5. Income Taxes

Reconciliations of income tax expense are:

(PPL)

				Three Months Ended March 31,
				2012		2011
Reconciliation of Income Tax Expense
	Federal income tax on Income from Continuing Operations Before Income Taxes
		at statutory tax rate - 35%		$	281	$	219
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				24		25
	State valuation allowance adjustments (a)						11
	Impact of lower U.K. income tax rates				(21)		(8)
	U.S. income tax on foreign earnings - net of foreign tax credit (b)				2		(6)
	Foreign tax reserve adjustments				3
	Federal income tax credits				(4)		(5)
	Amortization of investment tax credit				(2)		(3)
	Depreciation not normalized (a)				(2)		(4)
	State deferred tax rate change (c)				(11)
	Net operating loss carryforward adjustment (d)				(6)
	Other				(5)		(6)
			Total increase (decrease)		(22)		4
Total income taxes from continuing operations				$	259	$	223

(a) 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 tax purposes. Due to the decrease in projected taxable income related to bonus depreciation, PPL recorded state deferred income tax expense during the three months ended March 31, 2011 related to 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. The federal provision for 100% bonus depreciation generally applies to property placed in service before January 1, 2012. The placed in service deadline is extended to January 1, 2013 for property that exceeds $1 million, has a production period longer than one year and has a tax life of at least ten years.

(b) During the three months ended March 31, 2011, PPL recorded a $7 million federal income tax benefit related to U.K. pension contributions.

(c) During the three months ended March 31, 2012, PPL recorded an $11 million adjustment related to state deferred tax liabilities.

(d) During the three months ended March 31, 2012, PPL recorded an adjustment to deferred taxes related to net operating loss carryforwards of LKE.

(PPL Energy Supply)

				Three Months Ended March 31,
				2012		2011
Reconciliation of Income Tax Expense
	Federal income tax on Income from Continuing Operations Before Income Taxes
		at statutory tax rate - 35%		$	170	$	124
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				23		17
	State valuation allowance adjustments (a)						6
	Federal income tax credits				(4)		(5)
	State deferred tax rate change (b)				(11)
	Other				(1)
			Total increase (decrease)		7		18
Total income taxes from continuing operations				$	177	$	142

(a) 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 tax purposes. Due to the decrease in projected taxable income related to bonus depreciation, PPL Energy Supply recorded a $6 million state deferred income tax expense during the three months ended March 31, 2011 related to valuation allowances.

(b) During the three months ended March 31, 2012, PPL Energy Supply recorded an $11 million adjustment related to state deferred tax liabilities.

(PPL Electric)

			Three Months Ended March 31,
			2012		2011
Reconciliation of Income Tax Expense
	Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	20	$	28
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit			2		4
	Federal and state tax reserve adjustments			(1)		(2)
	Federal and state income tax return adjustments (a)					(2)
	Depreciation not normalized (a)			(1)		(3)
	Other					(2)
		Total increase (decrease)				(5)
Total income taxes			$	20	$	23

(a) 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 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. The federal provision for 100% bonus depreciation generally applies to property placed in service before January 1, 2012.

(LKE)

			Three Months Ended March 31,
			2012		2011
Reconciliation of Income Tax Expense
	Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	26	$	47
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit			2		5
	Net operating loss carryforward adjustment (a)			(6)
	Other			(1)		(3)
		Total increase (decrease)		(5)		2
Total income taxes			$	21	$	49

During the three months ended March 31, 2012, LKE recorded a prior period adjustment to deferred taxes related to net operating loss carryforwards. The impact of this adjustment was not material to any previously reported financial statements, and is not expected to be material to the financial statements for the full year of 2012.

(LG&E)

			Three Months Ended March 31,
			2012		2011
Reconciliation of Income Tax Expense
	Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	14	$	21
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit			1		2
	Amortization of investment tax credit			(1)		(1)
	Other			1
		Total increase (decrease)		1		1
Total income taxes			$	15	$	22

(KU)

			Three Months Ended March 31,
			2012		2011
Reconciliation of Income Tax Expense
	Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	21	$	31
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit			2		3
	Other			(1)		(2)
		Total increase (decrease)		1		1
Total income taxes			$	22	$	32

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

		Three Months Ended March 31,
		2012		2011
PPL
	Beginning of period	$	145	$	251
	Additions based on tax positions of prior years		4
	Reductions based on tax positions of prior years		(27)
	Additions based on tax positions related to the current year		1
	Reductions based on tax positions related to the current year				(1)
	Lapse of applicable statutes of limitations		(2)		(2)
	Effects of foreign currency translation				3
	End of period	$	121	$	251

PPL Energy Supply
	Beginning of period	$	28	$	183
	Additions based on tax positions of prior years		4
	Reductions based on tax positions of prior years		(1)
	Derecognition (a)				(155)
	End of period	$	31	$	28

PPL Electric
	Beginning of period	$	73	$	62
	Reductions based on tax positions of prior years		(26)
	Additions based on tax positions related to the current year		1
	Reductions based on tax positions related to the current year				(1)
	Lapse of applicable statutes of limitations		(2)		(2)
	End of period	$	46	$	59

(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.

LKE's, LG&E's and KU's unrecognized tax benefits and changes in those unrecognized tax benefits were insignificant for the three months ended March 31, 2012 and 2011.

At March 31, 2012, 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 reasonably possible 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 March 31, the total unrecognized tax benefits and related effects that, if recognized, would decrease the effective tax rate were as follows. The amounts for LKE, LG&E and KU were insignificant.

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 established an adequate liability for this issue.

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 claim 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 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, 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 the fourth quarter of 2011. In February 2012, PPL filed a petition for rehearing of the Third Circuit opinion. In March 2012, the Third Circuit denied PPL's petition. PPL is considering whether to file a petition for a writ of certiorari with the U.S. Supreme Court.