| PROSPECTUS SUPPLEMENT NO. 1 | Filed pursuant to Rule 424(b)(3) | ||||
| (To prospectus dated July 9, 2024) | Registration No. 333-280341 | ||||
TALEN ENERGY CORPORATION
36,825,683 SHARES OF COMMON STOCK
This prospectus supplement is being filed to update and supplement the information contained in the prospectus dated July 9, 2024 (the “Prospectus”), with the information contained in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (the “SEC”) on August 13, 2024 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.
The Prospectus and this prospectus supplement relate to the resale from time to time of up to 36,825,683 shares of our common stock, par value $0.001 per share (the “Common Stock”), by the selling stockholders named in the Prospectus or their permitted transferees.
This prospectus supplement updates and supplements the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any other amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus, and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement. The information in this prospectus supplement modifies and supersedes, in part, the information in the Prospectus. Any information in the Prospectus that is modified or superseded shall not be deemed to constitute a part of the Prospectus except as modified or superseded by this prospectus supplement.
You should not assume that the information provided in this prospectus supplement or the Prospectus is accurate as of any date other than their respective dates. Neither the delivery of this prospectus supplement and Prospectus, nor any sale made hereunder, shall under any circumstances create any implication that there has been no change in our affairs since the date of this prospectus supplement or that the information contained in this prospectus supplement or the Prospectus is correct as of any time after the date of that information.
The Common Stock is listed on The Nasdaq Global Select Market (“Nasdaq”) under the symbol “TLN”. On August 12, 2023, the last sale price of the Common Stock as reported on Nasdaq was $119.76 per share.
Investing in our securities involves certain risks, including those that are described in the section titled “Risk Factors” beginning on page 19 of the Prospectus.
Neither the SEC nor any state securities commission has approved or disapproved of the securities to be issued under the Prospectus or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is August 13, 2024.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 30, 2024
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from __________ to __________
Commission File Number: 001-37388
Talen Energy Corporation
(Exact name of registrant as specified in its charter)
| Delaware | 47-1197305 | ||||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||
2929 Allen Pkwy, Suite 2200 Houston, TX | 77019 | ||||
(Address of principal executive offices) | (Zip Code) | ||||
(888) 211-6011
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common stock, par value $0.001 per share | TLN | The Nasdaq Global Select Market | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☐ | Large accelerated filer | ☐ | Accelerated filer | ☐ | Emerging growth company | ||||||||||||
| ☒ | Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☒
As of August 13, 2024, the registrant had 51,001,450 shares outstanding of common stock, par value $0.001 per share.
TALEN ENERGY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | |||||||||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report (this “Report”) contains forward-looking statements concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not statements of historical fact. These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “target,” “project,” “forecast,” “seek,” “will,” “may,” “should,” “could,” “would” or similar expressions. Although we believe that the expectations and assumptions reflected in these forward-looking statements are reasonable, there can be no assurance that these expectations and assumptions will prove to be correct. Forward-looking statements are subject to many risks and uncertainties. The results, events or circumstances reflected in forward-looking statements may not be achieved or occur, and actual results, events or circumstances may differ materially from those discussed in forward-looking statements.
The risks, uncertainties and other factors that could cause actual results to differ materially from the forward-looking statements made by us include those discussed in this Report, as well as the items discussed in our Registration Statement and the included Annual Financial Statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Report.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Report primarily on our current expectations and assumptions about future events. Furthermore, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Report. While we believe such information provides a reasonable basis for these statements, such information may be limited or incomplete, and there can be no assurance that any expectations, assumptions, beliefs or opinions will prove to be correct. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Report to reflect events or circumstances after the date of this Report or to reflect new information, actual results, revised expectations or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations described in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TALEN ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| (Millions of Dollars, except share data) | Three Months Ended June 30, 2024 | May 18 through June 30, 2023 | April 1 through May 17, 2023 | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | ||||||||||||||||||||||||||||||||||||||
| Capacity revenues | $ | 46 | $ | 26 | $ | 42 | $ | 91 | $ | 26 | $ | 108 | ||||||||||||||||||||||||||||||||
| Energy and other revenues | 367 | 188 | 180 | 939 | 188 | 1,042 | ||||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on derivative instruments | 76 | 87 | (85) | (32) | 87 | 60 | ||||||||||||||||||||||||||||||||||||||
| Operating Revenues | 489 | 301 | 137 | 998 | 301 | 1,210 | ||||||||||||||||||||||||||||||||||||||
| Fuel and energy purchases | (163) | (57) | (69) | (313) | (57) | (176) | ||||||||||||||||||||||||||||||||||||||
| Nuclear fuel amortization | (28) | (25) | (9) | (63) | (25) | (33) | ||||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on derivative instruments | 15 | (46) | (9) | (12) | (46) | (123) | ||||||||||||||||||||||||||||||||||||||
| Energy Expenses | (176) | (128) | (87) | (388) | (128) | (332) | ||||||||||||||||||||||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||||||||||||||||||||||
| Operation, maintenance and development | (164) | (69) | (108) | (318) | (69) | (285) | ||||||||||||||||||||||||||||||||||||||
| General and administrative | (40) | (18) | (22) | (83) | (18) | (51) | ||||||||||||||||||||||||||||||||||||||
| Depreciation, amortization and accretion | (75) | (28) | (68) | (150) | (28) | (200) | ||||||||||||||||||||||||||||||||||||||
| Impairments | — | — | (16) | — | — | (381) | ||||||||||||||||||||||||||||||||||||||
| Operational restructuring | (1) | — | — | (1) | — | — | ||||||||||||||||||||||||||||||||||||||
| Other operating income (expense), net | (6) | (3) | (28) | (6) | (3) | (37) | ||||||||||||||||||||||||||||||||||||||
| Operating Income (Loss) | 27 | 55 | (192) | 52 | 55 | (76) | ||||||||||||||||||||||||||||||||||||||
| Nuclear decommissioning trust funds gain (loss), net | 27 | 39 | 11 | 102 | 39 | 57 | ||||||||||||||||||||||||||||||||||||||
| Interest expense and other finance charges | (62) | (33) | (59) | (121) | (33) | (163) | ||||||||||||||||||||||||||||||||||||||
| Reorganization income (expense), net | — | — | 838 | — | — | 799 | ||||||||||||||||||||||||||||||||||||||
| Gain (loss) on sale of assets, net (Note 17) | 561 | — | 15 | 885 | — | 50 | ||||||||||||||||||||||||||||||||||||||
| Other non-operating income (expense), net | 17 | (11) | 4 | 40 | (11) | 10 | ||||||||||||||||||||||||||||||||||||||
| Income (Loss) Before Income Taxes | 570 | 50 | 617 | 958 | 50 | 677 | ||||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | (112) | (19) | (198) | (181) | (19) | (212) | ||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | 458 | 31 | 419 | 777 | 31 | 465 | ||||||||||||||||||||||||||||||||||||||
| Less: Net income (loss) attributable to noncontrolling interest | 4 | 2 | (12) | 29 | 2 | (14) | ||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) Attributable to Stockholders (Successor) / Member (Predecessor) | $ | 454 | $ | 29 | $ | 431 | $ | 748 | $ | 29 | $ | 479 | ||||||||||||||||||||||||||||||||
| Per Common Share (Successor) | ||||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) Attributable to Stockholders - Basic | $ | 7.90 | $ | 0.49 | N/A | $ | 12.87 | $ | 0.49 | N/A | ||||||||||||||||||||||||||||||||||
| Net Income (Loss) Attributable to Stockholders - Diluted | 7.60 | 0.49 | N/A | 12.41 | 0.49 | N/A | ||||||||||||||||||||||||||||||||||||||
| Weighted-Average Number of Common Shares Outstanding - Basic (in thousands) | 57,434 | 59,029 | N/A | 58,119 | 59,029 | N/A | ||||||||||||||||||||||||||||||||||||||
| Weighted-Average Number of Common Shares Outstanding - Diluted (in thousands) | 59,775 | 59,088 | N/A | 60,269 | 59,088 | N/A | ||||||||||||||||||||||||||||||||||||||
The accompanying Notes to the Interim Financial Statements are an integral part of the financial statements.
2
TALEN ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| (Millions of Dollars) | Three Months Ended June 30, 2024 | May 18 through June 30, 2023 | April 1 through May 17, 2023 | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | ||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | $ | 458 | $ | 31 | $ | 419 | $ | 777 | $ | 31 | $ | 465 | ||||||||||||||||||||||||||||||||
| Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||
| Available-for-sale securities unrealized gain (loss), net | 2 | (6) | (4) | 1 | (6) | 6 | ||||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | (1) | 2 | 2 | — | 2 | (2) | ||||||||||||||||||||||||||||||||||||||
| Gains (losses) arising during the period, net of tax | 1 | (4) | (2) | 1 | (4) | 4 | ||||||||||||||||||||||||||||||||||||||
| Available-for-sale securities unrealized (gain) loss, net | (5) | 1 | (2) | (12) | 1 | 4 | ||||||||||||||||||||||||||||||||||||||
| Qualifying derivatives unrealized (gain) loss, net | — | — | — | — | — | (1) | ||||||||||||||||||||||||||||||||||||||
| Postretirement benefit actuarial (gain) loss, net | — | — | 1 | — | — | 2 | ||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | 2 | — | — | 5 | — | (3) | ||||||||||||||||||||||||||||||||||||||
| Reclassifications from AOCI, net of tax | (3) | 1 | (1) | (7) | 1 | 2 | ||||||||||||||||||||||||||||||||||||||
| Total Other Comprehensive Income (Loss) | (2) | (3) | (3) | (6) | (3) | 6 | ||||||||||||||||||||||||||||||||||||||
| Comprehensive Income (Loss) | 456 | 28 | 416 | 771 | 28 | 471 | ||||||||||||||||||||||||||||||||||||||
| Less: Comprehensive income (loss) attributable to noncontrolling interest | 4 | 2 | (12) | 29 | 2 | (14) | ||||||||||||||||||||||||||||||||||||||
| Comprehensive Income (Loss) Attributable to Stockholders (Successor) / Member (Predecessor) | $ | 452 | $ | 26 | $ | 428 | $ | 742 | $ | 26 | $ | 485 | ||||||||||||||||||||||||||||||||
The accompanying Notes to the Interim Financial Statements are an integral part of the financial statements.
3
TALEN ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| Successor | |||||||||||
| (Millions of Dollars, except share data) | June 30, 2024 | December 31, 2023 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 632 | $ | 400 | |||||||
| Restricted cash and cash equivalents (Note 16) | 483 | 501 | |||||||||
| Accounts receivable, net (Note 4) | 151 | 137 | |||||||||
| Inventory, net (Note 6) | 280 | 375 | |||||||||
| Derivative instruments (Notes 3 and 12) | 27 | 89 | |||||||||
Other current assets (a) | 380 | 52 | |||||||||
| Total current assets | 1,953 | 1,554 | |||||||||
| Property, plant and equipment, net (Note 8) | 3,250 | 3,839 | |||||||||
| Nuclear decommissioning trust funds (Notes 7 and 12) | 1,659 | 1,575 | |||||||||
| Derivative instruments (Notes 3 and 12) | 13 | 6 | |||||||||
| Other noncurrent assets | 207 | 147 | |||||||||
| Total Assets | $ | 7,082 | $ | 7,121 | |||||||
| Liabilities and Equity | |||||||||||
| Long-term debt, due within one year (Notes 11 and 12) | $ | 9 | $ | 9 | |||||||
| Accrued interest | 31 | 32 | |||||||||
| Accounts payable and other accrued liabilities | 212 | 344 | |||||||||
| Derivative instruments (Notes 3 and 12) | 63 | 32 | |||||||||
| Other current liabilities | 118 | 69 | |||||||||
| Total current liabilities | 433 | 486 | |||||||||
| Long-term debt (Notes 11 and 12) | 2,617 | 2,811 | |||||||||
| Derivative instruments (Notes 3 and 12) | 1 | 11 | |||||||||
| Postretirement benefit obligations (Note 13) | 364 | 368 | |||||||||
| Asset retirement obligations and accrued environmental costs (Note 9) | 473 | 469 | |||||||||
| Deferred income taxes (Note 5) | 495 | 407 | |||||||||
| Other noncurrent liabilities | 127 | 35 | |||||||||
| Total Liabilities | $ | 4,510 | $ | 4,587 | |||||||
| Commitments and Contingencies (Note 10) | |||||||||||
Stockholders’ Equity | |||||||||||
Common stock ($0.001 par value 350,000,000 shares authorized) (b) (c) | $ | — | $ | — | |||||||
| Additional paid-in capital | 2,092 | 2,346 | |||||||||
| Accumulated retained earnings (deficit) | 448 | 134 | |||||||||
| Accumulated other comprehensive income (loss) | (29) | (23) | |||||||||
Total Stockholders’ Equity | 2,511 | 2,457 | |||||||||
| Noncontrolling interests | 61 | 77 | |||||||||
| Total Equity | 2,572 | 2,534 | |||||||||
| Total Liabilities and Equity | $ | 7,082 | $ | 7,121 | |||||||
__________________
(a)Includes $300 million of proceeds from the Cumulus Data Campus Sale held in escrow.
(b)As of June 30, 2024 (Successor): 53,259,981 shares issued, 53,254,954 shares outstanding, and 5,027 shares held as treasury stock.
(c)As of December 31, 2023 (Successor): 59,028,843 shares issued and outstanding.
The accompanying Notes to the Interim Financial Statements are an integral part of the financial statements.
4
TALEN ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Successor | Predecessor | |||||||||||||||||||
| (Millions of Dollars) | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | |||||||||||||||||
| Operating Activities | ||||||||||||||||||||
| Net income (loss) | $ | 777 | $ | 31 | $ | 465 | ||||||||||||||
| Non-cash reconciliation adjustments: | ||||||||||||||||||||
| Unrealized (gains) losses on derivative instruments | 36 | (39) | 65 | |||||||||||||||||
| (Gain) loss on Cumulus Data Campus Sale and ERCOT Sale | (886) | — | — | |||||||||||||||||
| (Gain) loss on sales of assets, net | — | — | (50) | |||||||||||||||||
| Nuclear fuel amortization | 63 | 25 | 33 | |||||||||||||||||
| Depreciation, amortization and accretion | 144 | 27 | 208 | |||||||||||||||||
| Impairments | — | — | 381 | |||||||||||||||||
| NDT funds (gain) loss, net (excluding interest and fees) | (80) | (33) | (43) | |||||||||||||||||
| Deferred income taxes | 94 | 16 | 195 | |||||||||||||||||
| Reorganization (income) expense, net | — | — | (933) | |||||||||||||||||
| Other | (58) | 17 | 7 | |||||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||||||
| Accounts receivable, net | (14) | (5) | 261 | |||||||||||||||||
| Inventory, net | 90 | (11) | 10 | |||||||||||||||||
| Other assets | 34 | 22 | 98 | |||||||||||||||||
| Accounts payable and accrued liabilities | (114) | (89) | (69) | |||||||||||||||||
| Accrued interest | (1) | 25 | (124) | |||||||||||||||||
| Other liabilities | 65 | 13 | (42) | |||||||||||||||||
| Net cash provided by (used in) operating activities | 150 | (1) | 462 | |||||||||||||||||
| Investing Activities | ||||||||||||||||||||
| Property, plant and equipment expenditures | (45) | (20) | (138) | |||||||||||||||||
| Nuclear fuel expenditures | (44) | (14) | (49) | |||||||||||||||||
| NDT funds investment sale proceeds | 1,095 | 273 | 949 | |||||||||||||||||
| NDT funds investment purchases | (1,110) | (279) | (959) | |||||||||||||||||
| Equity investments in affiliates | (5) | — | (8) | |||||||||||||||||
| Proceeds from Cumulus Data Campus Sale and ERCOT Sale (Note 17) | 1,089 | — | — | |||||||||||||||||
| Proceeds from the sale of assets | 1 | — | 46 | |||||||||||||||||
| Other investing activities | (2) | 2 | 2 | |||||||||||||||||
| Net cash provided by (used in) investing activities | 979 | (38) | (157) | |||||||||||||||||
5
TALEN ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Successor | Predecessor | |||||||||||||||||||
| (Millions of Dollars) | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | |||||||||||||||||
| Financing Activities | ||||||||||||||||||||
| Contributions from member | — | — | 1,393 | |||||||||||||||||
| Financing proceeds at Emergence, net of discount | — | — | 2,219 | |||||||||||||||||
| Repayment of Prepetition Secured Indebtedness | — | — | (3,898) | |||||||||||||||||
| Payment of make-whole premiums on Prepetition Secured Indebtedness | — | — | (152) | |||||||||||||||||
| LMBE-MC TLB payments | — | (1) | (7) | |||||||||||||||||
| Cumulus Digital TLF repayment | (182) | — | — | |||||||||||||||||
| Share repurchases (Note 15) | (654) | — | — | |||||||||||||||||
| Repurchase of noncontrolling interest | (39) | — | — | |||||||||||||||||
| Cash settlement of restricted stock units | (28) | — | — | |||||||||||||||||
| Deferred finance costs | — | — | (74) | |||||||||||||||||
| Derivatives with financing elements | — | — | (20) | |||||||||||||||||
| Other | (12) | 1 | — | |||||||||||||||||
| Net cash provided by (used in) financing activities | (915) | — | (539) | |||||||||||||||||
| Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash and Cash Equivalents | 214 | (39) | (234) | |||||||||||||||||
| Beginning of period cash and cash equivalents and restricted cash and cash equivalents | 901 | 754 | 988 | |||||||||||||||||
| End of period cash and cash equivalents and restricted cash and cash equivalents | $ | 1,115 | $ | 715 | $ | 754 | ||||||||||||||
See Note 16 for supplemental cash flow information.
The accompanying Notes to the Interim Financial Statements are an integral part of the financial statements.
6
TALEN ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| (Millions of Dollars, except share data) | Common stock shares (a) | Additional paid-in capital | Accumulated earnings (deficit) | AOCI | Treasury Stock | Non controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||
| December 31, 2023 (Successor) | 59,029 | $ | 2,346 | $ | 134 | $ | (23) | $ | — | $ | 77 | $ | 2,534 | ||||||||||||||||||||||||||||
| Net income (loss) | — | — | 294 | — | — | 25 | 319 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (4) | — | — | (4) | ||||||||||||||||||||||||||||||||||
| Share repurchase | (493) | — | — | — | (39) | — | (39) | ||||||||||||||||||||||||||||||||||
Purchase of noncontrolling interest (c) | — | (15) | — | — | — | (24) | (39) | ||||||||||||||||||||||||||||||||||
Cash distributions (d) | — | — | — | — | — | (1) | (1) | ||||||||||||||||||||||||||||||||||
Non-cash distributions (b) | — | — | — | — | — | (12) | (12) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 8 | — | — | — | — | 8 | ||||||||||||||||||||||||||||||||||
| March 31, 2024 (Successor) | 58,536 | $ | 2,339 | $ | 428 | $ | (27) | $ | (39) | $ | 65 | $ | 2,766 | ||||||||||||||||||||||||||||
| Net income (loss) | — | — | 454 | — | — | 4 | 458 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (2) | — | — | (2) | ||||||||||||||||||||||||||||||||||
| Share repurchases | (5,281) | — | — | — | (622) | — | (622) | ||||||||||||||||||||||||||||||||||
| Retirement of treasury stock | — | (227) | (434) | — | 661 | — | — | ||||||||||||||||||||||||||||||||||
| Cash settlement of restricted stock units | — | (28) | — | — | — | — | (28) | ||||||||||||||||||||||||||||||||||
Non-cash distributions (b) | — | — | — | — | — | (8) | (8) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 8 | — | — | — | — | 8 | ||||||||||||||||||||||||||||||||||
| June 30, 2024 (Successor) | 53,255 | $ | 2,092 | $ | 448 | $ | (29) | $ | — | $ | 61 | $ | 2,572 | ||||||||||||||||||||||||||||
__________________
(a)Shares in thousands.
(b)Related primarily to distribution of Bitcoin to TeraWulf.
(c)TES acquisition of remaining noncontrolling interests in Cumulus Digital Holdings. See Note 17 for additional information.
(d)Distribution to noncontrolling interest owners of Cumulus Digital Holdings.
The accompanying Notes to the Interim Financial Statements are an integral part of the financial statements.
7
TALEN ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| (Millions of Dollars, except share data) | Common stock shares (a) | Additional paid-in capital | Accumulated earnings (deficit) | AOCI | Member's Equity | Non controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||
| December 31, 2022 (Predecessor) | $ | — | $ | — | $ | — | $ | — | $ | (573) | $ | 91 | $ | (482) | |||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | 48 | (2) | 46 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 9 | — | 9 | ||||||||||||||||||||||||||||||||||
Non-cash contributions (c) | — | — | — | — | — | 38 | 38 | ||||||||||||||||||||||||||||||||||
Non-cash distribution, net (d) | — | — | — | — | — | (2) | (2) | ||||||||||||||||||||||||||||||||||
| March 31, 2023 (Predecessor) | $ | — | $ | — | $ | — | $ | — | $ | (516) | $ | 125 | $ | (391) | |||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | 431 | (12) | 419 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (3) | — | (3) | ||||||||||||||||||||||||||||||||||
Cancellation of member’s equity (b) | — | — | — | — | 88 | — | 88 | ||||||||||||||||||||||||||||||||||
Issuance of member’s equity (b) | — | — | — | — | 2,313 | — | 2,313 | ||||||||||||||||||||||||||||||||||
Issuance of warrants (b) | — | — | — | — | 8 | — | 8 | ||||||||||||||||||||||||||||||||||
| Common equity from member's equity exchange | — | 2,321 | — | — | (2,321) | — | — | ||||||||||||||||||||||||||||||||||
Non-cash distributions (d) | — | — | — | — | — | (3) | (3) | ||||||||||||||||||||||||||||||||||
| May 17, 2023 (Predecessor) | $ | — | $ | 2,321 | $ | — | $ | — | $ | — | $ | 110 | $ | 2,431 | |||||||||||||||||||||||||||
| May 18, 2023 (Successor) | 59,029 | $ | 2,321 | $ | — | $ | — | $ | — | $ | 110 | $ | 2,431 | ||||||||||||||||||||||||||||
| Net income (loss) | — | — | 29 | — | — | 2 | 31 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (3) | — | — | (3) | ||||||||||||||||||||||||||||||||||
Non-cash distribution (d) | — | — | — | — | — | (3) | (3) | ||||||||||||||||||||||||||||||||||
| Other | — | 4 | — | — | — | — | 4 | ||||||||||||||||||||||||||||||||||
| June 30, 2023 (Successor) | 59,029 | $ | 2,325 | $ | 29 | $ | (3) | $ | — | $ | 109 | $ | 2,460 | ||||||||||||||||||||||||||||
__________________
(a)Shares in thousands.
(b)Pursuant to the Plan of Reorganization: (i) existing equity interests were canceled; and (ii) new equity interests and equity-classified warrants were issued.
(c)Relates to contributions of cryptocurrency mining machines by TeraWulf to Nautilus.
(d)Relates primarily to distributions of cryptocurrency mining machines or Bitcoin to TeraWulf.
The accompanying Notes to the Interim Financial Statements are an integral part of the financial statements.
8
TALEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO THE INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Capitalized terms and abbreviations appearing in these Notes to the Interim Financial Statements are defined in the glossary. Dollars are in millions, unless otherwise noted. References to the “Annual Financial Statements” are to the audited Talen Energy Corporation 2023 Annual Financial Statements and Notes thereto, which are attached to the Registration Statement.
“TEC” refers to Talen Energy Corporation. “TES” refers to Talen Energy Supply, LLC. For periods after May 17, 2023, the terms “Talen,” “Successor,” the “Company,” “we,” “us” and “our” refer to TEC and its consolidated subsidiaries (including TES), unless the context clearly indicates otherwise. For periods on or before May 17, 2023, the terms “Talen,” “Predecessor,” the “Company,” “we,” “us” and “our” refer to TES and its consolidated subsidiaries, unless the context clearly indicates otherwise. See “Emergence from Restructuring, Fresh Start Accounting, and Reverse Acquisition” in Note 2 for information on an accounting reverse acquisition that occurred at Emergence.
This presentation has been applied where identification of subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis. When identification of a subsidiary is considered important to understanding the matter being disclosed, the specific entity’s name is used. Each disclosure referring to a subsidiary also applies to TEC insofar as such subsidiary’s financial information is included in TEC’s consolidated financial information. TEC and each of its subsidiaries and affiliates are separate legal entities and, except by operation of law, are not liable for the debts or obligations of one another absent an express contractual undertaking to the contrary.
1. Organization and Operations
Talen owns and operates power infrastructure in the United States. We produce and sell electricity, capacity, and ancillary services into wholesale power markets in the United States primarily in PJM and WECC, with our generation fleet principally located in the Mid-Atlantic region of the United States and Montana. The majority of our generation is produced at our zero-carbon nuclear and lower-carbon gas-fired facilities. As of June 30, 2024 (Successor), our generation capacity was 10,665 MW (summer rating). Talen is headquartered in Houston, Texas.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
Our Interim Financial Statements, which are prepared in accordance with GAAP and pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q, include: (i) the accounts of all controlled subsidiaries; (ii) elimination adjustments for intercompany transactions between controlled subsidiaries; (iii) any undivided interests in jointly owned facilities consolidated on a proportionate basis; and (iv) all adjustments considered necessary for a fair statement of the information set forth. All adjustments are of a normal recurring nature except as otherwise disclosed. Certain information and note disclosures have been condensed or omitted from the Interim Financial Statements in accordance with GAAP. The Consolidated Balance Sheet as of December 31, 2023 (Successor) is derived from the 2023 Consolidated Balance Sheet in the Annual Financial Statements. The Interim Financial Statements and Notes thereto should be read in conjunction with the Annual Financial Statements and Notes thereto. The results of operations presented in our Interim Financial Statements are not necessarily indicative of the results to be expected for the full year or for other future periods because interim period results can be disproportionately influenced by operational developments, seasonality, and other various factors.
9
Emergence from Restructuring, Fresh Start Accounting, and Reverse Acquisition. In May 2022, TES and 71 of its subsidiaries filed voluntary petitions seeking relief under Chapter 11 of the U.S. Bankruptcy Code. In December 2022, TEC became a debtor in the Restructuring in order to facilitate certain transactions contemplated by the Plan of Reorganization. The Plan of Reorganization was approved by the requisite parties in November 2022, was confirmed by the U.S. Bankruptcy Court in December 2022, and became effective in May 2023, when TEC, TES and the other debtors emerged from the Restructuring.
Upon commencement of the Restructuring, TES was deconsolidated from TEC for financial reporting purposes because TEC no longer controlled TES. TEC regained control of TES at Emergence, which resulted in TEC’s reconsolidation of TES. The combination was accounted for as a reverse acquisition in which TEC was the legal acquirer and TES was the accounting acquirer. Accordingly, our Interim Financial Statements are issued under the name of TEC, the legal parent of TES and accounting acquiree, but represent the continuation of the financial statements of TES, the accounting acquirer.
After Emergence, TES applied fresh start accounting, which resulted in a new basis of accounting as the Company became a new financial reporting entity. As a result of the application of fresh start accounting and the implementation of the Plan of Reorganization, our financial position and results of operations beginning after Emergence are not comparable to our financial position or results of operations prior to that date. The financial results are presented for: (i) the Predecessor period from January 1 through May 17, 2023; and (ii) the Successor periods from May 18 through June 30, 2023, and from January 1 through June 30, 2024. The Interim Financial Statements and Notes thereto have been presented with a black line division to delineate the lack of comparability between the Predecessor and Successor.
See Notes 2, 3 and 4 in Notes to the Annual Financial Statements for additional information on the reverse acquisition, the legal structure of the Restructuring transactions, and the impacts of fresh start accounting.
Summary of Significant Accounting Policies
Reclassifications. Certain amounts in the prior period financial statements were reclassified to conform to the current period’s presentation. The reclassifications did not affect operating income, net income, total assets, total liabilities, net equity or cash flows.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Treasury Stock and Retirement of Treasury Shares. Share repurchases are accounted for under the cost method, which recognizes the entire cost of the acquired stock, including transaction costs and excise tax, as a reduction in additional paid-in-capital and are presented as “Treasury stock” on the Consolidated Balance Sheets. Share repurchases are recognized on a trade date basis when we are contractually obligated to purchase the shares. At retirement, the common stock balance is reduced for the par value of the shares. The excess of the acquisition cost of treasury shares over the par value is recognized in additional paid-in capital (up to the amount credited to additional paid-in capital upon original issuance of the shares), with any remaining cost deducted from retained earnings.
10
Nuclear PTCs. The Nuclear PTC program provides qualified nuclear power generation facilities with transferable credits for electricity produced and sold to an unrelated party during each tax year. These credits, which are accounted for by analogy to income-based grants under international accounting standards for government grants and disclosure of government assistance, are recognized when there is reasonable assurance that the Company will comply with the applicable conditions and that the credit will be received, which is generally over the period of production. As the credits that are generated each tax year are based on annual gross receipts and production volumes, the measurement of the credit value is estimated at each period until the final value can be determined at the end of the year, which may be different than the estimated amount. The credit value includes a five-times multiplier (up to $15 per MWh) for meeting prevailing wage requirements. Accordingly, Nuclear PTCs are recognized based on production volumes generated during the period and measured at the credit value for the tax year. See Note 4 for amounts recognized, which are presented as “Energy and other revenues” on the Consolidated Statements of Operations and “Other current assets” on the Consolidated Balance Sheets. Credits that are utilized to reduce federal income taxes payable are presented as a reduction of “Other current liabilities” on the Consolidated Balance Sheets. There have been no transfers of Nuclear PTCs to third parties during the six months ended June 30, 2024 (Successor). Additional guidance expected to be issued from the U.S. Treasury and IRS may impact the credit value received.
See Note 2 in Notes to the Annual Financial Statements for additional information on significant accounting policies.
3. Risk Management, Derivative Instruments and Hedging Activities
Risk Management Objectives
We are exposed to risks arising from our business, including, but not limited to, market and commodity price risk, credit and liquidity risk and interest rate risk. The hedging strategies deployed by our commercial organization manage and (or) balance these risks within a structured risk management program in order to minimize near-term future cash flow volatility. Our risk management committee, comprised of certain senior management members across the organization, oversees the management of these risks in accordance with our risk policy. In turn, the risk management committee is overseen by the risk committee of the Board of Directors.
The Board of Directors (including the risk committee) and management have established procedures to monitor, measure and manage hedging activities and credit risk in accordance with the risk policy.
Key risk control activities, which are designed to ensure compliance with the risk policy, include, among other activities, credit review and approval, validation of transactions and market prices, verification of risk and transaction limits, portfolio stress tests, analysis and monitoring of margin at risk and daily portfolio reporting.
Market and Commodity Price Risk. Volatility in the wholesale power markets provides uncertainty in the future performance and cash flows of the business. The price risk Talen is exposed to includes the price variability associated with future sales and (or) purchases of power, natural gas, coal, uranium, oil products, environmental products and other energy commodities in competitive wholesale markets. Several factors influence price volatility, including: seasonal changes in demand; weather conditions; available regional load-serving supply; regional transportation and (or) transmission availability; market liquidity; and federal, regional and state regulations.
Within the parameters of our risk policy, we generally utilize conventional first lien, exchange-traded and over-the-counter traded derivative instruments and, in certain instances, structured products, to economically hedge the commodity price risk of the forecasted future sales and purchases of commodities associated with our generation portfolio.
11
Open commodity purchase (sales) derivatives as of June 30, 2024 (Successor) range in maturity through 2026. The net notional volumes of open commodity derivatives were:
| Successor | |||||||||||
June 30, 2024 (a) | December 31, 2023 (a) | ||||||||||
| Power (MWh) | (38,172,764) | (27,557,871) | |||||||||
| Natural gas (MMBtu) | 70,334,960 | 8,314,060 | |||||||||
| Emission allowances (tons) | 75,000 | 500,000 | |||||||||
__________________
(a)The volumes may be less than the contractual volumes, as the probability that option contracts will be exercised is considered in the volumes displayed.
Interest Rate Risk. Talen is exposed to interest rate risk from the possibility that changes in interest rates will affect future cash flows associated with existing floating rate debt issuances. To reduce interest rate risk, derivative instruments are utilized to economically hedge the interest rates for a predetermined contractual notional amount, which results in a cash settlement between counterparties. To the extent possible, first lien interest rate fixed-for-floating swaps are utilized to hedge this risk.
Open interest rate derivatives are related to the TLB indebtedness and range in maturity dates through 2026. The net notional volumes of open interest rate derivatives were:
| Successor | |||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
Interest rate (in millions) | $ | 290 | $ | 290 | |||||||
Credit Risk. Credit risk, which is the risk of financial loss if a customer, counterparty or financial institution is unable to perform or pay amounts due, is applicable to cash and cash equivalents, restricted cash and cash equivalents, derivative instruments and accounts receivable. The maximum amount of credit exposure associated with financial assets is equal to the carrying value. Credit risk, which cannot be completely eliminated, is managed through a number of practices such as ongoing reviews of counterparty creditworthiness, prepayment, inclusion of termination rights in contracts which are triggered by certain events of default and executing master netting arrangements which permit amounts between parties to be offset. Additionally, credit enhancements such as cash deposits, LCs and credit insurance may be employed to mitigate credit risk.
Cash and cash equivalents are placed in depository accounts or high-quality, short-term investments with major international banks and financial institutions. Individual counterparty exposure from over-the-counter derivative instruments is managed within predetermined credit limits and includes the use of master netting arrangements and cash-call margins, when appropriate, to reduce credit risk. Exchange-traded commodity contracts, which are executed through futures commission merchants, have minimal credit risk because they are subject to mandatory margin requirements and are cleared with an exchange. However, Talen is exposed to the credit risk of the futures commission merchants arising from daily variation margin cash calls. Restricted cash and cash equivalents deposited to meet initial margin requirements are held by futures commission merchants in segregated accounts for the benefit of Talen.
Outstanding accounts receivable include those from sales of capacity, generated electricity and ancillary services through contracts directly with ISOs and RTOs and realized settlements of physical and financial derivative instruments with commodity marketers. Additionally, Talen carries accounts receivable due from joint owners for their portion of operating and capital costs for certain jointly owned facilities that are operated by the Company. The majority of outstanding receivables, which are continually monitored, have customary payment terms. The allowance for doubtful accounts was a non-material amount as of June 30, 2024 (Successor) and December 31, 2023 (Successor).
12
As of June 30, 2024 (Successor), Talen’s aggregate credit exposure, which excludes the effects of netting arrangements, cash collateral, LCs and any allowances for doubtful collections, was $437 million and its credit exposure net of such effects was $66 million. Excluding ISO and RTO counterparties, whose accounts receivable settlements are subject to applicable market controls, the ten largest single net credit exposures account for approximately 54% of Talen’s total net credit exposure, which are primarily with entities assigned investment grade credit ratings.
Certain derivative instruments contain credit risk-related contingent features, which may require us to provide cash collateral, LCs or guarantees from a creditworthy entity if the fair value of a liability eclipses a certain threshold or upon a decline in Talen’s credit rating. The fair values of derivative instruments in a net liability position, and that contain credit risk-related contingent features, were non-material as of June 30, 2024 (Successor) and December 31, 2023 (Successor).
Derivative Instrument Presentation
Balance Sheets Presentation. The fair value of derivative instruments presented within assets and liabilities on the Consolidated Balance Sheets were:
| Successor | |||||||||||||||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
| Commodity contracts | $ | 24 | $ | 63 | $ | 88 | $ | 32 | |||||||||||||||
| Interest rate contracts | 3 | — | 1 | — | |||||||||||||||||||
| Total current derivative instruments | 27 | 63 | 89 | 32 | |||||||||||||||||||
| Commodity contracts | 13 | 1 | 6 | 5 | |||||||||||||||||||
| Interest rate contracts | — | — | — | 6 | |||||||||||||||||||
| Total non-current derivative instruments | $ | 13 | $ | 1 | $ | 6 | $ | 11 | |||||||||||||||
All commodity and interest rate derivatives are economic hedges where the changes in fair value are presented immediately in income as unrealized gains and losses. Changes in the fair value and realized settlements on commodity derivative instruments are presented as separate components of “Energy revenues” and “Fuel and energy purchases” on the Consolidated Statements of Operations. See Note 12 for additional information on fair value.
Effect of Netting. Generally, the right of setoff within master netting arrangements permits the fair value of derivative assets to be offset with derivative liabilities. As an election, derivative assets and derivative liabilities are presented on the Consolidated Balance Sheets with the effect of such permitted netting as of June 30, 2024 (Successor) and December 31, 2023 (Successor).
The net amounts of “Derivative instruments” presented as assets and liabilities on the Consolidated Balance Sheets considering the effect of permitted netting and where cash collateral is pledged in accordance with the underlying agreement were:
| Gross Derivative Instruments | Eligible for Offset | Net Derivative Instruments | Collateral (Posted) Received | Net Amounts | |||||||||||||||||||||||||
| June 30, 2024 (Successor) | |||||||||||||||||||||||||||||
Assets | $ | 286 | $ | (246) | $ | 40 | $ | — | $ | 40 | |||||||||||||||||||
| Liabilities | 332 | (246) | 86 | (22) | 64 | ||||||||||||||||||||||||
| December 31, 2023 (Successor) | |||||||||||||||||||||||||||||
| Assets | $ | 295 | $ | (198) | $ | 97 | $ | (2) | $ | 95 | |||||||||||||||||||
| Liabilities | 300 | (198) | 102 | (59) | 43 | ||||||||||||||||||||||||
13
Statements of Operations Presentation. The location and pre-tax effect of “Derivative instruments” presented on the Consolidated Statements of Operations for the periods were:
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2024 | May 18 through June 30, 2023 | April 1 through May 17, 2023 | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | |||||||||||||||||||||||||||||||||||||||
| Realized gain (loss) on commodity contracts | ||||||||||||||||||||||||||||||||||||||||||||
Energy revenues (a) | $ | 38 | $ | 70 | $ | 65 | $ | 196 | $ | 70 | $ | 644 | ||||||||||||||||||||||||||||||||
Fuel and energy purchases (a) | (8) | (20) | (13) | (7) | (20) | (34) | ||||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on commodity contracts | ||||||||||||||||||||||||||||||||||||||||||||
Operating revenues (b) | 76 | 87 | (85) | (32) | 87 | 60 | ||||||||||||||||||||||||||||||||||||||
Energy expenses (b) | 15 | (46) | (9) | (12) | (46) | (123) | ||||||||||||||||||||||||||||||||||||||
| Realized and unrealized gain (loss) on interest rate contracts | ||||||||||||||||||||||||||||||||||||||||||||
| Interest expense and other finance charges | 1 | 1 | — | 9 | 1 | — | ||||||||||||||||||||||||||||||||||||||
__________________
(a)Does not include those derivative instruments that settle through physical delivery.
(b)Presented as “Unrealized gain (loss) on derivative instruments” on the Consolidated Statements of Operations.
4. Revenue
The disaggregation of our operating revenues for the periods were:
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2024 | May 18 through June 30, 2023 | April 1 through May 17, 2023 | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | |||||||||||||||||||||||||||||||||||||||
| Capacity revenues | $ | 46 | $ | 26 | $ | 42 | $ | 91 | $ | 26 | $ | 108 | ||||||||||||||||||||||||||||||||
| Electricity sales and ancillary services, ISO/RTO | 249 | 130 | 85 | 514 | 130 | 281 | ||||||||||||||||||||||||||||||||||||||
| Physical electricity sales, bilateral contracts, other | 22 | 6 | 13 | 86 | 6 | 62 | ||||||||||||||||||||||||||||||||||||||
| Other revenue from customers | 29 | 15 | 18 | 71 | 15 | 27 | ||||||||||||||||||||||||||||||||||||||
| Total revenue from contracts with customers | 346 | 177 | 158 | 762 | 177 | 478 | ||||||||||||||||||||||||||||||||||||||
| Realized and unrealized gain (loss) on derivative instruments | 100 | 124 | (21) | 157 | 124 | 732 | ||||||||||||||||||||||||||||||||||||||
Nuclear PTC and other revenue (a) | 43 | — | — | 79 | — | — | ||||||||||||||||||||||||||||||||||||||
| Operating revenues | $ | 489 | $ | 301 | $ | 137 | $ | 998 | $ | 301 | $ | 1,210 | ||||||||||||||||||||||||||||||||
(a)During the six months ended June 30, 2024, $51 million of estimated Nuclear PTCs were utilized as a credit against our federal income tax payable. See Note 5 for additional information on the tax impact of the Nuclear PTC.
14
Accounts Receivable
“Accounts receivable, net” presented on the Consolidated Balance Sheets were:
| Successor | |||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Customer accounts receivable | $ | 104 | $ | 52 | |||||||
| Other accounts receivable | 47 | 85 | |||||||||
| Accounts receivable, net | $ | 151 | $ | 137 | |||||||
During the six months ended June 30, 2024 (Successor), the period from May 18 through June 30, 2023 (Successor), and the period from January 1 through May 17, 2023 (Predecessor), there were no significant changes in accounts receivable other than normal receivable recognition and collection transactions. See Note 3 for additional information on Talen’s credit risk on the carrying value of its receivables.
Future Performance Obligations
In the normal course of business, Talen has future performance obligations for capacity sales awarded through market-based capacity auctions and (or) for capacity sales under bilateral contractual arrangements.
As of June 30, 2024 (Successor), the expected future period capacity revenues subject to unsatisfied or partially unsatisfied performance obligations were:
2024 (a) | 2025 | 2026 | 2027 | 2028 | |||||||||||||||||||||||||
| Expected capacity revenues | $ | 101 | $ | 85 | $ | 3 | $ | 3 | $ | 1 | |||||||||||||||||||
__________________
(a)For the period from July 1 through December 31, 2024.
The PJM capacity auction for the 2025/2026 PJM Capacity Year was held in July 2024. Talen cleared a total of 6,820 MW at a clearing price of $269.92 per MW-day for the MAAC, PPL, and PSEG locational deliverability areas. The PJM capacity auctions for any years thereafter have not yet been held. See Note 10 for additional information on the PJM RPM and auctions.
15
5. Income Taxes
Effective Tax Rate Reconciliations
The reconciliations of the effective tax rate for the periods were:
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2024 | May 18 through June 30, 2023 | April 1 through May 17, 2023 | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | |||||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes | $ | 570 | $ | 50 | $ | 617 | $ | 958 | $ | 50 | $ | 677 | ||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | (112) | (19) | (198) | (181) | (19) | (212) | ||||||||||||||||||||||||||||||||||||||
Effective tax rate | 19.6% | 38.0% | 32.1% | 18.9% | 38.0% | 31.3% | ||||||||||||||||||||||||||||||||||||||
| Federal income tax statutory tax rate | 21 % | 21 % | 21 % | 21 % | 21 % | 21 % | ||||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) computed at the federal income tax statutory tax rate | (120) | (10) | (130) | (201) | (10) | (143) | ||||||||||||||||||||||||||||||||||||||
| Income tax increase (decrease) due to: | ||||||||||||||||||||||||||||||||||||||||||||
| State income taxes, net of federal benefit | (17) | (2) | (32) | (29) | (2) | (34) | ||||||||||||||||||||||||||||||||||||||
| Change in valuation allowance | 14 | 2 | 116 | 34 | 2 | 129 | ||||||||||||||||||||||||||||||||||||||
| Production tax credits | 9 | — | — | 18 | — | — | ||||||||||||||||||||||||||||||||||||||
| Other permanent differences | 6 | (3) | (11) | 12 | (3) | (16) | ||||||||||||||||||||||||||||||||||||||
| Nuclear decommissioning trust taxes | (4) | (6) | (2) | (15) | (6) | (9) | ||||||||||||||||||||||||||||||||||||||
| Reorganization adjustments | — | — | (138) | — | — | (138) | ||||||||||||||||||||||||||||||||||||||
| Other | — | — | (1) | — | — | (1) | ||||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | $ | (112) | $ | (19) | $ | (198) | $ | (181) | $ | (19) | $ | (212) | ||||||||||||||||||||||||||||||||
Valuation Allowance
Management assesses the available positive and negative evidence to estimate whether it is more likely than not that sufficient future taxable income will be generated to permit use of existing deferred tax assets. The assessment of future taxable income includes the scheduled reversal of taxable temporary differences, projected future taxable income, tax planning strategies and results of recent operations. For the six months ended June 30, 2024 (Successor), Talen recognized a $34 million tax benefit for the reduction in federal and state valuation allowances, primarily related to year-to-date divestitures which increase the amount of tax attributes that can be utilized. See Note 17 for information on the sale transactions. At each period, management will continue to assess the available positive and negative evidence to determine the need for a valuation allowance.
6. Inventory
| Successor | |||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Coal | $ | 113 | $ | 152 | |||||||
| Oil products | 70 | 75 | |||||||||
| Fuel inventory for electric generation | 183 | 227 | |||||||||
| Materials and supplies, net | 77 | 72 | |||||||||
| Environmental products | 20 | 76 | |||||||||
| Inventory, net | $ | 280 | $ | 375 | |||||||
16
Inventory net realizable value and obsolescence charges on coal and fuel oil inventories are presented as “Other operating income (expense), net” on the Consolidated Statements of Operations. Such non-cash charges were non-material for the six months ended June 30, 2024 (Successor), non-material for the period from May 18 through June 30, 2023 (Successor), and $37 million for the period from January 1 through May 17, 2023 (Predecessor)
Of the above charges incurred during the period from January 1 through May 17, 2023 (Predecessor), $24 million is related to Brandon Shores inventories. See Note 8 for additional information on the Brandon Shores recoverability assessment.
7. Nuclear Decommissioning Trust Funds
| Successor | |||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||||||||||||||||||||
| Cash equivalents | $ | 13 | $ | — | $ | — | $ | 13 | $ | 9 | $ | — | $ | — | $ | 9 | |||||||||||||||||||||||||||||||
| Equity securities | 498 | 636 | 56 | 1,078 | 491 | 575 | 53 | 1,013 | |||||||||||||||||||||||||||||||||||||||
| Debt securities | 600 | 3 | 5 | 598 | 570 | 10 | 1 | 579 | |||||||||||||||||||||||||||||||||||||||
| Receivables (payables), net | (30) | — | — | (30) | (26) | — | — | (26) | |||||||||||||||||||||||||||||||||||||||
| NDT funds | $ | 1,081 | $ | 639 | $ | 61 | $ | 1,659 | $ | 1,044 | $ | 585 | $ | 54 | $ | 1,575 | |||||||||||||||||||||||||||||||
See Note 12 for additional information on the NDT fair value. There were no available-for-sale debt securities with credit losses as of June 30, 2024 (Successor) and December 31, 2023 (Successor).
As of June 30, 2024 (Successor), there was no intent to sell available-for-sale debt securities with unrealized losses, and it is not more likely than not that each of these investments will be required to be sold before the recovery of its amortized cost. The aggregate related fair value of available-for-sale debt securities with unrealized losses as of June 30, 2024 (Successor) were:
| Fair Value | Unrealized Losses | ||||||||||
| Corporate debt securities | $ | 78 | $ | (1) | |||||||
| Municipal debt securities | 64 | (1) | |||||||||
| U.S. Government debt securities | 183 | (3) | |||||||||
Total debt securities in unrealized loss position | $ | 325 | $ | (5) | |||||||
Securities in an unrealized loss position for a duration of one year or longer as of June 30, 2024 (Successor):
| Fair Value | Unrealized Losses | ||||||||||
| Municipal debt securities | $ | 49 | $ | (1) | |||||||
| U.S. Government debt securities | 105 | (2) | |||||||||
Total debt securities in unrealized loss position for one year or longer (a) | $ | 154 | $ | (3) | |||||||
__________________
(a)Excludes corporate debt securities which, in the aggregate, had a fair value of $23 million, as the unrealized losses were non-material.
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The contractual maturities for available-for-sale debt securities presented on the Consolidated Balance Sheets were:
| Successor | |||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Maturities within one year | $ | 75 | $ | 105 | |||||||
| Maturities within two to five years | 177 | 194 | |||||||||
| Maturities thereafter | 346 | 280 | |||||||||
| Debt securities, fair value | $ | 598 | $ | 579 | |||||||
The sales proceeds, gains, and losses for available-for-sale debt securities for the periods were:
| Successor | Predecessor | Successor | Predecessor | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2024 | May 18 through June 30, 2023 | April 1 through May 17, 2023 | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | |||||||||||||||||||||||||||||||||||||||
Sales proceeds of NDT funds investments (a) | $ | 535 | $ | 271 | $ | 243 | $ | 1,034 | $ | 271 | $ | 839 | ||||||||||||||||||||||||||||||||
| Gross realized gains | 2 | — | 2 | 5 | — | 7 | ||||||||||||||||||||||||||||||||||||||
| Gross realized losses | (3) | (2) | (2) | (6) | (2) | (12) | ||||||||||||||||||||||||||||||||||||||
__________________
(a)Sales proceeds are used to pay income taxes and trust management fees. Remaining proceeds are reinvested in the NDT.
8. Property, Plant and Equipment
| Successor | |||||||||||||||||||||||||||||||||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Estimated Useful Life (years) | Gross Value | Accumulated Provision | Carrying Value | Gross Value | Accumulated Provision | Carrying Value | |||||||||||||||||||||||||||||||||||
| Electric generation | 3-27 | $ | 3,015 | $ | (197) | $ | 2,818 | $ | 3,178 | $ | (109) | $ | 3,069 | ||||||||||||||||||||||||||||
| Nuclear fuel | 1-6 | 322 | (107) | 215 | 228 | (55) | 173 | ||||||||||||||||||||||||||||||||||
| Other property and equipment | 1-20 | 146 | (30) | 116 | 357 | (21) | 336 | ||||||||||||||||||||||||||||||||||
| Intangible assets | 2-26 | 1 | — | 1 | 1 | — | 1 | ||||||||||||||||||||||||||||||||||
| Capitalized software | 1-5 | 6 | (2) | 4 | 6 | (1) | 5 | ||||||||||||||||||||||||||||||||||
| Construction work in progress | 96 | — | 96 | 255 | — | 255 | |||||||||||||||||||||||||||||||||||
| Property, plant and equipment, net | $ | 3,586 | $ | (336) | $ | 3,250 | $ | 4,025 | $ | (186) | $ | 3,839 | |||||||||||||||||||||||||||||
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The components of “Depreciation, amortization and accretion” presented on the Consolidated Statements of Operations for the periods were:
| Successor | Predecessor | Successor | Predecessor | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2024 | May 18 through June 30, 2023 | April 1 through May 17, 2023 | Six Months Ended June 30, 2024 | May 18 through June 30, 2023 | January 1 through May 17, 2023 | ||||||||||||||||||||||||||||||||||||
Depreciation expense (a) | $ | 56 | $ | 23 | $ | 58 | $ | 116 | $ | 23 | $ | 173 | |||||||||||||||||||||||||||||
Amortization expense (b) | 4 | 1 | 1 | 6 | 1 | 4 | |||||||||||||||||||||||||||||||||||
Accretion expense (c) | 15 | 4 | 9 | 28 | 4 | 24 | |||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | (1) | |||||||||||||||||||||||||||||||||||
| Depreciation, amortization, and accretion | $ | 75 | $ | 28 | $ | 68 | $ | 150 | $ | 28 | $ | 200 | |||||||||||||||||||||||||||||
__________________
(a)Electric generation and other property and equipment.
(b)Intangible assets and capitalized software.
(c)ARO and accrued environmental cost accretion. See Note 9 for additional information.
The cost of nuclear fuel is presented as “Nuclear fuel amortization” on the Consolidated Statements of Operations.
Reliability Impact Assessments
Reliability Impact Assessments. In 2023, Talen provided notifications to PJM it intends to deactivate electric generation at both Brandon Shores and H.A. Wagner on June 1, 2025. PJM has notified Talen that the generation units at each facility are needed for reliability. In April 2024, cost-of-service rate schedules covering the period of June 1, 2025 through December 31, 2028 were filed at FERC for the continued Reliability-Must-Run operation and provision of service from Brandon Shores Units 1 and 2 and H.A Wagner Units 3 and 4. Each of the filed rate schedules sets forth the terms, conditions, and cost-based rates under which the applicable generation facility will agree to continue to operate its generation units. In June 2024: (i) FERC accepted each rate schedule, subject to refund; (ii) an administrative settlement judge was appointed; and (iii) settlement proceedings commenced. No assurance can be provided as to when, if at all, final rate schedules for each generation facility will be approved by FERC or how the rate schedules and resulting revenues may ultimately be modified in the course of settlement judge procedures, or, should they be necessary, in the course of any subsequent evidentiary hearing procedures.
2023 Impairment
Brandon Shores Asset Group. Brandon Shores is required by contract and permit to cease coal combustion by December 31, 2025. In the first quarter of 2023, Talen canceled its plan to convert Brandon Shores to an oil combustion facility due to an increase in expected conversion costs. This decision triggered a recoverability assessment of the carrying value of the Brandon Shores asset group.
The recoverability analysis indicated that the Brandon Shores asset group carrying value exceeded its future estimated undiscounted cash flows, which required an impairment charge to amend the asset group’s carrying value of its property, plant and equipment to its estimated fair value. Accordingly, for the period from January 1 through May 17, 2023 (Predecessor), a $361 million non-cash pre-tax impairment charge on the asset group’s undepreciated property, plant and equipment is presented as “Impairments” on the Consolidated Statements of Operations.
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9. Asset Retirement Obligations and Accrued Environmental Costs
| Successor | |||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Asset retirement obligations | $ | 484 | $ | 464 | |||||||
| Accrued environmental costs | 23 | 23 | |||||||||
| Total asset retirement obligations and accrued environmental costs | 507 | 487 | |||||||||
Less: asset retirement obligations and accrued environmental costs due within one year (a) | 34 | 18 | |||||||||
| Asset retirement obligations and accrued environmental costs due after one year | $ | 473 | $ | 469 | |||||||
__________________
(a)Presented as “Other current liabilities” on the Consolidated Statements of Operations.
Asset Retirement Obligations
The changes of the ARO carrying value were:
| ARO Rollforward | |||||
| Carrying value, December 31, 2023 (Successor) | $ | 464 | |||
| Obligations settled | (7) | ||||
| Accretion expense | 27 | ||||
| Carrying value, June 30, 2024 (Successor) | $ | 484 | |||
Supplemental information for the ARO:
| Successor | |||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Supplemental Information | |||||||||||
Nuclear (a) | $ | 227 | $ | 214 | |||||||
Non-Nuclear (b) | 257 | 250 | |||||||||
| Carrying value | $ | 484 | $ | 464 | |||||||
__________________
(a)Obligations are expected to be settled with available funds in the NDT at the time of decommissioning.
(b)Certain obligations are: (i) partially supported by surety bonds, some of which have been collateralized with cash and (or) LCs; or (ii) partially prefunded under phased installment agreements.
See Note 12 for additional information on Susquehanna’s NDT.
See “Talen Montana Financial Assurance” in Note 10 for additional information on Talen Montana’s requirement to provide financial assurance related to certain environmental decommissioning and remediation liabilities related to the Colstrip Units.
10. Commitments and Contingencies
Legal Matters
Talen is involved in certain legal proceedings, claims and litigation. While we believe that we have meritorious positions and will continue to defend our positions vigorously in these matters, we may not be successful in our efforts. If an unfavorable outcome is probable and can be reasonably estimated, a liability is recognized. In the event of an unfavorable outcome, the liability may be in excess of amounts currently accrued. Because of the inherently unpredictable nature of legal proceedings and the wide range of potential outcomes for any such matter, no estimate of the possible losses in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below. As a result, additional losses actually incurred in excess of amounts accrued could be substantial.
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Pending Legal Matters
ERCOT Weather Event Lawsuits. Beginning in March 2021, many power generation facility market participants, including the former Talen subsidiaries that at the time owned the Barney Davis, Nueces Bay and Laredo generation facilities, were sued in multiple Texas courts. In these suits, the plaintiffs: (i) allege, among other things, that they suffered losses due to the generation defendants’ failure to properly prepare their facilities to withstand extreme winter weather and other operational failures during Winter Storm Uri in February 2021, and (ii) seek unspecified compensatory, punitive and other damages. The lawsuits were consolidated into a multi-district litigation (“MDL”) pre-trial court. In January 2023, the court denied a motion to dismiss the MDL filed by the generation defendants. In December 2023, the Texas First Court of Appeals granted the generation defendants’ request for mandamus relief and ordered dismissal of the claims against the generation defendants. The plaintiffs have filed a motion seeking rehearing en banc with the First Court of Appeals. If unsuccessful, the plaintiffs are expected to petition the Texas Supreme Court to review the decision. Plaintiffs asserting prepetition Winter Storm Uri claims are limited to recovering any damages solely from the Talen defendants’ insurers pursuant to the Plan of Reorganization. Certain plaintiffs filed lawsuits asserting Winter Storm Uri claims after commencement of the Restructuring. If any of these post-commencement plaintiffs did not receive effective notice of the Restructuring under applicable bankruptcy law, they may not be subject to the terms of the Plan of Reorganization. Talen cannot predict the outcome of this matter for any such claims or its effect on Talen, which has retained these potential liabilities. See Note 17 for information on Talen’s sale of ERCOT generation assets.
In June 2021, TEC intervened in five cases in which certain market participants are challenging the validity of two Public Utility Commission of Texas (“PUCT”) orders directing ERCOT to ensure energy prices were at their maximum of $9,000 per MWh during Winter Storm Uri. One case has since been dismissed, one case is pending in the Texas Third Court of Appeals and two cases are pending in State District Court in Travis County, Texas. In March 2023, the Third Court of Appeals issued an opinion in Luminant v. PUCT that, in part, reversed and remanded the PUCT orders directing ERCOT to ensure prices were at their maximum of $9,000 per MWh during Winter Storm Uri. The PUCT (along with TEC and others) filed petitions for review with the Texas Supreme Court, which were granted in September 2023. In June 2024, the Texas Supreme Court reversed the judgment of the Texas Third Court of Appeals and affirmed the orders of the PUCT. The Court held that, in issuing its orders, the PUCT substantially complied with the Administrative Procedure Act’s procedural rulemaking requirements. Subject to any successful motion for rehearing in the Texas Supreme Court, this matter is effectively concluded in the Company’s favor.
Resolved Legal Matters
Pension Litigation. In November 2020, four former Talen employees filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania against TES, TEC, the TERP, the TERP committee, and (as amended) ten former retirement plan committee members alleging that they are owed enhanced benefits under the TERP. In September 2023, the parties reached an agreement to settle all claims on a class-wide basis, inclusive of attorneys’ fees, in exchange for $20 million. The settlement was approved by the court and became final by its terms in July 2024. Approximately $14 million of the settlement will be paid by the TERP to class members, with the remainder paid by the Company, net of insurance recoveries, to the plaintiffs’ attorneys and for certain administrative costs of the settlement. TES, at its discretion, may elect to fund a contribution into the TERP to cover settlement payments paid by the TERP. The settlement amounts and the expected insurance recoveries are presented on the Consolidated Balance Sheets as of June 30, 2024.
See Note 12 in Notes to the Annual Financial Statements for additional resolved legal matters.
21
Regulatory Matters
Talen is subject to regulation by federal and state agencies and other bodies that exercise regulatory authority in the various regions where we conduct business, including but not limited to: FERC; the Department of Energy; the Federal Communications Commission; the NRC; NERC; public utility commissions in various states in which we conduct business; and RTOs and ISOs in the regions in which we conduct business. Talen is party to proceedings before such agencies arising in the ordinary course of business and has other regulatory exposure due to new or amended regulations promulgated by such agencies from time to time. While the outcome of these regulatory matters and proceedings is uncertain, the likely results are not expected, either individually or in the aggregate, to have a material adverse effect on our financial condition or results of operations, although the effect could be material to our results of operations in any interim reporting period.
Susquehanna ISA Amendment. In June 2024, PJM filed at FERC an Amended Interconnection Service Agreement (“Amended ISA”) executed by PJM, PPL Electric Utilities Corporation (“PPL Electric,” a subsidiary of PPL), and Susquehanna, to enable Susquehanna to decrease the amount of power it will provide to the grid and thus increase, up to 480 MW, power that can be sold and provided directly to load via transmission owned by that load and connected directly to Susquehanna (and not to the power grid). The current Interconnection Service Agreement, previously accepted by FERC and similarly approved and executed by PJM and PPL Electric, already allows Susquehanna to decrease power to the grid by up to 300 MW in order to sell and provide that power to load. The increase to 480 MW was studied by PJM, which confirmed that such increase would have no reliability impacts on the grid. PJM requested an effective date of August 3, 2024 for the Amended ISA filing. In June 2024, Exelon Corporation and AEP filed a protest, despite the Amended ISA not being in their service territories and despite PPL Electric’s agreement to the terms. The protest raised generic issues about the service of load behind generators and requests that FERC set the Amended ISA proceeding for hearing or, in the alternative, reject the filing. Talen believes nearly all issues raised by Exelon Corporation and AEP are not within FERC’s limited jurisdictional review and lack merit, and Talen intends to defend against them quickly and vigorously. In July 2024, Talen filed responses at FERC opposing the aforementioned protest and urging FERC to accept the Amended ISA. In August 2024, FERC issued a deficiency letter seeking a more information about the Amended ISA. Talen will work closely with PJM and PPL to respond quickly to the deficiency letter. Additionally, in a separate order, FERC opened a new proceeding through which it will hold a commissioner-led technical conference in Fall 2024 to discuss generic issues related to the co-location of large loads. Talen intends to fully participate in that process.
PJM MOPR. In July 2021, PJM filed proposed tariff language to significantly reduce the application of the existing PJM MOPR by applying it only when the state requires an entity to act in a certain manner in the capacity market in exchange for receiving a subsidy. FERC did not act on PJM’s July 2021 filing, and the PJM MOPR tariff language went into effect in September 2021. In December 2023, the U.S. Court of Appeals for the Third Circuit denied the petitions for review of the MOPR tariff language. In March 2024, the Public Utilities Commission of Ohio filed at the U.S. Supreme Court a petition for certiorari asking the Court to review the Third Circuit’s December 2023 order, which the U.S. Supreme Court denied in May 2024. The final impacts on Talen’s financial condition, results of operations and liquidity are not known at this time.
PJM Market Seller Offer Cap. In March 2021, FERC responded to complaints filed by the PJM IMM on behalf of PJM and various consumer advocates alleging that the PJM MSOC was above a competitive offer level and was, therefore, unjust and unreasonable. In September 2021, FERC issued an order requiring the PJM ACR for each generator to be determined administratively by the PJM IMM. In August 2023, the U.S. Court of Appeals for the District of Columbia Circuit denied petitions by Talen and others for review of FERC’s order. In January 2024, the Electric Power Supply Association filed at the U.S. Supreme Court a petition for certiorari asking the Court to review the D.C. Circuit’s August 2023 order, which the U.S. Supreme Court denied in May 2024. The final impacts of this order on Talen’s financial condition, results of operations and liquidity are not known at this time.
22
PJM Capacity Market Reform. In February 2023, the PJM Board of Managers directed PJM and its stakeholders to resolve: (i) key issues that address the energy transition taking place in PJM; and (ii) issues observed from Winter Storm Elliott. The PJM Board of Managers directive included reliability risks, risk drivers and resource availability. The stakeholder process is referred to as Critical Issue Fast Path (“CIFP”) on resource adequacy. In October 2023, PJM made two filings at FERC regarding certain capacity market reforms developed through the CIFP process. In January 2024, FERC accepted one of PJM’s filings, subject to the condition that PJM submit a compliance filing within 30 days. However, in February 2024, FERC rejected the second of PJM’s capacity market reform filings and approved a request from PJM for a 35-day delay of Base Residual Auction. PJM held the Base Residual Auction for the 2025/2026 Delivery Year in July 2024. At this time, Talen cannot fully predict the impacts of PJM’s reforms on its operations and liquidity.
In June 2023, FERC accepted a request by PJM to delay certain PJM Base Residual Auctions in order to propose additional changes to the PJM RPM. The delay scheduled the PJM Base Residual Auctions for 2026/2027 in December 2024, for 2027/2028 in June 2025, and for 2028/2029 in December 2025. Although PJM has established dates for the next three auctions, there is no guarantee that the auctions will take place on those dates or at all. Depending on the ultimate outcome of matters related to PJM’s capacity auctions, capacity revenues in PJM could be affected, but the final impacts on Talen’s financial condition, results of operations and liquidity are not known at this time.
Environmental Matters
Extensive federal, state and local environmental laws and regulations are applicable to our business, including those related to air emissions, water discharges, and hazardous and solid waste management. From time to time, in the ordinary course of our business, Talen may become involved in other environmental matters or become subject to other, new or revised environmental statutes, regulations or requirements. It may be necessary for us to modify, curtail, replace or cease operation of certain facilities or performance of certain operations to comply with statutes, regulations and other requirements imposed by regulatory bodies, courts or environmental groups. We may incur costs to comply with environmental laws and regulations, including increased capital expenditures or operation and maintenance expenses, monetary fines, penalties or other restrictions, which could be material. Legal challenges to environmental permits or rules add to the uncertainty of estimating the future cost of complying with these permits and rules. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed.
Water and Waste. Changes made by the EPA to the EPA CCR Rule and the EPA ELG Rule in 2020 allow coal generation facility operators to request an extension to compliance deadlines if the facility commits to cessation of coal-fired generation by the end of 2028. Pursuant to Talen’s plans to cease wholly owned coal operations, Talen requested extensions for compliance under these rules for certain of its generation facilities; some have been approved and some are still under review. The most significant extension under review is the EPA CCR Rule Part A extension request for Montour Ash Impoundment 1, and a negative result would have a significant impact on the closure plan for this impoundment.
In 2023, the EPA proposed additional changes to the EPA ELG Rule and the EPA CCR Rule and finalized those changes in May 2024. The new EPA ELG Rule does not add treatment requirements to Talen’s coal-fired power generation facilities planning to cease burning coal by 2028, but it does establish discharge limits for waters collected from CCR units. Under the revised EPA CCR Rule, the EPA developed new categories of CCR units which are areas that were previously unregulated. These new CCR units, which are subject to the closure performance standards set by the EPA, are: (i) legacy CCR impoundments; and (ii) areas where CCR was disposed of or managed on land outside of regulated units called CCR management units (subject to a minimum threshold). Furthermore, the EPA’s interpretations of the EPA CCR Rule continue to evolve through litigation, enforcement, and other regulatory actions.
23
Talen submitted formal comments on both proposed rules citing their flaws. A number of challenges against the EPA ELG Rule have been filed in multiple U.S. Courts of Appeals. The various challenges have been filed by 15 state attorneys general, environmental groups, and industry parties and groups, including the Utility Water Act Group (“UWAG”), of which Talen is a member. In June 2024, the U.S. Court of Appeals for the Eighth Circuit was selected to hear the consolidated petitions for review and UWAG filed a motion to stay the EPA ELG Rule during the pendency of the litigation.
Multiple parties have filed challenges to the EPA CCR Rule in the U.S. Court of Appeals for the District of Columbia, including USWAG”), of which Talen is a member. It is uncertain at this time whether the revised Rules will withstand the filed and anticipated legal challenges by power producers, industry groups, state attorneys general, and others.
The Company continues to review the rule’s provisions, perform the required applicability assessments, and await additional information and guidance from the EPA in order to sufficiently interpret the rule’s requirements. Accordingly, as of June 30, 2024 (Successor), the Company did not have sufficient information to determine the scope of work required under the rule’s provisions and associated estimates. As the Company completes its assessment and determines the scope of work on its properties imposed by the new rule, new AROs and (or) revisions to existing AROs could be required. Such AROs could be material, and as a result, may have a material impact on our results of operations and financial condition.
Air. Since 2016, the coal-fired generation facilities in which Talen has ownership, including Brunner Island, Montour, Keystone and Conemaugh, have been the subject of various efforts under the Clean Air Act to strengthen applicable nitrogen oxides (“NOx”) emission limits. These include Section 126 petitions by downwind states, recommendations by the Ozone Transport Commission, and a ruling on Pennsylvania’s Reasonably Available Control Technology (“RACT”) 2 program by the U.S. District Court for the Southern District of New York. Although the petitions and recommendations are not withdrawn, open concerns appear to have been addressed by the EPA’s issuance of a federal implementation plan with short-term RACT2 NOx limits at these plants in 2022 (resulting from the above court case) (“2022 NOx RACT2 FIP”) and the EPA’s “Good Neighbor Plan FIP” issued in June 2023. Both the 2022 NOx RACT2 FIP and the Good Neighbor Plan FIP are further discussed below. Concerns by upwind states regarding NOx controls were not limited to coal plants owned by Talen.
Although EPA’s 2022 NOx RACT2 FIP for Pennsylvania, which Talen supported, was challenged by other parties, on May 2, 2024, the U.S. Court of Appeals for the Third Circuit upheld the 2022 NOx RACT2 FIP, and the Pennsylvania DEP has now proposed a new state implementation plan (“SIP”) that is consistent with the 2022 NOx RACT2 FIP. In November 2022, Pennsylvania finalized its NOx RACT3 standards for all power generation facilities to address the EPA’s 2015 Ozone Standard. Affected Talen facilities have submitted permit applications demonstrating their compliance methods. At this time, Talen cannot predict the outcome of these potential rule changes on the operations of its generation facilities and its results of operations.
Further, to address the EPA’s 2015 Ozone Standard, in June 2023, the EPA published a final rule covering the EPA CSAPR ozone season NOx allowance trading program for 2023 and beyond. The final rule is known as the Good Neighbor Plan FIP. The EPA made some reductions in allowance allocations, among other changes, to minimize NOx emissions during the Ozone Season. Talen’s plants in Texas had originally been covered by the Good Neighbor Plan FIP; however, Talen sold its Texas facilities in the second quarter of 2024 and therefore is no longer impacted by the rule in Texas. Talen’s facilities in Maryland, Pennsylvania and New Jersey remain subject to the new rule; however, the entire rule has been challenged by multiple parties, and the Good Neighbor Plan FIP was stayed in its entirety by the U.S. Supreme Court in June 2024 pending a complete review of the rule by the U.S. Court of Appeals for the D.C. Circuit. At this time, Talen cannot predict the long-term outcome of these rule changes on the operations of its generation facilities and its results of operations.
24
The EPA MATS Rule, which is the original EPA NESHAP for coal plants, has been in effect since 2012. In April 2023, the EPA proposed, and in May 2024, finalized, its Risk and Technology Review for coal-fired generation facilities under the EPA NESHAP. The final rule most notably requires coal plants to reduce particulate matter (“PM”) emissions by the end of 2027 (or 2028 in certain circumstances). Colstrip cannot meet the new PM standard without substantial upgrades to its control equipment; therefore, Talen and the Colstrip co-owners face the decision either to invest in new cost-prohibitive control equipment or retire the plant. That decision must be made in conjunction with compliance requirements under EPA’s new GHG Rule, finalized in May 2024.
Talen submitted formal comments on the new PM standard and revisions to the EPA MATS Rule, citing the rule’s flaws. A number of challenges to the EPA MATS Rule have been filed in the U.S. Court of Appeals for the D.C. Circuit, including challenges by Talen and by 23 state attorneys general. Multiple motions to stay the EPA MATS Rule during the pendency of the litigation have been filed by Talen and other parties, and in August 2024 the stay motions were denied. In light of the on-going legal challenges, Talen cannot predict the full impact of the revised EPA MATS Rule on the operations of its coal-fired generation facilities and its results of operations.
RGGI. In April 2022, Pennsylvania formally entered the RGGI program, with compliance set to begin on July 1, 2022. However, certain third parties filed lawsuits and appeals questioning the legality of the regulation and the implementation of RGGI in Pennsylvania was stayed. In November 2023, the Commonwealth Court of Pennsylvania ruled RGGI was an invalid tax and voided the rulemaking. The Pennsylvania Department of Environmental Protection appealed this decision to the Pennsylvania Supreme Court in November 2023, and the following day filed notice with the court that the RGGI program would not be implemented while the appeal is pending. In July 2024, the Pennsylvania Supreme Court permitted certain non-profit environmental groups (including Citizens for Pennsylvania’s Future, Clean Air Council, Sierra Club, and the Environmental Defense Fund) to intervene in the litigation. At this time, Talen is unable to determine the full impact of the RGGI program, when and if implemented, on its results of operations and liquidity.
Federal Climate Change Actions. The current federal administration has identified climate change policy as a priority that includes, but is not limited to, greenhouse gas (“GHG”) emission reductions. In May 2024, the EPA issued a new rule under the Clean Air Act that establishes New Source Performance Standards for new electric generating units and GHG Emissions Guidelines for existing electric generating units (“EGUs”) for state implementation. The guidelines would allow all existing EGUs to continue to operate until at least the end of 2031 without having to meet new GHG limits. Existing oil/gas steam EGUs (for example, Martins Creek) will not require additional controls at this time. However, if existing coal-fired EGUs (for example, Colstrip) are to be able to operate beyond 2031, they must install a GHG reduction technology, like carbon capture and sequestration (CCS), by the end of 2031. Talen will need to evaluate the viability and costs of additional controls and decide whether to invest in those controls at Colstrip or retire the units. That decision may be influenced by the cost of compliance with the revised EPA MATS Rule. The EPA stated that it chose not to finalize emission guidelines for existing fossil fuel-fired combustion turbines (for example, Lower Mt. Bethel); however, the EPA intends to take further action on such emission guidelines at a later date.
In 2023, Talen submitted formal comments on the proposed EPA GHG Rule, citing the rule’s flaws. A number of petitions for review of the EPA GHG Rule have been filed in the U.S. Court of Appeals for the D.C. Circuit, including by coalitions representing 27 states and an ad hoc coalition of power producers, of which Talen is a member. Various parties, including the ad hoc coalition of power producers that includes Talen, filed motions to stay the EPA GHG Rule during the pendency of the litigation; however, in July 2024, the D.C. Circuit denied the motions to stay the rule. Shortly thereafter, the coalition of West Virginia and 24 other states and other petitioners, including the ad hoc coalition of power producers that includes Talen, filed at the U.S. Supreme Court requests for an emergency stay of the EPA GHG Rule. If the rule withstands these legal challenges by power producers (including Talen), industry groups, state attorneys general, and others, the EPA GHG Rule could materially impact Colstrip and Talen. Talen is currently evaluating that potential impact. At this time, Talen cannot predict the full impact of the EPA GHG Rule on the operations of its coal-fired generation facilities and its results of operations.
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Environmental Remediation. From time-to-time, Talen undertakes investigative or remedial actions in response to notices of violations, spills or other releases at various on-site and off-site locations, negotiates with the EPA and state and local agencies regarding actions necessary for compliance with applicable requirements, negotiates with property owners and other third parties alleging impacts from our operations and undertakes similar actions necessary to resolve environmental matters that arise in the course of normal operations.
Future investigation or remediation work at sites currently under review, or at sites not currently identified, may result in additional costs, but at this time we are unable to determine if such investigation or remediation work will have a material adverse effect on our financial condition or results of operations.
Guarantees and Other Assurances
In the normal course of business, Talen enters into agreements that provide financial performance assurance to third parties on behalf of certain subsidiaries. These agreements primarily support or enhance the creditworthiness attributed to a subsidiary on a stand-alone basis or facilitate the commercial activities in which these subsidiaries engage. Such agreements may include guarantees, stand-by LCs issued by financial institutions, surety bonds issued by insurance companies, and indemnifications. In addition, they may include customary indemnifications to third parties related to asset sales and other transactions. Based on our current knowledge, the probability of expected material payment/performance for the guarantees and other assurances is considered remote.
Surety Bonds. Surety bonds provide financial performance assurance to third parties on behalf of certain subsidiaries for obligations including, but not limited to, environmental obligations and AROs. In the event of nonperformance by the applicable subsidiary, the beneficiary would make a claim to the surety, and the Company would be required to reimburse any payment by the surety. Talen’s liability with respect to any surety bond is released once the obligations secured by the surety bond are performed. Surety bond providers generally have the right to request additional collateral or request that such bonds be replaced by alternate surety providers, in each case upon the occurrence of certain events. As of June 30, 2024 (Successor) and December 31, 2023 (Successor), the aggregate amount of surety bonds outstanding was $235 million and $240 million, respectively, including surety bonds posted on behalf of Talen Montana as discussed below.
Talen Montana Financial Assurance. Pursuant to the Colstrip AOC, Talen Montana, in its capacity as the Colstrip operator, is obligated to close and remediate coal ash disposal impoundments at Colstrip. The Colstrip AOC specifies an evaluation process between Talen Montana and the Montana Department of Environmental Quality (“the MDEQ”) on the scope of remediation and closure activities, requires the MDEQ to approve such scope, and requires financial assurance to be provided to the MDEQ on approved plans. Each of the co-owners of the Colstrip Units have provided their proportional share of financial assurance to the MDEQ for estimates of coal ash disposal impoundments remediation and closure activities approved by the MDEQ.
TES has posted an aggregate $125 million of surety bonds to the MDEQ on behalf of Talen Montana’s proportional share of remediation and closure activities as of June 30, 2024 (Successor) and $115 million as of December 31, 2023 (Successor). In April 2024, the MDEQ approved a modified work scope that required Talen Montana to post an additional $7 million of surety bonds or other financial assurance in the second quarter 2024. Talen Montana has agreed to reimburse TES and its affiliates in the event that these surety bonds are called. Talen Montana’s surety bond requirements may increase due to scope changes, cost revisions and (or) other factors when the MDEQ conducts annual reviews of approved remediation and closure plans as required under the Colstrip AOC. The surety bond requirements will decrease as Colstrip’s coal ash impoundments remediation and closure activities are completed.
Cumulus Digital Assurances. As of December 31, 2023 (Successor), TES had issued LCs in the aggregate amount of $50 million to the lenders of the Cumulus Digital TLF, which LCs could be drawn upon, among other events, the acceleration of the loan due to a bankruptcy or other event of default by Cumulus Digital. The LCs were cancelled upon the repayment in full of the Cumulus Digital TLF in March 2024.
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Additionally, TEC had provided a guarantee to the lenders under the Cumulus Digital TLF for certain shortfalls in interest and principal payments by Cumulus Digital (up to a maximum of 23% of the principal amount of outstanding loans thereunder). The guarantee was cancelled upon the payment in full of the Cumulus Digital TLF in March 2024.
Other Commitments and Contingencies
Nuclear Insurance. The Price-Anderson Act is a United States federal law that governs liability-related issues and ensures the availability of funds for public liability claims arising from a nuclear incident at any U.S. licensed nuclear facility. It also seeks to limit the liability of nuclear reactor owners for such claims from any single incident. As of June 30, 2024 (Successor), the liability limit per incident is $16.3 billion for such claims, which is funded by insurance coverage from American Nuclear Insurers (approximately $500 million in coverage), with the remainder covered by an industry retrospective assessment program.
As of June 30, 2024 (Successor), under the industry retrospective assessment program, in the event of a nuclear incident at any of the reactors covered by the Price-Anderson Act, Susquehanna could be assessed deferred premiums of up to $332 million per incident, payable at a maximum of $49 million per year.
Additionally, Susquehanna purchases property insurance programs from Nuclear Electric Insurance Limited (“NEIL”), an industry mutual insurance company of which Susquehanna is a member. As of June 30, 2024 (Successor), facilities at Susquehanna are insured against nuclear property damage losses up to $2 billion and non-nuclear property damage losses up to $1 billion. Susquehanna also purchases an insurance program that provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions.
Under the NEIL property and replacement power insurance programs, Susquehanna could be assessed retrospective premiums in the event of the insurers’ adverse loss experience. The maximum assessment for this premium is $48 million as of June 30, 2024 (Successor). Talen has additional coverage that, under certain conditions, may reduce this exposure.
Talen Montana Fuel Supply. Talen Montana purchases coal from the Rosebud Mine for its interest in Colstrip Units 3 and 4 under a full requirements contract with an unaffiliated coal mine operator. In 2015, the MDEQ issued the mine operator an amendment to one of its mine permits expanding the area authorized for mining. Certain parties challenged the permit amendment in a proceeding at the Montana Board of Environmental Review (“the MBER”) and, after the MBER issued a decision upholding the permit amendment, in a lawsuit in Montana state district court. In January 2022, the district court entered an order vacating the permit amendment effective April 1, 2022. Rosebud Mining ceased mining in the expansion area prior to the April 1, 2022 deadline. The mine operator and the MDEQ appealed the district court’s decisions to the Montana Supreme Court and filed motions seeking to stay the order vacating the permit. In August 2022, the Montana Supreme Court entered an order staying the district court’s order pending resolution of the appeal. In November 2023, the Montana Supreme Court remanded the case to the MBER to reanalyze the administrative record, resolve factual questions, and re-examine its prior conclusion. The MBER is awaiting remand. In the meantime, however, the Montana Supreme Court reinstated vacatur of the permit amendment pending MBER review.
In May 2022, the MDEQ issued a second permit amendment expanding the area authorized for mining by the coal-mine operator. A group of complainants initiated proceedings at the MBER and in Montana state district court challenging the second permit amendment. Summary judgment briefing was completed in the MBER case as of January 2024. In December 2023 the Montana state district court challenge was stayed for six months pending a ruling from the Montana Supreme Court in analogous cases.
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In September 2022, the Montana Federal District Court entered an order upholding challenges to a third permit amendment expanding the area authorized for mining by the mine operator. The plaintiffs asserted that the U.S. Office of Surface Mining Reclamation and Enforcement (the “OSM”) violated the National Environmental Policy Act (“NEPA”) when preparing the Environmental Impact Statement (“the EIS”) for the permit amendment. The court ordered the OSM to complete an updated the EIS in accordance with NEPA’s requirements. The permit amendment will be vacated unless the OSM completes the updated the EIS within 19 months from the date of the court’s order. The federal defendants did not appeal and expect to issue a revised decision on the permit amendment within the 19-month deadline, but in November 2022, intervenor-defendants, Westmoreland Rosebud and International Union, appealed the ruling to the Ninth Circuit Court of Appeals. Montana Environmental Information Center and the other plaintiffs moved to dismiss the appeal for lack of jurisdiction, and the federal defendants did not oppose the motion to dismiss. The appeal was dismissed in November 2023, and the federal defendants requested an extension of the deadline to complete the updated EIS until June 30, 2025. In April 2024, the District Court granted an extension, but only to January 31, 2025.
At this time, Talen cannot predict the outcome of these matters or their effect on Talen Montana’s operations, results of operations or liquidity.
11. Long-Term Debt and Other Credit Facilities
Long-Term Debt
| Successor | |||||||||||||||||
Interest Rate (a) | June 30, 2024 | December 31, 2023 | |||||||||||||||
TLB | 8.83 % | $ | 861 | $ | 866 | ||||||||||||
TLC | 8.83 % | 470 | 470 | ||||||||||||||
| Secured Notes | 8.63 % | 1,200 | 1,200 | ||||||||||||||
PEDFA 2009B Bonds | 5.25 % | 50 | 50 | ||||||||||||||
PEDFA 2009C Bonds | 5.25 % | 81 | 81 | ||||||||||||||
Cumulus Digital TLF, including paid-in-kind interest (b) | — % | — | 182 | ||||||||||||||
| Total principal | 2,662 | 2,849 | |||||||||||||||
| Unamortized deferred finance costs and original issuance discounts | (36) | (29) | |||||||||||||||
| Total carrying value | 2,626 | 2,820 | |||||||||||||||
| Less: long-term debt, due within one year | 9 | 9 | |||||||||||||||
| Long-term debt | $ | 2,617 | $ | 2,811 | |||||||||||||
__________________
(a)Computed interest rate as of June 30, 2024 (Successor).
(b)Limited recourse to TES and TEC. See “Guarantees and Other Assurances - Cumulus Digital Assurances” in Note 10 for additional information. The Cumulus Digital TLF was repaid and extinguished in March 2024. See “2024 Transactions – Cumulus Digital TLF Repayment” below for additional information.
The aggregate long-term debt maturities, including amortization and early redemption provisions, as of June 30, 2024 (Successor) were:
2024 (a) | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| Total maturities | $ | 4 | $ | 9 | $ | 9 | $ | 9 | $ | 9 | $ | 2,622 | $ | 2,662 | |||||||||||||||||||||||||||
__________________
(a) For the period from July 1 through December 31, 2024.
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Revolving Credit and Other Facilities
| Successor | |||||||||||||||||||||||||||||||||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Expiration | Committed Capacity | Direct Cash Borrowings | |||||||||||||||||||||||||||||||||||||||