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Risk Management, Derivative Instruments and Hedging Activities | 6 Months Ended
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Jun. 30, 2025
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Risk Management, Derivative Instruments and Hedging Activities | 2. Risk Management, Derivative Instruments and Hedging Activities Risk Management Objectives We are exposed to risks arising from our business, including but not limited to market and commodity price risk, credit and liquidity risk, and interest rate risk. The hedging strategies deployed by our commercial and treasury organizations manage and (or) balance these risks within a structured risk management program in order to minimize near-term future cash flow volatility. Our risk management committee, comprised of certain senior management members across the organization, oversees the management of these risks in accordance with our risk policy. In turn, the risk management committee is overseen by the risk committee of the Board of Directors. The Board of Directors, including the risk committee, and management have established procedures to monitor, measure, and manage hedging activities and credit risk in accordance with the risk policy. Key risk control activities, which are designed to ensure compliance with the risk policy, include, among other activities, credit review and approval, validation of transactions and market prices, verification of risk and transaction limits, portfolio stress tests, analysis and monitoring of margin at risk, and daily portfolio reporting. Market and Commodity Price Risk. Volatility in the wholesale power markets provides uncertainty in the future earnings and cash flows of the business. The price risk Talen is exposed to includes the price variability associated with future sales and (or) purchases of power, natural gas, coal, uranium, oil products, environmental products, and other energy commodities in competitive wholesale markets. Several factors influence price volatility, including: (i) seasonal changes in demand; (ii) weather conditions; (iii) available regional load-serving supply; (iv) regional transportation and (or) transmission availability; (v) market liquidity; and (vi) federal, regional, and state regulations. Within the parameters of our risk policy, we generally utilize exchange-traded and over-the-counter traded derivative instruments and, in certain instances, structured products, to economically hedge the commodity price risk of the forecasted future sales and purchases of commodities associated with our generation portfolio. Open commodity purchase (sales) derivatives range in maturity through 2027. The net notional volumes of commodity derivatives were:
|  | June 30, 2025 (a) |  | December 31, 2024 (a)
Power (MWh) |  | (54,076,474) |  |  | (38,615,192) |
Natural gas (MMBtu) |  | 119,609,740 |  |  | 32,405,460 |
Emission allowances (tons) |  | — |  |  | 100,000 |
__________________ (a)The volumes may be different than the contractual volumes, as the probability that option contracts will be exercised is considered in the volumes displayed. Interest Rate Risk. Talen is exposed to interest rate risk from the possibility that changes in interest rates will affect future cash flows associated with existing floating rate debt issuances. To reduce interest rate risk, derivative instruments are utilized to economically hedge the interest rates for a predetermined contractual notional amount, which results in a cash settlement between counterparties. To the extent possible, first lien interest rate fixed-for-floating swaps are utilized to hedge this risk. Open interest rate derivatives mature in 2026 and 2029. The net notional volumes of open interest rate derivatives were:
|  | June 30, 2025 |  | December 31, 2024
Interest rate (in millions) |  | $ | 990 |  |  | $ | 290 |
Credit Risk. Credit risk, which is the risk of financial loss if a customer, counterparty, or financial institution is unable to perform or pay amounts due, is applicable to cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, and derivative instruments. The maximum amount of credit exposure associated with financial assets is equal to the carrying value of such assets. Credit risk, which cannot be completely eliminated, is managed through a number of practices such as ongoing reviews of counterparty creditworthiness, prepayment, inclusion of termination rights in contracts which are triggered by certain events of default, and executing master netting arrangements that permit amounts between parties to be offset. Additionally, credit enhancements such as cash deposits, LCs, and credit insurance may be employed to mitigate credit risk. Cash and cash equivalents are placed in depository accounts or high-quality, short-term investments with major international banks and financial institutions. Individual counterparty exposure from over-the-counter derivative instruments is managed within predetermined credit limits and includes the use of master netting arrangements and cash-call margins, when appropriate, to reduce credit risk. Exchange-traded commodity contracts, which are executed through futures commission merchants, have minimal credit risk because they are subject to mandatory margin requirements and are cleared with an exchange. However, Talen is exposed to the credit risk of the futures commission merchants arising from daily variation margin cash calls. Restricted cash and cash equivalents deposited to meet initial margin requirements are held by futures commission merchants in segregated accounts for the benefit of Talen. Outstanding accounts receivable include those from sales of capacity, generated electricity, and ancillary services through contracts directly with ISOs and RTOs and realized settlements of physical and financial derivative instruments with commodity marketers. Additionally, Talen carries accounts receivable due from joint owners for their portion of operating and capital costs for certain jointly owned facilities that are operated by the Company. The majority of outstanding receivables, which are continually monitored, have customary payment terms. The allowance for doubtful accounts was a non-material amount as of June 30, 2025 and December 31, 2024. As of June 30, 2025, Talen’s aggregate credit exposure, which excludes the effects of netting arrangements, cash collateral, LCs, and any allowances for doubtful collections, was $696 million and its credit exposure including such netting effects was $75 million. Excluding ISO and RTO counterparties, whose accounts receivable settlements and congestion products are subject to applicable market controls, the ten largest single net credit exposures account for 97% of Talen’s total net credit exposure, which are primarily with entities assigned investment grade credit ratings. Certain derivative instruments contain credit risk-related contingent features, which may require us to provide cash collateral, LCs, or guarantees from a creditworthy entity if the fair value of a liability eclipses a certain threshold or upon a decline in Talen’s credit rating. The fair values of derivative instruments in a net liability position, and that contain credit risk-related contingent features, were non-material as of June 30, 2025 and December 31, 2024. Derivative Instrument Presentation Balance Sheets Presentation. The fair value of derivative instruments presented within assets and liabilities on the Consolidated Balance Sheets were:
|  | June 30, 2025 |  | December 31, 2024
|  | Assets |  | Liabilities |  | Assets |  | Liabilities
Commodity contracts |  | $ | 78 |  |  | $ | 30 |  |  | $ | 65 |  |  | $ | — |
Interest rate contracts |  | 2 |  |  | 2 |  |  | 1 |  |  | — |
Total current derivative instruments |  | 80 |  |  | 32 |  |  | 66 |  |  | — |
Commodity contracts |  | — |  |  | 51 |  |  | 4 |  |  | 7 |
Interest rate contracts |  | — |  |  | 11 |  |  | 1 |  |  | — |
Total non-current derivative instruments |  | $ | — |  |  | $ | 62 |  |  | $ | 5 |  |  | $ | 7 |
All commodity and interest rate derivatives are economic hedges where the changes in fair value are presented immediately in income as unrealized gains and losses. Changes in the fair value and realized settlements on commodity derivative instruments are presented as separate components of “Energy and other revenues” and “Fuel and energy purchases” on the Consolidated Statements of Operations. See Note 11 for additional information on fair value. Changes in the fair value and realized settlements on interest rate derivative instruments are presented as “Interest expense and other finance charges” on the Consolidated Statements of Operations. Effect of Netting. Generally, the right of setoff within master netting arrangements permits the fair value of derivative assets to be offset with derivative liabilities. As an election, derivative assets and derivative liabilities are presented on the Consolidated Balance Sheets with the effect of such permitted netting as of June 30, 2025 and December 31, 2024. The net amounts of “Derivative instruments” presented as assets and liabilities on the Consolidated Balance Sheets considering the effect of permitted netting and where cash collateral is pledged in accordance with the underlying agreement were:
|  | Gross Derivative Instruments |  | Eligible for Offset |  |  |  | Net Derivative Instruments |  | Collateral (Posted) Received |  | Net Amounts
June 30, 2025 |  |  |  |  |  |  |  |  |  |  |  |
Assets |  | $ | 469 |  |  | $ | (381) |  |  |  |  | $ | 88 |  |  | $ | (8) |  |  | $ | 80 |
Liabilities |  | 552 |  |  | (381) |  |  |  |  | 171 |  |  | (77) |  |  | 94 |
December 31, 2024 |  |  |  |  |  |  |  |  |  |  |  |
Assets |  | $ | 227 |  |  | $ | (154) |  |  |  |  | $ | 73 |  |  | $ | (2) |  |  | $ | 71 |
Liabilities |  | 173 |  |  | (154) |  |  |  |  | 19 |  |  | (12) |  |  | 7 |
Statements of Operations Presentation. The location and pre-tax effect of “Derivative instruments” presented on the Consolidated Statements of Operations for the periods were:
|  | Three Months Ended June 30, |  | Six Months Ended June 30, |  |  |
|  | 2025 |  | 2024 |  | 2025 |  | 2024 |  |  |  |  |
Realized gain (loss) on commodity contracts |  |  |  |  |  |  |  |  |  |  |  |  |
Energy revenues (a) |  | $ | 43 |  |  | $ | 38 |  |  | $ | 16 |  |  | $ | 196 |  |  |  |  |  |
Fuel and energy purchases (a) |  | (5) |  |  | (8) |  |  | 19 |  |  | (7) |  |  |  |  |  |
Unrealized gain (loss) on commodity contracts |  |  |  |  |  |  |  |  |  |  |  |  |
Operating revenues (b) |  | 176 |  |  | 76 |  |  | (65) |  |  | (32) |  |  |  |  |  |
Energy expenses (b) |  | (84) |  |  | 15 |  |  | (25) |  |  | (12) |  |  |  |  |  |
Realized and unrealized gain (loss) on interest rate contracts |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense and other finance charges |  | — |  |  | 1 |  |  | (13) |  |  | 9 |  |  |  |  |  |
__________________ (a)Does not include those derivative instruments that settle through physical delivery. (b)Presented as “Unrealized gain (loss) on derivative instruments” on the Consolidated Statements of Operations.

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