Talen Energy Corporation and Talen Energy Supply — Q3 2016 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2016. Talen is a competitive power generation and marketing company with approximately 16,000 MW of generation, primarily in the Northeast, Mid-Atlantic and Southwest. Results include RJS for a longer period than in 2015 and MACH Gen, acquired in November 2015, for 2016 only; divestitures also changed the asset base, limiting direct comparability.
Key financial metrics
| Metric ($ millions, except EPS) | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | 1,238 | 1,320 | 3,108 | 3,359 |
| Operating income (loss) | 193 | (346) | 552 | (133) |
| Net income (loss), Talen Energy Corp. | 88 | (401) | 236 | (279) |
| EPS, diluted | $0.68 | $(3.12) | $1.82 | $(2.69) |
| Adjusted EBITDA (non-GAAP) | 247 | 357 | 614 | 765 |
| Margins (non-GAAP) | 442 | 569 | 1,314 | 1,408 |
| Cash from operating activities | Not provided by quarter | Not provided by quarter | 549 | 731 |
Liquidity and debt: At September 30, cash and cash equivalents were $1.358 billion, short-term debt $350 million, current maturities of long-term debt $5 million and long-term debt $3.894 billion. Credit facilities had $1.328 billion of unused capacity, after borrowings and letters of credit. Total debt on these balance-sheet lines was approximately $4.249 billion, versus $4.794 billion at December 31, 2015.
Material changes versus prior periods
- Revenue fell $82 million (6%) in Q3 and $251 million (7%) for the nine months. Management cited weaker realized power prices and spark spreads, lower capacity prices, and generation and capacity lost from divested plants.
- Adjusted EBITDA declined $110 million in Q3 and $151 million year to date; Margins declined $127 million and $94 million, respectively. Acquired RJS and MACH Gen assets partly offset weaker legacy-asset results.
- Reported earnings improved sharply from 2015 losses, but the comparison is heavily affected by 2015 impairments ($588 million in Q3) and other unusual items. 2016 nine-month results included $563 million of net pre-tax gains on facility sales and a $204 million Bell Bend impairment.
- Operating cash flow was $549 million versus $731 million. Investing cash flow was $1.219 billion versus $173 million used, mainly reflecting $1.525 billion in sale proceeds. Financing used $551 million; cash increased to $1.358 billion from $141 million at year-end 2015.
Outlook, commentary, risks and unusual items
- Proposed merger: Riverstone affiliates agreed to acquire eligible public shares for $14 per share in cash. Stockholders approved the transaction on October 6, 2016; NRC approval and customary conditions remained outstanding. Management expected closing by year-end 2016. At closing, the Supply revolver was to decline from $1.85 billion to $1.4 billion, and a $600 million secured term loan was planned. Closing was subject to a minimum liquidity condition, among others.
- Market and capacity outlook: Talen cleared 6,994 MW, about 67% of its PJM capacity, for the 2019/2020 planning year. Management estimated related capacity revenue of approximately $257 million; uncleared capacity could be offered in later auctions or bilateral transactions. Electricity and natural gas prices were lower year over year, pressuring margins.
- Capital spending: Projected 2016–2020 capital expenditures were $2.338 billion, including $487 million in 2016. The approximately $70 million Montour gas co-firing project was still under evaluation and excluded from that projection. Brunner Island Unit 1 co-firing was deferred to the first half of 2017.
- Asset and portfolio changes: Sales of Ironwood, C.P. Crane, Holtwood and Lake Wallenpaupack generated approximately $1.5 billion in proceeds and $563 million in net pre-tax gains. Talen abandoned the Bell Bend nuclear development and fully impaired its $204 million capitalized costs. The approved Colstrip settlement requires Units 1 and 2 to cease operations by July 1, 2022; expected annual depreciation increases by $6 million.
- Contingencies and operating risks: Merger-related stockholder litigation seeks rescission and damages; the company said it would defend the claims and could not predict the outcome. Other risks include commodity-price and counterparty exposure, plant availability and outages, environmental regulation, and potential collateral requirements. A pending EPA review of ozone petitions concerning Brunner Island could lead to emissions limits or operational restrictions; the company could not predict the outcome.
- Unusual items: Nine-month merger costs were $15 million at Talen Energy Corporation. Talen recorded $9 million in separation-benefit charges for management-position eliminations and identified approximately 130 bargaining-unit positions for potential elimination. The filing provides no formal earnings guidance.
Important facts for investors to verify
- Whether and when the merger closed, whether NRC approval and other conditions were satisfied, and the final financing, fees and liquidity position.
- How much of the reported earnings improvement reflects ongoing operations versus plant-sale gains, impairments, derivative valuation changes and other adjustments; review the company’s non-GAAP reconciliations.
- Realized power and capacity prices, plant availability, and the financial impact of divested generation and the 2019/2020 PJM capacity results.
- Execution and cost of capital projects, including Brunner Island co-firing, and any future decision on the Montour project.
- Developments in merger litigation, environmental proceedings and regulatory matters, including potential effects on operations, cash flows or liquidity.