Item 2. Combined Management's Discussion and Analysis of Financial Condition and

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Item 2. Combined Management's Discussion and Analysis of Financial Condition and

Results of Operations

(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' 2020 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, 2021 with the same periods in 2020. 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.
"Application of Critical Accounting Policies" provides an update to PPL's critical accounting policies disclosed in PPL's 2020 Form 10-K.

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 and Virginia; delivers natural gas to customers in Kentucky; and generates electricity from power plants in Kentucky.

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


		PPL Corporation*





PPL Electric* Engages in the regulated transmission and distribution of electricity in Pennsylvania		LKE A holding company that owns regulated utility operations through its subsidiaries, LG&E and KU.		PPL Capital Funding Provides financing for the operations of PPL and certain subsidiaries


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

Pennsylvania Regulated Segment		Kentucky Regulated Segment

PPL's reportable segments' results primarily represent the results of LKE and PPL Electric, except that in 2020 the reportable segments were also allocated certain corporate level financing and other costs that were not included in the results of LKE and PPL Electric. In 2021, corporate level financing costs are no longer being allocated to the reportable segments.

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 PUC, 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.

(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.

Business Strategy

(All Registrants)

PPL's strategy, which is supported by the other Registrants, 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 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 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 March 2021, PPL entered into definitive agreements that strategically reposition the company as a U.S.-based energy company focused on building the utilities of the future. These transactions are intended to strengthen PPL’s credit metrics, enhance long-term earnings growth and predictability, and provide the company with greater financial flexibility to invest in sustainable energy solutions. See Note 9 to the Financial Statements, and the "Sale of the U.K. Utility Business," "Share Purchase Agreement to Acquire Narragansett Electric" and "Use of Proceeds from the Sale of the U.K. Utility Business" discussions in "Financial and Operational Developments" below for additional information.

Financial and Operational Developments

(PPL)

Sale of the U.K. Utility Business

On March 17, 2021, PPL WPD Limited (WPD Limited) entered into a share purchase agreement (WPD SPA) to sell PPL's U.K. utility business to National Grid Holdings One plc (National Grid U.K.), a subsidiary of National Grid plc. Pursuant to the WPD SPA, National Grid U.K. would acquire 100% of the issued share capital of PPL WPD Investments Limited (WPD Investments) for £7.8 billion in cash. WPD Limited would also receive an additional amount of £548,000 for each day during the period from January 1, 2021 to the closing date if the dividends usually declared by WPD Investments to WPD Limited are not paid for that period.

On June 14, 2021, the sale of the U.K. utility business was completed. The transaction resulted in cash proceeds of $10.7 billion inclusive of foreign currency hedges executed by PPL. PPL received net proceeds, after taxes and fees, of $10.4 billion, resulting in a pre-tax loss on sale of $1.6 billion. See Note 9 to the Financial Statements for additional information on the sale of the U.K. utility business.

WPD Limited and National Grid U.K. each made customary representations and warranties in the WPD SPA. National Grid U.K., at its expense, purchased warranty and indemnity insurance. WPD Limited agreed to indemnify National Grid U.K. for certain tax related matters. See Note 11 to the Financial Statements for additional information. PPL has not had and will not have any significant involvement with the U.K. utility business after completion of the sale.

Share Purchase Agreement to Acquire Narragansett Electric

On March 17, 2021, PPL and its subsidiary, PPL Energy Holdings, entered into a share purchase agreement (Narragansett SPA) with National Grid USA (National Grid U.S.), a subsidiary of National Grid plc to acquire 100% of the outstanding shares of common stock of Narragansett Electric for approximately $3.8 billion in cash. On May 3, 2021, an Assignment and Assumption Agreement was entered into by PPL, PPL Energy Holdings, PPL Rhode Island Holdings and National Grid U.S. whereby certain interests of PPL Energy Holdings in the Narragansett SPA were assigned to and assumed by PPL Rhode Island Holdings. Pursuant to that Assignment and Assumption Agreement, PPL Rhode Island Holdings became the purchasing entity under the Narragansett SPA. The acquisition is expected to be funded with proceeds from the sale of the U.K. utility business. PPL has agreed to guarantee all obligations of PPL Energy Holdings and PPL Rhode Island Holdings under the Narragansett SPA and the related Assignment and Assumption Agreement.

The closing of the acquisition, which is currently expected to occur by March 2022, is subject to the receipt of certain U.S. regulatory approvals or waivers, and other customary conditions to closing. To date, four of the five required regulatory approvals or waivers have been received. The regulatory approvals and waiver remain subject to any applicable appeal periods. The remaining required regulatory approval from the Rhode Island Division of Public Utilities and Carriers is proceeding as expected. The consummation of the transaction is not subject to a financing condition.

See Note 9 to the Financial Statements for additional information on the Narragansett SPA.

Use of Proceeds from the Sale of the U.K. Utility Business (All Registrants)

PPL announced its intent to use the proceeds from the sale of the U.K. utility business to acquire Narragansett Electric, as discussed above, further strengthen its balance sheet and enhance opportunities for growth. The announcement included plans to reduce outstanding debt, to repurchase shares and invest in incremental capital at PPL's utilities or in renewables.

To date, the following actions have been taken:

PPL Capital Funding paid $3.876 billion to tender and/or redeem an aggregate total of $3.484 billion of outstanding debt during June and July of 2021, resulting in a loss on extinguishment of $73 million and $395 million for the three and nine months ended September 30, 2021. See "Long Term Debt" in Note 8 to the Financial Statements for additional information.
PPL's Board of Directors authorized share repurchases of up to $3 billion of PPL common shares. PPL currently expects to repurchase $1 billion of shares by the end of 2021. During the three and nine months ended September 30, 2021, PPL repurchased 9.6 million shares at a cost of $282 million. From October 1 to October 31, 2021, PPL repurchased an additional 9.4 million shares at a cost of $269 million. See "Equity Securities" in Note 8 to the Financial Statements for additional information.
PPL continues to develop its capital expenditure plans and currently is considering plans to invest at least $1 billion in additional regulated utility capital expenditures through 2025 needed to maintain and improve reliability and resiliency, to support modernization and to advance a sustainable energy future. Capital expenditure plans must be reviewed and approved by the Board of Directors, therefore, the amounts and dates noted are subject to change.

PPL will continue to evaluate the best use of proceeds to maximize shareowner value.

(PPL)

LKE Debt Redemption

On July 1, 2021, LKE redeemed, at par, its $250 million 4.375% Senior Notes due 2021 and on July 9, 2021, LKE filed a Form 15 with the SEC to suspend its duty to file reports under sections 13 and 15(d) of the Securities Exchange Act of 1934. As a result, beginning with the June 30, 2021 Form 10-Q, LKE was no longer reported as a Registrant.

U.K. Corporation Tax Rate Change

The U.K. Finance Act 2021, formally enacted on June 10, 2021, increased the U.K. corporation tax rate from 19% to 25%, effective April 1, 2023. The primary impact of the corporation tax rate increase was an increase in deferred tax liabilities of the U.K. utility business, which was sold on June 14, 2021, and a corresponding deferred tax expense of $383 million, which was recognized in continuing operations in the second quarter of 2021.

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, 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 7, 11 and 16 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 for additional information related to the RAR rider.

PPL Electric Transmission Formula Rate Return on Equity (PPL and PPL Electric)

On May 21, 2020, PP&L Industrial Customer Alliance (PPLICA) filed a complaint with the FERC alleging that PPL Electric's base return on equity (ROE) of 11.18% used to determine PPL Electric's formula transmission rate was unjust and unreasonable.

On August 20, 2021, PPL Electric entered into a settlement agreement (the "Settlement") with PPLICA and all other parties, including intervenors, with respect to the complaint filed by PPLICA on May 21, 2020.

The key aspects of the Settlement include:

changes to PPL Electric’s base ROE:

◦beginning as of May 21, 2020 and continuing through May 31, 2022, the ROE shall be 9.90%;

◦beginning on June 1, 2022 and continuing through May 31, 2023, the ROE shall be 9.95%;

◦beginning on June 1, 2023, the ROE shall be 10.00%, which shall continue in effect unless and until changed as permitted by the terms of the Settlement;

changes the equity component of PPL Electric’s capital structure to be the lower of (i) PPL Electric’s actual equity component, calculated in accordance with the formula rate template, or (ii) 56.00%;
allows modification of the current rate year of June 1 to May 31 to a calendar year of January 1 to December 31; and
allows modification of the current formula rate based on a historic test year to a projected test year.

Refunds will be paid by PPL Electric based on the difference between charges that were calculated using the ROE in effect at the time and reduced charges calculated using the ROE provided for in the Settlement, plus interest at the FERC interest rate. In the three and nine months ended September 30, 2021, PPL Electric recorded a revenue reserve of $13 million ($10 million after-tax) and $64 million ($46 million after-tax) representing revenue subject to refund for the period May 21, 2020 through September 30, 2021. The reserve recorded for the nine months ended September 30, 2021, includes $28 million ($20 million after-tax) related to the period from May 21, 2020 to December 31, 2020.

The impact of the lower ROE and formula rate modifications included in the Settlement, once fully-enacted beginning on June 1, 2023, is expected to reduce net income by $25 - $30 million on an annual basis. The Settlement is subject to review and action by the FERC, including approval, denial or modification. PPL Electric cannot predict the outcome of the FERC’s review of the Settlement.

While the FERC's review of the settlement is pending, on October 15, 2021, PPL Electric filed a request to the FERC Chief Administrative Law Judge for authorization to implement interim rates to reflect the agreed-to base ROE in the Settlement effective December 1, 2021. The requested interim settlement rates were accepted on October 20, 2021.

*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. 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. In March 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, subject to FERC review and approval. In July 2019, LG&E and KU proposed their transition mechanism to the FERC and in September 2019, the FERC rejected the proposed transition mechanism. In September 2020, the FERC issued orders in the rehearing process that modified various aspects of the September 2019 orders which had approved future termination of the credits, including adjusting which customer arrangements are covered by the transition mechanism and respective future periods or dates for termination of credits. In November 2020, the FERC denied the parties' rehearing requests. In November 2020 and January 2021, LG&E and KU and other parties appealed the September 2020 and November 2020 orders at the D.C. Circuit Court of Appeals. The appellate proceedings are continuing, and also include certain additional prior pending petitions for review relating to the matter. On January 15, 2021, LG&E and KU made a filing seeking FERC acceptance of a new proposal for a transition mechanism. On March 16, 2021, the FERC accepted the filed transition mechanism agreements effective on March 17, 2021 but subject to refund, and established hearing and settlement procedures. LG&E and KU cannot predict the outcome of the respective appellate and FERC proceedings. 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

(PPL, LG&E and KU)

On November 25, 2020, LG&E and KU filed requests with the KPSC for an increase in annual electricity and gas revenues of approximately $331 million ($131 million and $170 million in electricity revenues at LG&E and KU and $30 million in gas revenues at LG&E). The revenue increases would be an increase of 11.6% and 10.4% in electricity revenues at LG&E and KU, and an increase of 8.3% in gas revenues at LG&E. In recognition of the economic impact of COVID-19, LG&E and KU requested approval of a one-year billing credit which will credit customers approximately $53 million ($41 million at LG&E and $12 million at KU). The billing credit represents the return to customers of certain regulatory liabilities on LG&E’s and KU’s Balance Sheets and serves to partially mitigate the rate increases during the first year in which the new rates are in effect.

LG&E’s and KU’s applications also included a request for a CPCN to deploy Advanced Metering Infrastructure across LG&E’s and KU’s service territories in Kentucky.

The applications were based on a forecasted test year of July 1, 2021 through June 30, 2022 and requested an authorized return on equity of 10.0%.

On April 19, 2021, LG&E and KU entered into an agreement with all intervening parties to the proceedings resolving all matters in their applications, with the explicit exception of LG&E's and KU's net metering proposals. The agreement proposed increases in annual revenues of $217 million ($77 million and $116 million in electricity revenues at LG&E and KU and $24 million in gas revenues at LG&E) based on an authorized return on equity of 9.55%. The proposal included an authorized 9.35% return on equity for the ECR and GLT mechanisms. The agreement did not modify the requested one-year billing credit. The agreement proposed that the KPSC should grant LG&E’s and KU’s request for a CPCN to deploy Advanced Metering Infrastructure and proposed the establishment of a Retired Asset Recovery rider (RAR) to provide for recovery of and return on the remaining investment in certain electric generating units upon their retirement over a ten-year period following retirement. In respect of the RAR rider, the agreement proposed that LG&E and KU will continue to use currently approved depreciation rates for Mill Creek Units 1 and 2 and Brown Unit 3. The agreement also proposed a four-year "stay-out" commitment from LG&E and KU to refrain from effective base rate increases before July 1, 2025, subject to certain exceptions.

On June 30, 2021, the KPSC issued orders approving the proposed agreement filed in April 2021, with certain modifications. The orders provide for increases in annual revenues of $199 million ($73 million and $106 million in electricity revenues at LG&E and KU and $20 million in gas revenues at LG&E) based on an authorized return on equity of 9.425%. The order grants the requested authorized 9.35% return on equity for the ECR and GLT mechanisms and does not modify the requested one-year billing credit. The orders approve the CPCN to deploy Advanced Metering Infrastructure and provide regulatory asset treatment for the remaining net book value of legacy meters upon full implementation of the Advanced Metering Infrastructure program. The orders also approve the establishment of the RAR rider and accepted the four-year "stay-out". The orders, however, disallowed certain legal costs that were included in the settlement. On July 23, 2021, LG&E and KU filed motions for partial rehearing and clarification of the return on equity, the disallowed legal costs and certain other matters related to the KPSC's orders. On August 12, 2021, the KPSC granted rehearing and clarification of the disallowed legal costs and certain other matters and denied rehearing and clarification of the return on equity. On September 24, 2021, the KPSC issued orders providing adjustments to previous net metering proposals. These adjustments did not impact the previously ordered annual revenue increases. PPL, LG&E and KU cannot predict the outcome of the remaining issues subject to partial rehearing and clarification.

(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. KU's request is based on an authorized 10.4% return on equity. Subject to regulatory review and approval, new rates would become effective June 1, 2022.

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, 2021 with the same periods in 2020. 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, 2021 with the same periods in 2020.

(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:


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change
Operating Revenues	$	1,512	$	1,400	$	112	$	4,298	$	4,103	$	195
Operating Expenses
Operation
Fuel	195		177		18		531		478		53
Energy purchases	167		136		31		524		470		54
Other operation and maintenance	393		346		47		1,164		1,054		110
Depreciation	274		257		17		810		762		48
Taxes, other than income	52		47		5		153		131		22
Total Operating Expenses	1,081		963		118		3,182		2,895		287
Other Income (Expense) - net	12		6		6		25		11		14
Interest Expense	183		161		22		810		479		331
Income (Loss) from Continuing Operations Before Income Taxes	260		282		(22)		331		740		(409)
Income Taxes	51		165		(114)		455		266		189


Income (Loss) from Continuing Operations After Income Taxes	209		117		92		(124)		474		(598)
Income (Loss) from Discontinued Operations (net of income taxes) (Note 9)	(2)		164		(166)		(1,490)		705		(2,195)
Net Income (Loss)	$	207	$	281	$	(74)	$	(1,614)	$	1,179	$	(2,793)

Operating Revenues

The increase (decrease) in operating revenues was due to:


	Three Months		Nine Months

PPL Electric distribution price (a)	$	13	$	6
PPL Electric distribution volume (b)	—		19
PPL Electric PLR (c)	27		33
PPL Electric transmission formula rate (d)	1		(35)

LG&E retail rates (e)	22		22

LG&E volumes (f)	7		31
LG&E fuel and other energy prices (g)	7		23

LG&E economic relief billing credit, net of amortization of $6, $6	(6)		(6)
KU retail rates (e)	27		27
KU volumes (f)	4		38
KU fuel and other energy prices (g)	12		24
KU demand	2		8




KU economic relief billing credit, net of amortization of $0, $0	(3)		(3)
Other	(1)		8








Total	$	112	$	195

(a)The increases were primarily due to higher distribution rider prices.

(b)The increase for the nine months ended September 30, 2021 was primarily due to favorable customer usage.

(c)The increase for the three months ended September 30, 2021 was due to higher prices and favorable customer volumes, partially offset by unfavorable weather. The increase for the nine months ended September 30, 2021 was primarily due to favorable volumes, partially offset by higher customer shopping.

(d)The increase for the three months ended September 30, 2021 was primarily due to additional transmission capital investments and return of related depreciation expense, partially offset by a reserve recorded for a reduction in the transmission formula rate return on equity. The decrease for the nine months ended September 30, 2021 was primarily due to a reserve recorded for a reduction in the transmission formula rate return on equity and a lower PPL zonal peak load billing factor, partially offset by returns on additional transmission capital investments and return of related depreciation expense. See Note 7 to the Financial Statements for additional information on the transmission formula rate return on equity reserve.

(e)The increases were due to new base rates approved by the KPSC effective July 1, 2021.

(f)The increases were primarily due to favorable weather.

(g)The increases were primarily due to higher recoveries of fuel and energy purchases due to higher commodity costs.

Fuel

Fuel increased $18 million for the three months ended September 30, 2021 compared with 2020, primarily due to a $3 million increase in commodity costs and a $2 million increase in volumes driven by higher off-system sales at LG&E and a $12 million increase in commodity costs at KU.

Fuel increased $53 million for the nine months ended September 30, 2021 compared with 2020, primarily due to an $11 million increase in volumes driven by weather and a $3 million increase in commodity costs at LG&E and a $20 million increase in commodity costs and an $18 million increase in volumes driven by weather at KU.

Energy Purchases

Energy purchases increased $31 million for the three months ended September 30, 2021 compared with 2020, primarily due to $19 million in higher PLR prices at PPL Electric and a $6 million increase at LG&E primarily due to an increase in commodity costs.

Energy purchases increased $54 million for the nine months ended September 30, 2021 compared with 2020, primarily due to higher PLR volumes of $20 million at PPL Electric, a $13 million increase in commodity costs and a $9 million increase in gas volumes driven by weather at LG&E.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance was due to:


	Three Months		Nine Months
PPL Electric canceled projects	$	—	$	(11)
PPL Electric bad debts	1		(8)
PPL Electric storm costs	14		18

PPL Electric universal service programs	5		9
PPL Electric inventory adjustments	1		6


LG&E plant operations and maintenance	—		4
LG&E gas distribution operations and maintenance	—		2
LG&E plant outages	2		2
KU plant operations and maintenance	—		8
KU distribution operations and maintenance	—		4
KU transmission operations and maintenance	1		4
KU plant outages	2		2
Solar panel impairment (Note 2)	—		37
Charges related to the sale of the U.K. utility business	—		8
Charges related to the acquisition of Narragansett Electric	11		14
Payroll-related	4		6
Other	6		5
Total	$	47	$	110

Depreciation

The increase in depreciation was due to:


	Three Months		Nine Months
Additions to PP&E, net	$	7	$	32
Depreciation rate change effective July 2021	5		5
Cost of removal and salvage amortization	3		9
Other	2		2
Total	$	17	$	48

Taxes, Other Than Income

The increase (decrease) in taxes, other than income was due to:


	Three Months		Nine Months
State gross receipts tax (a)	$	—	$	10
Domestic property tax expense	2		8
Other	3		4
Total	$	5	$	22

(a) The increase was primarily due to a favorable settlement of 2008-2010 gross receipts tax assessments in 2020.

Other Income (Expense) - net

The increase (decrease) in other income (expense) - net was due to:


	Three Months		Nine Months
Defined benefit plans - non-service credits (Note 10)	$	5	$	14
Interest income	6		9
Other	(5)		(9)
Total	$	6	$	14

Interest Expense

The increase (decrease) in interest expense was due to:


	Three Months		Nine Months
Loss on extinguishment of debt (Note 8)	$	73	$	395
Long-term debt	(44)		(50)
Other	(7)		(14)
Total	$	22	$	331

Income Taxes

The increase (decrease) in income taxes was due to:


	Three Months		Nine Months
Change in pre-tax income	$	(3)	$	(113)

Valuation allowance adjustments (a)	(2)		20
Impact of the U.K. Finance Acts on deferred tax balances (b)	(104)		282


Other	(5)		—
Total	$	(114)	$	189

(a) In 2021, PPL recorded a $31 million state deferred tax benefit on a net operating loss and an offsetting valuation allowance in connection with the loss on extinguishment associated with a tender offer to purchase and retire PPL Capital Funding's outstanding Senior Notes. See Note 8 to the Financial Statements for additional information on the tender offer.

(b)The U.K. Finance Act 2020, formally enacted on July 22, 2020, cancelled the U.K. corporation tax rate reduction to 17%, thereby maintaining the corporation tax rate at 19% for financial years 2020 and 2021. The primary impact of the cancellation of the corporate tax rate reduction was an increase in deferred tax liabilities and a corresponding deferred tax expense of $102 million in the third quarter of 2020.

Income (Loss) from Discontinued Operations (net of income taxes)

Income (Loss) from discontinued operations (net of income taxes) decreased $166 million for the three months ended September 30, 2021 compared with 2020. The decrease was due to the completion of the sale of the U.K. utility business in the second quarter of 2021.

Income (Loss) from discontinued operations (net of income taxes) decreased $2,195 million for the nine months ended September 30, 2021 compared with 2020. The decrease was attributable primarily to a loss on sale of $1,609 million and an increase in income tax expense of $595 million in 2021.

See "Discontinued Operations" in Note 9 to the Financial Statements for summarized results of the operations of the U.K. utility business.

Segment Earnings

PPL's Net Income by reportable segment for the periods ended September 30 was as follows:


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change

Kentucky Regulated	$	159	$	129	$	30	$	389	$	330	$	59
Pennsylvania Regulated	126		135		(9)		335		371		(36)
Corporate and Other (a)(b)	(76)		(147)		71		(848)		(227)		(621)
Discontinued Operations (c)	(2)		164		(166)		(1,490)		705		(2,195)
Net Income	$	207	$	281	$	(74)	$	(1,614)	$	1,179	$	(2,793)

(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.

(b)The amounts for the periods ended September 30, 2020 have been adjusted for certain costs that were previously included in the U.K. Regulated segment.

(c)See Note 9 to the Financial Statements for additional information.

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:

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.
Significant losses on early extinguishment of debt.
Other charges or credits that are, in management's view, non-recurring or otherwise not reflective of the company's ongoing operations.

PPL's Earnings from Ongoing Operations by reportable segment for the periods ended September 30 were as follows:


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change

Kentucky Regulated	$	159	$	129	$	30	$	385	$	334	$	51
Pennsylvania Regulated	126		136		(10)		355		372		(17)
Corporate and Other (a)	(8)		(37)		29		(97)		(113)		16

Earnings from Ongoing Operations	$	277	$	228	$	49	$	643	$	593	$	50

(a)The amounts for the periods ended September 30, 2020 have been adjusted for certain costs that were previously included in the U.K. Regulated segment.

See "Reconciliation of Earnings from Ongoing Operations" below for a reconciliation of this non-GAAP financial measure to Net Income.

Kentucky Regulated Segment

The Kentucky Regulated segment consists primarily of the regulated electricity generation, transmission and distribution operations conducted by LG&E and KU, as well as LG&E's regulated distribution and sale of natural gas.

Net Income and Earnings from Ongoing Operations for the periods ended September 30 include the following results.


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change
Operating revenues	$	879	$	806	$	73	$	2,505	$	2,331	$	174
Fuel	195		177		18		531		478		53
Energy purchases	24		18		6		122		97		25
Other operation and maintenance	219		205		14		654		616		38
Depreciation	166		152		14		480		452		28
Taxes, other than income	22		21		1		65		57		8
Total operating expenses	626		573		53		1,852		1,700		152
Other Income (Expense) - net	1		1		—		7		3		4
Interest Expense	48		56		(8)		149		172		(23)
Interest Expense with Affiliate (a)	14		20		(6)		39		56		(17)
Income Taxes	33		29		4		83		76		7
Net Income	159		129		30		389		330		59
Less: Special Items	—		—		—		4		(4)		8
Earnings from Ongoing Operations	$	159	$	129	$	30	$	385	$	334	$	51

(a)Borrowings between LKE and PPL were $2,015 million and $1,451 million as of September 30, 2021 and December 31, 2020.

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 during the periods ended September 30.


	Income Statement Line Item		Three Months						Nine Months
		2021			2020			2021			2020

Valuation allowance adjustment (a)	Income Taxes		$	—		$	—		$	4		$	—
COVID-19 impact, net of tax of $0, $0, $0, $1 (b)	Other operation and maintenance		—			—			—			(4)





Total Special Items			$	—		$	—		$	4		$	(4)

(a)Adjustment of valuation allowances related to certain tax credits recorded in 2017 as a result of the TCJA.

(b)Incremental costs for outside services, customer payment processing, personal protective equipment and other safety related actions associated with the COVID-19 pandemic.

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 items.


	Three Months		Nine Months
Kentucky Adjusted Gross Margins	$	79	$	112
Other operation and maintenance	(17)		(38)
Depreciation	(41)		(49)
Taxes, other than income	(1)		(8)
Other Income (Expense) - net	—		4
Interest Expense	8		23
Interest Expense with Affiliate	6		17
Income Taxes	(4)		(10)
Earnings from Ongoing Operations	30		51
Special items, after-tax	—		8
Net Income	$	30	$	59

See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of Kentucky Adjusted Gross Margins.
Higher other operation and maintenance expense for the three month period primarily due to a $4 million increase in plant outage expenses and a $3 million increase due to certain ECR expenses transferred to base rates as a result of the 2020 Kentucky rate case and various support costs and other items that were not individually significant.
Higher other operation and maintenance expense for the nine month period primarily due to a $13 million increase in administrative and general expenses, an $8 million increase in plant operations and maintenance, a $4 million increase in plant outage expenses, a $3 million increase due to certain ECR and GLT expenses transferred to base rates as a result of the 2020 Kentucky rate case and various support costs and other items that were not individually significant.
Higher depreciation expense for the three month period due to a $30 million increase related to certain ECR and GLT depreciation expenses transferred to base rates as a result of the 2020 Kentucky rate case, a $7 million increase due to additional assets placed into service, net of retirements and a $4 million increase due to higher depreciation rates, effective July 1, 2021.
Higher depreciation expense for the nine month period due to a $30 million increase related to certain ECR and GLT depreciation expenses transferred to base rates as a result of the 2020 Kentucky rate case, a $15 million increase due to additional assets placed into service, net of retirements and a $4 million increase due to higher depreciation rates, effective July 1, 2021.
Lower interest expense, inclusive of affiliate interest, for the three month period primarily due to interest costs allocated to the Kentucky Regulated segment in 2020 that were not allocated in 2021.
Lower interest expense, inclusive of affiliate interest, for the nine month period primarily due to $31 million of interest costs allocated to the Kentucky regulated segment in 2020 that were not allocated in 2021 and a $7 million decrease due to lower interest rates.

Pennsylvania Regulated Segment

The Pennsylvania Regulated segment includes the regulated electricity transmission and distribution operations of PPL Electric.

Net Income and Earnings from Ongoing Operations for the periods ended September 30 include the following results.


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change
Operating revenues	$	627	$	586	$	41	$	1,769	$	1,748	$	21
Energy purchases	143		118		25		402		373		29
Other operation and maintenance	147		122		25		400		388		12
Depreciation	105		102		3		322		301		21
Taxes, other than income	30		30		—		88		78		10
Total operating expenses	425		372		53		1,212		1,140		72
Other Income (Expense) - net	8		8		—		18		17		1
Interest Expense	39		44		(5)		124		130		(6)
Income Taxes	45		43		2		116		124		(8)
Net Income	126		135		(9)		335		371		(36)
Less: Special Item	—		(1)		1		(20)		(1)		(19)
Earnings from Ongoing Operations	$	126	$	136	$	(10)	$	355	$	372	$	(17)

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 during the periods ended September 30.


	Income Statement Line Item		Three Months						Nine Months
		2021			2020			2021			2020



Transmission formula rate return on equity reserve, net of tax of $0, $0, $8, $0 (a)	Operating revenues		$	—		$	—		$	(20)		$	—
COVID impact, net of tax of $0, $0, $0, $0 (b)	Other operation and maintenance		—			(1)			—			(1)



Total Special Items			$	—		$	(1)		$	(20)		$	(1)

(a) Represents the portion of the reserve recognized in the September 30, 2021 Statements of Income related to the period from May 21, 2020 through December 31, 2020. See Note 7 to the Financial Statements for additional information.

(b) Incremental costs for outside services, personal protective equipment and other safety related actions associated with the COVID-19 pandemic.

The changes in the components of the Pennsylvania Regulated segment's results between these periods are 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.


	Three Months		Nine Months
Pennsylvania Adjusted Gross Margins	$	4	$	(7)
Other operation and maintenance	(13)		4
Depreciation	(4)		(15)
Taxes, other than income	1		(6)

Other Income (Expense) - net	—		1
Interest Expense	5		6
Income Taxes	(3)		—
Earnings from Ongoing Operations	(10)		(17)
Special Item, after tax	1		(19)
Net Income	$	(9)	$	(36)

See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of Pennsylvania Adjusted Gross Margins.
Higher other operation and maintenance expense for the three month period primarily due to higher Corporate support costs of $7 million and higher nonrecoverable storm costs of $5 million.
Lower other operation and maintenance expense for the nine month period primarily due to lower canceled project write-offs of $11 million and lower bad debt expense of $8 million, partially offset by higher nonrecoverable storm costs of $6 million and higher inventory adjustments of $6 million.
Higher depreciation expense for the nine month period primarily due to higher cost of removal and salvage amortization of $9 million and additional assets placed in service, net of retirements of $7 million.

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 periods ended September 30.


	2021 Three Months
	KY Regulated		PA Regulated		Corporate and Other		Discontinued Operations (a)		Total
Net Income	$	159	$	126	$	(76)	$	(2)	$	207
Less: Special Item (expense) benefit:
Income (loss) from Discontinued Operations (a)	—		—		—		(2)		(2)
Talen litigation costs, net of tax of $1 (b)	—		—		(1)		—		(1)
Strategic corporate initiatives, net of tax of $0 (c)	—		—		(1)		—		(1)


Acquisition integration, net of tax of $3 (e)	—		—		(9)		—		(9)


Loss on early extinguishment of debt, net of tax of $16 (h)	—		—		(57)		—		(57)

Total Special Items	—		—		(68)		(2)		(70)
Earnings from Ongoing Operations	$	159	$	126	$	(8)	$	—	$	277

	2020 Three Months
	KY Regulated		PA Regulated		Corporate and Other (i)		Discontinued Operations (a)		Total
Net Income	$	129	$	135	$	(147)	$	164	$	281
Less: Special Item (expense) benefit:
Income (loss) from Discontinued Operations (a)	—		—		—		164		164
Talen litigation costs, net of tax of $1 (b)	—		—		(2)		—		(2)
COVID-19 impact, net of tax of $0, $0, $0	—		(1)		(1)		—		(2)
Strategic corporate initiatives, net of tax of $2 (c)	—		—		(5)		—		(5)
U.K. tax rate change (f)	—		—		(102)		—		(102)





Total Special Items	—		(1)		(110)		164		53
Earnings from Ongoing Operations	$	129	$	136	$	(37)	$	—	$	228

	2021 Nine Months
	KY Regulated		PA Regulated		Corporate and Other		Discontinued Operations (a)		Total
Net Income	$	389	$	335	$	(848)	$	(1,490)	$	(1,614)
Less: Special Items (expense) benefit:
Income (loss) from Discontinued Operations (a)	—		—		—		(1,494)		(1,494)
Talen litigation costs, net of tax of $3 (b)	—		—		(10)		—		(10)
Strategic corporate initiatives, net of tax of $1 (c)	—		—		(3)		—		(3)
Valuation allowance adjustment (d)	4		—		(4)		4		4
Transmission formula rate return on equity reserve, net of tax of $8	—		(20)		—		—		(20)
Acquisition integration, net of tax of $4 (e)	—		—		(11)		—		(11)
U.K. tax rate change (f)	—		—		(383)		—		(383)
Solar panel impairment, net of tax of $9 (g)	—		—		(28)		—		(28)
Loss on early extinguishment of debt, net of tax of $83 (h)	—		—		(312)		—		(312)

Total Special Items	4		(20)		(751)		(1,490)		(2,257)
Earnings from Ongoing Operations	$	385	$	355	$	(97)	$	—	$	643


	2020 Nine Months
	KY Regulated		PA Regulated		Corporate and Other (i)		Discontinued Operations (a)		Total
Net Income	$	330	$	371	$	(227)	$	705	$	1,179
Less: Special Items (expense) benefit:
Income (loss) from Discontinued Operations (a)	—		—		—		705		705
Talen litigation costs, net of tax of $2 (b)	—		—		(6)		—		(6)
COVID-19 impact, net of tax of $1, $0, $0	(4)		(1)		(1)		—		(6)
Strategic corporate initiatives, net of tax of $2 (c)	—		—		(5)		—		(5)
U.K. tax rate change (f)	—		—		(102)		—		(102)





Total Special Items	(4)		(1)		(114)		705		586
Earnings from Ongoing Operations	$	334	$	372	$	(113)	$	—	$	593

(a)See Note 9 to the Financial Statements for additional information.

(b)PPL incurred legal expenses related to litigation with its former affiliate, Talen Montana. See Note 11 to the Financial Statements for additional information.

(c)Costs related to the sale of the U.K. utility business.

(d)Adjustment of valuation allowances related to certain tax credits recorded in 2017 as a result of the TCJA.

(e)Costs related to the integration of Narragansett Electric. See Note 9 to the Financial Statements for additional information.

(f)Impact of the U.K. Finance Acts on deferred federal and state income taxes. See Note 6 to the Financial Statements for additional information.

(g)See Note 2 to the Financial Statements for additional information.

(h)See Note 8 to the Financial Statements for additional information.

(i)The amounts for the periods ended September 30, 2020 have been adjusted for certain costs that were previously included in the U.K. Regulated segment.

Adjusted Gross Margins

Management also utilizes the following non-GAAP financial measures as indicators of performance for its businesses:

"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.

Changes in Adjusted Gross Margins

The following table shows Adjusted Gross Margins by PPL's reportable segment and by component, as applicable for the periods ended September 30 as well as the change between periods. The factors that gave rise to the changes are described following the table.


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change
Kentucky Regulated

Kentucky Adjusted Gross Margins	$	625	$	546	$	79	$	1,684	$	1,572	$	112

Pennsylvania Regulated
Pennsylvania Adjusted Gross Margins
Distribution	$	228	$	225	$	3	$	686	$	685	$	1
Transmission	180		179		1		495		503		(8)
Total Pennsylvania Adjusted Gross Margins	$	408	$	404	$	4	$	1,181	$	1,188	$	(7)

Kentucky Adjusted Gross Margins

Kentucky Adjusted Gross Margins increased for the three months ended September 30, 2021 compared with 2020, primarily due to higher base rates of $49 million and environmental and gas cost recoveries added to base rates of $33 million, partially offset by $9 million of lower adjusted gross margins as a result of the economic relief billing credit.

Kentucky Adjusted Gross Margins increased for the nine months ended September 30, 2021 compared with 2020, primarily due to higher base rates of $49 million, environmental and gas cost recoveries added to base rates of $33 million, $26 million of higher sales volumes primarily due to weather, and $9 million of higher commercial and industrial demand primarily due to the impacts of COVID-19 in 2020, partially offset by $9 million of lower adjusted gross margins as a result of the economic relief billing credit.

The increase in base rates was the result of new rates approved by the KPSC effective July 1, 2021. The environmental and gas cost recoveries added to base rates were the result of the transfer of certain ECR and GLT expenses into base rates as a result of the 2020 Kentucky rate case. This transfer results in depreciation and other operation and maintenance expenses associated with the ECR and GLT programs being excluded from margins in the second half of 2021, while the recovery of such costs remain in Kentucky Gross Margins through base rates.

Pennsylvania Adjusted Gross Margins

Distribution

Distribution Adjusted Gross Margins increased for the three months ended September 30, 2021 compared with 2020. Higher sales volumes of $8 million were partially offset by unfavorable weather of $7 million.

Distribution Adjusted Gross Margins increased for the nine months ended September 30, 2021 compared with 2020, primarily due to $13 million of higher sales volumes, partially offset by $8 million of lower returns on distribution system improvement capital investments.

Transmission

Transmission Adjusted Gross Margins increased for the three months ended September 30, 2021 compared with 2020, primarily due to $5 million of returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability and $5 million return of related depreciation expense. Offsetting these favorable items was a $13 million decrease due to a reserve recorded for a reduction in the transmission formula rate return on equity. See Note 7 to the Financial Statements for additional information on the transmission formula rate return on equity reserve.

Transmission Adjusted Gross Margins decreased for the nine months ended September 30, 2021 compared with 2020, primarily due to a $28 million decrease as a result of a lower PPL zonal peak load billing factor and a $36 million decrease due to a reserve recorded for a reduction in the transmission formula rate return on equity. Partially offsetting these unfavorable items was $39 million of returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability and $15 million return of related depreciation expense. See Note 7 to the Financial Statements for additional information on the transmission formula rate return on equity reserve.

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 periods ended September 30.


	2021 Three Months
	Kentucky Adjusted Gross Margins		Pennsylvania Adjusted Gross Margins		Other (a)		Operating Income (b)
Operating Revenues	$	879	$	628	$	5	$	1,512
Operating Expenses
Fuel	195		—		—		195
Energy purchases	24		143		—		167

Other operation and maintenance	22		35		336		393
Depreciation	12		12		250		274
Taxes, other than income	1		30		21		52
Total Operating Expenses	254		220		607		1,081
Total	$	625	$	408	$	(602)	$	431

	2020 Three Months
	Kentucky Adjusted Gross Margins		Pennsylvania Adjusted Gross Margins		Other (a)		Operating Income (b)
Operating Revenues	$	806	$	586	$	8	$	1,400
Operating Expenses
Fuel	177		—		—		177
Energy purchases	18		118		—		136

Other operation and maintenance	25		23		298		346
Depreciation	39		13		205		257
Taxes, other than income	1		28		18		47
Total Operating Expenses	260		182		521		963
Total	$	546	$	404	$	(513)	$	437

	2021 Nine Months
	Kentucky Adjusted Gross Margins		Pennsylvania Adjusted Gross Margins		Other (a)		Operating Income (b)
Operating Revenues	$	2,505	$	1,797	$	(4)	$	4,298
Operating Expenses
Fuel	531		—		—		531
Energy purchases	122		402		—		524

Other operation and maintenance	71		86		1,007		1,164
Depreciation	93		44		673		810
Taxes, other than income	4		84		65		153
Total Operating Expenses	821		616		1,745		3,182
Total	$	1,684	$	1,181	$	(1,749)	$	1,116


	2020 Nine Months
	Kentucky Adjusted Gross Margins		Pennsylvania Adjusted Gross Margins		Other (a)		Operating Income (b)
Operating Revenues	$	2,331	$	1,748	$	24	$	4,103
Operating Expenses
Fuel	478		—		—		478
Energy purchases	97		373		—		470

Other operation and maintenance	66		69		919		1,054
Depreciation	114		38		610		762
Taxes, other than income	4		80		47		131
Total Operating Expenses	759		560		1,576		2,895
Total	$	1,572	$	1,188	$	(1,552)	$	1,208

(a)Represents amounts excluded from Adjusted Gross Margins.

(b)As reported on the Statements of Income.

PPL Electric: Statement of Income Analysis

Statement of Income Analysis

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


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change
Operating Revenues	$	627	$	586	$	41	$	1,769	$	1,748	$	21
Operating Expenses
Operation
Energy purchases	143		118		25		402		373		29

Other operation and maintenance	147		122		25		400		388		12
Depreciation	105		102		3		322		301		21
Taxes, other than income	30		30		—		88		78		10
Total Operating Expenses	425		372		53		1,212		1,140		72
Other Income (Expense) - net	6		7		(1)		16		15		1
Interest Income from Affiliate	2		1		1		2		2		—
Interest Expense	39		44		(5)		124		130		(6)
Income Taxes	45		44		1		116		125		(9)
Net Income	$	126	$	134	$	(8)	$	335	$	370	$	(35)

Operating Revenues

The increase (decrease) in operating revenues was due to:


	Three Months		Nine Months
Distribution price (a)	$	13	$	6
Distribution volume (b)	—		19
PLR (c)	27		33
Transmission formula rate (d)	1		(35)


Other	—		(2)
Total	$	41	$	21

(a)The increases were primarily due to higher distribution rider prices.

(b)The increase for the nine months ended September 30, 2021 was primarily due to favorable customer usage.

PPL zonal peak load billing factor, partially offset by returns on additional transmission capital investments and return of related depreciation expense. See Note 7 to the Financial Statements for additional information on the transmission formula rate return on equity reserve.

Energy Purchases

Energy purchases increased $25 million for the three months ended September 30, 2021 compared with 2020, primarily due to higher PLR prices of $19 million.

Energy purchases increased $29 million for the nine months ended September 30, 2021 compared with 2020, primarily due to higher PLR volumes of $20 million and higher PLR prices of $4 million.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance was due to:


	Three Months		Nine Months
Storm costs	$	14	$	18
Universal service programs	5		9
Inventory adjustments	1		6
Support costs	7		2
Bad debts	1		(8)
Canceled projects	—		(11)









Other	(3)		(4)
Total	$	25	$	12

Depreciation

The increase in depreciation was due to:


	Three Months		Nine Months
Additions of PP&E, net	$	—	$	12
Cost of removal and salvage amortization	3		9
Total	$	3	$	21

LG&E: Statement of Income Analysis

Statement of Income Analysis

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


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change
Operating Revenues
Retail and wholesale	$	393	$	362	$	31	$	1,147	$	1,075	$	72
Electric revenue from affiliate	2		1		1		18		17		1
Total Operating Revenues	395		363		32		1,165		1,092		73
Operating Expenses
Operation
Fuel	70		64		6		203		188		15
Energy purchases	19		13		6		108		83		25
Energy purchases from affiliate	8		8		—		16		16		—
Other operation and maintenance	97		93		4		290		277		13
Depreciation	72		64		8		206		193		13
Taxes, other than income	12		11		1		34		30		4
Total Operating Expenses	278		253		25		857		787		70
Other Income (Expense) - net	2		(1)		3		3		(1)		4
Interest Expense	20		22		(2)		61		66		(5)
Income Taxes	17		16		1		48		47		1
Net Income	$	82	$	71	$	11	$	202	$	191	$	11

Operating Revenues

The increase (decrease) in operating revenues was due to:


	Three Months		Nine Months
Volumes (a)	$	7	$	30
Fuel and other energy prices (b)	7		23
Retail rates (c)	22		22

Economic relief billing credit, net of amortization of $6, $6	(6)		(6)





Other	2		4
Total	$	32	$	73

(a) The increases were primarily due to favorable weather.

(b) The increases were primarily due to higher recoveries of fuel and energy purchases due to higher commodity costs.

Fuel

Fuel increased $6 million for the three months ended September 30, 2021 compared with 2020, primarily due to a $3 million increase in commodity costs and a $2 million increase in volumes driven by higher off-system sales.

Fuel increased $15 million for the nine months ended September 30, 2021 compared with 2020, primarily due to an $11 million increase in volumes driven by weather and a $3 million increase in commodity costs.

Energy Purchases

Energy purchases increased $6 million for the three months ended September 30, 2021 compared with 2020, primarily due to an increase in commodity costs.

Energy purchases increased $25 million for the nine months ended September 30, 2021 compared with 2020, primarily due to a $13 million increase in commodity costs and a $9 million increase in gas volumes driven by weather.

Other Operation and Maintenance

The increase in other operation and maintenance was due to:


	Three Months		Nine Months

Plant operations and maintenance	$	—	$	4
Gas distribution operations and maintenance	—		2
Plant outages	2		2
Other	2		5
Total	$	4	$	13

Depreciation

Depreciation increased $8 million for the three months ended September 30, 2021 compared with 2020, primarily due to a $4 million increase driven by additional assets placed into service, net of retirements, and a $3 million increase driven by higher depreciation rates effective July 1, 2021.

Depreciation increased $13 million for the nine months ended September 30, 2021 compared with 2020, primarily due to a $9 million increase driven by additional assets placed into service, net of retirements, and a $3 million increase driven by higher depreciation rates effective July 1, 2021.

KU: Statement of Income Analysis

Statement of Income Analysis

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


	Three Months						Nine Months
	2021		2020		$ Change		2021		2020		$ Change
Operating Revenues
Retail and wholesale	$	486	$	444	$	42	$	1,358	$	1,256	$	102
Electric revenue from affiliate	8		8		—		16		16		—
Total Operating Revenues	494		452		42		1,374		1,272		102
Operating Expenses
Operation
Fuel	125		113		12		328		290		38
Energy purchases	5		5		—		14		14		—
Energy purchases from affiliate	2		1		1		18		17		1
Other operation and maintenance	110		105		5		336		316		20
Depreciation	94		88		6		273		258		15
Taxes, other than income	10		10		—		31		27		4
Total Operating Expenses	346		322		24		1,000		922		78
Other Income (Expense) - net	1		1		—		5		2		3
Interest Expense	27		28		(1)		81		85		(4)
Income Taxes	23		19		4		57		50		7
Net Income	$	99	$	84	$	15	$	241	$	217	$	24

Operating Revenues

The increase in operating revenues was due to:


	Three Months		Nine Months
Volumes (a)	$	4	$	36
Retail rates (b)	27		27

Fuel and other energy prices (c)	12		24

Demand	2		8
Economic relief billing credit, net of amortization of $0, $0	(3)		(3)



Other	—		10
Total	$	42	$	102

(a)The increases were primarily due to favorable weather.

(b)The increases were due to new base rates approved by the KPSC effective July 1, 2021.

(c)The increases were primarily due to higher recoveries of fuel and energy purchases due to higher commodity costs.

Fuel

Fuel increased $12 million for the three months ended September 30, 2021 compared with 2020, primarily due to an increase in commodity costs.

Fuel increased $38 million for the nine months ended September 30, 2021 compared with 2020, primarily due to a $20 million increase in commodity costs and an $18 million increase in volumes driven by weather.

Other Operation and Maintenance

The increase in other operation and maintenance was due to:


	Three Months		Nine Months
Plant operations and maintenance	$	—	$	8
Distribution operations and maintenance	—		4
Transmission operations and maintenance	1		4
Plant outages	2		2
Other	2		2
Total	$	5	$	20

Depreciation

Depreciation increased $6 million for the three months ended September 30, 2021 compared with 2020, primarily due to a $3 million increase driven by additional assets placed into service, net of retirements, and a $2 million increase driven by higher depreciation rates effective July 1, 2021.

Depreciation increased $15 million for the nine months ended September 30, 2021 compared with 2020, primarily due to an $11 million increase driven by additional assets placed into service, net of retirements, and a $2 million increase driven by higher depreciation rates effective July 1, 2021.

Financial Condition

The remainder of this Item 2 in this Form 10-Q is presented on a combined basis, providing information, as applicable, for all Registrants.

Liquidity and Capital Resources

(All Registrants)

The Registrants had the following at:


	PPL		PPL Electric		LG&E		KU
September 30, 2021
Cash and cash equivalents	$	4,767	$	59	$	5	$	8

Short-term debt	—		—		—		—
Long-term debt due within one year	474		474		—		—
Notes payable to affiliates			—		284		208

December 31, 2020
Cash and cash equivalents	$	442	$	40	$	7	$	22
Short-term debt	1,168		—		262		203
Long-term debt due within one year	1,074		400		292		132
Notes payable to affiliates			—		—		—

(PPL)

The Statements of Cash Flows separately report the cash flows of discontinued operations. The "Operating Activities",

"Investing Activities" and "Financing Activities" sections below include only the cash flows of continuing operations.

(All Registrants)

Net cash provided by (used in) operating, investing and financing activities for the nine month periods ended September 30, and the changes between periods, were as follows.


	PPL		PPL Electric		LG&E		KU
2021
Operating activities	$	1,252	$	704	$	412	$	504
Investing activities	9,078		(1,256)		(339)		(396)
Financing activities	(6,370)		571		(75)		(122)
2020
Operating activities	$	1,579	$	656	$	419	$	446
Investing activities	(1,690)		(844)		(329)		(378)
Financing activities	(83)		(48)		(95)		(65)
Change - Cash Provided (Used)
Operating activities	$	(327)	$	48	$	(7)	$	58
Investing activities	10,768		(412)		(10)		(18)
Financing activities	(6,287)		619		20		(57)

Operating Activities

The components of the change in cash provided by (used in) operating activities for the nine months ended September 30, 2021 compared with 2020 were as follows.


	PPL		PPL Electric		LG&E		KU
Change - Cash Provided (Used)
Net income	$	(598)	$	(35)	$	11	$	24
Non-cash components	331		—		9		(8)
Working capital	(41)		102		(2)		26
Defined benefit plan funding	20		—		3		—
Other operating activities	(39)		(19)		(28)		16
Total	$	(327)	$	48	$	(7)	$	58

(PPL)

PPL's cash provided by operating activities in 2021 decreased $327 million compared with 2020.

Net income decreased $598 million between the periods and included an increase in non-cash charges of $331 million. The increase in non-cash charges was primarily due to the loss on extinguishment of debt and the impairment of solar panels, partially offset by a decrease in deferred income taxes and investment tax credits.
The $41 million decrease in cash from changes in working capital was primarily due to a decrease in unbilled revenues, a decrease in taxes payable, and a decrease in accrued interest, partially offset by an increase in regulatory liabilities (primarily due to PPL Electric's transmission formula rate return on equity reserve and the timing of rate recovery mechanisms).

(PPL Electric)

PPL Electric's cash provided by operating activities in 2021 increased $48 million compared with 2020.

Net income decreased $35 million between the periods.
The $102 million increase in cash from changes in working capital was primarily due to an increase in regulatory liabilities (primarily due to the transmission formula rate return on equity reserve and the timing of rate recovery mechanisms) and a decrease in materials and supplies (primarily due to a decrease in transmission capital projects material), partially offset by a decrease in accounts payable (primarily due to timing of payments).
The $19 million decrease in cash provided by other operating activities was driven primarily by a decrease in accrued pension obligations.

(LG&E)

LG&E's cash provided by operating activities in 2021 decreased $7 million compared with 2020.

Net income increased $11 million between the periods and included an increase in non-cash components of $9 million. The increase in non-cash components was driven by an increase in depreciation expense (primarily due to additional assets placed into service, net of retirements and higher depreciation rates effective July 1, 2021).
The decrease in cash from changes in working capital was due to an increase in net regulatory assets (primarily due to the timing of rate recovery mechanisms), an increase in fuels, materials and supplies (primarily due to higher commodity costs) and an increase in accounts receivable from affiliates (primarily due to timing of payments), partially offset by an increase in accounts payable (primarily due to timing of payments).
The decrease in cash provided by other operating activities was driven by a decrease in other liabilities (primarily related to regulatory liabilities).

(KU)

KU's cash provided by operating activities in 2021 increased $58 million compared with 2020.

Net income increased $24 million between the periods and included a decrease in non-cash components of $8 million. The decrease in non-cash components was driven by a decrease in deferred income tax expense (primarily related to book versus tax plant timing differences), partially offset by an increase in depreciation expense (primarily due to additional assets placed into service, net of retirements and higher depreciation rates effective July 1, 2021).
The increase in cash from changes in working capital was primarily due to a decrease in accounts receivable (primarily due to the impacts of COVID-19) and an increase in accounts payable to affiliates (primarily due to timing of payments).
The increase in cash provided by other operating activities was driven primarily by a decrease in ARO expenditures.

Investing Activities

(All Registrants)

The components of the change in cash provided by (used in) investing activities for the nine months ended September 30, 2021 compared with 2020 were as follows.


	PPL		PPL Electric		LG&E		KU
Change - Cash Provided (Used)
Expenditures for PP&E	$	230	$	160	$	(10)	$	(19)



Proceeds from sale of discontinued operations, net of cash divested	10,560		—		—		—
Notes receivable from affiliate	—		(575)		—		—
Other investing activities	(22)		3		—		1
Total	$	10,768	$	(412)	$	(10)	$	(18)

For PPL, the decrease in expenditures for PP&E was due to lower project expenditures at PPL Electric and Safari Energy, partially offset by an increase in expenditures at LG&E and KU. The decrease in expenditures at PPL Electric was primarily due to timing differences on capital spending projects related to the ongoing efforts to improve reliability and replace aging infrastructure. The decrease in expenditures at Safari Energy was primarily due to timing differences on capital spending projects. The increase in expenditures at LG&E and KU was primarily due to higher spending on ELG projects.

For PPL, on June 14, 2021, the sale of the U.K. utility business was completed. The transaction resulted in cash proceeds of $10,732 million inclusive of foreign currency hedges executed by PPL. See Note 9 to the Financial Statements for additional information.

For PPL Electric, the changes in "Notes receivable from affiliate" activity resulted from the funding of $575 million to an affiliate for general corporate purposes. See Note 12 to the Financial Statements for further discussion of intercompany borrowings.

Financing Activities

(All Registrants)

The components of the change in cash provided by (used in) financing activities for the nine months ended September 30, 2021 compared with 2020 were as follows.


	PPL		PPL Electric		LG&E		KU
Change - Cash Provided (Used)
Debt issuance/retirement, net	$	(4,579)	$	250	$	—	$	2


Proceeds from project financing	(131)		—		—		—
Stock issuances/redemptions, net	(27)		—		—		—
Dividends	(5)		72		(24)		(41)
Purchase of treasury stock	(282)		—		—		—
Capital contributions/distributions, net	—		580		(9)		(38)
Issuance of term loan	(300)		—		—		—
Retirement of term loan	(300)		—		—		—
Change in short-term debt, net	(582)		(280)		(189)		(160)
Retirement of commercial paper	(73)		—		(41)		(32)
Net increase in notes payable with affiliate	—		—		284		208
Other financing activities	(8)		(3)		(1)		4
Total	$	(6,287)	$	619	$	20	$	(57)

See Note 8 to the Financial Statements in this Form 10-Q for information on 2021 short-term and long-term debt activity, equity transactions and PPL dividends. See Note 8 to the Financial Statements in the Registrants' 2020 Form 10-K for information on 2020 activity.

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. At September 30, 2021, the total committed borrowing capacity under credit facilities and the borrowings under these facilities were:

External


	Committed Capacity		Borrowed		Letters of Credit and Commercial Paper Issued		Unused Capacity
PPL Capital Funding Credit Facilities	$	1,550	$	—	$	15	$	1,535
PPL Electric Credit Facility	650		—		1		649


LG&E Credit Facilities	500		—		—		500
KU Credit Facilities	400		—		—		400
Total Credit Facilities (a)	$	3,100	$	—	$	16	$	3,084

(a)The commitments under the 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 - 7%, PPL Electric - 6%, LG&E - 7% and KU - 7%.

See Note 8 to the Financial Statements for further discussion of the Registrants' credit facilities.

Intercompany (LG&E and KU)


	Committed Capacity		Borrowed		Commercial Paper Program Capacity		Unused Capacity

LG&E Money Pool (a)	$	750	$	284	$	425	$	41
KU Money Pool (a)	650		208		350		92

(a)LG&E and KU participate in an intercompany money pool agreement whereby LKE and/or KU make available to LG&E, and LKE and/or LG&E make available to KU funds up to the difference between LG&E's and KU's FERC borrowing limit and LG&E's and KU's commercial paper capacity limit, at an interest rate based on the lower of a market index of commercial paper issues and two additional rate options based on LIBOR.

See Note 12 to the Financial Statements for further discussion of intercompany credit facilities.

Commercial Paper (All Registrants)

The Registrants 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 facility. The following commercial paper programs were in place at September 30, 2021:


	Capacity		Commercial Paper Issuances		Unused Capacity
PPL Capital Funding	$	1,500	$	—	$	1,500
PPL Electric	650		—		650

LG&E (a)	425		—		425
KU	350		—		350
Total PPL	$	2,925	$	—	$	2,925

(a)In March 2021, the capacity for the LG&E commercial paper program was increased from $350 million to $425 million.

Long-term Debt (All Registrants)

See Note 8 to the Financial Statements for information regarding the Registrants’ long-term debt activities.

(PPL)

Equity Securities Activities

Share Repurchase

In August 2021, PPL's Board of Directors authorized share repurchases of up to $3 billion of PPL common shares. PPL currently expects to repurchase approximately $1 billion by the end of 2021. The actual amount repurchased will depend on various factors, including PPL’s share price, market conditions, and the determination of other uses for the proceeds from the sale of the U.K. utility business, including for incremental capital expenditures. PPL may purchase shares on each trading day subject to market conditions and principles of best execution.

During the three and nine months ended September 30, 2021, PPL repurchased 9.6 million shares at a cost of $282 million.

From October 1 to October 31, 2021, PPL repurchased an additional 9.4 million shares at a cost of $269 million.

Commission fees incurred, which have been included in the cost of repurchases above, were insignificant through October 31, 2021.

See Note 8 to the Financial Statements for information regarding the Registrants’ equity securities activities.

ATM

In February 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 nine months ended September 30, 2021. The ATM program expired in February 2021.

Common Stock Dividends

In August 2021, PPL declared a quarterly common stock dividend, payable October 1, 2021, of 41.5 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.

Rating Agency Actions

(All Registrants)

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 rating agencies have taken the following actions related to the Registrants and their subsidiaries during 2021:

(PPL)

In March 2021, Moody's revised its outlook to positive for PPL and PPL Capital Funding.

(PPL and PPL Electric)

In March 2021, S&P revised its outlook to positive for PPL Electric.

In June 2021, Moody’s and S&P assigned ratings of A1 and A to PPL Electric’s $650 million First Mortgage Bonds, Floating Rate Series, due 2024. The bonds were issued on June 24, 2021.

(PPL and LG&E)

In March 2021, Moody’s and S&P assigned ratings of A1 and A to the Louisville/Jefferson County Metro Government, Kentucky’s $128 million 2.00% Pollution Control Revenue Bonds, 2003 Series A, due 2033, previously issued on behalf of LG&E. The bonds were remarketed April 1, 2021.

In March 2021, Moody’s assigned a rating of A1 and in April 2021, S&P assigned a rating of A to the Louisville/Jefferson County Metro Government, Kentucky’s $35 million 1.35% Pollution Control Revenue Bonds, 2001 Series B, due 2027, previously issued on behalf of LG&E. The bonds were remarketed May 3, 2021.

In March 2021, Moody’s assigned a rating of A1 and in April 2021, S&P assigned a rating of A to the County of Trimble, Kentucky’s $35 million 1.35% Pollution Control Revenue Bonds, 2001 Series B, due 2027, previously issued on behalf of LG&E. The bonds were remarketed May 3, 2021.

In May 2021, Moody’s and S&P assigned ratings of A1/P-2 and A/A-2 to the Louisville/Jefferson County Metro Government, Kentucky’s $31 million Environmental Facilities Revenue Refunding Bonds, 2007 Series A, due 2033, previously issued on behalf of LG&E. The bonds were remarketed June 1, 2021.

In May 2021, Moody’s and S&P assigned ratings of A1/P-2 and A/A-2 to Louisville/Jefferson County Metro Government, Kentucky’s $35 million Environmental Facilities Revenue Refunding Bonds, 2007 Series B, due 2033, previously issued on behalf of LG&E. The bonds were remarketed June 1, 2021.

In August 2021, Moody's and S&P assigned ratings of A1 and A to the County of Trimble, Kentucky's $28 million 0.625% Pollution Control Revenue Bonds, 2001 Series A, due 2026, previously issued on behalf of LG&E. The bonds were remarketed September 1, 2021.

(PPL and KU)

In May 2021, Moody's and S&P assigned ratings of A1 and A to the County of Carroll, Kentucky's $78 million 2.00% Environmental Facilities Revenue Bonds, 2008 Series A, due 2032, previously issued on behalf of KU. The bonds were remarketed June 1, 2021.

In May 2021, Moody's and S&P assigned ratings of A1 and A to County of Carroll, Kentucky's $54 million 2.125% Environmental Facilities Revenue Bonds, 2006 Series B, due 2034, previously issued on behalf of KU. The bonds were remarketed June 1, 2021.

Ratings Triggers

(PPL, 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, and interest rate instruments, contain provisions that require the posting of additional collateral or permit the counterparty to terminate the contract, if PPL's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade. See Note 15 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral requirements for PPL and LG&E for derivative contracts in a net liability position at September 30, 2021.

(All Registrants)

For additional information on the Registrants' liquidity and capital resources, see "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Registrants' 2020 Form 10-K.

Risk Management

Market Risk

(All Registrants)

See Notes 14 and 15 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

PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. A variety of financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of the debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under PPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolio due to changes in benchmark 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 September 30, 2021.


	Exposure Hedged		Fair Value, Net - Asset (Liability) (a)		Effect of a 10% Adverse Movement in Rates (b)		Maturities Ranging Through
PPL

Economic hedges
Interest rate swaps (c)	$	64	$	(19)	$	(1)	2033
LG&E
Economic hedges
Interest rate swaps (c)	64		(19)		(1)		2033

(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.

(c)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 at September 30, 2021 was insignificant for PPL, PPL Electric, LG&E and KU. The estimated impact of a 10% adverse movement in interest rates on the fair value of debt at September 30, 2021 is shown below.


	10% Adverse Movement in Rates
PPL	$	390
PPL Electric	164
LG&E	73
KU	113

Foreign Currency Risk (PPL)

Prior to the sale of the U.K. utility business on June 14, 2021, PPL was exposed to foreign currency risk, primarily through investments in and earnings of U.K. affiliates. PPL had adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactions, including the sale of its U.K. utility business and net investments. In addition, PPL entered into financial instruments to protect against foreign currency translation risk of expected GBP earnings.

(All Registrants)

Commodity Price Risk

PPL is exposed to commodity price risk through its domestic subsidiaries as described below.

PPL Electric is required to purchase electricity to fulfill its obligation as 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.

Prior to the sale of the U.K. utility business on June 14, 2021, WPD was exposed to volumetric risk which was significantly mitigated as a result of the method of regulation in the U.K. Under the RIIO-ED1 price control regulations,

recovery of such exposure occurs on a two year lag. See Note 1 in PPL's 2020 Form 10-K for additional information on revenue recognition under RIIO-ED1.

PPL Electric, LG&E and KU are exposed to volumetric risk on retail sales, mainly due to weather and other economic conditions for which there is limited mitigation between rate cases.

Credit Risk (All Registrants)

See Notes 14 and 15 to the Financial Statements in this Form 10-Q and "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Risk Management - Credit Risk" in the Registrants' 2020 Form 10-K for additional information.

Foreign Currency Translation (PPL)

The value of the British pound sterling fluctuates in relation to the U.S. dollar. The impact of foreign currency translation is recorded in AOCI. Changes in this exchange rate resulted in a pre-tax foreign currency translation gain of $495 million for the nine months ended September 30, 2021, which primarily reflected a $856 million increase to PP&E, a $151 million increase to goodwill and a $36 million increase to other net assets, partially offset by a $467 million increase to long-term debt, a $61 million increase to deferred income taxes and a $20 million increase to long term debt due within one year. Changes in this exchange rate resulted in a pre-tax foreign currency translation gain of $292 million for the nine months ended September 30, 2020, which primarily reflected a $477 million increase to PP&E, a $85 million increase to goodwill a $46 million increase to other net assets, partially offset by a $229 million increase to long-term debt and a $48 million increase to long term debt due within one year, and a $39 million increase to deferred income taxes.

As a result of the sale of the U.K. utility business on June 14, 2021, accumulated foreign currency translation losses of $786 million were removed from PPL’s Balance Sheets and realized as a component of “Income (Loss) from Discontinued Operations (net of income taxes)” on PPL’s Statements of Income (Loss) for the nine months ended June 30, 2021. See Note 9 to the Financial Statements for additional information.

Related Party Transactions (All Registrants)

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 12 to the Financial Statements for additional information on related party transactions for PPL Electric, LG&E and KU.

Acquisitions, Development and Divestitures (All Registrants)

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. See Note 9 to the Financial Statements for information on significant activities.

Environmental Matters (All Registrants)

Extensive federal, state and local environmental laws and regulations are applicable to the Registrants 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. The Registrants can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.

See "Environmental Matters" in Item 1. "Business" in the Registrants' 2020 Form 10-K for information about environmental laws and regulations affecting the Registrants' business. See "Legal Matters" in Note 11 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" in the Registrants' 2020 Form 10-K for information on projected environmental capital expenditures for 2021 through 2025. See Note 16 to the Financial Statements for information related to the impacts of CCRs on AROs.

The information below represents an update to “Item 1. Business – Environmental Matters – Air – NAAQS” and "Item 1. Business – Environmental Matters – Air – Climate Change" in the Registrants' 2020 Form 10-K.

NAAQS (PPL, LG&E and KU)

In March 2021, the EPA released final revisions to the Cross-State Air Pollution Rule (CSAPR) providing for reductions in ozone season nitrogen oxide emissions for 2021 and subsequent years from sources in 12 states, including Kentucky. Additionally, the EPA reversed its previous approval of the Kentucky State Implementation Plan with respect to these requirements. The CSAPR revisions are aimed at ensuring compliance with the 2008 ozone NAAQS, so additional nitrogen oxide emission reductions could potentially be required for compliance with the revised 2015 ozone NAAQS. PPL, LG&E and KU are currently assessing the potential impact of the CSAPR revisions on operations, but such impact is not expected to be material. Pursuant to the President’s executive order, the EPA is currently reviewing its previous determinations made in December 2020 to retain the existing NAAQS for ozone and particulate matter without change.

PPL, LG&E, and KU are unable to predict future emission reductions that may be required by future federal rules or state implementation actions. Compliance with the NAAQS, CSAPR and related requirements may require installation of additional pollution controls or other compliance actions, inclusive of retirements, the costs of which PPL, LG&E and KU believe would be subject to rate recovery.

Climate Change (All Registrants)

The Biden administration is undertaking wide-ranging efforts to address climate change. Recent government actions and policy developments, including the President’s announced goal of a carbon free electricity sector by 2035, could have far-reaching impacts on PPL’s business operations, products, and services. All of these developments, including the Build Back Better Agenda with a green power incentive and penalty structure, are preliminary or ongoing in nature and the Registrants cannot predict their final outcome or ultimate impact on operations*.*

New Accounting Guidance (All Registrants)

There has been no new accounting guidance adopted in 2021 and there is no new significant accounting guidance pending adoption as of September 30, 2021.

Application of Critical Accounting Policies (All Registrants**)**

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following table summarizes the accounting policies by Registrant that 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. See "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrants' 2020 Form 10-K for a discussion of each critical accounting policy.


		PPL
	PPL	Electric	LG&E	KU

Defined Benefits	X	X	X	X
Income Taxes	X	X	X	X
Regulatory Assets and Liabilities	X	X	X	X
Price Risk Management	X
Asset Impairment (Excluding Investments)	X		X	X
AROs	X		X	X
Revenue Recognition - Unbilled Revenue			X	X

Following is an update to the critical accounting policies disclosed in PPL's 2020 Form 10-K.

Income Taxes (PPL)

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 on tax returns, valuation allowances on deferred tax assets, as well as whether the undistributed earnings of WPD were 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 several factors in assessing the expected 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. When evaluating the need for valuation allowances, the uncertainty posed by political risk on such factors is also considered by management. 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.

The TCJA included new provisions requiring that certain income, referred to as global intangible low-taxed income (GILTI), earned by certain foreign subsidiaries be included in the gross income of their U.S. shareholder. Accounting guidance allows a policy election regarding the timing of inclusion of GILTI in an entity’s financial statements. The election may be either to record deferred taxes for expected GILTI in future periods or record such taxes as a current-period expense when incurred. PPL has elected to record the tax effect of expected GILTI inclusions and thus, records deferred taxes relating to such inclusions.

In light of the sale of PPL's U.K. utility business, indefinite reinvestment is no longer relevant. As such, PPL realized the outside book-tax basis difference in those assets. Accordingly, in June 2021, a current tax liability was recorded reflecting the estimated tax cost associated with the realization of that basis difference.

See Note 6 to the Financial Statements for income tax disclosures.

PPL Corporation

PPL Electric Utilities Corporation

Louisville Gas and Electric Company

Kentucky Utilities Company

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