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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2025-02-28 compared with 2016-02-29 · 68 added, 40 removed, 1 unchanged (99% of the section changed)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Talen Energy Corporation and Talen Energy Supply, LLC

Reference is made to "Risk Management" for the Registrants in "Item 7.

Combined Management's Discussion and Analysis of Financial Condition and Results of Operations."

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Talen Energy Corporation

We have audited the accompanying consolidated balance sheets of Talen Energy Corporation and subsidiaries as of December 31, 2015 and 2014 , and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2015 .

Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).

These financial statements and schedule are the responsibility of the Company's management.

Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

We were not engaged to perform an audit of the Company's internal control over financial reporting.

Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Talen Energy Corporation and subsidiaries at December 31, 2015 and 2014 , and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 , in conformity with U.S.

generally accepted accounting principles.

Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania

February 26, 2016

Report of Independent Registered Public Accounting Firm

The Board of Managers and Sole Member of Talen Energy Supply, LLC

We have audited the accompanying consolidated balance sheets of Talen Energy Supply, LLC (formerly known as PPL Energy Supply, LLC) and subsidiaries as of December 31, 2015 and 2014 , and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2015 .

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

We were not engaged to perform an audit of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Talen Energy Supply, LLC and subsidiaries at December 31, 2015 and 2014 , and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 , in conformity with U.S.

generally accepted accounting principles.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania

February 26, 2016

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The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.

Actual future results may differ materially from those presented.

These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk

Volatility in the wholesale power generation 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.

Margin Sensitivities

The table below displays sensitivities for changes in projected margins based upon consistent changes in power prices across our entire portfolio.

Actual price changes may differ by market and commodity, which could result in different results than displayed.

The base case for these sensitivities incorporates market prices, our economic hedge position, expected Nuclear PTC, and expected generation (including cost inputs and planned outages) as of December 31, 2024 (Successor):

Sensitivity Range 2025 Margin Effect (a)

2026 Margin Effect (a)

Low High Low $ High $ Low $ High $

Change in power price per $/MWh (b)

$ (5) $ 5 $ 7 $ 42 $ (115) $ 119

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(a) Margin price sensitivities hold constant certain microeconomic and macroeconomic factors that may impact our margin and the impact of changes in prices;

value in millions and includes expected value of Nuclear PTC.

(b) Power price sensitivities hold market heat rate constant for each month;

therefore, natural gas prices are adjusted accordingly.

Interest Rate Risk

We are 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.

Form 10-K Table of Contents

The following table displays the net fair value of interest rate swaps (including accrued interest, if applicable) outstanding at December 31, 2024 (Successor):

Notional Exposure Asset (Liability) 10% Adverse Movement (a)

Maturities Through

Interest rate swaps $ 290 $ (2) $ 6 2026

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(a) Effect of a 10% adverse interest rate movement decreases assets or increases liabilities, as applicable, which could result in an asset becoming a liability.

Additionally, we are exposed to a potential increase in interest expense and to changes in the fair value of debt.

The estimated impact of a 10% adverse movement in interest rates were:

December 31, 2024 December 31, 2023

Increase in interest expense $ 6 $ 6

Fair value of debt 46 53

Credit risk is the risk of financial loss if a customer, counterparty, or financial institution is unable to perform or pay amounts due, causing a financial loss to us.

Financial assets are considered credit-impaired when facts and circumstances reasonably indicate an event has occurred where the carrying value of the asset will not be recovered through cash settlement.

Such events may include deterioration of a customer’s or counterparty’s financial health leading to a probable bankruptcy or reorganization, a breach of contract, or other economic reasons.

Credit risk may impact accounts receivable, derivative instruments, cash and cash equivalents, and restricted cash and cash equivalents.

The maximum amount of credit exposure associated with financial assets is equal to the carrying value.

The carrying values of derivative instruments consider the probability that a counterparty will default when contracts are out of the money (from the counterparty’s standpoint).

Additionally, a credit impairment is recognized on receivables when facts indicate a high probability that amounts owed to us will not be paid.

Such allowances are presented as part of “Accounts receivable” on the Consolidated Balance Sheets.

As of December 31, 2024 (Successor) and December 31, 2023 (Successor), there were no material credit impairments.

We maintain credit procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit standards) and require other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk.

However, we have concentrations of suppliers and customers among electric utilities, financial institutions, marketing and trading companies, and the U.S.

These concentrations may impact our overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory, or other conditions.

See Note 5 in the Annual Financial Statements for additional information on credit risk.

Investment Price Risk

In accordance with certain NRC requirements, we maintain trust funds comprised of restricted assets that were established in order to fund our proportional share of Susquehanna's future decommissioning obligations.

As of December 31, 2024 (Successor), the NDT was invested primarily in domestic equity securities, fixed-rate, fixed-income securities, and short-term cash-equivalent securities and is presented as fair value on the Consolidated Balance Sheets.

The mix of securities is intended to provide returns sufficient to fund our proportional share of Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.

However, the equity securities included in the NDT are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.

We actively monitor the investment performance and periodically review the asset allocation in accordance with our nuclear decommissioning trust investment policy statement.

The following table shows the impact of a hypothetical 10% increase in interest rates and a 10% decrease in equity values:

December 31, 2024 December 31, 2023

Estimated increase (decrease) in the fair value of NDT assets $ (104) $ (91)

See Notes 9 and 14 to the Annual Financial Statements for additional information regarding the NDT.

Form 10-K Table of Contents

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk