Text

Annual Financial Information for the Years Ended December 31, 2105 and 2016
	ML17107A307
Person / Time
Site:	Susquehanna
Issue date:	04/13/2017
From:	Rausch T; Susquehanna, Talen Energy
To:	; Document Control Desk, Office of Nuclear Reactor Regulation
Shared Package
ML17107A306	List: PLA-7585, Annual Financial Information for the Years Ended December 31, 2105 and 2016;
References
	PLA-7585
	Download: ML17107A307 (61)
	v • d • e

Enclosure 1 to this letter contain Confidential Financial Information Withhold Under 10 CPR 2.390 TALEN ~

Timothy S. Rausch Susquehanna Nuclear, LLC President and Chief Nuclear Officer 769 Salem Boulevard Berwick, PA 18603 Tel. 570.542.3445 Fax 570.542.1504 ENERGY Timothy.Rausch@TalenEnergy.com APR 1 3 2017 U. S. Nuclear Regulatory Commission 10 CPR 50.71(b)

Attn: Document Control Desk Washington, DC 20555-0001 SUSQUEHANNA STEAM ELECTRIC STATION ANNUAL FINANCIAL INFORMATION REQUIRED BY 10 CFR50.71 Docket Nos. 50-387 PLA-7585 and 50-388 As required by 10 CPR 50.71(b), Enclosure 1 to this letter provides annual financial information for Talen Energy Supply, LLC (Talen). Susquehanna Nuclear, LLC is a wholly owned indirect subsidiary ofTalen. The financial information includes audited fmancial statements and associated notes of Talen. The information in Enclosure 1 is considered to be confidential financial information, and, as such, Susquehanna Nuclear requests that Enclosure 1 be withheld from public disclosure in accordance with 10 CPR 2.390. Enclosure 2 includes an affidavit requesting withholding. Enclosure 3 includes a redacted version of the financial information that can be made publically available.

This letter contains no new regulatory commitments.

If you have any questions or require additional information, please contact Mr. Jason Jennings, Manager ofNuclearRegulatory Affairs, at (570) 542-3155. : Annual Financial Information : Affidavit Requesting Withholding : Redacted Annual Financial Information Copy: NRC Region I Ms. T. E. Hood, NRC Project Manager (without Enclosure 1)

Ms. L. H. Micewski, NRC Sr. Resident Inspector Mr. M. Shields, PADEP/BRP (without Enclosure 1)

Enclosure 1 to this letter contain Confidential Financial Information Withhold Under 10 CFR2.390

Enclosure 2 to PLA-7585 Affidavit Requesting Withholding

Affidavit of WiUiam H. Fleenor I, William H. Fleenor, Chief Accounting Officer of Talen Energy Supply, LLC, do hereby affirm and state:

1. I am authorized to execute this affidavit on behalf of Talen Energy Supply, LLC and its subsidiaries, including Susquehanna Nuclear, LLC.

2. Susquehanna Nuclear, LLC is providing information pursuant to 10 CFR 50.71(b), which constitutes proprietary information ofTalen Energy Supply, LLC and its subsidiaries ("Talen") that should be held in confidence by the NRC pursuant to the policy reflected in 10 CFR 2.390(a}{4).

3. Susquehanna Nuclear, LLC requests that Enclosure 1, which is being submitted under separate cover and labeled ((CONFIDENTIAL INFORMATION SUBMITIED UNDER 10 C.F.R. § 2.390", be withheld from public disclosure under the provisions of 10 C.F.R. § 2.390(a)(4). A redacted version suitable for public disclosure is included in this submission as Enclosure 3.

4. The proprietary financial information contained in Enclosure 1 should be withheld from public disclosure because:

a. This information has been held in confidence by Talen, as a private company Talen keeps such information in confidence, and there is a rational basis for holding such information in confidence because it includes sensitive financial information concerning Talen's results from operations, balance sheet, cash flows, asset impairments and similar information.

b. The information is not available from public sources and could not be gathered readily from other publicly available information. To the extent that Tal en has shared this information with others, it has done so on a confidential basis.

c. This information is being transmitted to the NRC in confidence.

d. Public disclosure of this information would cause substantial harm to the competitive position ofTalen because such information has significant commercial value to Talen and could be used by other parties whose commercial interests may be adverse to those of Talen.

Talen Energy Supply, LLC William H. Fleenor Chief Accounting Officer Subscribed and sworn before me, a NoPtry Public in and for the State of Y-ean~ {v4J1t'CL this l!)..day: pril, 2017.

~~-::}.~

~OMMONWEAL TH OF P:NNSYl VAN A NOTARIAl SEAl

~*ary T. Kennedy. Notary Public City of.AI~entown. lehigh Coun!*,*

My Commlssron Expires March 12 ; t;<c

"'l MEMBER. PEIIIISYLVANIA ASSOCIATIOII c: ~::*--~~ ::d

Enclosure 3 to PLA-7585 Redacted Annual Financial Information (includes 57 pages)

Talen Energy Supply, LLC Consolidated Financial Statements

For the Years Ended December 31,2016 and 2015

Table of Contents TALEN ENERGY SUPPLY, LLC FOR THE YEAR ENDED DECEMBER 31, 2016 As used in this repmi, the tenns "Talen Energy Supply," "we," "us" and "our" refer to Talen Energy Supply and its consolidated subsidiaries, unless the context clearly indicates otherwise. See "Glossmy" at end for abbreviations and terms used in this rep mi.

TABLE OF CONTENTS Page ORGANIZATIONAL STRUCTURE ...... ..... .. .. .. ... ... ...... .......... ... ... ....... ... .... ... .. ... ......... ...... ....... ............. .... ....... ........ . 3 GENERATION FLEET. .. ... ..... ..... .... ....... ........ ..... .. .. .... .... .. ... ..... ..... .. ............. ... ..... ........... ..... .. .... .......................... .. .... 4 Repmi oflndependent Auditors .. ............... ...... .. ....... ...... ...... .. .. .. ...... .... ... .... .. .. .... ... ......... ..... ..... .... ..... ...... .............. ..... 5 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Operations .... .... .. ...................... ...... ....... ... .. ..... ... .. ... ... .. .. .. .. ..... ... ... ...... ... ....... ... ... .... . 6 Consolidated Statements of Comprehensive Income ...... ...... .. .... .... ...... .......... ... ... .. ...... ......... ... ... ....... .... ........ .... .. 7 Consolidated Balance Sheets ... .. .. ...... ... .. ...... ............ ....... ......................... .... .......... ...... ..... .. ... .... .. ... .. ... .... ... ........ . 8 Consolidated Statements of Cash Flows ........ .... ... ......... .......... ... ....... ... .. .. .. ........ .. ...... .. ... .... ........ ........ ......... ..... ... 9 Consolidated Statements of Equity .............. .... .... .... .... ... ... ... .... .. ....... ..... ..... ..... ..... .... ... ... ........... ..... ... ..... ........ ... .. 10 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Operations .... .................. .. ........ ............... ............ .. .... .... ......... ..... ............. .. .. ........... .. ...... ........ 11

2. Basis of Presentation and Summary of Significant Accounting Policies ..... ......... ...... .... ....... .... ....... ....... .... .... ... 12

3. Talen Formation Transactions ... .......... ............. .............................. ..... ...... ......... ....... .... ...... ... ... .......... ... .... ... ... .. .. 19

4. Mergers, Acquisitions and Divestitures .... ... ... .. ..... .... .... ........................... .... .... .. .. ... ..... ......... .................. ...... ...... 20

5. Inventmy ..... ....................... ..... .. .......... ............ .... ........... ........ .......... ...... ...... .... .. ............ .......... ... .... ..... ... .... ... ...... 22

6. Property, Plant and Equipment .. .. .... ... ... .. .... ... .. ....... .. .. .... ... ....... .... .... ..... ... .. .. ..... ... .. . .. ... .......... ... .. .... .... .. .... .. ... . ... 23

7. Jointly Owned Facilities ......... ...... .......................................... ........... ................ ...... .......... ..... ... ... .... ....... ..... ..... .. 23

8. Intangible Assets .... .............. ... ...... .. ..... .. ... .. ................. ...... .. ..... ..... .............. ...... ..... ........ .... .... ..... .. ..... ... ...... ... ..... 24

9. Asset Impairments ................ ..... .... ......... ..... ............................ .... .. ......... ....... .. ...... ......... .. ........ ...... .. ......... .......... . 24

10. Debt. ......... ........... ...... ...... ... ..... ... .. .. .. .... .. .... ............... .. .. .... ... ........ .. ................. .............. ..... ..... ............... .......... .. 27

11. Derivative Instruments and Hedging Activities .... .... .... ........ ........ ..... .. ........ .. ... ... .. .. ............ .. .... .. ... . .... .. .. .. .. .. .. .. 29

12. Fair Value Measurements ............. ....... ........................... ..... ..... ... ..... .... ...... .. ...... .... .. .... ......... ........ ... .. .. ... ...... .. ... 32

13. Stock-Based Compensation .... .. .................... ................. .. .. .... ...... ..................... ... ................ .......... .... ..... .. .. .. .... . 36

14. Retirement and Postemployment Benefits .. ............... .. .. ... ..... ............... ... .... ..... .. ... ...... ... ...... ........... ........ .......... 37

15. Commitments and Contingencies .. .. .. .. .. ...... ... ... .......... .. ... .... .. ... ... ........ ... .. ............. .. .. ... .. ..... ........ .. ....... ............ 43

16. Income Tax Expense (Benefit) .... ............... ... .. .. ... ............ .. .. .... .. ....... ... .. .. .......... ... ......... ...... ... ... .... .. .. ... .. ... ........ 48

17. Asset Retirement Obligations .. .. .. ..... .... .... ......... .. .. .. .. .. .. .. .. ....... .... .. ...... ... ... ... .... .. .. . ..... .. .. .. .. . .. ...... .... ... .... .... .. .. .. 49

18. NDT Funds ... .. .... ...... .. .. .. ... .... .. .. .. .. ... ... ... .. ................... ......... .. .. .. .... .... .. .. ....... ...... ..... ... ...... ..... ..... .. ......... .. .. .. ...... 50

19. Related Pmiy Transactions .. .. ................................. ...... .. .. ...... .. .. ....... .. .......... ...... ...... .... ..... ..... ........... .. .. ....... ... .. 51

20. Accumulated Other Comprehensive Income (Loss) .. .. .... ....... .. ... .. ... ..... ... ............. ............. ... ... ..... .. ...... .. .......... 52

21. Subsequent Events ... .......... ...... .. ............ .............. .......... .. .... .... ..... .. ....... .. .. ...... ..... .. ........ .. ............ ... ..... .. ... .... .. .. 52 GLOSSARY OF TERMS AND ABBREVIATIONS .... ... .. .. ............. ............... ........ .... .... ....... .... .. ...... ........ ... .. .... .. ...... 53

Table of Contents ORGANIZATIONAL STRUCTURE The following chart illustrates our organizational structure as of December 31, 2016.

Talen Energy Corporation Talen Energy Holdings, Inc.

Talen Energy Supply, LLC Talen Generation, Talen Energy Raven Power Jade Power Sapphire Powe1* fi\1Acu*G*e"D;'i::r:c-1 I I LLC Markellng, LLC Generation Generation Generation Holdings LLC Holdings LLC Holdings LLC ThroUizh subsidiaries. Engages in marketing Tbrough subsidiaries, Tbrough subsidiaries, Through subsidiaries, j Tbrough subsidiaries, 1 ow11; and operates . of wholesale and retail O\\llS and operates coal, owns and operates O\\llS and operates oil : 0\\1JS and operates :

nuclear, coal, oil and electricity and natural oil and natural gas-fired natural gas-fired and natural gas-fired 1 natural gas-fired !

natural gas-fired gas and, tbrough generntiug faciliries in generating facilities in generating facilities in ! generating facilities in !

generating faciliries in subsidiaries, supplies Mai)*Iatul Texas. New Jersey, ;Arizona, Massachusetts!

~~~.~~.~~.~~~.~......1 Pe*msylvania and mechanical contracting Pe*msyl\'atiia and Montana. services. .MassachuS<tts.

1......

'ew ).iA.CHG(!nRt~t'Oiwr XewMACH Gtn TLB 3

Table of Contents GENERATION FLEET Our electric generating capacity (summer rating) at December 31, 2016 was as follows .

Total MW % Region/

Plant Owner Capac ity (a) Ownership Ownership in MW Fuel Type State ISO PJM Nuclear Susquehamm (b) . Talen Generation 2,502 90.00 2,252 Nuclear PA PJM PJM Fossil and Other Martins Creek.. .. Talen Generation 1,535 100.00 1,535 Natural Gas/Oil PA PJM Montour. .. ................ Talen Generation 1,524 100.00 1,524 Coal PA PJM Brunner Island Talen Generation 1,426 100.00 1,426 Coal/Natural Gas PA PJM Brandon Shores Raven 1,279 100.00 1,279 Coal MD PJM H.A. Wagner ... ******** ******** Raven 967 100.00 967 Coal/Natural Gas/Oil MD PJM Lower Mt. Bethel Talen Generation 553 100.00 553 Natural Gas PA PJM Combustion turbines ... Talen Generation 358 100.00 358 Natural Gas/Oil PA PJM Conemaugh (b) .. Talen Generation 1,723 16.25 280 Coal PA PJM Keystone (b) Talen Generation 1,718 12.34 212 Coal PA PJM Bayonne .. Sapphire 163 100.00 163 Natural Gas/Oil NJ PJM Camden .. Sapphire 145 100.00 145 Natural Gas/Oil NJ PJM Newark Bay ... Sapphire 122 100.00 122 Natural Gas/Oil NJ PJM Pedricktown (c) ... Sapphire 116 100.00 116 Natural Gas/Oi l NJ PJM Dartmouth Sapphire 83 100.00 83 Natural Gas/Oil MA ISO-NE Elmwood Park Sapphire 70 100.00 70 Natural Gas/Oil NJ PJM York ................ ....... ............ Sapphire 47 100.00 47 Natural Gas PA PJM Renewables (d) .. N/A 7 100.00 7 Renewables PA PJM Total PJM Fossil and Other. .. 11 ,836 8,887 ERCOT Barney Davis .. Jade 962 100.00 962 Natural Gas TX ERCOT Nueces Bay .. Jade 659 100.00 659 Natural Gas TX ERCOT Laredo .. Jade 189 100.00 189 Natural Gas TX ERCOT TotalERCOL 1,810 1,810 MACHGen Harquahala .. MACHGen 1,040 100.00 1,040 Natural Gas AZ WECC Athens .. MACHGen 981 100.00 981 Natural Gas NY NY! SO Millennium ....................... MACHGen 342 100.00 342 Natural Gas MA ISO-NE Total MACH Gen 2,363 2,363 Montana Colstrip Units 1 & 2 (b) ... Talen Generation 614 50.00 307 Coal MT WECC Colstrip Unit 3 (b) ... Talen Generation 740 30.00 222 Coal MT WECC Total Montana ... 1,354 529 Total . 19,865 15,841 (a) The capacity of generation units is based on a number of factors, including the operating experience and physical conditions of the units and may be revised periodically to reflect changed circumstances.

(b) This unit is jointly owned. Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs. See Note 7 to the Consolidated Financial Statements for additional information.

(c) Pedricktown includes capacity dedicated to serving landlord load (maximum of II MW).

(d) Represents facilities for which we have the rights to the output through agreements ofTalen Energy Marketing with third parties.

4

Table of Contents Report of Independent Auditors The Board of Managers and Sole Member ofTalen Energy Supply, LLC We have audited the accompanying consolidated financial statements ofTalen Energy Supply, LLC and subsidiaries which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are fi*ee of material misstatement, whether due to fraud or error.

Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perfmm the audit to obtain reasonable assurance about whether the financial statements are fi*ee of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.

The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.

Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tal en Energy Supply, LLC and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

Philadelphia, Pennsylvania March 28,2017 5

Table of Contents CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, Talen Energy Supply, LLC and Subsidiaries (Millions ofDollars)

Operating Revenues Energy revenues ... ... ... ... .. ... ... .. ....... ....................... ....... ............... .................. .... ..... ..... ......... $

Unrealized gain (loss) on derivative contracts .. .............. .. .... .................. .. .............. ............ .

Other energy-related services .... ... .... ... ........ ..... .. .. .. .. .. ... ..... ...... .... .... .. ....... ... .... ............ .... ... .

2016

-$* - 2015 I

Total Operating Revenues ... ... .. .. ..... ... ...... ...... .... .......... .. ......... .. .. ........ .. ... .. ............... ..... . _ _ _....J Operating Expenses Energy expenses Fuel and energy purchases .... ... ... ....... ... ... .. .. ...... ............... .. .. .. .. .......... ..... .... ..... .... .... ... ... ..

Unrealized (gain) loss on derivative contracts ...... .. .... ...... .... .................. .... ........ .. .. .. .. ...... .

Nuclear fuel ammtization .. .. ... .. .. .. ........... ... .. ..... .. ..... .. ..... .. ............. ...... .. .......................... .

Total Energy Expenses ........................... .. .. .......... ..... ........................ .. ..... .. ... ............... .. .

Operation and maintenance ... ....... .. .. .. ........... ... .. ..... .... ........ ..... .. .... .. .................... .. ... .. .. .... .. .

Depreciation, ammtization and accretion ... ... ... ...... .. ........... .. ......... ................................ ... .. .

Other energy-related services ... .. .. ... .. ....... ... ...... .... ..... .... .... .. .. ..... ..... .. ... .... ... ........... ........... ..

Total Operating Expenses .. ..... ... ............ ... ...... .. .... ....... ....... ........... .. .............. .... .. .... ... ... ..

Merger costs ..... ............... ............ ... .. ... .. .. .... .... ....... ... ....... .. ... ....... ... .... .. .... ........... ....... .......... ..

(Gain) loss on sale .... ........ ....... ... ... .............. .............. ..... ... .. ..... .......... ... ...... ..... .......... .. .. ....... .

-* I Impai1ments ........... ...... ... .... ...... ...... .. ........ .................... ... .... ... .. ...... .... ... ....... ............. .. .... ..... ..

Operating Income (Loss) ... ........ ... .. .. ... ...... ..... ............ .. .. .. .... .. ... .. .. ......... .... .. ............... .. ...... .

Other Income (Expense)- net .. ..... .. .. .. .. .. ......... .... .... ...... .... ......... .......... .......... .. ...... .......... ..... .

Interest Expense .......... .. ....................... ........... ...... ....... ....... .. ...... ..... .. ............ ..... ... ........ .. ..... .. -----=*!!!!!!::-

Income (Loss) Before Income Taxes .. .............. ...... ...... ........ ..... ........ ......... ................... .. ..... - -

Income Tax Expense (Benefit) .................. .. .. .... .. ................ .. .... ............... ............... .... ... ........ - - - - -

Net Income (Loss) ............................ .. ... ............................ ....... ... .......... .. .. ....... .... .. ....... .... .... $

==

The accompanying Notes to the Consolidated Financial Statements are an integral part of the financial statements.

6

Table of Contents CONSOLI DATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, Talen Energy Supply, LLC and Subsidiaries (Millions of Dollars) 2016 2015 Net income (loss) .. ... ... .. .......... ......... ......... .......... ............... .... ............................. .. .. ............. .. $

Other comprehensive income (loss):

Amounts arising during the period- gains (losses), net of tax (expense) benefit:

Available-for-sale securities, net oftax o f - .. ..................................................... .. .

Defined benefit plans:

I I

Prior service costs, net of tax of. . ......................... .. .... ...................... .. ....... .......... .

Net actuarial gain (loss), net of tax o f - ........................ ...... ....... .... .. .... .. ....... . I Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):

Available-for-sale securities, net of tax of. . ................. ................ .. .......... .. ... ....... .. .. .

Qualifying derivatives, net of tax o f - .......... .. .. .... .. .................................. .. .......... .. .

Defined benefit plans:

Prior service costs, net of tax of. . .......... .. ...... .. .. .. .. ..... .................. .. ..................... . I

Net actuarial (gain) loss, net of tax o f - ................... .. ...... .. .. .. .. ..... .. .. .. ............. I ____.

Total other comprehensive income (loss) .. .................. ..... ....... .. ........................ .. ....... .. ....... _ _ _ _ .

Comprehensive income (loss) ....... .... .......... ..... ............. ... ... ... ......... .... ...... .. .... ......... ... ... ...... . ~~

The accompanying Notes to the Consolidated Financial Statements are an integral part of the fina llcial statemellls.

7

Table of Contents CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, Talen Energy Supply, LLC and Subsidiaries (Millions ofDollars) 2016 2015 Assets Current Assets Cash and cash equivalents ... ......... ......................... .. .... ..... .. ...... ....... .... .... .. .. ..... . ................. $

Restricted cash and cash equivalents ... ..... ...... ....... ......... ............ ... ............. ... .. ........... ....... .

Accounts receivable, net ..... .. ...... ..... .. .............. ... ................................. ........ .. .......... .... ..... ..

Inventory .. ... .... .......... ..... ...... ......... .. ......... ........ ....... ..... ..... ...... .. ..... ........... ............. .... ... ..... .

Derivative assets .. .... ......... .... ... ...... ... .. ..... .... ... .... ..... ... ...... .. ....... ..... ..... ... ..... .. ...... .. ...... ..... ..

Assets held for sale .. ... ...................... .. .......... .................... ......... ...................... ... ....... .... .... .

Other current assets ....... .. ....... ................ ............ ... ................................. .. ... .................. ......

Total current assets ..... .. ...... ...... ..... .. .... ... ...... ...... .......... ... .. ......... ... ..... .. ...... .. .... .. .. ..... ... .. ..

Property, plant and equipment, net. ....... .. ............. .............. .. ............ ... ......... ..... ...... ....... ... .. ..

Nuclear plant decommissioning trust funds ..... .............. .. .. ................................ .... ........ ...... .

Intangibles ......... ... ......... ....... ... ...... ............... ............ .. .... .......... ..... ...... .... .......... ... ....... .. ...... ..

Derivative assets ....... ... ...... ..... .. .. ...... .... ....... .... ...... .. ... .. ... ...... .. ... .. ............ ...... .... ........... .... .. .

Other noncurrent assets .... .... ................... ....................... ... .... .......... .. ........ ............. ... ........ .. ..

Total Assets ... ....... .. ..... .. ...... ...... .. .. ............ .. ....................... .. .. ... ..... ... ....... ...... ...... ................... ~~

Liabilities and Equity Current Liabilities Revolving lines of credit (a) ................................. ... ..... .. ...................... .. ....... ... ................. $

Long-term debt due within one year (a) ........ .. .... ...... ... .. ............ ........ .......... .. ..... ...... .. .. .. ..

Accounts payable and accrued liabilities ............... .. ......... ................. .... ..... ..................... ..

Derivative liabilities ............. ..... .... .... .. ..... .. .... ............ ....... ............. ..... .. .............. .... .. .... .... .

Liabilities held for sale ....... ........ .. ......... ... .. .. ............. ............................. .. .. ..... ... ... ......... ... .

Other current liabilities ....... .............. ..... ......... .. ..... ................ .... .. ......... ...... .................... .. .

Total current liabilities ................................ ..... ....... ..... ........................ ... ........................ .

Long-term debt (a) .... ........... ................. .. ........... ........... .... .. .............. .... ............. ...... ....... ... ..

Derivative liabilities .................. ...... .... ... ..... ................. ...................... ..... ............. ........ .. .... ..

Accrued pension obligations ...... ............ .................... ......... ..... .. ... ... .... .. ... .... ... ... ... ............ ..

Asset retirement obligations ........ ..... .... ....... .. ................ .... ............... .. ................... ...... ... ..... .

Deferred income taxes ........... ........ ....... ...................................... .. ..... ........ .............. .... .... .... .

Other noncurrent liabilities ............................... ............ ............. ... .. .... ...... .. ......................... .

Total Liabilities Commitments and Contingencies (Note 15)

Member's Equity .. .... .... ....... .. ..... .............. .... .. ......... ................ .............. ... .. ...... ...... ......... ..... - - - - - - - - - - - -

Total Liabilities and Equity .. ... ...... ... ....... ...... .................... .. ......... ........................... .. .......... ~ ~

(a) Includes MACH Gen related debt that is non-recourse to Tal en Energy Supply. See Note 10 for additional infonnation.

The accompanying Notes to the Consolidated Financial Statements are an integral part of the financial statements.

8

Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, Ta len Energy Supply, LLC and Subsid iaries (Millions of Dollars) 2016 2015 Cash Flows from Operating Activities Net income (loss) ........ .. ......... .. ..... .. ........ .. . .. .. ... ... ..... .... .. .. ........... ..................................... $

Adjustments to reconcile net income (loss) to net cash provided by operating activities Pre-tax gain from the sale of certain generation facilities ...

Depreciation, amortization and accretion (a) ............. ..

Amortization - nuclear fuel ............. .... .................. .......... ..

Deferred income taxes ........................................................................... ...

Impairment of assets ... .. ....... ..... ... ..... ... ........ .. ......... ........ ... ... ....... ........... .............. ...... ...... .. ... .. ... .... .. .

Unrealized (gains) losses on derivatives .. .................. .. .. ...... ............ ................. .... ........................... . I Other ........ ....... .. ...... .. ...................................... .......... ... .......... ........ ...... .... .... .. .. .. ... ......... .............. .... . I I Change in assets and liabilities Accounts receivable ....... ................. .. ...... .. .. ......... .. ............ .. ......... ...... ................. ... .... .................... . . I I I Inventory ......... ...... .................. .................. .... ............ ......................... ........ ..... .... .... .... .... .... .. ....... .... ..

I Other assets .... .. ......... .... ....... ...... ... .. .. ... .... ........... ............................................ .. .. .. ...... ........ .. ... ........ ..

I Accounts payable and accrued liabilities .. .. ....... ... .. .......... .. ............. ........ ............. .. ....................... ..

Other liabilities .. .. .. ..................... .... ........... .. .. .. ... ... ....... .. .......... .. .............. .. .... ...... .. .. .. .................... .

. I Net cash provided by operating activities .. ......... .. ............ .. ... .. .. .......... ............ .... .... .. ................ .

Cash Flows from Investing Activities Expenditures for property, plant and equipment .... .. ..

Proceeds from the sale of ceiiain generation facilities ........ .. ..... .. ...... ......... .... .. ........... .. ........... ...... . .. *-

Expenditures for intangible assets ...... ...... ... ..... ........ ..... ......... ......... ... ....................... ..... .. ................. .

Acquisition ofMACH Gen .. ...... .................... .... ....... ... ... ..... ...... .............................. ...... .. ..... .... ........ .

Purchases of nuclear plant decommissioning trust investments ......................................... .. ........... ...

Proceeds from the sale of nuclear plant decommissioning trust investments ................................ ..... .

Net (increase) decrease in restricted cash and cash equivalents .. .... .. .. .. ............. .... ........ .. ........... ... .. ..

Other investing activities .... ...... ... ......... ....... ..... ..... .. .................. .. .. .. .... .... ... .......... ... .... .................... ..... - -- ----;

- I I_

I

-* I I

Net cash provided by (used in) investing activities .. .. ... .... ....... .. .. .. .. ...... ... .. .. ...... .... .... .. ... ...... .... - - - - - - - - - -

Cash Flows from Financing Activities Issuance of long-term debt ..................... ........ ......... ..... .... ................... ........ ... .. .. ........ ... ...... .... .. ......... .

Retirement of long-term debt .......... .. ..... .... ...... .... .... ... ...... ... ... .. .... .... .... .. ...... .. .. ...... .. ... .. ... ......... ... ..... ..

I I Contributions from member .. ... ..... .... .. .............................. .. ... ..... _.............. ........... ...... .. ........ .. ............ .

Distributions to member .. ... ... .... ........ ..... ..... ...... .. ......... ... ... ... .. .. .. .. .. ... .. . ....... .. ...... ... .. ... ...... ..... .. .... ..... .

Net increase (decrease) in shmi-temlfevolving line of credit. .. ..

Settlement of share-based compensation .............................................. .. .......... .... ... ........................ ... . I Other fmancing activities. ... ... .. .. .......................................................... ..... .. ........ .. ......... .......... ... .........

Net cash provided by (used in) financing activities ................... ......... .. ............ ... ..... .. ... .. ... ...... .. . - - - - -

Net Increase (Decrease) in Cash and Cash Equivalents . .........................................................

Cash and Cash Equivalents at Beginning ofPeriod ......................... .. ...... .... .... .. .. .......... .. .. ...... .. ...... .... * - _ _ _ __

=

Cash and Cash Equivalents at End of Period ................................... .. ......... .. .. .. ....... .. ...... .. .. .. ............ ='$'=====::::!!!!*!!!!!!!!::

Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period for:

Interest- net of amount capitalized ..... .................... .... ... ........ ....... ....... .. .. ............ ...... .. .. .. ... .. .. ... .. $

I

I Income taxes - net .. .. ... .. ..... ... ... ....... . ..... ......... ......... .. ........................ ............ ................. ..

Increase (decrease) in capital expenditure accruals ............................................ .. .. .. ....... .. .... .... ...... .. ..

(a) Includes amortization expense included in "Fuel and energy purchases" on the Statements of Operations related to intangibles 201~ in 2015 and debt amortization costs included in "Interest expense" on the Statements of Operations 6 and~15.

The accompanying Notes to tl1e Consolidated Financial Statements are an integral part of the financial statements.

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Table of Contents CONSOLIDATED STATEMENTS OF EQUITY Talen Energy Supply, LLC and Subsidiaries (Millions ofDollars)

Member's equity December 31,2014 ....... ... ........... ... .. ... ... .. .. .. ... ............. ...... .. ............. ....... .. ...... ...... ...... .... ........... .. .. ........ ............ . $ --

Net income (loss) ... ...... ...... .. ...... ... ..... ... .. ...... ..... ... .. ... ..... .... .... ........ .. .. ............ .... .......... ....... .. .... ... .. ..... ...... .. ... ......

Other comprehensive income (loss) .. ............... ........ ... ..... ........ .. .. .. .. ....................... .... ... ..... ..... .......... ..... ... .... .. ... ..

Distributions to member ... ...... ......... .. .. ... ... ............ ... .. ... .. .. ...... ... .. .. ... ...... ......... .. .. ... ...... ...................... ......... .. ...... .

Contributions fi-om member (a) ...... ... .. ....... ........... ............. .. .. ... ...... .. .......... .... ...... ................................... .. ........ ..

December 31,2015 .... ................... ... ... .. ...... .. .............. ...... ...... ... .. ... ... ...... ...... ............ ..... ......... .. .... .... .... ........ ...... ====

Net inc01ne (loss) .... .. .. ........ ... .. ..... ... ... .... ....... ...... .. .... ....... .. .. .. .. .. . ..... . ... .. ...... ... ... ....... .. .. ... .. .. ... .... ..... .... ....... .... .... . $

I Other comprehensive income (loss) .. .......... .. ............. ........ .. .... .............. .. ........ ......... .. ... ....... ...... ..... ...... ..... .... .. ....

Distributions to member .... ..... ................. .. ...... ....... ..... ..... ... .... ... ...... ...... .. ... ....... ...... .... ........ ..... ...... ........ ............ ..

Contributions from member (b) ........... .......... .. .... .... .. ....... .. .... .. ......................... ... .. .... ..... ... ........ ...... .. .. .. ... ... .. ......

Cancellation of share based awards upon Merger (c). .. .. .. ......................... ............ ............... ..... ... ...... ......... .........

December 31,2016 .. .. .... .... .............. .. ....... .. ......... .... ... .. ..... ......... ..... .... ...... .. .... .... ... ... ...... .. ..... .... ...... ... .. .. .. .... .. .. .. ~

I (a) Includes activity related to the June 20 15 spinoff !Tom PPL and the contribution of RJS Power as of the acquisition date. See Note 3 for additional information.

(b) Primarily represents non-cash stock compensation that has been partially offset by an insignificant reduction for a non-cash correction of a contribution received !Tom PPL as part of the June I, 2015 spinoff.

(c) The awards were canceled and the holder received the right to receive cash settlement.

The accompanying Notes to the Consolidated Financial Statements are an integral part of the financial statements.

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Table of Contents Notes to the Consolidated Financial Statements Capitalized terms and abbreviations appearing in the notes to the financial statements are defined in the glossary. Dollars are in millions, unless otherwise noted. The terms "Talen Energy Supply," "we," "us" and "our" refer to Talen Energy Supply, LLC and its consolidated subsidiaries, unless the context clearly indicates othe1wise. This presentation has been applied where identification of pmiicular subsidiaries is not material to the matter being disclosed, and to confonn narrative disclosures to the presentation of financial information on a consolidated basis. When identification of a pmiicular subsidiary is considered impmiant to understanding the matter being disclosed, the specific entity's name is used. Each disclosure referring to a subsidiary applies to Talen Energy Supply.

1. Organization and Operations Tal en Energy Supply is one of the largest competitive energy and power generation companies in Nmih America. We produce and sell electricity, capacity and ancillary services to wholesale and retail power markets in the United States from our fleet of power plants totaling approximately 16,000 MW (summer rating) of generating capacity as of December 31, 2016. Tal en Energy Supply's pmifolio of generation assets is principally located in the Northeast, Mid-Atlantic and Southwest regions of the United States. Talen Energy Supply's generation fleet has significant fuel diversity including nuclear, natural gas, oil and coal generation capacity. Ce1iain of our facilities have the capability to utilize multiple fuel sources. Additionally, consistent with our risk management policy, we enter into physical and financial commodity contracts (including power and natural gas) to hedge and optimize our pmifolio of power plants. See "Generation Fleet" for a breakdown of our generation pmifolio at December 31,2016.

Talen Energy Supply is an indirect wholly owned subsidimy ofTalen Energy Corporation. Talen Energy Corporation was formed on June 1, 2015 by the spinoff ofTalen Energy Supply (then known as PPL Energy Supply, LLC), the competitive energy and power generation business owned by PPL, and the subsequent combination of that business with RJS Power, the competitive power generation business controlled by Riverstone to form an independent company (collectively, the "Talen Formation Transactions"). Upon completion of the Talen Fmmation Transactions, affiliates ofRiverstone owned approximately 35% ofTalen Energy Corporation's common stock.

On December 6, 2016, Talen Energy Corporation completed a go-private transaction in which all of the outstanding shares of Tal en Energy Corporation's common stock not owned by Riverstone affiliated entities were acquired. As a result of the go-private transaction, Talen Energy Corporation and Talen Energy Supply are now privately owned by affiliates ofRiverstone.

Concurrently with the closing of the go-private transaction, Talen Energy Supply appointed a new senior management team.

See Note 4 for additional information on acquisitions, divestitures and the go-private transaction mentioned above and see "Generation Fleet" for a breakdown of our generation portfolio at December 31, 2016.

Significant Business Risks We are subject to business risks within the power industry. These risks could cause future results to differ from historical results and include: (I) changes in market conditions, including developments in energy and commodity supply, volume and pricing; (2) state, federal and other rate regulations and legislation in the areas in which we do business; (3) risks associated with our nuclear facility, including the safe operation of, and unscheduled outages at, the facility, the availability and cost of nuclear fuel and fuel-related components and increased nuclear indushy security, safety and regulatory requirements that could increase our operating and capital costs associated with its operation; (4) weather and other natural phenomena; (5) changes in or application of environmental and other laws and regulations to which we are subject; (6) regulatory and legislative initiatives regarding deregulation, regulation, or restructuring of the electric utility indust1y; (7) the extent and timing of the ently of additional competition in the markets in which we operate; (8) the direct or indirect effects on our business resulting from the financial difficulties of our competitors or fuel suppliers, including but not limited to, the effects on liquidity in the trading and power industly and the views of the capital markets' regarding the energy or tl*ading industly; (9) risks associated with the operation of our other power plants including unscheduled outages; ( 10) the expiration or termination of our power sales agreements and ( 11) credit risk and losses resulting from non-performance of our counterpa1iies.

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2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation Our financial statements have been prepared in accordance with GAAP and include the accounts of all controlled subsidiaries.

Intercompany transactions have been eliminated in consolidation. The financial inf01mation prior to June I, 2015 includes Talen Energy Supply's operating results while owned by PPL. From June I, 20I5, upon completion of the Talen Formation Transactions, our financial information also includes RJS. In connection with the Merger, we have elected not to apply push down accounting for any of the fair value adjustments in connection with the change in control.

Investments in entities in which we have the ability to exercise significant influence but do not have a controlling financial interest are accounted for under the equity method.

These financial statements include our share of any undivided interests in jointly owned facilities, as well as our share of the related output and operating costs of those facilities. See Note 7 for additional information.

Entities for which a controlling financial interest is not demonstrated through voting interests are evaluated based on accounting guidance for VIEs. We consolidate a VIE when it is determined that we have a controlling interest in the VIE, and thus are the primary beneficiary of the entity. At December 31, 2016 and 2015 we are not the primary beneficiary in any material VIEs.

The assets and liabilities related to the Holtwood, Lake Wallenpaupack, C.P. Crane and Ironwood facilities were classified as "Assets held for sale" and "Liabilities held for sale" at December 31, 2015 but their operating results were not classified as discontinued operations on the statements of operations as they did not qualify as such under the accounting guidance on rep011ing discontinued operations. The sales were completed in 2016. See Note 4 for additional inf01mation on these divestitures.

Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the rep011ed 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.

Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform to the current period's presentation.

The reclassifications did not affect operating income, net income or equity.

See Note 5 for information on a change in presentation in 2016 related to emission allowances.

Fair Value of Financial lnstmments and Derivatives We value ce11ain financial and nonfinancial assets and liabilities at their fair value. The carrying values of accounts receivable, accounts payable and other receivables and payables approximate their fair values due to their short-term maturities. The most significant fair value measurements relate to derivative assets and liabilities, and investments in the NDT funds and defined benefit plans. See Notes 11, 12 and I4 for disclosures regarding fair value.

Revenue Recognition Our operating revenues are comprised of:

Sales of generated electricity and ancillary services through contracts directly with an RTO or ISO (PJM, ERCOT, ISO-NE and NYISO) and through bilateral contracts with counterparties in regions in which we operate; Capacity payments received from RTO or ISO capacity auctions in PJM, ISO-NE and NYISO and through bilateral contracts with counterpm1ies for generation capacity available in order to satisfy RTO and ISO system reliability requirements; Sales of physical electricity and natural gas to commercial, industrial and retail customers under executory bilateral contracts; I2

Table of Contents Realized settlements of physical and financial commodity derivative instruments; Unrealized mark-to-market gains and losses on commodity derivative instruments; and Other energy-related service revenue.

Sales of generated electricity and ancillary services through contracts directly with an RTO or ISO in which we operate are recognized in "Energy revenues" on the Statements of Operations upon transmission and delive1y to the RTO or ISO at the contractually agreed upon day ahead or real-time market price. We record realized hourly sales of physical power net of realized hourly purchases of power with RTOs and ISOs in the Statements of Operations as "Energy revenues" if in a net sales position and "Fuel and energy purchases" if in a net purchase position.

Capacity payments received from RTO or ISO capacity auctions in PJM, ISO-NE and NYISO are recognized in "Energy revenues" on the Statements of Operations when contractually earned based on cleared capacity prices for each respective generation asset.

Sales of physical electricity and natural gas to commercial, industrial and retail customers under executmy bilateral contracts are recognized in "Energy revenues" on the Statements of Operations upon transmission and delive1y to the customer at the contractual price. Unbilled retail revenues result from reading customers' meters throughout the month, rather than being read and billed on the last day of the month. Unbilled revenues for a month are calculated by multiplying an estimate of unbilled kWh by the estimated average cents per kWh. Unbilled wholesale energy revenues are recorded at month-end to reflect estimated amounts until actual do!Jars and MWhs are confirmed and invoiced.

Realized settlements of physical and financial commodity derivative instruments related to sales of electricity and natural gas are recognized in "Energy revenues" on the Statement of Operations on the settlement date. See "Derivative Instruments" below for recognition of unrealized mark-to-market gains and losses on commodity derivative instruments.

"Other energy-related services" revenue primarily includes revenue from our mechanical contracting and engineering subsidiaries. These subsidiaries record revenue from construction contracts on the percentage-of-completion method of accounting, measured by the actual cost incurred to date as a percentage of the estimated total cost for each contract. The related operating expense for these subsidiaries is the primmy component of "Other energy-related services" under "Operating Expenses" on the Statements of Operations. The costs and estimated earnings in excess of billings on uncompleted contracts are recorded within "Other current assets" on the Balance Sheets, and billings in excess of costs and estimated earnings on uncompleted contracts are recorded within "Other current liabilities" on the Balance Sheets. The amount of costs and estimated earnings in excess of billings was and at December 31, 2016 and 2015, and the amount of billings in excess of costs and estimated earnmgs was at December 31,2016 and 2015.

Energy Expenses Energy expenses are comprised primarily of the following:

Cost of coal, fuel oil and emission allowances purchased from third pmties under executmy contracts for consumption as fuel in our power plants in the generation of elech*icity; Amortization of nuclear fuel consumed in the generation of electricity; Costs of natural gas purchased from third parties under executory contracts with gas marketers for consumption in the generation of electricity or to fulfill sales requirements from contracts with retail customers (commercial and industrial);

Purchases of physical electricity through contracts directly with PJM to fulfill sales requirements from contracts with our retail customers (commercial, industrial and residential);

Realized settlements of physical and financial commodity derivative instruments; and Unrealized mark-to-market gains and losses on commodity derivative instruments.

Purchases of physical coal and fuel oil under executory bilateral contracts are recognized in "Inventory" on the Balance Sheets at the contractual price plus related transportation cost upon delivery and recognized in "Fuel and energy purchases" at the weighted average cost when used in the generation of electricity.

Nuclear fuel-related costs, including fuel, conversion, enrichment, fabrication and assemblies, are capitalized as prope11y, plant and equipment. Such costs are amortized as the fuel is consumed using the units-of-production method and included in "Nuclear fuel ammtization" on the Statements of Operations.

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Table of Contents Purchases of physical natural gas under executory bilateral contracts for consumption in the generation of electricity or to fulfill sales requirements from contracts with commercial, industrial and retail customers are recognized in "Fuel and energy purchases" on the Statements of Operations at the agreed contractual price upon delivery plus related transpmiation cost.

Purchases of physical electricity through contracts directly with PJM to fulfill sales requirements from contracts with our commercial, industrial and retail customers are recognized in "Fuel and energy purchases" upon transmission and delivery by the RTO or ISO at the contractually agreed upon day ahead or real-time market price. We record realized hourly purchases of physical power directly with the RTO or ISO net of sales of physical power in the Statements of Operations as "Fuel and energy purchases" if in a net purchase position and "Energy revenues" if in a net sale position.

Realized settlements of physical and financial commodity derivative instruments related to purchases of physical electricity and natural gas are recognized in "Fuel and energy purchases" on the Statements of Operations on the settlement date. See "Derivative Instruments" below for recognition of unrealized mark-to-market gains and losses on commodity derivative instruments.

Derivatil*e Instruments All unrealized gains and losses on derivative instruments are recognized as either "Derivative assets or liabilities" on the Balance Sheets at fair value. The accounting for changes in fair value (i.e. unrealized gains and losses) of a derivative instrument depend on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For derivatives that do not qualify for hedge accounting under the hedge accounting guidelines or the hedge accounting designation has not been elected, the gain or loss from fair value measurement is recognized in the current period in "Unrealized gain (loss) on derivative contracts" in the Statement of Operations. At December 31, 2016 and 2015, our commodity derivative instruments either did not qualify for hedge accounting under the hedge accounting guidance or the hedge accounting designation has not been elected. See Notes 11 and 12 for additional information on derivative contracts and fair value measurements.

Cash Equivalents All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

Restricted Cash and Cash Equivalents Bank deposits and other cash equivalents that are restricted by agreement are classified as restricted cash and cash equivalents.

The change in restricted cash and cash equivalents is repotied as an investing activity on the Statements of Cash Flows. On the Balance Sheets, restricted cash and cash equivalents are shown as "Restricted cash and cash equivalents" within current assets.

At December 31, the balances of restricted cash and cash equivalents included the following.

2016 2015 Margin deposits posted to counterparties $ I $ I Ironwood debt service reserves I

$ I $

Accounts Receivable Accounts receivable are repmied on the Balance Sheets at the net outstanding amount, gross accounts receivable adjusted for an allowance for doubtful accounts. At December 31, 2016 and 2015, the allowance for doubtful accounts was insignificant.

Inventmy Inventory consists of fuel stock (primarily coal and fuel oil), materials, supplies and emission allowances and is valued at the lower of weighted average cost or market. Generally, cost is reduced to market if the value of inventmy has declined and the utility of inventmy in the ordinary course of business will not be recovered through revenue earned. Fuel costs for electric generation are charged to "Fuel and energy purchases" on the Statements of Operations. Materials and supplies are charged to "Operation and maintenance" on the Statements of Operations as they are used for repairs and maintenance or capitalized to prope1iy, plant and equipment as they are used for capital projects. See Note 5 for additional information on inventory.

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Table of Contents Investments in Debt aiU/ Equity Securities Our investments in debt and equity securities are classified as available-for-sale and primarily relate to the securities held in the NDT funds. These available-for-sale securities are carried at fair value. The specific identification method is used to calculate realized gains and losses on debt and equity securities. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported, net of tax, in OCI until realized. If an available-for-sale security's fair value declines below cost and the decline is determined to be other-than-temporary, the umealized loss is recognized currently in earnings.

See Notes 12 and 18 for additional information on investments in debt and equity securities.

Property, Plaut and Equipment Property, plant and equipment is recorded at original cost or fair value at the time of acquisition, if acquired in business combinations. We capitalize costs incuiTed in connection with the purchase of prope1iy, constmction of power plants, and the addition or refurbishment of major equipment. We expense the cost of repairs and maintenance when work is performed that does not meet our capitalization criteria.

Depreciation is recorded over the estimated useful lives of property primarily using the straight-line, composite and group methods. When a component ofpropeiiy, plant and equipment that was depreciated under the composite or group method is retired, the original cost is charged to accumulated depreciation. When all or a significant portion of an operating unit that was depreciated under the composite or group method is retired or sold, the propeiiy and the related accumulated depreciation account is reduced and any gain or loss is included in income.

Nuclear fuel-related costs, including fuel, conversion, enrichment, fabrication and assemblies, are capitalized as propeiiy, plant and equipment. Such costs are am01iized as the fuel is consumed using the units-of-production method and included in "Nuclear fuel am01iization" on the Statements of Operations.

See "Asset Impairments" below and Note 6 for additional information.

Goodwill Goodwill represents the excess of the purchase price paid over the fair value of the identifiable net assets acquired in a business combination. In 2015, goodwill was fully impaired. See "Asset Impairments" below and Note 9 for additional information.

Intangible Assets We initially record and measure intangible assets based on the fair value of those rights transferred in the transaction in which the asset was acquired. Intangibles acquired outside of business combinations, including capitalized software and software licenses, are recorded at cost. Intangibles that have finite useful lives are amortized over their useful lives based upon the pattern in which the economic benefits of the intangible assets are consumed or otherwise used. Intangible assets determined to have indefinite I ives are not ammiized, but rather are tested for impaiiment at least annually or more frequently if events or changes in circumstances indicate that such intangible assets have finite lives and should be am01iized over their useful lives. See "Asset Impairments" below and Note 8 for additional information.

Asset Impairments We evaluate our long-lived assets that are classified as held and used, such as property, plant and equipment, definite-lived intangible assets and goodwill, for impairment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. When we believe an impairment condition may have occun*ed, we are required to estimate the undiscounted future cash flows associated with a long-lived asset or group of long-lived assets at the lowest level for which identifiable cash flows are estimated, largely independent of the cash flows of other assets and liabilities for long-lived assets. An impairment loss is indicated if the total future estimated undiscounted cash flows expected from an asset or asset group are less than its carrying value. An impairment charge is measured by the difference between an asset's carrying amount and fair value with the difference, if any, recorded as a loss in "Impairments" in the Statements of Operations. Fair values are determined by a variety of valuation methods, including third-party appraisals, sales prices of similar assets, and present value techniques See Note 9 for additional information on asset impai1ments recorded in 2016 and 2015.

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Table of Contents Asset Retirement Obligations We record liabilities to reflect various legal obligations associated with the retirement of long-lived assets. Initially, an obligation is measured at fair value and offset with an increase in the value of the capitalized asset, which is depreciated over the asset's useful life. Until the obligation is settled, the liability is increased through the recognition of accretion expense classified within "Depreciation, ammtization and accretion" on the Statements of Operations to reflect changes in the obligation due to the passage of time.

Estimated ARO costs and settlement dates, which affect the carrying value of the ARO and the related capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the ARO. Any change to the capitalized asset, positive or negative, is generally ammtized over the remaining life of the associated long-lived asset. See Note 17 for additional information on AROs.

Stock-Based Compensation In 2016 and subsequent to the June I, 2015 spinoff, cettain of our employees patticipated in Tal en Energy Corporation's stock-based compensation plans for purposes of granting stock options, restricted stock, restricted stock units and performance units to cettain employees as well as stock units and restricted stock units to directors ofTalen Energy Corporation. Prior to the Tal en Formation Transactions, cettain of our employees patticipated in plans sponsored by PPL. We recognized compensation expense for stock-based awards based on the fair value method. Stock options that vest in installments are valued as a single award. Talen Energy Corporation granted stock options with an exercise price that was not less than the fair value ofTalen Energy Corporation's common stock on the date of grant. All awards were recorded as equity or a liability on the Balance Sheets. Stock-based compensation expense for periods prior to the June I, 2015 spinoff also included an allocation ofPPL Services' expense. See Note 13 for additional information on stock-based compensation, including the cash settlement of outstanding awards associated with the Merger.

Defined Benefits Tal en Energy Supply and certain of its subsidiaries sponsor or participate in, as applicable, various qualified funded and non-qualified unfunded defined benefit pension plans and both funded and unfunded other postretirement benefit plans. An asset or liability is recorded with an offsetting entry to AOCI to recognize the funded status of all defined benefit plans sponsored by us and our subsidiaries. Consequently, the funded status of all sponsored defined benefit plans is fully recognized on the Balance Sheets.

We use an accelerated amortization method for the recognition of gains and losses for our defined benefit pension plans. Under the accelerated method, actuarial gains and losses in excess of 30% of the plan's projected benefit obligation are ammtized on a straight-line basis over one-half of the expected average remaining setvice of active plan participants. Actuarial gains and losses in excess of IO% of the greater of the plan's projected benefit obligation or the market-related value of plan assets and less than 30% of the plan's projected benefit obligation are amortized on a straight-line basis over the expected average remaining setvice period of active plan participants.

See Note 14 for additional information about the plans and the accounting for defined benefits, including a discussion of the pension and other postretirement benefit plans we sponsor that replaced our participation in similar PPL plans effective with the June I, 20I5 spinoff.

Income Taxes Talen Energy Corporation and its subsidiaries file a consolidated U.S. federal income tax return, which includes Talen Energy Supply. Our tax provision is calculated as ifTalen Energy Supply and its subsidiaries each filed a separate consolidated tax return.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax basis, tax credits and NOL carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the enactment date. We record valuation allowances to reduce deferred tax assets for the amounts that are more likely than not to be realized.

We recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is 16

Table of Contents measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. We reverse a previously recognized tax position in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination. We account for interest and penalties from tax unce11ainties in "Income Tax Expense (Benefit)" in the Statement of Operations. See Note 16 for a finther discussion on our income taxes.

Loss Contingencies Potential losses are accrued when (I) inf01mation is available that indicates it is "probable" that a loss has been incurred, given the likelihood of the unce11ain future events and (2) the amount of the loss can be reasonably estimated. Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur." We continuously assess potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events. Loss contingencies for environmental remediation are discounted when appropriate. See Note 15 for additional infonnation.

Sales and Gross Receipts Taxes We present sales taxes in "Other current liabilities" on the Balance Sheets. These taxes are not reflected in the Statements of Operations. We record gross receipt taxes in the Statements of Operations in "Fuel and energy purchases." For the years ended December 31,2016 and 2015 we recorded~ and~ of gross receipts tax.

New Accounting Standards- Adopted SimplifYing the Presentation of Debt Issuance Costs Effective January 1, 2016, we adopted accounting guidance that simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with the presentation of debt discounts. In August 2015 , additional guidance was issued to address issuance costs related to line-of-credit arrangements stating that an entity may defer and am011ize debt issuance costs over the term of a line-of-credit arrangement, regardless of whether there are any related outstanding borrowings.

During the first qum1er of2016, we retrospectively adopted this guidance which resulted in the December 31, 2015 Balance Sheet reflecting a reclassification o f - between "Other noncurrent assets" and "Long-term debt" for the implementation. Issuance costs related to line-of-credit arrangements remain deferred as a long-te1m asset and amortized over the life of the arrangement.

Going Concern Effective December 31, 2016, we adopted accounting guidance that requires management, in connection with preparing financial statements for each annual and interim reporting period, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are available to be issued. The adoption of this guidance did not have a material impact on our financial statements.

Cloud Computing Arrangements Effective Janumy 1, 2016, we prospectively adopted guidance that clarifies how to determine if a cloud computing arrangement includes a software license. If a cloud computing aJTangement contains a software license, the license should be accounted for in a manner consistent with the acquisition of other software licenses. If a cloud computing arrangement does not contain a software license, the aJTangement should be accounted for as a service contract. The initial adoption of this guidance did not have a material impact on our financial statements.

In December 2016, the FASB clarified that the license of internal-use software shall be accounted for as an acquisition of an intangible asset. As a result, we reclassified- fi*om "Prope11y, plant and equipment, net" to "Intangibles" on the December 31, 2015 Balance Sheet, which represented all internal use software related costs.

Net Asset Value Effective December 31 , 2016, we adopted accounting guidance which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The standard impacts the fair value presentation for assets measured at NAV. We adopted this guidance effective December 31, 17

Table of Contents 2016. The retrospective approach requires that an investment for which fair value is measured using the NAV per share practical expedient be removed from the fair value hierarchy for all periods presented. This standard affects the NDT and Retirement and Postemployment Benefits fair value hierarchy and has been retrospectively applied.

New Accounting Standards -Pending Adoption Accounting for Revenue from Contracts with Customers In May 2014, the FASB issued accounting guidance that establishes a comprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or se1vices. In March 2016, the FASB issued guidance to clarifY the implementation of principal versus agent considerations, and in April2016, the FASB issued guidance to clarifY the identification ofpe1formance obligations contained within the original standard. In December 2016, the FASB issued guidance that allows entities not to make quantitative disclosures about remaining performance obligations in ce1tain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The guidance also makes additional technical corrections and improvements to the new revenue standard.

This guidance can be applied using either a full retrospective or modified retrospective transition method. Entities may early adopt the guidance as of the original effective date of the standard, which for public business entities is annual repmting periods beginning after December 15, 2016. We expect to adopt this guidance effective Janumy 1, 2018 .

We are currently assessing the impact of adopting this guidance on our consolidated financial statements, as well as the transition method we will use.

Recognition of Measurement of Financial Assets and Financial Liabilities In Janumy 2016, the FASB issued accounting guidance that affects the accounting for equity investments, financial liabilities under the fair value option, and the disclosure requirements for financial instruments. This guidance generally requires entities to measure equity investments that are not accounted for under the equity method of accounting and do not result in consolidation at fair value and recognize any changes in fair value in net income. Entities may elect to record equity investments without readily determinable fair values at cost, less impairment, adjusted for observable price changes. The impairment model for equity investments subject to this election is a single-step qualitative assessment performed each qumter.

For financial liabilities measured using the fair value option, changes in fair value related to instrument-specific credit risk is to be presented separately within ocr.

This guidance should generally be applied prospectively for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is generally not permitted, although entities may early adopt the provision related to financial liabilities under the fair value option.

We expect to adopt this guidance effective January 1, 2018. Upon adoption, we will record a cumulative-effect adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is adopted, with the exception that the amendments related to equity securities with readily determined fair values will be applied prospectively.

We are currently assessing the impact of adopting this guidance on our consolidated financial statements, which may be significant for equity securities held in the NDT funds .

Accounting for Leases In Februmy 2016, the FASB issued accounting guidance that supersedes all existing lease guidance. The updated guidance will require lessees to recognize assets and liabilities for the rights and obligations created by their leases with lease terms of more than 12 months. Consistent with current accounting guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance lease (similar to the current capital lease) or an operating lease. However, unlike current accounting guidance, which requires only capital leases to be recognized on the balance sheet, the new accounting guidance will require both types of leases to be recognized on the balance sheet.

This guidance is effective for annual repmting periods beginning after December 15, 2018 and interim periods within those years. Early application is permitted. We are currently assessing the impact of adopting this guidance and expect to adopt this guidance effective January 1, 2019.

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Table of Contents Accounting for Credit Losses on Financial Instruments In June 20 I6, the FASB issued accounting guidance that that requires the use of a current expected credit loss (CECL) model for the measurement of credit losses on financial instruments within the scope of this guidance, which includes accounts receivable. The CECL model requires an entity to measure credit losses using historical information, current information and reasonable and suppmiable forecasts of future events, rather than the incurred loss impairment model required under current GAAP.

This guidance is effective for fiscal years beginning after December I5, 20I9, and interim periods therein. Early adoption is permitted for annual periods beginning after December I5, 20 I8. We are currently assessing the impact of adopting this guidance on our consolidated financial statements and expect to adopt this guidance effective January I, 2020.

Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued accounting guidance related to how an entity classifies certain cash receipts and cash payments on its statement of cash flows. The guidance clarifies eight specific cash flow presentation issues that have developed due to diversity in practice, including debt prepayment or extinguishment costs; distributions received from equity method investees; and cash receipts from payments on beneficial interests in securitization transactions.

This guidance is effective for fiscal years beginning after December I5, 20I7, and interim periods therein. Early adoption is permitted and the guidance's provisions are required to be applied retrospectively. We are currently assessing the impact of adopting this guidance on our consolidated financial statements and expect to adopt this guidance effective January I, 20 I8.

Statement of Cash Flows- Restricted Cash In November 20I6, the FASB issued accounting guidance that requires restricted cash and cash equivalents to be included with cash and restricted cash equivalents when reconciling beginning and ending cash in the statement of cash flows and also requires disclosure of the restrictions on cash, cash equivalents and restricted cash.

The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption in an interim period is permitted. We adopted this guidance effective January 1, 2017.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost In March 2017, the FASB issued accounting guidance that requires entities to include only the service cost component of net periodic benefit cost and net periodic posh*etirement benefit cost in operation expenses, together with other employee compensation costs. The other components of net benefit cost, including amm1ization of prior service cost/credit, and settlement and cm1ailment effects are to be included in non-operating expenses in a separate line item. The line item in which the components of net benefit cost other than the service cost are included need to be identified as such on the statement of operations or in the disclosures.

This guidance should be applied using a full retrospective transition method. The guidance establishes a practical expedient upon transition that permits entities to use their previously disclosed service cost and other cost as estimates for the prior period changes to the statement of operations. The amendment is effective for interim and annual periods beginning after December 15,20I7.

We are currently assessing the impact of adopting this guidance on our consolidated financial statements.

3. Talen Formation Transactions In June 20I4, PPL and the Sponsor Entities executed definitive agreements to combine their competitive power generation businesses under the ownership of a new, stand-alone, publicly traded company named Tal en Energy Corporation. On June I, 2015, our former parent, PPL, completed the spinoff of its competitive power generation business, PPL Energy Supply, LLC (subsequently renamed "Talen Energy Supply, LLC"). PPL Energy Supply, LLC is considered the accounting predecessor of Talen Energy Supply. Contemporaneous with the spinoff, RJS Power, the competitive power generation business conh*olled by Riverstone, was contributed by the Sponsor Entities to Tal en Energy Corporation, the indirect parent holding company of Tal en Energy Supply, which became, at that time, an independent, publicly traded company (referred to as the "Talen Formation 19

Table of Contents Transactions"). RJS Power companies became subsidiaries ofTalen Energy Supply as a result of the Talen Formation Transactions.

In accordance with business combination accounting guidance, the Talen Formation Transactions were treated as an acquisition with Talen Energy Supply considered the acquirer ofRJS Power. Accordingly, we applied acquisition accounting to the assets and liabilities ofRJS Power whereby the purchase price was allocated to the underlying tangible and intangible assets and liabilities based on their respective fair values as of June 1, 2015 , with the remainder allocated to goodwill.

The total consideration for the acquisition was deemed to b e - based on the fair value ofTalen Energy Corporation common stock issued for the acquisition using the June 1, 2015 closing "when-issued" market price. Various accounting valuation adjustments were made during the third and fourth qumiers of2015 resulting in a goodwill. The statement of operations effect of these adjustments recorded during the measurement Goodwill recorded as a result of the Talen Fonnation Transactions primarily reflected synergies expected to be achieved related to the spinoff and acquisition . The goodwill was not deductible for income tax purposes. See Note 9 for additional information related to the impainnent of goodwill.

In connection with the Talen Formation Transactions, additional employee-related costs were incurred primarily related to accelerated stock-based compensation and pro-rated performance-based cash incentive and stock-based compensation awards previously issued under PPL stock incentive programs, primarily for our employees and for PPL employees who became our employees in connection with the transaction. These costs were recognized at the closing of the spinoff. During 2015, we recorde~ in "Operation and maintenance" on the Statement of Operations related to these accelerated stock-based compensation and pro-rated stock-based compensation awards at spinoff. As the vesting for all employees was accelerated and all remaining unrecognized compensation expense accelerated concurrently with the spinoff, we did not recognize future compensation costs for equity awards from PPL stock incentive programs held by our employees. See Note 13 for additional information on stock-based compensation.

In addition, during 2015, we i n c u r r e d - of restructuring costs related to the Talen Formation Transactions which are recorded in "Operation and maintenance" on the Statement of Operations.

Prior to completion of the Talen Formation Transactions, our financial statements included certain transactions with affiliates of PPL, which were disclosed as related pmiy transactions. After June 1, 2015, all transactions with PPL or its affiliates are no longer related pmiy transactions. See Note 19 for additional information on related party transactions.

Following the Talen Formation Transactions, ceJiain services, including information technology, financial and accounting, human resource and other specified services are provided by PPL on a transition basis pursuant to the TSA. The TSA with PPL was for a period of up to two years from the date of the transaction. For 2016 and 2015, the costs incurred for these services w e r e - a n d - . See Note 19 for information on the TSA with Topaz Power Management, LP.

Nonrecurring acquisition, integration and other costs directly related to the Talen Formation Transactions o f - were incurred during 2015 and recorded in "Operation and maintenance" on the Statement of Operations.

4. Mergers, Acquisitions and Divestitures 2016 Go Private Transaction and Merger On December 6, 2016, Talen Energy Corporation, the indirect parent holding company ofTalen Energy Supply, completed a go-private transaction in which Tal en Energy Corporation became wholly owned by the Sponsor Entities.

Pursuant to the terms of the Agreement and Plan of Merger (the Merger Agreement) with RPH Parent LLC, SPH Parent LLC, CRJ Parent LLC (each, an affiliate ofRiverstone, and collectively refeJTed to as "Parent"), and RJS Merger Sub Inc. (a wholly owned subsidiary of Parent referred to as "Merger Sub"), Merger Sub was merged with and into Tal en Energy Corporation (the Merger) on December 6, 2016, with Talen Energy Corporation continuing as the surviving corporation on the terms and conditions set fmih in the Merger Agreement. At the effective time of the Merger, each share ofTalen Energy Corporation's common stock was canceled and converted into the right to receive $14.00 in cash, other than shares held by Parent or their affiliates (including the Sponsor Entities), which were conve1ied into shares of the surviving corporation upon completion of the Merger. As a result of the Merger, Talen Energy Corporation is privately owned by the Sponsor Entities.

20

Table of Contents Upon closing of the Merger, the Tal en Energy Supply Revolver capacity was reduced from Talen Energy Supply's subsidiaries that the Talen Revolver now our obli with and Merger consideration, paid by Talen Energy Corporation, was funded by our cash on hand and pm1ially from the proceeds of the 2016 Talen Energy Supply TLB. See Note 10 for additional information on the term loan. In conjunction with the close of the Merger, the following cash activity occurred:

Distribution to Member (a)

Issuance of2016 Talen Energy Supply TLB (b)

Commitment fee for 2016 Talen Energy Supply TLB Tal en Energy Supply Revolver repayment (Outflow) Inflow Compensation related payments Merger costs paid to affiliates reflected in Statement of Operations Total (a) For payment of the Merger Consideration to Tal en Energy Corporation stockholders, transaction fees and expenses. Amount

fees paid prior to closing the Merger.

(b) Net of discount and issuance costs.

Purpmied class action lawsuits challenging the merger were filed in the State of Delaware. See Note 15 for additional information.

For the year ended December 31, 2016, we recorded- of expenses related to the Merger, primarily for accelerated stock-based compensation expense, employee termination and other benefits, investment banking, legal and other professional services and costs associated with financings. Included in "Merger costs" a r e - of stock-based compensation expense that was accelerated due to the Merger a n d - of employee termination and other benefits. Additionally,-

of costs, associated with the December 2016 TLB financing and the write-off of Tal en Energy Supply Revolver fees, are reflected in "Interest expense" on the Statement of Operations. See Notes 13 and 15 for information on stock based compensation and separation benefits.

Acquisition of MACH Gen On November 2, 2015, we completed the acquisition of the membership interests ofMACH Gen f o r - in cash consideration (based on estimated working capital at that time). The final cash purchase price, after post-closing adjustments, w a s - . The purchase price was funded by a borrowing under the Talen Energy Supply Revolver and cash on hand.

The New MACH Gen TLB and the New MACH Gen Revolver remain outstanding following the completion of the transaction.

See Note 10 for additional information.

Various purchase accounting adjustments were made during the first and second qumier of2016 that had an insignificant impact to property, plant and equipment and related deferred income taxes. The statement of operations effect of these adjustments during the measurement period was also insignificant. The purchase price allocation was considered by management to be final as of June 30, 2016.

Divestiture of Talen Renewable Energy In November 2015, we completed the sale ofTalen Renewable Energy f o r - in cash and recorded a pre-tax gain on the sale o f - , which is reflected in "(Gain) loss on sale" on the Statement of Operations.

Divestiture oflromvood Power Plant In February 2016, Talen Generation completed the sale ofTalen Ironwood Holdings, which through its subsidiaries owned and operated the Ironwood natural gas combined-cycle plant in . We recorded a pre-tax gain, net of transaction costs including the make-whole premium on the debt, year ended December 31 ,

2016, which is recorded to "(Gain) loss on sale" on the Statement of Operations. A pm1ion the proceeds from the sale of Talen Ironwood Holdings, LLC were used to repay the majority of our then outstanding shmi-term debt. At December 31, 2015, Talen Ironwood Holdings, LLC was considered an individually significant component ofTalen Energy Supply whose 21

Table of Contents pre-tax income (loss) attributable to Tal en Energy Supply for 2015 w a s -

See Note 10 for additional information on the redemption of debt in connection with the sale.

Divestiture o[C.P. Crane Power Plant In February 2016, Raven Power Marketing LLC, our wholly owned, indirect subsidiaty, completed the sale ofC.P. Crane LLC, which owned and operated the C.P. Crane coal-fired power plant in Mmyland. For the year ended December 31, 2016, we recorded a - pre-tax loss, which is recorded in "(Gain) loss on sale" on the Statement of Operations.

Divestiture of Holtwood and Lake Wallenpaupack Hydroelectric Facilities In April 2016, Holtwood, LLC, our wholly owned, indirect subsidiary, completed the sale of the Holtwood and Lake Wallenpaupack hydroelectric facilities in Pennsylvania f 0 1 * - . We recorded a pre-tax gain o f - in "(Gain) loss on sale" on the Statement of Operations for the year ended December 31, 2016 related to this sale.

The 2016 divestitures mentioned above satisfied the requirement to divest cet1ain PJM assets to comply with a December 2014 FERC order approving the Tal en Formation Transactions as described in Note 3. At December 31, 2015 the major component of assets held for sale related to the sale of these businesses was p r i m a r i l y - of property, plant and equipment.

5. Inventory "Invent01y" on the Balance Sheets consisted of the following at December 31:

2016 2015 Fuel Materials and supplies Emission allowances

- I

- I Total $

In the fom1h qum1er of 2016, we conducted a review of the materials and supplies invent01y at certain of our generating facilities in conjunction with our year end impairment review of I assets. See Note 9 for additional information.

Based on the results ofthe review, we recorded a charge is reflected in "Operation and maintenance on In 2016, we changed our classification of purchased emission allowances to include them in "Inventory" on the Balance Sheet.

In 2015, they were presented as intangible assets. The change, which was applied prospectively at December 31, 2016, resulted from a change in how we manage our emission allowance pot1folio. Stat1ing in the fom1h qum1er of2016, emission allowances will not only be used for compliance purposes, but may, from time to time, be sold to manage working capital. As a result, presenting emission allowances as inventory more accurately reflects the nature of these assets and how they will be managed on a prospective basis. The table below reflects the location of emission allowances on the Balance Sheet at December 31:

2016 2015 Assets Inventory $ I $ I Other current assets I I Intangibles I I Liabilities Accounts payable and accrued expenses (a) I I Other noncurrent liabilities (a) I I (a) Amounts were netted against the applicable liabilities in 2015.

We made a corresponding change to the Statement of Cash Flows. In 2016, we reflect the purchase and sale of emission allowances on the Statement of Cash Flows as an operating activity, while in 2015 this activity was reflected as an investing activity. The 2015 Statement of Cash Flows i n c l u d e s - of net purchase activity as an investing cash outflow. There was no impact to amounts recorded within "Fuel and energy purchases" on the Statement of Operations.

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6. Property, Plant and Equipment The major components of property, plant and equipment at December 31 are as follows :

Generation Nuclear Fuel 2016 2015 Other Construction work in progress Property, plant and equipment, at cost Less: accumulated depreciation Property, plant and equipment, net $

We capitalize interest costs as part of construction costs. Capitalized interest w a s - a n d - for the years ended December 31, 2016 and 2015.

The weighted-average rates of depreciation for property, plant and equipment- generation, were~ and~ at December 31, 2016 and 2015 . For the years ended December 31, 2016 and 2015, we recorded depreciation expense o f .

-and-.

7. Jointly Owned Facilities At December 31, 2016 and 2015, the Balance Sheets reflect the owned interests in the facilities below.

Ownership Other Accumulated Construction Work Interest Gene.-ation Plant Property Depreciation in Progress December 31, 2016 Generating Plants Susquehanna Conemaugh

$ I I I I

I

I Keystone I I Colstrip Units I & 2 (a) I I I I Colstrip Unit 3 (a) I I I I Merrill Creek Reservoir I I I I December 31, 2015 Generating Plants Susquehanna Conemaugh

$ I I I I

I

I Keystone I I Colstrip Units I & 2 I I I I Colstrip Unit 3 I I I I Merrill Creek Reservoir I I I (a) These units were impaired during 2016. See Note 9 for additional information.

Each subsidiary owning these interests provides its own funding for its share of the facility. Each receives a portion of the total output of the generating plants equal to its percentage ownership. The share of fuel and other operating costs associated with the plants is included in the corresponding operating expenses on the Statements of Operations.

Tal en Montana, which has . - ownership in Colstrip Unit 3, a n d - interest in Colstrip Unit 4 and NmihWestem Corporation, which has no legal ownership in Unit 3, and a~wnership interest in Unit 4, have a sharing agreement that governs each patiy's responsibilities and rights relating to the operation of each unit. Under the terms of that agreement, each pmiy is responsible fm** of the total non-coal operating and construction costs of each unit and is entitled to take up t o . of the available generation from each unit.

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8. Intangible Assets The gross canying amount and the accumulated amortization of intangible assets were:

December 31,2016 December 31, 2015 Gross Carrying Accumulated Gross Carrying Accumu lated Amount Amortization Amount Amortization Land and transmission rights I I I I I I I I Emission allowances (a)

I I I I Capitalized software (b) I I Licenses and other (c)

Total I I I (a) 2015 includes of amortization expense related to emission allowances, which are amortized to expense as the emission liability is incurred or when they are sold; therefore, there is no accumulated amortization. See Note 5 for information on our change in classification of these assets in 2016.

(b) All internal use software costs were reclassified from "Property, Plant and Equipment, net" to "Intangibles" on the Balance Sheet to conform presentation with a new accounting standard requirement for software license costs. At December 31 , 2016 and 2015, "Gross Carrying Amount" in the table above included and of costs that were in development. See Note 2 for additional information on the new accounting guidance. Additions to capitalized software in 2016 were assigned a useful life o ,* * * *

(c) "Other" at December 31, 2015 included costs for the development of licenses, the most significant of which was the COLA. See Note 9 for additional infonnation on the COLA impairment recorded in 2016.

Current intangible assets are included in "Other current assets" and long-term intangible assets are presented as "Intangibles" on the Balance Sheets.

Amot1ization expense, excluding consumption of emission allowances, w a s - a n d - for the years ended December 31,2016 and 2015.

Amortization expense for each of the next five years is estimated to be:

2017 2018 2019 2020 2021

$ I $ I $ I $ I $ I

9. Asset Impairments Asset impairments recorded for the years ended December 31 include:

2016 2015 I

I I I I I I I I

I I I I

I

I I

During the fourth qum1er of 2016, as we updated our estimated future cash flows in connection with the preparation of our annual budget, it became apparent that in the of cet1ain infrastructure combined with a reduction in and were carrying value of may not be recoverable, and as a result we performed 24

Table of Contents a recoverability test. Based on the results of the recoverability test we concluded that the carrying amount o f -

. .was higher than the future estimated undiscounted cash flows expected to be by these ants and that they were impaired. Duri the fomih umier of2016 we recorded an impairment on the . The fair value of was determined by a proprietary discounted cash flow model which unobservable 3 pncmg mputs, including forecasted generation, forecasted operation, maintenance and capital expenditures and a market pmiicipant discount rate. We are and altematives, including, but not limited lenders under the

-We hold an undivided- in for additional information on the settlement, to the closure and a . economic interest in

. In July 2016, we agreed, as pmi See Note 7 Litigation

. See Note 15 for additional infmmation on the settlement.

During the fourth qumier management with respect to future capital commitments and started to evaluate strategic options for our interests in the jointly o w n e d - . The change in plans was driven in part by (i) a decline in power prices i n - ; (ii) limited tenor of above market power sales contracts; (iii) current level of fixed operating costs; (iv) long-term out of the money fuel supply contracts; and (v) projected shutdown and decommissioning costs, which we considered to be indicators that the canying value of approximately- currently recorded for our interests in th~ may not be recoverable, and as a result we performed a recoverability test. We concluded that the canying amount of our interests in th~ was higher than the future estimated undiscounted cash flows expected to be generated by our interests in the units and that our interests in impaired. During the fomih quarter of 2016, we recorded an impainnent loss o f - on our interests . The fair value of our interests in determined by a proprietmy discounted cash flow certain unobservable Level 3 pricing generation, forecasted operation, maintenance and capital expenditures and a market participant

-During the fomih quarter of 2016, we revised our estimated future cash flows in connection with the budget to reflect the unlikely probability these events are indicators that the carrying of our annual

, may not be recoverable, and thus we performed a recoverability test. that the canying higher than the future estimated undiscounted cash flows expected to be generated by the plant During the fourth quarter of2016, we recorded an impairment loss o f - on Bayonne. The was determined by a proprietary intemal discounted cash flow model which used ce1iain unobservable Level 3 pri uding forecasted generation, forecasted operation, maintenance and capital expenditures and a market participant discount rate.

During the fomih qumier of2016, we revised our long-term estimated future cash flows for to reflect a reduction in long-term energy and capacity prices i~ fi"om an increase relative to demand. We considered this to be an indicator that the canying value of approximately recorded not be recoverable, and as a result we perfmmed a recoverability test.

higher than the future estimated undiscounted cash flows expected to be generated by the During the fourth qumier of2016, we recorded an impairment l o s s - on was determined by a proprietmy internal discounted cash flow model which used ce1iain unobservable Level 3 , including forecasted generation, forecasted operation, maintenance and capital expenditures and a market pmiicipant discount rate.

In 2008, our subsidimy,

- b e built loan guarantee in the second qumier of 2016, we our u-.ov>uo-.u to no pursue the development of the

- Management concluded that the t h - a definite-lived asset, were not recoverable.

Management used a market approach to value of the incomplete COLA, considering the highest and best use 25

Table of Contents from a market patiicipant perspective, and concluded that there was no value to another market participant given current and forecasted capacity and energy prices and forecasted operating costs combined with the high cost to build a nuclear facility, as well as the lack of progress by t h - specified nuclear reactor vendor on its-design cetiification and lack of usefulness to a standalone market patiicipant. Through our analysis, we detetmined the fair value o f - to be negligible. T h e - impairment charge represented all ofth~ reflected on the Balance Sheet.

2015 Impairment Losses In the third quatier of2015, we updated our fundamental pricing models in conjunction with market information gained as a result of the 2018/2019 planning year PJM auction eted in 2015. As a result, we assessed certain long-lived assets for and determined that a recoverability test and as a result, we charge on esttm at September 30, 2015. Additionally, time were classified as held for sale due to their inclusion in the required divestiture its order approving and accordingly had to be carried at value or fair value less cash flow information to calculate the ton was to ca and and an additional write-down was necessary at that time based on the updated estimated fair value.

charge recorded for year ended December 31,2015 w a s - .

To estimate the fair value we perfonned an internal analysis primarily using an income approach based on (a propnetary Talen Energy Supply model) to assess the fair value of these assets. Assumptions used in the proprietary model were forward energy and capacity price curves, forecasted generation, and forecasted operation, maintenance and and a market patiicipant discount rate. this determined the fair value ber 30, 2015 and Talen Energy Corporation's stock price declined significantly throughout the third quarter of2015, indicating a significant change in the financial markets' view of the value of our business and/or the associated with an investment in Talen common stock.

in which we and risks we an ts usmg a combination compara an mcome approach based on discounted cash flows.

Assumptions used in the discounted cash flow model, in addition to those discussed above, were forward energy and capacity price curves, forecasted generation, and forecasted operation, maintenance and capital expenditures and a market participant discount rate. The market approach primarily applies EBITDA multiples, based on the implied market value of comparable publicly traded companies, to Talen Energy Supply's and the East repmiing unit's EBITDA to determine estimated fair values.

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Table of Contents The changes in the carrying amount of t h e - the year ended December 31, 2015 was as follows.

Balance atJanuary I, 2015 I I Goodwill recognized during the period (a)

Balance at December 31 , 2015 I

I (a) Recognized as a result of the acquisition ofRJS Power. See Note 3 for additional information.

10. Debt Revolving Credit Facilities The following secured revolving credit facilities were in place at:

December 31, 2016 December 31, 2015 Expiration Letters of Unused Letters of Date Capacity Borrowed Credit Issued Capacity Borrowed Credit Issued Recourse debt Tal en Energy Supply Revolver (a)

I I I I I I I Non-Recourse debt New MACH Gen Revolver (b)

Total Credit Facilities I ** I ** I ** I **

(a) The facility is syndicated and provides Tal en Energy Supply the ability to make revolving cash borrowings and to request lenders to issue up t o .

- o f ! etters of credit, which in combination cannot exceed the capacity of the facility at any given time. The facility requires us to maintain a senior secured net debt to adjusted EBITDA ratio (as defmed in the agreement) of less than or equal to as of the last day of any fiscal quarter. The Tal en Energy Supply Revolver is subject to affirmative and negative covenants that are customary for a facility of this type, including, but not limited to, certain limitations on the ability to incur liens and additional indebtedness, the ability to pay dividends and the ability to consummate asset sales. We pay customary fees on the facility and borrowings bear interest at our option of either a defined base rate or LIBOR-based rates, in each case plus an applicable margin. The weighted average interest rate on outstanding borrowings w a s - at December 31 , 2015.

The Tal en Energy Supply Revolver capacity was reduced to as part of the Merger, and further reduced as described below.

(b) The facility provides New MACH Gen the ability to make revolving cash borrowings and to request the lenders to issue up to of letters of credit, which in combination cannot exceed the capacity of the facility at any given time. New MACH Gen pays customary fees on the facility and borrowings bear interest The weighted average interest rate on outstanding borrowings w a s -

an~ at December 31 , 2016 and December 31 , 2015. This debt is non-recourse to Talen Energy Supply.

In March 2017, we entered into an amendment to extend the maturity of the Tal en Energy Supply Revolver fi*o m - -

years (the Revolver Extension). In connection with this amendment, cetiain lenders have agreed to extend appro~

million in commitments for the period (the Extended Revolver Tranche).

ConcutTent with the Revolver Extension we ents available to be bot1'owed from the lenders who provided the Extended Revolver Tranche by such that the aggregate commitments available to be borrowed under the Talen Energy Supply Revolver are approxim t h r o u g h - and to make certain covenant changes to conform to the 2016 Talen Energy TLB. covenant changes we agreed to make included (i) reducing our stated accordion allowance from , and reducing the leverage ratio test that allows additional incremental loans from our general lien basket to liens securing not more than.

- (reduced from total assets (reduced from.), (iii) reducing our general restricted payment basket to o~ of consolidated total assets (reduce~v) reducing the senior ratio we are to maintain as of the end of each quatier f r o m - :

. This amendment will provide us the ability to make revolving cash botTowings and to request lenders to issue up to approximate!)- ofletters of credit, which in combination cannot exceed the capacity of the facility at any given time.

The Tal en Energy Supply Revolver is secured by liens on a majority of our assets and is guaranteed by cetiain of our subsidiaries, which are in turn secured by liens on assets of such subsidiaries with an aggregate catrying value o f - at December 31,2016.

The New MACH Gen Revolver is a component of the New MACH Gen First Lien Credit and Guaranty Agreement.

Obligations under the New MACH Gen First Lien Credit and Guaranty Agreement are guaranteed by each of New MACH 27

Table of Contents Gen's subsidiaries and are secured by a first priority security interest, subject to possible shared first lien status with certain permitted hedge and power sale agreements, in all of the assets ofNew MACH Gen and each guarantor, including the equity interests in New MACH Gen and each guarantor, which assets collectively have an aggregate carrying value of approximately

- a t December 31,2016.

Long-term Debt The following long-term debt was outstanding at December 31:

Interest Rate Outstanding 2016 2016 2015 Recourse Debt Senior Secured Tenn Loan B Due. (a)

Senior Unsecured Notes

-*- * **

I I I

PEDFA B-Total Recourse Debt Non-Recourse Debt Ironwood Senior Secured Note~**** I New MACH Gen Term Loan (b)

Total Outstanding Principal Debt issuance cost Unamortized premium and (discount), net Total Long-term Debt Current maturities Total Long-term Debt, noncurrent (a) Interest rate is variable based ontl***~~*~

(b) Debt is non-recourse to Tal en Energy Supply as described and is part of the First Lien Credit and Guarantee Agreement described under "Revolving Credit Facilities" above_ Interest rate is variable based on - -

The aggregate maturities oflong-tenn debt are as follows:

2017 Long-term Debt Activity 2018 2019 2020 In December 2015, Tal en Energy Supply announced an "exchange offer" for all of its 2021 Thereafter Total

- that were issued in a private offering in May 2015. Pursuant to the all of the outstanding notes for a like principal amount of under the Securities Act of 1933, as amended. In January 20 exchanged.

In connection with the sale ofTalen Ironwood Hold 2016, a Talen Ironwood Holdings, LLC subsidiary completed the redemption o f - of its prior to the closing of the sale transaction, which occurred in February 2016. payment of a make whole premium o f - ,

which is reflected in "(Gain) loss on sale" on the 2016 Statement of Operations and "Cash from operating activities" on the 2016 Statement of Cash Flows. See Note 4 for additional information on the sale.

28

Table of Contents In May 2016, matured. We repaid the debt using short-term borrowings under the Talen was repaid in December with the proceeds of the 2016 Talen Energy Supply TLB discussed below.

and-ofour gam, m "Other income ("'v"'"'o"'

we repurchased an additional- of The 2017 repurchases resulted in an insi

"'"'~'"'u*>v), net" on the Statement of Operations.

2016 Talen Energy Supply TLB In December 2016, we issued a senior secured Term Loan B upon closing of the Merger and received proceeds of net of discount net ofundetwriting and other fees. The Joan has an interest rate per annum of floor or (ii) a defined base rate plus . ., as elected by Talen Energy Supply.

payments of. . of the original principal amount, with the balance payable on the final

. The loan is subject to similar covenants, qualifications, exceptions and limitations as the The net proceeds from the Joan were used to fund the Merger consideration and related expenses, to repay outstanding borrowings under the Talen Energy Supply Revolver and for working capital needs and other general corporate purposes of Talen Energy Supply. The Joan is secured by the same collateral and guaranteed by the same direct and indirect wholly owned subsidiaries ofTalen Energy Supply as the Talen Energy Supply Revolver. See Note 4 for information on subsidiary guarantees of certain long-term debt in connection with the Merger.

Commodity Hedging Facilities We are party to a - Amended Secured Trading Facility that allows us to receive credit to satisfy collateral posting obligations related to our hedging activities with counterparties pat1icipating in the facility. The facility became effective in December 2015 and has a five-year term ending December 2020 which automatically extends one-year on each anniversary of the effective date, subject to cettain conditions. The facility is secured by liens, and guaranteed by certain subsidiaries, to the same extent as the Talen Energy Supply Revolver and the 2016 Talen Energy Supply TLB. There w e r e - and.

- o f secured obligations outstanding under this facility at December 3 I, 2016 and 2015.

We are patty to a - agreement expiring June 2017 that provides the ability to request up t o - of committed unsecured letter of credit at fees to be at the time of each request, based on cettain market conditions. At December 31, 2016, for the issuance of letters of credit under this arrangement and we do not plan to request any capactty pnor to 1 expiration.

11. Derivative Instruments and Hedging Activities Risk Management Objectives In 2016 and 2015, a risk management committee, comprised of senior management and chaired by the Director-Risk Management, oversaw the risk management function. Key risk control activities designed to ensure compliance with the risk policy included, but were not limited to, credit review and approval, validation of transactions and market prices, verification of risk and transaction limits, portfolio stress tests, gross margin at risk analysis, sensitivity analysis and daily pottfolio repot1ing.

Interest Rate Risk We are exposed to interest rate risk associated with forecasted fixed-rate and existing floating-rate debt issuances. To reduce our exposure to fluctuations in interest rates, we may utilize swap agreements related to interest rates that require payments to or from counterpatties based upon the differential between a fixed interest rate and variable interest rate index for a predetermined contractual notional amount.

In March 2017, we entered into interest rate swaps with an aggregate notional amount that economically hedge interest payments on variable rate debt. The swaps have maturity dates ranging from 29

Table of Contents Credit Risk Financial instmments that potentially subject us to concentrations of credit risk include cash and cash equivalents, restricted cash, accounts receivable and derivative contracts. We believe the credit risk in cash and cash equivalents is limited because we maintain our cash in major U.S. banks and the funds are available upon demand. From time to time, cash amounts in U.S. banks may exceed the FDIC insured limit. Historically, we have not incurred losses related to these deposits.

Credit risk is inherent in our commercial activities and relates to the risk of loss resulting fi*om nonperfonnance of contractual obligations by counterpatiies. Although not always possible, we seek to enter into contracts that permit netting of receivables and payables with a given counterparty. We also enter into contracts that enable us to obtain collateral fi*om a given counterparty as well as to terminate contracts upon occurrence of certain events of default.

01-At December 31,2016, we had credit exposure o f - from energy trading patiners, excluding the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, our credit exposure was reduced to . The ten counterpatiies, including their affiliates, accounted f m * - , of these exposures. had an investment grade credit rating from S&P or Moody's and accounted f o r . of the top ten exposures. counterpatiies have not been rated by S&P or Moody's, and are current on their obligations.

Market and Commodity Price Risk We are exposed to various market risks. These risks arise from the ownership of our assets and operation of our business.

Commodity price risk, including basis and volumetric risk, is among our most significant risks due to the level of investment that we maintain in our competitive generation assets. Several factors influence price levels and volatilities. These factors include, but are not limited to, seasonal changes in demand, weather conditions, available generating assets within regions, transportation/transmission availability and reliability within and between regions, market liquidity, and the nature and extent of current and potential federal and state regulations.

We have a formal hedging pro grain to economically hedge the forecasted purchase and sale of commodities related to our competitive generation fleet, as well as our retail commercial, industrial and retail customer portfolio. We enter into financial and physical derivative contracts, including forwards, futures, swaps and options, to hedge the price risk associated with electricity, natural gas, oil and other commodities. At December 31, 2016, the net volumes of derivative (sales)/purchase contracts used in suppmi of the various strategies discussed above were as follows:

Volumes (a)

Commodity Unit of Measure 2017 2018 2019 Thereafter (b)

Power MWh I MMBtu Gas FTRs MW-Month I CRRs MWh I I Emission allowances Tons I I (a) Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.

(b) Derivative contracts range in maturity througl-All commodity derivatives are recorded at fair value and included in the Balance Sheets as derivative assets and derivative liabilities. See Note 12 for additional information on fair value.

Cetiain of our subsidiaries have master netting arrangements or similar agreements in place including derivative clearing agreements with futures commission merchants (FCMs) to permit the trading of cleared derivative products on one or more futures exchanges. The clearing arrangements permit a FCM to use and apply any propetiy in its possession as a setoff to pay amounts or discharge obligations owed by a customer upon default of the customer and typically do not place any restrictions on the FCM's use of collateral posted by the customer. Certain of our subsidiaries also enter into agreements pursuant to which they trade cetiain energy and other products. Under the agreements, upon termination of the agreement as a result of a default or other termination event, the non-defaulting patiy typically would have a right to offset amounts owed under the agreement against any other obligations arising between the two patiies (whether under the agreement or not), whether matured or contingent, in place of payment or in place of booking of the obligation.

30

Table of Contents We have elected not to offset derivative assets and liabilities with the same counterparty for which we have a master netting agreement in place and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivatives agreements. The table below summarizes the energy commodities derivative positions presented in the balance sheets where a right of offset exists under these arrangements and related cash collateral received or pledged.

Assets Liabilities Eligible for Offset Eligible for Offset Cash Cash Derivative Collatera l Derivative Collateral Gross Instruments Received Net Gross Instruments Pledged Net December 31 , 2016 December 31 , 2015 I

J

._JI *. _JI *I_JI I I

._J

._JI *._JI I I

. _J

1 -

Economic Commodity Hedges All commodity derivative contracts are considered economic hedges of our generation assets and retail customer portfolio, but either do not qualify for hedge accounting under the hedge accounting guidelines or the hedge accounting designation has not been elected. Changes in fair value and realized settlements on commodity derivative contracts are recognized as separate components of revenues on the Statements of Operations. The following table presents the location and pre-tax effect of derivative instruments recognized in the Statement of Operations:

Derivatives Not Designated as Location of Gain (Loss) Recognized in Hedging Instruments Income on Derivative 2016 2015 Commodity contracts Energy revenues - realized Unrealized gain (loss) on derivative contracts- revenue I

I

I Fuel and energy purchases- realized Unrealized gain (loss) on derivative contracts- expense **

Discontinued Cash Flow Hedges Total I

I

Ce11ain derivative contracts previously qualified and were designated as cash flow hedges of a forecasted transaction.

Derivatives designated as cash flow hedges are can*ied at fair value on the Balance Sheets with the effective portion of the derivative's gain or loss recorded in AOCI to be subsequently recognized in earnings in the same period or periods as the hedged forecasted transaction affects earnings. In January 2013, the cash flow hedge accounting treatment for these derivative contracts was discontinued. In these circumstances, from the date the hedge relationship is discontinued, any subsequent changes in the fair value of the derivative (i .e. unrealized gains and losses) is recognized in the current period. Amounts previously recorded to AOCI will be reclassified into earnings when the previously designated forecasted transaction ultimately impacts earnings. At December 31, 2016, we h a d - , after-tax, recorded in AOCI that will be reclassified to earnings through 2035. At December 31, 2016, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months w e r e - . In 2016 and 2015, there were no active cash flow hedges and there was no hedge ineffectiveness associated with energy derivatives. The following tables present the location and pre-tax effect of discontinued cash flow hedges recognized in the Statement of Operations:

Gain (Loss) Reclassified from AOCI into Income (Effective Portion)

Derivative Relationships Location of Gain (Loss) Recognized in Income on Derivative 2016 2015 Discontinued Cash Flow Hedges:

Commodity contracts Energy revenues - realized I .I

Fuel and energy purchases- realized I I Other I I Total I I :!!::1====::::::!!1~

Credit Risk-Related Contingent Features Ce11ain derivative contracts contain credit risk-related contingent features which, when we are in a net liability position, would permit the counterparties to require the transfer of additional collateral upon a decrease in our credit ratings.

31

Table of Contents Additionally, cetiain derivative contracts contain credit risk-related contingent features that require adequate assurance of performance be provided if the other party has reasonable concerns regarding our performance obligation under the contract. A counterparty demanding adequate assurance could require a transfer of additional collateral or other security, including letters of credit, cash and guarantees from a creditwmihy entity. This would typically involve negotiations among the parties. However, amounts disclosed below represent assumed immediate payment or immediate and ongoing full collateralization for derivative instruments in net liability positions with "adequate assurance" features.

At December 31, 2016, the value of derivative contracts in a net liability position that contain credit risk-related contingent features w a s - . Collateral posted on those positions w a s - and the additional potential collateral requirements, primarily related to further adequate assurance features, were insignificant.

12. Fair Value Measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market patiicipants at the measurement date (an exit price). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market patiicipants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of fmancial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values.

We classifY fair value measurements within one of three levels in the fair value hierarchy. The level assigned to a fair value measurement is based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hjerarchy are as follows:

Levell -quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing infotmation on an ongoing basis.

Level2 - inputs other than quoted prices included within Level I that are either directly or indirectly observable for substantially the full term of the asset or liability.

Level3 - unobservable inputs that management believes are predicated on the assumptions market patiicipants would use to measure the asset or liability at fair value.

32

Table of Contents Recurring Fair Value Measurements The assets and liabilities measured at fair value were:

December 31, 2016 December* 31,2015 Total Levell Level2 Level3 NAV Total Levell Level2 Level3 NAV Assets Cash and cash equivalents Restricted cash and cash equivalents (a)

Derivative assets:

I I

- ** ** *I *I **

Energy commodities Total derivative assets NOT funds:

I I ** ** **

Cash and cash equivalents I I I I I I I I I I Equity securities U.S. large-cap U.S. mid/small-cap Debt securities

I I

I I I

I I I I

I I

I *I U.S. Treasury U.S. government sponsored agency Municipality I

I I I

I I

Investment-grade corporate I I I I I I I I I I Other I I I I I I I I I I I

- I ** I I

- - *I *** *I **I ***

I I Receivables (payables), net Total NOT funds I Auction rate securities (b) I I Total assets

~- $ ~- J..._,l_ ~- ~- ~- ~- ~- ~-

Liabilities Derivative liabilities:

Energy commodities Total derivative liabilities I

I I

I (a) Current portion is included in "Restricted cash and cash equivalents" and long-tenn portion, when applicable, is included in "Other noncurrent assets" on the Balance Sheets.

(b) Included in "Other noncurrent assets" on the Balance Sheets.

A reconciliation of net assets and liabilities classified as Level 3 for the years ended December 31, is as follows:

Fair Value Measurements Using Significant Unobser-vable Inputs (Level3) 2016 2015 Energy Energy Commodities, Auction Rate Commodities, Auction Rate net Securities Total net Securities Total Balance at beginning of period Total realized/uruealized gains (losses)

$ I $ I $ I $ -$ I $

Included in earnings I I I I

Purchases (a) I I I I Sales Settlements Transfers into Level 3 I

I I

I I

Transfers out of Level 3 Balance at end of period $

I I

I $ * **

(a) 2015 includes positions acquired through the acquisition ofRJS Power.

33

Table of Contents The significant unobservable inputs used in and quantitative information about the fair value measurement of assets and liabilities classified as Level 3 are as follows:

December 31, 2016 Fair Value, net Range Asset Valuation Significant Unobservable (Weighted (Liability) Technique Input(s) Average) (a)

Energy commodities Proprietary model used to Natural gas contracts $ I Discounted cash flow calculate fonvard prices Proprietary model used to Power sales contracts I Discounted cash flow calculate fonvard prices Proprietary model used to Heat rate call options (b)

Discounted cash flow calculate fonvard prices Proprietary model used to CRR purchase contracts .Discounted cash flow calculate fonvard prices December 31, 2015 Fair Value, net Range Asset Valuation Significant Unobservable (Weighted (Liability) Technique Input(s) Average) (a)

Energy commodities Proprietary model used to Natural gas contracts $ -Discounted cash flow calculate fonvard prices Proprietary model used to Power sales contracts I Discounted cash flow calculate forward prices FTR purchase contracts

Discounted cash flow Historical settled prices used to model fonvard prices Heat rate call options (b)

CRR purchase contracts

- Discounted cash flow Discounted cash flow Proprietary model used to calculate fonvard prices Proprietary model used to calculate fonvard prices Auction rate securities (c) I Discounted cash flow Modeled from SIFMA Index (a) The range and weighted average represent the percentage of fair value derived from the unobservable inputs.

(b) The proprietary model used to calculate fair value incorporates market heat rates, correlations and volatilities.

(c) The model used to calculate fair value incorporated an assumption that the auctions continued to fail.

Net gains and losses on assets and liabilities classified as Level 3 and included in earnings for the years ended December 31 are reported in the Statements of Operations as follows:

Energy Commodities, net Total gains (losses) included in earnings $

Energy Revenues 2016 I $

2015

.$ Fuel and Energy Purchases 2016 2015 Change in unrealized gains (losses) relating to positions still held at the reporting date Derivative Assets/Liabilities -Energy Commodities I I Energy commodity contracts are generally valued using the income approach, except for exchange-traded derivative contracts, which are valued using the market approach and are classified as Level 1. Level 2 contracts are valued using inputs which may include quotes obtained from an exchange (where there is insufficient market liquidity to wan*ant inclusion in Level 1), binding and non-binding broker quotes, prices posted by ISOs or published tariff rates. Furthermore, independent quotes are obtained from the market to validate the forward price curves. Energy commodity contracts include forwards, futures, swaps, options and structured transactions and may be offset with similar positions in exchange-traded markets. To the extent possible, fair value measurements utilize various inputs that include quoted prices for similar contracts or market-corroborated inputs. In cetiain instances, these contracts may be valued using models, including standard option valuation models and other standard industJy models. When the lowest level inputs that are significant to the fair value measurement of a contract are observable, the contract is classified as Level 2.

34

Table of Contents When unobservable inputs are significant to the fair value measurement, a contract is classified as Level3 . Level 3 contracts are valued using our proprietmy models which may include significant unobservable inputs such as delive1y at a location where pricing is unobservable, delivery dates that are beyond the dates for which independent quotes are available, volumetric assumptions, implied volatilities, implied correlations, and market implied heat rates. Forward transactions, including f01ward transactions classified as Level 3, are analyzed by our Risk Management depmiment. We interpret the analysis quarterly to appropriately classify the fair value measurements in the fair value hierarchy. Valuation techniques are evaluated periodically. Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on our own creditw011hiness (for net liabilities) and its counterpa11ies' creditw011hiness (for net assets). Our credit depmiment assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment.

In ce11ain instances, energy commodity contracts are transfeJTed between Level 2 and Level 3. The primary reasons for the transfers during 2016 were changes in the availability of market information and changes in the significance of the unobservable inputs utilized in the valuation of the contracts.

NDT Funds The market approach is used to measure the fair value of equity securities held in the NDT funds.

The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets.

Commingled equity funds are not classified within the fair value hierarchy. The fair value measurements of these funds are based on firm quotes ofNAV per share, which are not obtained from a quoted price in an active market.

The fair value of debt securities is generally measured using a market approach, including the use of pricing models which incorporate obse1vable inputs. Common inputs include benchmark yields, relevant trade data, broker/dealer bid/ask prices, benchmark securities and credit valuation adjustments. When necessmy, the fair value of debt securities is measured using the income approach, which incorporates similar observable inputs as well as payment data, future predicted cash flows, collateral performance and new issue data.

Auction Rate Securities Historically, the fair value of auction rate securities was estimated using an income approach that included readily obse1vable inputs, such as principal payments and discount curves for bonds with credit ratings and maturities similar to the securities, and unobservable inputs, such as future interest rates that were estimated based on the SIFMA Index, creditw011hiness, and liquidity assumptions driven by the impact of auction failures. The probability of realizing losses on these securities was not significant.

When the present value of future interest payments was significant to the overall valuation, the auction rate securities were classified as Level3. At December 31, 2016, the market approach was used to measure the fair value. Since a market price was available at December 31, 2016, the securities are classified as Level 1.

Nonrecurring Fair Value Measurements See Note 9 for information on nonrecurring fair value measurements related to the impairments of long-lived assets.

Financial Instruments Not Recorded at Fair Value The carrying amounts of long-term debt on the Balance Sheets and its estimated fair values are set f011h below. The fair value of fixed rate debt was primarily estimated using an income approach by discounting future cash flows at estimated current cost of funding rates, which incorporates our credit risk. The canying amounts ofboJTowings under the New MACH Gen Revolver, the New MACH Gen TLB, and the 2016 Tal en Energy Supply TLB approximate fair value due to the variable interest rates associated with the debt. Long-term debt is primarily classified as Level 2.

December 31, 2016 December 31, 2015 Carrying Amount Fair Value Carrying Amount Fair Value Long-tenn debt $

The canying amount of sh01i-term debt, when outstanding, approximates fair value due to the variable interest rates associated with the debt and is classified as Level 2.

35

Table of Contents

13. Stoci<-Based Compensation Stock /uceutive Piau Tal en Energy Corporation granted share-based compensation to our eligible pmiicipants in 2016 and 2015 under the Tal en Energy Stock Incentive Plan (SIP). Under the SIP, restricted shares ofTalen Energy Corporation stock, restricted stock units, performance units and stock options were granted to officers, directors and other key employees. Awards under the SIP were made by the Compensation, Governance and Nominating Committee (CGNC) of the Talen Energy Corporation Board of Directors or its delegate.

On December 6, 2016, in accordance with the Merger agreement, each outstanding restricted stock unit and perforn1ance unit under the SIP was canceled and terminated, which modified the terms of the awards, in exchange for $14.00 per share, without interest and less applicable withholding taxes and in December 2016 we p a i d - to cash settle these units. Each stock option which was outstanding immediately prior to the merger was canceled and terminated without any cash payment due to the fact that the exercise price was greater than $14.00 per share.

Restricted Stock Units Restricted stock units were awarded in 2015 and 2016 based on the fair value of a share of Tal en Energy Corporation common stock on the date of grant. On December 6, 2016, t h e - restricted stock units outstanding were canceled and terminated as described above.

Performance Units Performance units with a market based performance condition were awarded in 2015 and 2016 with fair value estimated using a Monte Carlo pricing model that values market based performance conditions such as TSR. These performance units represented a target number of shares of Tal en Energy Corporation's common stock that the recipient would receive upon Tal en Energy Corporation's TSR attainment, which would be detetmined based on TSR during a three-year performance period. At the end of the performance period, payout would be determined by comparing Talen Energy Corporation's TSR to the TSR of peer group companies that Talen Energy Corporation selected. Performance units were also awarded in 2016 that contained an internal performance condition with fair value based on the fair value of a share ofTalen Energy Corporation common stock on the date of grant.

On December 6, 2 0 1 6 , - of performance units with the market based performance condition an~ of performance units with an internal performance condition were canceled and terminated as described above.

Stock Options Stock options were awarded in 2015 with an option exercise price per share not less than the fair value ofTalen Energy Corporation's common stock on the date of grant. On December 6, 2016, t h e - stock options outstanding were cancelled and terminated as described above. The weighted-average exercise price per share was . . .

The fair value of each option granted was estimated using a Black-Scholes option-pricing model. Tal en Energy Corporation used a risk-free interest rate, expected option life and expected volatility to value its stock options. Talen Energy Corporation did not expect to pay dividends therefore a dividend yield assumption was not used to value stock options. The risk-free interest rate reflected the yield for a U.S . Treasury Strip available on the date of grant with constant rate maturity approximating the option's expected life. Expected life was calculated using the simplified method described in SEC Staff Accounting Bulletin (SAB) 107/110 (updated by SAB 110). Expected volatility was derived from the historical volatility of a peer group selected by management as Talen Energy Corporation's common stock does not have the requisite trading history.

The assumptions used in the model were:

Risk-free interest rate Expected option life Expected stock volatility 36

Table of Contents Compensation Expense Compensation expense associated with stock-based compensation awards was recorded in 2016, ofwhich.

- i s reflected in "Merger costs" on the Statement of Operations and IS reflected in "Operation and maintenance" on the Statement of Operations. Amounts recorded to "Merger costs" relate to the accelerated vesting as a result of the modification ofthe terms of all outstanding restricted stock and performance units pursuant to the terms ofthe Merger agreement.

The year ended December 31, 2015 includes an insignificant amount of compensation expense for Tal en Energy Corporation restricted stock units, performance units and stock options accounted for as equity awards.

At December 31, 2015, unrecognized compensation expense related to non vested restricted stock units, performance units and stock options from Talen Energy Supply w a s - .

Prior to the spinoff, restricted shares ofPPL common stock and related restricted stock units, performance units and stock options were granted to officers and other key employees of Tal en Energy Supply. At December 31, 2014, these Tal en Energy Supply officers and employees h a d - ofunvested shares of restricted stock and restricted stock u n i t s , - of performance units a n d - of outstanding stock options issued by PPL. The vesting of these awards was accelerated in 20 I5 in connection with the spinoff from PPL. See Note 3 for information on the recording of expense related to this acceleration and additional information on the spinoff from PPL. For the year ended December 31, 2015, compensation expense for these awards, excluding the acceleration, but including an allocation ofPPL Services' compensation expense for similar awards, w a s - .

14. Retirement and Postemployment Benefits Prior to the June I, 20I5 spinoff, the majority of our employees were eligible for pension benefits under a PPL non-contributory defined benefit pension plan, with benefits based on length of service and either career average pay or final average pay, as defined by the plan. Prior to the June I, 2015 spinoff, this plan was closed to all newly hired employees.

Newly hired employees were eligible to participate in a PPL 40 I (k) savings plan with enhanced employer contributions. We were allocated costs of the PPL pension plan based on our employees' participation in the plan. Employees who participated in this PPL pension plan who became employees ofTalen Energy Supply transferred into a newly created pension plan we sponsor, which provides benefits similar to that of the PPL pension plan.

Prior to the June I, 20I5 spinoff, the majority of our employees were also eligible for certain health care and life insurance benefits upon retirement through the PPL other postretirement benefit plans, which prior to June 1, 20 I5, were closed to all newly hired employees. We were allocated costs of the PPL plans based on our employees' participation in the plans.

Employees who participated in the health care and life insurance plans and who became employees ofTalen Energy Supply transferred into our newly created other postretirement benefit plans we sponsor, which provide benefits similar to those of the PPL other postretirement benefit plans.

A remeasurement of the assets and the obligations for the PPL pension and other postretirement benefit plans was performed as of May 3I, 20 I5 in order to separate assets and obligations of the PPL plans attributed to us, as required by the spinoff agreements. Our pension plan assumed from PPL the pension benefit obligations for active plan participants who became employees of Tal en Energy Supply in connection with the spinoff and for individuals who terminated employment from Tal en Energy Supply on or after July I, 2000. A pmtion of the PPL pension plan assets were also allocated to our new pension plan.

The asset allocation was based on the rules prescribed by ERISA (Employee Retirement Income Security Act) for allocating assets in connection with a pension plan spinoff. Our other postretirement benefit plans assumed the other postretirement benefit obligations from PPL for active plan patiicipants who became employees ofTalen Energy Supply in connection with the spinoff. PPL retained obligations attributable to existing retirees as of the date of the spinoff. A portion of the PPL other postretirement benefit plan assets, which were held in VEBA trusts and a 40I(h) account, were also allocated to the new Talen Energy Supply other postretirement benefit plans. The asset allocation was determined separately for each funding vehicle based on the ratio of the accumulated postretirement benefit obligation (APBO) we assumed to the total APBO attributed to each funding vehicle. As a result, the net funded status of our new pension and other postretirement benefit plans at June 1, 2015 was a liability o f -.

The majority ofTalen Montana's employees are eligible for pension benefits under a cash balance plan. Newly hired employees are eligible to patiicipate in a 40I(k) savings plan with enhanced employer contributions. The majority ofTalen Montana's employees are also eligible for ce1tain health care and life insurance benefits upon retirement, under a retiree health plan 37

Table of Contents sponsored by Talen Montana, which is now closed to newly hired employees. There were no changes to the pension and other postretirement benefit plans for employees ofTalen Montana as a result of the spinoff transaction. However, PPL retained the liability for other postretirement benefits attributable to existing retirees ofTalen Montana as of the date of the spinoff.

Employees of ce1tain of our mechanical contracting companies are eligible for benefits under multiemployer plans sponsored by various unions .

The following table provides net periodic defined benefit costs and amounts recognized in OCI for our pension and other postretirement plans for the years ended December 31. The 2015 periods include seven months of costs under the newly formed Talen Energy Supply plans and a full year ofTalen Montana plans.

Pension Benefits Other Postretirement Benefits 2016 2015 2016 2015 Net periodic defined benefit costs (a) $ I $ I $ I $ I Total recognized in OCI Total recognized in net periodic defined benefit costs and OCI (a)

I I- $

Net periodic defined benefit costs for pension benefits charged to operating expense, excluding amounts charged to constmction and other non-I I_

expense accounts, for 2016 and for 2015. These amounts include costs for specific plans sponsored by Tal en Energy Supply and, in 20 I allocated costs of the PPL pension plan prior to the spinoff, based on our participation in that plan.

Actuarial loss o f - related to these plans is expected to be ammtized from AOCI into net periodic defined benefit costs in 2017.

The following weighted-average assumptions were used in the valuation of the benefit obligations at December 31.

Pension Benefits Other Postretirement Benefits 2016 2015 2016 2015 Discount rate Rate of compensation increase The following weighted-average assumptions were used to determine the net periodic defined benefit costs for our plans for the years ended December 31.

Pension Benefits Other Postretirement Benefits 2016 2015 2016 2015 Discount rate Rate of compensation increase Expected return on plan assets (a)

(a) The expected long-term rates of return for pension and other postretirement benefits are based on management's projections using a best-estimate of expected returns, volatilities and correlations for each asset class. Each plan's specific current and expected asset allocations are also considered in developing a reasonable retum assumption.

The funded status of our plans at December 31 was as follows:

Pension Benefits Other Postretirement Benefits 2016 2015 2016 2015 Benefit obiigation $ $ $ I $ I

- I **

Plan assets at fair value Funded status end of period, noncurrent liability $ $ $

Total recognized in AOCI (pre-tax)

Total accumulated benefit obligation for defined benefit pension plans $ * * $ $ I In2016, pension contributions t o t a l e d - and pension benefits paid to pmticipants w e r e - .

Our pension plans had projected and accumulated benefit obligations in excess of the fair value of plan assets at December 31, 2016 and 2015.

38

Table of Contents Our mechanical contracting subsidiaries make contributions to approximately. multiemployer pension and postretirement benefit plans, based on the bargaining units from which labor is procured. The risks ofpatiicipating in these multiemployer plans are different from single-employer plans in the following aspects:

Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other patiicipating employers.

If a patiicipating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining patiicipating employers.

If our mechanical contracting subsidiaries choose to stop patiicipating in some of their multiemployer plans, they may be required to pay those plans an amount based on the unfunded status of the plan, referred to as a withdrawal liability.

andth~

two p most significant contributions were uuuw-w* statements were issued, the Form 5500s were not available for either plan for the plan year ending in 20 I 6. Therefore, the following disclosures specific to these plans are being made based on the 2015 and 2014 Fonn 5500s filed.

for 2016 a n d - for 2015 .

vidually as a greater t h a . contributor not as a greater

on the 2015 Form 5500. The plan has a Pension Protection Act zone status red, less t h a n - , as of December 31,2015. The plan adopted a funding improvement plan to improve the plan's funded status which is expected to be achieved by 2020. The expiration date of the collective-bargaining agreement related to those employees participating in this plan i s - .

Contributions to the w e r e - for 2016. Our mechanical contracting subsidiary, tha.Coirti1butor on the 2015 Form 5500. The plan has a zone status as of 2016. The plan adopted a funding improvement plan to improve the plan's funded status which ts expected The expiration date of the collective-bargaining agreement related to those employees participating m thts plan The table below details total contributions to all multiemployer pension and other postretirement plans, including the plans identified as significant above.

2016 2015 Pension plans $ I $ I Other postretirement benefit plans I I Total contributions $

I ~$====:!!!!*~

Plan Assets Our pension plan assets are invested in the Talen Energy Retirement Plans Master Trust (the Master Trust) that also includes a 40l(h) account that is restricted for certain other posh*etirement benefit obligations ofTalen Energy Supply. The investment strategy for the Master Trust is to achieve a risk-adjusted return on a mix of assets that, in combination with our funding policy, will ensure that sufficient assets are available to provide long-term growth and liquidity for benefit payments, while also managing the duration of the assets to complement the duration of the liabilities as well as concentration of risk through diversification of asset types.

The investment policy of the Master Trust outlines investment objectives and defines the responsibilities of the Retirement Plan Committee ofTalen Energy Corporation, which is the named fiduciary, external investment managers, investment advisor and trustee and custodian. The Retirement Plan Committee created a risk management framework around the trust assets and pension liabilities that considers the trust assets as being composed of three sub-pmifolios; growth, immunizing and liquidity.

Target asset allocation ranges have been developed for the Master Trust based on input from external consultants with a goal of limiting funded status volatility. The Retirement Plan Committee monitors the investments in the Master Trust, and seeks to 39

Table of Contents obtain a target portfolio that emphasizes reduction of risk of loss from market volatility. In pursuing that goal, the Retirement Plan Committee establishes revised guidelines from time to time.

The asset allocation for the Master Trust and the target allocation prescribed by the investment guidelines by pmifolio at December 31 are as follows:

Percentage of trust assets Target Asset Allocation 2016 2015 2016 Growth Portfolio Equity securities Debt securities (a)

Alternative investments Immunizing Portfolio Debt securities (a)

Derivatives Liquidity Portfolio Total (a) Includes commingled debt funds, which we treat as debt securities for asset allocation purposes.

The fair value of net assets in the Master Trust by asset class and level within the fair value hierarchy was:

December 31, 2016 December 31, 2015 Fair Value Measurements Fair Value Measurements Total Level 1 Level2 Level 3 NAV Total Level 1 Leve l 2 Level 3 NAV Cash and cash equivalents Equity securities:

$ I $ I $ I $ I $ I $

$ -$ I $ I $ I U.S.

International ** I I

I I

I I I

I I

I Commingled debt Debt securities:

I I I I I I U .S. Treasury and U .S.

government sponsored agency Corporate Intemational government I I I

I I

I I I

I I

I Other I I I I I I I I I I Derivatives:

Interest rate swaps I I I I I I I I I I Other I I I I I I I I I I Alternative investments:

Commodity fund I I I I I I I I I I Hedge funds I I I I I I I I I I Private equity partnerships I I I I I I I I I I Real estate I I I ** I I *

I

Total Master Trust Assets, at fair value $ $ $ $ I $ $ $

Receivables and payables, net (a) 40l(h) accounts restricted for other postretirement benefit obi igations Total Master Trust pension assets (a) Receivables and payables represent amounts for investments sold/purchased, but not yet settled along with interest and dividends earned, but not yet received.

The fair value measurements of cash and cash equivalents are based on the amounts on deposit.

40

Table of Contents The market approach is used to measure fair value of equity securities. The fair value measurements of equity securities that are classified as Level I are based on quoted prices in active markets. These securities represent actively and passively managed equity investments, that are managed against various equity indices, as well as a commingled debt fund in 2016 that invests primarily in non-investment grade bonds.

The fair value measurements of debt securities are generally based on valuations that reflect observable market information, such as actual trade information for identical securities or for similar securities, adjusted for observable differences. The fair value of debt securities is generally measured using a market approach, including the use of pricing models which incorporate observable inputs. Common inputs include benchmark yields, relevant trade data, broker/dealer bid/ask prices, benchmark securities and credit valuation adjustments. When necessary, the fair value of debt securities is measured using the income approach, which incorporates similar observable inputs as well as payment data, future predicted cash flows, collateral performance and new issue data. For the Master Trust, these securities represent investments in securities issued by U.S.

Treasmy and U.S . government sponsored agencies; investments securitized by pooled loans; investments in investment grade and non-investment grade bonds issued by U.S. companies across several industries and investments in debt securities issued by foreign governments and corporations.

The fair value measurements of derivative instruments utilize various inputs that include quoted prices for similar contracts or market-corroborated inputs. In cetiain instances, these instruments may be valued using models, including standard indushy models. These instruments primarily include interest rate swaps, which are valued based on the swap details, such as swap curves, notional amount, index and term of index, reset frequency, and payer/receiver credit ratings.

As noted below, cetiain investments are measured at NAV of units held. The NAV is used as a practical expedient to estimate fair value. These investments are not required to be presented in a level in the fair value hierarchy. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the repmied NAV.

The investment in a commodity fund represents ownership interest of a commingled fund that is invested in a potifolio of exchange-traded futures and forward contracts in commodities to obtain a broad exposure to all principal groups in the global commodity markets, including energy, agriculture, livestock and metals (both precious and industrial) using proprietary commodity trading strategies. Redemptions can be made the 15th calendar day and last calendar day of the month with a specified notification period. The fund's fair value is based upon a NAVas calculated by the fund's administrator.

Investments in hedge funds represent investments in hedge fund of funds. Hedge funds seek a return utilizing a number of diverse investment strategies. The strategies, when combined, aim to reduce volatility and risk while attempting to deliver positive returns under most market conditions. Major investment strategies for the hedge fund of funds include long/shmi equity, market neutral, distressed debt, and relative value. Generally, shares may be redeemed within 60 to 95 days with prior written notice. The funds are subject to short term lockups and have limitations on the amount that may be withdrawn based on a percentage of the total NAV of the fund, among other restrictions. All withdrawals are subject to the general partner's approval. The fair value is estimated using the NAV per share or is based on an ownership interest in partners' capital to which a propmiionate share of net assets is attributed.

Investments in private equity patinerships represent interests in partnerships in private equity fund of funds that use a number of diverse investment strategies. The patinerships have limited lives ranging from ten to fifteen years, after which liquidating distt*ibutions will be received. Prior to the end of each patinership's life, the investment cannot be redeemed with the patinership; however, the interest may be sold to other patties, subject to the general partner's approval. The Master Trust has unfunded commitments o f - a n d - at December 31, 2016 and 2015, that may be required during the lives of the patinerships. Fair value is based on an ownership interest in patiners' capital to which a propmiionate share of net assets is attributed.

The investment in real estate represents an investment in a patinership whose purpose is to manage investments in core U.S.

real estate propetiies diversified geographically and across major propetiy types (e.g., office, industrial, retail, etc.). The manager is focused on properties with high occupancy rates with quality tenants. This results in a focus on high income and stable cash flows with appreciation being a secondaty factor. Core real estate generally has a lower degree of leverage when compared with more speculative real estate investing strategies. The patinership has limitations on the amounts that may be redeemed based on available cash to fund redemptions. Additionally, the general partner may decline to accept redemptions when necessary to avoid adverse consequences for the patinership, including legal and tax implications, among others. The fair value of the investment is based upon a NAV per patinership unit.

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Table of Contents Investments in U.S. large-cap equity funds, international equity funds and commingled debt funds are based on NAYs per share, which are not considered obtained from a quoted price in an active market. Investments in debt funds include funds that invest in a diversified portfolio of emerging market debt obligations, as well as funds that invest in investment grade long-duration fixed-income securities.

Plan Assets - Other Postretirement Benefit Plans The investment strategy with respect to other postretirement benefit obligations is to fund VEBA trusts and/or 401(h) accounts with voluntary contributions, when appropriate, and to invest in a tax efficient manner. Excluding the 401(h) accounts included in the Master Trust, other postretirement benefit plans are invested in a mix of assets for long-tenn growth with an objective of earning returns that provide liquidity as required for benefit payments. These plans benefit from diversification of asset types, investment fund strategies and investment fund managers, and therefore, have no significant concentration of risk. Equity securities include investments in domestic large-cap commingled funds. Ownership interests in commingled funds that invest entirely in debt securities are classified as equity securities, but treated as debt securities for asset allocation and target allocation purposes. Ownership interests in money market funds are treated as cash and cash equivalents for asset allocation and target allocation purposes. The asset allocation for the VEBA trusts and the target allocation, by asset class, at December 31 are detailed below.

Percentage of plan assets Target Asset Allocation 2016 2015 2016 Asset Class U.S . equity securities Debt securities Cash and cash equivalents Total The fair value of assets in the other postretirement benefit plans by asset class and level within the fair value hierarchy was:

December 31, 2016 December 31, 2015 Fair Value Measurement Using Fair Value Measurement Using Total Levell Level2 Level3 NAV Total Levell Level2 Level3 NAV U.S. large-cap equity funds $ I ___._I

$ $ I $ I $ I $ I ___._I

$ $ I $ I $ I U.S. debt funds Total VEBA trust assets, at fair value ** $ I $ * * * **

I $ I $ I $ I $ * *

I $ I $ I 40 I (h) account assets Total other postretirement benefit plan assets $

I $ **

Investments in U.S . large-cap equity securities represent investments in a passively managed equity index fund that invests in securities and a combination of other collective funds. Fair value measurements are not obtained fi*om a quoted price in an active market but are based on fi1m quotes ofNAV per share as provided by the trustee of the fund. Redemptions can be made daily on this fund.

Investments in U.S. debt securities represent investments in a fund that invests in a diversified portfolio of investment grade long-duration fixed income securities. Redemptions can be made daily on these funds.

Expected Cash Flows- Defined Benefit Plans Our defined benefit pension plans have the option to utilize available prior year credit balances to meet current and future contribution requirements. We may utilize such credit balances to satisfy any minimum required contributions for our defined benefit pension plans in 2017.

We are not required to make contributions to our other postretirement benefit plans.

42

Table of Contents The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans:

Other Postretirement Pension Benefit Payments 2017 $ I $ I 2018 I I 2019 I I 2020 I I 2021 2022-2026 ** I I

Savings Plans Substantially all employees are eligible to participate in deferred savings plans (401 (k)s ). Employer contributions to the plans w e r e - in 2016 a n d - in 2015 .

15. Commitments and Contingencies Leases We have entered into various agreements for the lease of office space, vehicles, land and other equipment. At December 31, 2016, our most significant lease, whic~, relates to our corporate headquarters.

Rent expense for the years ended December 31 for operating leases was as follows:

2016 2015

$ I $ I Total future minimum rental payments for all operating leases are estimated to be:

2017 2018 2019 2020 2021 Thereafter Total

$ I $ I $ I $ I $ I $ I $ I Energy Purchase Commitments We enter into long-term energy and energy related contracts which include commitments to purchase:

Contract Type Natural Gas Natural Gas Power, Fuels (a) Limestone Storage Transportation excluding wind RECs Wind Power Maximum Maturity Date (a)

In 2015, as a result of depressed wholesale market prices for electricity and natural gas, we experienced a shift in the dispatching of our generation fleet from coal-fired to combined-cycle natural gas-fired generation. This reduction in coal-fired generation output resulted in a surplus of coal inventory at certain of our Pennsylvania plants during that time. To mitigate the risk of oversupply, we incurred pre-tax charges o t j * *

during 2015 in connection with an agreement to reduce our 2015 through 2018 contracted coal deliveries. These charges were recorded to "Fuel and Energy Purchases" on the Statement of Operations.

Legal Matters We are involved in the following legal proceedings, claims and litigation. We believe that we have meritorious defenses in connection with our current legal proceedings, claims and litigation, and intend to vigorously contest each of them. However, we cannot provide assurance that we will be successful in our efforts.

No estimate ofthe possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding any of the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors such as ongoing discovery, significant facts that are in dispute, the stage of the proceeding and the wide range of potential outcomes for any such matter. As a result, any losses actually incurred could be substantial.

43

Table of Contents Sierra Club Litigation In July 2016, a settlement agreement was reached regarding the previously disclosed litigation filed by the Sierra Club and MEIC in the U.S. District Comt, District of Montana, Billings Division against Talen Montana and the other Colstrip Steam Electric Station (Colstrip) owners: Avista Corporation, Puget Sound Energy, Pmtland General Electric Company, NmthWestern Corporation and PacifiCorp. The complaint, which was amended twice, alleged ce1tain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements. The settlement agreement includes a commitment by the defendants to cease operations of Colstrip Units 1 and 2 on or before July 1, 2022 and liability releases for the owners of all Colstrip units, without requiring monetary payments to the plaintiffs. Apa1t from outright dismissal of all claims against Colstrip Units 3 and 4, those units are not affected by the proposed settlement. The settlement agreement was approved by the U.S . District Comt, District of Montana, Billings Division, in September 2016, and the court entered an order in February 2017 granting in pmt plaintiffs' motion seeking an award of attorneys' fees and costs against the Colstrip owners and dismissing the case. Talen Montana's share of the attorneys' fees and costs is insignificant. As result of the court approval, in the third qumter of2016, management reduced the remaining useful life of Colstrip Units 1 and associated AROs and assessed the Colstrip plant assets for impairment. The in useful life resulted in an for the ended December 31 2016. The . In Montana Hydroelectric Litigation In February 2012, the U.S. Supreme Comt issued a unanimous decision overturning judgments by the Montana First Judicial District Comt and the Montana Supreme Comt in pending litigation, which had held that the streambeds underlying the Talen Montana hydroelectric generating facilities were owned by the State of Montana (State) and that Talen Montana owed the State compensation for its prior use of those streambeds. The case was remanded by the U.S. Supreme Comt to the Montana Supreme Comt for fu1ther proceedings in accordance with the decision and, in April2012, was similarly remanded by the Montana Supreme Comt to the Montana First Judicial District Comt. In the interim, nothing further was done by the State to formally prosecute the action until April2016, when the State filed a Complaint on Remand against Talen Montana and NmthWestem Corporation, the latter of which had purchased the facilities from Talen Montana in November 2014. The allegations of the complaint are ve1y similar to the claims made by the State in the prior state court litigation. North Western Corporation has since removed the case to the Federal District Court in Montana and motions have been filed to dismiss certain of the claims. The State opposed removal and filed a motion to remand the case to the First Judicial District Comt. That motion remains pending before the federal comt. At this time, we cannot predict the outcome of this matter or its effect on Tal en Energy Supply; however, a material adverse judgment for monetary damages could have an adverse effect on our results of operations and liquidity.

Topaz Power Holdings, LLC (Topaz) Gas Supply Litigation In November 2014, Southwest Energy, L.P. (SWE) filed a petition alleging breach of contract against Topaz, our wholly owned indirect subsidiary, in the 2691h Judicial District Court, Harris County, Texas. SWE and Topaz were pmties to a natural gas supply contract that was terminated in October 2014. SWE seeks damages in the approximate amount o f - for Topaz's alleged failure to te1minate the contract in accordance with its terms. SWE subsequently amended the petition to join additional pmties, including other Talen Energy Supply affiliates, and assert additional claims relating to the contract termination and the circumstances under which Topaz obtained an alternative natural gas supply for 2015. In April2016, the cou1t granted SWE's motion for partial summary judgment on the breach of contract claim holding that the contract had not been properly terminated and as a result, we recorded and maintenance" on the Statement of Operations for the year ended December 31, 2016. ent agreement fully resolving the litigation in Februmy 2017. The settlement amount Litigation Relating to the Merger In connection with the Merger, four purpmted stockholders ofTalen Energy Corporation have filed a putative class action lawsuit in the Court of Chancery of the State of Delaware naming as defendants the directors ofTalen Energy Corporation, Riverstone and certain Riverstone affiliates. The plaintiffs allege, among other things, that (i) the directors ofTalen Energy Corporation breached fiducimy duties owed to Talen Energy Corporation's public stockholders in approving the Merger; (ii)

Riverstone and ce1tain of its affiliates aided and abetted the directors ofTalen Energy Corporation in the alleged breaches of their fiduciary duties; (iii) Riverstone, as an alleged controlling stockholder ofTalen Energy Corporation, breached fiduciary duties that it owed Talen Energy Corporation and its minority stockholders in the Merger; and (iv) certain directors of Tal en 44

Table of Contents Energy Corporation aided and abetted the foregoing alleged breaches offiduciaty duties . The plaintiffs seek to rescind the Merger and also seek damages, costs and attorney's fees.

We believe the plaintiffs' allegations are without merit and intend to defend vigorously against them. At this time, however, we cannot predict the outcome of this matter or its effect on Talen Energy Supply or the Merger. A material adverse judgment for monetaty damages could have an adverse effect on our results of operations and liquidity.

Holhvood Construction Litigation Walsh Construction Company (Walsh) filed suit in the U.S. District Comt, Eastern District of Pennsylvania against Holtwood, LLC (Holtwood), a subsidiary ofTalen Energy Supply, asserting claims relating to work performed on the project to redevelop the Holtwood hydroelectric facility that was substantially completed in 2013. Holtwood assessed liquidated damages in the amount o f - against Walsh under the patties' contract as a result of Walsh's failure to timely meet ce1tain contractual deadlines. Holtwood retained approximately- from payment ofWalsh's invoices in pattial satisfaction of the liquidated damages. Walsh's complaint alleges that no liquidated damages are owed and asserts claims seeking i) payment of t h e - withheld by Holtvvood; ii) additional compensation in the amount o f - for work that it contends is outside Walsh's contractual scope of work; iii) interest on all amounts sought; and iv) an award of attorneys' fees. Holtwood has asse1ted counterclaims seeking to establish its entitlement to t h e - withheld as liquidated damages, recove1y of an additional- in liquidated damages, and recovery for additional amounts for Walsh's breaches of the patties' contract.

The patties continue to conduct discove1y. No trial date has been set. We believe the allegations set in Walsh's complaint are without merit and intend to defend vigorously against them. At this time, we cannot predict the outcome of this matter or its effect on Tal en Energy Supply; however, a material adverse judgment for monetaty damages could have an adverse effect on our results of operations and liquidity.

Other In addition to the above matters, from time-to-time in the ordinary course of business, we may be subject to other legal proceedings, claims and litigation. While the outcome of these legal proceedings, claims and litigation is unce1tain, 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 repmting period.

Regulatory Matters We are subject to regulation by federal and state agencies in the various regions where we conduct business, including, but not limited to, the FERC, Department of Energy, Federal Communications Commission, PUC, NERC, and public utility commissions in other states in which we conduct business, as well as RTOs and ISOs in the regions in which we conduct business.

Pacific Northwest Markets Talen Energy Marketing and Talen Montana made spot market bilateral sales of power in the Pacific Nmthwest during the period from December 2000 through June 2001. Several parties subsequently claimed refunds at the FERC as a result of these sales. Following subsequent FERC actions, the City of Seattle, Tal en Montana's last remaining claim outstanding, appealed the FERC's decision to the United States Court of Appeals for the Ninth Circuit in 2016. In October 201 Tal en Montana and the City of Seattle reached a settlement whereby to resolve the remaining outstanding claims. The settlement was <>nrwm.!Pfl Other We are party to other regulatmy proceedings arising in the ordina1y course of business or have other regulatmy exposure.

While the outcome of these other regulatmy 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 repmting period.

Environmental Laws and Regulations Extensive federal, state and local environmental laws and regulations are applicable to our power generation operations, including the regulation of air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of the business. In addition, many of these environmental considerations are also applicable to the operations of key 45

Table of Contents suppliers, or customers, such as coal producers and industrial power users, and may impact the cost for their products or their demand for our services.

It may be necessary for us to modifY, curtail, replace or cease operation of cettain facilities or performance of certain operations to comply with statutes, regulations and other requirements imposed by regulatoty 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, monetaty 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.

Superfund and Other Remediation Under the Pennsylvania Clean Streams Law, a subsidiary ofTalen Generation is obligated to remediate acid mine drainage at a former mine site and may be required to take additional steps to prevent acid mine drainage at the previously capped refuse pile at this mine site. The subsidiaty is currently pumping and treating mine water at the former mine site.

At December 31, 2016, Tal en Generation had accrued a discounted liability o f - to cover the costs of pumping and treating groundwater at the remaining mine site for 50 years. We discounted this liability based on a credit adjusted risk-free rate of. . at the time of the mine closure. Expected undiscounted payments are estimated to be insignificant for each of the years 2017 through 2020, - for 2021 a n d - for work after 2021.

From time-to-time, we undet1ake investigative or remedial actions in response to notices of violations, spills or other releases at various on-site and off-site locations, negotiate with the EPA and state and local agencies regarding actions necessaty for compliance with applicable requirements, negotiate with propetty owners and other third parties alleging impacts from our operations and undertake similar actions necessaty to resolve environmental matters which arise in the course of normal operations. Based on analysis to-date, resolution of these known environmental matters is not expected to have a material adverse effect on our 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, 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.

Other From time to time, in the ordinary course of our business, we 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 us, 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 our financial condition or results of operations, although the effect could be material to our results of operations in any interim reporting period.

Other Commitments and Contingencies Nuclear Insurance The Price-Anderson Act is a United States Federal law which govems liability-related issues and ensures the availability of funds for public liability claims arising from an incident at any of the U.S. licensed nuclear facilities. It also seeks to limit the liability of nuclear reactor owners for such claims from any single incident. At December 31, 2016, the liability limit per incident i s - for such claims which is funded by insurance coverage from American Nuclear Insurers and an industty retroactive assessment program.

Under the industty retroactive assessment program, in the event of a nuclear incident at any of the reactors covered by the Price-Anderson Act, as amended, Susquehanna Nuclear could be assessed deferred premiums of up t o . million per incident, payable at a maximum o . million per year.

Additionally, Susquehanna Nuclear purchases propet1y insurance programs from NEIL, an industry mutual insurance company of which Susquehanna Nuclear is a member. At December 31, 2016, facilities at the Susquehanna plant are insured against propetty damage losses up t o - . Susquehanna Nuclear also purchases an insurance program that provides coverage for the cost of replacement power during prolonged outages of nuclear units caused by cettain specified conditions.

46

Table of Contents Under the NEIL propetiy and replacement power insurance programs, Susquehanna Nuclear could be assessed retrospective premiums in the event of the insurers' adverse loss experience. This maximum assessment i s - at December 31, 2016. Tal en Energy Supply has additional coverage that, under cetiain conditions, may reduce this exposure.

Labor Union Agreements Labor agreements with . Collective bargaining agreements, "'"""'""'"'

of our workforce is covered by the agreements one-year extensio~ We cannot Guarantees and Other Assurances In the normal course of business, we enter into agreements that provide financial petformance assurance to third patiies on behalf of cetiain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of credit issued by financial institutions and surety bonds issued by insurance companies. These agreements are entered into primarily to suppmi or enhance the creditworthiness attributed to a subsidimy on a stand-alone basis or to facilitate the commercial activities in which these subsidiaries engage.

The table below details guarantees provided as of December 31, 2016. "Exposure" represents the estimated maximum potential amount offuture payments that could be required to be made under the guarantee. The probability of expected payment/

performance for the guarantees described below is remote. There was no recorded liability at December 31 , 2016 or 2015 .

We have agreed to indemnify third pmiies related to sales of assets that are governed by the specific sales agreement and include breach of the representations, warranties and covenants, and liabilities for certain other matters. Our maximum exposure with respect to such indemnification obligations and the expiration of such indemnification obligations cannot be estimated because the maximum potential liability is not always capped by the transaction documents and the expiration date is based on the applicable statute of limitations. The exposure and expiration date noted is based on those cases in which the agreements provide for specific limits. Our exposure and related expiration dates are:

Indemnification obligations for sales of assets $

December 31, 2016 In connection with the acquisition ofRJS Power and the Talen Formation Transactions, we agreed to indemnify PPL and its Expiration Date affiliates following the spinoff for liabilities primarily relating to the business prior to the spinoff, as well as for losses arising out of breaches of our failure to petform covenants and agreements in the transaction agreements following the spinoff or arising out of breaches by the Sponsor Entities of cetiain representations and warranties in the transaction agreements . We also agreed to indemnify PPL for liabilities relating to the employment or termination of service ofPPL employees who primarily suppmied our business prior to the spinoff(excluding however defined benefit pension obligations ofPPL employees who terminated service prior to July 1, 2000 or who were not employed by us or our subsidiaries at the time of termination). We also agreed to indemnify PPL from tax liabilities resulting from our actions following the closing resulting in the transaction failing to qualify for its intended tax-free treatment.

Talen Energy Supply and/or its subsidiaries provide other miscellaneous guarantees through contracts entered into in the normal course of business. These guarantees are primarily in the form of indemnification obligations or warranties related to services or equipment and vmy in duration. The amounts of these guarantees often are not explicitly stated, and the overall maximum amount of the obligation under such guarantees cannot be reasonably estimated. Historically, no significant payments have been made with respect to these types of guarantees and the probability of payment/performance under these guarantees is remote.

Tal en Energy Supply, on behalf of itself and certain of its subsidiaries, maintains insurance that may cover liability assumed under contract for bodily injmy and propetiy damage. The coverage provides maximum aggregate coverage o f .

million. This insurance may be applicable to obligations under cetiain of these contractual arrangements.

Separation Benefits Talen Energy Supply and certain subsidiaries provide separation benefits to eligible employees. Generally, applicable employees separated are eligible for cash severance payments, outplacement services and a single sum payment approximating the dollar amount of premium payments that would be incurred for continuation of group health and welfare coverage.

47

Table of Contents Separation benefits for certain bargaining unit employees also include enhanced pension and postretirement medical benefits.

Separation benefits are recorded when such amounts are probable and estimable.

at our Energy employees, some of whom may be the collective bargaining agreement. related to these eliminations to "Operation and maintenance" on the Statement of Operations and the remammg unpa is included in "Other current liabilities" on the Balance Sheet. As the identification of employees is finalized, management expects to update its estimate in future periods.

In 2016, we eliminated approxi . As a result, we recorded a charge o f - to "Operation and maintenance" on the Statement of Operations - t o "Merger costs" on the Statement of Operations. At December 31 , 2 0 1 6 , - is reflected in "Other current liabilities" on the Balance Sheet.

16. Income Tax Expense (Benefit)

The income tax provision consisted of the following amounts:

2016 2015 Income Tax Expense (Benefit)

Current Federal $

$ I State I Total Current Deferred

Federal State Total - Deferred Investment tax credit, net- federal Total Income Tax Expense (Benefit) $ * $

2016 2015 Reconciliation of Income Tax Expense (Benefit)

Federal income tax on Income Before Income Taxes at statutory tax rate- 35%

Increase (decrease) due to:

State income taxes, net of federal benefit Worthless stock tax benefit I Federal and state tax reserve adjustments I Federal income tax credits State deferred tax rate change, net of federal benefit Federal and state income tax retum adjustments **

Goodwill Impairment Other I

I

I Total increase (decrease)

Total Income Tax Expense (Benefit) $ $

Effective income tax rate For the year ended December 31, 2016, our overall effective tax rate was different than the statutory rate o f . primarily due to the net impact of the benefit of current year state losses, a favorable state deferred tax rate change, and the ability to recognize a cmTent year tax loss resulting from an election to treat a wholly-owned domestic subsidiary as a disregarded entity.

For the year ended December 31 , 2015, our overall effective tax rate was different than the statutOiy rate o f . primarily due to the book goodwill impairment which was not deductible for tax purposes, the favorable state deferred tax rate change, and the federal and state tax reserve adjustments resulting from the settlement by PPL of open audits from the tax years 2008-2011.

48

Table of Contents At December 31, significant components of our defened income tax assets and liabilities were as follows :

2016 2015 Deferred Tax Assets Deferred investment tax credits $ I $ I Accrued pension costs Federal net operating loss carryforwards I State net operating loss carry forwards I I Other Total deferred tax asset Valuation allowances I

Total net deferred tax assets Deferred Tax Liabilities Plant- net Unrealized gain on quali f),ing derivatives Other Total deferred tax liabilities Net deferred tax liability $

Based on our assessment of both positive and negative evidence, we have determined that the state defened tax assets, including state net operating loss carryfmwards, are more likely than not to be realized and we have reduced the valuation allowance against those deferred tax assets compared to the amount we calculated in December 31, 2015. We believe it is more likely than not that the Company's deferred tax assets, net of valuation allowances will be realized. In atTiving at this conclusion, we considered the taxable income that will be generated from future reversals of existing taxable temporary differences .

At December 31, we had the following federal and state net operating loss carryforwards.

2016 Expiration Loss carryforwards Federal net operating losses State net operating losses I

Unrecognized Tax Benefits At December 31,2016 we had no unrecognized tax benefits recorded compared to December 2015 , where we h a d -

ofunrecognized tax benefits recorded .

We or our subsidiaries indirectly or directly file tax returns primarily in two tax jurisdictions. With few exceptions, at December 31, 2016, the tax years in these jurisdictions that remain subject to examination are:

U .S. (federal)

Pennsylvania (state)

17. Asset Retirement Obligations We have recorded AROs to reflect various legal obligations associated with the retirement of long-lived assets, the most significant of which relates to the decommissioning of the Susquehanna nuclear plant. The decommissioning ARO totaled

- at December 31, 2016. The NRC operating license expiration date for Susquehanna Unit 1 is in 2042 and 2044 for Unit 2. Assets in the NDT funds are legally restricted for the purpose of settling this ARO. See Notes 12 and 18 for additional information on the nuclear decommissioning trust funds. Other AROs recorded relate to various environmental requirements for coal piles, ash basins and other waste basin retirements .

We have recorded several conditional AROs, the most significant of which is related to the removal and disposal of asbestos-containing material. ln addition to the AROs that were recorded for asbestos-containing material , we identified other asbestos-49

Table of Contents related obligations, but were unable to reasonably estimate their fair values. Management was unable to reasonably estimate a settlement date or range of settlement dates for the remediation of all of the asbestos-containing material at cet1ain of the generation plants. If economic events or other circumstances change that enable us to reasonably estimate the fair value of these retirement obligations, they will be recorded at that time.

We also identified legal retirement obligations associated with the retirement of a reservoir that could not be reasonably estimated due to an indeterminable settlement date.

The changes in the carrying amounts of AROs were as follows.

2016 2015 ARO at begirming of period Accretion expense

I

I Changes in estimate of cash flow or settlement date Obligations assumed in RJS Power acquisition Obligations incurred

I I

I I

I Obligations settled ARO at end of period $ $

Substantially all of the ARO balances are classified as non-current at December 31, 2016 and 2015 .

18. NOT Funds Securities held by our NDT funds are classified as available-for-sale.

The following table shows the amortized cost, the gross unrealized gains and losses recorded in AOCI and the fair value of our available-for-sale securities.

December 31, 2016 December 31, 2015 Gross Gross Gross Gross Amortized Unrealized Unrealized Fair* Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value NDT funds:

Cash and cash equivalents $ 5 $ $ $ 5 $ II $ $ $ II Equity securities 321 469 790 297 406 703 Debt securities 233 5 2 236 230 7 237 Receivables/payables, net 2 2 Total NOT funds $ 561 $ 474 $ 2 $ 1,033 $ 538 $ 413 $ $ 951 See Note 12 for details on the securities held by the NDT funds.

There were no securities with credit losses at December 31, 2016 and 2015.

The following table shows the scheduled maturity dates of debt securities held at December 31, 2016.

Maturity Maturity Maturity Maturity Less Than 1-5 6-10 in Excess I Year Years Years of 10 Years Total Amortized cost $ 6 $ 104 $ 76 $ 47 $ 233 Fair value 6 104 76 50 236 The following table shows proceeds from and realized gains and losses on sales of available-for-sale securities.

2016 2015 Proceeds from sales of NOT securities (a) $ 158 $ 180 Gross realized gains (b) 31 26 Gross realized losses (b) 22 22 (a) These proceeds are used to pay income taxes and fees related to managing the trust. Remaining proceeds are reinvested in the trust.

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Table of Contents (b) Excludes the impact of other-than-temporary impainnent charges recognized on the Statements of Operations.

Amounts previously collected from PPL Electric's customers for decommissioning the Susquehanna nuclear plant, less applicable taxes, were deposited in external trust funds for investment and can only be used for future decommissioning costs.

To the extent that the actual costs for decommissioning exceed the amounts in the nuclear decommissioning trust funds, Susquehmma Nuclear would be obligated to fund 90% of the shotifall.

19. Related Party Transactions Prior to the spinoff, PPL Electric and PPL Services were affiliates ofTalen Energy Supply. The disclosures below provide information regarding transactions that occurred prior to June 1, 2015. After June 1, 2015, transactions with PPL Electric, PPL Services, or any other PPL subsidiaries are not related patiy transactions.

PLR Contracts/Sales ofAccounts Receivable PPL Electric holds competitive solicitations for PLR generation supply. Talen Energy Marketing, while an affiliate ofPPL Electric, was awarded a pmiion of the PLR generation supply through these competitive solicitations. The sales between Talen Energy Marketing and PPL Electric for the five months ended May 31, 2015 w e r e - and are included in the Statement of Operations as "Energy revenues."

PPL Electric's customers may choose an alternative supplier for their generation supply. As part of a PUC-approved purchase of accounts receivable program, PPL Electric purchases cetiain accounts receivable from altemative electricity suppliers (including Tal en Energy Marketing) at a discount. During the five month period up to the spinoff included in the year ended December 31, 2015, Talen Energy Marketing sold accounts receivable to PPL Electric o f - . Losses resulting from the sales of accounts receivable to PPL Electric during the Support Costs Prior to the spinoff, we were provided with administrative, management and support services, primarily from PPL Services.

Where applicable, the costs of these services were charged to us as direct suppmi costs. General costs that could not be directly attributed to a specific affiliate were allocated and charged to the respective affiliates, including us, as indirect suppmi costs. PPL Services used a three-factor methodology that includes the affiliates invested capital, operation and maintenance expenses and number of employees to allocate indirect costs, which methodology we believe was reasonable.

We were charged, primarily by PPL Setvices,- for the year ended December 31, 2015 including amounts applied to accounts that are futiher distributed between capital and expense.

Transition Services Agreement As pati of the spinoff transaction, we entered into a TSA with Topaz Power Management, LP (an affiliate ofRiverstone) for cetiain business administrative services. The TSA expired in Januaty 2016. For the year ended December 31 , 2015, these costs, which are recorded in "Operation and maintenance" on the Statement of Operations, w e r e - .

Gas Supply Contract A subsidiary of Jade has a gas supply contract in place with TrailStone NA Logistics LLC (TrailStone), an affiliate of Riverstone, under which Trail Stone supplies gas to generation facilities owned by Jade. For the years ended December 31, 2016 and 2015, we i n c u r r e d - a n d - of costs for these gas purchases, which are primarily recorded in "Fuel and energy purchases" on the Statements of Operations.

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Table of Contents

20. Accumulated Other Comprehensive Income (Loss)

The after-tax changes in AOCI by component for the years ended December 31 were as follows .

Unrealized gains (losses) Defined benefit plans Available- Prior Actuarial for-sale Qualifying service gain securities derivatives costs (loss) Total December 31, 2014 Amounts arising during the period

- $ I I

I $

I

I Reclassifications from AOCI

I* *I Net OCI during the period I

December 31, 2015 $ $ I $ $ $

Amounts arising during the period I I Reclassifications from AOCI I Net OCI during the period December 31, 2016 $ $ $

I I $ **

The following table presents the gains (losses) and related income taxes for reclassifications from AOCI for the years ended December 31 . The defined benefit plan components of AOCI are not reflected in their entirety in the statement of operations during the years; rather, they are included in the computation of net periodic defined benefit costs (credits). See Note 14 for additional information.

Affected Line Item on the Details about AOCI 2016 2015 Statements of Operations Available-for-sale securities $ I $ I Other Income (Expense)- net Income Tax Expense (Benefit)

Total After-tax *I *I Qualifying derivatives Commodity contracts

I I

I I

Energy revenues Fuel and energy purchases Other Total Pre-tax I I Income Tax Expense (Benefit)

Total After-tax

I *I Defined benefit plans Prior service costs I I Net actuarial (gain) loss Total Pre-tax

I Income Tax Expense (Benefit)

Total After-tax

I

I Total reclassifications during the period $ I $ I

21. Subsequent Events We evaluated subsequent events through March 28, 2017, the date the financial statements are available to be issued; all significant subsequent events are included in their respective notes to the financial statements.

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Table of Contents GLOSSARY OF TERMS AND ABBREVIATIONS LEGAL ENTITIES Athens -New Athens Generating Company, LLC, an indirect subsidia1y of MACH Gen and Talen Energy Supply that owns generating operations in New York.

Harquahala- New Harquahala Generating Company, LLC, an indirect subsidimy of MACH Gen and Talen Energy Supply that owns generating operations in Arizona.

Holdco- Talen Energy Holdings, Inc., a Delaware corporation, which was fanned for the purposes of the spinoff transaction.

Jade- Jade Power Generation Holdings LLC, a subsidiary ofTalen Energy Supply that owns generating operations in Texas.

MACH Gen -MACH Gen, LLC, a subsidimy ofTalen Energy Supply and parent of New MACH Gen. This subsidimy has outstanding debt under the New MACH Gen Revolver and New MACH Gen TLB that is non-recourse to Talen Energy Supply.

Millennium- Millennium Power Pminers, L.P., an indirect subsidia1y of MACH Gen and Talen Energy Supply that owns generating operations in Massachusetts.

New MACH Gen -New MACH Gen, LLC, an indirect subsidia1y ofTalen Energy Supply and a direct subsidimy of MACH Gen that, through its subsidiaries, owns generating operations in Arizona, Massachusetts and New York. This subsidimy has outstanding debt under the New MACH Gen Revolver and New MACH Gen TLB that is non-recourse to Talen Energy Supply.

Ral'en- Raven Power Generation Holdings LLC, a subsidimy ofTalen Energy Supply that owns generating operations in Maryland.

Ril'erstone- Riverstone Holdings LLC.

RJS- Raven, Jade and Sapphire, collectively.

RJS Power- RJS Generation Holdings LLC, former parent ofRJS that was contributed by the Sponsor Entities to Talen Energy Supply on June 1, 2015 in exchange for 35% ofTalen Energy Corporation's common stock. Following the contribution, RJS Power was merged into Tal en Energy Supply.

Sapphire- Sapphire Power Generation Holdings LLC, a subsidiary ofTalen Energy Supply that owns generating operations in Massachusetts, New Jersey and Pennsylvania.

Sponsor Entities- Raven Power Holdings LLC, C/R Energy Jade, LLC and Sapphire Power Holdings LLC, affiliates of Riverstone that formerly owned RJS Power and contributed RJS Power to Talen Energy Supply on June 1, 2015 in exchange for 35% ofTalen Energy Corporation's common stock. As a result of the Merger on December 6, 2016, the Sponsor Entities became owners of 100% ofTalen Energy Corporation's common stock.

Susquehanna Nuclear- Susquehanna Nuclear, LLC, a subsidiary ofTalen Generation that owns a nuclear-powered generating station in Pennsylvania.

Talen Energy Supply- Talen Energy Supply, LLC, an indirect subsidia1y ofTalen Energy Corporation and the parent company ofTalen Generation, Talen Energy Marketing, RJS and MACH Gen.

Talen Energy Cmporation- the indirect parent ofTalen Energy Supply following the spinoff from PPL.

Talen Energy Marketing- Talen Energy Marketing, LLC, a subsidimy ofTalen Energy Supply that markets wholesale and retail electricity and gas, and supplies energy and energy services in competitive markets.

Talen Generation - Tal en Generation, LLC, a subsidimy ofTalen Energy Supply that owns and operates generating facilities through various subsidiaries primarily in Pennsylvania.

Talen Montana- Talen Montana, LLC, an indirect subsidiary ofTalen Generation that owns generating operations in Montana.

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Table of Contents Talen Renewable Energy - Talen Renewable Energy, LLC, a former subsidiary, which owned Talen Energy Supply's renewable energy business.

OTHER TERMS AND ABBREVIATIONS 2016 Talen Energy Supply TLB- Talen Energy Supply's senior secured Term Loan B issued in December 2016 upon closing of the Merger.

2017 Talen Energy Supply TLB - Tal en Energy Supply's senior secured Term Loan B signed in February 2017.

401(11) account- a sub-account established within a qualified pension trust to provide for the payment of retiree medical costs.

Adjusted EBITDA- see Management's Discussion and Analysis ofFinancial Condition and Results of Operations- Margins, EBITDA and Adjusted EBITDA and Statement of Operations Analysis- EBITDA and Adjusted EBITDA.

Amended Secured Trading Facility- Amended and Restated Common Agreement dated as of December 15, 2015, among Talen Energy Marketing, Talen Energy Supply, as guarantor, Brunner Island, LLC, Montour, LLC, Wilmington Trust, National Association, as agent, and the secured counterparties thereto.

AOCI- accumulated other comprehensive income or loss.

ARO- asset retirement obligation.

Basis - when used in the context of derivatives and commodity trading, the commodity price differential between two locations, products or time periods.

Capacity Factor- a measure of the plants' output compared to its capacity for output.

CCR(s) -coal combustion residual(s), which include fly ash, bottom ash and sulfur dioxide scrubber wastes.

Clean Air Act- federal legislation enacted to address ce11ain environmental issues related to air emissions, including acid rain, ozone and toxic air emissions.

COLA - license application for a combined construction permit and operating license from the NRC for a nuclear plant.

CRRs - congestion revenue rights, which are financial instruments established to manage price risk related to electricity transmission congestion that entitle the holder to receive compensation or require the holder to remit payment for certain congestion-related transmission charges based on the level of congestion between two pricing locations, known as source and sink.

CSAPR - Cross-State Air Pollution Rule.

EBITDA- see Management's Discussion and Analysis of Financial Condition and Results of Operations- Margins, EBITDA and Adjusted EBITDA and Statement of Operations Analysis- EBITDA and Adjusted EBITDA .

EPA -U.S. Environmental Protection Agency.

Equivalent Availability Factor- a measure showing the prop01tion of time a unit/plant was available for service over a period of time.

ERCOT- the Electric Reliability Council of Texas, operator of the electricity transmission network and electricity energy market in most of Texas.

FERC- U.S. Federal Energy Regulatory Commission.

Form 5500- the f01m used to file an employee benefit plan's annual information return with the Depat1ment of Labor.

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Table of Contents FTRs - financial transmission rights, which are financial instruments established to manage price risk related to electricity transmission congestion that entitle the holder to receive compensation or require the holder to remit payment for certain congestion-related transmission charges based on the level of congestion between two pricing locations, known as source and sink.

GAAP- Generally Accepted Accounting Principles in the U.S.

GHG- greenhouse gas(es).

GWII - gigawatt hour, one million kilowatt hours.

IBEW- International Brotherhood of Electrical Workers.

Ironwood- a natural gas combined-cycle unit in Lebanon, Pennsylvania.

IRS- U.S. Internal Revenue Service.

ISO - Independent System Operator.

ISO-NE- ISO New England Inc., which oversees the bulk power generation and transmission system that serves Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

kWh - kilowatt hour, basic unit of electrical energy.

LIB OR - London Interbank Offered Rate.

MEIC- Montana Environmental Information Center.

Merger- the December 6, 2016 go-private transaction in which Talen Energy Corporation became wholly owned by the Sponsor Entities.

Merger Consideration- $14.00 per share payable to stockholders ofTalen Energy Corporation common stock at the effective time ofthe Merger.

MMBtu - One million British The1mal Units.

Moody's- Moody's Investors Service, Inc., a credit rating agency.

MW- megawatt, one thousand kilowatts.

MWII - megawatt-hour, one thousand kilowatt-hours.

NAAQS- National Ambient Air Quality Standard.

NAV- net asset value New MACH Gen First Lien Credit and Guaranty Agreement- the First Lien Credit and Guaranty Agreement dated as of April 28, 2014, among New MACH Gen, as borrower, the guarantors named therein, the lenders party thereto and CLMG Corp., as administrative agent, amended as ofMarch 30,2015, April20, 2016 and May 16,2016.

NDT- Susquehanna Nuclear's plant decommissioning trust.

NERC- North American Electric Reliability Corporation.

New MACH Gen Revolver- revolving credit facility within the New MACH Gen First Lien Credit and Guaranty Agreement.

New MACH Gen TLB- New MACH Gen Term Loan B secured under the New MACH Gen First Lien Credit and Guaranty Agreement.

55

Table of Contents NRC- U.S. Nuclear Regulatory Commission.

NYISO- the New York Independent System Operator, which operates competitive wholesale markets to manage the flow of electricity across New York.

OCI- other comprehensive income or loss.

Opacity- the degree to which emissions reduce the transmission of light and obscure the view of an object in the background.

There are emission regulations that limit the opacity of power plant stack gas emissions.

PJM- PJM Interconnection, L.L.C., operator of the electricity transmission network and electricity market in all or pat1s of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, Nm1h Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

PLR- Provider of Last Resort, the role ofPPL Electric in providing default electricity supply within its delivery area to retail customers who have not chosen to select an alternative electricity supplier under the Customer Choice Act.

PPL- PPL Corporation, the former indirect parent holding company of all Talen Energy Supply companies except for RJS and MACH Gen and their respective subsidiaries.

PPL Electric- PPL Electric Utilities Corporation, a public utility subsidiaty ofPPL and former affiliate ofTalen Energy Supply engaged in the regulated transmission and distribution of electricity in its Pennsylvania service area and that provides electricity supply to its retail customers in this area as a PLR.

PPL Services- PPL Services Corporation, a subsidiary ofPPL and former affiliate ofTalen Energy Supply that provided services under a transition services agreement.

PUC- Pennsylvania Public Utility Commission, the state agency that regulates certain ratemaking, setvices, accounting and operations of Pennsylvania utilities.

RECs - Renewable Energy Credits.

Regional Haze- the EPA program that requires states to develop and implement air quality protection plans to reduce pollution that causes visibility impairment in national parks and wilderness areas.

RGGI- Regional Greenhouse Gas Initiative.

RTO- Regional Transmission Organization.

S&P- Standard & Poor's Ratings Services, a credit rating agency.

Scrubber- an air pollution control device that can remove particulates and/or gases (primarily sulfur dioxide) from exhaust gases.

SEC- the U.S. Securities and Exchange Commission.

SIFMA In de.-..:- the Securities Industry and Financial Markets Association Municipal Swap Index.

Spark Spread- a measure of gross margin representing the price of power on a per MWh basis less the equivalent measure of the natural gas cost to produce that power. This measure is used to describe the gross margin ofTalen Energy Supply's competitive natural gas-fired generating fleet. This term is also used to describe a derivative contract in which Talen Energy Supply subsidiaries sell power and buy natural gas on a fmward basis in the same conh*act.

Supelfimd- federal environmental statute that addresses remediation of contaminated sites; states also have similar statutes.

Talen Formation Transactions- The contribution ofRJS Power by Sponsor Entities to Talen Energy Supply, simultaneously with the spinoff from PPL, creating, at that time, an independent, publicly h*aded company.

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Table of Contents Talen Energy Supply Revolver- the Credit Agreement dated as of June 1, 2015 among Tal en Energy Supply, as borrower, the guarantors party thereto, the lenders pmty thereto and Citibank, N.A., as administrative agent.

TSR - Total Stockholder Return. The change in market value of a share of a company's common stock plus the value of all dividends paid on a share of the common stock during the applicable performance period, divided by the price of the common stock as of the begirming of the performance period.

TSA- as applicable, the Transition Services Agreement, dated June 1, 2015 , by and between PPL and Talen Energy Supply and the Transition Services Agreement, dated May 4, 2015, by and between Tal en Energy Supply and Topaz Power Management, LP.

VEBA - Voluntmy Employee Benefit Association Trust, accounts for health and welfare plans for future benefit payments for employees, retirees or their beneficiaries.

VIE- variable interest entity.

Volumetric risk- the risk that the actual load volumes provided under full-requirement sales contracts could vary significantly from forecasted volumes.

WECC- the Western Electricity Coordinating Council, which develops and implements regional reliability standards for the western interconnection from Canada to Mexico and includes the provinces of Alberta and British Columbia, the no11hern p011ion of Baja California, Mexico and all or p011ions of the 14 states in between.

57

PLA-7585, Annual Financial Information for the Years Ended December 31, 2105 and 2016

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