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

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 6 for additional information.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the U.S. and certain foreign jurisdictions in which PPL's operations have historically been profitable.

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

			2012		2011
Deferred Tax Assets
	Deferred investment tax credits		$	130	$	113
	Regulatory obligations			124		149
	Accrued pension costs			276		325
	Federal loss carryforwards			524		305
	State loss carryforwards			305		272
	Federal and state tax credit carryforwards			287		240
	Foreign capital loss carryforwards			525		578
	Foreign loss carryforwards			6		7
	Foreign - pensions			254		74
	Foreign - regulatory obligations			27		67
	Foreign - other			16		21
	Contributions in aid of construction			134		133
	Domestic - other			239		229
	Valuation allowances			(706)		(724)
		Total deferred tax assets		2,141		1,789

Deferred Tax Liabilities
	Domestic plant - net			3,967		3,465
	Taxes recoverable through future rates			141		137
	Unrealized gain on qualifying derivatives			122		331
	Other regulatory assets			319		234
	Reacquired debt costs			40		93
	Foreign plant - net			937		975
	Foreign - other					22
	Domestic - other			66		103
		Total deferred tax liabilities		5,592		5,360
Net deferred tax liability			$	3,451	$	3,571

		2012		Expiration

Loss carryforwards
	Federal net operating losses	$	1,481	2028-2032
	Federal charitable contributions		19	2016-2017
	State net operating losses		5,099	2013-2032
	State capital losses		138	2013-2016
	Foreign net operating losses		27	Indefinite
	Foreign capital losses		2,282	Indefinite

Credit carryforwards
	Federal investment tax credit		233	2025-2032
	Federal alternative minimum tax credit		20	Indefinite
	Federal foreign tax credit		1	2017-2022
	Federal - other		30	2016-2032
	State - other		4	2022

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:

(a) The reduction of the U.K. statutory income tax rate resulted in a reduction in deferred tax assets and the corresponding valuation allowances. See "Reconciliation of Income Tax Expense" below for more information on the impact of the U.K. Finance Act of 2012.

(b) 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.

(c) The reduction of the U.K. statutory income tax rate resulted in a $35 million reduction in deferred tax assets and the corresponding valuation allowances. See "Reconciliation of Income Tax Expense" below for more information on the impact of the U.K. Finance Act of 2011.

(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.

PPL Global does not pay or record U.S. income taxes on the undistributed earnings of WPD, with the exception of certain financing entities, as management has determined that the earnings are indefinitely reinvested. Historically, dividends paid by WPD have been distributions from current year's earnings. WPD's long-term working capital forecasts and capital expenditure projections for the foreseeable future require reinvestment of WPD's undistributed earnings, and WPD would have to issue debt or access credit facilities to fund any distributions in excess of current earnings. Additionally, U.S. long-term working capital forecasts and capital expenditure projections for the foreseeable future do not require or contemplate distributions from WPD in excess of some portion of future WPD earnings. The cumulative undistributed earnings are included in "Earnings Reinvested" on the Balance Sheets. The amounts considered indefinitely reinvested at December 31, 2012 and 2011 were $2.0 billion and $1.2 billion. If the WPD undistributed earnings were remitted as dividends, PPL Global could be subject to additional U.S. taxes, net of allowable foreign tax credits. It is not practicable to estimate the amount of additional taxes that could be payable on these foreign earnings.

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:

				2012		2011		2010
Income Tax Expense (Benefit)
	Current - Federal					$	54	$	(51)
	Current - State			$	(2)		(20)		43
	Current - Foreign				121		73		20
			Total Current Expense (Benefit)		119		107		12
	Deferred - Federal				553		558		358
	Deferred - State				103		127		(82)
	Deferred - Foreign				35		(23)		(9)
			Total Deferred Expense (Benefit), excluding operating loss carryforwards		691		662		267

	Investment tax credit, net - Federal				(10)		(10)		(5)
	Tax benefit of operating loss carryforwards
		Deferred - Federal			(195)		(30)		6
		Deferred - State			(60)		(38)		(17)
			Total Tax Benefit of Operating Loss Carryforwards		(255)		(68)		(11)
	Total income taxes from continuing operations (a)			$	545	$	691	$	263

	Total income tax expense - Federal			$	348	$	572	$	308
	Total income tax expense (benefit) - State				41		69		(56)
	Total income tax expense - Foreign				156		50		11
			Total income taxes from continuing operations (a)	$	545	$	691	$	263

(a) Excludes current and deferred federal and state tax expense (benefit) recorded to Discontinued Operations of $(4) million in 2012, $2 million in 2011 and $(6) million in 2010. Excludes realized tax expense (benefits) related to stock-based compensation, recorded as a decrease (increase) to additional paid-in capital of $(1) million in 2012, $3 million in 2011 and an insignificant amount in 2010. Excludes tax benefits related to the issuance costs of the Purchase Contracts, recorded as an increase to additional paid-in capital of an insignificant amount in 2012, $5 million in 2011 and $10 million in 2010, offset by an insignificant amount of related valuation allowances for state deferred taxes in 2012 and 2011. Also excludes federal, state, and foreign tax expense (benefit) recorded to OCI of $(526) million in 2012, $(137) million in 2011 and $83 million in 2010, and related valuation allowances for state deferred taxes of an insignificant amount in 2012 and $3 million in 2011.

				2012		2011		2010
Reconciliation of Income Tax Expense
	Federal income tax on Income from Continuing Operations Before Income Taxes at
		statutory tax rate - 35%		$	729	$	770	$	434
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				27		63		36
	State valuation allowance adjustments (a)				13		36		(65)
	Impact of lower U.K. income tax rates (b)				(123)		(41)		(20)
	U.S. income tax on foreign earnings - net of foreign tax credit (c)				43		(14)		34
	Federal and state tax reserves adjustments (d)				(1)		39		(60)
	Foreign tax reserves adjustments (e)				(5)		(141)
	Federal and state income tax return adjustments (a) (f)				16		(17)		(3)
	Foreign income tax return adjustments				(6)
	Domestic manufacturing deduction (f) (g)								(11)
	Health Care Reform (h)								8
	Foreign losses resulting from restructuring (e)								(261)
	Enactment of the U.K.'s Finance Acts (b)				(75)		(69)		(18)
	Federal income tax credits (i)				(12)		(13)		(12)
	Depreciation not normalized (a)				(11)		(20)		(3)
	Foreign valuation allowance adjustments (e)						147		215
	State deferred tax rate change (j)				(19)		(26)
	Net operating loss carryforward adjustments (k)				(9)
	Intercompany interest on U.K. financing entities (l)				(13)		(12)
	Other				(9)		(11)		(11)
			Total increase (decrease)		(184)		(79)		(171)
Total income taxes from continuing operations				$	545	$	691	$	263
Effective income tax rate					26.2%		31.4%		21.2%

(a) During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. The guidance 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 projected 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 during 2011.

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 has a cost in excess of $1 million, has a production period longer than one year and has a tax life of at least ten years. PPL's tax deduction for 100% bonus regulated tax depreciation was significantly lower in 2012 than in 2011.

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. Based on the projected revenue increase related to the expiration of the generation rate caps in 2010, PPL recorded a $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) The U.K.'s 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 during 2012 related to both rate decreases.

The U.K.'s 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 during 2011 related to both rate decreases.

The U.K.'s Finance Act of 2010, enacted in July 2010, reduced the U.K. statutory income tax rate from 28% to 27% effective April 1, 2011. As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during 2010.

(c) During 2012, PPL recorded a $23 million adjustment to federal income tax expense related to the recalculation of 2010 U.K. earnings and profits and $19 million of U.S. income tax expense on foreign earnings of certain U.K. financing entities not indefinitely reinvested.

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 primarily resulting from increased taxable dividends.

(d) In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD. PPL filed its federal income 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, 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. 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 oral argument was held on February 20, 2013. 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.

In July 2010, the 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.

PPL recorded a tax benefit of $6 million during 2012 and 2011 and $7 million during 2010 to federal and state income tax reserves related to stranded cost securitization.

(e) During 2012, PPL recorded a foreign tax benefit following resolution of a U.K. tax issue related to interest expense.

During 2011, WPD reached an agreement with HMRC 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 utilized.

(f) During 2012, PPL recorded federal and state income tax expense related to the filing of the 2011 federal and state income tax returns. Of this amount, $5 million relates to the reversal of prior years' state income tax benefits related to regulated depreciation. PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year. In August 2011, the IRS issued guidance regarding the use and evaluation of statistical samples and sampling estimates for network assets. The IRS guidance provided 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.

During 2011, PPL recorded 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 related to an additional domestic manufacturing deduction resulting from revised bonus depreciation amounts and $3 million in tax benefits related to the flow-through impact of Pennsylvania regulated state tax depreciation.

(g) In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property. The increased tax depreciation eliminated the tax benefits related to domestic manufacturing deductions in 2012 and 2011.

(h) 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.

(i) During 2012, 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) In 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 reductions in the future estimated state tax rate, PPL recorded deferred tax benefits related to its December 31, 2012 and 2011 state deferred tax liabilities.

(k) During 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

(l) During 2012 and 2011, PPL recorded foreign income tax benefits related to interest expense on intercompany loans for which there was no domestic income tax expense.

(a) The increase between 2011 and 2010 is due primarily to the acquisition of WPD Midlands on April 1, 2011. See Note 10 for additional information.

(b) The increase between 2011 and 2010 is due primarily to the acquisition of LKE on November l, 2010. See Note 10 for additional information.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the U.S. jurisdictions in which PPL Energy Supply's operations have historically been profitable.

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

			2012		2011
Deferred Tax Assets
	Deferred investment tax credits		$	75	$	55
	Accrued pension costs			94		100
	Federal loss carryforwards			51		1
	Federal tax credit carryforwards			113		58
	State loss carryforwards			79		78
	Other			68		80
	Valuation allowances			(74)		(72)
		Total deferred tax assets		406		300

Deferred Tax Liabilities
	Plant - net			1,579		1,407
	Unrealized gain on qualifying derivatives			173		380
	Other			44		51
		Total deferred tax liabilities		1,796		1,838
Net deferred tax liability			$	1,390	$	1,538

At December 31, PPL Energy Supply had the following loss and tax credit carryforwards.

		2012		Expiration
Loss carryforwards
	Federal net operating losses	$	143	2031-2032
	Federal charitable contributions		3	2016
	State net operating losses		1,202	2013-2032

Credit carryforwards
	Federal investment tax credit		108	2031-2032
	Federal - other		5	2031-2032

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:

(a) During 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Funding. See Note 9 for additional information.

(b) 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 $52 million.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income (Loss) from Continuing Operations Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

				2012		2011		2010
Income Tax Expense (Benefit)
	Current - Federal			$	89	$	139	$	208
	Current - State				22		(12)		78
			Total Current Expense (Benefit)		111		127		286
	Deferred - Federal				193		251		66
	Deferred - State				10		70		(89)
			Total Deferred Expense (Benefit), excluding operating loss carryforwards		203		321		(23)

	Investment tax credit, net - federal				(2)		(3)		(2)
	Tax benefit of operating loss carryforwards
		Deferred - Federal			(48)
		Deferred - State			(1)
			Total Tax Benefit of Operating Loss Carryforwards		(49)
	Total income taxes from continuing operations (a)			$	263	$	445	$	261

	Total income tax expense - Federal			$	232	$	387	$	272
	Total income tax expense (benefit) - State				31		58		(11)
			Total income taxes from continuing operations (a)	$	263	$	445	$	261

(a) Excludes current and deferred federal, state and foreign tax expense (benefit) recorded to Discontinued Operations of $3 million in 2011 and $(5) million in 2010. Also, excludes federal, state and foreign tax expense (benefit) recorded to OCI of $(267) million in 2012, $(83) million in 2011 and $132 million in 2010. The deferred tax benefit of operating loss carryforwards was insignificant for 2011 and 2010.

				2012		2011		2010
Reconciliation of Income Tax Expense
	Federal income tax on Income from Continuing Operations Before Income Taxes at
		statutory tax rate - 35%		$	258	$	424	$	308
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				33		60		41
	State valuation allowance adjustments (a)				2		22		(52)
	State deferred tax rate change (b)				(19)		(26)
	Federal and state tax reserves adjustments				(2)		2		(11)
	Domestic manufacturing deduction (c) (d)								(11)
	Federal and state income tax return adjustments (d)				4		(22)		(6)
	Health Care Reform (e)								5
	Federal income tax credits (f)				(12)		(12)		(12)
	Other				(1)		(3)		(1)
			Total increase (decrease)		5		21		(47)
Total income taxes from continuing operations				$	263	$	445	$	261
Effective income tax rate					35.6%		36.7%		29.6%

(a) During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. The guidance 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 projected taxable income related to bonus depreciation and a decrease in projected future taxable income, PPL Energy Supply recorded $22 million in state deferred income tax expense related to deferred tax valuation allowances during 2011.

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. Based on the projected revenue increase related to the expiration of the generation rate caps, PPL Energy Supply recorded a $52 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances over the remaining carry forward period of the net operating losses during 2010.

(b) In 2011, PPL Energy Supply completed the sale of certain non-core generation facilities. See Note 9 for additional information. Due to changes in state apportionment resulting in reductions in the future estimated state tax rate, PPL Energy Supply recorded deferred tax benefits related to its December 31, 2012 and 2011 state deferred tax liabilities.

(c) In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property. The increased tax depreciation deduction eliminated the tax benefits related to domestic manufacturing deductions in 2012 and 2011.

(d) During 2011, PPL recorded 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 related to an additional domestic manufacturing deduction resulting from revised bonus depreciation amounts.

(e) 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 Energy Supply recorded deferred income tax expense during 2010. See Note 13 for additional information.

(f) During 2012, 2011 and 2010, PPL Energy Supply recorded a deferred tax benefit related to investment tax credits on progress expenditures related to hydroelectric plant expansions. See Note 8 for additional information.

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 "Regulated liabilities" on the Balance Sheets.

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

			2012		2011
Deferred Tax Assets
	Accrued pension costs		$	81	$	93
	Contributions in aid of construction			106		104
	Regulatory obligations			24		28
	State loss carryforwards			39		26
	Federal loss carryforwards			81		3
	Other			46		29
		Total deferred tax assets		377		283

Deferred Tax Liabilities
	Electric utility plant - net			1,229		1,078
	Taxes recoverable through future rates			122		120
	Reacquired debt costs			27		32
	Other regulatory assets			174		127
	Other			12		16
		Total deferred tax liabilities		1,564		1,373
Net deferred tax liability			$	1,187	$	1,090

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:

				2012		2011		2010
Income Tax Expense (Benefit)
	Current - Federal			$	(28)	$	(25)	$	(127)
	Current - State				(18)		(13)		(14)
			Total Current Expense (Benefit)		(46)		(38)		(141)
	Deferred - Federal				162		123		184
	Deferred - State				42		25		27
			Total Deferred Expense (Benefit), excluding operating loss carryforwards		204		148		211

	Investment tax credit, net - Federal				(1)		(2)		(2)
	Tax benefit of operating loss carryforwards
		Deferred - Federal			(72)		(12)		6
		Deferred - State			(17)		(28)		(17)
			Total Tax Benefit of Operating Loss Carryforwards		(89)		(40)		(11)
	Total income tax expense			$	68	$	68	$	57

	Total income tax expense - Federal			$	61	$	84	$	61
	Total income tax expense (benefit) - State				7		(16)		(4)
			Total income tax expense	$	68	$	68	$	57

			2012		2011		2010
Reconciliation of Income Taxes
	Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	71	$	90	$	67
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit			9		12		9
	Amortization of investment tax credit			(1)		(2)		(2)
	Federal and state tax reserves adjustments (a)			(8)		(9)		(12)
	Federal and state income tax return adjustments (b) (c)			7		(4)		(1)
	Depreciation not normalized (c)			(8)		(17)		(3)
	Other			(2)		(2)		(1)
		Total increase (decrease)		(3)		(22)		(10)
Total income tax expense			$	68	$	68	$	57
Effective income tax rate				33.3%		26.5%		29.7%

(a) In July 2010, the U.S. Tax Court ruled in PPL Electric'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 Electric 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.

PPL Electric recorded a tax benefit of $6 million during 2012 and 2011 and $7 million during 2010 to federal and state income tax reserves related to stranded cost securitization.

(b) PPL Electric changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year. In August 2011, the IRS issued guidance regarding the use and evaluation of statistical samples and sampling estimates for network assets. The IRS guidance provided a safe harbor method of determining whether the repair expenditures for electric transmission and distribution property can be currently deducted for tax purposes. PPL Electric adopted the safe harbor method with the filing of its 2011 federal income tax return and recorded a $5 million adjustment to federal and state income tax expense resulting from the reversal of prior years' state income tax benefits related to regulated depreciation.

During 2011, PPL Electric recorded a $5 million federal and state income tax benefit as a result of filing its 2010 federal and state income tax returns. Of this amount, $3 million in tax benefits related to the flow-through impact of Pennsylvania regulated 100% bonus tax depreciation.

(c) During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. The guidance allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal income 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 into service before January 1, 2012. The placed in-service deadline is extended to January 1, 2013 for property that has a cost in excess of $1 million, has a production period longer than one year and has a tax life of at least ten years. PPL Electric's tax deduction for 100% bonus depreciation was significantly lower in 2012 than in 2011.

(a) 2011 includes PURTA tax that was refunded to PPL Electric customers in 2011.

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, TRA 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:

			2012		2011
Deferred Tax Assets
	Net operating loss carryforward		$	376	$	318
	Federal tax credit carryforwards			170		170
	Regulatory liabilities			99		124
	Accrued pension costs			42		67
	State capital loss carryforward			5		5
	Income taxes due to customers			26		30
	Deferred investment tax credits			54		56
	Other			41		30
	Valuation allowances			(5)		(5)
		Total deferred tax assets		808		795

Deferred Tax Liabilities
	Plant - net			1,171		986
	Regulatory assets			152		180
	Other			13		25
		Total deferred tax liabilities		1,336		1,191
Net deferred tax liability			$	528	$	396

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

		2012		Expiration

Loss carryforwards
	Federal net operating losses	$	948	2028-2032
	State net operating losses		1,173	2028-2032
	State capital losses		119	2013-2016

Credit carryforwards
	Federal investment tax credit		125	2025-2028
	Federal alternative minimum tax credit		20	Indefinite
	Federal - other		25	2016-2032
	State - other		4	2022

(b) A valuation allowance was recorded against deferred tax assets for state capital loss carryforwards.

(c) Related to release of a valuation allowance associated with federal capital loss carryforwards due to the LKE acquisition by PPL.

				Successor						Predecessor
								Two Months		Ten Months
				Year Ended		Year Ended		Ended		Ended
				December 31,		December 31,		December 31,		October 31,
				2012		2011		2010		2010
Income Tax Expense (Benefit)
	Current - Federal			$	(32)	$	(71)	$	(31)	$	33
	Current - State				2		6		4		11
			Total Current Expense (Benefit)		(30)		(65)		(27)		44
	Deferred - Federal				185		208		52		62
	Deferred - State				15		16		1		5
			Total Deferred Expense, excluding operating loss carryforwards		200		224		53		67
	Investment tax credit, net - Federal				(6)		(6)		(1)		(2)
	Tax benefit of operating loss carryforwards
		Deferred - Federal			(46)
		Deferred - State			(12)
			Total Tax Benefit of Operating Loss Carryforwards		(58)
	Total income tax expense from continuing operations (a)			$	106	$	153	$	25	$	109

	Total income tax expense - Federal			$	101	$	131	$	20	$	93
	Total income tax expense - State				5		22		5		16
			Total income tax expense from continuing operations (a)	$	106	$	153	$	25	$	109

(a) Excludes current and deferred federal and state tax expense (benefit) recorded to Discontinued Operations of $(4) million in 2012, $(1) million in 2011, $1 million for the two month period ended December 31, 2010 and $(1) million for the ten month period ended October 31, 2010. Also, excludes deferred federal and state tax expense (benefit) recorded to OCI of $(12) million in 2012, $(1) million in 2011, $3 million for the two month period ended December 31, 2010 and $(7) million for the ten month period ended October 31, 2010.

				Successor						Predecessor
								Two Months		Ten Months
				Year Ended		Year Ended		Ended		Ended
				December 31,		December 31,		December 31,		October 31,
				2012		2011		2010		2010
Reconciliation of Income Taxes
	Federal income tax on Income Before Income Taxes at
		statutory tax rate - 35%		$	116	$	147	$	25	$	105
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				6		15		2		9
	Amortization of investment tax credit				(6)		(5)				(2)
	Net operating loss carryforward (a)				(9)
	Other				(1)		(4)		(2)		(3)
			Total increase (decrease)		(10)		6				4
Total income tax expense from continuing operations				$	106	$	153	$	25	$	109
Effective income tax rate					32.0%		36.5%		35.7%		36.3%

(a) During 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.

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:

			2012		2011
Deferred Tax Assets
	Regulatory liabilities		$	54	$	65
	Deferred investment tax credits			16		17
	Income taxes due to customers			21		23
	Other			9		10
		Total deferred tax assets		100		115

Deferred Tax Liabilities
	Plant - net			526		462
	Regulatory assets			86		98
	Accrued pension costs			27		19
	Other			9		9
		Total deferred tax liabilities		648		588
Net deferred tax liability			$	548	$	473

LG&E expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

At December 31, 2012, LG&E had $22 million of state net operating loss carryforwards that expire in 2030.

			Successor						Predecessor
							Two Months		Ten Months
			Year Ended		Year Ended		Ended		Ended
			December 31,		December 31,		December 31,		October 31,
			2012		2011		2010		2010
Income Tax Expense (Benefit)
	Current - Federal		$	(2)	$	12	$	(4)	$	32
	Current - State			3		8		1		5
		Total Current Expense (Benefit)		1		20		(3)		37
	Deferred - Federal			65		52		12		21
	Deferred - State			6		2		1		2
		Total Deferred Expense		71		54		13		23
	Investment tax credit, net - Federal			(3)		(3)				(2)
		Total income tax expense (a)	$	69	$	71	$	10	$	58

	Total income tax expense - Federal		$	60	$	61	$	8	$	51
	Total income tax expense - State			9		10		2		7
		Total income tax expense (a)	$	69	$	71	$	10	$	58

(a) Excludes deferred federal and state tax expense recorded to OCI of $7 million for the ten month period ended October 31, 2010.

				Successor						Predecessor
								Two Months		Ten Months
				Year Ended		Year Ended		Ended		Ended
				December 31,		December 31,		December 31,		October 31,
				2012		2011		2010		2010
Reconciliation of Income Taxes
	Federal income tax on Income Before Income Taxes at
		statutory tax rate - 35%		$	67	$	68	$	10	$	58
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				5		7		1		4
	Other				(3)		(4)		(1)		(4)
			Total increase (decrease)		2		3
Total income tax expense				$	69	$	71	$	10	$	58
Effective income tax rate					35.9%		36.4%		34.5%		34.7%

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, TRA 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:

			2012		2011
Deferred Tax Assets
	Regulatory liabilities		$	45	$	58
	Deferred investment tax credits			38		39
	Net operating loss carryforward			20
	Income taxes due to customers			5		7
	Accrued pension costs			(5)		9
	Other			7		6
		Total deferred tax assets		110		119

Deferred Tax Liabilities
	Plant - net			623		500
	Regulatory assets			65		82
	Other			5		16
		Total deferred tax liabilities		693		598
Net deferred tax liability			$	583	$	479

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

At December 31, 2012, KU had $56 million of federal net operating loss carryforwards that expire in 2032.

				Successor						Predecessor
								Two Months		Ten Months
				Year Ended		Year Ended		Ended		Ended
				December 31,		December 31,		December 31,		October 31,
				2012		2011		2010		2010
Income Tax Expense (Benefit)
	Current - Federal			$	(20)	$	(8)	$	13	$	46
	Current - State				(1)		4		3		9
			Total Current Expense (Benefit)		(21)		(4)		16		55
	Deferred - Federal				111		101		4		20
	Deferred - State				11		10				3
			Total Deferred Expense, excluding operating loss carryforwards		122		111		4		23
	Investment tax credit, net - Federal				(3)		(3)
	Tax benefit of operating loss carryforwards
		Deferred - Federal			(20)
			Total Tax Benefit of Operating Loss Carryforwards		(20)
	Total income tax expense (a)			$	78	$	104	$	20	$	78

	Total income tax expense - Federal			$	68	$	90	$	17	$	66
	Total income tax expense - State				10		14		3		12
			Total income tax expense (a)	$	78	$	104	$	20	$	78

(a) Excludes deferred federal and state tax (benefit) recorded to OCI of $1 million in 2012 and $(1) million for the ten month period ended October 31, 2010.

				Successor						Predecessor
								Two Months		Ten Months
				Year Ended		Year Ended		Ended		Ended
				December 31,		December 31,		December 31,		October 31,
				2012		2011		2010		2010
Reconciliation of Income Taxes
	Federal income tax on Income Before Income Taxes at
		statutory tax rate - 35%		$	75	$	99	$	19	$	77
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				6		9		2		8
	Other				(3)		(4)		(1)		(7)
			Total increase (decrease)		3		5		1		1
Total income tax expense				$	78	$	104	$	20	$	78
Effective income tax rate					36.3%		36.9%		36.4%		35.8%

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

		2012		2011
PPL
	Beginning of period	$	145	$	251
	Additions based on tax positions of prior years		15		40
	Reductions based on tax positions of prior years		(61)		(160)
	Additions based on tax positions related to the current year		7		25
	Reductions based on tax positions related to the current year		(3)		(4)
	Settlements		(2)
	Lapse of applicable statute of limitation		(9)		(10)
	Effects of foreign currency translation				3
	End of period	$	92	$	145

PPL Energy Supply
	Beginning of period	$	28	$	183
	Additions based on tax positions of prior years		4		1
	Reductions based on tax positions of prior years		(2)
	Reductions based on tax positions related to the current year				(1)
	Derecognize unrecognized tax benefits (a)				(155)
	End of period	$	30	$	28

PPL Electric
	Beginning of period	$	73	$	62
	Reductions based on tax positions of prior years		(43)
	Additions based on tax positions related to the current year		5		22
	Reductions based on tax positions related to the current year				(1)
	Lapse of applicable statute of limitation		(9)		(10)
	End of period	$	26	$	73

(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. See Note 9 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 at December 31, 2012 and December 31, 2011.

At December 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 projected 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 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, 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.

PPL or its subsidiaries file tax returns in five major tax jurisdictions. The income tax provisions for PPL Energy Supply, PPL Electric, LKE, 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. Based on this tax sharing agreement, PPL Energy Supply or its subsidiaries indirectly or directly file tax returns in three major tax jurisdictions, 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, 2012, 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)

2008 and prior

Kentucky (state)

2008 and prior

2010 and prior

Montana (state)

2008 and prior

U.K. (foreign)

2010 and prior

(a) For LKE, LG&E and KU 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.

PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year for Pennsylvania operations. PPL made the same change for its Montana operations for tax year 2009. In 2011, the IRS issued guidance on repair expenditures related to network assets providing a safe harbor method of determining whether the repair expenditures can be currently deducted for tax purposes. The IRS has not yet issued guidance to provide a safe harbor method related to 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.

On January 2, 2013, H.R. 8, The American Taxpayer Relief Act of 2012, was signed into law. The most significant extension of tax relief under this Act applicable to PPL is the extension of bonus depreciation. This provision extends the current 50% expensing provision for qualifying property purchased and placed in service before January 1, 2014 (before January 1, 2015 for certain longer-lived and transportation assets). PPL is still evaluating the changes. However, PPL does not expect that the changes related to this legislation will have a material impact on income tax expense.