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PPL : Combined Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/05/2020 | 02:58pm EST

(All Registrants)

This "Item 2. Combined Management's Discussion and Analysis of Financial
Condition and Results of Operations" is separately filed by PPL, PPL Electric,
LKE, LG&E and KU. Information contained herein relating to any individual
Registrant is filed by such Registrant solely on its own behalf, and no
Registrant makes any representation as to information relating to any other
Registrant. The specific Registrant to which disclosures are applicable is
identified in parenthetical headings in italics above the applicable disclosure
or within the applicable disclosure for each Registrant's related activities and
disclosures. Within combined disclosures, amounts are disclosed for individual
Registrants when significant.

The following should be read in conjunction with the Registrants' Condensed
Consolidated Financial Statements and the accompanying Notes and with the
Registrants' 2019 Form 10-K. Capitalized terms and abbreviations are defined in
the glossary. Dollars are in millions, except per share data, unless otherwise

"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,
2020 with the same periods in 2019. For PPL, "Results of Operations" also
includes "Segment Earnings" and "Adjusted Gross Margins," which provide a
detailed analysis of earnings by reportable segment. These discussions include
non-GAAP financial measures, including "Earnings from Ongoing Operations" and
"Adjusted Gross Margins" and provide explanations of the non-GAAP financial
measures and a reconciliation of the non-GAAP financial measures to the most
comparable GAAP measure.

•"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.




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

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


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                                                                             PPL Corporation*

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

                             PPL Global                                                                                               PPL Electric*
              Engages in the regulated distribution of                             LKE*                                         Engages in the regulated
                       electricity in the U.K.                                                                              transmission and distribution of
                                                                                                                               electricity in Pennsylvania

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

                                U.K.                                             Kentucky                                             Pennsylvania
                          Regulated Segment                                  Regulated Segment                                      Regulated Segment

PPL's reportable segments' results primarily represent the results of PPL Global, LKE and PPL Electric, except that the reportable segments are also allocated certain corporate level financing and other costs that are not included in the results of PPL Global, LKE and PPL Electric. PPL Global is not a Registrant. Unaudited annual consolidated financial statements for the U.K. Regulated segment are furnished by PPL on a Form 8-K with the SEC.

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

(PPL Electric)

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


LKE, acquired in 2010 and headquartered in Louisville, Kentucky, is a wholly
owned subsidiary of PPL and a holding company that owns regulated utility
operations through its subsidiaries, LG&E and KU, which constitute substantially
all of LKE's assets. LG&E and KU are engaged in the generation, transmission,
distribution and sale of electricity. LG&E also engages in the distribution and
sale of natural gas. LG&E and KU maintain separate corporate identities and
serve customers in Kentucky under their respective names. KU also serves
customers in Virginia under the Old Dominion Power name.


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, 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

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utility by the KPSC and the VSCC, and certain of its transmission and wholesale
power activities are subject to the jurisdiction of the FERC under the Federal
Power Act. KU serves its Kentucky customers under the KU name and its Virginia
customers under the Old Dominion Power name.

Business Strategy

(All Registrants)

PPL operates seven fully regulated, high-performing utilities. These utilities
are located in the U.K., Pennsylvania and Kentucky, in constructive regulatory
jurisdictions with distinct regulatory structures and customer classes. PPL
believes this business portfolio positions the company well for continued
success and provides earnings and dividend growth potential.

PPL's strategy, and that of the other Registrants, is to deliver best-in-sector
operational performance, invest in a sustainable energy future, provide superior
customer service, maintain a strong financial foundation, and engage and develop
its people. PPL's business plan is designed to achieve growth by providing
efficient, reliable and safe operations and strong customer service, maintaining
constructive regulatory relationships and achieving timely recovery of costs.
These businesses are expected to achieve strong, long-term growth in rate base
in the U.S. and RAV in the U.K. Rate base growth is being driven by planned
significant capital expenditures to maintain existing assets and improve system
reliability and, for LKE, LG&E and KU, to comply with federal and state
environmental regulations related to coal-fired electricity generation

For the U.S. businesses, central to PPL's strategy is recovering capital project
costs efficiently through various rate-making mechanisms, including periodic
base rate case proceedings using forward test years, 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
addition, the KPSC requires a utility to obtain a CPCN prior to constructing a
facility, unless the construction is an ordinary extension of existing
facilities in the usual course of business or does not involve sufficient
capital expenditures to materially affect the utility's financial
condition. Although such KPSC proceedings do not directly address cost recovery
issues, the KPSC, in awarding a CPCN, concludes that the public convenience and
necessity require the construction of the facility on the basis that the
facility is the lowest reasonable cost alternative to address the need. 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

To manage financing costs and access to credit markets, and to fund capital
expenditures, a key objective of the Registrants is to maintain their investment
grade credit ratings and adequate liquidity positions. In addition, the
Registrants have financial and operational risk management programs that, among
other things, are designed to monitor and manage exposure to earnings and cash
flow volatility, as applicable, related to changes in interest rates, foreign
currency exchange rates and counterparty credit quality. To manage these risks,
PPL generally uses contracts such as forwards, options and swaps. See "Financial
Condition - Risk Management" below for further information.

Earnings generated by PPL's U.K. subsidiaries are subject to foreign currency
translation risk. Because WPD's earnings represent such a significant portion of
PPL's consolidated earnings, PPL enters into foreign currency contracts to
economically hedge the value of the GBP versus the U.S. dollar. These hedges do
not receive hedge accounting treatment under GAAP. See "Financial and
Operational Developments - U.K. Withdrawal from European Union" for additional
discussion of the U.K. earnings hedging activity.

The U.K. subsidiaries also have currency exposure to the U.S. dollar to the extent of their U.S. dollar denominated debt. To manage these risks, PPL generally uses contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts.

As discussed above, a key component of this strategy is to maintain constructive
relationships with regulators in all jurisdictions in which the Registrants
operate (U.K., U.S. federal and state). This is supported by a strong culture of
integrity and delivering on commitments to customers, regulators and
shareowners, and a commitment to continue to improve customer service,
reliability and operational efficiency.

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Financial and Operational Developments

Initiation of Formal Process to Sell U.K. Utility Business (PPL)

On August 10, 2020, PPL announced that it has initiated a formal process to sell
its U.K. utility business. PPL noted that there can be no assurance of any
specific outcome, including whether the sale process will result in the
completion of any potential transaction, the timing or terms thereof, the value
or benefits that may be realized or the effect that any potential transaction
will have on future financial results.

As a result of the potential sale, PPL assessed the recoverability of the assets
of its U.K. utility business. PPL prepared a probability-weighted undiscounted
cash flow estimate as of September 30, 2020 that considered the likelihood of
the possible outcomes of the sale process, including the possibility of not
selling the U.K. utility business. The resulting cash flow analysis exceeded the
carrying value of the assets of the U.K. utility business. A change in the
possible outcomes of the sale process could result in the carrying value of the
assets of the U.K. utility business not being recoverable, which could result in
an impairment in future periods. The U.K. utility business will continue to be
classified as held and used until it meets the criteria to be classified as held
for sale, which includes management obtaining a commitment to a plan to sell
from its Board of Directors.

Should the U.K. utility business meet the criteria to be classified as held for
sale in a future period, PPL will be required at that time to compare the
estimated fair value of its investment in the U.K. utility business, less costs
to sell, to its carrying value for impairment purposes. The measurement of PPL's
carrying value of the U.K. utility business will include the realization of
accumulated other comprehensive losses, which could arise from currency
translation adjustments and defined benefit plans associated with the U.K.
utility business.

Outbreak of COVID-19 (All Registrants)

The continued spread of COVID-19 has led to global economic disruption and
volatility in financial markets. The Registrants have taken significant steps to
mitigate the potential spread of COVID-19 to our customers, suppliers and
employees. PPL has successfully implemented its company-wide pandemic plan,
which guides the emergency response. Business continuity and other precautionary
measures have been taken to ensure we can continue to safely provide reliable
electricity and gas service to our customers. The Registrants have implemented
social distancing measures for all employees including work from home
arrangements where possible and continue to implement strong physical and cyber
security measures to ensure that systems function effectively to serve
operational and remote workforce needs. The Registrants continue to monitor
developments affecting their workforces and customers and will take additional
actions as appropriate to respond to changing conditions and mitigate the

This is a rapidly evolving situation that could lead to extended disruption of
economic activity in the Registrants' markets for an undetermined period of
time. Lock-down or closure of non-essential businesses has occurred in each of
the Registrants' service territories, which has resulted in reductions in
commercial and industrial demand and an increase in residential demand for
electricity service. The impact of this net reduction in load has not been
material to the Registrants' year to date 2020 financial condition. The impact
on future periods will depend upon various factors, including the pace and
extent to which the Registrants' jurisdictions reopen their economies and
community response to the reopening of businesses as well as the extent that
businesses continue work from home protocols. We cannot predict these factors
and therefore cannot quantify the overall impact COVID-19 will have on our 2020
results of operations.

The Registrants are committed to supporting their customers and communities and
have followed federal and state mandates to suspend disconnections for
non-payment and new late fees, reconnect service for customers who had
previously been disconnected and develop late payment plans with customers,
where appropriate. The Registrants have experienced an increase in aged accounts
receivable, resulting in an increase in credit losses. See "Current Expected
Credit Losses" in Note 2 to the Financial Statements for additional information.
The Registrants will continue to monitor cash receipts and accounts receivable
aging to determine if further increases in their allowance for uncollectible
accounts are required.

At September 30, 2020, the Registrants had approximately $3.6 billion of
combined unused credit facility capacity. In addition, PPL Capital Funding, PPL
Electric, LG&E and KU may, subject to certain conditions, increase their
syndicated credit facilities in an aggregate amount of up to $1 billion. In
April 2020, PPL Capital Funding issued $1 billion in senior notes. In June 2020,
KU issued $500 million of First Mortgage Bonds due 2050. In October 2020, PPL
Electric issued $250 million of First Mortgage Bonds, Floating Rate Series due
2023. In October 2020, WPD (South Wales) issued £250 million of 1.625% Senior

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Notes due 2035. Based on available liquidity and access to capital markets, the
Registrants do not anticipate a significant impact on their financial condition
or liquidity, and do not foresee difficulties in accessing the capital markets
in the near-term. See Note 8 to the Financial Statements for additional

The Registrants have assessed the fair value of their assets and liabilities and
no impairment charges were required. See "Goodwill Assessment" below for
additional information on the interim goodwill impairment test performed for the
U.K. Regulated segment reporting unit in the first quarter of 2020.

PPL's pension plans continue to be well-funded as its liability-driven investment strategy and active management function to mitigate investment losses resulting from market volatility.

In response to COVID-19, on March 27, 2020, President Donald Trump signed into
law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). PPL
evaluated the provisions of the CARES Act and believes there is no significant
effect on its financial statements. Certain tax provisions may result in
immaterial cash benefits in 2020.

To date, there has been no material impact on the Registrants' business,
financial condition, liquidity or on their supply chain as a result of COVID-19.
For the three and nine months ended September 30, 2020, the following estimated
changes in revenue and incremental costs incurred resulted from the impact of
                                                      Increase (Reduction) in Revenue                   Incremental Costs
                                                    Three Months          Nine Months          Three Months           Nine Months
PPL                                                 $      (33)$        (94)$       6             $         26
WPD                                                        (30)                  (70)                 4                       19
LKE                                                         (3)                  (24)                 -                        5
LG&E                                                        (5)                  (14)                 -                        2
KU                                                           2                   (10)                 -                        3

WPD tariffs are set to recover allowed revenues. Any under-recoveries, including
the estimated amounts shown above, will be added to revenue, with interest, in
future years through K-factor. See discussion of K-factor in "Item 1. Business"
of PPL's 2019 Form 10-K. The impact on revenue and incremental COVID-19 related
costs were not significant at PPL Electric.

The ultimate severity or duration of the outbreak or its effects on the global economy, the capital markets, or the Registrants' workforce, contractors, customers and suppliers is uncertain. The Registrants cannot predict the ultimate impact COVID-19 will have on their financial position, results of operations, cash flows or liquidity.

Goodwill Assessment (PPL, LKE, LG&E and KU)

The COVID-19 pandemic has disrupted the U.S. and global economies and continues
to present extraordinary challenges to businesses, communities, workforces and
markets. In the U.S. and throughout the world, governmental authorities have
taken urgent and extensive actions to contain the spread of the virus and
mitigate known or foreseeable impacts. In the Registrants' service territories,
mitigation measures have included quarantines, stay-at-home orders, travel
restrictions, reduced operations or closures of businesses, schools and
governmental agencies, and legislative or regulatory actions to address health
or other pandemic-related concerns, all of which have the potential to adversely
impact the Registrants' business and operations, especially if these measures
remain in effect for a prolonged period of time. PPL's shares have experienced
volatility and a decrease in market value since the outbreak of COVID-19.

During the three month period ended March 31, 2020, PPL, LKE, LG&E and KU
considered whether these events would more likely than not reduce the fair value
of the Registrants' reporting units below their carrying amounts. Based on our
assessment, a quantitative impairment test was not required for the LKE, LG&E
and KU reporting units, but was required for the U.K. Regulated segment
reporting unit, the allocated goodwill of which was $2.5 billion at March 31,
2020. The test did not indicate impairment of the reporting unit.

Management used both discounted cash flows and market multiples, including
implied RAV premiums, which required significant assumptions, to estimate the
fair value of the reporting units. Significant assumptions used in the
discounted cash flows include discount and growth rates, the finalization of
RIIO-ED2, and projected operating and capital cash flows. Projected operating
and capital cash flows are based on the internal business plans, which assume
the occurrence of certain

Table of Content s future events. Significant assumptions used in the market multiples include sector market performance and comparable transactions.

A high degree of judgment is required to develop estimates related to fair value
conclusions. A decrease in the forecasted cash flows of 10%, an increase in the
discount rate of 10%, or a 10% decrease in the market multiples would not have
resulted in an impairment of goodwill for the U.K. Regulated segment reporting

During the three month periods ended June 30, 2020 and September 30, 2020, no
goodwill impairment triggers were identified. However, an impairment charge
could occur in future periods if PPL's share price or any of the assumptions
used in determining fair value of the reporting units are negatively impacted.

U.K. Corporation Tax Rate Change (PPL)

The U.K. corporation tax rate was scheduled to be reduced from 19% to 17%,
effective April 1, 2020. On March 11, 2020, the U.K. Finance Act 2020 included a
cancellation of the tax rate reduction to 17%, thereby maintaining the
corporation tax rate at 19%. The Finance Act 2020 was formally enacted on July
22, 2020. The primary impact of the cancellation of the corporation tax rate
reduction was an increase in deferred tax liabilities and a corresponding
deferred tax expense of $106 million.

U.S. Tax Reform (All Registrants)

In July 2020, the IRS issued final and new proposed regulations relating to
limitations on interest deductibility for tax purposes. The Registrants will
apply the final regulations beginning in the 2021 tax year. The proposed
regulations will apply in the year in which the regulations are issued in final
form, which is expected to be in 2021 or later. The Registrants are evaluating
the final and proposed regulations, but do not expect the regulations to have a
material impact on the Registrants' financial condition or results of

U.K. Withdrawal from European Union (PPL)
In March 2017, the U.K. Government invoked Article 50 (Article 50) of the Lisbon
Treaty, formally beginning the two-year period for the U.K. to negotiate an
agreement specifying the terms of its withdrawal from the European Union (EU),
popularly referred to as Brexit. After repeated extensions, in October 2019, the
EU agreed to extend the Article 50 process until January 31, 2020. Following an
early general election in December 2019, which resulted in a substantial
Conservative Party Parliamentary majority, the U.K. and EU Parliaments voted to
approve the EU withdrawal agreement negotiated by Prime Minister Boris Johnson.

The U.K. formally left the EU on January 31, 2020, entering a transition period
that is scheduled to end on December 31, 2020. During the transition period, the
U.K. will seek to negotiate a free trade arrangement with the EU and also
negotiate new trade terms with countries outside of the EU. The deadline for the
U.K. requesting an extension to the transition period passed on June 30, 2020.
Significant uncertainty continues to surround the outcome of the transition
period. PPL believes that its greatest risks relate to any extended period of
depressed value of the GBP or the potential further decline in the value of the
GBP compared to the U.S. dollar. A decline in the value of the GBP compared to
the U.S. dollar will reduce the value of WPD's earnings to PPL.

PPL has executed hedges to mitigate the foreign exchange risk to its U.K. earnings. As of September 30, 2020, PPL's foreign exchange exposure related to budgeted earnings is 100% hedged for 2020 at an average rate of $1.45 per GBP.

PPL cannot predict the impact, in either the short-term or long-term, on foreign
exchange rates or PPL's financial condition that may be experienced as a result
of the actions taken by the U.K. government to withdraw from the EU, although
such impacts could be material.

PPL does not expect the financial condition and results of operations of WPD,
itself, to change significantly as a result of Brexit. The regulatory
environment and operation of WPD's businesses are not expected to change.
RIIO-ED1, the current price control, with allowed revenues agreed with Ofgem
runs through March 2023. The impact of a slower economy or recession on WPD
would be mitigated in part because U.K. regulation provides that any reduction
in the volume of electricity delivered will be recovered in allowed revenues in
future periods through the K-factor adjustment. See "Item 1. Business - Segment
Information - U.K. Regulated Segment" in PPL's 2019 Form 10-K for additional
information on the current price control and K-factor adjustment. In addition,
an increase in inflation would have a positive effect on revenues and RAV as
annual inflation adjustments are applied to both revenues and RAV (and real
returns are earned on inflated RAV). This impact, however, would

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be partially offset by higher operation and maintenance expenses and interest
expense on index-linked debt. With respect to access to financing, WPD has
substantial borrowing capacity under existing credit facilities and expects to
continue to have access to all major financial markets. With respect to access
to and cost of equipment and other materials, WPD management continues to review
U.K. government issued advice on preparations for Brexit and has taken actions
to mitigate potential increasing costs and disruption to its critical sources of
supply. Additionally, less than 1% of WPD's employees are non-U.K. EU nationals
and no change in their domicile is expected.

Regulatory Requirements

(All Registrants)

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

(PPL, LKE, LG&E and KU)

The businesses of LKE, LG&E and KU are subject to extensive federal, state and
local environmental laws, rules and regulations, including those pertaining to
CCRs, GHG, and ELGs. See Notes 7, 11 and 16 to the Financial Statements for a
discussion of these significant environmental matters. These and other stringent
environmental requirements led PPL, LKE, LG&E and KU to retire approximately
1,200 MW of coal-fired generating plants in Kentucky since 2010.

RIIO-2 Framework (PPL)

In 2018, Ofgem issued its consultation document on the RIIO-2 framework,
covering all U.K. gas and electricity transmission and distribution price
controls. The current electricity distribution price control, RIIO-ED1,
continues through March 31, 2023 and will not be impacted by the RIIO-2
consultation process. Later in 2018, Ofgem published its decision following its
RIIO-2 framework consultation after consideration of comments received including
those from WPD and PPL.

In August 2019, Ofgem published an open letter seeking views on its proposed
sector specific approach on the RIIO-ED2 framework. WPD and PPL provided
responses to this open letter. In December 2019, Ofgem published its decision on
the RIIO-ED2 framework, thus confirming the following points in its RIIO-2 and
RIIO-ED2 framework decision documents:

•RIIO-ED2 will be a five-year price control period, compared to eight years in
the current RIIO-ED1 price control.
•CPI or CPIH will be used for inflation measurement in calculating both RAV and
allowed returns rather than RPI.
•The baseline allowed return on equity will be set using the same methodology in
all RIIO-2 sectors. The new methodology includes; (a) an equity indexation,
whereby the allowed return on equity is updated to reflect changes in the
risk-free rate, and (b) potentially setting the allowed return 0.5% below the
expected return.
•Full debt indexation will be retained.
•The early settlement process (fast tracking) will be removed and replaced with
an alternative mechanism to incentivize high-quality, rigorous and ambitious
business plans.
•The Totex incentive rate will be based on a confidence level for setting
baseline cost allowances.
•A new enhanced engagement model will be introduced requiring distribution
companies to set up a customer engagement group to provide Ofgem with a public
report of local stakeholders' views on the companies' business plans. Ofgem will
also establish an independent RIIO-2 challenge group comprised of consumer
experts to provide Ofgem with a public report on companies' business plans.
•There will be no change to the existing depreciation policy of using economic
asset lives as the basis for depreciating RAV as part of base revenue
calculations. WPD is currently transitioning to 45-year asset lives for new
additions in RIIO-ED1 based on Ofgem's extensive review of asset lives in
•A focus of RIIO-2 will be on whole-system outcomes. Ofgem intends for network
companies and system operators to work together to ensure the energy system as a
whole is efficient and delivers the best value to consumers. Ofgem is
undertaking further work to clarify the definition of whole-system and the
appropriate roles of the network companies in supporting this objective. Ofgem
is still undecided on how DSO functions are to be treated. Ofgem will include a
DSO reopener to reassess progress made in the establishment of DSO activities.


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On July 30, 2020 Ofgem published its consultation on the RIIO-ED2 price control
methodology which Ofgem will use to apply its framework decisions listed above.
Some of the key aspects in Ofgem's consultation include:

•Proposing a suite of Net-Zero related investment and innovation mechanisms,
including a Net Zero re-opener, to ensure that RIIO-ED2 is adaptable and can
keep pace with changes in the wider policy and technological environment.
•Consulting on four different models for managing strategic investment to enable
more flexibility within the price control and allow DNOs to adapt their
investment plans to keep pace with Net Zero.
•Consulting on debt allowance proposals including the debt allowance
calibration, the index used, and a possible additional cost of borrowing
•Consulting on whether the three-stage equity indexation methodology for
baseline allowance returns proposed in the Gas Distribution and Transmission
Draft Determination should equally apply to the ED sector and if the estimation
approach for systematic risk should differ for ED2.
•Proposing to introduce a suite of reforms to define and regulate the
distribution system operation. In the first instance, those reforms will apply
to DNOs.

WPD and PPL continue to be fully engaged in the RIIO-ED2 process. The comment
period on the July 30, 2020 consultation closed on October 1, 2020, which WPD
provided a response to, and a decision on the RIIO-ED2 Sector Specific
Methodology will be made in December 2020. Final Determinations for RIIO-ED2
will be made in December 2022. The RIIO-ED2 price control will come into effect
on April 1, 2023. PPL cannot predict the outcome of this process or the
long-term impact the final RIIO-ED2 price control will have on its financial
condition or results of operations.

Challenge to PPL Electric Transmission Formula Rate Return on Equity

(PPL and PPL Electric)

On May 21, 2020, PP&L Industrial Customer Alliance (PPLICA) filed a complaint
with the FERC alleging that PPL Electric's base return on equity (ROE) of 11.18%
used to determine PPL Electric's formula transmission rate is unjust and
unreasonable, and proposing an alternative ROE of 8.0% based on its
interpretation of FERC Opinion No. 569. However, also on May 21, 2020, the FERC
issued Opinion No. 569-A in response to numerous requests for rehearing of
Opinion No. 569, which revised the method for analyzing base ROE. On June 10,
2020, PPLICA filed a Motion to Supplement the May 21, 2020 complaint in which
PPLICA continued to allege that PPL Electric's base ROE is unjust and
unreasonable, but revised its analysis of PPL Electric's base ROE to reflect the
guidance provided in Opinion No. 569-A. The amended complaint proposed an
updated alternative ROE of 8.5% and also requested that the FERC preserve the
original refund effective date as established by the filing of the original
complaint on May 21, 2020. Several parties have filed motions to intervene,
including one party who filed Comments in Support of the original complaint.

On July 10, 2020, PPL Electric filed its Answer and supporting Testimony to the
PPLICA filings arguing that the FERC should deny the original and amended
complaints as they are without merit and fail to demonstrate the existing base
ROE is unjust and unreasonable. In addition, PPL Electric contended any refund
effective date should be set for no earlier than June 10, 2020 and PPLICA's
proposed replacement ROE should be rejected.

On October 15, 2020, the FERC issued an order on the PPLICA complaints which
established hearing and settlement procedures, set a refund effective date of
May 21, 2020 and granted the motions to intervene. PPL Electric continues to
believe its ROE is just and reasonable and that it has meritorious defenses
against the original and amended complaints. At this time, PPL Electric cannot
predict the outcome of this matter or the range of possible losses, if any, that
may be incurred. However, revenue earned from May 21, 2020 through the
settlement of this matter may be subject to refund. A change of 50 basis points
to the base ROE would impact PPL Electric's net income by approximately
$12 million on an annual basis.

FERC Transmission Rate Filing

(PPL, LKE, 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

  Table of Content    s
issue are generally waivers or credits granted to a limited number of Kentucky
municipalities for either certain LG&E and KU or MISO transmission charges
incurred for transmission service received. Due to the development of robust,
accessible energy markets over time, LG&E and KU believe the mitigation
commitments are no longer relevant or appropriate. In March 2019, the FERC
granted LG&E's and KU's request to remove the ongoing credits, conditioned upon
the implementation by LG&E and KU of a transition mechanism for certain existing
power supply arrangements, subject to FERC review and approval. In July 2019,
LG&E and KU proposed their transition mechanism to the FERC and in September
2019, the FERC rejected the proposed transition mechanism and issued a separate
order providing clarifications of certain aspects of the March order. In October
2019, LG&E and KU filed requests for rehearing and clarification on the two
September orders. In September 2020, FERC issued its orders in the rehearing
process that modified the discussion in, and set aside portions of, the
September 2019 orders including adjusting factors impacting the proposed
transition mechanism. In October 2020, both LG&E and KU and other parties filed
separate motions for rehearing and clarification regarding FERC'sSeptember 2020
orders. A FERC decision on these rehearing requests is expected by November 18,
2020. Certain other petitions for review of the FERC's orders have been filed by
multiple parties, including LG&E and KU, with the D.C. Circuit Court of Appeals.
LG&E and KU cannot predict the outcome of these proceedings. LG&E and KU
currently receive recovery of waivers and credits provided through other rate

(PPL and PPL Electric)

In April 2020, PPL Electric filed its annual transmission formula rate update
with the FERC, reflecting a revised revenue requirement that took effect in June

Rate Case Proceedings

(PPL, LKE, LG&E and KU)

On October 23, 2020, LG&E and KU filed notices of intent with the KPSC to file
applications for proposed adjustments of general electric and gas rates on or
after November 25, 2020. The applications will also include requests for a CPCN
to deploy Advanced Metering Infrastructure and other matters. LG&E and KU cannot
predict the outcome of these potential proceedings.

(LKE and KU)

In July 2019, KU filed a request with the VSCC for an increase in annual
Virginia base electricity revenues of approximately $13 million, representing an
increase of 18.2%. In January 2020, KU reached a partial settlement agreement
including an increase in annual Virginia base electricity revenues of $9 million
effective May 1, 2020, representing an increase of 12.9%. A hearing on the
settlement and certain tariff provisions was held in January 2020. On April 6,
2020, the VSCC issued an order approving the settlement and Hearing Examiner
tariff provision recommendations. KU implemented the new rates on May 1, 2020.

                             Results of Operations


The "Statement of Income Analysis" discussion below describes significant
changes in principal line items on PPL's Statements of Income, comparing the
three and nine months ended September 30, 2020 with the same periods in 2019.
The "Segment Earnings" and "Adjusted Gross Margins" discussions for PPL provide
a review of results by reportable segment. These discussions include non-GAAP
financial measures, including "Earnings from Ongoing Operations" and "Adjusted
Gross Margins," and provide explanations of the non-GAAP financial measures and
a reconciliation of those measures to the most comparable GAAP measure.

Tables analyzing changes in amounts between periods within "Statement of Income
Analysis," "Segment Earnings" and "Adjusted Gross Margins" are presented on a
constant GBP to U.S. dollar exchange rate basis, where applicable, in order to
isolate the impact of the change in the exchange rate on the item being
explained. Results computed on a constant GBP to U.S. dollar exchange rate basis
are calculated by translating current year results at the prior year
weighted-average GBP to U.S. dollar exchange rate.


  Table of Content    s
(PPL Electric, LKE, LG&E and KU)

A "Statement of Income Analysis" is presented separately for PPL Electric, LKE, LG&E and KU. The "Statement of Income Analysis" discussion below describes significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 2020 with the same periods in 2019.

(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:

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