(All Registrants)
This "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL,PPL Electric , LKE, LG&E and KU. Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant. The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures. Within combined disclosures, amounts are disclosed for individual Registrants when significant. The following should be read in conjunction with the Registrants' Consolidated Financial Statements and the accompanying Notes. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted.
"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:
• "Overview" provides a description of each Registrant's business strategy
and a discussion of important financial and operational developments.
• "Results of Operations" for all Registrants includes a "Statement of Income Analysis," which discusses significant changes in principal line items on the Statements of Income, comparing 2019 with 2018. For PPL,
"Results of Operations" also includes "Segment Earnings" and "Adjusted
Gross Margins" which provide a detailed analysis of earnings by reportable
segment. These discussions include non-GAAP financial measures, including
"Earnings from Ongoing Operations" and "Adjusted Gross Margins" and
provide explanations of the non-GAAP financial measures and a
reconciliation of the non-GAAP financial measures to the most comparable
GAAP measure. The "2020 Outlook" discussion identifies key factors expected to impact 2020 earnings. • "Financial Condition - Liquidity and Capital Resources" provides an
analysis of the Registrants' liquidity positions and credit profiles. This
section also includes a discussion of forecasted sources and uses of cash
and rating agency actions.
• "Financial Condition - Risk Management" provides an explanation of the
Registrants' risk management programs relating to market and credit risk. • "Application of Critical Accounting Policies" provides an overview of the
accounting policies that are particularly important to the results of
operations and financial condition of the Registrants and that require
their management to make significant estimates, assumptions and other judgments of inherently uncertain matters. For comparison of the Registrants' results of operations and cash flows for the years endedDecember 31, 2018 toDecember 31, 2017 , refer to "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2018 Form 10-K, filed with theSEC onFebruary 14, 2019 . Overview
For a description of the Registrants and their businesses, see "Item 1. Business."
Business Strategy (All Registrants)
PPL operates seven fully regulated high-performing utilities. These utilities
are located in the
PPL's strategy, and that of the other Registrants, is to deliver best-in-sector operational performance, invest in a sustainable energy future, maintain a strong financial foundation, and engage and develop its people. PPL's business plan is designed to achieve growth by providing efficient, reliable and safe operations and strong customer service, maintaining constructive regulatory relationships and achieving timely recovery of costs. These businesses are expected to achieve strong, long-term 34 --------------------------------------------------------------------------------
Table of Contents
growth in rate base in theU.S. and RAV in the U.K. Rate base growth is being driven by planned significant capital expenditures to maintain existing assets and improve system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to coal-fired electricity generation facilities. For theU.S. businesses, central to PPL's strategy is recovering capital project costs efficiently through various rate-making mechanisms, including periodic base rate case proceedings using forward test years, annualFERC formula rate mechanisms and other regulatory agency-approved recovery mechanisms designed to limit regulatory lag. InKentucky , the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause and gas supply clause) and recovery on construction work-in-progress that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. In addition, the KPSC requires a utility to obtain a CPCN prior to constructing a facility, unless the construction is an ordinary extension of existing facilities in the usual course of business or does not involve sufficient capital expenditures to materially affect the utility's financial condition. Although such KPSC proceedings do not directly address cost recovery issues, the KPSC, in awarding a CPCN, concludes that the public convenience and necessity require the construction of the facility on the basis that the facility is the lowest reasonable cost alternative to address the need. InPennsylvania , theFERC transmission formula rate, DSIC mechanism, Smart Meter Rider and other recovery mechanisms are in place to reduce regulatory lag and provide for timely recovery of and a return on, as appropriate, prudently incurred costs. To manage financing costs and access to credit markets, and to fund capital expenditures, a key objective of the Registrants is to maintain their investment grade credit ratings and adequate liquidity positions. In addition, the Registrants have financial and operational risk management programs that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility, as applicable, related to changes in interest rates, foreign currency exchange rates and counterparty credit quality. To manage these risks, PPL generally uses contracts such as forwards, options and swaps. See "Financial Condition - Risk Management" below for further information. Earnings generated by PPL'sU.K. subsidiaries are subject to foreign currency translation risk. Because WPD's earnings represent such a significant portion of PPL's consolidated earnings, PPL enters into foreign currency contracts to economically hedge the value of the GBP versus theU.S. dollar. These hedges do not receive hedge accounting treatment under GAAP. See "Financial and Operational Developments -U.K. Membership inEuropean Union " for additional discussion of theU.K. earnings hedging activity.
The
As discussed above, a key component of this strategy is to maintain constructive relationships with regulators in all jurisdictions in which the Registrants operate (U.K. ,U.S. federal and state). This is supported by a strong culture of integrity and delivering on commitments to customers, regulators and shareowners, and a commitment to continue to improve customer service, reliability and operational efficiency.
Financial and Operational Developments
TheIRS 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 inNovember 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 theIRS onFebruary 26, 2019 .U.K. Membership inEuropean Union (PPL) Following theJune 2016 referendum, onMarch 29, 2017 , theU.K. Government invoked Article 50 (Article 50) of the Lisbon Treaty, formally beginning the two-year period provided by Article 50 for theU.K. to negotiate an agreement specifying the 35
--------------------------------------------------------------------------------
Table of Contents
terms of its withdrawal from theEuropean Union (EU), popularly referred to as Brexit. After repeated extensions, onOctober 28, 2019 , the EU agreed to extend the Article 50 process untilJanuary 31, 2020 . The U.K. Parliament subsequently approved an early general election forDecember 12, 2019 , which resulted in a substantial Conservative Party Parliamentary majority and subsequentU.K. and EU Parliamentary votes to approve the EU withdrawal agreement negotiated by Prime MinisterBoris Johnson . TheU.K. formally left the EU onJanuary 31, 2020 with agreed upon withdrawal terms, entering a transition period that is scheduled to end onDecember 31, 2020 . During the transition period, theU.K. will seek to negotiate a free trade arrangement with the EU and also negotiate new trade terms with countries outside of the EU. Significant uncertainty continues to surround the outcome of the transition period. PPL believes that its greatest risk related to the remaining Brexit uncertainties is an extended period of depressed value of the GBP or the potential further decline in the value of the GBP compared to theU.S. dollar. A decline in the value of the GBP compared to theU.S. dollar will reduce the value of WPD's earnings to PPL. PPL has executed hedges to mitigate the foreign exchange risk to itsU.K. earnings. As ofJanuary 31, 2020 , PPL's foreign exchange exposure related to budgeted earnings is 90% hedged for 2020 at an average rate of$1.48 per GBP and 5% hedged for 2021 at an average rate of$1.33 per GBP. PPL cannot predict the impact, in either the short-term or long-term, on foreign exchange rates or PPL's financial condition that may be experienced as a result of the actions taken by theU.K. government to withdraw from the EU, although such impacts could be material. PPL does not expect the financial condition and results of operations of WPD, itself, to change significantly as a result of Brexit. The regulatory environment and operation of WPD's businesses are not expected to change. RIIO-ED1, the current price control, with allowed revenues agreed with Ofgem runs throughMarch 2023 . The impact of a slower economy or recession on WPD would be mitigated in part becauseU.K. regulation provides that any reduction in the volume of electricity delivered will be recovered in allowed revenues in future periods through the K-factor adjustment. See "Item 1. Business - Segment Information -U.K. Regulated Segment" for additional information on the current price control and K-factor adjustment. In addition, an increase in inflation would have a positive effect on revenues and RAV as annual inflation adjustments are applied to both revenues and RAV (and real returns are earned on inflated RAV). This impact, however, would be partially offset by higher operation and maintenance and interest expense on index-linked debt. With respect to access to financing, WPD has substantial borrowing capacity under existing credit facilities and expects to continue to have access to all major financial markets. With respect to access to and cost of equipment and other materials, WPD management continues to reviewU.K. government issued advice on preparations for Brexit and has taken actions to mitigate potential increasing costs and disruption to its critical sources of supply. Additionally, less than 1% of WPD's employees are non-U.K. EU nationals and no change in their domicile is expected. Regulatory Requirements (All Registrants)
The Registrants cannot predict the impact that future regulatory requirements may have on their financial condition or results of operations.
(PPL, LKE, LG&E and KU)
The businesses of LKE, LG&E and KU are subject to extensive federal, state and local environmental laws, rules and regulations, including those pertaining to CCRs, GHG, and ELGs. See "Item 1. Business" and Notes 7, 13 and 19 to the Financial Statements for a discussion of these significant environmental matters. These and other environmental requirements led PPL, LKE, LG&E and KU to retire approximately 1,000 MW of coal-fired generating plants inKentucky since 2015.
TCJA Impact on FERC Rates (All Registrants)
InNovember 2019 , theFERC published Final Rules providing that public utility transmission providers include mechanisms in their formula rates to deduct excess ADIT from, or add deficient ADIT to, rate base and adjust their income tax allowances by amortized excess or deficient ADIT, and to make a related compliance filing. InFebruary 2019 ,PPL Electric filed with theFERC proposed revisions to its transmission formula rate template pursuant to Section 205 of theFederal Power Act and Section 35.13 of the FERC Rules and Regulations. Specifically,PPL Electric proposed to modify its formula rate to permit the return or recovery of excess or deficient ADIT resulting from the TCJA and 36 --------------------------------------------------------------------------------
Table of Contents
permitPPL Electric to prospectively account for the income tax expense associated with the depreciation of the equity component of the AFUDC. InApril 2019 , theFERC accepted the proposed revisions to the formula rate template, which were effectiveJune 1, 2019 , as well as the proposed adjustments to ADIT, effectiveJanuary 1, 2018 . InFebruary 2019 , in connection with the requirements of the TCJA andKentucky HB 487, LG&E and KU filed a request with theFERC to amend their transmission formula rates resulting from the laws' reductions to corporate income tax rates. TheFERC approved this request effectiveJune 1, 2019 . LG&E and KU are currently reviewing the Final Rule and will submit a compliance filing addressing excess ADIT byJune 1, 2020 . LG&E and KU do not anticipate the impact of the TCJA and Kentucky HB 487 related to theirFERC -jurisdictional rates to be significant.
Pennsylvania Alternative Ratemaking (
InJune 2018 , GovernorTom Wolf signed into law Act 58 of 2018 (codified at 66 Pa. C.S. § 1330) authorizing public utilities to implement alternative rates and rate mechanisms in base rate proceedings before the PUC. The effective date of Act 58 wasAugust 27, 2018 . Under the new law, a public utility may file an application to establish alternative rates and rate mechanisms in a base rate proceeding. These alternative rates and rate mechanisms include, but are not limited to, decoupling mechanisms, performance-based rates, formula rates, multi-year rate plans, or a combination of those or other mechanisms.
On
RIIO-2 Framework (PPL)
In 2018, Ofgem issued its consultation document on the RIIO-2 framework, covering allU.K. gas and electricity transmission and distribution price controls. The current electricity distribution price control, RIIO-ED1, continues throughMarch 31, 2023 and will not be impacted by the RIIO-2 consultation process. Later in 2018, Ofgem published its decision following its RIIO-2 framework consultation after consideration of comments received including those from WPD and PPL. InAugust 2019 , Ofgem published an open letter seeking views on its proposed sector specific approach on the RIIO-ED2 framework. WPD and PPL provided responses to this open letter. InDecember 2019 , Ofgem published its decision on the RIIO-ED2 framework, thus confirming the following points in its RIIO-2 and RIIO-ED2 framework decision documents: • RIIO-ED2 will be a five-year price control period, compared to eight years in the current RIIO-ED1 price control. • CPI or CPIH will be used for inflation measurement in calculating both RAV and allowed returns rather than RPI. • The baseline allowed return on equity will be set using the same methodology in all RIIO-2 sectors. The new methodology
includes; (a)
an equity indexation, whereby the allowed return on equity is updated to reflect changes in the risk-free rate, and (b) potentially setting the allowed return 0.5% below the expected return.
• Full debt indexation will be retained.
• The early settlement process (fast tracking) will be removed
and
replaced with an alternative mechanism to incentivize
high-quality,
rigorous and ambitious business plans. • The Totex incentive rate will be based on a confidence level for setting baseline cost allowances. • A new enhanced engagement model will be introduced requiring distribution companies to set up a customer engagement group to provide Ofgem with a public report of local stakeholders' views on the companies' business plans. Ofgem will also establish an independent RIIO-2 challenge group comprised of consumer
experts to
provide Ofgem with a public report on companies' business plans. • There will be no change to the existing depreciation policy of using economic asset lives as the basis for depreciating RAV as part
of
base revenue calculations. WPD is currently transitioning to
45-year
asset lives for new additions in RIIO-ED1 based on Ofgem's
extensive
review of asset lives in RIIO-ED1. • A focus of RIIO-2 will be on whole-system outcomes. Ofgem
intends
network companies and system operators working together to
ensure
the energy system as a whole is efficient and delivers the
best
value to consumers. Ofgem is undertaking further work to
clarify the
definition of whole-system and the appropriate roles of the
network
companies in supporting this objective. Ofgem is still
undecided on
how DSO functions are to be treated. Ofgem will include a DSO reopener to reassess progress made in the establishment of DSO activities. 37
--------------------------------------------------------------------------------
Table of Contents
Ofgem will now shift focus to the development of the RIIO-ED2 price control methodology, with the consultation expected to be published by the third quarter of 2020. WPD and PPL continue to be fully engaged in the RIIO-ED2 process. PPL cannot predict the outcome of this process or the long-term impact the final RIIO-ED2 price control will have on its financial condition or results of operations. Any decision for RIIO-ED2 will not be finalized untilNovember 2022 . The RIIO-ED2 price control will come into effect onApril 1, 2023 .
FERC Transmission Rate Filing
(PPL, LKE, LG&E and KU)
In 2018, LG&E and KU applied to theFERC requesting elimination of certain on-going credits to a sub-set of transmission customers relating to the 1998 merger of LG&E's and KU's parent entities and the 2006 withdrawal of LG&E and KU from theMidcontinent Independent System Operator, Inc. (MISO), a regional transmission operator and energy market. The application seeks termination of LG&E's and KU's commitment to provide certainKentucky municipalities mitigation for certain horizontal market power concerns arising out of the 1998 LG&E and KU merger and 2006 MISO withdrawal. The amounts at issue are generally waivers or credits granted to a limited number of Kentucky Municipalities for either certain LG&E and KU or MISO transmission charges incurred for transmission service received. Due to the development of robust, accessible energy markets over time, LG&E and KU believe the mitigation commitments are no longer relevant or appropriate. InMarch 2019 , theFERC granted LG&E's and KU's request to remove the on-going credits, conditioned upon the implementation by LG&E and KU of a transition mechanism for certain existing power supply arrangements, subject toFERC review and approval. InJuly 2019 , LG&E and KU proposed their transition mechanism to theFERC and inSeptember 2019 , theFERC rejected the proposed transition mechanism and issued a separate order providing clarifications of certain aspects of the March order. InOctober 2019 , LG&E and KU filed requests for rehearing and clarification on the two September orders. These rehearing requests are currently pending beforeFERC . Additionally, certain petitions for review ofFERC's orders have been filed by multiple parties, including LG&E and KU, at theD.C. Circuit Court of Appeals . LG&E and KU cannot predict the outcome of the proceedings. LG&E and KU currently receive recovery of waivers and credits provided through other rate mechanisms.
(
InApril 2019 ,PPL Electric filed its annual transmission formula rate update with theFERC , reflecting a revised revenue requirement, which includes the impact of the TCJA. The filing established the revenue requirement used to set rates that took effect inJune 2019 .
Rate Case Proceedings
(PPL, LKE, LG&E and KU)
InSeptember 2018 , LG&E and KU filed requests with the KPSC for an increase in annual base electricity rates and gas rates and the elimination of the TCJA bill credit mechanism. InApril 2019 , the KPSC issued orders eliminating the TCJA bill credit mechanism and increasing annual base electricity and gas rates providing for an annual revenue increase of$187 million ($114 million at KU and$73 million at LG&E), based on a 9.725% return-on-equity. The new base rates and all elements of the orders became effectiveMay 1, 2019 . See Note 7 to the Financial Statements for additional information.
(KU)
InJuly 2019 , KU filed a request with the VSCC for an increase in annualVirginia base electricity revenues of approximately$13 million , representing an increase of 18.2%. InJanuary 2020 , KU reached a partial settlement agreement including an increase in annualVirginia base electricity revenues of$9 million effectiveMay 1, 2020 , representing an increase of 12.9%. A hearing on the settlement of remaining issues was held inJanuary 2020 . A VSCC ruling in the proceeding is expected inApril 2020 .
Distribution of TCJA Savings
(
In
38 --------------------------------------------------------------------------------
Table of Contents Results of Operations (PPL) The "Statement of Income Analysis" discussion below describes significant changes in principal line items on PPL's Statements of Income, comparing 2019 with 2018. The "Segment Earnings" and "Adjusted Gross Margins" discussions for PPL provide a review of results by reportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "Adjusted Gross Margins," and provide explanations of the non-GAAP financial measures and a reconciliation of those measures to the most comparable GAAP measure. The "2020 Outlook" discussion identifies key factors expected to impact 2020 earnings. Tables analyzing changes in amounts between periods within "Statement of Income Analysis," "Segment Earnings" and "Adjusted Gross Margins" are presented on a constant GBP toU.S. dollar exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained. Results computed on a constant GBP toU.S. dollar exchange rate basis are calculated by translating current year results at the prior year weighted-average GBP toU.S. dollar exchange rate.
(
A "Statement of Income Analysis" is presented separately forPPL Electric , LKE, LG&E and KU. The "Statement of Income Analysis" discussion below describes significant changes in principal line items on the Statements of Income, comparing 2019 with 2018. The results of operations section forPPL Electric , LKE, LG&E and KU is presented in a reduced disclosure format in accordance with General Instructions (I)(2)(a) of Form 10-K.
PPL: Statement of Income Analysis, Segment Earnings and Adjusted Gross Margins
Statement of Income Analysis
Net income for the years ended
Change 2019 2018 2019 vs. 2018 Operating Revenues$ 7,769 $ 7,785 $ (16 ) Operating Expenses Operation Fuel 709 799 (90 ) Energy purchases 723 745 (22 ) Other operation and maintenance 1,985 1,983 2 Depreciation 1,199 1,094 105 Taxes, other than income 313 312 1 Total Operating Expenses 4,929 4,933 (4 ) Other Income (Expense) - net 309 396 (87 ) Interest Expense 994 963 31 Income Taxes 409 458 (49 ) Net Income$ 1,746 $ 1,827 $ (81 ) 39
--------------------------------------------------------------------------------
Table of Contents Operating Revenues
The increase (decrease) in operating revenues was due to:
2019 vs. 2018
Domestic:
PPL Electric Distribution price (a) $ 42 PPL Electric Distribution volume (8 ) PPL Electric PLR 8 PPL Electric Transmission Formula Rate (b) 51 PPL Electric TCJA refund (c) (12 ) LKE Retail rates (d) 123 LKE ECR (e) 60 LKE Volumes (f) (91 ) LKE Municipal supply (g) (56 ) LKE Fuel and other energy prices (h) (48 ) Other 16 Total Domestic 85U.K. : Price 83 Volume (64 ) Foreign currency exchange rates (116 ) Other (4 ) Total U.K. (101 ) Total$ (16 )
(a) The increase was primarily due to reconcilable cost recovery mechanisms
approved by the PUC.
(b) The increase was primarily due to
transmission capital investments partially offset by a
unfavorable impact of the TCJA, which reduced the new revenue requirement
that went into effect
(c) The decrease was due to the estimated income tax savings owed to or already
returned to distribution customers related to the reduced
corporate income taxes as a result of the TCJA. See Note 7 to the Financial
Statements for additional information.
(d) The increase was primarily due to higher base rates, inclusive of the
termination of the TCJA bill credit mechanism, effective
(e) The increase was primarily due to higher returns on additional environmental
capital investments and higher recoverable depreciation expense as a result
of higher depreciation rates effective
(f) The decrease was primarily due to weather.
(g) The decrease was primarily due to the termination of eight supply contracts
with
(h) The decrease was primarily due to lower recoveries of fuel and energy
purchases due to lower commodity costs.
Fuel
Fuel decreased$90 million in 2019 compared with 2018 at LKE, primarily due to a$42 million decrease in commodity costs, a$33 million decrease in volumes driven by weather and a$20 million decrease in volumes driven by the termination of eight supply contracts withKentucky municipalities onApril 30, 2019 . Energy Purchases Energy purchases decreased$22 million in 2019 compared with 2018, primarily due to a$27 million decrease at LKE (primarily due to a$14 million decrease in commodity costs and a$7 million decrease in gas volumes driven by weather in 2019), partially offset by a$5 million increase atPPL Electric (primarily due to higher PLR volumes of$33 million , partially offset by lower PLR prices of$25 million ). 40
--------------------------------------------------------------------------------
Table of Contents
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance was due to:
2019 vs. 2018
Domestic:
PPL Electric project cancellation costs$ (12 ) Stock compensation expense 10 Other operation and maintenance of Safari Energy (a) 20 Other 14
Foreign currency exchange rates (23 ) Third-party engineering (4 ) Other (3 ) Total $ 2
(a) The increase is primarily due to 2019 including a full year of other
operation and maintenance expense of Safari Energy, which was acquired on
June 1, 2018 . Depreciation
The increase (decrease) in depreciation was due to:
2019 vs. 2018 Additions to PP&E, net $ 66 Foreign currency exchange rates (13 ) Depreciation rates (a) 52 Total$ 105
(a) Higher depreciation rates were effective
Other Income (Expense) - net
The increase (decrease) in other income (expense) - net was due to:
2019 vs. 2018
Economic foreign currency exchange contracts (Note 17)
59 Charitable contributions 7 Other 11 Total $ (87 ) Interest Expense
The increase (decrease) in interest expense was due to:
2019 vs. 2018 Long-term debt interest $ 38 Short-term debt interest 7 Foreign currency exchange rates (20 ) Other 6 Total $ 31 41
--------------------------------------------------------------------------------
Table of Contents Income Taxes
The increase (decrease) in income taxes was due to:
2019 vs.
2018
Change in pre-tax income$ (24 ) Deferred tax impact of Kentucky state tax reform (a) (9 ) Kentucky recycling credit, net of federal income tax expense (b) (18 ) Other 2 Total$ (49 )
(a) In 2018, LKE recorded deferred income tax expense, primarily associated with
LKE's non-regulated entities, due to the
reduction from 6% to 5%, as enacted by HB 487, effective
(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
applicable credit provides tax benefits for a portion of the equipment costs
for major recycling projects in
See Note 6 to the Financial Statements for additional information on income taxes.
Segment Earnings
PPL's net income by reportable segments were as follows:
Change 2019 2018 2019 vs. 2018
25 Pennsylvania Regulated 458 431 27 Corporate and Other (a) (125 ) (129 ) 4 Net Income$ 1,746 $ 1,827 $ (81 )
(a) Primarily represents financing and certain other costs incurred at the
corporate level that have not been allocated or assigned to the segments,
which are presented to reconcile segment information to PPL's consolidated
results.
Earnings from Ongoing Operations
Management utilizes "Earnings from Ongoing Operations" as a non-GAAP financial measure that should not be considered as an alternative to net income, an indicator of operating performance determined in accordance with GAAP. PPL believes that Earnings from Ongoing Operations is useful and meaningful to investors because it provides management's view of PPL's earnings performance as another criterion in making investment decisions. In addition, PPL's management uses Earnings from Ongoing Operations in measuring achievement of certain corporate performance goals, including targets for certain executive incentive compensation. Other companies may use different measures to present financial performance. Earnings from Ongoing Operations is adjusted for the impact of special items. Special items are presented in the financial tables on an after-tax basis with the related income taxes on special items separately disclosed. Income taxes on special items, when applicable, are calculated based on the statutory tax rate of the entity where the activity is recorded. Special items may include items such as:
• Unrealized gains or losses on foreign currency economic hedges (as discussed
below).
• Gains and losses on sales of assets not in the ordinary course of business.
• Impairment charges.
• Significant workforce reduction and other restructuring effects.
• Acquisition and divestiture-related adjustments.
• Other charges or credits that are, in management's view, non-recurring or
otherwise not reflective of the company's ongoing operations.
Unrealized gains or losses on foreign currency economic hedges include the changes in fair value of foreign currency contracts used to hedge GBP-denominated anticipated earnings. The changes in fair value of these contracts are recognized immediately within GAAP earnings. Management believes that excluding these amounts from Earnings from Ongoing Operations until settlement of the contracts provides a better matching of the financial impacts of those contracts with the economic value of 42 --------------------------------------------------------------------------------
Table of Contents
PPL's underlying hedged earnings. See Note 17 to the Financial Statements and "Risk Management" below for additional information on foreign currency economic activity. PPL's Earnings from Ongoing Operations by reportable segment were as follows: Change 2019 2018 2019 vs. 2018 U.K. Regulated$ 1,032 $ 968 $ 64 Kentucky Regulated 436 418 18 Pennsylvania Regulated 458 436 22 Corporate and Other (120 ) (117 ) (3 )
Earnings from Ongoing Operations
See "Reconciliation of Earnings from Ongoing Operations" below for a reconciliation of this non-GAAP financial measure to Net Income.
TheU.K. Regulated segment consists ofPPL Global , which primarily includes WPD's regulated electricity distribution operations, the results of hedging the translation of WPD's earnings from GBP intoU.S. dollars, and certain costs, such asU.S. income taxes, administrative costs, and certain acquisition-related financing costs. TheU.K. Regulated segment represents 56% of PPL's Net Income for 2019 and 39% of PPL's assets atDecember 31, 2019 .
Net Income and Earnings from Ongoing Operations include the following results:
Change 2019 2018 2019 vs. 2018 Operating revenues$ 2,167 $ 2,268 $ (101 ) Other operation and maintenance 510 538 (28 ) Depreciation 250 247 3 Taxes, other than income 127 134 (7 ) Total operating expenses 887 919 (32 ) Other Income (Expense) - net 294 403 (109 ) Interest Expense 405 413 (8 ) Income Taxes 192 225 (33 ) Net Income 977 1,114 (137 ) Less: Special Items (55 ) 146 (201 )
Earnings from Ongoing Operations
The following after-tax gains (losses), which management considers special
items, impacted the
Income Statement Line Item 2019
2018
Foreign currency economic hedges, net of Other Income
tax of
(Expense) - net$ (51 )
Other operation and Other, net of tax of$1 ,$0 (b) maintenance (4 )
-
U.S. tax reform (c) Income Taxes -
3
Other operation and Death benefit, net of tax of$0 ,$1 (d) maintenance - (5 ) Total$ (55 ) $ 146
(a) Unrealized gains (losses) on contracts that economically hedge anticipated
GBP-denominated earnings.
(b) Settlement of a contractual dispute.
(c) Adjustments to certain provisional amounts recognized in the
2017 Statement of Income related to the enactment of the TCJA.
(d) Primarily a payment related to the death of the WPD Chief Executive.
The changes in the components of theU.K. Regulated segment's results between these periods were due to the factors set forth below, which reflect amounts classified asU.K. Adjusted Gross Margins, the items that management considers special and the effects of movements in foreign currency exchange, including the effects of foreign currency hedge contracts, on separate lines and not in their respective Statement of Income line items. 43 --------------------------------------------------------------------------------
Table of Contents 2019 vs. 2018U.K.
3 Depreciation (16 ) Other Income (Expense) - net 74 Interest expense (12 ) Income taxes (15 )U.S. Income taxes 6 Other (4 ) Foreign currency exchange, after-tax 12 Earnings from Ongoing Operations 64 Special items, after-tax (201 ) Net Income$ (137 )
• See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an
explanation of
• Higher other income (expense) - net in 2019 compared with 2018 primarily due
to higher pension income.
Kentucky Regulated Segment
The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations of LG&E and KU, as well as LG&E's regulated distribution and sale of natural gas. In addition, certain acquisition-related financing costs are allocated to the Kentucky Regulated segment. The Kentucky Regulated segment represents 25% of PPL's Net Income for 2019 and 34% of PPL's assets atDecember 31, 2019 . Net Income and Earnings from Ongoing Operations include the following results: Change 2019 2018 2019 vs. 2018 Operating revenues$ 3,206 $ 3,214 $ (8 ) Fuel 709 799 (90 ) Energy purchases 174 201 (27 ) Other operation and maintenance 861 848 13 Depreciation 547 475 72 Taxes, other than income 74 70 4 Total operating expenses 2,365 2,393 (28 ) Other Income (Expense) - net (13 ) (16 ) 3 Interest Expense 298 274 24 Income Taxes 94 120 (26 ) Net Income 436 411 25 Less: Special Items - (7 ) 7
Earnings from Ongoing Operations
The following after-tax gains (losses), which management considers special items, impacted the Kentucky Regulated segment's results and are excluded from Earnings from Ongoing Operations:
Income Statement Line Item 2019 2018 U.S. tax reform (a) Income Taxes $ -$ 2 Kentucky state tax reform (b) Income Taxes - (9 ) Total $ -$ (7 )
(a) Adjustments to certain provisional amounts recognized in the
2017 Statement of Income related to the enactment of the TCJA.
(b) In 2018, LKE recorded deferred income tax expense, primarily associated with
LKE's non-regulated entities, due to the
reduction from 6% to 5%, as enacted by HB 487, effective
44 --------------------------------------------------------------------------------
Table of Contents
The changes in the components of the Kentucky Regulated segment's results between these periods were due to the factors set forth below, which reflect amounts classified as Kentucky Adjusted Gross Margins and the items that management considers special on separate lines and not in their respective Statement of Income line item.
2019 vs. 2018 Kentucky Adjusted Gross Margins $ 70 Other operation and maintenance (19 ) Depreciation (26 ) Taxes, other than income (5 ) Other Income (Expense) - net 3 Interest Expense (24 ) Income Taxes 19 Earnings from Ongoing Operations 18 Special Items, after-tax 7 Net Income $ 25
• See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an
explanation of Kentucky Adjusted Gross Margins.
• Higher depreciation expense in 2019 compared with 2018 primarily due to a
million increase related to higher depreciation rates effective
and an
net of retirements.
• Higher interest expense in 2019 compared with 2018 primarily due to increased
borrowings and higher interest rates.
• Lower income taxes in 2019 compared with 2018 primarily due to the recording
of a deferred income tax benefit related to a
Pennsylvania Regulated Segment
The Pennsylvania Regulated segment includes the regulated electricity transmission and distribution operations ofPPL Electric . In addition, certain costs are allocated to the Pennsylvania Regulated segment. ThePennsylvania Regulated segment represents 26% of PPL's Net Income for 2019 and 26% of PPL's assets atDecember 31, 2019 . Net Income and Earnings from Ongoing Operations include the following results: Change 2019 2018 2019 vs. 2018 Operating revenues$ 2,358 $ 2,277 $ 81 Energy purchases 549 544 5 Other operation and maintenance 566 578 (12 ) Depreciation 386 352 34 Taxes, other than income 112 109 3 Total operating expenses 1,613 1,583 30 Other Income (Expense) - net 31 32 (1 ) Interest Expense 169 159 10 Income Taxes 149 136 13 Net Income 458 431 27 Less: Special Items - (5 ) 5
Earnings from Ongoing Operations
The following after-tax gains (losses), which management considers special items, impacted the Pennsylvania Regulated segment's results and are excluded from Earnings from Ongoing Operations:
45 --------------------------------------------------------------------------------
Table of Contents Income Statement Line Item 2019 2018 Other operation and IT transformation, net of tax of$0 ,$2 (a) maintenance $ -$ (5 ) Total $ -$ (5 )
(a) In
reorganization, which was substantially completed in the third quarter of
2018. As a result,
benefits as well as outside services for strategic consulting to establish
the new IT organization, were incurred.
The changes in the components of the Pennsylvania Regulated segment's results between these periods were due to the factors set forth below, which reflect amounts classified as Pennsylvania Adjusted Gross Margins and the items that management considers special on separate lines and not in their respective Statement of Income line items. 2019 vs. 2018 Pennsylvania Adjusted Gross Margins $ 54 Other operation and maintenance 9 Depreciation (19 ) Other Income (Expense) - net (1 ) Interest Expense (10 ) Income Taxes (11 ) Earnings from Ongoing Operations 22 Special Items, after-tax 5 Net Income $ 27
• See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an
explanation of Pennsylvania Adjusted Gross Margins.
• Higher depreciation expense in 2019 compared with 2018 primarily due to
additional assets placed into service, related to the ongoing efforts to
ensure the reliability of the delivery system and the replacement of aging
infrastructure, net of retirements.
Reconciliation of Earnings from Ongoing Operations
The following tables contain after-tax gains (losses), in total, which management considers special items, that are excluded from Earnings from Ongoing Operations and a reconciliation to PPL's "Net Income" for the years endedDecember 31 : 2019 U.K. KY PA Corporate Regulated Regulated Regulated and Other Total Net Income$ 977 $ 436 $ 458 $ (125 ) $ 1,746 Less: Special Items (expense) benefit: Foreign currency economic hedges, net of tax of$13 (51 ) - - - (51 ) Talen litigation costs, net of tax of$1 (a) - - - (5 ) (5 ) Other, net of tax of$1 (4 ) - - - (4 ) Total Special Items (55 ) - - (5 ) (60 )
Earnings from Ongoing Operations
46
--------------------------------------------------------------------------------
Table of Contents 2018 Corporate and U.K. Regulated KY Regulated PA Regulated Other Total Net Income$ 1,114 $ 411 $ 431 $ (129 ) $ 1,827 Less: Special Items (expense) benefit: Foreign currency economic hedges, net of tax of ($39 ) 148 - - - 148 U.S. tax reform (b) 3 2 - (5 ) - Kentucky state tax reform - (9 ) - - (9 ) IT transformation, net of tax of$2 - - (5 ) - (5 ) Talen litigation costs, net of tax of$2 (a) - - - (7 ) (7 ) Death benefit, net of tax of$1 (5 ) - - - (5 ) Total Special Items 146 (7 ) (5 ) (12 ) 122
Earnings from Ongoing Operations $ 968
436
(a) PPL incurred legal expenses related to litigation with its former affiliate,
information.
(b) PPL recorded adjustments to certain provisional amounts recognized in the
See Note 6 to the Financial Statements for additional information.
Adjusted Gross Margins
Management also utilizes the following non-GAAP financial measures as indicators of performance for its businesses.
• "
the electricity distribution operations of the
calculating this measure, direct costs such as connection charges from
National Grid, which owns and manages the electricity transmission network in
maintenance" on the Statements of Income) are deducted from operating
revenues, as they are costs passed through to customers. As a result, this
measure represents the net revenues from the delivery of electricity across
WPD's distribution network in the
• "Kentucky Adjusted Gross Margins" is a single financial performance measure
of the electricity generation, transmission and distribution operations of
the Kentucky Regulated segment, as well as the Kentucky Regulated segment's
distribution and sale of natural gas. In calculating this measure, fuel,
energy purchases and certain variable costs of production (recorded in "Other
operation and maintenance" on the Statements of Income) are deducted from
operating revenues. In addition, certain other expenses, recorded in "Other
operation and maintenance", "Depreciation" and "Taxes, other than income" on
the Statements of Income, associated with approved cost recovery mechanisms
are offset against the recovery of those expenses, which are included in
revenues. These mechanisms allow for direct recovery of these expenses and,
in some cases, returns on capital investments and performance incentives. As
a result, this measure represents the net revenues from electricity and gas
operations.
• "Pennsylvania Adjusted Gross Margins" is a single financial performance
measure of the electricity transmission and distribution operations of the
Pennsylvania Regulated segment. In calculating this measure, utility revenues
and expenses associated with approved recovery mechanisms, including energy
provided as a PLR, are offset with minimal impact on earnings. Costs
associated with these mechanisms are recorded in "Energy purchases," "Other
operation and maintenance," (which are primarily Act 129, Storm Damage and
Universal Service program costs), "Depreciation" (which is primarily related
to the Act 129 Smart Meter program) and "Taxes, other than income," (which is
primarily gross receipts tax) on the Statements of Income. This measure represents the net revenues from the Pennsylvania Regulated segment's electricity delivery operations. These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and report their results of operations. Management believes these measures provide additional useful criteria to make investment decisions. These performance measures are used, in conjunction with other information, by senior management and PPL's Board of Directors to manage operations and analyze actual results compared with budget. 47
--------------------------------------------------------------------------------
Table of Contents
Changes in Adjusted Gross Margins
The following table shows Adjusted Gross Margins by PPL's reportable segments and by component, as applicable, for the year endedDecember 31 as well as the changes between periods. The factors that gave rise to the changes are described following the table: Change 2019 2018 2019 vs. 2018U.K. Regulated U.K. Adjusted Gross Margins$ 1,998 $ 2,089 $ (91 ) Impact of changes in foreign currency exchange rates (107 )U.K. Adjusted Gross Margins excluding impact of foreign currency exchange rates
$ 16
Kentucky Regulated Kentucky Adjusted Gross Margins$ 2,111 $ 2,041
$ 70
Pennsylvania Regulated Pennsylvania Adjusted Gross Margins Distribution$ 927 $ 924 $ 3 Transmission 600 549 51 Total Pennsylvania Adjusted Gross Margins$ 1,527 $ 1,473 $ 54U.K. Adjusted Gross MarginsU.K. Adjusted Gross Margins, excluding the impact of changes in foreign currency exchange rates, increased in 2019 compared with 2018 primarily due to$83 million from theApril 1, 2018 and 2019 price increases, partially offset by$64 million of lower volumes.
Kentucky Adjusted Gross Margins
Kentucky Adjusted Gross Margins increased in 2019 compared with 2018 primarily due to higher retail rates approved by the KPSC of$123 million , inclusive of the termination of the TCJA bill credit mechanism, and higher returns on additional environmental capital investments of$21 million . These increases were partially offset by$37 million of decreased sales volumes primarily due to weather and a$32 million decrease due to the termination of eight supply contracts withKentucky municipalities onApril 30, 2019 .
Pennsylvania Adjusted Gross Margins
Distribution
Distribution Adjusted Gross Margins increased in 2019 compared with 2018 primarily due to returns on additional distribution system improvement capital investments of$10 million and returns on additional Smart Meter capital investments of$5 million , partially offset by a$12 million net of gross receipts tax impact of the estimated income tax savings owed to customers as a result of the impact of theU.S. federal corporate income tax rate reduction from 35% to 21% as enacted by the TCJA.
Transmission
Transmission Adjusted Gross Margins increased in 2019 compared with 2018 primarily due to an increase of$77 million from returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability, partially offset by$27 million from the impact of the reducedU.S. federal corporate income taxes as a result of the TCJA in the first five months of 2019.
Reconciliation of Adjusted Gross Margins
The following tables contain the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the years endedDecember 31 : 48 --------------------------------------------------------------------------------
Table of Contents 2019 Kentucky U.K. Adjusted Adjusted Pennsylvania Gross Gross Adjusted Gross Operating Margins Margins Margins Other (a) Income (b) Operating Revenues $ 2,129 (c)$ 3,206 $ 2,358$ 76 $ 7,769 Operating Expenses Fuel - 709 - - 709 Energy purchases - 174 549 - 723 Other operation and maintenance 131 92 125 1,637 1,985 Depreciation - 116 50 1,033 1,199 Taxes, other than income - 4 107 202 313 Total Operating Expenses 131 1,095 831 2,872 4,929 Total $ 1,998$ 2,111 $ 1,527$ (2,796 ) $ 2,840 2018 Kentucky U.K. Adjusted Adjusted Pennsylvania Gross Gross Adjusted Gross Operating Margins Margins Margins Other (a) Income (b) Operating Revenues $ 2,230 (c)$ 3,214 $ 2,277$ 64 $ 7,785 Operating Expenses Fuel - 799 - - 799 Energy purchases - 201 544 - 745 Other operation and maintenance 141 98 121 1,623 1,983 Depreciation - 70 35 989 1,094 Taxes, other than income - 5 104 203 312 Total Operating Expenses 141 1,173 804 2,815 4,933 Total $ 2,089$ 2,041 $ 1,473$ (2,751 ) $ 2,852
(a) Represents amounts excluded from Adjusted Gross Margins.
(b) As reported on the Statements of Income.
(c) 2019 and 2018 exclude
2020 Outlook (PPL) Higher net income is projected in 2020 compared with 2019. The following projections and factors underlying these projections (on an after-tax basis) are provided for PPL's segments and the Corporate and Other category and the related Registrants.
(PPL's
Higher net income is projected in 2020 compared with 2019. Excluding 2019 special items, the increase is driven primarily by higher base demand revenues and higher assumed GBP exchange rates, partially offset by lower true-up mechanisms, lower pension income and higher interest expense.
(PPL's Kentucky Regulated Segment and LKE)
Higher net income is projected in 2020 compared with 2019, driven primarily by higher retail rates, partially offset by higher depreciation expense and higher income tax expense. (LG&E)
Higher net income is projected in 2020 compared with 2019, driven primarily by higher retail rates, partially offset by higher depreciation expense.
49 --------------------------------------------------------------------------------
Table of Contents (KU)
Net income is projected in 2020 to be comparable with 2019, driven primarily by higher retail rates, offset by higher depreciation expense.
Higher net income is projected in 2020 compared with 2019, driven primarily by higher returns on transmission investments and lower operation and maintenance expense, partially offset by higher depreciation expense.
(PPL's Corporate and Other Category)
Lower costs are projected in 2020 compared with 2019, driven primarily by lower expenses and other factors.
(All Registrants)
Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7, and Notes 1, 7 and 13 to the Financial Statements (as applicable) for a discussion of the risks, uncertainties and factors that may impact future earnings.PPL Electric : Statement of Income Analysis
Net income for the years ended
Change 2019 2018 2019 vs. 2018 Operating Revenues$ 2,358 $ 2,277 $ 81 Operating Expenses Operation Energy purchases 549 544 5 Other operation and maintenance 566 578 (12 ) Depreciation 386 352 34 Taxes, other than income 112 109 3 Total Operating Expenses 1,613 1,583 30 Other Income (Expense) - net 25 23 2 Interest Income from Affiliate 6 8 (2 ) Interest Expense 170 159 11 Income Taxes 149 136 13 Net Income$ 457 $ 430 $ 27 Operating Revenues
The increase (decrease) in operating revenues was due to:
2019 vs. 2018 Distribution Price (a) $ 42 Distribution volume (8 ) PLR 8 Transmission Formula Rate (b) 51 TCJA Refund (c) (12 ) Total $ 81
(a) Distribution price variances were primarily due to reconcilable cost recovery
mechanisms approved by the PUC.
(b) Transmission Formula Rate revenues increased primarily due to
from returns on additional transmission capital investments partially offset
by a
revenue requirement that went into effect
(c) Represents the estimated income tax savings owed to or already returned to
distribution customers related to the reduced
taxes as a result of the TCJA. See Note 7 to the Financial Statements for additional information. 50
--------------------------------------------------------------------------------
Table of Contents Energy Purchases Energy purchases increased$5 million in 2019 compared with 2018. This increase was primarily due to higher PLR volumes of$33 million , partially offset by lower PLR prices of$25 million and lower transmission enhancement expenses of$3 million .
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance was due to:
2019 vs. 2018 Project cancellations$ (12 ) Storm costs (4 ) Bad debts (3 ) Contractor-related expenses 3 Vegetation management 2 Support costs 1 Other 1 Total$ (12 ) Depreciation Depreciation increased by$34 million in 2019 compared with 2018. This increase was primarily due to additional assets placed into service, related to the ongoing efforts to ensure the reliability of the delivery system and the replacement of aging infrastructure as well as the roll-out of the Act 129 Smart Meter program, net of retirements.
Interest Expense
Interest expense increased$11 million in 2019 compared with 2018, primarily due to theJune 2018 issuance of$400 million of 4.15% First Mortgage Bonds due 2048 and theSeptember 2019 issuance of$400 million of 3.00% First Mortgage Bonds due 2049. Income Taxes
Income taxes increased
LKE: Statement of Income Analysis
Net income for the years ended
Change 2019 2018 2019 vs. 2018 Operating Revenues$ 3,206 $ 3,214 $ (8 ) Operating Expenses Operation Fuel 709 799 (90 ) Energy purchases 174 201 (27 ) Other operation and maintenance 861 848 13 Depreciation 547 475 72 Taxes, other than income 74 70 4 Total Operating Expenses 2,365 2,393 (28 ) Other Income (Expense) - net (13 ) (16 ) 3 Interest Expense 226 206 20 Interest Expense with Affiliate 31 25 6 Income Taxes 103 129 (26 ) Net Income$ 468 $ 445 $ 23 51
--------------------------------------------------------------------------------
Table of Contents Operating Revenues
The increase (decrease) in operating revenues was due to:
2019 vs. 2018 Volumes (a)$ (91 ) Municipal supply (b) (56 ) Fuel and other energy prices (c) (48 ) Retail rates (d) 123 ECR (e) 60 Other 4 Total $ (8 )
(a) The decrease was primarily due to weather.
(b) The decrease was primarily due to the termination of eight supply contracts
with
(c) The decrease was primarily due to lower recoveries of fuel and energy
purchases due to lower commodity costs.
(d) The increase was primarily due to higher base rates, inclusive of the
termination of the TCJA bill credit mechanism, effective
(e) The increase was primarily due to higher returns on additional environmental
capital investments and higher recoverable depreciation expense as a result
of higher depreciation rates effective
Fuel
Fuel decreased$90 million in 2019 compared with 2018, primarily due to a$42 million decrease in commodity costs, a$33 million decrease in volumes driven by weather and a$20 million decrease in volumes driven by the termination of eight supply contracts withKentucky municipalities onApril 30, 2019 .
Energy Purchases
Energy purchases decreased$27 million in 2019 compared with 2018, primarily due to a$14 million decrease in commodity costs and a$7 million decrease in gas volumes driven by weather in 2019.
Depreciation
Depreciation increased$72 million in 2019 compared with 2018, primarily due to a$52 million increase related to higher depreciation rates effectiveMay 1, 2019 and a$15 million increase related to additional assets placed into service, net of retirements.
Income Taxes
The increase (decrease) in income taxes was due to:
2019 vs.
2018
(9 ) Other 1 Total$ (26 )
(a) 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
applicable credit provides tax benefits for a portion of the equipment costs
for major recycling projects in
(b) In 2018, LKE recorded deferred income tax expense, primarily associated with
LKE's non-regulated entities, due to the
reduction from 6% to 5%, as enacted by HB 487, effective
See Note 6 to the Financial Statements for additional information on income taxes.
52 --------------------------------------------------------------------------------
Table of Contents LG&E: Statement of Income Analysis
Net income for the years ended
Change 2019 2018 2019 vs. 2018 Operating Revenues Retail and wholesale$ 1,473 $ 1,467 $ 6 Electric revenue from affiliate 27 29 (2 ) Total Operating Revenues 1,500 1,496 4 Operating Expenses Operation Fuel 289 308 (19 ) Energy purchases 154 183 (29 ) Energy purchases from affiliates 7 13 (6 ) Other operation and maintenance 387 376 11 Depreciation 231 195 36 Taxes, other than income 39 36 3 Total Operating Expenses 1,107 1,111 (4 ) Other Income (Expense) - net (11 ) (12 ) 1 Interest Expense 87 76 11 Income Taxes 63 64 (1 ) Net Income$ 232 $ 233 $ (1 ) Operating Revenues
The increase (decrease) in operating revenues was due to:
2019 vs. 2018 Retail rates (a) $ 46 ECR (b) 26 Volumes (c) (53 ) Fuel and other energy prices (d) (20 ) Other 5 Total $ 4
(a) The increase was due to higher base rates, inclusive of the termination of
the TCJA bill credit mechanism, effective
(b) The increase was primarily due to higher returns on additional environmental
capital investments and higher recoverable depreciation expense as a result
of higher depreciation rates effective
(c) The decrease was primarily due to weather.
(d) The decrease was primarily due to lower recoveries of fuel and energy
purchases due to lower commodity costs.
Fuel
Fuel decreased$19 million in 2019 compared with 2018, primarily due to a$10 million decrease in commodity costs and a$10 million decrease in volumes driven by weather. Energy Purchases Energy purchases decreased$29 million in 2019 compared with 2018, primarily due to a$14 million decrease in commodity costs and a$7 million decrease in gas volumes driven by weather in 2019.
Depreciation
Depreciation increased$36 million in 2019 compared with 2018, primarily due to a$26 million increase related to higher depreciation rates effectiveMay 1, 2019 and a$9 million increase related to additional assets placed into service, net of retirements. 53
--------------------------------------------------------------------------------
Table of Contents KU: Statement of Income Analysis
Net income for the years ended
Change 2019 2018 2019 vs. 2018 Operating Revenues Retail and wholesale$ 1,733 $ 1,747 $ (14 ) Electric revenue from affiliate 7 13 (6 ) Total Operating Revenues 1,740 1,760 (20 ) Operating Expenses Operation Fuel 420 491 (71 ) Energy purchases 20 18 2 Energy purchases from affiliates 27 29 (2 ) Other operation and maintenance 438 441 (3 ) Depreciation 315 279 36 Taxes, other than income 35 34 1 Total Operating Expenses 1,255 1,292 (37 ) Other Income (Expense) - net (4 ) (6 ) 2 Interest Expense 109 100 9 Income Taxes 79 76 3 Net Income$ 293 $ 286 $ 7 Operating Revenue
The increase (decrease) in operating revenue was due to:
2019 vs. 2018 Municipal supply (a)$ (56 ) Volumes (b) (43 ) Fuel and other energy prices (c) (30 ) Retail rates (d) 77 ECR (e) 34 Other (2 ) Total$ (20 )
(a) The decrease was primarily due to the termination of eight supply contracts
with
(b) The decrease was primarily due to weather.
(c) The decrease was primarily due to lower recoveries of fuel due to lower
commodity costs.
(d) The increase was due to higher base rates, inclusive of the termination of
the TCJA bill credit mechanism, effective
(e) The increase was primarily due to higher returns on additional environmental
capital investments and higher recoverable depreciation expense as a result
of higher depreciation rates effective
Fuel
Fuel decreased$71 million in 2019 compared with 2018, primarily due to a$32 million decrease in commodity costs, a$23 million decrease in volumes driven by weather and a$20 million decrease in volumes driven by the termination of eight supply contracts withKentucky municipalities onApril 30, 2019 .
Depreciation
Depreciation increased$36 million in 2019 compared with 2018, primarily due to a$26 million increase related to higher depreciation rates effectiveMay 1, 2019 and a$6 million increase related to additional assets placed into service, net of retirements. 54
--------------------------------------------------------------------------------
Table of Contents Financial Condition
The remainder of this Item 7 in this Form 10-K is presented on a combined basis, providing information, as applicable, for all Registrants.
Liquidity and Capital Resources
(All Registrants)
The Registrants' cash flows from operations and access to cost effective bank and capital markets are subject to risks and uncertainties. See "Item 1A. Risk Factors" for a discussion of risks and uncertainties that could affect the Registrants' cash flows.
The Registrants had the following at:
PPL PPL (a) Electric LKE LG&E KUDecember 31, 2019 Cash and cash equivalents$ 815 $ 262 $ 27 $ 15 $ 12 Short-term debt 1,151 - 388 238 150 Long-term debt due within one year 1,172 - 975 -
500
Notes payable with affiliates - 150 - - December 31, 2018 Cash and cash equivalents$ 621 $ 267 $ 24 $ 10 $ 14 Short-term debt 1,430 - 514 279 235 Long-term debt due within one year 530 - 530 434
96
Notes payable with affiliates - 113 -
-
(a) At
denominated in GBP. If these amounts would be remitted as dividends, PPL
would not anticipate an incremental
Financial Statements for additional information on undistributed earnings of
WPD. (All Registrants)
Net cash provided by (used in) operating, investing and financing activities for
the years ended
PPL PPL Electric LKE LG&E KU
2019
Operating activities
2018
Operating activities$ 2,821 $ 978 $ 915 $ 443 $ 581 Investing activities (3,361 ) (1,193 ) (1,116 ) (554 ) (561 ) Financing activities 690 433 195 106 (21 ) 2019 vs. 2018 Change Operating activities$ (394 ) $ (65 ) $ 23 $ 49 $ (28 ) Investing activities 281 76 22 72 (49 ) Financing activities 146 (234 ) (36 ) (111 ) 76 Operating Activities
The components of the change in cash provided by (used in) operating activities were as follows:
55 --------------------------------------------------------------------------------
Table of Contents PPL PPL Electric LKE LG&E KU 2019 vs. 2018 Change - Cash Provided (Used): Net income$ (81 ) $ 27 $ 23 $ (1 ) $ 7 Non-cash components 241 (17 ) 64 33 34 Working capital (451 ) (90 ) (181 ) (48 ) (126 ) Defined benefit plan funding 11 7 97 55 51 Other operating activities (114 ) 8 20 10 6 Total$ (394 ) $ (65 ) $ 23 $ 49 $ (28 ) (PPL)
PPL cash provided by operating activities in 2019 decreased
in net non-cash charges of
charges was primarily due to an increase in depreciation expense (primarily due to additional assets placed into service, related to the ongoing efforts to ensure reliability of the delivery system and the replacement of aging infrastructure, net of retirements and higher
depreciation rates) and unrealized losses on hedging activities partially
offset by an increase in the
(primarily due to lower levels of unrecognized losses being amortized) and
a decrease in deferred income taxes (primarily due to book versus tax plant timing differences). • The$451 million decrease in cash from changes in working capital was
primarily due to a decrease in accounts payable (primarily due to timing
of payments), an increase in net regulatory assets and liabilities (primarily due to the impact of the TCJA and timing of recovery rate mechanisms), an increase in other current liabilities (primarily due to
timing of payments and operating lease liability), an increase in unbilled
revenue (primarily due to weather, higher retail rates effectiveMay 1, 2019 and a change in pricing method in the model), an increase in fuel, materials and supplies (primarily due to inventory management) and an increase in other (primarily due to a decrease in taxes payable and a decrease in counter-party collateral partially offset by an increase in customer deposits).
• The
was primarily due to the
2018, related to the favorable private letter ruling received by PPL from
the
Retiree Health Plan VEBA to a new sub-account within the VEBA, to be used
to pay for medical claims of active bargaining unit employees, decrease in
non-current regulatory liabilities (due to timing of rate recovery
mechanisms) and an increase in other assets (primarily due to settlement
of interest rate swaps and purchase of solar panels).
(
decrease in non-cash components of
components was primarily due to a
tax expense (due to book versus tax plant timing differences and Federal
net operating losses, partially offset by a book to tax timing difference
related to the TCJA regulatory liability) and a
Other (primarily due to an increase in AFUDC and a decrease in canceled
projects), partially offset by a
expense (primarily due to additional assets placed into service, net of
retirements, related to the ongoing efforts to ensure the reliability of
the delivery system and the replacement of aging infrastructure as well as
the roll-out of the Act 129 Smart Meter program). • The$90 million decrease in cash from changes in working capital was
primarily due to an increase in net regulatory assets and liabilities (due
to timing of rate recovery mechanisms), an increase in unbilled revenue
(primarily due to a change in pricing method in the model), an increase in
other net current assets and current liabilities (primarily due to an increase in 2019 material and supplies) and an increase in accounts receivable (primarily due to timing of receipts).
• The
primarily due to a decrease in non-current regulatory assets (due to
timing of rate recovery mechanisms, amortization of storm costs incurred
in the prior year and$22 million of storm costs incurred in 2018), partially offset by a decrease in non-current liabilities (primarily due to a$41 million TCJA liability in 2018). 56
--------------------------------------------------------------------------------
Table of Contents (LKE) LKE had a$23 million increase in cash provided by operating activities in 2019 compared with 2018. • Net income increased$23 million between the periods and included an
increase in non-cash components of
components was primarily driven by an increase in depreciation expense
(primarily due to higher depreciation rates and additional assets placed
into service, net of retirements).
• The decrease in cash from changes in working capital was primarily driven
by an increase in net regulatory assets and liabilities (primarily due to
the impact of the TCJA and timing of rate recovery mechanisms), a decrease
in accounts payable (primarily due to timing of payments) and an increase
in unbilled revenues (primarily due to weather).
• Defined benefit plan funding was
• The increase in cash provided by other operating activities was driven
primarily by a decrease in other assets (primarily due to non-current
regulatory asset increases as a result of significant storm activity in 2018). (LG&E) LG&E had a$49 million increase in cash provided by operating activities in 2019 compared with 2018. • Net income decreased$1 million between the periods and included an
increase in non-cash components of
components was primarily driven by an increase in depreciation expense
(primarily due to higher depreciation rates and additional assets placed
into service, net of retirements).
• The decrease in cash from changes in working capital was primarily driven
by an increase in net regulatory assets and liabilities (primarily due to
the impact of the TCJA and timing of rate recovery mechanisms), a decrease
in accounts payable (primarily due to timing of payments) and an increase
in accounts receivable and unbilled revenues (primarily due to weather).
• Defined benefit plan funding was
• The increase in cash provided by other operating activities was driven
primarily by a decrease in other assets (primarily due to non-current
regulatory asset increases as a result of significant storm activity in 2018). (KU)KU had a$28 million decrease in cash provided by operating activities in 2019 compared with 2018. • Net income increased$7 million between the periods and included an
increase in non-cash components of
components was primarily driven by an increase in depreciation expense
(primarily due to higher depreciation rates and additional assets placed
into service, net of retirements).
• The decrease in cash from changes in working capital was primarily driven
by an increase in net regulatory assets and liabilities (primarily due to
the impact of the TCJA and timing of rate recovery mechanisms), a decrease
in accounts payable (primarily due to timing of payments) and an increase
in unbilled revenues (primarily due to weather).
• Defined benefit plan funding was
Investing Activities (All Registrants)
The components of the change in cash provided by (used in) investing activities were as follows:
57 --------------------------------------------------------------------------------
Table of Contents PPL PPL Electric LKE LG&E KU 2019 vs. 2018 Change - Cash Provided (Used): Expenditures for PP&E$ 155 $ 78 $ 23 $ 72 $ (48 ) Purchase of investments 10 - - -
-
Proceeds from sale of investments 63 - - -
- Other investing activities 53 (2 ) (1 ) - (1 ) Total$ 281 $ 76 $ 22 $ 72 $ (49 ) For PPL, in 2019 compared with 2018, the decrease in expenditures was due to lower project expenditures at WPD,PPL Electric , LKE and LG&E, partially offset by higher project expenditures at KU. The decrease in expenditures at WPD was primarily due to a decrease in expenditures to enhance system reliability and a decrease in foreign currency exchange rates. The decrease in expenditures forPPL Electric was primarily due to timing differences on capital spending projects related to ongoing efforts to improve reliability and replace aging infrastructure. The decrease in expenditures at LKE was primarily due to decreased spending for environmental water projects at LG&E and KU'sTrimble County plant, LG&E'sMill Creek plant and KU'sGhent plant, partially offset by spending on various other projects at KU that are not individually significant.
See "Forecasted Uses of Cash" for detail regarding projected capital expenditures for the years 2020 through 2024.
Financing Activities
(All Registrants)
The components of the change in cash provided by (used in) financing activities were as follows: PPL PPL Electric LKE LG&E KU 2019 vs. 2018 Change - Cash Provided (Used): Debt issuance/retirement, net$ 383 $ (105 ) $ 414 $ 99 $ 315 Debt issuance/retirement, affiliate - (250 ) - - Stock issuances/redemptions, net 469 - - - - Dividends (59 ) (96 ) - (26 ) 17 Capital contributions/distributions, net (29 ) 57 (58 ) 23 Changes in net short-term debt (641 ) - (396 ) (121 ) (275 ) Note payable with affiliate - 149 - - Other financing activities (6 ) (4 ) (10 ) (5 ) (4 ) Total$ 146 $ (234 ) $ (36 ) $ (111 ) $ 76 (PPL) For PPL, in 2019 compared with 2018, cash provided by financing activities increased primarily as a result of an increase in cash required to fund capital and general corporate expenditures to offset a decrease in cash from operations of$394 million . (PPL Electric)
For
(LKE, LG&E and KU)
For LKE and LG&E, in 2019 compared with 2018, cash provided by financing activities decreased primarily as a result of a decrease in cash required to fund capital and general expenditures. For KU, in 2019 compared with 2018, cash provided by financing activities increased primarily as a result of an increase in cash required to fund capital and general expenditures. 58 --------------------------------------------------------------------------------
Table of Contents (All Registrants) See "Long-term Debt and Equity Securities " below for additional information on current year activity. See "Forecasted Sources of Cash" for a discussion of the Registrants' plans to issue debt and equity securities, as well as a discussion of credit facility capacity available to the Registrants. Also see "Forecasted Uses of Cash" for a discussion of PPL's plans to pay dividends on common securities in the future, as well as the Registrants' maturities of long-term debt.
Long-term debt and equity securities activity for 2019 included:
Debt Net Stock Issuances (a) Retirements Issuances Cash Flow Impact: PPL $ 1,465 $ 300$ 1,167 PPL Electric 393 100 LKE 705 200 LG&E 399 200 KU 306 -
(a) Issuances are net of pricing discounts, where applicable, and exclude the
impact of debt issuance costs. Includes debt issuances with affiliates.
See Note 8 to the Financial Statements for additional long-term debt information.
(PPL) Equity Securities Activities Equity Forward Contracts
In
In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the total 63.25 million shares of PPL common stock. Under the forward sale agreements, PPL was obligated to settle these forward sale agreements no later thanNovember 2019 . The forward sale agreements were classified as equity transactions. InSeptember 2018 , PPL settled a portion of the initial forward sale agreements by issuing 20 million shares of PPL common stock, resulting in net cash proceeds of$520 million . InNovember 2019 , PPL settled the remaining 43.25 million shares of PPL common stock, resulting in net cash proceeds of$1.1 billion . The net proceeds received will be used for general corporate purposes. See Note 5 for information on the forward sale agreements impact on the calculation of diluted EPS.
See Note 8 to the Financial Statements for additional information.
ATM Program
InFebruary 2018 , PPL entered into an equity distribution agreement, pursuant to which PPL may sell, from time to time, up to an aggregate of$1.0 billion of its common stock through an at-the-market offering program, including a forward sales component. The compensation paid to the selling agents by PPL may be up to 2% of the gross offering proceeds of the shares. There were no issuances under the ATM program for the twelve months endedDecember 31, 2019 . PPL issued 42 million shares of common stock and received proceeds of$119 million for the year endedDecember 31, 2018 .
Forecasted Sources of Cash
(All Registrants)
The Registrants expect to continue to have adequate liquidity available from operating cash flows, cash and cash equivalents, credit facilities and commercial paper issuances. Additionally, subject to market conditions, the Registrants and their
59 --------------------------------------------------------------------------------
Table of Contents
subsidiaries may access the capital markets, and
Credit Facilities
The Registrants maintain credit facilities to enhance liquidity, provide credit support and provide a backstop to commercial paper programs. Amounts borrowed under these credit facilities are reflected in "Short-term debt" on the Balance Sheets. AtDecember 31, 2019 , the total committed borrowing capacity under credit facilities and the borrowings under these facilities were: External Letters of Credit and Commercial Committed Paper Unused Capacity Borrowed Issued Capacity PPL Capital Funding Credit Facilities$ 1,550 $ -$ 465 $ 1,085 PPL Electric Credit Facility 650 - 1 649 LG&E Credit Facilities 500 - 238 262 KU Credit Facilities 400 - 150 250 Total LKE Consolidated 900 - 388 512
Total
854
Total
(a) The syndicated credit facilities, KU's letter of credit facility and PPL
Capital Funding's bilateral facility, each contain a financial covenant
requiring debt to total capitalization not to exceed 70% for
Funding,
facility, and other customary covenants.
The commitments under the domestic credit facilities are provided by a diverse
bank group, with no one bank and its affiliates providing an aggregate
commitment of more than the following percentages of the total committed
capacity: PPL - 8%,
facility. Borrowings generally bear interest at LIBOR-based rates plus an
applicable margin.
(c) The facilities contain financial covenants to maintain an interest coverage
ratio of not less than 3.0 times consolidated earnings before income taxes,
depreciation and amortization and total net debt not in excess of 85% of its
RAV, calculated in accordance with the credit facility.
The amounts borrowed atDecember 31, 2019 , include a USD-denominated borrowing of$200 million and GBP-denominated borrowings of £88 million, which equated to$113 million . AtDecember 31, 2019 , the USD equivalent of unused capacity under theU.K. committed credit facilities was approximately$1.0 billion .
The commitments under the
In addition to the financial covenants noted in the table above, the credit agreements governing the above credit facilities contain various other covenants. Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements. The Registrants monitor compliance with the covenants on a regular basis. AtDecember 31, 2019 , the Registrants were in compliance with these covenants. At this time, the Registrants believe that these covenants and other borrowing conditions will not limit access to these funding sources.
See Note 8 to the Financial Statements for further discussion of the Registrants' credit facilities.
Intercompany (LKE, LG&E and KU)
Committed Non-affiliate Used
Unused
Capacity Borrowed Capacity Capacity LKE Credit Facility$ 375 $ 150 $ -$ 225 LG&E Money Pool (a) 500 - 238 262 KU Money Pool (a) 500 - 150 350 60
--------------------------------------------------------------------------------
Table of Contents
(a) LG&E and KU participate in an intercompany agreement whereby LKE, LG&E and/or
KU make available funds up to
market index of commercial paper issues. However, the
maximum aggregate short-term debt limit for each utility at
all covered sources.
See Note 14 to the Financial Statements for further discussion of intercompany credit facilities.
Commercial Paper (All Registrants)
PPL,PPL Electric , LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as necessary. Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's credit facilities. The following commercial paper programs were in place at: December 31, 2019 Commercial Paper Unused Capacity Issuances Capacity
PPL Capital Funding$ 1,500 $ 450 $ 1,050 PPL Electric 650 - 650 LG&E 350 238 112 KU 350 150 200 Total LKE 700 388 312 Total PPL$ 2,850 $ 838 $ 2,012
(PPL)
PPL and its subsidiaries are authorized to issue, at the discretion of
management and subject to market conditions, up to
(
PPL Electric is authorized to issue, at the discretion of management and subject to market conditions and regulatory approvals, up to$700 million of long-term debt securities, the proceeds of which would be used to fund capital expenditures and for general corporate purposes.
(LKE, LG&E and KU)
LKE is authorized to issue, at the discretion of management, up to$800 million of long-term debt with a PPL affiliate, the proceeds of which would be used to repay$475 million of Senior Unsecured Notes maturing inNovember 2020 and for general corporate purposes.
LG&E is authorized to issue, at the discretion of management and subject to
market conditions and regulatory approvals, up to
KU is authorized to issue, at the discretion of management and subject to market conditions and regulatory approvals, up to$800 million of long-term debt securities, the proceeds of which would be used to repay$500 million of First Mortgage Bonds maturing inNovember 2020 , repay short-term debt incurred to fund capital expenditures and for general corporate purposes.
Contributions from Parent/Member (
From time to time, LKE's member or the parents ofPPL Electric , LG&E and KU make capital contributions to subsidiaries. The proceeds from these contributions are used to fund capital expenditures and for other general corporate purposes and, in the case of LKE, to make contributions to its subsidiaries. 61 --------------------------------------------------------------------------------
Table of Contents Forecasted Uses of Cash (All Registrants) In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, the Registrants currently expect to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common stock, distributions by LKE to its member, and possibly the purchase or redemption of a portion of debt securities.
Capital Expenditures
The table below shows the Registrants' current capital expenditure projections for the years 2020 through 2024. Expenditures for the domestic regulated utilities are expected to be recovered through rates, pending regulatory approval.
Projected Total 2020 (b) 2021 2022 2023 2024 PPL Construction expenditures (a) Generating facilities$ 763 $ 148 $ 222 $ 106 $ 121 $ 166 Distribution facilities 9,299 1,961 1,860 1,767 1,800 1,911 Transmission facilities 2,724 903 632 470 357 362 Environmental 549 139 209 113 84 4 Other 932 221 207 161 171 172 Total Capital Expenditures$ 14,267 $ 3,372 $ 3,130 $ 2,617 $ 2,533 $ 2,615 PPL Electric (a) Distribution facilities$ 1,810 $ 419 $ 406 $ 397 $ 294 $ 294 Transmission facilities 1,960 713 399 350 245 253 Total Capital Expenditures$ 3,770 $ 1,132 $ 805 $ 747 $ 539 $ 547 LKE Generating facilities$ 763 $ 148 $ 222 $ 106 $ 121 $ 166 Distribution facilities 1,661 417 392 296 284 272 Transmission facilities 764 190 233 120 112 109 Environmental 549 139 209 113 84 4 Other 407 113 98 58 69 69 Total Capital Expenditures$ 4,144 $ 1,007 $ 1,154 $ 693 $ 670 $ 620 LG&E Generating facilities$ 322 $ 48 $ 100 $ 58 $ 54 $ 62 Distribution facilities 1,013 273 254 166 164 156 Transmission facilities 132 44 39 15 15 19 Environmental 214 58 90 38 28 - Other 207 60 47 31 34 35 Total Capital Expenditures$ 1,888 $ 483 $ 530 $ 308 $ 295 $ 272 KU Generating facilities$ 441 $ 100 $ 122 $ 48 $ 67 $ 104 Distribution facilities 648 144 138 130 120 116 Transmission facilities 632 146 194 105 97 90 Environmental 335 81 119 75 56 4 Other 203 52 52 28 36 35 Total Capital Expenditures$ 2,259 $ 523 $ 625 $ 386 $ 376 $ 349
(a) Construction expenditures include capitalized interest and AFUDC, which are
expected to total approximately
Electric over the five-year period. 62
--------------------------------------------------------------------------------
Table of Contents
(b) The 2020 total excludes amounts included in accounts payable as of December
31, 2019.
Capital expenditure plans are revised periodically to reflect changes in
operational, market and regulatory conditions. For the years presented, this
table includes
Contractual Obligations
The Registrants have assumed various financial obligations and commitments in
the ordinary course of conducting business. At
Total 2020 2021-2022 2023-2024 After 2024 PPL Long-term Debt (a)$ 22,002 $ 1,169 $ 2,848 $ 3,186 $ 14,799 Interest on Long-term Debt (b) 15,131 926 1,657 1,435 11,113 Operating Leases (c) 122 26 42 27 27 Purchase Obligations (d) 2,759 1,137 842 325 455 Pension Benefit Plan Funding Obligations (e) 681 272 226 183 - Total Contractual Cash Obligations$ 40,695 $ 3,530 $ 5,615 $ 5,156 $ 26,394 PPL Electric Long-term Debt (a)$ 4,039 $ -$ 874 $ 90 $ 3,075 Interest on Long-term Debt (b) 3,441 166 317 281 2,677 Unconditional Power Purchase Obligations 30 22 8 - - Total Contractual Cash Obligations$ 7,510 $ 188 $ 1,199 $ 371 $ 5,752 LKE Long-term Debt (a)$ 6,041 $ 975 $ 674 $ 13 $ 4,379 Interest on Long-term Debt (b) 3,598 237 378 363 2,620 Operating Leases (c) 61 18 22 13 8 Coal and Natural Gas Purchase Obligations (f) 1,482 572 661 235 14 Unconditional Power Purchase Obligations (g) 554 31 62 62 399 Construction Obligations (h) 221 184 34 3 - Pension Benefit Plan Obligations (e) 22 22 - - - Other Obligations 304 159 78 25 42 Total Contractual Cash Obligations$ 12,283 $ 2,198 $ 1,909 $ 714 $ 7,462 LG&E Long-term Debt (a)$ 2,024 $ -$ 292 $ -$ 1,732 Interest on Long-term Debt (b) 1,573 80 146 143 1,204 Operating Leases (c) 24 7 9 5 3 Coal and Natural Gas Purchase Obligations (f) 837 289 383 155 10 Unconditional Power Purchase Obligations (g) 382 21 42 43 276 Construction Obligations (h) 77 64 12 1 - Pension Benefit Plan Obligations (e) 4 4 - - - Other Obligations 99 50 20 15 14 Total Contractual Cash Obligations$ 5,020 $ 515 $ 904 $ 362 $ 3,239 63
--------------------------------------------------------------------------------
Table of Contents Total 2020 2021-2022 2023-2024 After 2024 KU Long-term Debt (a)$ 2,642 $ 500 $ 132 $ 13 $ 1,997 Interest on Long-term Debt (b) 1,809 104 173 172 1,360 Operating Leases (c) 36 11 13 8 4 Coal and Natural Gas Purchase Obligations (f) 645 283 278 80 4 Unconditional Power Purchase Obligations (g) 172 10 20 19 123 Construction Obligations (h) 108 97 10 1 - Pension Benefit Plan Obligations (e) 1 1 - - - Other Obligations 146 70 39 9 28 Total Contractual Cash Obligations$ 5,559 $ 1,076 $ 665 $ 302 $ 3,516
(a) Reflects principal maturities based on stated maturity or earlier put dates.
See Note 8 to the Financial Statements for a discussion of variable-rate
remarketable bonds issued on behalf of LG&E and KU. The Registrants do not
have any significant finance lease obligations.
(b) Assumes interest payments through stated maturity or earlier put dates. For
PPL, LKE, LG&E and KU the payments herein are subject to change, as payments
for debt that is or becomes variable-rate debt have been estimated and for
PPL, payments denominated in British pounds sterling have been translated to
(c) See Note 9 to the Financial Statements for additional information.
(d) The amounts include agreements to purchase goods or services that are
enforceable and legally binding and specify all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Primarily
includes, as applicable, the purchase obligations of electricity, coal,
natural gas and limestone, as well as certain construction expenditures,
which are also included in the Capital Expenditures table presented above.
(e) The amounts for PPL include WPD's contractual deficit pension funding
requirements arising from actuarial valuations performed in
portion of the contributions relating to the plan deficit. The amounts also
include contributions made or committed to be made in 2020 for PPL's and
LKE's
of these amounts). Based on the current funded status of these plans, except
for WPD's plans, no cash contributions are required. See Note 11 to the
Financial Statements for a discussion of expected contributions.
(f) Represents contracts to purchase coal, natural gas and natural gas
transportation. See Note 13 to the Financial Statements for additional
information.
(g) Represents future minimum payments under OVEC power purchase agreements
through
information.
(h) Represents construction commitments, which are also reflected in the Capital
Expenditures table presented above.
Dividends/Distributions (PPL) PPL views dividends as an integral component of shareowner return and expects to continue to pay dividends in amounts intended to maintain a capitalization structure that supports investment grade credit ratings. InNovember 2019 , PPL declared its quarterly common stock dividend, payableJanuary 2, 2020 , at41.25 cents per share (equivalent to$1.65 per annum). OnFebruary 14, 2020 , PPL announced an increase of its quarterly common stock dividend to41.5 cents per share (equivalent to$1.66 per annum). Future dividends, declared at the discretion of the Board of Directors, will depend upon future earnings, cash flows, financial and legal requirements and other factors. Subject to certain exceptions, PPL may not declare or pay any cash dividend or distribution on its capital stock during any period in whichPPL Capital Funding defers interest payments on its 2007 Series A Junior Subordinated Notes due 2067 or 2013 Series B Junior Subordinated Notes due 2073. AtDecember 31, 2019 , no interest payments were deferred.
(
From time to time, as determined by their respective Board of Directors, the Registrants pay dividends or distributions, as applicable, to their respective shareholders or members. Certain of the credit facilities ofPPL Electric , LKE, LG&E and KU include minimum debt covenant ratios that could effectively restrict the payment of dividends or distributions.
(All Registrants)
See Note 8 to the Financial Statements for these and other restrictions related to distributions on capital interests for the Registrants and their subsidiaries.
64 --------------------------------------------------------------------------------
Table of Contents
Purchase or Redemption of
The Registrants will continue to evaluate outstanding debt securities and may decide to purchase or redeem these securities in open market or privately negotiated transactions, in exchange transactions or otherwise, depending upon prevailing market conditions, available cash and other factors, and may be commenced or suspended at any time. The amounts involved may be material.
Rating Agency Actions
Moody's and S&P periodically review the credit ratings of the debt of the Registrants and their subsidiaries. Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.
A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues. The credit ratings of the Registrants and their subsidiaries are based on information provided by the Registrants and other sources. The ratings of Moody's and S&P are not a recommendation to buy, sell or hold any securities of the Registrants or their subsidiaries. Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities. The credit ratings of the Registrants and their subsidiaries affect their liquidity, access to capital markets and cost of borrowing under their credit facilities. A downgrade in the Registrants' or their subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets. The Registrants and their subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt. The following table sets forth the Registrants' and their subsidiaries' credit ratings for outstanding debt securities or commercial paper programs as ofDecember 31, 2019 . Senior Unsecured Senior Secured Commercial Paper Issuer Moody's S&P Moody's S&P Moody's S&P PPL PPL Capital Funding Baa2 BBB+ P-2 A-2 WPD plc Baa3 BBB+ WPD (East Midlands) Baa1 A- WPD (West Midlands) Baa1 A- WPD (South Wales) Baa1 A- WPD (South West) Baa1 A- PPL and PPL Electric PPL Electric A1 A P-2 A-2 PPL and LKE LKE Baa1 BBB+ LG&E A1 A P-2 A-2 KU A1 A P-2 A-2
The rating agencies have taken the following actions related to the Registrants and their subsidiaries.
(PPL)
In
(
In
65 --------------------------------------------------------------------------------
Table of Contents (PPL, LKE and LG&E)
In
InMarch 2019 , Moody's and S&P assigned ratings of A1 and A to the County ofJefferson, Kentucky's $128 million 1.85% Pollution Control Revenue Bonds, 2001 Series A, due 2033, previously issued on behalf of LG&E. The bonds were remarketedApril 1, 2019 . InMay 2019 , Moody's assigned a rating of A1, and inJune 2019 , S&P assigned a rating of A to the County ofJefferson, Kentucky's $31 million 1.65% Series A Environmental Facilities Revenue Refunding Bonds, due 2033, previously issued on behalf of LG&E. The bonds were remarketedJune 1, 2019 . InMay 2019 , Moody's assigned a rating of A1, and inJune 2019 , S&P assigned a rating of A to the County ofJefferson, Kentucky's $35 million 1.65% Series B Environmental Facilities Revenue Refunding Bonds, due 2033, previously issued on behalf of LG&E. The bonds were remarketedJune 1, 2019 . InSeptember 2019 , Moody's and S&P assigned ratings of A1 and A to the County ofJefferson, Kentucky's $40 million 1.75% Pollution Control Revenue Bonds, 2005 Series A, due 2035, previously issued on behalf of LG&E. The bonds were remarketedSeptember 17, 2019 .
(PPL, LKE and KU)
InMarch 2019 , Moody's assigned a rating of A1 and S&P assigned a rating of A to KU's$300 million 4.375% First Mortgage Bonds due 2045. The bonds were issuedApril 1, 2019 . InAugust 2019 , Moody's assigned a rating of A1, and inSeptember 2019 , S&P assigned a rating of A to the County ofCarroll, Kentucky's $96 million 1.55% Pollution Control Revenue Refunding Bonds, 2016 Series A (Kentucky Utilities Company Project ), due 2042, previously issued on behalf of KU. The bonds were remarketedSeptember 3, 2019 .
In
Revenue Bonds, 2004 Series A due 2034;
• County of
Revenue Refunding Bonds, 2006 Series B due 2034;
• County of
Revenue Bonds, 2006 Series B due 2032;
• County of
Facility Revenue Bonds, 2000 Series A due 2023.
The bonds, previously issued on behalf of KU, were remarketedSeptember 3, 2019 . S&P and Moody's lowered their ratings as a result of KU's termination of the letters of credit that previously provided credit enhancement for these bonds. See Note 8 to the Financial Statements for additional information.
Ratings Triggers
(PPL)
As discussed in Note 8 to the Financial Statements, certain of WPD's senior unsecured notes may be put by the holders to the issuer for redemption if the long-term credit ratings assigned to the notes are withdrawn by any of the rating agencies (Moody's or S&P) or reduced to a non-investment grade rating of Ba1 or BB+ or lower in connection with a restructuring event. A restructuring event includes the loss of, or a material adverse change to, the distribution licenses under which WPD (East Midlands ), WPD (South West), WPD (South Wales ) and WPD (West Midlands ) operate and would be a trigger event for each company. These notes totaled £5.4 billion (approximately$6.9 billion ) nominal value atDecember 31, 2019 . (PPL, LKE, LG&E and KU) Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, interest rate and foreign currency instruments (for PPL), contain provisions that require the posting of additional collateral, or permit the counterparty to terminate the contract, if PPL's, LKE's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade. See Note 17 to the Financial Statements for a 66 --------------------------------------------------------------------------------
Table of Contents
discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral requirements for PPL, LKE and LG&E for derivative contracts in a net liability position atDecember 31, 2019 .
Guarantees for Subsidiaries (PPL)
PPL guarantees certain consolidated affiliate financing arrangements. Some of the guarantees contain financial and other covenants that, if not met, would limit or restrict the consolidated affiliates' access to funds under these financing arrangements, accelerate maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions. At this time, PPL believes that these covenants will not limit access to relevant funding sources. See Note 13 to the Financial Statements for additional information about guarantees.
Off-Balance Sheet Arrangements (All Registrants)
The Registrants have entered into certain agreements that may contingently require payment to a guaranteed or indemnified party. See Note 13 to the Financial Statements for a discussion of these agreements.
Risk Management Market Risk (All Registrants) See Notes 1, 16 and 17 to the Financial Statements for information about the Registrants' risk management objectives, valuation techniques and accounting designations. The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions. Actual future results may differ materially from those presented. These are not precise indicators of expected future losses, but are rather only indicators of possible losses under normal market conditions at a given confidence level.
Interest Rate Risk
The Registrants and their subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. The Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of their debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolios due to changes in the absolute level of interest rates. In addition, the interest rate risk of certain subsidiaries is potentially mitigated as a result of the existing regulatory framework or the timing of rate cases.
The following interest rate hedges were outstanding at
2019 2018 Effect of a Effect of a Fair Value, 10% Adverse Maturities Fair Value, 10% Adverse Exposure Net - Asset Movement Ranging Exposure Net - Asset Movement Hedged (Liability) (a) in Rates (b) Through Hedged (Liability) (a) in Rates (b) PPL Cash flow hedges Cross-currency swaps (c)$ 702 $ 156$ (71 ) 2028$ 702 $ 137$ (76 ) Economic hedges Interest rate swaps (d) 147 (22 ) (1 ) 2033 147 (20 ) (1 ) LKE Economic hedges Interest rate swaps (d) 147 (22 ) (1 ) 2033 147 (20 ) (1 ) LG&E Economic hedges Interest rate swaps (d) 147 (22 ) (1 ) 2033 147 (20 ) (1 ) 67
--------------------------------------------------------------------------------
Table of Contents
(a) Includes accrued interest, if applicable.
(b) Effects of adverse movements decrease assets or increase liabilities, as
applicable, which could result in an asset becoming a liability.
Sensitivities represent a 10% adverse movement in interest rates, except for
cross-currency swaps which also includes a 10% adverse movement in foreign
currency exchange rates.
(c) Changes in the fair value of these instruments are recorded in equity and
reclassified into earnings in the same period during which the item being
hedged affects earnings.
(d) Realized changes in the fair value of such economic hedges are recoverable
through regulated rates and any subsequent changes in the fair value of these
derivatives are included in regulatory assets or regulatory liabilities.
The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios. The estimated impact of a 10% adverse movement in interest rates on interest expense atDecember 31, 2019 and 2018 was insignificant for PPL,PPL Electric , LKE, LG&E and KU. The estimated impact of a 10% adverse movement in interest rates on the fair value of debt atDecember 31 is shown below. 10% Adverse Movement in Rates 2019 2018 PPL $ 655$ 652 PPL Electric 197 188 LKE 198 172 LG&E 84 62 KU 104 92 Foreign Currency Risk (PPL) PPL is exposed to foreign currency risk primarily through investments in and earnings ofU.K. affiliates. Under its risk management program, PPL may enter into financial instruments to hedge certain foreign currency exposures, including translation risk of expected earnings, firm commitments, recognized assets or liabilities, anticipated transactions and net investments.
The following foreign currency hedges were outstanding at
2019 2018 Effect of a 10% Effect of a 10% Fair Value, Adverse Movement Maturities Fair Value, Adverse Movement Exposure Net - Asset in Foreign Currency Ranging Exposure Net - Asset in Foreign Currency Hedged (Liability) Exchange Rates (a) Through Hedged (Liability) Exchange Rates (a) Economic hedges (b) £ 859 $ 137 $ (89 ) 2020 £ 1,540 $ 201 $ (181 )
(a) Effects of adverse movements decrease assets or increase liabilities, as
applicable, which could result in an asset becoming a liability.
(b) To economically hedge the translation of expected earnings denominated in
GBP. (All Registrants) Commodity Price Risk
PPL is exposed to commodity price risk through its domestic subsidiaries as described below.
•
a PLR. Potential commodity price risk is insignificant and mitigated through
its PUC-approved cost recovery mechanism and full-requirement supply agreements to serve its PLR customers which transfer the risk to energy suppliers.
• LG&E's and KU's rates include certain mechanisms for fuel, fuel-related
expenses and energy purchases. In addition, LG&E's rates include a mechanism
for natural gas supply expenses. These mechanisms generally provide for
timely recovery of market price fluctuations associated with these expenses.
Volumetric Risk Volumetric risk is the risk related to the changes in volume of retail sales due to weather, economic conditions or other factors. PPL is exposed to volumetric risk through its subsidiaries as described below. 68 --------------------------------------------------------------------------------
Table of Contents
• WPD is exposed to volumetric risk which is significantly mitigated as a
result of the method of regulation in the
control regulations, recovery of such exposure occurs on a two year lag. See
Note 1 to the Financial Statements for additional information on revenue
recognition under RIIO-ED1.
•
mainly due to weather and other economic conditions for which there is limited mitigation between rate cases.
Defined Benefit Plans - Equity Securities Price Risk
See "Application of Critical Accounting Policies - Defined Benefits" for additional information regarding the effect of equity securities price risk on plan assets.
Credit Risk (All Registrants) Credit risk is the risk that the Registrants would incur a loss as a result of nonperformance by counterparties of their contractual obligations. The Registrants maintain credit policies and procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit ratings) and require other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk. However, the Registrants, as applicable, have concentrations of suppliers and customers among electric utilities, financial institutions and energy marketing and trading companies. These concentrations may impact the Registrants' overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.
(
InJanuary 2017 , the PUC issued a Final Order approvingPPL Electric's PLR procurement plan for the periodJune 2017 throughMay 2021 , which includes a total of eight semi-annual solicitations for electricity supply in April and October. To date,PPL Electric has conducted six of its planned eight competitive solicitations. Under the standard Supply Master Agreement (the Agreement) for the competitive solicitation process,PPL Electric requires all suppliers to post collateral if their credit exposure exceeds an established credit limit. In the event a supplier defaults on its obligation,PPL Electric would be required to seek replacement power in the market. All incremental costs incurred byPPL Electric would be recoverable from customers in future rates. AtDecember 31, 2019 , most of the successful bidders under all of the solicitations had an investment grade credit rating from S&P and were not required to post collateral under the Agreement. A small portion of bidders were required to post an insignificant amount of collateral under the Agreement. There is no instance under the Agreement in whichPPL Electric is required to post collateral to its suppliers.
See Note 17 to the Financial Statements for additional information on credit risk.
Foreign Currency Translation (PPL)
The value of the British pound sterling fluctuates in relation to theU.S. dollar. In 2019, changes in this exchange rate resulted in a foreign currency translation gain of$106 million , which reflected a$181 million increase to PP&E,$34 million increase to goodwill and$12 million decrease to other net liabilities partially offset by a$121 million increase to long-term debt. In 2018, changes in this exchange rate resulted in a foreign currency translation loss of$453 million , which reflected a$754 million decrease to PP&E and$150 million decrease to goodwill partially offset by a$445 million decrease to long-term debt and a decrease of$6 million to other net liabilities. In 2017, changes in this exchange rate resulted in a foreign currency translation gain of$537 million , which reflected a$935 million increase to PP&E and$198 million increase to goodwill partially offset by a$549 million increase to long-term debt and an increase of$47 million to other net liabilities.
(All Registrants)
Related Party Transactions
The Registrants are not aware of any material ownership interests or operating responsibility by senior management in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with the Registrants. See Note 14 to the Financial Statements for additional information on related party transactions forPPL Electric , LKE, LG&E and KU. 69 --------------------------------------------------------------------------------
Table of Contents
Acquisitions, Development and Divestitures
The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with, modify or terminate the projects. Any resulting transactions may impact future financial results.
Capacity Needs (PPL, LKE, LG&E and KU)
As a result of environmental requirements and energy efficiency measures, KU retired two older coal-fired electricity generating units at the E.W. Brown plant inFebruary 2019 with a combined summer rating capacity of 272 MW. Despite the retirement of these units, LG&E and KU maintain sufficient generating capacity to serve their anticipated load.
Environmental Matters
(All Registrants)
Extensive federal, state and local environmental laws and regulations are applicable to PPL's,PPL Electric's , LKE's, LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of the Registrants' businesses. The costs of compliance or alleged non-compliance cannot be predicted with certainty but could be significant. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed. Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs for their products or their demand for the Registrants' services. Increased capital and operating costs are subject to rate recovery. PPL,PPL Electric , LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities. See "Legal Matters" in Note 13 to the Financial Statements for a discussion of the more significant environmental claims. See "Financial Condition - Liquidity and Capital Resources - Forecasted Uses of Cash - Capital Expenditures" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" for information on projected environmental capital expenditures for 2020 through 2024. See Note 19 to the Financial Statements for information related to the impacts of CCRs on AROs.
Sustainability
Increasing attention has been focused on a broad range of corporate activities under the heading of "sustainability", which has resulted in a significant increase in the number of requests from interested parties for information on sustainability topics. These parties range from investor groups focused on environmental, social, governance and other matters to non-investors concerned with a variety of public policy matters. Often the scope of the information sought is very broad and not necessarily relevant to an issuer's business or industry. As a result, a number of private groups have proposed to standardize the subject matter constituting sustainability, either generally or by industry. Those efforts remain ongoing. In addition, certain of these private groups have advocated that theSEC promulgate regulations requiring specific sustainability reporting under the Securities Exchange Act of 1934, as amended (the "'34 Act"), or that issuers voluntarily include certain sustainability disclosure in their '34 Act reports. To date, no new reporting requirements have been adopted or proposed by theSEC . As has been PPL's practice, to the extent sustainability issues have or may have a material impact on the Registrants' financial condition or results of operation, PPL discloses such matters in accordance with applicable securities law andSEC regulations. With respect to other sustainability topics that PPL deems relevant to investors but that are not required to be reported under applicable securities law andSEC regulation, PPL will continue each spring to publish its annual sustainability report including tracking reductions related to the company's goal to reduce carbon emissions and post that report on its corporate website at www.pplweb.com and on www.pplsustainability.com. Neither the information in such annual sustainability report nor the information at such websites is incorporated in this Form 10-K by reference, and it should not be considered a part of this Form 10-K. In preparing its sustainability report, PPL is guided by the framework established by the Global Reporting Initiative, which identifies environmental, social, governance and other subject matter categories. PPL also participates in efforts by theEdison Electric Institute to provide the appropriate subset of sustainability information that can be applied consistently across the electric utility industry. Additionally, PPL publicly discloses its corporate political contributions and responds to the CDP climate survey. 70
--------------------------------------------------------------------------------
Table of Contents Cybersecurity
See "Cybersecurity Management" in "Item 1. Business" and "Item 1A. Risk factors" for a discussion of cybersecurity risks affecting the Registrants and the related strategies for managing these risks.
Competition
See "Competition" under each of PPL's reportable segments in "Item 1. Business - General - Segment Information" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting the Registrants. New Accounting Guidance
See Notes 1 and 21 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.
Application of Critical Accounting Policies Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to an understanding of the reported financial condition or results of operations and require management to make estimates or other judgments of matters that are inherently uncertain. Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements). Senior management has reviewed with PPL's Audit Committee these critical accounting policies, the following disclosures regarding their application, and the estimates and assumptions regarding them. Defined Benefits (All Registrants) Certain of the Registrants and/or their subsidiaries sponsor or participate in certain qualified funded and non-qualified unfunded defined benefit pension plans and both funded and unfunded other postretirement benefit plans. See Notes 1, 7 and 11 to the Financial Statements for additional information about the plans and the accounting for defined benefits. A summary of plan sponsors by Registrant and whether a Registrant or its subsidiaries sponsor (S) or participate in and receives allocations (P) from those plans is shown in the table below. Plan Sponsor PPL PPL Electric LKE LG&E KU PPL Services S P WPD (a) S LKE (b) S P P LG&E (b) S
(a) Does not sponsor or participate in other postretirement benefits plans.
(b) The pension plans sponsored by LKE and LG&E were merged effective
2020 into the LG&E and KU Pension Plan. The merged plan is sponsored by LKE.
LG&E and KU participate in this plan.
Management makes certain assumptions regarding the valuation of benefit obligations and the performance of plan assets. As such, annual net periodic defined benefit costs are recorded in current earnings or regulatory assets and liabilities based on estimated results. Any differences between actual and estimated results are recorded in AOCI or, in the case ofPPL Electric , LG&E and KU, regulatory assets and liabilities for amounts that are expected to be recovered through regulated customer rates. These amounts in AOCI or regulatory assets and liabilities are amortized to income over future periods. The significant assumptions are:
• Discount Rate - In selecting the discount rates for
plans, the plan sponsors start with a cash flow analysis of the expected
benefit payment stream for their plans. The plan-specific cash flows are
matched against the coupons and expected maturity values of Aa-rated
non-callable (or callable with make-whole provisions) bonds that could be
purchased for a hypothetical settlement portfolio. The plan sponsors then use
the single discount rate derived from matching the discounted benefit payment
stream to the market value of the selected bond portfolio. 71
--------------------------------------------------------------------------------
Table of Contents
In selecting the discount rate for itsU.K. pension plans, WPD starts with a cash flow analysis of the expected benefit payment stream for its plans. These plan-specific cash flows are matched against a spot-rate yield curve to determine the assumed discount rate. The spot-rate yield curve uses an iBoxx British pounds sterling denominated corporate bond index as its base. From this base, those bonds with the lowest and highest yields are eliminated to develop an appropriate subset of bonds. WPD uses the single weighted-average discount rate derived from the spot rates to discount the benefit obligation. In addition, the spot rates that match the cash flows associated with the service cost and interest cost are used to discount those components of net periodic defined benefit cost.
• Expected Return on Plan Assets - The expected long-term rates of return for
pension and other postretirement benefits are based on management's
projections using a best-estimate of expected returns, volatilities and
correlations for each asset class. Each plan's specific current and expected
asset allocations are also considered in developing a reasonable return assumption.
• Rate of Compensation Increase - Management projects employees' annual pay
increases, which are used to project employees' pension benefits at
retirement. In selecting a rate of compensation increase, plan sponsors
consider past experience, the potential impact of movements in inflation
rates and expectations of ongoing compensation practices.
See Note 11 to the Financial Statements for details of the assumptions selected for pension and other postretirement benefits. A variance in the assumptions could significantly impact accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and AOCI or regulatory assets and liabilities. The following tables reflect changes in certain assumptions based on the Registrants' primary defined benefit plans. The inverse of this change would have the opposite impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and AOCI or regulatory assets and liabilities. The sensitivities below reflect an evaluation of the change based solely on a change in that assumption. Increase (Decrease) Actuarial assumption Discount Rate (0.25 %) Expected Return on Plan Assets (0.25 %) Rate of Compensation Increase 0.25 % Increase Increase (Increase) Increase Increase (Decrease) (Decrease) Decrease (Decrease) (Decrease) Defined Benefit Defined Benefit AOCI Net Regulatory Defined Benefit Actuarial assumption Asset Liabilities (pre-tax) Assets Costs PPL Discount rates$ (371 ) $ 134 $ 413 $ 92 $ 47 Expected return on plan assets n/a n/a n/a n/a 31 Rate of compensation increase (56 ) 15 62 9 13 PPL Electric Discount rates 57 - 57 3 Expected return on plan assets n/a - n/a 4 Rate of compensation increase 6 - 6 1 LKE Discount rates (9 ) 51 26 34 6 Expected return on plan assets n/a n/a n/a n/a 4 Rate of compensation increase n/a 6 3 3 2 72
--------------------------------------------------------------------------------
Table of Contents Increase (Decrease) Increase (Decrease) (Increase) Decrease Increase (Decrease) Increase (Decrease) Defined Benefit Defined Benefit AOCI Net Regulatory Defined Benefit Actuarial assumption Asset Liabilities (pre-tax) Assets Costs LG&E Discount rates (16 ) 2 n/a 18 2 Expected return on plan assets n/a n/a n/a n/a 1 Rate of compensation increase (1 ) - n/a 1 - KU Discount rates (14 ) 2 n/a 16 2 Expected return on plan assets n/a n/a n/a n/a 1 Rate of compensation increase (2 ) - n/a 2 -
Income Taxes (All Registrants)
Significant management judgment is required in developing the Registrants' provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns, valuation allowances on deferred tax assets, as well as whether the undistributed earnings of WPD are considered indefinitely reinvested. Additionally, significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position. On a quarterly basis, uncertain tax positions are reassessed by considering information known as of the reporting date. Based on management's assessment of new information, a tax benefit may subsequently be recognized for a previously unrecognized tax position, a previously recognized tax position may be derecognized, or the benefit of a previously recognized tax position may be remeasured. The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements in the future. The need for valuation allowances to reduce deferred tax assets also requires significant management judgment. Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset. Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies. Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized to account for an uncertain tax position. Management also considers the uncertainty posed by political risk and the effect of this uncertainty on the various factors that management takes into account in evaluating the need for valuation allowances. The amount of deferred tax assets ultimately realized may differ materially from the estimates utilized in the computation of valuation allowances and may materially impact the financial statements in the future. See Note 6 to the Financial Statements for income tax disclosures, including the impact of the TCJA and management's conclusion that the undistributed earnings of WPD are considered indefinitely reinvested. Based on this conclusion,PPL Global does not record deferredU.S. federal income taxes on WPD's undistributed earnings.
Regulatory Assets and Liabilities
(All Registrants)
PPL Electric , LG&E and KU are subject to cost-based rate regulation. As a result, the effects of regulatory actions are required to be reflected in the financial statements. Assets and liabilities are recorded that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates. Regulatory liabilities are recognized for amounts expected to be returned through future regulated customer rates. In certain cases, regulatory liabilities are recorded based on an understanding or agreement with the regulator that rates have been set to recover costs that are expected to be incurred in the future, and the regulated entity is accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose. Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to the Registrants and other regulated entities, and the status of any pending or potential deregulation legislation. Based 73
--------------------------------------------------------------------------------
Table of Contents
on this continual assessment, management believes the existing regulatory assets are probable of recovery. This assessment reflects the current political and regulatory climate at the state and federal levels and is subject to change in the future. If future recovery of costs ceases to be probable, the regulatory asset would be written-off. Additionally, the regulatory agencies can provide flexibility in the manner and timing of recovery of regulatory assets.
See Note 7 to the Financial Statements for regulatory assets and regulatory
liabilities recorded at
(PPL)
WPD's operations are regulated by Ofgem. Ofgem has adopted a price control regulatory framework focused on outputs and performance in contrast to traditionalU.S. utility ratemaking that operates under a cost recovery model. Because the regulatory model is incentive-based, WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP for entities subject to cost-based rate regulation and does not record regulatory assets and liabilities. See "General - Regulation" in Note 1 to the Financial Statements for additional information.
Price Risk Management (PPL)
See "Financial Condition - Risk Management" above.
Goodwill Impairment (PPL, LKE, LG&E and KU)
PPL, LKE, LG&E and KU may elect either to initially make a qualitative evaluation about the likelihood of an impairment of goodwill or to bypass the qualitative evaluation and test goodwill for impairment using a two-step quantitative test. See "Long-Lived and Intangible Assets - Asset Impairment (Excluding Investments)" in Note 1 to the Financial Statements for further discussion of qualitative and quantitative goodwill impairment tests. See Note 18 to the Financial Statements for information on goodwill balances atDecember 31, 2019 . PPL elected to perform the two-step quantitative impairment test of goodwill for theU.K. Regulated segment reporting unit in the fourth quarter of 2019. Management used both discounted cash flows and market multiples including implied RAV premiums, which required significant assumptions, to estimate the fair value of the reporting units. Significant assumptions used in the discounted cash flows include discount and growth rates, outcomes of future rate filings, and projected operating and capital cash flows. Projected operating and capital cash flows is based on the Registrants' internal business plan, which assumes the occurrence of certain future events. Significant assumptions used in the market multiples include utility sector market performance and comparable transactions. Application of an appropriate weighting to both the discounted cash flow and market multiple valuations for the most recent impairment test performed as ofOctober 1, 2019 did not require the second-step assessment and did not result in any impairment. A high degree of judgment is required to develop estimates related to fair value conclusions. A decrease in the forecasted cash flows of 10%, an increase in the discount rate of 0.25%, or a 10% decrease in the market multiples would not have resulted in an impairment of goodwill for this reporting unit. PPL (for its Kentucky Regulated segment), and individually, LKE, LG&E and KU elected to perform the qualitative step zero evaluation of goodwill, as ofOctober 1, 2019 . Based on these evaluations, management concluded it was not more likely than not that the fair value of these reporting units was less than their carrying values. As such, the two-step quantitative impairment test was not performed. 74
--------------------------------------------------------------------------------
Table of Contents
Asset Retirement Obligations (PPL, LKE, LG&E and KU)
ARO liabilities are required to be recognized for legal obligations associated with the retirement of long-lived assets. Initial obligations are measured at estimated fair value. An ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated. An equivalent amount is recorded as an increase in the value of the capitalized asset and amortized to expense over the asset's useful life. In determining AROs, management must make significant judgments and estimates to calculate fair value. Fair value is developed using an expected present value technique based on assumptions of market participants that consider estimated retirement costs in current period dollars, inflated to the anticipated retirement date and discounted back to the date the ARO was incurred. Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements. Estimated ARO costs and settlement dates, which affect the carrying value of the ARO and the related capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the ARO estimate. Any change to the capitalized asset is generally amortized over the remaining life of the associated long-lived asset. See "Long-Lived and Intangible Assets - Asset Retirement Obligations" in Note 1, Note 7 and Note 19 to the Financial Statements for additional information on AROs.
At
Most Significant AROs Total ARO Amount Recorded Recorded % of Total Description PPL$ 282 $ 181 64 Ponds, landfills and natural gas mains LKE 215 181 84 Ponds, landfills and natural gas mains LG&E 73 56 77 Ponds, landfills and natural gas mains KU 142 125 88 Ponds and landfills The most significant assumptions surrounding AROs are the forecasted retirement costs (including settlement dates and the timing of cash flows), discount and inflation rates. AtDecember 31, 2019 , a 10% increase to retirement cost would increase these ARO liabilities by$33 million . A 0.25% decrease in the discount rate would increase these ARO liabilities by$4 million and a 0.25% increase in the inflation rate would increase these ARO liabilities by$2 million . There would be no significant change to the annual depreciation expense of the ARO asset or the annual accretion expense of the ARO liability as a result of these changes in assumptions.
Revenue Recognition - Unbilled Revenues (LKE, LG&E and KU)
Revenues related to the sale of energy are recorded when service is rendered or when energy is delivered to customers. Because customers are billed on cycles which vary based on the timing of actual meter reads taken throughout the month, estimates are recorded for unbilled revenues at the end of each reporting period. For LG&E and KU, such unbilled revenue amounts reflect estimates of deliveries to customers since the date of the last reading of their meters. The unbilled revenue estimates reflect consideration of factors including daily load models, estimated usage for each customer class, the effect of current and different rate schedules, the meter read schedule, the billing schedule, actual weather data, and, where applicable, the impact of weather normalization or other regulatory provisions of rate structures. See "Unbilled revenues" on the Registrants' Balance Sheets for balances atDecember 31, 2019 and 2018. Other Information (All Registrants)
PPL's Audit Committee has approved the independent auditor to provide audit and
audit-related services, tax services and other services permitted by
Sarbanes-Oxley and
75 --------------------------------------------------------------------------------
Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to "Risk Management" for the Registrants in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations."
76 --------------------------------------------------------------------------------
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareowners and the Board of Directors of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofPPL Corporation and subsidiaries (the "Company") as ofDecember 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period endedDecember 31, 2019 , and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019 , in conformity with accounting principles generally accepted inthe United States of America . We have also audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) (PCAOB), the Company's internal control over financial reporting as ofDecember 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission and our report datedFebruary 14, 2020 , expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Regulatory Assets and Liabilities - Impact of Rate Regulation on Various Account Balances and Disclosures - Refer to Notes 1 and 7 to the Financial Statements Critical Audit Matter Description As discussed in Note 1 to the financial statements,PPL Corporation owns and operates three cost-based rate-regulated utilities inthe United States (U.S. ) for which rates are set by theFederal Energy Regulatory Commission (FERC), theKentucky Public Service Commission (KPSC), theVirginia State Corporation Commission (VSCC) and thePennsylvania Public Utility Commission (PUC) to enable the regulated utilities to recover the costs of providing electric or gas service, as applicable, and to provide a reasonable return to shareholders. Base rates are generally established based on a future test period. As a result, the financial statements are subject to the accounting for certain types of regulation as prescribed by accounting principles generally accepted inthe United States of America and reflect the effects of regulatory actions. Regulatory assets are recognized for the effect of transactions or events where future recovery of underlying costs is probable in regulated customer rates. The effect of such accounting is to defer certain or qualifying costs that would otherwise currently be charged to expense. Regulatory liabilities are recognized for amounts expected to be returned through future regulated customer rates. 77 --------------------------------------------------------------------------------
Table of Contents
The accounting for regulatory assets and regulatory liabilities is based on specific ratemaking decisions or precedent for each transaction or event as prescribed by theFERC , KPSC, VSCC and PUC. The accounting for the economics of rate regulation also impacts other financial statement line items, including regulated utility plant, operating revenues, depreciation, and income taxes and impacts multiple note disclosures. As ofDecember 31, 2019 ,PPL Corporation had a recorded regulatory assets balance of$1,559 million and regulatory liabilities balance of$2,687 million .PPL Corporation's U.S. regulated utilities' rates are subject to cost-based rate-setting processes and annual earnings oversight. Rates are established based on an analysis of the costs incurred and the regulated utility's capital structure, and must be approved by one or more federal or state regulatory commissions, including theFERC , KPSC, VSCC and PUC. Regulatory decisions can have an impact on the recovery of costs, the rate earned on invested capital, and the timing and amount of assets to be recovered by rates. TheFERC , KPSC, VSCC and PUC regulation of rates is premised on the full recovery of prudently incurred costs and an adequate return on capital investments. Decisions to be made by theFERC , KPSC, VSCC and PUC in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required. WhilePPL Corporation's U.S. utilities have indicated that they expect to recover costs from customers through regulated rates, there is a risk that theFERC , KPSC, VSCC or PUC will not approve full recovery of such costs or approve recovery on a timely basis in future regulatory decisions. We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management in continually assessing whether the regulatory assets are probable of future recovery by considering factors, such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders and the status of any pending legislation. Auditing these judgments required specialized knowledge of accounting for rate regulation and the rate-setting process due to its inherent complexities. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the uncertainty of future decisions by theFERC , KPSC, VSCC and PUC included the following, among others:
• We tested the effectiveness of management's internal controls over
evaluating the likelihood of recovery in future rates of costs deferred as
regulatory assets. We tested the effectiveness of management's controls
over the recognition of amounts as regulated utility plant, regulatory
assets or liabilities, operating revenues, depreciation, income taxes, and
note disclosures and the monitoring and evaluation of regulatory
developments that may affect the likelihood of recovering costs in future
rates or of a future reduction in rates.
• We obtained and read relevant regulatory orders issued by the
VSCC and PUC for
likelihood of recovery in future rates or of a future reduction in rates. • We inquired of management about regulated utility plant that may be
abandoned. We inspected minutes of the board of directors, regulatory
orders and other filings with the commission to identify any evidence that
may contradict management's assertion regarding probability of an abandonment. • We evaluatedPPL Corporation's disclosures related to the impacts of rate-regulation, including the balances recorded and regulatory developments, in the financial statements.
Critical Audit Matter Description
PPL Corporation's balance sheet includes$3.2 billion of goodwill as ofDecember 31, 2019 , of which$2.5 billion was allocated to theU.K. Regulated reporting unit. The fair value of theU.K. Regulated reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized.PPL Corporation elected to perform the two-step quantitative impairment test of goodwill for theU.K. Regulated reporting unit in the fourth quarter of 2019. Management used both discounted cash flows and market multiples, which required significant assumptions, to estimate the fair value of the reporting units. Significant assumptions used in the discounted cash flows included discount and growth rates, and projected operating and capital cash flows. Projected operating and capital cash flows are based onPPL Corporation's internal business plan, which assumes the occurrence of certain events in the future. Significant assumptions used in the market multiples include utility sector market performance and comparable transactions. 78 --------------------------------------------------------------------------------
Table of Contents
We identified goodwill for theU.K. Regulated reporting unit as a critical audit matter because of the significant judgments made by management to estimate the fair value of theU.K. Regulated reporting unit, specifically due to changes in the economy in theU.K. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management's estimates and assumptions related to the regulatory asset value premiums (RAV premiums), discount and growth rates, and projected operating and capital cash flows.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the RAV premiums, discount and growth rates, and projected operating and capital cash flows used by management to estimate the fair value of theU.K. Regulated reporting unit included the following, among others: • We tested the effectiveness of management's internal controls over their
goodwill impairment evaluation, including those over the determination of
the fair value of the
related to management's RAV premiums estimate, and selection of discount
and growth rates and projected operating and capital cash flows.
• We evaluated the reasonableness of management's projected operating and
capital cash flows by comparing the forecasts to:
• Historical operating and capital cash flows.
• Internal communications to management and the board of directors.
• Forecasted information included inPPL Corporation's press releases as well as in analyst and industry reports for PPL
Corporation.
• We evaluated the impact of changes in management's forecasts from theOctober 1, 2019 annual measurement date toDecember 31, 2019 . • With the assistance of our fair value specialists, we evaluated the
reasonableness of the (1) valuation methodology, (2) RAV premiums and (3)
discount and growth rates by: • Testing the source information underlying the determination of the RAV premiums, and discount and growth rates and the
mathematical
accuracy of the calculation. • Developing a range of independent estimates and comparing those to the RAV premiums, and discount and growth rates selected by management. Income Taxes - Valuation Allowances - Estimates of future taxable income and management's determination of whether it is more likely than not that deferred tax assets will be realized - Refer to Note 1 and 6 to the Financial Statements
Critical Audit Matter Description
Deferred income taxes reflect the net future 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 losses and tax credit carryforwards. Net deferred tax assets have been recognized based on management's estimates of future taxable income for theU.S. and theU.K. PPL Corporation files tax returns in multiple jurisdictions with complex tax laws and regulations. Valuation allowances have been established for the amount that, more likely than not, will not be realized.PPL Corporation has$834 million of valuation allowances recorded on$1,479 million of deferred tax assets related to federal, state and foreign loss and credit carryforwards as ofDecember 31, 2019 . Management considers a number of factors in assessing the realization of a deferred tax asset associated with net operating losses and tax credit carryforwards, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax-planning strategies. Management also considers the uncertainty posed by political risk and the effect of this uncertainty on the various factors that management takes into account in evaluating the need for valuation allowances. The amount of deferred tax assets ultimately realized may differ materially from the estimates utilized in the computation of valuation allowances and may materially impact the financial statements in the future. 79 --------------------------------------------------------------------------------
Table of Contents
We identified management's estimation of the valuation allowances associated with loss and credit carryforwards as a critical audit matter because the need for valuation allowances to reduce deferred tax assets requires significant management judgment. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists, when performing audit procedures to evaluate the reasonableness of management's estimates of future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to estimated future taxable income and the determination of whether it is more likely than not that the deferred tax assets will be realized included the following, among others:
• We tested the effectiveness of management's internal controls over the
valuation allowance for income taxes, including management's internal
controls over the estimates of future taxable income and the determination
of whether it is more likely than not that the deferred tax assets will be
realized.
• We evaluated the reasonableness of the methods, assumptions, and judgments
used by management to determine whether a valuation allowance was necessary.
• With the assistance of our income tax specialists, we evaluated whether
the sources of management's estimated taxable income were of the
appropriate character and sufficient to utilize the deferred tax assets
under the relevant tax laws.
• We evaluated management's ability to accurately estimate taxable income by
comparing actual results to management's historical estimates and
evaluating whether there have been any changes that would affect
management's ability to continue accurately estimating taxable income. • We tested the reasonableness of management's estimates of future taxable
income by comparing the estimates to:
• Internal budgets.
• Historical taxable income, as adjusted for nonrecurring items.
• Internal communications to management and the board of directors.
• Forecasted information included inPPL Corporation's press releases as well as in analyst and industry reports for PPL
Corporation. /s/Deloitte & Touche LLP Parsippany, New Jersey February 14, 2020
We have served as the Company's auditor since 2015.
80
--------------------------------------------------------------------------------
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareowners and the Board of Directors ofPPL Corporation Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting ofPPL Corporation and subsidiaries (the "Company") as ofDecember 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2019 , based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) (PCAOB), the consolidated financial statements as of and for the year endedDecember 31, 2019 , of the Company and our report datedFebruary 14, 2020 , expressed an unqualified opinion on those financial statements. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting at Item 9A. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/Deloitte & Touche LLP Parsippany, New Jersey February 14, 2020 81
--------------------------------------------------------------------------------
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareowner and the Board of Directors ofPPL Electric Utilities Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets ofPPL Electric Utilities Corporation and subsidiaries (the "Company") as ofDecember 31, 2019 and 2018, the related consolidated statements of income, equity, and cash flows, for each of the three years in the period endedDecember 31, 2019 , and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019 , in conformity with accounting principles generally accepted inthe United States of America . Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/Deloitte & Touche LLP Parsippany, New Jersey February 14, 2020
We have served as the Company's auditor since 2015.
82
--------------------------------------------------------------------------------
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Sole Member and the Board of Directors of
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets ofLG&E and KU Energy LLC and Subsidiaries (the "Company") as ofDecember 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period endedDecember 31, 2019 , and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019 , in conformity with accounting principles generally accepted inthe United States of America . Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/Deloitte & Touche LLP Louisville, Kentucky February 14, 2020
We have served as the Company's auditor since 2015.
83 --------------------------------------------------------------------------------
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and the Board of Directors of
Opinion on the Financial Statements We have audited the accompanying balance sheets ofLouisville Gas and Electric Company (the "Company") as ofDecember 31, 2019 and 2018, the related statements of income, equity, and cash flows, for each of the three years in the period endedDecember 31, 2019 , and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019 , in conformity with accounting principles generally accepted inthe United States of America . Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/Deloitte & Touche LLP Louisville, Kentucky February 14, 2020
We have served as the Company's auditor since 2015.
84
--------------------------------------------------------------------------------
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder and the Board of
Opinion on the Financial Statements We have audited the accompanying balance sheets ofKentucky Utilities Company (the "Company") as ofDecember 31, 2019 and 2018, the related statements of income, equity, and cash flows, for each of the three years in the period endedDecember 31, 2019 , and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019 , in conformity with accounting principles generally accepted inthe United States of America . Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/Deloitte & Touche LLP Louisville, Kentucky February 14, 2020
We have served as the Company's auditor since 2015.
85
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source