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Fair Value Measurements and Credit Concentration | 3 Months Ended
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Mar. 31, 2016
Fair Value Disclosures [Abstract] |
Fair Value Measurements and Credit Concentration | Fair Value Measurements and Credit Concentration 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 participants 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 participants 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 financial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values. During the three months ended March 31, 2016 and 2015, there were no transfers between Level 1 and Level 2. See Note 1 in Talen Energy's 2015 Form 10-K for information on the levels in the fair value hierarchy. Recurring Fair Value Measurements The assets and liabilities measured at fair value were:
| March 31, 2016 |  | December 31, 2015
| Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 393 |  |  | $ | 393 |  |  | $ | — |  |  | $ | — |  |  | $ | 141 |  |  | $ | 141 |  |  | $ | — |  |  | $ | — |
Restricted cash and cash equivalents (a) | 72 |  |  | 72 |  |  | — |  |  | — |  |  | 106 |  |  | 106 |  |  | — |  |  | — |
Price risk management assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Energy commodities | 840 |  |  | — |  |  | 751 |  |  | 89 |  |  | 693 |  |  | — |  |  | 597 |  |  | 96 |
Total price risk management assets | 840 |  |  | — |  |  | 751 |  |  | 89 |  |  | 693 |  |  | — |  |  | 597 |  |  | 96 |
NDT funds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | 7 |  |  | 7 |  |  | — |  |  | — |  |  | 11 |  |  | 11 |  |  | — |  |  | — |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. large-cap | 623 |  |  | 462 |  |  | 161 |  |  | — |  |  | 616 |  |  | 457 |  |  | 159 |  |  | — |
U.S. mid/small-cap | 87 |  |  | 37 |  |  | 50 |  |  | — |  |  | 87 |  |  | 37 |  |  | 50 |  |  | — |
Debt securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury | 106 |  |  | 106 |  |  | — |  |  | — |  |  | 98 |  |  | 98 |  |  | — |  |  | — |
U.S. government sponsored agency | 5 |  |  | — |  |  | 5 |  |  | — |  |  | 6 |  |  | — |  |  | 6 |  |  | — |
Municipality | 87 |  |  | — |  |  | 87 |  |  | — |  |  | 83 |  |  | — |  |  | 83 |  |  | — |
Investment-grade corporate | 44 |  |  | — |  |  | 44 |  |  | — |  |  | 47 |  |  | — |  |  | 47 |  |  | — |
Other | 3 |  |  | — |  |  | 3 |  |  | — |  |  | 3 |  |  | — |  |  | 3 |  |  | — |
Receivables (payables), net | 2 |  |  | (1 | ) |  | 3 |  |  | — |  |  | — |  |  | (2 | ) |  | 2 |  |  | — |
Total NDT funds | 964 |  |  | 611 |  |  | 353 |  |  | — |  |  | 951 |  |  | 601 |  |  | 350 |  |  | — |
Auction rate securities (b) | 6 |  |  | — |  |  | — |  |  | 6 |  |  | 6 |  |  | — |  |  | — |  |  | 6 |
Total assets | $ | 2,275 |  |  | $ | 1,076 |  |  | $ | 1,104 |  |  | $ | 95 |  |  | $ | 1,897 |  |  | $ | 848 |  |  | $ | 947 |  |  | $ | 102 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Price risk management liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Energy commodities | $ | 619 |  |  | $ | — |  |  | $ | 598 |  |  | $ | 21 |  |  | $ | 539 |  |  | $ | — |  |  | $ | 497 |  |  | $ | 42 |
Total price risk management liabilities | $ | 619 |  |  | $ | — |  |  | $ | 598 |  |  | $ | 21 |  |  | $ | 539 |  |  | $ | — |  |  | $ | 497 |  |  | $ | 42 |
(a) | Current portion is included in "Restricted cash and cash equivalents" and long-term portion is included in "Other noncurrent assets" on the Balance Sheets.
(b) | Included in "Other investments" on the Balance Sheets.
A reconciliation of net assets and liabilities classified as Level 3 for the period ended March 31, 2016 is as follows:
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
| Three Months
| Energy Commodities, net |  | Auction Rate Securities |  | Total
Balance at beginning of period | $ | 54 |  |  | $ | 6 |  |  | $ | 60 |
Total realized/unrealized gains (losses) included in earnings | 60 |  |  | — |  |  | 60 |
Settlements | (45 | ) |  | — |  |  | (45 | )
Transfers into Level 3 | 1 |  |  | — |  |  | 1 |
Transfers out of Level 3 | (2 | ) |  | — |  |  | (2 | )
Balance at end of period | $ | 68 |  |  | $ | 6 |  |  | $ | 74 |
A reconciliation of net assets and liabilities classified as Level 3 for the period ended March 31, 2015 is as follows:
|  | Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|  | Three Months
|  | Energy Commodities, net |  | Auction Rate Securities |  | Total
Balance at beginning of period |  | $ | 111 |  |  | $ | 8 |  |  | $ | 119 |
Total realized/unrealized gains (losses) included in earnings |  | (17 | ) |  | — |  |  | (17 | )
Settlements |  | 30 |  |  | — |  |  | 30 |
Transfers into Level 3 |  | 4 |  |  | — |  |  | 4 |
Transfers out of Level 3 |  | 1 |  |  | — |  |  | 1 |
Balance at end of period |  | $ | 129 |  |  | $ | 8 |  |  | $ | 137 |
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:
| March 31, 2016
| Fair Value, net Asset (Liability) |  | Valuation Technique |  | Significant Unobservable Input(s) |  | Range (Weighted Average) (a)
Energy commodities |  |  |  |  |  |  |
Natural gas contracts (b) | $ | 57 |  |  | Discounted cash flow |  | Proprietary model used to calculate forward prices |  | 11% - 100% (57%)
Power sales contracts (c) | 16 |  |  | Discounted cash flow |  | Proprietary model used to calculate forward prices |  | 21% - 100% (69%)
FTR purchase contracts (d) | (2 | ) |  | Discounted cash flow |  | Historical settled prices used to model forward prices |  | 100% (100%)
Heat rate call options (e) | (1 | ) |  | Discounted cash flow |  | Proprietary model used to calculate forward prices |  | 100% (100%)
CRR purchase contracts (d) | (2 | ) |  | Discounted cash flow |  | Proprietary model used to calculate forward prices |  | 100% (100%)
Auction rate securities (f) | 6 |  |  | Discounted cash flow |  | Modeled from SIFMA Index |  | 45% - 47% (46%)
| December 31, 2015
| Fair Value, net Asset (Liability) |  | Valuation Technique |  | Significant Unobservable Input(s) |  | Range (Weighted Average) (a)
Energy commodities |  |  |  |  |  |  |
Natural gas contracts (b) | $ | 55 |  |  | Discounted cash flow |  | Proprietary model used to calculate forward prices |  | 10% - 100% (50%)
Power sales contracts (c) | 13 |  |  | Discounted cash flow |  | Proprietary model used to calculate forward prices |  | 10% - 100% (100%)
FTR purchase contracts (d) | (2 | ) |  | Discounted cash flow |  | Historical settled prices used to model forward prices |  | 100% (100%)
Heat rate call options (e) | (10 | ) |  | Discounted cash flow |  | Proprietary model used to calculate forward prices |  | 100% (100%)
CRR purchase contracts (d) | (2 | ) |  | Discounted cash flow |  | Proprietary model used to calculate forward prices |  | 100% (100%)
Auction rate securities (f) | 6 |  |  | Discounted cash flow |  | Modeled from SIFMA Index |  | 46% - 47% (46.5%)
(a) | The range and weighted average represent the percentage of fair value derived from the unobservable inputs.
(b) | As the forward price of natural gas increases/(decreases), the fair value of purchase contracts increases/(decreases). As the forward price of natural gas increases/(decreases), the fair value of sales contracts (decreases)/increases.
(c) | As forward market prices increase/(decrease), the fair value of contracts (decreases)/increases. As volumetric assumptions for contracts in a gain position increase/(decrease), the fair value of contracts increases/(decreases). As volumetric assumptions for contracts in a loss position increase/(decrease), the fair value of the contracts (decreases)/increases.
(d) | As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases).
(e) | The proprietary model used to calculate fair value incorporates market heat rates, correlations and volatilities. As the market implied heat rate increases/(decreases), the fair value of purchased calls increases/(decreases). As the market implied heat rate increases/(decreases), the fair value of sold calls (decreases)/increases.
(f) | The model used to calculate fair value incorporates an assumption that the auctions will continue to fail. As the modeled forward rates of the SIFMA Index increase/(decrease), the fair value of the securities increases/(decreases).
Net gains and losses on assets and liabilities classified as Level 3 and included in earnings for the periods ended March 31 are reported in the Statements of Income as follows:
|  | Three Months
|  | Energy Commodities, net
|  | Wholesale Energy |  | Retail Energy |  | Fuel and Energy Purchases
|  | 2016 |  | 2015 |  | 2016 |  | 2015 |  | 2016 |  | 2015
Total gains (losses) included in earnings |  | $ | 41 |  |  | $ | 21 |  |  | $ | 18 |  |  | $ | (40 | ) |  | $ | 1 |  |  | $ | 2 |
Change in unrealized gains (losses) relating to positions still held at the reporting date |  | 13 |  |  | 25 |  |  | 7 |  |  | (9 | ) |  | (1 | ) |  | 1 |
Price Risk Management Assets/Liabilities - Energy Commodities 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 warrant 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 certain instances, these contracts may be valued using models, including standard option valuation models and other standard industry 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. When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3. Level 3 contracts are valued using Talen Energy's proprietary models which may include significant unobservable inputs such as delivery 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 forward transactions classified as Level 3, are analyzed by Talen Energy's Risk Management department. Accounting personnel 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 Talen Energy's own creditworthiness (for net liabilities) and its counterparties' creditworthiness (for net assets). Talen Energy's credit department assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment. In certain instances, energy commodity contracts are transferred 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.
• | The fair value measurements of investments in commingled equity funds are classified as Level 2. These fair value measurements are based on firm quotes of net asset values 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 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. Auction Rate Securities The fair value of auction rate securities is estimated using an income approach that includes readily observable 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 are estimated based on the SIFMA Index, creditworthiness, and liquidity assumptions driven by the impact of auction failures. The probability of realizing losses on these securities is not significant. When the present value of future interest payments is significant to the overall valuation, the auction rate securities are classified as Level 3. Auction rate securities are valued by the Treasury department. Accounting personnel interpret the analysis quarterly to classify the fair value measurements in the fair value hierarchy. Valuation techniques are evaluated periodically. 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 forth below. The fair value was primarily estimated using an income approach by discounting future cash flows at estimated current cost of funding rates, which incorporates the credit risk of Talen Energy Supply. Long-term debt is classified primarily as Level 2.
| March 31, 2016 |  | December 31, 2015
| Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Long-term debt | $ | 4,268 |  |  | $ | 3,808 |  |  | $ | 4,203 |  |  | $ | 3,343 |
The carrying value of revolver borrowings, when outstanding, and MACH Gen's Term Loan B approximates fair value due to the variable interest rates associated with the debt and are classified as Level 2. Credit Concentration Associated with Financial Instruments Contracts are entered into with many entities for the purchase and sale of energy. When NPNS is elected, the fair value of these contracts is not reflected in the financial statements. However, the fair value of these contracts is considered when committing to new business from a credit perspective. See Note 13 for information on credit procedures used to manage credit risk, including master netting arrangements and collateral requirements. At March 31, 2016, Talen Energy had credit exposure of $579 million from energy trading partners, excluding the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, Talen Energy's credit exposure was reduced to $400 million. The top ten counterparties, including their affiliates, accounted for $161 million, or 40%, of these exposures. Eight of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 86% of the top ten exposures. The remaining counterparty has not been rated by S&P or Moody's, but is current on its obligations.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=49121117&loc=d3e13433-108611 + Details
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