PPL Corp

5. Income and Other Taxes

(All Registrants)

Tax Cuts and Jobs Act (TCJA)

On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the taxation of corporations, including provisions specifically applicable to regulated public utilities. The more significant changes that impact the Registrants are:


•	The reduction in the U.S. federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, effective January 1, 2018;


•	The exclusion from U.S. federal taxable income of dividends from foreign subsidiaries and the associated "transition tax;"


•	Limitations on the tax deductibility of interest expense, with an exception to these limitations for regulated public utilities;


•	Full current year expensing of capital expenditures with an exception for regulated public utilities that qualify for the exception to the interest expense limitation; and


•	The continuation of certain rate normalization requirements for accelerated depreciation benefits. For non-regulated businesses, the TCJA generally provides for full expensing of property acquired after September 27, 2017.

Under GAAP, the tax effect of changes in tax laws must be recognized in the period in which the law is enacted, or December 2017 for TCJA. The changes enacted by the TCJA were recorded as an adjustment to the Registrants' deferred tax provision, and have been reflected in "Income Taxes" on the Statement of Income for the year ended December 31, 2017 as follows:



	PPL		PPL Electric			LKE		LG&E		KU
Income tax expense (benefit)	$	321	$	(13	)	$	112	$	—	$	—

The components of these adjustments are discussed below:

Reduction of U.S. Federal Corporate Income Tax Rate

GAAP requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Registrants' deferred taxes were remeasured based upon the new U.S. federal corporate income tax rate of 21%. For PPL’s regulated entities, the changes in deferred taxes were, in large part, recorded as an offset to either a regulatory asset or regulatory liability and will be reflected in future rates charged to customers. The rate reduction on non-regulated deferred tax assets and liabilities were recorded as an adjustment to the Registrants' deferred tax provision, and have been reflected in "Income Taxes" on the Statement of Income for the year ended December 31, 2017 as follows:



	PPL		PPL Electric			LKE		LG&E		KU
Income tax expense (benefit)	$	220	$	(13	)	$	112	$	—	$	—

As indicated in Note 1 - "Summary of Significant Accounting Policies - Income Taxes", PPL’s U.S. regulated operations' accounting for income taxes are impacted by rate regulation. Therefore, reductions in accumulated deferred income tax balances due to the reduction in the U.S. federal corporate income tax rate to 21% under the provisions of the TCJA may result in amounts previously collected from utility customers for these deferred taxes to be refundable to such customers over a period of time. The TCJA includes provisions that stipulate how these excess deferred taxes are to be passed back to customers for certain accelerated tax depreciation benefits. Potential refunds of other deferred taxes will be determined by the Registrants’ regulators. The Balance Sheets at December 31, 2017 reflect the increase to the Registrants' net regulatory liabilities as a result of the TCJA as follows:



	PPL		PPL Electric		LKE		LG&E		KU
Net Increase in Regulatory Liabilities	$	2,185	$	1,019	$	1,166	$	532	$	634

Prior to the TCJA, PPL Electric had recorded a net regulatory asset related to taxes recoverable on certain property related deferred taxes, the tax benefit of which was received by the customer. The net regulatory asset represents the future taxes owed in excess of taxes paid by the customer to date, with an additional tax gross-up. As a result of the U.S. federal corporate income tax rate reduction enacted by the TCJA, the future taxes expected to be due are now less than taxes funded through rates, resulting in a net regulatory liability.

Transition Tax

The TCJA included a conversion from a worldwide tax system to a territorial tax system, effective January 1, 2018. In the transition to the territorial regime, a one-time transition tax was imposed on PPL’s unrepatriated accumulated foreign earnings in 2017. These earnings were treated as a taxable deemed dividend to PPL of approximately $462 million. As the PPL consolidated U.S. group had a taxable loss for 2017, inclusive of the taxable deemed dividend, the foreign tax credits associated with the deemed dividend were recorded as a deferred tax asset. However, it is expected that under the TCJA, the current and prior year foreign tax credit carryforwards will not be fully realizable.

As a result, the net deferred income tax expense impact of the deemed repatriation was $101 million and was recorded in "Income Taxes" on the PPL Statement of Income for the year ended December 31, 2017 and "Deferred tax liabilities" on the PPL Balance Sheet at December 31, 2017.

SEC Guidance on Accounting for TCJA

On December 22, 2017, the SEC issued guidance for accounting for income taxes in the event that information is not available or is incomplete for purposes of reflecting the impact of the TCJA. The SEC guidance provides a period of up to one year (the measurement period) to complete the analysis and accounting to properly reflect the TCJA. The SEC guidance provides a three-step process that companies should apply to each reporting period within the measurement period:


1.	A company should record the effects of the TCJA for which the accounting is complete.


2.	A company should report provisional amounts (or adjustments to provisional amounts) for the effects of the TCJA for which the accounting is not complete, but for which a reasonable estimate can be determined. Provisional amounts and any related adjustments to such provisional amounts should be recorded to income tax expense through continuing operations in the period they are identified.


3.	A company should continue to apply GAAP based on the tax law in effect just prior to enactment of TCJA if a reasonable estimate of the specific effect of the TCJA cannot be made.

The measurement period ends at the earlier of the time the company finalizes its accounting for the impact of the TCJA or one year.

The Registrants have completed or made reasonable estimates of the effects of the TCJA and reflected these amounts in their December 31, 2017 financial statements. The Registrants continue to evaluate the application of the TCJA and have made certain assumptions concerning the application of various components of the law in the calculation of 2017 income tax expense. The current and deferred components of the income tax expense calculations that the Registrants consider provisional within the meaning of the SEC guidance due to uncertainty either with respect to the technical application of the law or the quantification of the impact of the law include (but are not limited to): tax depreciation, deductible executive compensation, and the accumulated foreign earnings used to calculate the deemed dividend included in PPL’s taxable income in 2017 along with the impact of associated foreign tax credits and related valuation allowances. The Registrants believe that classification of these items as provisional is appropriate. The Registrants have accounted for these items based on their interpretation of the TCJA.

Further interpretive guidance on the TCJA from the IRS, Treasury, the Joint Committee on Taxation through its “Blue Book” or from Congress in the form of Technical Corrections may differ from the Registrants' interpretation of the TCJA.

(PPL)

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



	2017		2016		2015
Domestic income	$	874	$	1,463	$	968
Foreign income	1,038		1,087		1,100
Total	$	1,912	$	2,550	$	2,068

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards. The provision for PPL's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles of the applicable jurisdiction. See Notes 1 and 6 for additional information.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the U.S. and the U.K.

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



	2017 (a)			2016
Deferred Tax Assets
Deferred investment tax credits	$	33		$	51
Regulatory liabilities	62			94
Income taxes due to customer (b)	499			—
Accrued pension costs	159			250
Federal loss carryforwards	356			565
State loss carryforwards	409			326
Federal and state tax credit carryforwards	455			256
Foreign capital loss carryforwards	329			302
Foreign loss carryforwards	2			3
Foreign - pensions	(32		)	41
Foreign - regulatory obligations	2			6
Foreign - other	7			5
Contributions in aid of construction	134			141
Domestic - other	104			188
Unrealized losses on qualifying derivatives	10			20
Valuation allowances	(838		)	(593		)
Total deferred tax assets	1,691			1,655

Deferred Tax Liabilities
Domestic plant - net (b)	3,168			4,325
Taxes recoverable through future rates (b)	—			170
Regulatory assets	211			343
Reacquired debt costs	15			25
Foreign plant - net	726			640
Domestic - other	9			14
Total deferred tax liabilities	4,129			5,517
Net deferred tax liability	$	2,438		$	3,862


(a)	Deferred tax assets and liabilities at December 31, 2017 reflect the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.


(b)	The impact on net deferred tax liabilities as a result of the U.S. federal corporate income tax rate reduction enacted by the TCJA is primarily related to plant (net of net operating losses) and resulted in a regulatory liability for income taxes due to customers, the deferred tax impact of which is reflected as a deferred tax asset.

State deferred taxes are determined on a by entity, by jurisdiction basis. As a result, $24 million and $27 million of net deferred tax assets are shown as "Other noncurrent assets" on the Balance Sheets for 2017 and 2016.

At December 31, 2017, PPL had the following loss and tax credit carryforwards, related deferred tax assets and valuation allowances recorded against the deferred tax assets.



	Gross		Deferred Tax Asset		Valuation Allowance			Expiration
Loss carryforwards
Federal net operating losses (a)	$	1,662	$	349	$	—		2029-2037
Federal charitable contributions (a)	36		7		—			2020-2022
State net operating losses (a)	5,512		407		(348		)	2018-2037
State charitable contributions (a)	26		2		—			2018-2022
Foreign net operating losses	10		2		—			Indefinite
Foreign capital losses	1,938		329		(329		)	Indefinite



Credit carryforwards
Federal investment tax credit	133	—		2025-2036
Federal alternative minimum tax credit (b)	30	—		Indefinite
Federal foreign tax credits (c)	267	(148	)	2024-2027
Federal - other	24	(8	)	2019-2037
State - other	1	—		Indefinite


(a)	Due to the enactment of the TCJA, deferred tax assets are reflected at the new U.S. federal corporate income tax rate of 21%.


(b)	The TCJA repealed the corporate alternative minimum tax (AMT) for tax years beginning after December 31, 2017. The existing indefinite carryforward period for AMT credits was retained.


(c)	Includes $62 million of foreign tax credits carried forward from 2016 and $205 million of additional foreign tax credits in 2017 related to the taxable deemed dividend associated with the TCJA.

Valuation allowances have been established for the amount that, more likely than not, will not be realized. The changes in deferred tax valuation allowances were as follows:



			Additions
	Balance at Beginning of Period		Charged to Income			Charged to Other Accounts			Deductions			Balance at End of Period
2017	$	593	$	256	(a)	$	—		$	11		$	838
2016	662		17			2			88		(b)	593
2015	622		24			77		(c)	61		(b)	662


(a)	Increase in valuation allowance of approximately $145 million related to expected future utilization of both 2017 foreign tax credits and pre-2017 foreign tax credits carried forward. For additional information, see the "Reconciliation of Income Tax Expense" and associated notes below.

In addition, the reduction of the U.S. federal corporate income tax rate enacted by the TCJA in 2017 resulted in a $62 million increase in federal deferred tax assets and a corresponding valuation allowance related to the federal tax benefits of state net operating losses.

(b)

The reductions of the U.K. statutory income tax rates in 2016 and 2015 resulted in $19 million and $44 million in reductions in the deferred tax assets and corresponding valuation allowances. See "Reconciliation of Income Tax Expense" below for more information on the impact of the U.K. Finance Acts 2016 and 2015. In addition, the deferred tax assets and corresponding valuation allowances were reduced in 2016 by approximately $65 million due to the effect of foreign currency exchange rates.


(c)	Valuation allowance related to the deferred tax assets previously reflected on the PPL Energy Supply Segment. The deferred tax assets and related valuation allowance remained with PPL after the spinoff.

PPL Global does not record U.S. income taxes on the unremitted earnings of WPD, as management has determined that such earnings are indefinitely reinvested. Current year distributions from WPD to the U.S. are sourced from a portion of the current year’s earnings of the WPD group. As noted above, the TCJA includes a conversion from a worldwide tax system to a territorial tax system, effective January 1, 2018. In the transition to the territorial regime, a one-time transition tax was imposed on PPL’s unrepatriated accumulated foreign earnings in 2017. These earnings were treated as a taxable deemed dividend from the U.K. The total amount of the taxable deemed dividend was approximately $462 million, including $205 million of foreign tax credits. The U.S. tax consequences of the deemed dividend have been recorded in PPL’s 2017 tax provision and are explained below. Despite this 2017 deemed dividend, there have been no material changes to the facts underlying PPL’s assertion that historically reinvested earnings of WPD as well as some portion of current year earnings will continue to be indefinitely reinvested. WPD's long-term working capital forecasts and capital expenditure projections for the foreseeable future require reinvestment of WPD's undistributed earnings. Additionally, U.S. long-term working capital forecasts and capital expenditure projections for the foreseeable future do not require or contemplate annual distributions from WPD in excess of some portion of WPD's future annual earnings. The cumulative undistributed earnings are included in "Earnings reinvested" on the Balance Sheets. The amount considered indefinitely reinvested at December 31, 2017 was $6.0 billion. It is not practicable to estimate the amount of additional taxes that could be payable on these foreign earnings in the event of repatriation to the U.S.

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



	2017		2016			2015
Income Tax Expense (Benefit)
Current - Federal	$	6	$	(14	)	$	(26	)
Current - State	25		21			25
Current - Foreign	45		80			89
Total Current Expense	76		87			88
Deferred - Federal (a)	532		385			699
Deferred - State	88		89			68
Deferred - Foreign	133		86			41
Total Deferred Expense, excluding operating loss carryforwards	753		560			808



	2017			2016			2015
Income Tax Expense (Benefit)

Amortization of investment tax credit	(3		)	(3		)	(4		)
Tax expense (benefit) of operating loss carryforwards
Deferred - Federal (b)	(16		)	25			(396		)
Deferred - State	(26		)	(21		)	(31		)
Total Tax Expense (Benefit) of Operating Loss Carryforwards	(42		)	4			(427		)
Total income taxes from continuing operations	$	784		$	648		$	465

Total income tax expense - Federal	$	519		$	393		$	273
Total income tax expense - State	87			89			62
Total income tax expense - Foreign	178			166			130
Total income taxes from continuing operations	$	784		$	648		$	465


(a)	Due to the enactment of the TCJA in 2017, PPL recorded the following:


•	$220 million of deferred income tax expense related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on deferred tax assets and liabilities;


•	$162 million of deferred tax expense related to the utilization of current year losses resulting from the taxable deemed dividend; partially offset by,


•	$60 million of deferred tax benefits related to the $205 million of 2017 foreign tax credits partially offset by $145 million of valuation allowances.


(b)	Increase in federal loss carryforwards for 2015 primarily relates to the extension of bonus depreciation and the impact of bonus depreciation related to provision to return adjustments.

In the table above, the following income tax expense (benefit) are excluded from income taxes from continuing operations:



	2017			2016			2015
Discontinued operations - PPL Energy Supply Segment	$	—		$	—		$	(30	)
Stock-based compensation recorded to Earnings Reinvested	—			(7		)	—
Other comprehensive income	(34		)	(6		)	(2		)
Valuation allowance on state deferred taxes recorded to other comprehensive income	(1		)	1			(4		)
Total	$	(35	)	$	(12	)	$	(36	)



	2017			2016			2015
Reconciliation of Income Tax Expense
Federal income tax on Income from Continuing Operations Before Income Taxes at statutory tax rate - 35%	$	669		$	893		$	724
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	46			46			31
Valuation allowance adjustments (a)	36			16			24
Impact of lower U.K. income tax rates (b)	(176		)	(177		)	(176		)
U.S. income tax on foreign earnings - net of foreign tax credit (c)	47			(42		)	8
Federal and state tax reserves adjustments (d)	—			—			(22		)
Foreign income return adjustments	(8		)	2			—
Impact of the U.K. Finance Acts on deferred tax balances (b)	(16		)	(49		)	(91		)
Depreciation not normalized	(10		)	(10		)	(5		)
Interest benefit on U.K. financing entities	(16		)	(17		)	(20		)
Stock-based compensation (e)	(3		)	(10		)	—
Deferred tax impact of U.S. tax reform (f)	220			—			—
Other	(5		)	(4		)	(8		)
Total increase (decrease)	115			(245		)	(259		)
Total income taxes from continuing operations	$	784		$	648		$	465
Effective income tax rate	41.0		%	25.4		%	22.5		%


(a)	During 2017, PPL recorded an increase in valuation allowances of $23 million primarily related to foreign tax credits recorded in 2016. The future utilization of these credits is expected to be lower as a result of the TCJA.

During 2017 and 2016, PPL recorded deferred income tax expense of $16 million and $13 million for valuation allowances primarily related to increased Pennsylvania net operating loss carryforwards expected to be unutilized.

During 2015, PPL recorded $24 million of deferred income tax expense related to deferred tax valuation allowances. PPL recorded state deferred income tax expense of $12 million primarily related to increased Pennsylvania net operating loss carryforwards expected to be unutilized and $12 million of federal deferred income tax expense primarily related to federal tax credit carryforwards that are expected to expire as a result of lower future taxable earnings due to the extension of bonus depreciation.


(b)	The U.K. Finance Act 2016, enacted in September 2016, reduced the U.K. statutory income tax rate effective April 1, 2020 from 18% to 17%. As a result, PPL reduced its net deferred tax liabilities and recognized a $42 million deferred income tax benefit during 2016.

The U.K. Finance Act 2015, enacted in November 2015, reduced the U.K. statutory income tax rate from 20% to 19% effective April 1, 2017 and from 19% to 18% effective April 1, 2020. As a result, PPL reduced its net deferred tax liabilities and recognized a $90 million deferred income tax benefit during 2015, related to both rate decreases.


(c)	During 2017, PPL recorded a federal income tax benefit of $35 million primarily attributable to U.K. pension contributions.

During 2017, PPL recorded deferred income tax expense of $83 million primarily related to enactment of the TCJA. The enacted tax law included a conversion from a worldwide tax system to a territorial tax system, effective January 1, 2018. In the transition to the territorial regime, a one-time transition tax was imposed on PPL’s unrepatriated accumulated foreign earnings in 2017. These earnings were treated as a taxable deemed dividend to PPL of approximately $462 million, including $205 million of foreign tax credits. As the PPL consolidated U.S. group had a taxable loss for 2017, inclusive of the taxable deemed dividend, these credits were recorded as a deferred tax asset. However, it is expected that under the TCJA, only $83 million of the $205 million of foreign tax credits will be realized in the carry forward period. Accordingly, a valuation allowance on the current year foreign tax credits in the amount of $122 million has been recorded to reflect the reduction in the future utilization of the credits. The foreign tax credits associated with the deemed repatriation result in a gross carryforward and corresponding deferred tax asset of $205 million offset by a valuation allowance of $122 million.

During 2016, PPL recorded lower income taxes primarily attributable to foreign tax credit carryforwards, arising from a decision to amend prior year tax returns to claim foreign tax credits rather than deduct foreign taxes. This decision was prompted by changes to the Company's most recent business plan.


(d)	During 2015, PPL recorded a $9 million income tax benefit related to a planned amendment of a prior period tax return and a $12 million income tax benefit related to the settlement of the IRS audit for the tax years 1998-2011.


(e)	During 2016, PPL recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 1 for additional information.


(f)	During 2017, PPL recorded deferred income tax expense related to the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.



	2017			2016		2015
Taxes, other than income
State gross receipts (a)	$	102		$	100	$	89
State capital stock	(6		)	—		—
Foreign property	127			135		148
Domestic Other	69			66		62
Total	$	292		$	301	$	299


(a)	In 2015, the settlement of a 2011 gross receipts tax audit resulted in the reversal of $17 million of previously recognized reserves.

(PPL Electric)

The provision for PPL Electric's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles reflected in rates established by the PUC and the FERC. The difference in the provision for deferred income taxes for regulated assets and liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

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



	2017 (a)		2016
Deferred Tax Assets
Accrued pension costs	$	63	$	107
Contributions in aid of construction	117		112
Regulatory liabilities	25		34
Income taxes due to customers (b)	193		—
State loss carryforwards	19		22
Federal loss carryforwards	91		147
Other	45		81
Total deferred tax assets	553		503

Deferred Tax Liabilities
Electric utility plant - net (b)	1,544		2,001
Taxes recoverable through future rates (b)	—		141
Reacquired debt costs	8		15
Regulatory assets	150		240
Other	5		5
Total deferred tax liabilities	1,707		2,402
Net deferred tax liability	$	1,154	$	1,899


(a)	Deferred tax assets and liabilities at December 31, 2017 reflect the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.


(b)	The impact on net deferred tax liabilities as a result of the U.S. federal tax rate reduction enacted by the TCJA is primarily related to plant (net of net operating losses) and resulted in a regulatory liability for income taxes due to customers, the deferred tax impact of which is reflected as a deferred tax asset.

At December 31, 2017, PPL Electric had the following loss carryforwards and related deferred tax assets:



	Gross		Deferred Tax Asset		Expiration
Loss carryforwards (a)
Federal net operating losses	$	426	$	89	2031-2037
Federal charitable contributions	8		2		2020-2022
State net operating losses	233		18		2030-2032
State charitable contributions	13		1		2018-2022


(a)	Due to the enactment of the TCJA, deferred tax assets are reflected at the new U.S. federal corporate income tax rate of 21%.

Credit carryforwards were insignificant at December 31, 2017.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were as follows.



	2017			2016			2015
Income Tax Expense (Benefit)
Current - Federal	$	(65	)	$	(29	)	$	(80	)
Current - State	20			19			23
Total Current Expense (Benefit)	(45		)	(10		)	(57		)
Deferred - Federal (a)	234			193			287
Deferred - State	29			29			12
Total Deferred Expense, excluding operating loss carryforwards	263			222			299



	2017			2016		2015
Amortization of investment tax credit	—			—		—
Tax expense (benefit) of operating loss carryforwards
Deferred - Federal	(5		)	—		(75		)
Deferred - State	—			—		(3		)
Total Tax Expense (Benefit) of Operating Loss Carryforwards	(5		)	—		(78		)
Total income tax expense	$	213		$	212	$	164

Total income tax expense - Federal	$	164		$	164	$	132
Total income tax expense - State	49			48		32
Total income tax expense	$	213		$	212	$	164


(a)	Due to the enactment of the TCJA in 2017, PPL Electric recorded a $13 million deferred tax benefit related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on deferred tax assets and liabilities.



	2017			2016			2015
Reconciliation of Income Taxes
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%	$	201		$	193		$	146
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	36			36			25
Depreciation not normalized	(8		)	(8		)	(4		)
Stock-based compensation (a)	(2		)	(6		)	—
Deferred tax impact of U.S. tax reform (b)	(13		)	—			—
Other	(1		)	(3		)	(3		)
Total increase (decrease)	12			19			18
Total income tax expense	$	213		$	212		$	164
Effective income tax rate	37.0		%	38.4		%	39.4		%


(a)	During 2016, PPL Electric recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 1 for additional information.


(b)	During 2017, PPL Electric recorded a deferred tax benefit related to the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.



	2017		2016		2015
Taxes, other than income
State gross receipts (a)	$	102	$	100	$	89
Property and other	5		5		5
Total	$	107	$	105	$	94


(a)	In 2015, the settlement of a 2011 gross receipts tax audit resulted in the reversal of $17 million of previously recognized reserves.

(LKE)

The provision for LKE's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles reflected in rates established by the KPSC, VSCC and the FERC. The difference in the provision for deferred income taxes for regulated assets and liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

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



	2017 (a)			2016
Deferred Tax Assets
Federal loss carryforwards	$	150		$	248
State loss carryforwards	41			35
Federal tax credit carryforwards	181			186
Contributions in aid of construction	17			29
Regulatory liabilities	37			60
Accrued pension costs	29			58
Income taxes due to customers (b)	305			15
Deferred investment tax credits	33			51
Derivative liability	7			12
Other	26			49
Valuation allowances	(8		)	(11		)
Total deferred tax assets	818			732

Deferred Tax Liabilities
Plant - net (b)	1,615			2,352
Regulatory assets	61			102
Other	8			13
Total deferred tax liabilities	1,684			2,467
Net deferred tax liability	$	866		$	1,735


(a)	Deferred tax assets and liabilities at December 31, 2017 reflect the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.


(b)	The impact on net deferred tax liabilities as a result of the U.S. federal tax rate reduction enacted by the TCJA is primarily related to plant (net of net operating losses) and resulted in a regulatory liability for income taxes due to customers, the deferred tax impact of which is reflected as a deferred tax asset.

At December 31, 2017, LKE had the following loss and tax credit carryforwards, related deferred tax assets, and valuation allowances recorded against the deferred tax assets.



	Gross		Deferred Tax Asset		Valuation Allowance		Expiration
Loss carryforwards (a)
Federal net operating losses	$	713	$	150	$	—	2028-2037
Federal charitable contributions	14		3		—		2020-2022
State net operating losses	874		41		—		2028-2037



Credit carryforwards
Federal investment tax credit	133	—		2025-2036
Federal alternative minimum tax credit (b)	27	—		Indefinite
Federal - other	21	(8	)	2019-2037
State - other	1	—		Indefinite


(a)	Due to the enactment of the TCJA, deferred tax assets are reflected at the new U.S. federal corporate income tax rate of 21%.


(b)	The TCJA repealed the corporate alternative minimum tax (AMT) for tax years beginning after December 31, 2017. The existing indefinite carryforward period for AMT credits was retained.

Changes in deferred tax valuation allowances were:



	Balance at Beginning of Period		Additions			Deductions			Balance at End of Period
2017	$	11	$	4	(a)	$	7	(b)	$	8
2016	12		—			1		(b)	11
2015	—		12		(c)	—			12


(a)	Federal tax credits expiring in 2021 that are more likely than not to expire before being utilized.


(b)	Federal tax credit expiring.


(c)	Federal tax credits expiring in 2016 through 2020 that are more likely than not to expire before being utilized.



	2017			2016			2015
Income Tax Expense (Benefit)
Current - Federal	$	74		$	(36	)	$	2
Current - State	6			1			1
Total Current Expense (Benefit)	80			(35		)	3
Deferred - Federal (a)	268			248			405
Deferred - State	32			38			32
Total Deferred Expense, excluding benefits of operating loss carryforwards	300			286			437
Amortization of investment tax credit - Federal	(3		)	(3		)	(3		)
Tax benefit of operating loss carryforwards
Deferred - Federal	(2		)	10			(198		)
Deferred - State	—			(1		)	—
Total Tax Expense (Benefit) of Operating Loss Carryforwards	(2		)	9			(198		)
Total income tax expense from continuing operations (b)	$	375		$	257		$	239

Total income tax expense - Federal	$	337		$	219		$	206
Total income tax expense - State	38			38			33
Total income tax expense from continuing operations (b)	$	375		$	257		$	239


(a)	Due to the enactment of the TCJA in 2017, LKE recorded $112 million of deferred income tax expense, of which $108 million related to the impact of the U.S. federal corporate income tax rate reduction from 35% to 21% on deferred tax assets and liabilities and $4 million related to valuation allowances on tax credits expiring in 2021.


(b)	Excludes deferred federal and state tax expense (benefit) recorded to OCI of $(10) million in 2017, $(16) million in 2016 and less than $(1) million in 2015.



	2017			2016			2015
Reconciliation of Income Taxes
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%	$	242		$	240		$	211
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	25			25			22
Amortization of investment tax credit	(3		)	(3		)	(3		)
Valuation allowance adjustment (a)	—			—			12
Stock-based compensation (b)	1			(3		)	—
Deferred tax impact of U.S. tax reform (c)	112			—			—
Other	(2		)	(2		)	(3		)
Total increase	133			17			28
Total income tax expense	$	375		$	257		$	239
Effective income tax rate	54.3		%	37.5		%	39.6		%


(a)	Represents a valuation allowance against tax credits expiring through 2020 that are more likely than not to expire before being utilized.


(b)	During 2016, LKE recorded lower income tax expense related to the application of new stock-based compensation accounting guidance. See Note 1 for additional information.


(c)	During 2017, LKE recorded deferred income tax expense primarily due to the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.



	2017		2016		2015
Taxes, other than income
Property and other	$	65	$	62	$	57
Total	$	65	$	62	$	57

(LG&E)

The provision for LG&E's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles reflected in rates established by the KPSC and the FERC. The difference in the provision for deferred income taxes for regulated assets and liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

Significant components of LG&E's deferred income tax assets and liabilities were as follows:



	2017 (a)		2016
Deferred Tax Assets
Federal loss carryforwards	$	29	$	80
Contributions in aid of construction	11		18
Regulatory liabilities	21		34
Deferred investment tax credits	9		14
Income taxes due to customers (b)	142		17
Derivative liability	7		12
Other	12		17
Total deferred tax assets	231		192

Deferred Tax Liabilities
Plant - net (b)	724		1,058
Regulatory assets	40		65
Accrued pension costs	34		35
Other	5		8
Total deferred tax liabilities	803		1,166
Net deferred tax liability	$	572	$	974


(a)	Deferred tax assets and liabilities at December 31, 2017 reflect the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.


(b)	The impact on net deferred tax liabilities as a result of the U.S. federal tax rate reduction enacted by the TCJA is primarily related to plant (net of net operating losses) and resulted in a regulatory liability for income taxes due to customers, the deferred tax impact of which is reflected as a deferred tax asset.

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

At December 31, 2017, LG&E had $140 million of federal net operating loss carryforwards that expire in 2035 and $6 million of federal credit carryforwards that expire from 2034 to 2037.



	2017			2016			2015
Income Tax Expense (Benefit)
Current - Federal	$	—		$	(22	)	$	(15	)
Current - State	5			1			3
Total current Expense (Benefit)	5			(21		)	(12		)
Deferred - Federal	112			134			190
Deferred - State	14			18			13
Total Deferred Expense, excluding benefits of operating loss carryforwards	126			152			203
Amortization of investment tax credit - Federal	(1		)	(1		)	(1		)
Tax benefit of operating loss carryforwards
Deferred - Federal	1			(4		)	(76		)
Total Tax Benefit of Operating Loss Carryforwards	1			(4		)	(76		)
Total income tax expense	$	131		$	126		$	114

Total income tax expense - Federal	$	112		$	107		$	98
Total income tax expense - State	19			19			16
Total income tax expense	$	131		$	126		$	114



	2017			2016			2015
Reconciliation of Income Taxes
Federal income tax on Income Before Income Taxes at
statutory tax rate - 35%	$	120		$	115		$	105
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	13			12			11
Amortization of investment tax credit	(1		)	(1		)	(1		)
Other	(1		)	—			(1		)
Total increase	11			11			9
Total income tax expense	$	131		$	126		$	114
Effective income tax rate	38.1		%	38.3		%	38.1		%



	2017		2016		2015
Taxes, other than income
Property and other	$	33	$	32	$	28
Total	$	33	$	32	$	28

(KU)

The provision for KU's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles reflected in rates established by the KPSC, VSCC and the FERC. The difference in the provision for deferred income taxes for regulated assets and liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

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



	2017 (a)		2016
Deferred Tax Assets
Federal loss carryforwards	$	13	$	79
Contributions in aid of construction	6		11
Regulatory liabilities	16		26
Deferred investment tax credits	24		37
Income taxes due to customers (b)	163		—
Other	9		11
Total deferred tax assets	231		164

Deferred Tax Liabilities
Plant - net (b)	882		1,280
Regulatory assets	21		37
Accrued pension costs	17		12
Other	2		5
Total deferred tax liabilities	922		1,334
Net deferred tax liability	$	691	$	1,170


(a)	Deferred tax assets and liabilities at December 31, 2017 reflect the U.S. federal corporate income tax rate reduction from 35% to 21% enacted by the TCJA.


(b)	The impact on net deferred tax liabilities as a result of the U.S. federal tax rate reduction enacted by the TCJA is primarily related to plant (net of net operating losses) and resulted in a regulatory liability for income taxes due to customers, the deferred tax impact of which is reflected as a deferred tax asset.

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

At December 31, 2017, KU had $61 million of federal net operating loss carryforwards that expire in 2035 and $6 million of federal credit carryforwards that expire from 2034 to 2037.



	2017			2016			2015
Income Tax Expense (Benefit)
Current - Federal	$	—		$	31		$	(21	)
Current - State	7			5			1
Total Current Expense (Benefit)	7			36			(20		)
Deferred - Federal	138			131			240
Deferred - State	16			19			19
Total Deferred Expense, excluding benefits of operating loss carryforwards	154			150			259
Amortization of investment tax credit - Federal	(2		)	(2		)	(2		)
Tax benefit of operating loss carryforwards
Deferred - Federal	—			(21		)	(97		)
Total Tax Benefit of Operating Loss Carryforwards	—			(21		)	(97		)
Total income tax expense (a)	$	159		$	163		$	140

Total income tax expense - Federal	$	136		$	139		$	120
Total income tax expense - State	23			24			20
Total income tax expense (a)	$	159		$	163		$	140


(a)	Excludes deferred federal and state tax expense (benefit) recorded to OCI of less than $1 million in 2017, and less than $(1) million in 2016 and 2015.



	2017			2016			2015
Reconciliation of Income Taxes
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%	$	146		$	150		$	131
Increase (decrease) due to:
State income taxes, net of federal income tax benefit	15			16			13
Amortization of investment tax credit	(2		)	(2		)	(2		)
Other	—			(1		)	(2		)
Total increase	13			13			9
Total income tax expense	$	159		$	163		$	140
Effective income tax rate	38.0		%	38.1		%	37.4		%



	2017		2016		2015
Taxes, other than income
Property and other	$	32	$	30	$	29
Total	$	32	$	30	$	29

Unrecognized Tax Benefits (All Registrants)

PPL or its subsidiaries file tax returns in four major tax jurisdictions. The income tax provisions for PPL Electric, LG&E and KU are calculated in accordance with an intercompany tax sharing agreement, which provides that taxable income be calculated as if each domestic subsidiary filed a separate consolidated return. Based on this tax sharing agreement, PPL Electric or its subsidiaries indirectly or directly file tax returns in two major tax jurisdictions, and LKE, LG&E and KU or their subsidiaries indirectly or directly file tax returns in two major tax jurisdictions. With few exceptions, at December 31, 2017, these jurisdictions, as well as the tax years that are no longer subject to examination, were as follows.



	PPL	PPL Electric	LKE	LG&E	KU
U.S. (federal)	2013 and prior	2013 and prior	2013 and prior	2013 and prior	2013 and prior
Pennsylvania (state)	2011 and prior	2011 and prior
Kentucky (state)	2012 and prior		2012 and prior	2012 and prior	2012 and prior
U.K. (foreign)	2014 and prior

Other (PPL)

In 2015, PPL recorded a tax benefit of $24 million, related to the settlement of the IRS audit for tax years 1998-2011. Of this amount, $12 million is reflected in continuing operations. PPL finalized the settlement of interest in 2016 and recorded an additional $3 million tax benefit.