL consolidated U.S. group had a taxable loss for 2017, inclusive of the taxable deemed dividend, these credits were recorded as a deferred tax asset. However, it is expected that under the TCJA, only $83 million of the $205 million of foreign tax credits will be realized in the carry forward period. Accordingly, a valuation allowance on the current year foreign tax credits in the amount of $122 million has been recorded to reflect the reduction in the future utilization of the credits. The foreign tax credits associated with the deemed repatriation result in a gross carryforward and corresponding deferred tax asset of $205 million offset by a valuation allowance of $122 million.


(e)	The U.K. Finance Act 2016, enacted in September 2016, reduced the U.K. statutory income tax rate effective April 1, 2020 to 17%. As a result, PPL reduced its net deferred tax liabilities each year as it revalued its balances at the 17% tax rate.

(f)

In 2019 and 2018, PPL recorded lower income tax expense for the amortization of excess deferred income taxes that primarily resulted from the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA. This amortization represents each year's refund amount, prior to a tax gross-up, to be paid to customers for previously collected deferred taxes at higher income tax rates.


(g)	In 2017, PPL recorded deferred income tax expense related to the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.

In 2018, PPL 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.

(h)

In 2019, LKE recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky, with the benefit recognized during the period in which the assets are placed into service.


(i)	In 2018, PPL filed its consolidated federal income tax return, which included updates to the TCJA provisional amounts recorded in 2017. The adjustments to the various provisional amounts that are considered complete as of the filed tax return resulted in an immaterial impact to income tax expense and are discussed in the TCJA section below.



	2019		2018		2017
Taxes, other than income
State gross receipts	$	107	$	103	$	102
State capital stock	—		—		(6		)
Foreign property	127		134		127
Domestic Other	79		75		69
Total	$	313	$	312	$	292

(PPL Electric)

The provision for PPL Electric's deferred income taxes for regulated assets and liabilities 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 liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

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



	2019		2018
Deferred Tax Assets
Accrued pension and postretirement costs	$	81	$	110
Contributions in aid of construction	88		118
Regulatory liabilities	31		35
Income taxes due to customers	170		181
State loss carryforwards	6		14
Federal loss carryforwards	78		79
Other	23		25
Total deferred tax assets	477		562



	2019		2018

Deferred Tax Liabilities
Electric utility plant - net	1,761		1,681
Regulatory assets	139		176
Other	24		25
Total deferred tax liabilities	1,924		1,882
Net deferred tax liability	$	1,447	$	1,320

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

At December 31, 2019, PPL Electric had the following loss carryforwards and related deferred tax assets:



	Gross		Deferred Tax Asset		Expiration
Loss carryforwards
Federal net operating losses	$	363	$	76	2032-2037
Federal charitable contributions	9		2		2020-2024
State net operating losses	81		6		2031-2032

Credit carryforwards were insignificant at December 31, 2019.



	2019		2018			2017
Income Tax Expense (Benefit)
Current - Federal	$	44	$	2		$	(65	)
Current - State	15		9			20
Total Current Expense (Benefit)	59		11			(45		)
Deferred - Federal (a)	51		96			234
Deferred - State	39		37			29
Total Deferred Expense (Benefit), excluding operating loss carryforwards	90		133			263

Tax expense (benefit) of operating loss carryforwards
Deferred - Federal	—		(8		)	(5		)
Total Tax Expense (Benefit) of Operating Loss Carryforwards	—		(8		)	(5		)
Total income tax expense (benefit)	$	149	$	136		$	213

Total income tax expense (benefit) - Federal	$	95	$	90		$	164
Total income tax expense (benefit) - State	54		46			49
Total income tax expense (benefit)	$	149	$	136		$	213


(a)	Due to the enactment of the TCJA in 2017, PPL Electric recorded a $13 million deferred tax benefit related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on deferred tax assets and liabilities.



	2019			2018			2017
Reconciliation of Income Tax Expense (Benefit)
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	127		$	119		$	201
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (a)	47			43			36
Depreciation and other items not normalized	(10		)	(11		)	(8		)
Amortization of excess deferred federal income taxes (b)	(18		)	(17		)	—
Deferred tax impact of U.S. tax reform (c)	—			—			(13		)
Other	3			2			(3		)
Total increase (decrease)	22			17			12
Total income tax expense (benefit)	$	149		$	136		$	213
Effective income tax rate	24.6		%	24.0		%	37.0		%


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

(b)

In 2019 and 2018, PPL Electric recorded lower income tax expense for the amortization of excess deferred taxes that primarily resulted from the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA. This amortization represents each year's refund amount, prior to a tax gross-up, to be paid to customers for previously collected deferred taxes at higher income tax rates.


(c)	In 2017, PPL Electric recorded a deferred tax benefit related to the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.



	2019		2018		2017
Taxes, other than income
State gross receipts	$	107	$	103	$	102
Property and other	5		6		5
Total	$	112	$	109	$	107

(LKE)

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

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



	2019			2018
Deferred Tax Assets
Federal loss carryforwards	$	140		$	142
State loss carryforwards	31			33
Federal tax credit carryforwards	162			169
Contributions in aid of construction	23			21
Regulatory liabilities	44			52
Accrued pension and postretirement costs	71			92
State tax credit carryforwards	19			1
Income taxes due to customers	292			299
Deferred investment tax credits	31			32
Lease liabilities	14			—
Valuation allowances	(6		)	(8		)
Other	28			28
Total deferred tax assets	849			861

Deferred Tax Liabilities
Plant - net	1,778			1,671
Regulatory assets	122			138
Lease right-of-use assets	12			—
Other	6			8
Total deferred tax liabilities	1,918			1,817
Net deferred tax liability	$	1,069		$	956

At December 31, 2019, LKE had the following loss and tax credit carryforwards, related deferred tax assets, and valuation allowances recorded against the deferred tax assets:



	Gross		Deferred Tax Asset		Valuation Allowance		Expiration
Loss carryforwards
Federal net operating losses	$	668	$	140	$	—	2032 - 2037
Federal charitable contributions	23		5		—		2020 - 2024
State net operating losses	797		31		—		2029 - 2038



	Gross	Deferred Tax Asset	Valuation Allowance		Expiration
Credit carryforwards
Federal investment tax credit		133	—		2025 - 2028, 2036 - 2039
Federal alternative minimum tax credit (a)		7	—		Indefinite
Federal - other		22	(6	)	2020-2039
State - recycling credit		18	—		2028
State - other		1	—		Indefinite


(a)	The TCJA repealed the corporate alternative minimum tax (AMT) for tax years beginning after December 31, 2017. The existing indefinite carryforward period for AMT credits was retained.

Changes in deferred tax valuation allowances were:



	Balance at Beginning of Period		Additions		Deductions			Balance at End of Period
2019	$	8	$	3	$	5	(a)	$	6
2018	8		—		—			8
2017	11		4		7		(a)	8


(a)	Tax credits expiring.



	2019			2018			2017
Income Tax Expense (Benefit)
Current - Federal	$	20		$	31		$	74
Current - State	—			4			6
Total Current Expense (Benefit)	20			35			80
Deferred - Federal (a)	81			65			268
Deferred - State (b)	5			34			32
Total Deferred Expense (Benefit), excluding benefits of operating loss carryforwards	86			99			300
Amortization of investment tax credit - Federal	(3		)	(3		)	(3		)
Tax expense (benefit) of operating loss carryforwards
Deferred - Federal	—			(2		)	(2		)
Total Tax Expense (Benefit) of Operating Loss Carryforwards	—			(2		)	(2		)
Total income tax expense (benefit) (c)	$	103		$	129		$	375

Total income tax expense (benefit) - Federal	$	98		$	91		$	337
Total income tax expense (benefit) - State	5			38			38
Total income tax expense (benefit) (c)	$	103		$	129		$	375


(a)	Due to the enactment of the TCJA in 2017, LKE recorded $112 million of deferred income tax expense, of which $108 million related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on deferred tax assets and liabilities and $4 million related to valuation allowances on tax credits expiring in 2021.


(b)	In 2019, LKE recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky


(c)	Excludes deferred federal and state tax expense (benefit) recorded to OCI of $(1) million in 2019, $5 million in 2018 and $(10) million in 2017.



	2019			2018			2017
Reconciliation of Income Tax Expense (Benefit)
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	120		$	121		$	242
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	23			22			26
Amortization of investment tax credit	(3		)	(3		)	(3		)
Amortization of excess deferred federal and state income taxes (b)	(23		)	(20		)	(2		)
Deferred tax impact of U.S. tax reform (c)	—			—			112
Deferred tax impact of state tax reform (d)	—			9			—
Kentucky Recycling Credit, net of federal income tax expense (e)	(18		)	—			—
Other	4			—			—
Total increase (decrease)	(17		)	8			133
Total income tax expense (benefit)	$	103		$	129		$	375
Effective income tax rate	18.0		%	22.5		%	54.3		%


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

(b)

In 2019 and 2018, LKE recorded lower income tax expense for the amortization of excess deferred income taxes that primarily resulted from the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA. This amortization represents each year's refund amount, prior to a tax gross-up, to be paid to customers for previously collected deferred taxes at higher income tax rates.


(c)	In 2017, LKE recorded deferred income tax expense primarily due to the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.


(d)	In 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.


(e)	In 2019, LKE recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky.



	2019		2018		2017
Taxes, other than income
Property and other	$	74	$	70	$	65
Total	$	74	$	70	$	65

(LG&E)

The provision for LG&E's deferred income taxes for regulated assets and liabilities 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 liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

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



	2019			2018
Deferred Tax Assets
Contributions in aid of construction	$	15		$	14
Regulatory liabilities	19			24
Accrued pension and postretirement costs	6			16
Deferred investment tax credits	8			9
Income taxes due to customers	136			139
State tax credit carryforwards	14			—
Lease liabilities	5			—
Valuation allowances	(14		)	—
Other	10			15
Total deferred tax assets	199			217



	2019		2018

Deferred Tax Liabilities
Plant - net	811		751
Regulatory assets	77		88
Lease right-of-use assets	4		—
Other	4		6
Total deferred tax liabilities	896		845
Net deferred tax liability	$	697	$	628

At December 31, 2019 LG&E had $14 million of state credit carryforwards that expire in 2028. In 2019, LG&E recorded a $14 million valuation allowance related to state credit carryforwards due to insufficient projected Kentucky taxable income.



	2019			2018			2017
Income Tax Expense (Benefit)
Current - Federal	$	4		$	—		$	—
Current - State	4			4			5
Total Current Expense (Benefit)	8			4			5
Deferred - Federal	46			51			112
Deferred - State	10			10			14
Total Deferred Expense (Benefit), excluding benefits of operating loss carryforwards	56			61			126
Amortization of investment tax credit - Federal	(1		)	(1		)	(1		)
Tax expense (benefit) of operating loss carryforwards
Deferred - Federal	—			—			1
Total Tax Expense (Benefit) of Operating Loss Carryforwards	—			—			1
Total income tax expense (benefit)	$	63		$	64		$	131

Total income tax expense (benefit) - Federal	$	49		$	50		$	112
Total income tax expense (benefit) - State	14			14			19
Total income tax expense (benefit)	$	63		$	64		$	131



	2019			2018			2017
Reconciliation of Income Tax Expense (Benefit)
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	62		$	62		$	120
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	12			11			14
Amortization of excess deferred federal and state income taxes (b)	(10		)	(8		)	(1		)
Kentucky recycling credit, net of federal income tax expense (c)	(14		)	—			—
Valuation allowance adjustments (c)	14			—			—
Other	(1		)	(1		)	(2		)
Total increase (decrease)	1			2			11
Total income tax expense (benefit)	$	63		$	64		$	131
Effective income tax rate	21.4		%	21.5		%	38.1		%


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

(b)

In 2019 and 2018, LG&E recorded lower income tax expense for the amortization of excess deferred income taxes that primarily resulted from the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA. This amortization represents each year's refund amount, prior to a tax gross-up, to be paid to customers for previously collected deferred taxes at higher income tax rates.

(c)

In 2019, LG&E recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky. This amount has been reserved due to insufficient Kentucky taxable income projected at LG&E.



	2019		2018		2017
Taxes, other than income
Property and other	$	39	$	36	$	33
Total	$	39	$	36	$	33

(KU)

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

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



	2019			2018
Deferred Tax Assets
Contributions in aid of construction	$	8		$	7
Regulatory liabilities	25			28
Accrued pension and postretirement costs	—			7
Deferred investment tax credits	23			23
Income taxes due to customers	156			160
State tax credit carryforwards	5			—
Lease liabilities	8			—
Valuation allowances	(4		)	—
Other	3			3
Total deferred tax assets	224			228

Deferred Tax Liabilities
Plant - net	959			911
Regulatory assets	45			50
Accrued pension and postretirement costs	2			—
Lease right-of-use assets	7			—
Other	3			2
Total deferred tax liabilities	1,016			963
Net deferred tax liability	$	792		$	735

At December 31, 2019 KU had $5 million of state credit carryforwards of which $4 million will expire in 2028 and $1 million that has an indefinite carryforward period. In 2019, KU recorded a $4 million valuation allowance related to state credit carryforwards due to insufficient projected Kentucky taxable income.



	2019			2018			2017
Income Tax Expense (Benefit)
Current - Federal	$	35		$	22		$	—
Current - State	5			6			7
Total Current Expense (Benefit)	40			28			7
Deferred - Federal	28			40			138
Deferred - State	13			10			16
Total Deferred Expense (Benefit)	41			50			154
Amortization of investment tax credit - Federal	(2		)	(2		)	(2		)
Total income tax expense (benefit)	$	79		$	76		$	159

Total income tax expense (benefit) - Federal	$	61		$	60		$	136
Total income tax expense (benefit) - State	18			16			23
Total income tax expense (benefit)	$	79		$	76		$	159



	2019			2018			2017
Reconciliation of Income Tax Expense (Benefit)
Federal income tax on Income Before Income Taxes at statutory tax rate (a)	$	78		$	76		$	146
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	15			13			15
Amortization of investment tax credit	(2		)	(2		)	(2		)
Amortization of excess deferred federal and state income taxes (b)	(13		)	(12		)	(1		)
Kentucky recycling credit, net of federal income tax expense (c)	(4		)	—			—
Valuation allowance adjustments (c)	4			—			—
Other	1			1			1
Total increase (decrease)	1			—			13
Total income tax expense (benefit)	$	79		$	76		$	159
Effective income tax rate	21.2		%	21.0		%	38.0		%


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


(b)	In 2019 and 2018, KU recorded lower income tax expense for the amortization of excess deferred income taxes that primarily resulted from the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA. This amortization represents each year's refund amount, prior to a tax gross-up, to be paid to customers for previously collected deferred taxes at higher income tax rates.

(c)

In 2019, KU recorded a deferred income tax benefit associated with two projects placed into service that prepare a generation waste material for reuse and, as a result, qualify for a Kentucky recycling credit. The applicable credit provides tax benefits for a portion of the equipment costs for major recycling projects in Kentucky. This amount has been reserved due to insufficient Kentucky taxable income projected at KU.



	2019		2018		2017
Taxes, other than income
Property and other	$	35	$	34	$	32
Total	$	35	$	34	$	32

Unrecognized Tax Benefits (All Registrants)

PPL or its subsidiaries file tax returns in four major tax jurisdictions. The income tax provisions for PPL Electric, LG&E and KU are calculated in accordance with an intercompany tax sharing agreement, which provides that taxable income be calculated as if each domestic subsidiary filed a separate consolidated return. 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, 2019, these jurisdictions, as well as the tax years that are no longer subject to examination, were as follows.



	PPL	PPL Electric	LKE	LG&E	KU
U.S. (federal)	2015 and prior	2015 and prior	2015 and prior	2015 and prior	2015 and prior
Pennsylvania (state) (a)	2015 and prior	2015 and prior
Kentucky (state)	2014 and prior		2014 and prior	2014 and prior	2014 and prior
U.K. (foreign)	2015 and prior


(a)	Tax year 2013 is still subject to examination.

Tax Cuts and Jobs Act (TCJA)

On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA were effective for taxable years beginning after December 31, 2017. The TCJA included significant changes to the taxation of corporations, including provisions specifically applicable to regulated public utilities. The more significant changes that impact the Registrants were:


•	The reduction in the U.S. federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, effective January 1, 2018;


•	The exclusion from U.S. federal taxable income of dividends from foreign subsidiaries and the associated "transition tax;"


•	Limitations on the tax deductibility of interest expense, with an exception to these limitations for regulated public utilities;


•	Full current year expensing of capital expenditures with an exception for regulated public utilities that qualify for the exception to the interest expense limitation; and


•	The continuation of certain rate normalization requirements for accelerated depreciation benefits. For non-regulated businesses, the TCJA generally provides for full expensing of property acquired after September 27, 2017.

Under GAAP, the tax effect of changes in tax laws must be recognized in the period in which the law is enacted, or December 2017 for the TCJA. The changes enacted by the TCJA were recorded as an adjustment to the Registrants' deferred tax provisions, and were reflected in "Income Taxes" on the Statement of Income for the year ended December 31, 2017 as follows:



	PPL		PPL Electric			LKE		LG&E		KU
Income tax expense (benefit)	$	321	$	(13	)	$	112	$	—	$	—

The components of these adjustments are discussed below:

Reduction of U.S. Federal Corporate Income Tax Rate

GAAP requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Registrants' deferred taxes were remeasured based upon the U.S. federal corporate income tax rate of 21%. For PPL’s regulated entities, the changes in deferred taxes were, in large part, recorded as an offset to either a regulatory asset or regulatory liability and will be reflected in future rates charged to customers. The tax rate reduction impacts on non-regulated deferred tax assets and liabilities were recorded as an adjustment to the Registrants' deferred tax provisions, and were reflected in "Income Taxes" on the Statement of Income for the year ended December 31, 2017 as follows:



	PPL		PPL Electric			LKE		LG&E		KU
Income tax expense (benefit)	$	220	$	(13	)	$	112	$	—	$	—

As indicated in Note 1 - "Summary of Significant Accounting Policies - Income Taxes", PPL’s U.S. regulated operations' accounting for income taxes are impacted by rate regulation. Therefore, reductions in accumulated deferred income tax balances due to the reduction in the U.S. federal corporate income tax rate to 21% under the provisions of the TCJA resulted in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers over a period of time. The TCJA included provisions that stipulate how these excess deferred taxes are to be passed back to customers for certain accelerated tax depreciation benefits. Refunds of other deferred taxes either have been or will be determined by the Registrants’ regulators. The Balance Sheets at December 31, 2017 reflected the increase to the Registrants' net regulatory liabilities as a result of the TCJA as follows:



	PPL		PPL Electric		LKE		LG&E		KU
Net Increase in Regulatory Liabilities	$	2,185	$	1,019	$	1,166	$	532	$	634

Transition Tax

The TCJA included a conversion from a worldwide tax system to a territorial tax system, effective January 1, 2018. In the transition to the territorial regime, a one-time transition tax was imposed on PPL’s unrepatriated accumulated foreign earnings in 2017. These earnings were treated as a taxable deemed dividend to PPL of approximately $462 million for purposes of the 2017 tax provision. As the PPL consolidated U.S. group had a taxable loss for 2017, inclusive of the taxable deemed dividend, the foreign tax credits associated with the deemed dividend were recorded as a deferred tax asset. However, it is expected that under the TCJA, the current and prior year foreign tax credit carryforwards will not be fully realizable.

As a result, the net deferred income tax expense impact of the deemed repatriation was $101 million and was recorded in "Income Taxes" on the PPL Statement of Income for the year ended December 31, 2017 and "Deferred tax liabilities" on the PPL Balance Sheet at December 31, 2017.

2018 Impacts of 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 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 was 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. In the fourth quarter of 2018, PPL completed its analysis of the deductibility of executive compensation awarded as of November 2, 2017 and concluded that no material change to the provisional amounts was required. The final amounts reported in PPL's 2017 federal income tax return, provisional amounts for the year ended December 31, 2017, the related measurement period adjustments, and the resulting tax impact for the year ended December 31, 2018 were as follows:



	Taxable Income (Loss) (a)
	Adjustments per 2017 Tax Return			Adjustments per 2017 Tax Provision			2018 Adjustments
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, 2018. 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			2018 Adjustments
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	229			220			9
Total	$	321		$	321		$	—

PPL Electric
Reduction in U.S. federal income tax rate	$	(13	)	$	(13	)	$	—

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

The Registrants' accounting related to the effects of the TCJA on financial results for the period ended December 31, 2017 was complete as of December 31, 2018 with respect to all provisional amounts.

2019 TCJA Regulatory Update

The IRS issued proposed regulations for certain provisions of the TCJA in 2018, including interest deductibility and Global Intangible Low-Taxed Income (GILTI). In 2019, final and new proposed regulations were issued relating to the GILTI provisions. PPL has determined that neither the final or new proposed regulations materially change PPL's conclusion that currently no incremental tax arises under these rules. Proposed regulations relating to the limitation on the deductibility of interest expense were issued in November 2018 and such regulations provide detailed rules implementing the broader statutory provisions. These proposed regulations should not apply to the Registrants until the year in which the regulations are issued in final form, which is expected to be in 2020. It is uncertain what form the final regulations will take and, therefore, the Registrants cannot predict what impact the final regulations will have on the tax deductibility of interest expense. However, if the proposed regulations were issued as final in their current form, the Registrants could have a limitation on a portion of their interest expense deduction for tax purposes and such limitation could be significant. PPL expressed its views on these proposed regulations in a comment letter addressed to the IRS on February 26, 2019.

Other

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. PPL is evaluating the impact, if any, of unitary or elective consolidated income tax reporting on all its Registrants. LKE recognized a deferred tax charge of $9 million in 2018 primarily associated with the remeasurement of non-regulated accumulated deferred income tax balances.

As indicated in Note 1, 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 will result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers in future periods. In 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 2019, LG&E and KU began returning state excess deferred income taxes to customers in conjunction with the 2018 Kentucky base rate case. See Note 7 for additional information related to the rate case proceedings.