We Generate Energy for a Brighter Tomorrow Talen Energy Third Quarter Update November 10, 2016
Forward-Looking Information Statement Statements contained in this presentation, including statements with respect to future earnings, EBITDA, Adjusted EBITDA or Adjusted Free Cash Flow results, cash flows, tax attributes, financing, regulation, closing of the Merger, and the completion of the Brunner Island dual-fuel project are "forward-looking statements" within the meaning of the federal securities laws. These statements often include such words as "believe," "expect," "anticipate," "intend," "plan," "estimate," "target," "project," "forecast," "seek," "will," "may," "should," "could," "would" or similar expressions. Although Talen Energy believes that the expectations and assumptions reflected in these forward-looking statements are reasonable, these statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results discussed in the statements. Among the important factors that could cause actual results to differ materially from the forward-looking statements are: failure to complete the Merger, as a result of the failure to obtain regulatory approvals or otherwise; the payment by Talen Energy of a termination fee if the Merger Agreement is terminated in certain circumstances; the loss of key customers and suppliers resulting from any uncertainties associated with the Merger; the negative impact on Talen Energy's business and the market price for Talen Energy's common stock should the Merger not be consummated; adverse economic conditions; changes in commodity prices and related costs; the effectiveness of Talen Energy's risk management techniques, including hedging; accounting interpretations and requirements that may impact reported results; operational, price and credit risks in the wholesale and retail electricity markets; Talen Energy's ability to forecast the actual load needed to perform full-requirements sales contracts; weather conditions affecting generation, customer energy use and operating costs and revenues; disruptions in fuel supply; circumstances that may impact the levels of coal inventory that are held; the performance of transmission facilities and any changes in the structure and operation of, or the pricing limitations imposed by, the RTOs and ISOs that operate those facilities; blackouts due to disruptions in neighboring interconnected systems; competition; federal and state legislation and regulation; costs of complying with environmental and related worker health and safety laws and regulations; the impacts of climate change; the availability and cost of emission allowances; changes in legislative and regulatory policy; security and safety risks associated with nuclear generation; Talen Energy's level of indebtedness; the terms and conditions of debt instruments that may restrict Talen Energy's ability to operate its business; the performance of Talen Energy's subsidiaries and affiliates, on which its cash flow and ability to meet its debt obligations largely depend; the risks inherent with variable rate indebtedness; disruption in financial markets; Talen Energy's ability to access capital markets; acquisition or divestiture activities, and Talen Energy's ability to realize expected synergies and other benefits from such business transactions, including in connection with the completed MACH Gen acquisition; changes in technology; any failure of Talen Energy's facilities to operate as planned, including in connection with scheduled and unscheduled outages; Talen Energy's ability to optimize its competitive power generation operations and the costs associated with any capital expenditures, including the Brunner Island dual-fuel project; significant increases in operation and maintenance expenses; the loss of key personnel, the ability to hire and retain qualified employees and the impact of collective labor bargaining negotiations; war, armed conflicts or terrorist attacks, including cyber-based attacks; risks associated with federal and state tax laws and regulations; any determination that the transaction that formed Talen Energy does not qualify as a tax-free distribution under the Internal Revenue Code; Talen Energy's ability to successfully integrate the RJS Power businesses and to achieve anticipated synergies and cost savings as a result of the spinoff transaction and combination with RJS Power; costs of complying with reporting requirements as a newly public company and any related risks of deficiencies in disclosure controls and internal control over financial reporting as a standalone entity; and the ability of affiliates of Riverstone, to exercise influence over matters requiring Board of Directors and/or stockholder approval. Any such forward-looking statements should be considered in light of such important factors and in conjunction with Talen Energy's Form 10-K for the year ended December 31, 2015, its quarterly reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016 and its other reports on file with the SEC. Talen Energy Corporation 2016 2
Third Quarter Highlights Highlights Q3 results in line with expectations - Lower margins due to lost energy and capacity revenues from assets sold in 2016 and lower energy and capacity prices, partially offset by margins from MACH Gen assets acquired in November 2015 and reduced O&M spending Strong performance through the first nine months of 2016 drives updated guidance ranges Adjusted EBITDA midpoint maintained and range narrowed Adjusted Free Cash Flow increased and narrowed due to additional tax benefits, updated working capital assumptions and lower capex Merger transaction remains on schedule - Stockholder approval received October 6 th - Term Loan B facility priced; satisfies provisions for new debt issuance set forth in Merger Agreement - FERC and NYPSC approvals received; NRC review proceeding as planned - Transaction expected to be completed by the end of 2016 Third Quarter Results ($ in millions) Net Income/(Loss) ($401) Adjusted EBITDA Narrowed 2016 Guidance Ranges ($ in millions) $855 Q315 Q316 YTD15 YTD16 $236 $88 $357 $247 $765 $614 Q315 Q316 YTD15 YTD16 $805 $655 $705 2016 Adjusted EBITDA Updated 2016 Adjusted EBITDA ($279) $460 $260 2016 Adjusted FCF $600 $500 Updated 2016 Adjusted FCF Note: Refer to Supplemental Information Regulation G Reconciliations for reconciliation of non-gaap financial measures Talen Energy Corporation 2016 3
Third Quarter Financial Review Adjusted EBITDA Walk Q3 2015 to Q3 2016 ($ in millions) $357 ($127) $17 ($3) $3 $247 Q3 2015 Adjusted EBITDA Margins O&M Taxes, OTI Other Q3 2016 Adjusted EBITDA Adjusted EBITDA Highlights Margins: + Addition of MACH Gen assets acquired in November 2015 - Lost margins from asset divestitures - Lower capacity prices - Lower realized energy prices and spark spreads O&M: + Lower non-outage costs at Susquehanna plant + Operating costs of assets sold in 2016 + Optimization and efficiency initiatives Operating costs of assets acquired in 2015 Q3 Results by Segment ($ in millions) Operating Income Adjusted EBITDA Q3 2015 Q3 2016 Q3 2015 Q3 2016 East ($345) $221 $331 $250 West 39 16 49 21 Other (40) (44) (23) (24) Total ($346) $193 $357 $247 Note: Refer to Supplemental Information Regulation G Reconciliations for reconciliation of non-gaap financial measures Talen Energy Corporation 2016 4
Third Quarter Operational Review Net Generation (GWh) Equivalent Forced Outage Factor (EFOF) 6,273 5,984 4,559 4,737 4,982 4,946 183 2,578 1,203 1,027 1,013 3% 11% 0% 0% 1% 10% 0% 3% 4% 7% 7% Gas/Oil - East Nuclear Coal - PJM Hydro Gas - West Coal - MT (1) (1) Gas/Oil - East Nuclear Coal - PJM Hydro Gas - West Coal - MT Q3 2015 Q3 2016 Q3 2015 Q3 2016 Equivalent Availability Factor (EAF) (2) Safety - TCIR (3) 90% 81% 100% 100% 92% 84% 97% 96% 94% 93% 93% BLS Utility Average 2.4 (4) 2.1 1.5 Gas/Oil - East Nuclear Coal - PJM Hydro Gas - West Coal - MT (1) Q3 2015 Q3 2016 Q3 2015 Q3 2016 Note: 2015 metrics exclude MACH Gen asset results (acquired in November 2015) (1) Talen Energy s hydro assets were sold on April 1, 2016, therefore no comparable data exists for Q3 2016 (2) EAF reflects planned, maintenance and forced outages (3) TCIR Total Case Incidence Rate using OSHA measurement standards (4) Based upon 2014 Bureau of Labor Statistics (BLS) average incident rate for the utilities sector (NAICS 221) Talen Energy Corporation 2016 5
Transaction Update Key Regulatory Approvals: Hart-Scott-Rodino On June 24, 2016, the Antitrust Division of the US Department of Justice and the Federal Trade Commission granted early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended New York Public Service Commission (NYPSC) Declaratory ruling citing no further review of the transaction issued and effective on September 19, 2016 Federal Energy Regulatory Commission (FERC) Order approving the transaction with no substantive conditions issued on October 19, 2016 Nuclear Regulatory Commission (NRC) Application filed on June 29, 2016; approval expected by year end Stockholder Approval: Stockholders of record at the close of business on September 1, 2016 were entitled to vote Approval received following voting results from October 6, 2016 special stockholder meeting Talen Energy expects transaction to be completed by the end of 2016 Talen Energy Corporation 2016 6
Supplemental Information Talen Energy Corporation 2016 7
Comparative Operational Statistics Quarter-to-date Net Generation (GWh) Capacity Factor Availability (EAF) EFOF Q3 2015 Q3 2016 Q3 2015 Q3 2016 Q3 2015 Q3 2016 Q3 2015 Q3 2016 East: Natural Gas/Oil 4,965 4,737 48.4% 45.9% 93.7% 81.5% 3.1% 11.4% Nuclear 4,982 4,946 100.5% 99.8% 99.7% 99.5% 0.0% 0.2% Coal - PJM 6,146 5,984 49.3% 48.1% 92.2% 83.8% 0.9% 9.8% Year-to-date (1) (2) West: Natural Gas 2,208 2,578 33.2% 37.8% 86.7% 94.3% 7.4% 4.0% Coal - Montana 1,027 1,013 87.9% 86.7% 92.7% 93.3% 7.1% 6.5% TOTAL GENERATION 19,328 19,258 54.7% 54.2% 92.7% 87.5% 2.8% 7.8% Net Generation (GWh) Capacity Factor (1) Availability (EAF) (2) EFOF YTD 2015 YTD 2016 YTD 2015 YTD 2016 YTD 2015 YTD 2016 YTD 2015 YTD 2016 East: Natural Gas/Oil 12,128 13,005 38.9% 41.2% 87.5% 84.5% 2.8% 6.0% Nuclear 13,690 12,558 93.1% 85.1% 91.2% 84.6% 0.0% 0.8% Coal - PJM 18,073 13,459 49.3% 36.3% 86.8% 79.3% 2.0% 6.7% West: Natural Gas 3,893 5,224 20.0% 26.0% 79.0% 86.2% 12.6% 2.1% Coal - Montana 2,617 2,235 75.5% 64.3% 86.7% 80.5% 6.1% 9.2% TOTAL GENERATION 50,401 46,481 48.1% 43.7% 86.2% 82.9% 4.0% 4.9% Statistics shown here reflect Talen Energy s current portfolio of assets for comparative and modeling purposes. Statistics for assets no longer owned by Talen Energy are excluded from current and prior year. Statistics for assets acquired during 2015 (RJS and MACH Gen assets) are included for all periods of 2015 for a full, relative comparison. (1) EAF Equivalent Availability Factor, which reflects planned, maintenance and forced outages (2) EFOF Equivalent Forced Outage Factor Talen Energy Corporation 2016 8
Hedging & Commercial Management Hedge Position for Expected Generation Nuclear and Coal Fuel Hedge Position 102% 85% 99% 80% 96% 77% 51% 55% 100% 100% 100% 100% 83% 71% 6% 12% 2016 2017 East Nuclear & Coal (1) (2) East Gas/Oil West Coal West Gas Total Portfolio Margin Sensitivities ($ millions) 2016 $14 $17 Gas +/- $0.50/mmBtu $29 ($0) ($9) ($15) (3) Heat Rate +/- 1.0 mmbtu/mwh $110 ($88) 2017 $136 ($103) Power +/- $5/MWh $222 ($169) 2016 2017 Nuclear East Coal West Coal Average Hedge Prices 2016 2017 East Segment: PJM Power: Nuclear & Coal ($/MWh) $40-41 $38-40 PJM Consumed Coal (Delivered $/ton) $67-68 $67-68 (1) Spark Spread ($/MWh) $11-12 $14-16 West Segment: MT Power: Coal ($/MWh) $34-35 $36-38 MT Consumed Coal (Delivered $/ton) $25-28 $27-31 (2) Spark Spread ($/MWh) $22-23 $24-26 Notes: As of September 30, 2016. Hedge detail and sensitivities exclude assets sold in conjunction with FERC mitigation (Ironwood, East hydro and C.P. Crane) (1) 2016 excludes generation from Sapphire portfolio and out of the money heat rate call options related to the Sapphire portfolio that were included in the RJS Power acquisition and expire by the end of 2016 (2) Excludes Harquahala (3) Gas price sensitivity assumes system heat rate is unchanged. Heat Rate sensitivity assumes power prices move and gas price is unchanged. Power price sensitivity assumes gas price is unchanged Talen Energy Corporation 2016 9
Liquidity Available Liquidity ($ millions) Liquidity Sources 6/30/2016 9/30/2016 (1) Cash $ 1,144 $ 1,404 Liquidity facility arrangements 3,810 3,810 Total Liquidity $ 4,954 $ 5,214 Less: Current liquidity facility usage 748 704 Total Available Liquidity $ 4,206 $ 4,510 Liquidity Facility Arrangements ($ millions) As of September 30, 2016 (2) Expiration Outstanding LCs / Total Cash / Facility Date Capacity Lien-Based Borrowed Unused Capacity (1) Cash $ 1,404 - - $ 1,404 (3) CDS Backed Jun-17 500 - - 500 New MACH Gen Revolver Jul-21 160 $ 32 $ 105 23 (4) Secured Trading Dec-20 1,300 22-1,278 Talen Revolver Jun-20 1,850 195 350 1,305 Total $ 5,214 $ 249 $ 455 $ 4,510 (1) Total cash & cash equivalents including restricted cash used in collateral postings of $46 million at September 30, 2016 and $53 million at June 30, 2016 (2) Letters of Credit (3) Facility allows Talen Energy Supply to request up to $500 million of committed unsecured letter of credit capacity at fees to be agreed upon at the time of each request, based on certain market conditions (4) Facility allows Talen Energy Supply to receive credit to satisfy collateral posting obligations related to Talen Energy s energy marketing and trading activities Talen Energy Corporation 2016 10
Long-term Debt Maturities ($ in millions) Talen Energy Supply, LLC 2016 2017 2018 2019 2020 & Beyond Total 2021 Senior Notes: Maturity (yr) Talen ES 6.50% 2018 $ - $ - $ 400 $ - $ - $ - $ 400 Talen ES 4.625% 2019 - - - 1,220 - - 1,220 Talen ES 4.60% 2021 - - - - - 712 712 Talen ES 6.50% 2025 - - - - - 600 600 Talen ES 6.00% 2036 - - - - - 200 200 Total Senior Notes $ - $ - $ 400 $ 1,220 $ - $ 1,512 $ 3,132 Municipal Bonds: Maturity (yr) Talen ES 6.40% Series A 2038 - - - - - 100 100 (1) Talen ES 5.00% Series B 2038 - - - - 50-50 (1) Talen ES 5.00% Series C 2037 - - - - 81-81 Total Municipal Bonds $ - $ - $ - $ - $ 131 $ 100 $ 231 - New MACH Gen, LLC Maturity (yr) (2) Term Loan B 2022 1 5 24 24 48 368 470 Total Maturities $ 1 $ 5 $ 424 $ 1,244 $ 179 $ 1,980 $ 3,833 Note: As of September 30, 2016 (1) Bonds are subject to mandatory repurchase and optional remarketing in 2020 (2) Annual interest rate is equivalent to 12-month LIBOR plus 5.50%. Maturities reflect principal amortization Talen Energy Corporation 2016 11
Talen Energy Corporate Structure Talen Energy Corporation (NYSE: TLN) Talen Energy Holdings, Inc. $1,850mm Talen Energy Supply Revolver (1) Talen Energy Supply, LLC (2) $3,363mm Senior Unsecured Notes Legacy Energy Supply Subs RJS Subs MACH Gen LLC (3) $160mm New MACH Gen Revolver $470mm New MACH Gen Term Loan B (3) As of September 30, 2016 (in millions) (1) Revolver capacity will be reduced to $1.4 billion upon closing of the proposed merger with an affiliate of Riverstone. (2) In October 2016, Talen Energy Supply received commitments from lenders for a $600 million Senior Secured Term Loan B in connection with the merger. The Term Loan B will be secured by the same collateral securing, and will be guaranteed by the same direct and indirect wholly owned subsidiaries of Talen Energy Supply that are guarantors of the revolving credit facility. The closing of the Term Loan B is subject to customary closing conditions and the closing of the merger (3) Debt is non-recourse to Talen Energy entities other than the MACH Gen entities First Lien New MACH Gen Term Loan B $ 470 Senior Unsecured Talen Energy Supply Notes 3,363 Total Long-Term Debt $ 3,833 Talen Energy Corporation 2016 12
Talen Energy Asset Overview Asset Location Fuel Type Ownership Net Heat Rate (Btu / kwh) Owned Capacity(1) COD Region East Assets Nuclear & Coal Susquehanna PA Nuclear 90% N/A 2,252 1983-1985 PJM-MAAC Brandon Shores MD Coal 100% 10,252 1,279 1984-1991 PJM-SWMAAC Brunner Island PA Coal 100% 9,842 1,426 1961-1969 PJM-MAAC Conemaugh PA Coal 16% 9,700 280 1970-1971 PJM-MAAC Keystone PA Coal 12% 9,600 212 1967-1968 PJM-MAAC Montour PA Coal 100% 9,661 1,524 1972-1973 PJM-MAAC H.A. Wagner MD Coal/NG/Oil 100% 10,663 967 1956-1972 PJM-SWMAAC Natural Gas / Oil Athens NY Natural Gas 100% 7,100 981 2004 NYISO Bayonne NJ Natural Gas/Oil 100% 8,857 163 1988 PJM-PS North Camden NJ Natural Gas/Oil 100% 8,675 145 1993 PJM-PSEG Dartmouth MA Natural Gas/Oil 100% 8,715 (CCGT) / 11,326 (Peaker) 83 1996 ISO-NE Elmwood Park NJ Natural Gas/Oil 100% 9,500 70 1989 PJM-PS North Lower Mt. Bethel PA Natural Gas 100% 7,170 553 2004 PJM-MAAC Martins Creek 3&4 PA Natural Gas/Oil 100% 11,744 (Gas) / 10,676 (Oil) 1,716 1975-1977 PJM-MAAC Millennium MA Natural Gas 100% 6,975 342 2001 ISO-NE Newark Bay NJ Natural Gas/Oil 100% 8,680 122 1993 PJM-PS North Pennsylvania Peakers PA Natural Gas/Oil 100% Various 358 1967-1973 PJM-MAAC Pedricktown NJ Natural Gas/Oil 100% 8,455 116 1992 PJM-EMAAC York PA Natural Gas 100% 9,551 47 1989 PJM-MAAC Renewables Renewables PA Renewable 100% Various 7 Various PJM-MAAC East Subtotal 12,644 Natural Gas / Oil West Assets Barney Davis 1 TX Natural Gas 100% 10,100 328 1974 ERCOT-South Barney Davis 2 TX Natural Gas 100% 7,100 634 2010 ERCOT-South Laredo 4 TX Natural Gas 100% 8,900 99 2008 ERCOT-South Laredo 5 TX Natural Gas 100% 8,900 90 2008 ERCOT-South Harquahala AZ Natural Gas 100% 7,100 1,040 2004 WECC Nueces Bay 7 TX Natural Gas 100% 7,100 659 2010 ERCOT-South Coal Colstrip 1 & 2 MT Coal 50% 10,941 307 1975, 1976 WECC Colstrip 3 MT Coal 30% 10,660 222 1984, 1986 WECC West Subtotal 3,379 Total Talen Energy 16,023 (1) Based upon 2016 summer capacity testing Talen Energy Corporation 2016 13
Regulation G Reconciliations Quarter-to-date Adjusted EBITDA Three Months Ended September 30, ($ in millions) 2016 2015 East West Other Total East West Other Total Net income (loss) $ 88 $ (401) Interest expense 60 55 Income taxes 54 1 Other (income) expense - net (9) (1) Operating income (loss) $ 221 $ 16 $ (44) $ 193 $ (345) $ 39 $ (40) $ (346) Depreciation 97 12 3 112 84 10 1 95 Other income (expense) - net 9 9 1 1 EBITDA $ 327 $ 28 $ (41) $ 314 $ (260) $ 49 $ (39) $ (250) Margins: Unrealized (gain) loss on derivative contracts (a) (85) (9) (94) (50) (50) Coal contract adjustment (d) 41 41 Other (e) 5 5 5 5 Operation and maintenance: Stock-based compensation expense (f) 2 2 1 1 ARO accretion, net 10 1 11 8 8 Impairments (g) 1 1 588 588 TSA costs 8 8 14 14 Separation benefits 3 3 Transaction and restructuring costs (i) 4 4 1 1 Other income (expense): (Gain) loss from NDT funds (7) (7) (1) (1) Adjusted EBITDA $ 250 $ 21 $ (24) $ 247 $ 331 $ 49 $ (23) $ 357 Note: Please refer to Regulation G Reconciliation footnotes for year-to-date Adjusted EBITDA on slide 16 Talen Energy Corporation 2016 14
Regulation G Reconciliations Year-to-date Adjusted EBITDA Nine Months Ended September 30, ($ in millions) 2016 2015 East West Other Total East West Other Total Net income (loss) $ 236 $ (279) Interest expense 180 146 Income taxes 157 11 Other (income) expense - net (21) (11) Operating income (loss) $ 765 $ (64) $ (149) $ 552 $ 33 $ 18 $ (184) $ (133) Depreciation 289 36 5 330 243 14 2 259 Other income (expense) - net 18 3 21 12 (1) 11 EBITDA $ 1,072 $ (28) $ (141) $ 903 $ 288 $ 32 $ (183) $ 137 Margins: Unrealized (gain) loss on derivative contracts (a) (29) 3 (26) (120) 17 (103) Terminated derivative contracts (b) (13) (13) Revenue adjustment (c) 7 7 Coal contract adjustment (d) 41 41 Other (e) 10 10 9 9 Operation and maintenance: Stock-based compensation expense (f) 10 10 41 41 ARO accretion, net 25 2 27 25 25 Impairments (g) 204 10 214 591 591 (Gain) loss on dispositions (j) (563) (563) TSA costs 32 32 19 19 Separation benefits 12 12 2 2 Corette closure costs (h) 4 4 Transaction and restructuring costs (i) 19 19 16 16 Legal contingency (k) 4 4 Other (8) (8) Other income (expense): (Gain) loss from NDT funds (20) (20) (11) (11) Adjusted EBITDA $ 691 $ (9) $ (68) $ 614 $ 817 $ 53 $ (105) $ 765 Note: Please refer to Regulation G Reconciliation footnotes for year-to-date Adjusted EBITDA on slide 16 Talen Energy Corporation 2016 15
Regulation G Reconciliations Adjusted EBITDA Footnotes (a) Represents unrealized gains (losses) on derivatives. Amounts have been adjusted for option premiums of $3 million and $5 million for the three months ended September 30, 2016 and 2015, and $8 million and $14 million for the nine months ended September 30, 2016 and 2015. (b) (c) (d) (e) (f) (g) Represents net realized gains on certain derivative contracts that were terminated due to the spinoff transaction. Related to a prior period revenue adjustment for the receipt of revenue under a transmission operating agreement with Talen Energy Supply's former affiliate, PPL Electric Utilities Corporation. To mitigate the risk of oversupply, Talen Energy incurred pre-tax charges for the three and nine months ended September 30, 2015 to reduce its contracted coal deliveries. Includes OCI amortization on non-active derivative positions. For the periods prior to June 2015, represents the portion of PPL's stock-based compensation cost allocable to Talen Energy. 2016 includes charges for the Bell Bend Combined Operating License Application and Harquahala plant impairments. 2015 includes charges for goodwill and certain long lived assets. (h) Operations were suspended and the Corette plant was retired in March 2015. (i) (j) (k) Costs related to the spinoff transaction, including expenses associated with FERC-required mitigation and legal and professional fees. Also includes transaction costs related to the proposed merger transaction with Riverstone affiliates that was announced in June 2016. Relates to Ironwood, Holtwood, Lake Wallenpaupack and C.P. Crane sales. Contingency relates to the termination of a gas supply contract. Talen Energy Corporation 2016 16
Regulation G Reconciliations Year-to-Date Adjusted Free Cash Flow ($ in millions) Nine Months Ended September 30, 2016 2015 Cash from Operations $ 549 $ 731 Capital Expenditures, excluding growth (a) (303) (282) Counterparty collateral paid (received) 27 (76) Adjusted Free Cash Flow, including other adjustments 273 373 Cash adjustments: Transition Services Agreement costs 32 19 Coal contract adjustment (b) 41 Legal settlement (c) 3 Separation benefits 12 2 Corette closure costs (d) 4 Transaction and restructuring costs (e) 32 15 Taxes on above adjustments (f) (32 ) (33) Taxes on mitigated asset sales (g) 203 Adjusted Free Cash Flow $ 523 $ 421 (a) (b) (c) Includes expenditures related to intangible assets. To mitigate the risk of oversupply, Talen Energy incurred pre-tax charges for the nine months ended September 30, 2015 to reduce its contracted coal deliveries. Contingency relates to the termination of a gas supply contract. (d) Operations were suspended and the Corette plant was retired in March 2015. (e) Costs related to the spinoff transaction, including FERC-required mitigation plan expenses and legal and professional fees. Also includes transaction costs related to the proposed merger transaction with Riverstone affiliates that was announced in June 2016. (f) Assumed a marginal tax rate of 40%. (g) Federal taxes paid on gains associated with mitigated asset sales Talen Energy Corporation 2016 17
Regulation G Reconciliations Adjusted EBITDA Forecast ($ in millions) Low - 2016E Midpoint - 2016E High - 2016E Net Income (Loss) $ 179 $ 209 $ 239 Income Taxes 117 137 157 Interest Expense 240 240 240 Depreciation and Amortization 442 442 442 EBITDA 978 1,028 1,078 Stock-based compensation 12 12 12 Asset retirement obligation, net 37 37 37 Unrealized (gains) losses on derivative contracts (a) (26) (26) (26) Nuclear decommissioning trust losses (gains) (23) (23) (23) (Gain) loss on dispositions (b) (563) (563) (563) Impairments (c) 214 214 214 Transition Services Agreement costs and other adjustments (d) 76 76 76 Adjusted EBITDA $ 705 $ 755 $ 805 (a) (b) (c) (d) Represents unrealized (gains) losses on derivatives. Amounts have been adjusted for option premiums. Relates to Ironwood, Holtwood, Lake Wallenpaupack and C.P. Crane sales. Relates to Bell Bend Combined Operating License Application costs and Harquahala plant impairments. Other includes: (i) costs related to the spinoff transaction, including FERC-required mitigation plan expenses and legal and professional fees; (ii) separation benefits related to workforce reductions; and (iii) costs related to the proposed merger transaction with Riverstone affiliates that was announced in June 2016. Talen Energy Corporation 2016 18
Regulation G Reconciliations Adjusted Free Cash Flow Forecast ($ in millions) Low - 2016E Midpoint - 2016E High - 2016E Cash from Operations (a) $ 582 $ 622 $ 662 Capital Expenditures, excluding growth (b)... (437) (427) (417) Counterparty collateral paid (received)... 27 27 27 Transition Services Agreement costs... 40 40 40 Legal contingency (c)... 3 3 3 Separation benefits... 12 12 12 Transaction and restructuring costs (d)... 42 42 42 Taxes on above adjustments (e)... (39) (39) (39) Taxes on mitigated asset sales (f)... 270 270 270 Adjusted Free Cash Flow $ 500 $ 550 $ 600 (a) (b) (c) (d) Includes taxes paid on gains generated from the mitigated asset sales. Includes expenditures related to intangible assets. Contingency relates to the termination of a gas supply contract. Costs related to the spinoff transaction, including FERC-required mitigation plan expenses and legal and professional fees. Also includes costs related to the proposed merger transaction with Riverstone affiliates that was announced in June 2016. (e) Assumed a marginal tax rate of 40%. (f) Estimated federal taxes associated with mitigated asset sales included in Cash from Operations. Talen Energy Corporation 2016 19
Definitions of Non-GAAP Financial Measures EBITDA as presented in this presentation represents net income (loss) before interest expense, income taxes, depreciation and certain amortization. Adjusted EBITDA represents EBITDA further adjusted for certain non-cash and other items that management believes are not indicative of ongoing operations, including, but not limited to, unrealized gains and losses on derivative contracts, stock-based compensation expense, asset retirement obligation accretion, gains and losses on securities in the nuclear decommissioning trust fund, impairments, gains or losses on sales, dispositions or retirements of assets, debt extinguishments, and transition, transaction and restructuring costs. EBITDA and Adjusted EBITDA are not intended to represent cash flows from operations or net income (loss) as defined by U.S. GAAP as indicators of operating performance and are not necessarily comparable to similarly-titled measures reported by other companies. Talen Energy believes EBITDA and Adjusted EBITDA are useful to investors and other users of its financial statements in evaluating its operating performance because they provide additional tools to compare business performance across companies and across periods. Talen Energy believes that EBITDA is widely used by investors to measure a company s operating performance without regard to such items as interest expense, income taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Additionally, it believes that investors commonly adjust EBITDA information to eliminate the effect of restructuring and other expenses, which vary widely from company to company and impair comparability. Talen Energy adjusts for these and other items, as its management believes that these items would distort their ability to efficiently view and assess its core operating trends. In summary, Talen Energy s management uses EBITDA and Adjusted EBITDA as measures of operating performance to assist in comparing performance from period to period on a consistent basis and to readily view operating trends, as measures for planning and forecasting overall expectations and for evaluating actual results against such expectations, and in communications with its Board of Directors, shareholders, creditors, analysts and investors concerning its financial performance. Adjusted Free Cash Flow as presented in this presentation represents Cash from Operations less capital expenditures, excluding growth-related capital expenditures, adjusted for changes in counterparty collateral and further adjusted for after-tax transaction and restructuring costs, and certain other after-tax cash items that management believes are not indicative of ongoing operations. Adjusted Free Cash Flow should not be considered an alternative to Cash from Operations, which is determined in accordance with U.S. GAAP. Talen Energy believes that Adjusted Free Cash Flow, although a non-u.s. GAAP measure, is an important measure to both management and investors as an indicator of the company s ability to sustain operations without additional outside financing beyond the requirement to fund maturing debt obligations. These measures are not necessarily comparable to similarly-titled measures reported by other companies as they may be calculated differently. Net debt as presented in this presentation represents total debt less cash and cash equivalents. Talen Energy Corporation 2016 20