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Income Taxes
9 Months Ended
Sep. 30, 2012
Income Taxes [Abstract]  
Income Taxes

5. Income Taxes

 

Reconciliations of income tax expense for the periods ended September 30 are:

(PPL)
                
     Three Months Nine Months
     2012 2011 2012 2011
Reconciliation of Income Tax Expense            
 Federal income tax on Income from Continuing Operations Before            
  Income Taxes at statutory tax rate - 35% $ 130 $ 196 $ 539 $ 518
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   6   8   38   47
 State valuation allowance adjustments (a)   2      2   11
 Impact of lower U.K. income tax rates (b)   (30)   (12)   (75)   (31)
 U.S. income tax on foreign earnings - net of foreign tax credit (c)   1   (10)   2   (25)
 Federal and state tax reserve adjustments   (2)   4   (7)   1
 Foreign tax reserve adjustments (d)      2   (5)   2
 Enactment of the U.K.'s Finance Acts 2012 and 2011 (b)   (74)   (69)   (74)   (69)
 Federal income tax credits   (5)   (4)   (12)   (11)
 Amortization of investment tax credit   (2)   (2)   (7)   (6)
 Depreciation not normalized (a)   (2)   (1)   (6)   (7)
 State deferred tax rate change (e)   (6)      (17)   
 Net operating loss carryforward adjustments (f)         (9)   
 Nondeductible acquisition-related costs (g)      1      9
 Other   (1)   (3)   (5)   (10)
   Total increase (decrease)   (113)   (86)   (175)   (89)
Total income taxes from continuing operations $ 17 $ 110 $ 364 $ 429

(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 nine months ended September 30, 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 into 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)       The U.K. Finance Act of 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit in the third quarter of 2012 related to both rate decreases.

 

The U.K. Finance Act of 2011, enacted in July 2011, reduced the U.K. statutory income tax rate from 27% to 26% retroactive to April 1, 2011 and from 26% to 25% effective April 1, 2012. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit in the third quarter of 2011 related to both rate decreases.

(c)       During the three and nine months ended September 30, 2011, PPL recorded a $7 million and $21 million federal income tax benefit related to U.K. pension contributions.

(d)       During the nine months ended September 30, 2012, PPL recorded a tax benefit following resolution of a U.K. tax issue related to interest expense.

(e)       During the three and nine months ended September 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.

(f)       During the nine months ended September 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

(g)       During the three and nine months ended September 30, 2011, PPL recorded non-deductible acquisition-related costs (primarily the U.K. stamp duty tax) associated with its acquisition of WPD Midlands.

(PPL Energy Supply)            
                
     Three Months Nine Months
     2012 2011 2012 2011
Reconciliation of Income Tax Expense            
 Federal income tax on Income from Continuing Operations Before            
  Income Taxes at statutory tax rate - 35% $ 25 $ 96 $ 205 $ 272
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   1   11   25   38
 State valuation allowance adjustments (a)   2      2   6
 Federal and state tax reserve adjustments      1      2
 Federal income tax credits   (4)   (5)   (10)   (11)
 State deferred tax rate change (b)   (6)      (17)   
 Other   (2)   1   (3)   (2)
   Total increase (decrease)   (9)   8   (3)   33
Total income taxes from continuing operations $ 16 $ 104 $ 202 $ 305

(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 state deferred income tax expense during the nine months ended September 30, 2011 related to valuation allowances on state net operating loss carryforwards.

(b)       During the three and nine months ended September 30, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.

(PPL Electric)            
                
     Three Months Nine Months
     2012 2011 2012 2011
Reconciliation of Income Tax Expense            
 Federal income tax on Income Before Income Taxes at statutory            
  tax rate - 35% $ 17 $ 16 $ 51 $ 64
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   2   2   7   9
 Federal and state tax reserve adjustments    (2)   (2)   (5)   (6)
 Federal and state income tax return adjustments (a)            (2)
 Depreciation not normalized (a)   (1)   (1)   (5)   (6)
 Other      (1)   (1)   (3)
   Total increase (decrease)   (1)   (2)   (4)   (8)
Total income taxes $ 16 $ 14 $ 47 $ 56

(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 Nine Months
     2012 2011 2012 2011
Reconciliation of Income Tax Expense            
 Federal income tax on Income from Continuing Operations Before             
  Income Taxes at statutory tax rate - 35% $ 46 $ 50 $ 96 $ 120
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   5   4   7   11
 Amortization of investment tax credit   (1)   (1)   (4)   (4)
 Net operating loss carryforward adjustments (a)         (9)   
 Other   (2)   (1)   (1)   (2)
   Total increase (decrease)   2   2   (7)   5
Total income taxes from continuing operations  $ 48 $ 52 $ 89 $ 125

(a)       During the nine months ended September 30, 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.

(LG&E)            
                
     Three Months Nine Months
     2012 2011 2012 2011
Reconciliation of Income Tax Expense            
 Federal income tax on Income Before Income Taxes at statutory            
   tax rate - 35% $ 24 $ 23 $ 52 $ 56
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   2   2   5   5
 Other   (1)   (1)   (3)   (3)
   Total increase (decrease)   1   1   2   2
Total income taxes $ 25 $ 24 $ 54 $ 58

(KU)            
                
     Three Months Nine Months
     2012 2011 2012 2011
Reconciliation of Income Tax Expense            
 Federal income tax on Income Before Income Taxes at statutory            
  tax rate - 35% $ 28 $ 31 $ 66 $ 79
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   3   3   6   7
 Other   (1)   (2)   (2)   (4)
   Total increase (decrease)   2   1   4   3
Total income taxes $ 30 $ 32 $ 70 $ 82

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

 

Changes to unrecognized tax benefits for the periods ended September 30 were as follows.

   Three Months Nine Months
   2012 2011 2012 2011
PPL            
 Beginning of period $113 $250 $145 $251
 Additions based on tax positions of prior years  2  1  6  2
 Reductions based on tax positions of prior years     (14)  (31)  (14)
 Additions based on tax positions related to the current year     4     4
 Reductions based on tax positions related to the current year  (1)  (1)  (2)  (3)
 Lapse of applicable statutes of limitations  (2)  (3)  (6)  (8)
 Effects of foreign currency translation     (2)     3
 End of period (a) $112 $235 $112 $235
              
PPL Energy Supply            
 Beginning of period $31 $28 $28 $183
 Additions based on tax positions of prior years        4   
 Reductions based on tax positions of prior years        (1)   
 Derecognize unrecognized tax benefits (b)           (155)
 End of period $31 $28 $31 $28
              
PPL Electric            
 Beginning of period $43 $56 $73 $62
 Reductions based on tax positions of prior years  (1)     (28)   
 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)  (3)  (6)  (8)
 End of period $40 $53 $40 $53

(a)       Unrecognized tax benefits at September 30, 2011 included $146 million of U.K. capital losses related to positions previously recorded on U.K. income tax returns. In October 2011, the U.K. tax authority accepted these capital loss positions. As a result, capital loss carryforwards were increased. PPL reversed the unrecognized tax benefit and recorded a deferred tax asset in the fourth quarter of 2011. Simultaneously, PPL recorded a valuation allowance against the deferred tax asset related to the increase in capital loss carryforwards.

(b)       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 in PPL Energy Supply's 2011 Form 10-K 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 for the three and nine months ended September 30, 2012 and 2011.

At September 30, 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 projected over the next 12 months.

    Increase Decrease
         
PPL $ 21 $ 105
PPL Energy Supply   1   31
PPL Electric   22   38

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 September 30, 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.

       
  2012 2011
       
PPL $34 $172
PPL Energy Supply  14  12
PPL Electric  4  9

Other (PPL, PPL Energy Supply and PPL Electric)

 

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. PPL adopted the safe harbor method with the filing of its 2011 federal income tax return.

 

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 reserve for this contingency.

 

Tax Litigation (PPL)

 

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 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's opinion. In March 2012, the Third Circuit denied PPL's petition. In June 2012, the U.S. Court of Appeals for the Fifth Circuit issued a contrary opinion in an identical case involving another company. In July 2012, PPL filed a petition for a writ of certiorari seeking U.S. Supreme Court review of the Third Circuit's opinion. The Supreme Court granted PPL's petition on October 29, 2012, and PPL is assessing what impact, if any, this development will have on its results of operations in the fourth quarter of 2012. PPL expects the case to be decided before the end of the Supreme Court's current term in June 2013 and cannot predict the outcome of this matter.