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

161K characters. Original on sec.gov · Markdown

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' 2021 Form 10-K. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:

  • "Overview" provides a description of each Registrant's business strategy and a discussion of important financial and operational developments.

  • "Results of Operations" for all Registrants includes a "Statement of Income Analysis," which discusses significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 2022 with the same period in 2021. The PPL "Results of Operations" also includes "Segment Earnings" and "Adjusted Gross Margins," which provide a detailed analysis of earnings by reportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "Adjusted Gross Margins" and provide explanations of the non-GAAP financial measures and a reconciliation of the non-GAAP financial measures to the most comparable GAAP measure.

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

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

Overview

Introduction

(PPL)

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

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

PPL Corporation*
PPL Capital Funding Provides financing for the operations of PPL and certain subsidiaries
PPL Electric* Engages in the regulated transmission and distribution of electricity in PennsylvaniaLKE A holding company that owns regulated utility operations through its subsidiaries, LG&E and KURIE Engages in the regulated transmission, distribution and sale of electricity and regulated distribution and sale of natural gas in Rhode Island
LG&E* Engages in the regulated generation, transmission, distribution and sale of electricity and regulated distribution and sale of natural gas in KentuckyKU* Engages in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky
Pennsylvania Regulated SegmentKentucky Regulated SegmentRhode Island Regulated Segment

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

(PPL Electric)

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

(LG&E)

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

(KU)

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

Segment Information (PPL)

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

PPL is organized into three reportable segments as depicted in the chart above: Kentucky Regulated, which primarily represents the results of LG&E and KU, Pennsylvania Regulated, which primarily represents the results of PPL Electric and Rhode Island

Regulated, which primarily represents the results of RIE. "Corporate and Other" primarily includes financing costs incurred at the corporate level that have not been allocated or assigned to the segments.

Rhode Island Regulated Segment

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

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

Franchises and Licenses

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

Competition

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

Rates and Regulation

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

Distribution

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

Transmission

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

Deferral Mechanisms

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

account when the regulatory specified events or conditions have been met, when the amounts are determinable, and are probable of recovery (or payment) through future rate adjustments.

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

Last Resort Service

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

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

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

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

Natural Gas Distribution Supply

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

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

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

Business Strategy

(All Registrants)

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

Central to PPL's and the other Registrants' strategy is recovering capital project costs efficiently through various rate-making mechanisms, including periodic base rate case proceedings using forward test years, annual FERC formula rate mechanisms and other regulatory agency-approved recovery mechanisms designed to limit regulatory lag. In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, and gas supply clause) and recovery on

construction work-in-progress that reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs. In Pennsylvania, the FERC transmission formula rate, DSIC mechanism, Smart Meter Rider and other recovery mechanisms operate to reduce regulatory lag and provide for timely recovery of and a return on, as appropriate, prudently incurred costs. In Rhode Island, the gas cost adjustment, net metering, infrastructure, safety and reliability (ISR) and revenue decoupling mechanisms and other rate adjustment mechanisms operate to reduce regulatory lag and provide timely recovery of and return on, as appropriate, prudently incurred costs.

Financial and Operational Developments

(PPL)

Acquisition of Narragansett Electric

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

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

See Note 8 to the Financial Statements for additional information.

Sale of Safari Holdings

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

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

See Note 8 to the Financial Statements for additional information.

Pennsylvania State Tax Reform (PPL and PPL Electric)

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

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

Inflation Reduction Act (All Registrants)

On August 16, 2022, the Inflation Reduction Act (IRA) was signed into law. Among other things, the IRA enacted a new 15% corporate "book minimum tax," which is based on adjusted GAAP pre-tax income and is only applicable to corporations whose pre-tax income exceeds a certain threshold. PPL continues to assess the impacts of the IRA on the financial statements of PPL

and the other Registrants and will monitor guidance issued by the U.S. Treasury in the future. PPL does not anticipate a material cash tax impact in the foreseeable future. In addition, the IRA enacted numerous new tax credits, largely associated with renewable energy. PPL continues to assess the applicability of these provisions to PPL and its subsidiaries.

Regulatory Requirements

(All Registrants)

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

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

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

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

In 2018, LG&E and KU applied to the FERC requesting elimination of certain on-going credits to a sub-set of transmission customers relating to the 1998 merger of LG&E's and KU's parent entities and the 2006 withdrawal of LG&E and KU from the Midcontinent Independent System Operator, Inc. (MISO), a regional transmission operator and energy market. The application sought termination of LG&E's and KU's commitment to provide certain Kentucky municipalities mitigation for certain horizontal market power concerns arising out of the 1998 LG&E and KU merger and 2006 MISO withdrawal. The amounts at issue are generally waivers or credits granted to a limited number of Kentucky municipalities for either certain LG&E and KU or MISO transmission charges incurred for transmission service received. In 2019, the FERC granted LG&E's and KU's request to remove the ongoing credits, conditioned upon the implementation by LG&E and KU of a transition mechanism for certain existing power supply arrangements, which was subsequently filed, modified, and approved by the FERC in 2020 and 2021. In 2020, LG&E and KU and other parties filed appeals with the D.C. Circuit Court of Appeals regarding the FERC's orders on the elimination of the mitigation and required transition mechanism. On August 4, 2022, the D.C. Circuit Court of Appeals issued an order remanding the proceedings back to the FERC. LG&E and KU cannot predict the outcome of the proceedings at the FERC on remand. LG&E and KU currently receive recovery of the waivers and credits provided through other rate mechanisms and such rate recovery would be anticipated to be adjusted consistent with potential changes or terminations of the waivers and credits, as such become effective.

Rate Case Proceedings (KU)

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

Labor Union Agreement (PPL and PPL Electric)

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

Results of Operations

(PPL)

The "Statement of Income Analysis" discussion below describes significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 2022 with the same periods in 2021. The "Segment Earnings" and "Adjusted Gross Margins" discussions provide a review of results by reportable segment. These discussions include non-GAAP financial measures, including "Earnings from Ongoing Operations" and "Adjusted Gross Margins," and provide explanations of the non-GAAP financial measures and a reconciliation of those measures to the most comparable GAAP measure.

(PPL Electric, LG&E and KU)

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

(All Registrants)

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

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

Statement of Income Analysis

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

Three MonthsNine Months
20222021$ Change20222021$ Change
Operating Revenues$2,134$1,512$622$5,612$4,298$1,314
Operating Expenses
Operation
Fuel26719572708531177
Energy purchases4361672691,093524569
Other operation and maintenance6783932851,6711,164507
Depreciation3122743887281062
Taxes, other than income100524823015377
Total Operating Expenses1,7931,0817124,5743,1821,392
Other Income (Expense) - net1012(2)362511
Interest Expense136183(47)361810(449)
Income from Continuing Operations Before Income Taxes215260(45)713331382
Income Taxes4151(10)147455(308)
Income from Continuing Operations After Income Taxes174209(35)566(124)690
Loss from Discontinued Operations (net of income taxes) (Note 8)—(2)2—(1,490)1,490
Net Income (Loss)$174$207$(33)$566$(1,614)$2,180

Operating Revenues

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

Three MonthsNine Months
PPL Electric distribution price (a)$(23)$(40)
PPL Electric distribution volume (b)—10
PPL Electric PLR (c)153382
PPL Electric transmission formula rate (d)584
LG&E retail rates (e)—50
LG&E volumes(1)15
LG&E fuel and other energy prices (f)36116
LG&E economic relief billing credit, net of amortization of $5, ($5)6(6)
KU retail rates (e)—55
KU volumes(3)8
KU fuel and other energy prices (f)56130
KU economic relief billing credit, net of amortization of ($1), $03(2)
Rhode Island Energy384512
Other6—
Total$622$1,314

(a)The decreases were primarily due to reconcilable cost recovery mechanisms approved by the PAPUC.

(b)The increase for the nine months ended September 30, 2022 was due to weather and higher customer volumes.

(c)The increases were primarily due to higher energy prices, lower volumes of shopping customers and higher customer volumes including weather.

(d)The increases for the nine months ended September 30, 2022 were due to a higher PPL zonal peak load billing factor in 2022, a revenue reduction recorded due to a challenge to the transmission formula rate return on equity in 2021 and additional returns on transmission capital investments. See Note 6 to the Financial Statements for additional details on the transmission formula rate return on equity reduction.

(e)The increase for the nine months ended September 30, 2022 was due to new base rates approved by the KPSC effective July 1, 2021.

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

Fuel

Fuel increased $72 million for the three months ended September 30, 2022 compared with 2021, due to a $24 million increase at LG&E and a $49 million increase at KU primarily due to higher commodity costs.

Fuel increased $177 million for the nine months ended September 30, 2022 compared with 2021, due to a $62 million increase at LG&E and a $116 million increase at KU primarily due to higher commodity costs.

Energy Purchases

Energy purchases increased $269 million for the three months ended September 30, 2022 compared with 2021, primarily due to higher PLR prices of $128 million and higher PLR volumes of $13 million at PPL Electric and a $9 million increase at LG&E primarily due to an increase in commodity costs and an additional $116 million due to the operations of RIE.

Energy purchases increased $569 million for the nine months ended September 30, 2022 compared with 2021, primarily due to higher PLR prices of $304 million and higher PLR volumes of $48 million at PPL Electric and a $54 million increase at LG&E primarily due to an increase in commodity costs and an additional $154 million due to the operations of RIE.

Other Operation and Maintenance

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

Three MonthsNine Months
PPL Electric bad debts$6$11
PPL Electric storm costs(24)(18)
PPL Electric Act 12924
PPL Electric universal service programs15
LG&E storm costs—6
KU plant operations and maintenance27
Charges related to the sale of the U.K. utility business—(15)
Rhode Island Energy (a)232435
Stock compensation expense13
Solar panel impairment—(37)
Sale of Safari Holdings (b)6767
Other(2)39
Total$285$507

(a)Includes activity associated with the operations of RIE and integration costs. See Note 8 to the Financial Statements for additional information.

(b)Impairment charge related to the sale of Safari Holdings. See Note 8 to the Financial Statements for additional information.

Depreciation

The increase (decrease) in depreciation was due to:

Three MonthsNine Months
Additions to PP&E, net (a)$(6)$(7)
Depreciation rate change (b)—14
Rhode Island Energy3853
Other62
Total$38$62

(a)The decreases were primarily due to decreases in software and computer hardware depreciation at PPL Electric, as a result of end-of-life retirements, partially offset by increases in additional assets placed into service, net of retirements at LG&E and KU.

(b)The increase for the nine months ended September 30, 2022 is due to higher depreciation rates at LG&E and KU effective July 2021.

Taxes, Other Than Income

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

Three MonthsNine Months
State gross receipts tax (a)$22$38
Domestic property tax expense (a)2436
Other23
Total$48$77

(a)Taxes, other than income increased for the three months and nine months ended September 30, 2022 compared to 2021, primarily due to the acquisition of RIE.

Other Income (Expense) - net

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

Three MonthsNine Months
Defined benefit plans - non-service credits (Note 9)$1$9
Interest income(6)(12)
Other314
Total$(2)$11

Interest Expense

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

Three MonthsNine Months
Loss on extinguishment of debt (a)$(73)$(395)
Long-term debt (b)8(74)
Rhode Island Energy1622
Other2(2)
Total$(47)$(449)

(a) In June 2021, in connection with the tender offer, PPL Capital Funding retired $1,962 million combined aggregate principal amount of its outstanding Senior Notes for $2,293 million aggregate cash purchase price. In July 2021, PPL Capital Funding redeemed the remaining $1,072 million combined aggregate principal amount of its outstanding Senior Notes for an aggregate cash purchase price of $1,133 million. The loss on extinguishment activity included the tender premium, make-whole premiums, accrued interest, bank fees and unamortized fees, hedges and discounts.

(b) The decrease for the nine month period ended September 30, 2022 was primarily due to PPL Capital Funding debt that was redeemed in June and July 2021.

Income Taxes

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

Three MonthsNine Months
Change in pre-tax income$(19)$124
Valuation allowance adjustments (a)(6)(30)
Amortization of investment tax credit including deferred taxes on basis difference1(5)
Amortization of excess deferred federal and state income taxes11(9)
Depreciation and other items not normalized—(4)
Impact of U.K. Finance Acts (b)—(383)
Federal and state income tax return adjustments43
State income tax rate change (c)(5)(5)
Other41
Total$(10)$(308)

(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.

(b)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.

(c) On July 8, 2022, the Governor of Pennsylvania signed into law Pennsylvania House Bill 1342 (H.B. 1342). Among other changes to the state tax code, the bill will reduce the corporate net income tax rate from 9.99% to 8.99% beginning January 1, 2023, and further reduces the rate annually by half a percentage point until the rate reaches 4.99% in 2031. The income statement impact of the corporate net income tax reduction was a deferred tax benefit of $5 million.

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

Loss from discontinued operations (net of income taxes) decreased $2 million and $1,490 million for the three and nine months ended September 30, 2022 compared with 2021. The decreases were due to the completion of the sale of the U.K. utility business in the second quarter of 2021.

See "Discontinued Operations" in Note 8 to the Financial Statements for summarized results of operations of the U.K. utility business in 2021.

Segment Earnings

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

Three MonthsNine Months
20222021$ Change20222021$ Change
Kentucky Regulated$153$159$(6)$434$389$45
Pennsylvania Regulated1431261741033575
Rhode Island Regulated (a)(26)—(26)(55)—(55)
Corporate and Other (b)(96)(76)(20)(223)(848)625
Income (Loss) from Discontinued Operations (a)—(2)2—(1,490)1,490
Net Income$174$207$(33)$566$(1,614)$2,180

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

(b)Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results.

Earnings from Ongoing Operations

Management utilizes "Earnings from Ongoing Operations" as a non-GAAP financial measure that should not be considered as an alternative to net income, an indicator of operating performance determined in accordance with GAAP. PPL believes that Earnings from Ongoing Operations is useful and meaningful to investors because it provides management's view of PPL's earnings performance as another criterion in making investment decisions. In addition, PPL's management uses Earnings from Ongoing Operations in measuring achievement of certain corporate performance goals, including targets for certain executive incentive compensation. Other companies may use different measures to present financial performance.

Earnings from Ongoing Operations is adjusted for the impact of special items. Special items are presented in the financial tables on an after-tax basis with the related income taxes on special items separately disclosed. Income taxes on special items, when applicable, are calculated based on the statutory tax rate of the entity where the activity is recorded. Special items may include items such as:

  • 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 MonthsNine Months
20222021$ Change20222021$ Change
Kentucky Regulated$155$159$(4)$442$385$57
Pennsylvania Regulated134126840135546
Rhode Island Regulated28—2837—37
Corporate and Other(12)(8)(4)(48)(97)49
Earnings from Ongoing Operations$305$277$28$832$643$189

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 MonthsNine Months
20222021$ Change20222021$ Change
Operating revenues$977$879$98$2,864$2,505$359
Fuel26719572708531177
Energy purchases35241118112259
Other operation and maintenance224219568365429
Depreciation171166551348033
Taxes, other than income2322169654
Total operating expenses720626942,1541,852302
Other Income (Expense) - net211871
Interest Expense53485149149—
Interest Expense with Affiliate (a)1414—41392
Income Taxes39336948311
Net Income153159(6)43438945
Less: Special Items(2)—(2)(8)4(12)
Earnings from Ongoing Operations$155$159$(4)$442$385$57

(a)Borrowings between LKE and PPL were $1,649 million and $2,166 million as of September 30, 2022 and December 31, 2021.

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 ItemThree MonthsNine Months
2022202120222021
Strategic corporate initiatives, net of tax of $0, $0, $2, $0 (a)Other operations and maintenance$(2)$—$(8)$—
Valuation allowance adjustment (b)Income taxes———4
Total Special Items$(2)$—$(8)$4

(a)Costs incurred relate to PPL's corporate centralization efforts.

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

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 MonthsNine Months
Kentucky Adjusted Gross Margins$14$181
Other operation and maintenance(3)(21)
Depreciation(3)(86)
Taxes, other than income(2)(7)
Other Income (Expense) - net11
Interest Expense(5)—
Interest Expense with Affiliate—(2)
Income Taxes(6)(9)
Earnings from Ongoing Operations(4)57
Special items, after-tax(2)(12)
Net Income$(6)$45

  • See "Adjusted Gross Margins - Changes in Adjusted Gross Margins" for an explanation of Kentucky Adjusted Gross Margins.

  • Higher depreciation expense for the nine month period due to a $60 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 an $11 million increase due to higher depreciation rates, effective July 1, 2021.

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 MonthsNine Months
20222021$ Change20222021$ Change
Operating revenues$766$627$139$2,217$1,769$448
Energy purchases285143142759402357
Other operation and maintenance127147(20)41540015
Depreciation99105(6)296322(26)
Taxes, other than income393091088820
Total operating expenses5504251251,5781,212366
Other Income (Expense) - net78(1)24186
Interest Expense43394122124(2)
Income Taxes3745(8)13111615
Net Income1431261741033575
Less: Special Items9—99(20)29
Earnings from Ongoing Operations$134$126$8$401$355$46

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 ItemThree MonthsNine Months
2022202120222021
PA tax rate change (a)Income taxes$9$—$9$—
Transmission formula rate return on equity reduction, net of tax of $0, $0, $0, $8 (b)Operating revenues———(20)
Total Special Items$9$—$9$(20)

(a)Impact of Pennsylvania state tax reform. See Note 5 to the Financial Statements for additional information.

(b)Represents the portion of the reduction recognized in the September 30, 2021 Statement of Income related to the period from May 21, 2020 through December 31, 2020. See Note 6 to the Financial Statements for additional information.

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 MonthsNine Months
Pennsylvania Adjusted Gross Margins$9$80
Other operation and maintenance6(24)
Depreciation—(1)
Taxes, other than income——
Other Income (Expense) - net(1)5
Interest Expense(5)2
Income Taxes(1)(16)
Earnings from Ongoing Operations846
Special Items, after tax929
Net Income$17$75

  • 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 nine month period primarily due to higher Corporate support costs of $7 million, higher nonrecoverable bad debt expense of $11 million and other items that were not individually significant.

Rhode Island Regulated Segment

The Rhode Island Regulated segment consists primarily of the regulated electricity transmission and distribution operations and

regulated distribution and sale of natural gas conducted by RIE.

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

Three MonthsNine Months
20222021$ Change20222021$ Change
Operating revenues$384$—$384$512$—$512
Energy purchases116—116154—154
Other operation and maintenance215—215308—308
Depreciation38—3853—53
Taxes, other than income39—3953—53
Total operating expenses408—408568—568
Other Income (Expense) - net5—57—7
Interest Expense15—1522—22
Income Taxes(8)—(8)(16)—(16)
Net Income(26)—(26)(55)—(55)
Less: Special Items(54)—(54)(92)—(92)
Earnings from Ongoing Operations$28$—$28$37$—$37

The following after-tax gains (losses), which management considers special items, impacted the Rhode Island Regulated segment's results and are excluded from Earnings from Ongoing Operations during the periods ended September 30.

Income Statement Line ItemThree MonthsNine Months
20222022
Acquisition integration, net of tax of $4, $14 (a)Other operations and maintenance$(14)$(53)
Acquisition integration, net of tax of $0, $0 (a)Other income and (expense) - net—1
Acquisition integration, net of tax of $10, $10 (a)Operating revenues(40)(40)
Total Special Items$(54)$(92)

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

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.

2022 Three Months
KY RegulatedPA RegulatedRI Regulated (a)Corporate and OtherDiscontinued Operations (a)Total
Net Income$153$143$(26)$(96)$—$174
Less: Special Items (expense) benefit:
Strategic corporate initiatives, net of tax of $0 (c)(2)————(2)
Acquisition integration, net of tax of $14, $6 (a)——(54)(22)—(76)
Solar panel impairment, net of tax of $0———(1)—(1)
PA tax rate change (h)—9—(5)—4
Sale of Safari Holdings, net of tax of $19 (i)———(56)—(56)
Total Special Items(2)9(54)(84)—(131)
Earnings from Ongoing Operations$155$134$28$(12)$—$305
2021 Three Months
KY RegulatedPA RegulatedRI Regulated (a)Corporate and OtherDiscontinued Operations (a)Total
Net Income$159$126$—$(76)$(2)$207
Less: Special Items (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 (a)———(9)—(9)
Loss on early extinguishment of debt, net of tax of $16 (f)———(57)—(57)
Total Special Items———(68)(2)(70)
Earnings from Ongoing Operations$159$126$—$(8)$—$277
2022 Nine Months
KY RegulatedPA RegulatedRI Regulated (a)Corporate and OtherDiscontinued Operations (a)Total
Net Income$434$410$(55)$(223)$—$566
Less: Special Items (expense) benefit:
Talen litigation costs, net of tax of ($1) (b)———5—5
Strategic corporate initiatives, net of tax of $2, $4 (c)(8)——(15)—(23)
Acquisition integration, net of tax of $24, $28 (a)——(92)(104)—(196)
PA tax rate change (h)—9—(5)—4
Sale of Safari Holdings, net of tax of $19 (i)———(56)—(56)
Total Special Items(8)9(92)(175)—(266)
Earnings from Ongoing Operations$442$401$37$(48)$—$832
2021 Nine Months
KY RegulatedPA RegulatedRI Regulated (a)Corporate and OtherDiscontinued 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)44
Transmission formula rate return on equity reduction, net of tax of $8—(20)———(20)
Acquisition integration, net of tax of $4 (a)———(11)—(11)
U.K. tax rate change (e)———(383)—(383)
Solar panel impairment, net of tax of $9 (g)———(28)—(28)
Loss on early extinguishment of debt, net of tax of $83 (f)———(312)—(312)
Total Special Items4(20)—(751)(1,490)(2,257)
Earnings from Ongoing Operations$385$355$—$(97)$—$643

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

(b)PPL incurred legal expenses and received insurance reimbursement related to litigation with its former affiliate, Talen Montana. See Note 10 to the Financial Statements for additional information.

(c)Costs incurred in 2022 relate to PPL’s strategic repositioning and corporate centralization efforts. Costs incurred for 2021 are related to the sale of the U.K. utility business and PPL’s strategic repositioning.

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

(e)Impact of the U.K. Finance Acts on deferred tax balances. See Note 5 to the Financial Statements for more information.

(f)In June 2021, in connection with the tender offer, PPL Capital Funding retired $1,962 million combined aggregate principal amount of its outstanding Senior Notes for $2,293 million aggregate cash purchase price. In July 2021, PPL Capital Funding redeemed the remaining $1,072 million combined aggregate principal amount of its outstanding Senior Notes for an aggregate cash purchase price of $1,133 million. The loss on extinguishment activity included the tender premium, make-whole premiums, accrued interest, bank fees and unamortized fees, hedges and discounts.

(g)Reflects solar panel write-down due to extension of federal government’s solar investment tax credits, technological advances resulting in more efficient modules available on the market, and rising commodity prices for materials used in various solar projects.

(h)Impact of Pennsylvania state tax reform. See Note 5 to the Financial Statements for additional information.

(i)Primarily includes the current estimated loss on the sale of Safari Holdings, LLC. See Note 8 to the Financial Statements for more information.

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.

  • "Rhode Island Adjusted Gross Margins" is a single financial performance measure of the electricity transmission and distribution operations of the Rhode Island Regulated segment, as well as the Rhode Island Regulated segment's distribution and sale of natural gas. In calculating this measure, utility revenues and expenses associated with approved recovery mechanisms are offset with minimal impact on earnings. Costs associated with these mechanisms are recorded in "Energy purchases," "Other operation and maintenance" (which are primarily energy efficiency and storm cost related) and "Taxes, other than income" (which is primarily gross earnings tax) on the Statements of Income. This measure represents the net revenues from Rhode Island 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 MonthsNine Months
20222021$ Change20222021$ Change
Kentucky Regulated
Kentucky Adjusted Gross Margins$639$625$14$1,865$1,684$181
Pennsylvania Regulated
Pennsylvania Adjusted Gross Margins
Distribution$232$228$4$710$686$24
Transmission185180555149556
Total Pennsylvania Adjusted Gross Margins$417$408$9$1,261$1,181$80
Rhode Island Regulated
Rhode Island Adjusted Gross Margins$184$—$184$254$—$254

Kentucky Adjusted Gross Margins

Kentucky Adjusted Gross Margins increased for the three months ended September 30, 2022 compared with 2021, primarily due to the expiration of the economic relief billing credit in June 2022.

Kentucky Adjusted Gross Margins increased for the nine months ended September 30, 2022 compared with 2021, primarily due to higher base rates of $105 million, environmental and gas cost recoveries added to base rates of $66 million and higher sales volumes of $15 million, partially offset by $8 million of lower adjusted gross margins as a result of the economic relief billing credit, net of amortization.

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 first half of 2022, 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 nine months ended September 30, 2022 compared with 2021, primarily due to higher sales volumes including weather of $8 million and higher late payment charges of $10 million as a result of not charging late payment fees in 2021. The remaining items were not individually significant in comparison to the prior year.

Transmission

Transmission Adjusted Gross Margins increased for the nine months ended September 30, 2022 compared with 2021, primarily due to $29 million as a result of a higher annual PPL zonal peak load billing factor in 2022 and $23 million of returns on additional transmission capital investments focused on replacing aging infrastructure and improving reliability.

Rhode Island Adjusted Gross Margins

Rhode Island Adjusted Gross Margins increased for the three and nine months ended September 30, 2022 compared with 2021 due to the acquisition of Narragansett Electric on May 25, 2022.

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.

2022 Three Months
Kentucky Adjusted Gross MarginsPennsylvania Adjusted Gross MarginsRhode Island Adjusted Gross Margins (a)Other (b)Operating Income (c)
Operating Revenues$977$766$434$(43)$2,134
Operating Expenses
Fuel267———267
Energy purchases35286116(1)436
Other operation and maintenance2221120515678
Depreciation145—293312
Taxes, other than income—371449100
Total Operating Expenses3383492508561,793
Total$639$417$184$(899)$341
2021 Three Months
Kentucky Adjusted Gross MarginsPennsylvania Adjusted Gross MarginsRhode Island Adjusted Gross MarginsOther (b)Operating Income (c)
Operating Revenues$879$628$—$5$1,512
Operating Expenses
Fuel195———195
Energy purchases24143——167
Other operation and maintenance2235—336393
Depreciation1212—250274
Taxes, other than income130—2152
Total Operating Expenses254220—6071,081
Total$625$408$—$(602)$431
2022 Nine Months
Kentucky Adjusted Gross MarginsPennsylvania Adjusted Gross MarginsRhode Island Adjusted Gross Margins (a)Other (b)Operating Income (c)
Operating Revenues$2,864$2,217$562$(31)$5,612
Operating Expenses
Fuel708———708
Energy purchases181759154(1)1,093
Other operation and maintenance69771361,3891,671
Depreciation4017—815872
Taxes, other than income110318108230
Total Operating Expenses9999563082,3114,574
Total$1,865$1,261$254$(2,342)$1,038
2021 Nine Months
Kentucky Adjusted Gross MarginsPennsylvania Adjusted Gross MarginsRhode Island Adjusted Gross MarginsOther (b)Operating Income (c)
Operating Revenues$2,505$1,797$—$(4)$4,298
Operating Expenses
Fuel531———531
Energy purchases122402——524
Other operation and maintenance7186—1,0071,164
Depreciation9344—673810
Taxes, other than income484—65153
Total Operating Expenses821616—1,7453,182
Total$1,684$1,181$—$(1,749)$1,116

(a)Operating revenues excludes a $50 million customer bill credit to all electric and natural gas distribution customers that was treated as a special item. See Note 8 to the Financial Statements for additional information.

(b)Represents amounts excluded from Adjusted Gross Margins.

(c)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 MonthsNine Months
20222021$ Change20222021$ Change
Operating Revenues$766$627$139$2,217$1,769$448
Operating Expenses
Operation
Energy purchases285143142759402357
Other operation and maintenance127147(20)41540015
Depreciation99105(6)296322(26)
Taxes, other than income393091088820
Total Operating Expenses5504251251,5781,212366
Other Income (Expense) - net66—19163
Interest Income from Affiliate12(1)523
Interest Expense43394122124(2)
Income Taxes3745(8)13111615
Net Income$143$126$17$410$335$75

Operating Revenues

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

Three MonthsNine Months
Distribution price (a)$(23)$(40)
Distribution volume (b)—10
PLR (c)153382
Transmission formula rate (d)584
Other (e)412
Total$139$448

(a)The decreases were primarily due to reconcilable cost recovery mechanisms approved by the PAPUC.

(b)The increase for the nine months ended September 30, 2022 was due to weather and higher customer volumes.

(c)The increases were primarily due to higher energy prices, lower volumes of shopping customers and higher customer volumes including weather.

(d)The increases for the nine months ended September 30, 2022 were due to a higher PPL zonal peak load billing factor in 2022, a revenue reduction recorded due to a challenge to the transmission formula rate return on equity in 2021 and additional returns on transmission capital investments. See Note 6 to the Financial Statements for additional details on the transmission formula rate return on equity reduction.

(e)The increase for the nine months ended September 30, 2022 was primarily due to higher late payment charges in 2022, which were not billed in 2021 due to the COVID pandemic.

Energy Purchases

Energy purchases increased $142 million for the three months ended September 30, 2022 compared with 2021. This increase was primarily due to higher PLR prices of $128 million and higher PLR volumes of $13 million.

Energy purchases increased $357 million for the nine months ended September 30, 2022 compared with 2021. This increase was primarily due to higher PLR prices of $304 million and higher PLR volumes of $48 million.

Other Operation and Maintenance

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

Three MonthsNine Months
Support costs$(6)$7
Storm costs(24)(18)
Universal service rider15
Bad debts611
Act 129 Smart Meter Program24
Other16
Total$(20)$15

Depreciation

Depreciation decreased $26 million for the nine months ended September 30, 2022 compared with 2021, primarily due to decreases in software and computer hardware depreciation as a result of end-of-life retirements.

Income Taxes

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

Three MonthsNine Months
Change in pre-tax income$3$26
Depreciation not normalized(1)(3)
State deferred tax rate change (a)(9)(9)
Other(1)1
Total$(8)$15

(a)On July 8, 2022, the Governor of Pennsylvania signed into law Pennsylvania House Bill 1342 (H.B. 1342). Among other changes to the state tax code, the bill will reduce the corporate net income tax rate from 9.99% to 8.99% beginning January 1, 2023, and further reduces the rate annually by half a percentage point until the rate reaches 4.99% in 2031. The income statement impact of the corporate net income tax reduction was a deferred tax benefit of $9 million.

LG&E: Statement of Income Analysis

Statement of Income Analysis

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

Three MonthsNine Months
20222021$ Change20222021$ Change
Operating Revenues
Retail and wholesale$433$393$40$1,313$1,147$166
Electric revenue from affiliate32126188
Total Operating Revenues436395411,3391,165174
Operating Expenses
Operation
Fuel94702426520362
Energy purchases2819916210854
Energy purchases from affiliate98118162
Other operation and maintenance9897130129011
Depreciation7472222320617
Taxes, other than income1212—36342
Total Operating Expenses315278371,005857148
Other Income (Expense) - net—2(2)33—
Interest Expense2320364613
Income Taxes2117449481
Net Income$77$82$(5)$224$202$22

Operating Revenues

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

Three MonthsNine Months
Fuel and other energy prices (a)$36$116
Retail rates (b)—50
Volumes(1)15
Economic relief billing credit, net of amortization of $5, ($5)6(6)
Other—(1)
Total$41$174

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

(b)The increase for the nine months ended September 30, 2022 was due to new base rates approved by the KPSC effective July 1, 2021.

Fuel

Fuel increased $24 million and $62 million for the three and nine months ended September 30, 2022 compared with 2021, primarily due to an increase in commodity costs.

Energy Purchases

Energy purchases increased $9 million and $54 million for the three and nine months ended September 30, 2022 compared with 2021, primarily due to an increase in commodity costs.

Other Operation and Maintenance

Other operation and maintenance increased $11 million for the nine months ended September 30, 2022 compared with 2021, primarily due to a $6 million increase in storm restoration costs and a $3 million increase in bad debt expense.

Depreciation

Depreciation increased $17 million for the nine months ended September 30, 2022 compared with 2021, due to a $10 million increase driven by additional assets placed into service, net of retirements and an $8 million increase driven by higher depreciation rates effective July 1, 2021.

Income Taxes

Income taxes increased $4 million for the three months ended September 30, 2022 compared with 2021, primarily due to lower amortization of unprotected excess deferred income taxes as a result of the expiration of the economic relief billing credit in June 2022.

KU: Statement of Income Analysis

Statement of Income Analysis

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

Three MonthsNine Months
20222021$ Change20222021$ Change
Operating Revenues
Retail and wholesale$544$486$58$1,551$1,358$193
Electric revenue from affiliate98118162
Total Operating Revenues553494591,5691,374195
Operating Expenses
Operation
Fuel17412549444328116
Energy purchases65118144
Energy purchases from affiliate32126188
Other operation and maintenance115110534833612
Depreciation9694228927316
Taxes, other than income1110133312
Total Operating Expenses405346591,1581,000158
Other Income (Expense) - net211651
Interest Expense3127486815
Income Taxes2423163576
Net Income$95$99$(4)$268$241$27

Operating Revenues

The increase in operating revenues was due to:

Three MonthsNine Months
Retail rates (a)$—$55
Fuel and other energy prices (b)56130
Economic relief billing credit, net of amortization of ($1), $03(2)
Volumes(3)8
Other34
Total$59$195

(a)The increase for the nine months ended September 30, 2022 was due to new base rates approved by the KPSC effective July 1, 2021.

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

Fuel

Fuel increased $49 million and $116 million for the three and nine months ended September 30, 2022 compared with 2021, primarily due to an increase in commodity costs.

Other Operation and Maintenance

Other operation and maintenance increased $5 million for the three months ended September 30, 2022 compared with 2021, primarily due to a $2 million increase in generation maintenance expenses.

Depreciation

Depreciation increased $16 million for the nine months ended September 30, 2022 compared with 2021, primarily due to a $9 million increase driven by additional assets placed into service, net of retirements, and a $6 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:

PPLPPL ElectricLG&EKU
September 30, 2022
Cash and cash equivalents$303$22$25$25
Short-term debt510—110—
Long-term debt due within one year264250—13
Notes payable to affiliates—1422
December 31, 2021
Cash and cash equivalents$3,571$21$9$13
Short-term debt69—69—
Long-term debt due within one year474474——
Notes payable to affiliates—324294

(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.

PPLPPL ElectricLG&EKU
2022
Operating activities$1,511$498$473$556
Investing activities(5,186)(120)(273)(397)
Financing activities407(377)(184)(147)
2021
Operating activities$1,252$704$412$504
Investing activities9,078(1,256)(339)(396)
Financing activities(6,370)571(75)(122)
Change - Cash Provided (Used)
Operating activities$259$(206)$61$52
Investing activities(14,264)1,13666(1)
Financing activities6,777(948)(109)(25)

Operating Activities

The components of the change in cash provided by (used in) operating activities for the nine months ended September 30, 2022 compared with 2021 were as follows.

PPLPPL ElectricLG&EKU
Change - Cash Provided (Used)
Net income$690$75$22$27
Non-cash components(274)(45)1024
Working capital(269)(264)236
Defined benefit plan funding33211—
Other operating activities7975(5)
Total$259$(206)$61$52

(PPL)

PPL's cash provided by operating activities in 2022 increased $259 million compared with 2021.

  • Net income increased $690 million between the periods and included a decrease in non-cash charges of $274 million. The decrease in non-cash charges was primarily due to a decrease in primarily due to the loss on extinguishment of debt and the impairment of solar panels.

  • The $269 million decrease in cash from changes in working capital was primarily due to a decrease in taxes payable and a decrease in regulatory liabilities (primarily due to refunds to customers related to the transmission formula rate return on equity reduction) partially offset by an increase in accounts payable (primarily due to timing).

  • The $33 million decrease in defined benefit plan funding was primarily due to a decrease in contribution to its pension plans in 2022, as PPL's defined benefit pension plans have the option to utilize available prior year credit balances to meet current and future contribution requirements.

  • The $79 million increase in cash provided by other operating activities was primarily due to an increase in regulatory liabilities, partially offset by an increase in regulatory assets.

(PPL Electric)

PPL Electric's cash provided by operating activities in 2022 decreased $206 million compared with 2021.

  • Net income increased $75 million between the periods and included a decrease in non-cash components of $45 million. The decrease in non-cash components was primarily due to a decrease in depreciation expense (primarily related to a decrease in software and computer hardware depreciation as a result of end-of-life retirements) and a decrease in defined benefit plan income (due to an increase in net periodic pension activity).

  • The $264 million decrease in cash from changes in working capital was primarily due to a decrease in regulatory liabilities (primarily due to refunds to customers related to the transmission formula rate return on equity reduction)

and a decrease in taxes payable, partially offset by an increase in accounts receivable (primarily to do pricing), an increase in unbilled revenues (primarily due to weather and rate recovery mechanisms), and an increase in materials and supplies (primarily due to an increase in material purchasing).

  • A $21 million decrease in defined benefit plan funding was primarily due to a decrease in contributions to pension plans in 2022, as PPL Electric's defined benefit pension plans have the option to utilize available prior year credit balances to meet current and future contribution requirements.

  • The $7 million increase in cash provided by other operating activities was driven primarily by other liabilities and assets (primarily related to pension adjustments due to centralization and PPE).

(LG&E)

LG&E's cash provided by operating activities in 2022 increased $61 million compared with 2021.

  • Net income increased $22 million between the periods and included an increase in non-cash components of $10 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 increase in cash from changes in working capital was primarily due to an increase in accounts payable with affiliates (primarily due to timing of payments) partially offset by an increase in fuels, materials and supplies (primarily due to higher priced natural gas in storage).

(KU)

KU's cash provided by operating activities in 2022 increased $52 million compared with 2021.

  • Net income increased $27 million between the periods and included an increase in non-cash components of $24 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 increase in cash from changes in working capital was primarily due to an increase in accounts payable with affiliates (primarily due to timing of payments) partially offset by an increase in fuels, materials and supplies (primarily due to the accumulation of inventory for upcoming transmission and distribution projects).

Investing Activities

(All Registrants)

The components of the change in cash provided by (used in) investing activities for the nine months ended September 30, 2022 compared with 2021 were as follows.

PPLPPL ElectricLG&EKU
Change - Cash Provided (Used)
Expenditures for PP&E$(55)$59$66$3
Acquisition of Narragansett Electric, net of cash acquired(3,674)———
Proceeds from sale of discontinued operations, net of cash divested(10,560)———
Notes receivable from affiliate—1,074——
Other investing activities253—(4)
Total$(14,264)$1,136$66$(1)

For PPL, the increase in expenditures for PP&E was due to project expenditures at RIE offset by lower project expenditures at PPL Electric and LG&E. The decrease in expenditures at LG&E was primarily due to lower spending on various projects that are not individually significant.

For PPL Electric, the change in "Notes receivable from affiliate" activity resulted from payments received on the short-term note between affiliates in 2022, issued to support general corporate purposes. See Note 11 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, 2022 compared with 2021 were as follows.

PPLPPL ElectricLG&EKU
Change - Cash Provided (Used)
Debt issuance/retirement, net$4,543$(250)$300$300
Dividends3415(85)(48)
Purchase of treasury stock282———
Capital contributions/distributions, net—(705)(34)—
Retirement of term loan300———
Change in short-term debt, net1,236—262171
Retirement of commercial paper73—4132
Net increase (decrease) in notes payable with affiliate——(594)(480)
Other financing activities221—
Total$6,777$(948)$(109)$(25)

See Note 7 to the Financial Statements in this Form 10-Q for information on 2022 short-term and long-term debt activity, equity transactions and PPL dividends. See Note 8 to the Financial Statements in the Registrants' 2021 Form 10-K for information on 2021 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 except for borrowings under PPL Electric's, LG&E's, and KU's term loan agreements, which are reflected in "Long-term debt" on the Balance Sheets. At September 30, 2022, the total committed borrowing capacity under credit facilities and the borrowings under these facilities were:

External

Committed CapacityBorrowedLetters of Credit and Commercial Paper IssuedUnused Capacity
PPL Capital Funding Credit Facilities$1,350$—$400$950
PPL Electric Credit Facility9002501649
LG&E Credit Facilities800300110390
KU Credit Facilities700300—400
Total Credit Facilities (a)$3,750$850$511$2,389

(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 - 14%, PPL Electric - 18%, LG&E - 19% and KU - 21%.

See Note 7 to the Financial Statements for further discussion of the Registrants' credit facilities.

Intercompany (LG&E and KU)

Committed CapacityBorrowedCommercial Paper IssuedUnused Capacity
LG&E Money Pool (a)$750$14$110$626
KU Money Pool (a)65022—628

(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 issued, 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 11 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, 2022:

CapacityCommercial Paper IssuancesUnused Capacity
PPL Capital Funding$1,350$400$950
PPL Electric650—650
LG&E500110390
KU400—400
Total PPL$2,900$510$2,390

Long-term Debt (All Registrants)

See Note 7 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. In 2021, PPL repurchased approximately $1 billion of PPL common shares. There were no share repurchases during the three and nine months ended September 30, 2022. Any additional amounts to be repurchased pursuant to this authority will depend on various factors, including PPL’s share price and market conditions. PPL may purchase shares on each trading day subject to market conditions and principles of best execution.

See Note 7 to the Financial Statements for information regarding the Registrants’ equity securities activities.

Forecasted Uses of Cash

(PPL)

Capital Expenditures

PPL updated its capital expenditure plan to include RIE upon completion of the acquisition. PPL currently anticipates capital expenditures for RIE of $450 million in 2022, including approximately $275 million under PPL's ownership since the closing of the acquisition. For the period 2023 through 2024, PPL currently anticipates capital expenditures for RIE of up to approximately $1.3 billion.

Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.

Contractual Obligations

PPL has assumed various financial obligations and commitments related to the acquisition of RIE. At September 30, 2022, estimated contractual cash obligations for RIE were as follows:

Total20222023-20242025-2026After 2026
RIE
Long-term Debt (a)$1,503$1$2$1$1,499
Interest on Long-term Debt (b)75516123123493
Operating Leases2421066
Unconditional Power Purchase Obligations1,07530041375287
Total Contractual Cash Obligations$3,357$319$548$205$2,285

(a)Reflects principal maturities based on stated maturity or earlier put dates. See Note 7 to the Financial Statements for more information.

(b)Assumes interest payments through stated maturity or earlier put dates.

Common Stock Dividends

In August 2022, PPL declared a quarterly common stock dividend, payable October 3, 2022, of 22.5 cents per share. 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 2022:

(PPL)

In June 2022, Moody’s affirmed its commercial paper rating for PPL Capital Funding and upgraded the following ratings with a stable outlook:

  • the long-term issuer rating from Baa2 to Baa1 for PPL;

  • the senior unsecured rating from Baa2 to Baa1 for PPL Capital Funding;

  • the junior subordinated rating from Baa3 to Baa2 for PPL Capital Funding; and

  • the senior unsecured bank credit facility rating from Baa2 to Baa1 for PPL Capital Funding.

In June 2022, Moody’s upgraded the following ratings with a stable outlook:

  • the long-term issuer rating from Baa1 to A3 for Narragansett Electric Company;

  • the senior unsecured rating from Baa1 to A3 for Narragansett Electric Company; and

  • the preferred stock rating from Baa3 to Baa2 for Narragansett Electric Company.

In June 2022, S&P upgraded the following ratings with a stable outlook:

  • the long-term issuer rating from BBB+ to A- for Narragansett Electric Company;

  • the senior unsecured rating from BBB+ to A- for Narragansett Electric Company; and

  • the preferred stock rating from BBB- to BBB for Narragansett Electric Company.

(PPL and PPL Electric)

In May 2022, S&P upgraded the following ratings with a stable outlook for PPL Electric:

  • the long-term issuer credit rating from A- to A;

  • the issue-level senior secured rating from A to A+; and

  • the short-term and commercial paper ratings from A-2 to A-1.

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 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral requirements for PPL for derivative contracts in a net liability position at September 30, 2022.

(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' 2021 Form 10-K.

Risk Management (All Registrants)

Market Risk

See Notes 13 and 14 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, 2022.

Exposure HedgedFair Value, Net - Asset (Liability) (a)Effect of a 10% Adverse Movement in Rates (b)Maturities Ranging Through
PPL and LG&E
Economic hedges
Interest rate swaps (c)$64$(7)$(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 the fair value of debt and interest expense at September 30, 2022 is shown below.

10% Adverse Movement in Rates on Fair Value of Debt10% Adverse Movement in Rates on Interest Expense for Floating Exposure
PPL$497$11
PPL Electric1794
LG&E842
KU1261

Commodity Price Risk

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

  • PPL Electric is required to purchase electricity to fulfill its obligation as a PLR. Potential commodity price risk is mitigated through its PAPUC-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.

  • RIE utilizes derivative instruments pursuant to its RIPUC-approved plan to manage commodity price risk associated with its natural gas purchases. RIE's commodity risk management strategy is to reduce fluctuations in firm gas sales prices to its customers. RIE's costs associated with derivatives instruments are generally recoverable through its RIPUC- approved cost recovery mechanism. RIE is required to purchase electricity to fulfill its obligation to provide Last Resort Service (LRS). Potential commodity price risk is mitigated through its RIPUC-approved cost recovery mechanisms and full requirements service agreements to serve LRS customers, which transfer the risk to energy suppliers. RIE is required to contract through long-term agreements for clean energy supply under the Rhode Island Renewable Energy Growth program and Long-term Clean Energy Standard. Potential commodity price risk is mitigated through its RIPUC-approved cost recovery mechanisms, which true-up cost differences between contract prices and market prices.

(All Registrants)

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:

  • 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.

  • RIE is exposed to volumetric risk, which is significantly mitigated by regulatory mechanisms. RIE's electric and gas distribution rates both have a revenue decoupling mechanism, which allows for annual adjustments to RIE's delivery rates.

Inflation and Supply Chain Related Risk

PPL and its subsidiaries continue to monitor the impact of inflation and supply chain disruptions. PPL and its subsidiaries monitor the cost of fuel, construction, regulatory and environmental compliance costs and other costs. Mechanisms are in place to mitigate the risk of inflationary effects and supply chain disruptions, to the extent possible, but increased costs and supply chain disruptions may directly or indirectly affect our ongoing operations. These mechanisms include pricing strategies, productivity improvements and cost reductions in order to ensure that the Registrants are able to procure the necessary materials and other resources needed to maintain services in a safe and reliable manner, and to grow infrastructure consistent with the capital expenditure plan. For additional information see "Forward-looking Information” at the beginning of this report and “Item 1A. Risk Factors" of the Registrants' 2021 Form 10-K.

Credit Risk

See Notes 13 and 14 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' 2021 Form 10-K 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 11 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 8 to the Financial Statements for additional information on the share purchase agreement to acquire Narragansett Electric.

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 expected to be 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' 2021 Form 10-K for information about environmental laws and regulations affecting the Registrants' business. See "Legal Matters" in Note 10 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' 2021 Form 10-K for information on projected environmental capital expenditures for 2022 through 2024. See Note 15 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' 2021 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), aimed at ensuring compliance with the 2008 ozone NAAQS and 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. In February 2022, the EPA Administrator released a proposed Federal Implementation Plan under the Good Neighbor provisions of the Clean Air Act providing for significant additional nitrogen oxide emission reductions for compliance with the revised 2015 ozone NAAQS. The proposed reductions in Kentucky state-wide nitrogen oxide budgets are scheduled to commence in 2023, with the largest reductions planned for 2026, based on the installation time frame for certain selective catalytic reduction controls, subject to future specific allowance calculations. PPL, LG&E and KU are currently assessing the potential impact of the proposed Good Neighbor Plan revisions on operations. The current and proposed rules provide for reduced availability of NOx allowances that have historically permitted operational flexibility for fossil units and could potentially result in constraints that may require implementation of additional emission

controls or accelerate implementation of lower emission generation technologies. 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, Good Neighbor Plan, 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. On June 30, 2022, the Supreme Court ruled that provisions of the EPA's Clean Power Plan, premised on generation shifting from coal-fired plants to lower emitting natural gas-fired plants and renewables, exceeded the authority granted to the EPA under the Clean Air Act. The EPA has announced that it plans on issuing new greenhouse gas rules in the future. It is uncertain how the Supreme Court ruling may impact future EPA rulemaking. All of these developments 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 2022 and there is no new significant accounting guidance pending adoption as of September 30, 2022.

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' 2021 Form 10-K for a discussion of each critical accounting policy.

PPL
PPLElectricLG&EKU
Defined BenefitsXXXX
Income TaxesXXXX
Regulatory Assets and LiabilitiesXXXX
Goodwill ImpairmentXXX
AROsXX
Revenue Recognition - Unbilled RevenueXXX

Following is an update to the critical accounting policies disclosed in PPL's 2021 Form 10-K attributable to the acquisition of RIE.

(PPL)

Price Risk Management

See "Financial Condition - Risk Management" above.

Revenue Recognition - Unbilled Revenues

For RIE, revenues related to the sale of energy are recorded when service is rendered or when energy is delivered to customers. Because customers are billed on cycles which vary based on the timing of actual meter reads taken throughout the month, estimates are recorded for unbilled revenues at the end of each reporting period. Such unbilled revenue amounts reflect estimates of deliveries to customers since the date of the last reading of their meters. The unbilled revenue estimates reflect consideration of factors including daily load models, estimated usage for each customer class, the effect of current and different rate schedules, the meter read schedule, the billing schedule, actual weather data, and, where applicable, the impact of weather normalization or other regulatory provisions of rate structures.

PPL Corporation

PPL Electric Utilities Corporation

Louisville Gas and Electric Company

Kentucky Utilities Company

Previous: Item 1. Financial Statements · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk