Item 1. Business
ITEM 1. BUSINESS
GENERAL
Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, unless otherwise noted.
Talen Energy Corporation, through its principal subsidiary Talen Energy Supply, is a North American competitive energy and power generation and marketing company headquartered in Allentown, Pennsylvania. Talen Energy produces and sells electricity, capacity and ancillary services from its fleet of power plants totaling approximately 17,400 MW of generating capacity. Talen Energy's portfolio of generation assets is principally located in the Northeast, Mid-Atlantic and Southwest regions of the U.S. See "Item 2. Properties" for additional information on Talen Energy's plants.
Talen Energy's business was formed on June 1, 2015 by the spinoff of Talen Energy Supply, the competitive power generation business owned by PPL, and the substantially contemporaneous combination of that business with RJS Power, the competitive power generation business controlled by Riverstone Holdings LLC, under a new holding company, Talen Energy Corporation. See Notes 1 , 3 and 6 to the Financial Statements for additional information on the spinoff and acquisition.
Talen Energy seeks to optimize the value from its competitive power generation assets and marketing portfolio while mitigating near-term volatility in both cash flow and earnings metrics. Talen Energy endeavors to accomplish this by matching projected output from its generation assets with forward power sales in the wholesale and retail markets while effectively managing exposure to fuel price volatility, counterparty credit risk and operational risk. Talen Energy is focused on safe, reliable, and resilient operations, disciplined capital investment, portfolio optimization, cost management and the pursuit of value-enhancing growth opportunities.
To manage financing costs and access to credit markets, and to fund capital expenditures and growth opportunities, a key objective of Talen Energy is to maintain adequate liquidity capacity. In addition, Talen Energy has a financial risk management policy and operational procedures that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility related to, as applicable, changes in energy and fuel prices, interest rates, counterparty credit quality and the operating performance of generating units. To manage these risks, Talen Energy generally uses contracts such as forwards, options, swaps and insurance contracts primarily focused on mitigating cash flow volatility within the next 12 month period.
The following chart illustrates Talen Energy's organizational structure as of December 31, 2015 .
Talen Energy's subsidiaries, Talen Generation, Raven, Jade, Sapphire, and MACH Gen, own and operate competitive power generation facilities. Another Talen Energy subsidiary, Talen Energy Marketing, markets the output of Talen Energy's plants, electricity, capacity and ancillary services, and other energy-related products in competitive wholesale and retail markets.
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Talen Energy Marketing sells the output of its affiliated generation facilities to a diverse group of wholesale customers, including RTOs and ISOs, utilities, cooperatives, municipalities, power marketers, and financial counterparties. Talen Energy Marketing also sells the output of its affiliated generation plants to commercial, industrial and residential retail customers.
Talen Energy earns revenue primarily by participating in energy and capacity markets and by providing related ancillary services.
•
The energy markets in which Talen Energy participates are designed to meet the short-term needs for electricity. They include day-ahead markets, where hourly prices are calculated for the next operating day based on bids and offers, and real-time spot markets, in which energy is continuously bought and sold based on actual grid operating conditions.
•
The capacity markets in which Talen Energy participates are designed to procure sufficient generating capacity to meet forecasted peak demand to ensure that the longer-term needs for electricity are met to keep the applicable power grids operating reliably. PJM and ISO-NE procure capacity three years in advance whereas NYISO conducts three nearer term auctions; a six-month summer and winter strip auction, a monthly auction and a spot auction. Capacity markets provide generation owners, such as Talen Energy, some forward-looking revenue visibility.
•
Ancillary services, such as non-spinning reserves, responsive reserves and regulation up/down, are supplied in some of the markets in which Talen Energy operates to help maintain system reliability by compensating generators for being available during short-term capacity shortage conditions.
Talen Energy's generation fleet is diverse in terms of fuel, technology, dispatch characteristics and location. A majority of Talen Energy's revenue comes from the sale of electricity produced by its generation facilities. Talen Energy also produces additional revenue from the sale of capacity within the PJM, ISO-NE and NYISO markets as well as by providing ancillary services.
The charts below illustrate the composition and diversity of Talen Energy's generation portfolio capacity (summer rating) by market and fuel type as of December 31, 2015 :
The charts above do not reflect the completed or announced divestitures of approximately 1,400 MW of generation capacity to satisfy the FERC approved mitigation in connection with the RJS Power acquisition. See "Acquisitions and Divestitures" below and Notes 1 and 6 to the Financial Statements for additional information.
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MARKETS
Included in the table below are the markets in which Talen Energy operates and the revenue opportunities presented by each:
Revenue Opportunities
Markets
Category
Location
Energy
Market
Capacity
Market
Ancillary
Services
PJM
RTO
All or part of thirteen states in the Northeast U.S. and the District of Columbia (DE, IL, IN, KY, MD, MI, NC, NJ, OH, PA, TN, VA & WV)
X
X
X
ERCOT
ISO
Majority of the State of Texas
X
-
X
NYISO
ISO
State of New York
X
X
X
ISO-NE
RTO
New England states (CT, MA, ME, NH, RI & VT)
X
X
X
WECC (a)
Investor Owned Utilities
14 States in the Western U.S., 2 Canadian provinces and northern Baja Mexico (AZ, CA, CO, ID, MT, NE, NM, NV, OR, SD, portion of TX, UT, WA & WY)
X
-
X
(a)
Members are uniquely structured in that they typically do not have organized markets, but rather, are organized into 38 separate Balancing Authorities (BAs). Each BA is responsible for balancing loads and resources within their respective boundaries.
See "Item 2. Properties" for additional information on Talen Energy's generating plants, including each plants' market location.
Recent Market Developments
PJM
As a result of unusual market and weather volatility in the first quarter of 2014, PJM determined that changes were necessary to ensure system reliability. In December 2014, PJM proposed to add an enhanced Capacity Performance (CP) product to the capacity market structure to permit additional compensation for generation owners/operators to make the necessary investments to maintain system reliability in exchange for stronger performance requirements, with higher penalties for non-performers. For more information on recent PJM market developments, see "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.
ERCOT
The PUCT and ERCOT have taken significant measures to improve scarcity pricing in ERCOT. ERCOT's system-wide offer cap was increased from $7,000 per MWh to $9,000 per MWh effective June 1, 2015. An operating reserve demand curve (ORDC) was implemented in June 2014, which is intended to produce longer periods of gradually increasing scarcity prices, and the PUCT and ERCOT are currently evaluating whether any changes need to be made to improve the operation of the ORDC during scarcity conditions.
NYISO
The NYISO will be undertaking its triennial Demand Curve Reset (DCR) process, which will reset the capacity auction parameters, potentially impacting compensation to capacity resources. Draft tariff sheets reflecting recommended changes to the DCR process are to be presented to the NYISO's Installed Capacity Working Group in February 2016.
Two major initiatives, Reform the Energy Vision and the Clean Energy Standard are being pursued in New York State. Both of these initiatives are long term endeavors and either or both could have impacts on the overall New York energy market. Talen Energy is still assessing any potential impacts to both the market and its portfolio.
ISO-NE
ISO-NE added an enhanced Performance Incentive (PI) product to the capacity market structure to permit additional compensation for generation owners/operators to make the necessary investments to maintain system reliability in exchange for stronger performance requirement, with higher penalties for non-performers without exception. The PI product was first implemented in the ninth forward capacity auction for delivery year 2018/19, which was held in February 2015. ISO-NE merged the Northeast Massachusetts zone with the Southeastern Massachusetts/Rhode Island capacity zone to create the import-constrained Southern New England (SENE) zone. The tenth forward capacity auction will now only consist of two zones: SENE and Rest of Pool (including Maine, Western/Central Massachusetts, New Hampshire and Vermont). In addition,
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ISO-NE has unveiled a new, sloped demand curve design that could be implemented for the eleventh forward capacity auction and would likely put downward pressure on clearing prices.
RESERVE MARGINS
Reserve margin is a measure of generation capacity available to meet peak demand. Each ISO/RTO sets a target reserve margin to ensure grid reliability, which is used as an indicator of a supply surplus or deficit based on the requirement. If the actual reserve margin exceeds the requirement, the system is in a surplus and energy prices should remain lower and stable. A deficit to the required reserve margin could trigger energy price spikes and volatility, sending a signal to the market that more capacity is needed. PJM, NYISO, and ISO-NE have forward looking capacity markets to procure sufficient capacity to meet forecasted demand. ERCOT operates in an energy only market, where scarcity pricing sends the signal to develop more capacity. Each market is currently well supplied and reserve margins exceed their targets and low energy prices are reflective of the adequate reserves. The table below contains the target reserve margin and the expected reserve margin for the 2015/16 planning year for each of the aforementioned ISOs/RTOs:
ISO/RTO
Target Reserve Margin (a)
2015/16 Planning Year Reserve Margin (a)
PJM (b)
15.6
%
20.2
%
NYISO
17.0
%
24.7
%
ISO-NE
15.0
%
22.8
%
ERCOT
13.8
%
15.7
%
(a)
Source: data obtained from applicable ISO/RTO or other federal agency publications.
(b)
PJM announced that the target reserve margin increased to 16.5% for planning year 2019/20.
OPERATIONS
Revenues by Segment
Talen Energy is organized in two segments: East and West, based on geographic location. The East segment includes the generating, marketing and trading activities in PJM, NYISO and ISO-NE. The West segment includes the generating, marketing and trading activities located in ERCOT and WECC. See Note 2 to the Financial Statements for additional information on Talen Energy's segments and the segment reevaluation.
Details of revenue by segment for the years ended December 31 as adjusted to reflect the November 2015 segment reevaluation referenced above, are as follows:
2015
2014
2013
East
West
Total
East
West
Total
East
West
Total
Energy
Wholesale energy (a)
$
2,631
$
211
$
2,842
$
2,609
$
128
$
2,737
$
2,846
$
95
$
2,941
Retail energy
1,022
73
1,095
1,162
81
1,243
945
82
1,027
Total Energy
3,653
284
3,937
3,771
209
3,980
3,791
177
3,968
Energy-related businesses (b)
544
—
544
601
—
601
527
—
527
Total
$
4,197
$
284
$
4,481
$
4,372
$
209
$
4,581
$
4,318
$
177
$
4,495
(a)
Included in these amounts for 2015 , 2014 and 2013 are $14 million, $84 million and $51 million of wholesale electricity sales to a former affiliate, PPL Electric.
(b)
Energy-related businesses are mechanical contracting and services subsidiaries that primarily support the generation and marketing businesses in Talen Energy's East segment. Activities of these businesses include developing renewable energy projects and providing energy-related products and services to commercial and industrial customers.
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Power Generation by Fuel Source and Segment
During 2015 , Talen Energy owned or controlled power plants (including facilities for which Talen Energy has the rights to the output) that generated the following amounts of electricity (by segment):
GWh
Fuel Source
East
West
Total
Nuclear (a)
18,505
—
18,505
Natural Gas/Oil
15,320
2,470
17,790
Coal
18,181
3,775
21,956
Hydro
903
—
903
Renewables (b)
293
—
293
Total
53,202
6,245
59,447
(a)
Represents Talen Energy's share of the total output.
(b)
In 2015 , Talen Energy owned or controlled renewable energy projects (including facilities for which Talen Energy has the rights to the output) located in Pennsylvania, New Jersey, Vermont and New Hampshire with an aggregate generating capacity (summer rating) of 26 MW. Talen Energy Marketing sold the energy, capacity and RECs produced by these plants into the wholesale market as well as to commercial and industrial customers. In November 2015, projects that had an aggregate generating capacity of 19 MW were sold. For the projects sold, the above generation amounts include generation through their date of sale.
Fuel Supply
See "Item 2. Properties" for information on the fuel source for each of Talen Energy's plants.
Nuclear
The nuclear fuel cycle consists of several material and service components: the mining and milling of uranium ore to produce uranium concentrates; the conversion of these concentrates into uranium hexafluoride, a gas component; the enrichment of the hexafluoride gas; the fabrication of fuel assemblies for insertion and use in the reactor core; and the temporary storage and final disposal of spent nuclear fuel.
Susquehanna Nuclear has a portfolio of supply contracts, with varying expiration dates, for nuclear fuel materials and services. These contracts are expected to provide sufficient fuel to permit Unit 1 to operate into the first quarter of 2020 and Unit 2 to operate into the first quarter of 2019. Susquehanna Nuclear anticipates entering into additional contracts to ensure continued operation of the nuclear units.
Susquehanna Nuclear has an on-site spent fuel storage facility employing dry cask fuel storage technology, which, together with the spent fuel pools, has the capacity to accommodate spent fuel expected to be discharged through 2017. This spent fuel storage facility is currently in the process of being expanded to accommodate additional spent fuel storage, and assuming appropriate approvals are obtained, additional expansion will take place in the future such that, together, the spent fuel pools and the expanded dry fuel storage facility will accommodate all of the spent nuclear fuel expected to be discharged through 2044, the current licensed life of the plant.
In May 2011, Susquehanna Nuclear entered into a settlement agreement with the U.S. Government relating to Susquehanna Nuclear's 2004 lawsuit against the U.S. Government for partial breach of the standard contract for disposal of spent nuclear fuel. The settlement included reimbursement of certain costs to store spent nuclear fuel at the Susquehanna nuclear plant incurred through December 31, 2013, and Susquehanna Nuclear received payments for its claimed costs for those periods. In exchange, Susquehanna Nuclear waived any claims against the U.S. Government for costs paid or injuries sustained related to storing spent nuclear fuel at the Susquehanna nuclear plant through December 31, 2013. In January 2014, Susquehanna Nuclear entered into an addendum to that agreement to extend the settlement agreement on the same terms for an additional three years to the end of 2016. Susquehanna Nuclear expects to enter into discussions with the DOE this year to further extend the settlement agreement beyond 2016.
Natural Gas and Oil
Talen Energy manages natural gas and oil supply utilizing a combination of contracted purchases, spot market purchases and storage for the commodities and pipeline capacity. The amount and duration of contracted capacity varies due to factors including fuel availability, economic considerations and plant location on the pipeline grid. Talen Energy has various short and
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long-term natural gas supply and transportation contracts in place; however, the majority of the natural gas supply needs are satisfied with short-term transactions on a spot basis.
Oil requirements are normally supplied by inventory and replenished through purchases on the spot market.
Coal
Talen Energy actively manages its coal requirements by purchasing coal from mines located in central and northern Appalachia and Colorado for its plants located within PJM and from mines located adjacent to the Colstrip facility in Montana. Coal is delivered by rail, barge or conveyor. Reliability of coal deliveries can be affected from time to time by a number of factors including fluctuations in demand, coal mine production issues and other supplier or transporter operating difficulties. Coal inventory is maintained at levels estimated to be necessary to avoid operational disruptions at coal-fired generating units. Long-term supply contracts support adequate levels of coal inventory and are augmented with spot market purchases, as needed. Talen Energy has long-term supply agreements through 2018 for plants located in PJM and for the Colstrip plant through 2019. The contracts in place are expected to provide 62% of 2016 requirements.
In addition, certain of Talen Energy's plants are equipped with flue gas desulfurization equipment or Scrubbers, which use limestone in their operations. Talen Energy has entered into limestone contracts with suppliers that will provide limestone for the plants located in PJM through 2016 and for the Colstrip plant through 2030 and are expected to provide 100% of 2016 requirements.
See Note 10 to the Financial Statements for additional information on Talen Energy's ownership interest in and cost sharing arrangement related to Colstrip.
ACQUISITIONS AND DIVESTITURES
Completion Date
Capacity (a)
Markets
Acquisitions:
MACH Gen
November 2015
2,344 MW
NYISO, ISO-NE, WECC
RJS Power
June 2015
5,182 MW
PJM, ERCOT, ISO-NE
Divestitures:
Ironwood
February 2016
661 MW
PJM
C.P. Crane
February 2016
402 MW
PJM
Talen Renewable Energy
November 2015
19 MW
Various
Montana Hydroelectric Business
November 2014
633 MW
WECC
Announced Divestitures:
Holtwood and Lake Wallenpaupack
March 2016 (b)
308 MW
PJM
(a)
Based on summer rating.
(b)
Anticipated closing date.
See Note 6 to the Financial Statements for additional information on acquisitions and divestitures.
FRANCHISES AND LICENSES
Talen Energy Marketing has a license from the DOE to export electricity to Canada. Talen Energy Marketing also has a permit from the National Energy Board of Canada to export firm and interruptible electricity from Canada to the United States.
Susquehanna Nuclear operates Units 1 and 2 pursuant to NRC operating licenses that expire in 2042 for Unit 1 and in 2044 for Unit 2. In 2008, a Talen Energy subsidiary, Bell Bend, LLC, submitted a COLA to the NRC for a new nuclear generating unit (Bell Bend) to be built adjacent to the Susquehanna nuclear plant. Also in 2008, the COLA was formally docketed and accepted for review by the NRC. Talen Energy does not expect the COLA review process with the NRC to be completed prior to 2018. See Note 6 to the Financial Statements for additional information.
Holtwood, LLC, a subsidiary of Talen Generation that owns hydroelectric generating operations in Pennsylvania, operates the Holtwood and Lake Wallenpaupack hydroelectric generating plants pursuant to FERC-granted licenses that expire in 2030 and 2045, respectively. In 2015, Talen Energy announced that it agreed to sell these facilities. The sale is expected to close in March 2016. In connection with the relicensing of these generating facilities, applicable law permits the FERC to relicense the original licensee or license a new licensee or allow the U.S. government to take over the facility. If the original licensee is not
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relicensed, it is compensated for its net investment in the facility, not to exceed the fair value of the property taken, plus reasonable damages to other property affected by the lack of relicensing.
COMPETITION
Since the early 1990s, there has been increased competition in U.S. energy markets because of federal and state competitive market initiatives. Although some states have created a competitive market for electricity generation, other states continue to consider different types of regulatory initiatives concerning competition in the power and gas industries. Some states that were considering creating competitive markets have slowed their plans or postponed further consideration. In addition, states that have created competitive markets have, from time to time, considered new market rules and re-regulation measures that could result in more limited opportunities for competitive energy suppliers. However, these initiatives have not fully developed as a result of various efforts by industry participants to prevent the erosion of the competitive market structure. As such, the markets in which Talen Energy participates are highly competitive.
The power generation business is a regional business that is diverse in terms of industry structure and fundamentals. Demand for electricity may be met by generation capacity based on several competing generation technologies, such as natural gas-fired, coal-fired or nuclear generation, as well as power generation facilities fueled by alternative energy sources, including hydro power, synthetic fuels, solar, wind, wood, geothermal, waste heat and solid waste sources. Talen Energy faces competition in wholesale markets for available energy, capacity and ancillary services. Competition is impacted by electricity and fuel prices, congestion along the power grid, subsidies provided by state and federal governments for new generation facilities, new market entrants, construction of new generating assets, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors. In retail power markets, Talen Energy primarily competes with other electricity suppliers based on its ability to aggregate generation supply at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities, ISOs and RTOs. Competitors in wholesale power markets include regulated utilities, industrial companies, NUGs, competitive subsidiaries of regulated utilities, financial institutions and other energy marketers. See "Item 1A. Risk Factors-Risks Related to Our Business," "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 11 and 15 to the Financial Statements for more information concerning the risks faced with respect to competitive energy markets.
SEASONALITY
The demand for and market prices of electricity and natural gas are affected by weather. As a result, Talen Energy's operating results in the future may fluctuate substantially on a seasonal basis, especially when more severe weather conditions such as heat waves or extreme winter weather make such fluctuations more pronounced. The pattern of this fluctuation may change depending on the type and location of the facilities owned, the retail load served and the terms of contracts to purchase or sell electricity. See "Item 1A. Risk Factors - Risks Related to Our Business" and "Environmental Matters" below for additional information regarding climate change.
FINANCIAL CONDITION
See "Financial Condition" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" for this information.
CAPITAL EXPENDITURE REQUIREMENTS
See "Financial Condition - Liquidity and Capital Resources - Forecasted Uses of Cash - Capital Expenditures" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" for information concerning the $2.4 billion of projected capital expenditure requirements for 2016 through 2020. Included in the projections are $137 million of expenditures to comply with environmental requirements, which reflect Talen Energy's best estimate of capital expenditures that may be required within the next five years. Actual costs (including capital, emission allowance purchases and operational modifications) may be significantly lower or higher depending on the final compliance requirements and market conditions. Talen Energy also may incur environmental-related capital expenditures and operating expenses, which are not now determinable, but could be significant. See "Environmental Matters" below for additional information on the potential impact on capital expenditures from environmental matters.
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ENVIRONMENTAL MATTERS
Environmental Laws and Regulations
Extensive federal, state and local environmental laws and regulations are applicable to Talen Energy's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of its business. In addition, many of these environmental considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the cost for their products or their demand for Talen Energy's services.
It may be necessary for Talen Energy 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. Talen Energy may incur costs to comply with environmental laws and regulations, including increased capital expenditures or operating 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.
The following is a discussion of the more significant environmental matters impacting Talen Energy's business.
CSAPR
The EPA's CSAPR addresses the interstate transport of fine particulates and ozone by regulating emissions of sulfur dioxide and nitrogen oxide. CSAPR establishes interstate allowance trading programs for sulfur dioxide and nitrogen oxide emissions from fossil-fuel fired plants for 28 states in two phases: Phase 1 trading commenced in January 2015, and Phase 2 trading is expected to commence in 2017. Although Talen Energy does not currently anticipate significant costs to comply with these programs, changes in market or operating conditions, or significant regulatory changes, could result in impacts that are greater than anticipated. Talen Energy is evaluating the EPA's recently released "CSAPR Update Rule" proposal which recommends more stringent ozone season nitrogen oxide budgets for 23 states, including several where Talen Energy owns affected generation. Additional capital and/or operating and maintenance expenses could be imposed on Talen Energy plants in Maryland, New Jersey, New York, Pennsylvania and Texas as a result of this action. Legal challenges to CSAPR are on-going in federal and state court.
NAAQS
In 2008, the EPA revised downward the NAAQS for ozone. As a result, states in the ozone transport region (OTR), including Pennsylvania, Maryland, Massachusetts, New York and New Jersey, are required by the Clean Air Act to impose additional reductions in nitrogen oxide emissions based upon reasonably available control technologies (RACT). PADEP is expected to finalize a RACT rule by the end of the first quarter of 2016 that requires some fossil-fuel fired power plants in Pennsylvania to operate at more stringent nitrogen oxide emission rates starting in 2017. Maryland coal plants operated at reduced nitrogen oxide emission rates during the 2015 ozone season as a result of an emergency action issued by the Governor of Maryland (which later became a final rule) and in November 2015 the MDE promulgated additional nitrogen oxide regulations for Maryland coal plants that require even more stringent operations starting no later than June 2020. In October 2015, the EPA released a final rule that strengthened the NAAQS for ozone. This could lead to even further nitrogen oxide reductions for Talen Energy's fossil-fuel fired plants within and outside of the OTR. State and federal efforts to address interstate transport issues associated with ozone NAAQS, including increased pressure by state environmental agencies and environmental groups to further reduce nitrogen oxide emissions from plants with selective catalytic reduction technology, and updated transport rules such as that proposed by EPA in December 2015 (as discussed above), could additionally lead to further emission reductions and increased compliance costs.
In 2010, the EPA finalized a more stringent NAAQS for sulfur dioxide and required states to identify areas that meet the standard and areas that are in non-attainment or are unclassifiable. In July 2013, the EPA finalized non-attainment designations for parts of the country where attainment is due by 2018. States are working on designations for other areas pursuant to a consent decree between the EPA and Sierra Club approved in March 2015 with 2017 or 2020 deadlines, depending on which designation methodology (modeling or monitoring) is selected. Several of Talen Energy's plants are in areas being evaluated for designation.
Until final rules are promulgated, all non-attainment designations are finalized, and state compliance plans are developed, Talen Energy cannot predict the ultimate outcome of the new NAAQS for ozone and sulfur dioxide on its fleet or plants, or whether they may have a material adverse effect on Talen Energy's financial condition or results of operations. Talen Energy anticipates
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that some of the measures required for compliance with the CSAPR (as discussed above) or the MATS and Regional Haze Rules (as discussed below), will help to achieve compliance.
MATS
In February 2012, the EPA finalized a rule (known as the MATS Rule) requiring reductions of mercury and other hazardous air pollutants from fossil-fuel fired power plants by April 2015 with one-and two-year extension opportunities. Subsequently, the U.S. Supreme Court determined that the EPA acted unreasonably by refusing to consider costs when determining whether the MATS regulation was appropriate and necessary. To address the Supreme Court action, the DC Circuit in December 2015 remanded the MATS Rule to the EPA to incorporate a revised appropriate and necessary finding. The EPA has since issued a proposed supplemental finding on cost, claiming that the regulation was appropriate and necessary. The EPA has committed to finalizing the Rule by April 2016. The existing MATS Rule remains in effect. Separate from the EPA's MATS Rule, several states, including Montana and Maryland where Talen Energy owns affected facilities, have enacted regulations requiring mercury emission reductions from coal plants. Talen Energy cannot currently predict whether any costs necessary to comply with the EPA's MATS Rule or similar regulations will have a material adverse effect on Talen Energy's financial condition or results of operations.
Regional Haze
The EPA's regional haze programs were developed under the Clean Air Act to eliminate man-made visibility degradation by 2064. Under the programs, states are required to make reasonable progress every decade, through the application of, among other things, Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977. The primary power plant emissions affecting visibility are sulfur dioxide, nitrogen oxides and particulates. While the focus of regional haze regulation previously was on the western U.S., in December 2015, a final federal implementation plan for Texas was released with an emphasis on coal plants. Minimal impacts are anticipated to Talen Energy's gas fleet in Texas.
As for the eastern U.S., the EPA had determined that region-wide reductions under the CSAPR trading program could, in most instances, be utilized under state programs to satisfy BART requirements for sulfur dioxide and nitrogen oxides. However, the EPA's determination is being challenged by environmental groups. In September 2015, the Third Circuit Court of Appeals vacated portions of the EPA's approval of Pennsylvania's regional haze state implementation plan and remanded the rule to the EPA for further consideration. Talen Energy is unable to determine at this time if the future impacts of regional haze regulation on Talen Energy plants in the eastern U.S. will have a material adverse effect on Talen Energy's financial condition or results of operations. See Note 11 to the Financial Statements for information on a legal decision issued by the Ninth Circuit Court of Appeals in a case involving Talen Montana challenging the EPA's final Regional Haze Federal Implementation Plan for Montana.
New Source Review (NSR)
The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants. The EPA has alleged that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR requirements under the Clean Air Act. Talen Energy has responded to several information requests from the EPA, but has received no further substantive communications from the EPA related to those requests since providing its responses. See Note 11 to the Financial Statements for information on a lawsuit filed by environmental groups in March 2013 against Talen Montana and other owners of Colstrip related to NSR.
Climate Change
Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to Talen Energy's generation assets, as well as impacts on Talen Energy's customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where Talen Energy's generation facilities use river water for cooling. Federal and state initiatives to prepare energy assets and infrastructure for the impacts of climate change, such as those actions driven by President Obama's 2013 Climate Action Plan (discussed further below), could result in binding obligations to physically protect Talen Energy's generation assets from climate change impacts.
Talen Energy cannot currently predict whether its businesses will experience these potential risks or whether any related costs will have a material adverse effect on Talen Energy's financial condition or results of operations.
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GHG Regulations & Tort Litigation
In April 2010, the EPA and the U.S. Department of Transportation issued new light-duty vehicle emissions standards that applied beginning with 2012 model year vehicles. The EPA stated that this standard authorizes regulation of carbon dioxide emissions from stationary sources under the NSR and Title V operating permit provisions of the Clean Air Act. Following legal challenges, in June 2014, the U.S. Supreme Court ruled that the EPA has the authority to regulate carbon dioxide emissions under the Clean Air Act, but only for stationary sources that would otherwise have been subject to these provisions due to significant increases in emissions of other regulated pollutants. As a result, any new sources or major modifications to an existing GHG source causing a net significant increase in carbon dioxide emissions must comply with best achievable control technology (BACT) permit limits for carbon dioxide if it would otherwise be subject to BACT or lowest achievable emissions rate limits due to significant increases in other regulated pollutants. EPA is expected to propose a de minimis threshold for such permits in June 2016.
In June 2013, President Obama released his Climate Action Plan reiterating the goal of reducing GHG emissions in the U.S. through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing more restrictive energy efficiency standards. In October 2015, the EPA finalized carbon dioxide regulations for new and existing power plants, and the EPA has proposed a federal implementation plan that would apply to any states that fail to submit an acceptable state plan for the existing plant rule. EPA's existing plant rule has been stayed by the U.S. Supreme Court until all legal challenges to the rule have been resolved. The new plant rule remains in effect and challenges are also outstanding in federal court. Implementation of the new and existing power plant rules could have a significant industry-wide impact, but at this time Talen Energy is unable to determine if the rules will have a material adverse effect on Talen Energy's financial condition or results of operations.
A number of lawsuits have been filed asserting common law claims including nuisance, trespass and negligence against various companies with GHG emitting plants and, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims.
Exemptions for Startup, Shutdown and Malfunction Events
In May 2015, the EPA released a final rule which prohibits states from exempting startup, shutdown and malfunction (SSM) events from compliance requirements in State Implementation Plans (SIPs). The Rule issues a SIP call for each of those states where the SSM provisions in the SIPs of those states fail to meet the EPA's requirements. Affected states, including Arizona, New Jersey, Montana and Texas where Talen Energy owns generation facilities, must submit revised provisions to the EPA in November 2016. Revisions to a SIP or other regulations in other non-affected states where Talen Energy operates could result from this action. The EPA's final rule is being challenged in federal court. Talen Energy cannot currently predict whether revisions to SIPs or other similar regulations will have a material adverse effect on Talen Energy's financial condition or results of operations.
CCRs
The EPA's final rule regulating CCRs, including fly ash, bottom ash and sulfur dioxide scrubber wastes became effective in October 2015. It imposes extensive new requirements, including location restrictions, design and operating standards, groundwater monitoring and corrective action requirements and closure and post-closure care requirements on CCR impoundments and landfills that are located at active power plants and not closed. Under the rule, the EPA will regulate CCRs as non-hazardous under Subtitle D of RCRA and allow beneficial use of CCRs, with some restrictions. This self-implementing rule requires posting of compliance documentation on a publicly accessible website and is only enforceable through citizen suits. Talen Energy expects that its plants using surface impoundments for management and disposal of CCRs, or that previously managed CCRs and continue to manage wastewaters, will be most impacted by the rule. Requirements for covered CCR impoundments and landfills include commencement or completion of closure activities generally between three and ten years from certain triggering events. Talen Energy anticipates incurring capital or operation and maintenance costs prior to that time to address other requirements of the rule, such as groundwater monitoring and disposal facility modifications, or to implement various compliance strategies. The final CCR Rule is being challenged in federal court.
Talen Energy continues to review the Rule and evaluate financial and operational impacts. During 2015, an increase of $41 million was recorded to existing AROs. Further changes to AROs may be required as estimates are refined and compliance with the rule continues. See Note 18 for information on AROs.
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ELGs and Standards
The EPA's final ELG regulations that revise discharge limitations for steam electric generation wastewater discharge permits became effective in January 2016. The final limitations are based on the EPA's review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and for scrubber wastewater. The EPA's final ELG regulations contain requirements that could have a material impact on Talen Energy's coal-fired plants. At the present time, Talen Energy is evaluating the new requirements. The new ELG limitations and standards will be implemented as each plant's discharge permit is renewed. The compliance period for the new requirements is from November 2018 through the end of 2023, based on the date that the permit is renewed and the applicable deadline negotiated with the agencies for that facility. At this point, Talen Energy is unable to estimate a range of reasonably possible compliance costs. The final ELG regulations are being challenged in federal court.
Seepages and Groundwater Infiltration - Pennsylvania and Montana
Talen Energy has completed or is completing assessments of seepages or groundwater infiltration at various active and retired wastewater basins and landfills at certain of its facilities. Talen Energy has completed or is working with agencies to respond to related notices of violations and implement assessment or abatement measures, where required or applicable. A range of reasonably possible losses cannot currently be estimated and, therefore, Talen Energy is unable to determine if any such abatement measures will have a material adverse effect on Talen Energy's financial condition or results of operations.
In August 2012, Talen Montana entered into an Administrative Order on Consent (AOC) with the MDEQ which establishes a comprehensive process to investigate and remediate groundwater seepage impacts related to the wastewater facilities at the Colstrip power plant. The AOC requires that within five years, Talen Montana provide financial assurance to the MDEQ for the costs associated with closure and future monitoring of the waste-water treatment facilities. Talen Montana cannot predict at this time if the actions required under the AOC will create the need to adjust the existing ARO related to this facility. Talen Montana is defending the AOC in litigation brought by environmental groups as discussed in Note 11 to the Financial Statements.
Under the Pennsylvania Clean Streams Law, a subsidiary of Talen Generation is obligated to remediate acid mine drainage at a former mine site and may be required to take additional steps to prevent potential acid mine drainage at a previously capped refuse pile at this mine site. The subsidiary is pumping and treating mine water at the former mine site.
At December 31, 2015, Talen Generation had accrued a discounted liability of $19 million to cover the costs of pumping and treating groundwater at this mine site for 50 years. Talen Energy discounted this liability based on a risk-free rate of 8.41% at the time of the mine closure. Expected undiscounted payments are estimated to be $1 million for each of the years 2016, 2017, 2019, and 2020, $3 million in 2018, and $92 million for work after 2020.
Clean Water Act_316(b) Rule
The EPA's final 316(b) Rule for existing facilities became effective in October 2014 and regulates cooling water intake structures and their impact on aquatic organisms. States are allowed considerable authority to make site-specific determinations under the Rule which requires existing facilities to choose between several options to reduce impingement and entrainment. Plants already equipped with closed-cycle cooling, an acceptable option, would likely not incur substantial compliance costs. Plants equipped with once-through cooling water systems would likely require additional technology to comply with the rule. Talen Energy is evaluating compliance strategies, but does not presently expect to incur material compliance costs. The EPA's final rule is being challenged in federal court.
Waters of the United States (WOTUS)
In June 2015, the EPA and the U.S. Army Corps of Engineers (Army Corps) published their final rule redefining the term WOTUS. The rule, which became effective in August 2015, identifies six types of categorically jurisdictional waters and two categories of waters for which case-by-case evaluations are needed to determine whether a "significant nexus" exists. In October 2015, the U.S. Court of Appeals for the Sixth Circuit issued an order preventing the EPA from implementing the rule nationwide. Talen Energy will continue to evaluate the rule, and while no material impacts to Talen Energy's financial condition or results of operations are anticipated, the redefinition could impact future development actions, such as plant and gas infrastructure expansions, in the event the stay is lifted. Legal challenges are on-going in federal and state court.
Superfund and Other Remediation
From time to time, Talen Energy 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
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necessary for compliance with applicable requirements, negotiates with property owners and other third parties alleging impacts from Talen Energy's operations and undertakes similar actions necessary to resolve environmental matters which arise in the course of normal operations. Based on analysis to-date, resolution of these environmental matters is not expected to have a material adverse effect on Talen Energy's financial condition or results of operations.
Future investigation or remediation work at sites currently under review, or at sites not currently identified, may result in additional costs for Talen Energy, but at this time Talen Energy is unable to determine if such investigation or remediation work will have a material adverse effect on Talen Energy's financial condition or results of operations.
Other
In addition to the environmental matters discussed above, from time-to-time in the ordinary course of its business, Talen Energy may become involved in other environmental matters or become subject to other environmental statutes, regulations or requirements. In the opinion of management based upon information currently available to Talen Energy, while the outcome of these other environmental matters and proceedings is uncertain, the likely results are not expected, either individually or in the aggregate, to have a material adverse effect on Talen Energy's financial condition or results of operations, although the effect could be material to Talen Energy's results of operations in any interim reporting period.
See Note 11 to the Financial Statements for additional information on environmental matters.
REGULATORY MATTERS
Talen Energy operates in a highly regulated industry and is subject to regulation by various federal and state agencies and in the various regions where it conducts business.
Certain of Talen Energy's generation subsidiaries are EWGs that sell electricity into wholesale markets. EWGs are subject to regulation by the FERC, which has authorized these EWGs to sell the electricity generated at market-based prices. A portion of this electricity is sold to Talen Energy Marketing under FERC-jurisdictional power purchase agreements. Susquehanna Nuclear is subject to the jurisdiction of the NRC in connection with the operation of its Susquehanna nuclear units. In addition, certain of Talen Energy's other subsidiaries are subject to the jurisdiction of the NRC in connection with the operation of their fossil plants with respect to certain level and density monitoring devices. Certain operations of Talen Energy are also subject to OSHA and comparable state statutes.
The following is a discussion of the more significant regulatory matters impacting Talen Energy's business.
Proposed Legislation/Initiatives - Pacific Northwest
In January 2016, legislation was proposed in the State of Washington to provide a means of cost recovery to utility owners of coal-fired generating facilities who commit to retire such facilities. An initiative also was submitted to the Washington legislature that would impose a carbon tax of $25 per ton on fossil fuels in Washington. The 2016 legislature now has three options relative to the initiative - (i) pass the same into law as drafted; (ii) defer action on the same to the voters in November 2016; or (iii) revise and pass the initiative, sending both the original and amended measures to the November 2016 state-wide ballot.
In the same time frame, legislation was proposed in the State of Oregon that would double the renewable mandate in Oregon to 50% by 2040 and would limit Oregon utilities' ability to use coal power in Oregon only until 2030, although one utility there would be able to use a small amount thereafter until 2035. A key provision of the Oregon legislation is that two pending "no coal" initiatives would be withdrawn once the bill becomes law.
Talen Energy cannot predict whether any legislation seeking to achieve these objectives will be enacted in either state or, if enacted, if such legislation would have a material adverse effect on Talen Energy's financial condition or results of operations.
Electricity - Reliability Standards
The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system. The FERC oversees this process and independently enforces the Reliability Standards.
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The Reliability Standards have the force and effect of law and apply to certain users of the bulk power electricity system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.
Talen Energy monitors its subsidiaries' compliance with the Reliability Standards and continues to self-report potential violations of certain applicable reliability requirements and submit accompanying mitigation plans, as required. The resolution of a number of potential violations is pending.
In the course of implementing their programs to ensure compliance with the Reliability Standards by those Talen Energy subsidiaries subject to the standards, certain other instances of potential non-compliance may be identified from time to time. Talen Energy cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.
Other
In addition to the regulatory matters discussed above, Talen Energy and its subsidiaries are party to other regulatory proceedings arising in the ordinary course of business or have other regulatory exposure. While the outcome of these other 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 Talen Energy's financial condition or results of operations, although the effect could be material to Talen Energy's results of operations in any interim reporting period.
See Note 11 to the Financial Statements for additional information on regulatory matters.
EMPLOYEE RELATIONS
At December 31, 2015 , Talen Energy and its subsidiaries had 4,981 full-time employees, 2,579 of which were represented by labor unions. These numbers include union employees of mechanical contracting subsidiaries and tend to fluctuate due to the nature of the mechanical contractors' business.
AVAILABLE INFORMATION
Talen Energy's Internet website is www.talenenergy.com. Under the Investor heading of that website, Talen Energy provides access to all SEC filings of the Registrants (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8‑K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d)) free of charge, as soon as reasonably practicable after filing or furnishing with the SEC.
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