NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
1. PLAN DESCRIPTION
The PPL Employee Stock Ownership Plan (the "Plan")
was adopted effective January 1, 1975 to provide for employee ownership in PPL Corporation ("PPL"). The Plan is
currently sponsored by PPL Services Corporation (the "Company"), an unregulated subsidiary of PPL. Amounts contributed
to the Plan are used to purchase shares of PPL Corporation common stock ("Common Stock"). The following description of
the Plan provides only general information. Participants should refer to the Plan document for a more complete description of the
Plan provisions.
Employees of participating PPL companies,
as defined in the Plan document, are eligible to participate in the Plan on the first day of the month following their date
of hire. Effective January 1, 2015, the Plan was closed to newly-hired employees.
The shares of Common Stock ("Shares")
allocated to a participant's account may not exceed the maximum permitted by law. All Shares credited to a participant's account
are 100% vested and nonforfeitable, but cannot be pledged as security by the participant. The Common Stock is held by Fidelity
Management Trust Company (the "Trustee").
The Plan allows for dividends on Shares held
to be reinvested in the Plan or paid in cash to participants. Under existing income tax laws, PPL is permitted to deduct the amount
of those dividends for income tax purposes on its consolidated federal income tax return and to contribute the resulting tax savings
(dividend-based contribution) to the Plan. The dividend-based contribution can be made in Shares or in cash that is used to buy
Shares. The dividend-based contribution is expressly conditioned upon the deductibility of the contribution for federal income
tax purposes. Shares are allocated to participants' accounts, 75% on the basis of Shares held in a participant's account and 25%
on the basis of the participant's compensation.
Participants may elect to withdraw from their
accounts Shares that have been allocated with respect to a plan year ending at least 36 months prior to the end of the plan year
in which the election is made. Participants so electing may receive cash or Common Stock for the number of whole Shares and cash
for any fractional Shares available for withdrawal, or may make a rollover to a qualified plan.
Participants who have attained age 55 and have
completed ten years of participation in the Plan may elect to withdraw Shares or diversify the value of Shares held into other
investment options under the Plan. For the first five years after meeting the requirement, participants may withdraw or diversify
up to an aggregate of 25% of such Shares. In the sixth year, qualified participants may withdraw or diversify up to an aggregate
of 50% of such Shares. Participants who elect to diversify may direct the Trustee to invest their eligible diversification amounts
into various mutual funds and investments, which are similar to those provided through PPL's 401(k) savings plans.
Upon termination of service with a participating
PPL company, participants are entitled to make a withdrawal and receive cash or Common Stock for the number of whole Shares and
cash for any fractional Shares allocated to them, or may make a rollover to a qualified plan. Participants who terminate service
with a participating PPL company and whose account
PPL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
balance exceeds, or exceeded at the time of
any prior distribution, $1,000, may defer distribution of the Shares in their account until April 1st of the calendar year following
the year in which the participant reaches age 70-1/2. If a participant wishes to withdraw prior to age 70-1/2, the entire account
balance must be withdrawn.
The Plan is subject to the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA"), as amended.
Provisions of the Plan regarding vesting, distributions
and other matters are more fully described in the plan document and Summary Plan Description.
The Plan is administered by the Employee Benefit
Plan Board (the "Plan Administrator"), which is composed of certain PPL officers and employees appointed by the Board
of Directors of PPL.
Company contributions are held and managed by
the Trustee, which invests securities and cash received, interest, and dividend income and makes distributions to participants.
The Plan pays investment and certain administrative expenses directly.
Certain administrative functions of the Plan
are performed by employees of the Company. No such employees receive compensation from the Plan.
Certain professional fees and administrative
expenses incurred by the Plan are paid by the Company and are not included in these financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been
prepared under the accrual basis of accounting.
For the following note disclosures dollar amounts
are presented in thousands.
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of additions and deductions during the reporting period. Actual results could differ
from those estimates.
Investments are reported at fair value
(except for fully benefit-responsive investment contracts, which are reported at contract value). Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The Plan Administrator determines the Plan’s valuation policies utilizing information provided by the investment
advisors, custodians and insurance companies. See Note 4 for discussion of fair value measurements.
PPL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
Purchases and sales of securities are recorded
on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation
(depreciation) includes the gains and losses on investments bought and sold as well as held during the year.
Prior year results were restated to conform
to current year presentation as the result of adoption of the following new accounting guidance.
In May 2015, the Financial Accounting Standards
Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-07, Fair Value Measurement (Topic 820):
Disclosures for Investments in Certain Entities That Calculate Net Asset Value ("NAV") per Share (or Its Equivalent).
ASU 2015-07 removes the requirement to include investments in the fair value hierarchy for which fair value is measured using the
net asset value practical expedient in Accounting Standards Codification 820. ASU 2015-07 requires retrospective application and
is effective for fiscal years beginning after December 15, 2015 with early adoption permitted. The Plan has elected to early adopt
the provisions of this new standard. Accordingly, the standard was retrospectively applied.
The adoption of this guidance resulted in the
Plan no longer categorizing investments for which fair value is measured using NAV per Share in the fair value hierarchy. See Note
4 for the related disclosures.
In July 2015, the FASB issued ASU No. 2015-12,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare
Benefit Plans (Topic 965) - I. Fully Benefit-Responsive Investment Contracts; II. Plan Investment Disclosures, and III. Measurement
Date Practical Expedient. Part I requires fully benefit-responsive investment contracts to be measured, presented, and disclosed
only at contract value. Part II requires that investments that are measured using fair value (both participant-directed and nonparticipant-directed
investments) be grouped only by general type, eliminating the need to disaggregate the investments by nature, characteristics,
and risks. Part II also eliminates the disclosure of individual investments that represent 5 percent or more of net assets available
for benefits and the disclosure of net appreciation or depreciation for investments by general type, requiring only presentation
of net appreciation or depreciation in investments in the aggregate. Additionally, if an investment is measured using the net asset
value per share as a practical expedient and that investment is a fund that files a U.S. Department of Labor Form 5500, as a direct
filing entity, disclosure of that investment’s strategy is no longer required. Part III is not applicable to the Plan. The
amendments in ASU 2015-12 are effective for fiscal years beginning after December 15, 2015, with early application permitted. The
amendments within Parts I and II require retrospective application. The Plan has elected to early adopt the provisions of Parts
I and II of this new standard. Accordingly, these provisions were retrospectively applied.
As a result of adoption, the Statements of Net
Assets Available for Benefits, for the current and prior year, no longer include the line Net Assets Reflecting Investments at
Fair Value. In addition, the adjustment from fair value to contract value line has been eliminated and the Plan interest in the
PPL Defined Contribution Master Trust (the "Master Trust") is now disclosed at contract value and is removed from the
fair value table in Note 4.
PPL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
3. INTEREST IN PPL DEFINED CONTRIBUTION MASTER
TRUST
PPL maintains a Master Trust with the Trustee
to pool the investments of its defined contribution benefit plans. The Blended Interest Rate Fund (the "Fund") is the
only investment option of the Plan included in the Master Trust, and represented less than 1% of plan assets at December 31,
2015 and 2014. Therefore, no detailed disclosures related to the Master Trust have been presented in these financial statements.
The Fund is structured as a synthetic investment contract and meets the fully benefit-responsive investment contract criteria to
be measured at contract value. Contract value is the amount received by participants initiating transactions under the terms of
the Plan. Contract value represents contributions made, plus earnings, less withdrawals, and administrative expenses.
Investments directed by participants to the
Fund within the Master Trust are combined with similar investments applicable to other plans participating in the Master Trust
and invested in high-grade investment contracts issued by insurance companies and banks, as well as other high-quality debt obligations
and short-term money market instruments. Wrapper contracts are purchased from another party, which are agreements that allow for
the Fund to maintain a constant NAV and provide for participant transactions to be made at contract value. In a typical wrapper
contract, the wrapper issuer agrees to pay the Fund the difference between the contract value and the market value of the covered
assets if the market value becomes totally exhausted as a result of significant participant redemptions. Purchasing wrapper contracts
is similar to buying insurance, in that the Fund pays a relatively small amount to protect against the relatively unlikely event
of participant redemption of most of the shares of the Fund. The fair value of the wrapper contracts is determined using the replacement
cost methodology that incorporates various inputs including the difference between the market for wrapper fees and the actual wrapper
fees currently charged.
Wrapper contracts accrue interest using a formula
called the "crediting rate." Wrapper contracts use the crediting rate formula to convert market value changes in the
covered assets into income distributions in order to minimize the difference between the market and contract value of the covered
assets over time. Using the crediting rate formula, an estimated future market value is calculated by compounding the Fund's current
market value at the Fund's current yield to maturity for a period equal to the Fund's duration. The crediting rate is the discount
rate that equates estimated future market value with the Fund's current contract value. Crediting rates are reset monthly.
4. FAIR VALUE MEASUREMENTS
The framework for measuring fair value provides
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority
to unobservable inputs (level 3). The three levels of the fair value hierarchy are described as follows:
Level 1 – Inputs to the valuation
methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Plan has the ability to
access.
PPL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
Level 2 – Inputs to the valuation
methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets
or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs
that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability
has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 – Inputs to the valuation
methodology are unobservable. Management believes such inputs are predicated on the assumptions market participants would use to
measure the asset at fair value.
The asset or liability's fair value measurement
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
The following table summarizes instruments measured
at fair value on a recurring basis at December 31, 2015:
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$
|
227,721
|
|
$
|
227,721
|
|
$
|
-
|
|
$
|
-
|
|
Mutual funds
|
|
|
374
|
|
|
374
|
|
|
-
|
|
|
-
|
|
|
|
$
|
228,095
|
|
$
|
228,095
|
|
$
|
-
|
|
$
|
-
|
|
Common collective trust funds
(a)
|
|
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
229,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
In accordance with accounting guidance certain investments that are measured at fair value using the NAV, or its equivalent, practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of net assets available for benefits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
The following table summarizes instruments measured at fair value
on a recurring basis at December 31, 2014:
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$
|
256,263
|
|
$
|
256,263
|
|
$
|
-
|
|
$
|
-
|
|
Mutual funds
|
|
|
552
|
|
|
552
|
|
|
-
|
|
|
-
|
|
|
|
$
|
256,815
|
|
$
|
256,815
|
|
$
|
-
|
|
$
|
-
|
|
Common collective trust funds
(a)
|
|
|
2,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
In accordance with accounting guidance certain investments that are measured at fair value using the NAV, or its equivalent, practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of net assets available for benefits.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is a description of the valuation
methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2015
and 2014.
The fair value measurement of Common Stock,
classified as level 1, is based on its quoted market price in an active market.
The fair value measurements of common collective
trust funds are valued at the NAV of units of a bank collective trust. The NAV, as provided by the trustee, is used as a practical
expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities.
This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount
different than the reported NAV. Participant transactions (purchases and sales) may occur daily. If the Plan was to initiate a
full redemption of the collective trust, the investment adviser reserves the right to temporarily delay withdrawal from the trust
in order to ensure that securities liquidations will be carried out in an orderly business fashion.
The fair value measurements of mutual funds,
classified as level 1, are valued at the daily closing prices as reported by the funds. Mutual funds held by the Plan are open-end
mutual funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily NAV
and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
The preceding methods described may produce
a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although
the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value of
PPL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
certain financial instruments could result in
a different value measurement at the reporting date.
5. INVESTMENTS
The Plan's investments in Common Stock at December 31 are as
follows:
|
|
|
|
|
|
2015
|
|
2014
|
Common Stock*:
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
6,672,166
|
|
|
7,053,754
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
115,099
|
|
$
|
128,214
|
|
|
Fair value
|
|
$
|
227,721
|
|
$
|
256,263
|
|
|
|
|
|
|
|
|
|
|
|
* Non-participant directed
|
|
|
|
|
|
|
The fair value per share of Common Stock at
December 31, 2015 and 2014 was $34.13 and $36.33, respectively.
The Plan's investments (including investments bought, sold and held
during the year) appreciated/(depreciated) by $(16,212) and $46,451 for the years ended December 31, 2015 and 2014, respectively.
6. RELATED-PARTY AND PARTY-IN-INTEREST TRANSACTIONS
Transactions involving Shares qualify as party-in-interest
transactions under the provisions of ERISA.
No dividend-based contribution was recorded
in regard to the plan years ended December 31, 2015 and 2014.
Certain Plan investments held in the Plan are
shares of mutual funds managed by Fidelity Investments. Fidelity Investments is an affiliate of the Trustee and therefore, transactions
in these investments qualify as party-in-interest transactions that are exempt from the prohibited transaction rules.
7. PLAN TERMINATION
Although it has not expressed any intent to
do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject
to the provisions of ERISA. In the event of Plan termination, participants would receive distribution of their accounts.
PPL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
8. TAX STATUS
The Plan obtained its latest determination letter
dated May 13, 2014, in which the Internal Revenue Service (the "IRS") stated that the Plan, as then designed, was in
compliance with the applicable requirements of the Internal Revenue Code (the "Code"). The Plan is currently being operated
in compliance with the applicable requirements of the Code. Therefore, the Plan Administrator believes that the Plan was qualified
and the related trust was tax exempt as of the financial statement date.
Accounting principles generally accepted in
the United States of America require Plan management to evaluate tax positions taken by the Plan and recognize a tax liability
(or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the
IRS. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods
in progress.
9. RISK AND UNCERTAINTIES
The Plan provides for various investment options
in various combinations of investment funds. Investment funds are exposed to various risks, such as interest rate, market and credit
risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes
in the values of investment securities will occur in the near term and that such changes could materially affect participants'
account balances and the amounts reported in the Statements of Net Assets Available for Benefits.
10. RECONCILIATION TO FORM 5500
For financial reporting purposes, the investment
in the Master Trust related to fully benefit-responsive investment contracts is presented at contract value. However, this investment
should be reported at fair value on the Form 5500.
The following is a reconciliation of Net Assets
Available for Benefits per the financial statements to the Form 5500 at December 31:
|
|
|
|
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Net assets available for benefits per the financial statements
|
|
$
|
230,572
|
|
$
|
259,994
|
Adjustment from contract value to fair value for fully benefit
|
|
|
|
|
|
|
|
- responsive investment contracts
|
|
|
11
|
|
|
16
|
Net assets available for benefits per the Form 5500
|
|
$
|
230,583
|
|
$
|
260,010
|
PPL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
The following reconciliation details the reporting
differences from the Plan's financial statements to the Form 5500 for the Plan investment income (loss) from the Master Trust and
the adjustment for fair value reporting of fully benefit-responsive contracts for the years ended December 31:
|
|
|
|
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Investment income in Master Trust per the financial
|
|
|
|
|
|
|
|
statements
|
|
$
|
15
|
|
$
|
12
|
Adjustment from contract value to fair value for fully
|
|
|
|
|
|
|
|
benefit - responsive investment contracts previous year
|
|
|
(16)
|
|
|
(17)
|
Adjustment from contract value to fair value for fully
|
|
|
|
|
|
|
|
benefit - responsive investment contracts current year
|
|
|
11
|
|
|
16
|
Investment gain/(loss) in Master Trust per the Form 5500
|
|
$
|
10
|
|
$
|
11
|
13. TALEN ENERGY CORPORATION DISTRIBUTION
On June 9, 2014, PPL announced the signing of
definitive agreements with Riverstone Holdings LLC ("Riverstone") to form a new, publicly traded independent power producing
company, Talen Energy Corporation ("Talen Energy"). Pursuant to the agreements, on June 1, 2015 PPL contributed its wholly
owned subsidiary PPL Energy Supply, LLC ("Energy Supply"), to Talen Energy and distributed Talen Energy to PPL shareowners
in a tax free spinoff transaction. Immediately following the spinoff, Riverstone contributed its merchant generation business to
Talen Energy in exchange for shares of Talen Energy common stock.
On April 29, 2015, PPL's Board of Directors
declared a pro rata distribution of all of the common stock of Talen Energy to PPL's shareowners of record on May 20, 2015 (the
"Record Date"), with a distribution date of June 1, 2015 (the "Distribution Date").
On May 21, 2015, PPL announced the definitive
distribution ratio for the spinoff of Energy Supply to PPL shareowners: Approximately 0.1249 shares of Talen Energy common stock
for each share of PPL common stock owned as of 5:00 p.m., New York City time, on the Record Date.
The Plan is a tax-qualified benefit plan designed
to provide eligible PPL employees with shares of PPL common stock. The Plan holds PPL common stock for its participants in a trust.
By law, the Plan cannot retain the shares of Talen Energy common stock received in the spinoff because the Plan is required primarily
to invest only in the securities of its sponsoring employer, PPL.
The Trustee of the Plan has allocated shares
of Talen Energy common stock to participants’ accounts based on the number of shares of PPL common stock held in participants’
accounts as of the Distribution Date. Beginning on the day after the Distribution Date, the Trustee liquidated the shares of Talen
Energy common stock allocated to participants’ accounts and used the proceeds to purchase additional shares of PPL common
stock in the open market and credited the value of those shares of PPL common stock to participants’ accounts.
PL
EMPLOYEE
STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
As a result of the spinoff, the Plan received
824,471 shares of Talen Energy common stock on June 2, 2015. These shares were sold during the first two weeks of June 2015, with
the resulting proceeds of $15,615 used to purchase 502,322 shares of PPL common stock that were credited to participants’
accounts.