Talen Energy gets ready for final creation and stock market float

Talen Energy is moving into the final days before the transactions that will create it as a major new independent power producer will close, and it will be floated in an IPO on the New York Stock Exchange under the trading symbol “TLN.”

Said a May 1 company filing with the SEC: “This prospectus is being furnished in connection with the planned distribution by PPL Corporation (‘PPL’) on a pro rata basis to its shareholders of all the shares of common stock of its wholly owned subsidiary Talen Energy Holdings, Inc. (‘HoldCo’) outstanding prior to the Merger described below. HoldCo will own and operate PPL Energy Supply, LLC (‘Energy Supply’) and, immediately prior to the Merger described below, will own 100% of the common stock of Talen Energy Corporation (‘Talen Energy’). We refer to such planned distribution as the ‘Distribution’ or ‘spinoff.’

“Immediately following the Distribution and at the Effective Time (as defined below), a wholly owned subsidiary of Talen Energy will be merged with and into HoldCo, with HoldCo continuing as the surviving company and as a wholly owned subsidiary of Talen Energy (the ‘Merger’), and each share of HoldCo common stock distributed to PPL shareholders and outstanding immediately prior to the Effective Time will be automatically converted into one share of Talen Energy common stock. Substantially contemporaneous with the Merger, the competitive power generation business owned by RJS Generation Holdings LLC (‘RJS Power’) and its subsidiaries (the ‘RJS Power business’) will be contributed by its owners to Talen Energy through the contribution, directly or indirectly, of all of the equity interests of RJS Power, in exchange for shares of Talen Energy common stock (such contribution referred to herein as the ‘Combination’).

“Each share of PPL common stock outstanding as of 5:00 p.m. New York City time on May 20, 2015, the record date for the Distribution (the ‘record date’), will entitle its holder to receive a number of shares of HoldCo common stock determined by a formula described in this prospectus. We expect the distribution ratio of the HoldCo common stock to be approximately 0.125 shares of HoldCo common stock per share of PPL common stock. Upon the immediate conversion of HoldCo common stock into Talen Energy common stock as described above, the PPL shareholders will receive their shares of Talen Energy common stock in book-entry form.

“As a result of the Combination, Raven Power Holdings LLC (‘Raven’), C/R Energy Jade, LLC (‘Jade’) and Sapphire Power Holdings LLC (‘Sapphire’) or a special purpose entity wholly owned by Raven, Jade and Sapphire and controlled by Raven (the ‘RJS SPE”’ will receive in a private placement transaction a number of shares of Talen Energy common stock that will result in PPL’s shareholders owning 65% of Talen Energy’s outstanding shares of common stock and Raven, Jade and Sapphire, collectively, or the RJS SPE, as applicable (the ‘Contributors’) owning the remaining 35% immediately following the Combination. We expect that the Distribution, the Merger and the Combination will be tax-free to PPL’s shareholders for U.S. federal income tax purposes, except for gain or loss attributable to cash received in lieu of fractional shares of Talen Energy in the Merger. Immediately after the Distribution and the Combination, Talen Energy will be an independent, publicly traded company that will own and operate the combined businesses of Energy Supply and RJS Power. Except for the provision of certain transition services, PPL will have no continuing involvement in Talen Energy or its businesses.”

Talen to have 14,000 MW of power, mostly in PJM and ERCOT

Upon completion of these transactions, Talen Energy Corp. will be one of the largest competitive energy and power generation companies in North America. Its primary business will be the production and sale of electricity, capacity and related products from our fleet of power plants totaling approximately 14,000 MW of capacity. It will own and operate a portfolio of generation assets principally located in the PJM Interconnection and Electric Reliability Council of Texas (ERCOT) regions, which it considers to be two of the most attractive power markets in the United States. Within these markets, its portfolio is expected to benefit from technological and fuel diversity, enabling it to respond to changing market conditions and regulatory developments.

The PJM capacity market, known as the Reliability Pricing Model (RPM), is intended to ensure that resources are available when needed to keep the power grid operating reliably for customers. Under the RPM, PJM conducts a series of auctions. Most capacity is procured in the base residual auctions each May for the sale of generating capacity three years in advance of the delivery year. In these auctions, prices are set based on available capacity and other factors such as transmission constraints. The capacity market construct provides generation owners the opportunity for some revenue visibility on a multi-year basis. Talen said that recent developments have the potential to be supportive of future revenue opportunities for generation owners in PJM, including:

  • PJM’s proposal to add an enhanced “Capacity Performance” product to the capacity market structure to permit additional compensation for generation owners/operators to make the necessary investments to maintain system reliability in exchange for stronger performance requirements. The intent of the Capacity Performance product is to improve operational availability during periods of peak power system demand, such as extreme weather. Specifically, PJM’s stated objectives of this product include fuel security through dependable fuel sources, high availability of generation resources and operational diversity. If approved by the FERC, Capacity Performance is expected to benefit generation owners like Talen Energy that will own assets supplied by firm fuel commitments and have demonstrated reliability during peak load and extreme weather conditions;
  • PJM’s recent changes to the “Variable Resource Requirement” (VRR) curve. The VRR curve is a downward-sloping demand curve used by PJM to model sufficient capacity resources for PJM and set capacity prices. The VRR curve supports PJM’s objective of attracting and retaining adequate capacity resources to ensure grid reliability, providing an indication of incremental reliability and economic value of capacity at different planning reserve levels. PJM’s recent changes include a shift in the VRR curve, which signifies an increase in demand and therefore price, offering potential upside to future capacity prices for PJM generators;
  • Recent developments that increase uncertainty associated with demand response’s ability to participate in future capacity auctions, offering potential upside to future capacity prices for PJM generators; and
  • Potential rule changes affecting price formation including offer cap changes which may lead to higher energy market prices.

The company’s power plants in PJM will include PPL’s big Brunner Island and Montour coal plants, plus shares in the big Keystone and Conemaugh coal plants, all in Pennsylvania.

The company said it believes the ERCOT market resents attractive value opportunities, driven by robust demand growth and limited import capacity, which it expects will result in a lower reserve margin. Its generation assets in ERCOT (Laredo, Neuces Bay and Barney Davis plants) consist of flexible, natural gas-fired units that have the ability to start up quickly and respond to load variability, which positions them well to produce significant margin from ancillary products offered in this market in addition to physical energy sales. All of its ERCOT capacity is located in the ERCOT South Zone, which has historically experienced premium pricing due to favorable supply and demand fundamentals and strong demand driven by growth related to Eagle Ford shale development, the midstream energy sector and petrochemical industry expansion.

The ERCOT regulatory framework has addressed resource adequacy concerns through rule changes that have increased generator compensation and pricing floors for ancillary products and increased the state-wide offer cap. ERCOT reserve margins are forecasted to continue to compress due to growing demand and limited announced new-build projects, further tightening the supply/demand balance across ERCOT and creating conditions that may generate increased price volatility and higher energy prices until additional resources are added.

The prospectus noted PPL Energy Supply is also presently considering divesting its renewables plants, which collectively represent approximately 25 MW of generating capacity (summer rating) and are located in various states in the eastern United States. The renewables plants represented an average of less than 2% of each of PPL Energy Supply’s income from continuing operations and total assets over the five-year period ended Dec. 31, 2014.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.