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PPL CORPORATION

(PPL)
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Delayed Nyse  -  04:00:01 2023-01-27 pm EST
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PPL CORP Combined Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/04/2022 | 10:56am EST

(All Registrants)


This "Item 2. Combined Management's Discussion and Analysis of Financial
Condition and Results of Operations" is separately filed by PPL, PPL Electric,
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' Condensed
Consolidated Financial Statements and the accompanying Notes and with the
Registrants' 2021 Form 10-K. 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 the three and nine months ended September 30,
2022 with the same period in 2021. The 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.

•"Financial Condition - Liquidity and Capital Resources" provides an analysis of the Registrants' liquidity positions and credit profiles. This section also includes a discussion of rating agency actions.

•"Financial Condition - Risk Management" provides an explanation of the Registrants' risk management programs relating to market and credit risk.

                                    Overview

Introduction

(PPL)

PPL, headquartered in Allentown, Pennsylvania, is a utility holding company.
PPL, through its regulated utility subsidiaries, delivers electricity to
customers in Pennsylvania, Kentucky, Virginia, and Rhode Island; delivers
natural gas to customers in Kentucky and Rhode Island; and generates electricity
from power plants in Kentucky.

PPL's principal subsidiaries are shown below (* denotes a Registrant).

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                                                                                PPL Corporation*


                                                                                                                           PPL Capital Funding
                                                                                                              Provides financing for the operations of PPL
                                                                                                                        and certain subsidiaries


                                                                                      LKE                                                     RIE
                               PPL Electric*                              A holding company that owns                              Engages in the regulated
                 Engages in the regulated transmission and                regulated utility operations                        transmission, 

distribution and sale

                      distribution of electricity in                     through its subsidiaries, LG&E                          of electricity and regulated
                               Pennsylvania                                          and KU                                  distribution and sale of natural gas
                                                                                                                                        in Rhode Island


                                                            LG&E*
                                             Engages in the regulated generation,                                    KU*
                                             transmission, distribution and sale                    Engages in the regulated generation,
                                                 of electricity and regulated                      transmission, distribution and sale of
                                             distribution and sale of natural gas                    electricity, primarily in Kentucky
                                                         in Kentucky

                               Pennsylvania                                         Kentucky                                             Rhode Island
                             Regulated Segment                                 Regulated Segment                                       Regulated Segment


In addition to PPL, the other Registrants included in this filing are as follows.

(PPL Electric)


PPL Electric, headquartered in Allentown, Pennsylvania, is a wholly-owned
subsidiary of PPL and a regulated public utility that is an electricity
transmission and distribution service provider in eastern and central
Pennsylvania. PPL Electric is subject to regulation as a public utility by the
PAPUC, and certain of its transmission activities are subject to the
jurisdiction of the FERC under the Federal Power Act. PPL Electric delivers
electricity in its Pennsylvania service area and provides electricity supply to
retail customers in that area as a PLR under the Customer Choice Act. PPL
Electric was organized in 1920 as Pennsylvania Power & Light Company.

(LG&E)


LG&E, headquartered in Louisville, Kentucky, is a wholly-owned subsidiary of LKE
and a regulated utility engaged in the generation, transmission, distribution
and sale of electricity and distribution and sale of natural gas in Kentucky.
LG&E is subject to regulation as a public utility by the KPSC, and certain of
its transmission activities are subject to the jurisdiction of the FERC under
the Federal Power Act.

(KU)

KU, headquartered in Lexington, Kentucky, is a wholly-owned subsidiary of LKE
and a regulated utility engaged in the generation, transmission, distribution
and sale of electricity in Kentucky and Virginia. KU is subject to regulation as
a public utility by the KPSC and the VSCC, and certain of its transmission and
wholesale power activities are subject to the jurisdiction of the FERC under the
Federal Power Act. KU serves its Kentucky customers under the KU name and its
Virginia customers under the Old Dominion Power name.

Segment Information (PPL)

The following segment information represents an update to "Item 1. Business" in PPL's 2021 Form 10-K and should be read in conjunction with those disclosures.


PPL is organized into three reportable segments as depicted in the chart above:
Kentucky Regulated, which primarily represents the results of LG&E and KU,
Pennsylvania Regulated, which primarily represents the results of PPL Electric
and Rhode Island
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Regulated, which primarily represents the results of RIE. "Corporate and Other"
primarily includes financing costs incurred at the corporate level that have not
been allocated or assigned to the segments.

                         Rhode Island Regulated Segment

The Rhode Island Regulated segment consists primarily of the regulated electricity transmission and distribution operations and regulated distribution and sale of natural gas conducted by RIE.


RIE is engaged in the regulated transmission, distribution and sale of
electricity and regulated distribution and sale of natural gas in Rhode Island.
RIE provides electricity service to approximately 510,000 customers and natural
gas service to approximately 270,000 customers in Rhode Island. RIE's service
area covers substantially all of Rhode Island. See Note 3 to the Financial
Statements for revenue information.

Franchises and Licenses


RIE provides electricity delivery service and natural gas distribution service
in its service territory pursuant to certain franchises, licenses, statutory
service areas, easements and other rights or permissions granted by state
legislatures, cities or municipalities or other entities.

Competition

There are currently no other electric or gas public utilities operating within the service area of RIE.


Rates and Regulation

RIE is subject to the jurisdiction of the FERC, the RIPUC and the Rhode Island
Division of Public Utilities and Carriers. RIE operates under a FERC-approved
open access transmission tariff.

Distribution


RIE owns and maintains electric and natural gas distribution networks in Rhode
Island. Distribution revenues are primarily from the sale of electricity,
natural gas, and related services to retail customers. Distribution sales are
regulated by the RIPUC, which is responsible for approving the rates and other
terms of services as part of the rate making process. Natural gas and electric
distribution revenues are derived from the regulated sale and distribution of
electricity and natural gas to residential, commercial, and industrial customers
within RIE's service territory under the tariff rates. The tariff rates approved
by the regulator are designed to recover the costs incurred by RIE for products
and services provided, along with a return on investment.

Transmission


RIE owns an electric transmission system in Rhode Island. RIE's transmission
services are regulated by the FERC and coordinated with Independent System
Operator (ISO) - New England. Additionally, RIE makes available its transmission
facilities to NEP, for operation and control pursuant to an integrated
facilities agreement, Service Agreement No. 23 (Integrated Facilities Agreement
or IFA). These revenues arise under tariff/rate agreements.

Deferral Mechanisms


RIE records revenues in accordance with accounting principles for rate-regulated
operations for arrangements between RIE and the regulator. These include various
deferral mechanisms such as capital trackers, energy efficiency programs, and
other programs that qualify as Alternative Revenue Programs (ARPs). ARPs enable
RIE to adjust rates in the future, in response to past activities or completed
events. RIE's electric and gas distribution rates both have a revenue decoupling
mechanism, which allows for annual adjustments to the RIE's delivery rates, as a
result of the reconciliation between allowed revenue and billed revenue. RIE
also has other ARPs related to the achievement of certain objectives, demand
side management initiatives, and certain other rate making mechanisms. RIE
recognizes ARPs with a corresponding offset to a regulatory asset or liability
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account when the regulatory specified events or conditions have been met, when
the amounts are determinable, and are probable of recovery (or payment) through
future rate adjustments.

At September 30, 2022, all of RIE's regulatory assets earn a rate of return except $99 million of environmental response costs, $75 million of postretirement benefits and $52 million of net metering deferral costs.

Last Resort Service


RIE is required by the RIPUC and by statute to provide Last Resort Service. Last
Resort Service is available to all customers who have not elected to receive
their electric supply from a non-regulated power producer or any customer who,
for any reason, has stopped receiving generation service from a non-regulated
power producer.

The charge for Last Resort Service is the sum of the applicable Last Resort
Service charges in addition to all appropriate Retail Delivery charges as stated
in the applicable tariff. The monthly charge for Last Resort Service also
includes the costs incurred by RIE to comply with the Renewable Energy Standard,
established in R.I.G.L. Section 39-26-1 and the costs to comply with the RIPUC's
Rules Governing Energy Source Disclosure. The charge for Last Resort Service
includes the administrative costs associated with the procurement of Last Resort
Service, including an adjustment for uncollectible accounts as approved by the
RIPUC.

Numerous alternative suppliers have offered to provide generation supply in RIE's service area. As the cost of generation supply is a pass-through cost for RIE, its financial results are not impacted if its customers purchase electricity supply from these alternative suppliers.

See Note 6 to the Financial Statements for additional information on rate mechanisms and regulatory matters.

Natural Gas Distribution Supply


To meet the projected annual gas supply requirements of approximately 37 Bcf,
RIE has a portfolio of gas supply arrangements of varying contractual terms and
durations to provide reliable and cost-effective service to its customers. These
natural gas supply arrangements include contracts with natural gas producers and
marketers that reflect market price signals. RIE also has firm pipeline and
underground storage capacity contracts to support the delivery of natural gas
supplies to its customers. To manage the winter peak requirements for RIE
customers, RIE contracts for liquified natural gas (LNG) service and owns and
operates certain LNG storage facilities.

The RIE gas supply portfolio includes contracts for firm transportation service
with eleven interstate pipeline companies and natural gas storage operators.
These contracts have various termination dates with certain contracts being
subject to evergreen renewal provisions affording RIE with flexibility in
managing its upstream resource portfolio.

RIE expects to purchase natural gas supplies for its gas distribution operations
from onshore producing regions accessed by its pipeline capacity portfolio in
South Texas, East Texas, and Louisiana, as well as gas originating in the
Marcellus and Utica production areas. RIE expects to purchase certain natural
gas supplies that originate in Canada and from regional LNG importation
terminals.

Business Strategy

(All Registrants)

PPL's strategy, which is supported by the other Registrants and subsidiaries, is
to achieve industry-leading performance in safety, reliability, customer
satisfaction and operational efficiency; to advance a clean energy transition
while maintaining affordability and reliability; to maintain a strong financial
foundation and create long-term value for our shareowners; to foster a diverse
and exceptional workplace; and to build strong communities in areas that we
serve.

Central to PPL's and the other Registrants' strategy is recovering capital
project costs efficiently through various rate-making mechanisms, including
periodic base rate case proceedings using forward test years, annual FERC
formula rate mechanisms and other regulatory agency-approved recovery mechanisms
designed to limit regulatory lag. In Kentucky, the KPSC has adopted a series of
regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, and gas supply
clause) and recovery on
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construction work-in-progress that reduce regulatory lag and provide timely
recovery of and return on, as appropriate, prudently incurred costs. In
Pennsylvania, the FERC transmission formula rate, DSIC mechanism, Smart Meter
Rider and other recovery mechanisms operate to reduce regulatory lag and provide
for timely recovery of and a return on, as appropriate, prudently incurred
costs. In Rhode Island, the gas cost adjustment, net metering, infrastructure,
safety and reliability (ISR) and revenue decoupling mechanisms and other rate
adjustment mechanisms operate to reduce regulatory lag and provide timely
recovery of and return on, as appropriate, prudently incurred costs.

Financial and Operational Developments

(PPL)

Acquisition of Narragansett Electric


On May 25, 2022, PPL Rhode Island Holdings acquired 100% of the outstanding
shares of common stock of Narragansett Electric from National Grid U.S. The
consideration for the Acquisition consisted of approximately $3.8 billion in
cash and approximately $1.5 billion of long-term debt assumed through the
transaction. The $3.8 billion total cash consideration paid was funded with
proceeds from PPL's 2021 sale of its U.K. utility business. The Acquisition
resulted in $1.6 billion of goodwill. The results of RIE are reported in PPL's
Rhode Island Regulated segment.

The acquisition of Narragansett Electric was deemed an asset acquisition for federal and state income tax purposes, as a result of PPL and National Grid making a tax election under Internal Revenue Code (IRC) §338(h)(10). Accordingly, the tax bases of substantially all of the assets acquired were increased to fair market value, which equaled net book value, thereby eliminating the related deferred tax assets and liabilities. This election resulted in tax goodwill that will be amortized for tax purposes over 15 years.

See Note 8 to the Financial Statements for additional information.

Sale of Safari Holdings


On September 29, 2022, PPL signed a definitive agreement to sell all of Safari
Holdings membership interests to Aspen Power Services, LLC (Aspen Power). On
November 1, 2022, PPL completed the sale of Safari Holdings.

In connection with entering into the definitive agreement, PPL's investment in
Safari Holdings met the held for sale criteria as of September 30, 2022. As a
result, net assets held for sale, including $53 million of goodwill previously
presented in the Corporate and Other category for segment reporting purposes,
were written down to their estimated fair value, less cost to sell, of
$120 million at September 30, 2022. An impairment charge of $67 million
($50 million net of tax benefit) was recorded in "Other operation and
maintenance" on the Statements of Income for the three and nine months ended
September 30, 2022.

See Note 8 to the Financial Statements for additional information.

Pennsylvania State Tax Reform (PPL and PPL Electric)


On July 8, 2022, the Governor of Pennsylvania signed into law Pennsylvania House
Bill 1342 (H.B. 1342). Among other changes to the state tax code, the bill
reduces the corporate net income tax rate from 9.99% to 8.99% beginning January
1, 2023, and further reduces the rate annually by half a percentage point until
the rate reaches 4.99% in 2031.

GAAP requires that deferred tax assets and liabilities be measured at the
enacted tax rate expected to apply when temporary book-to-tax differences are
expected to be realized or settled. In the third quarter of 2022, PPL and PPL
Electric recorded an increase in regulatory liabilities of $274 million for the
remeasurement of regulated accumulated deferred tax balances and a deferred tax
benefit of $5 million and $9 million, respectively, associated with the
remeasurement of non-regulated accumulated deferred income tax balances. The
foregoing numbers are estimates that will be updated quarterly to reflect
revised forecast, actual activity, and orders from regulatory authorities.

Inflation Reduction Act (All Registrants)


On August 16, 2022, the Inflation Reduction Act (IRA) was signed into law. Among
other things, the IRA enacted a new 15% corporate "book minimum tax," which is
based on adjusted GAAP pre-tax income and is only applicable to corporations
whose pre-tax income exceeds a certain threshold. PPL continues to assess the
impacts of the IRA on the financial statements of PPL
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and the other Registrants and will monitor guidance issued by the U.S. Treasury
in the future. PPL does not anticipate a material cash tax impact in the
foreseeable future. In addition, the IRA enacted numerous new tax credits,
largely associated with renewable energy. PPL continues to assess the
applicability of these provisions to PPL and its subsidiaries.

Regulatory Requirements

(All Registrants)

The Registrants cannot predict the impact that future regulatory requirements may have on their financial condition or results of operations.

Environmental Considerations for Coal-Fired Generation (PPL, LG&E and KU)


The businesses of 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 Notes 6, 10 and 15 to the Financial Statements for a
discussion of these significant environmental matters. These and other
environmental requirements led PPL, LG&E and KU to retire approximately 1,200 MW
of coal-fired generating plants in Kentucky since 2010. As part of the long-term
generation planning process, LG&E and KU evaluate a range of factors including
the impact of potential stricter environmental regulations, fuel price
scenarios, the cost of replacement generation, continued operations and major
maintenance costs and the risk of major equipment failures in determining when
to retire generation assets. As a result of environmental requirements and aging
infrastructure, LG&E anticipates retiring two older coal-fired units at the Mill
Creek Plant and KU anticipates retiring one coal-fired unit at the E.W. Brown
plant. Mill Creek Unit 1 has 300 MW of capacity and is expected to be retired in
2024. Mill Creek Unit 2 and E.W. Brown Unit 3 have capacities of 297 MW and 412
MW and are expected to be retired in 2028. LG&E and KU anticipate earning
recovery of and return on any remaining net book value of these assets through
the Retired Asset Recovery (RAR) rider. See Note 7 to the Financial Statements
in the Registrants' 2021 Form 10-K for additional information related to the RAR
rider.

FERC Transmission Rate Filing (PPL, LG&E and KU)


In 2018, LG&E and KU applied to the FERC 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 the Midcontinent Independent System Operator, Inc. (MISO), a regional
transmission operator and energy market. The application sought termination of
LG&E's and KU's commitment to provide certain Kentucky 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. In 2019, the FERC granted LG&E's and KU's request to remove
the ongoing credits, conditioned upon the implementation by LG&E and KU of a
transition mechanism for certain existing power supply arrangements, which was
subsequently filed, modified, and approved by the FERC in 2020 and 2021. In
2020, LG&E and KU and other parties filed appeals with the D.C. Circuit Court of
Appeals regarding the FERC's orders on the elimination of the mitigation and
required transition mechanism. On August 4, 2022, the D.C. Circuit Court of
Appeals issued an order remanding the proceedings back to the FERC. LG&E and KU
cannot predict the outcome of the proceedings at the FERC on remand. LG&E and KU
currently receive recovery of the waivers and credits provided through other
rate mechanisms and such rate recovery would be anticipated to be adjusted
consistent with potential changes or terminations of the waivers and credits, as
such become effective.

Rate Case Proceedings (KU)

On August 31, 2021, KU filed a request with the VSCC for an annual increase in
Virginia base electricity rates of approximately $12 million, based on an
authorized 10.4% return on equity. On March 11, 2022, KU, certain intervenors
and the VSCC staff reached a partial stipulation and recommendation agreement
providing KU with an increase in base electricity rates of approximately $7
million based on an authorized 9.4% return on equity. A hearing on open issues
occurred on March 17, 2022. On May 25, 2022, the VSCC issued an order approving
the proposed agreement. New rates became effective June 1, 2022.

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Labor Union Agreement (PPL and PPL Electric)

In March 2022, members of the IBEW Local 1600 ratified a new five-year labor
agreement with PPL and PPL Electric. The contract covers over 1,000 employees
and was effective May 16, 2022. The terms of the new labor agreement are not
expected to have a significant impact on the financial results of PPL or PPL
Electric.

                             Results of Operations

(PPL)

The "Statement of Income Analysis" discussion below describes significant
changes in principal line items on the Statements of Income, comparing the three
and nine months ended September 30, 2022 with the same periods in 2021. The
"Segment Earnings" and "Adjusted Gross Margins" discussions 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.

(PPL Electric, LG&E and KU)

A "Statement of Income Analysis" is presented separately for PPL Electric, LG&E and KU. The "Statement of Income Analysis" discussion below describes significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 2022 with the same periods in 2021.

(All Registrants)


The results for interim periods can be disproportionately influenced by numerous
factors and developments and by seasonal variations. As such, the results of
operations for interim periods do not necessarily indicate results or trends for
the year or future periods.

PPL: Statement of Income Analysis, Segment Earnings and Adjusted Gross Margins

Statement of Income Analysis

Net income for the periods ended September 30 includes the following results:

© Edgar Online, source Glimpses

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