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Rating Action:

Moody's assigns B1 to new Talen guaranteed notes and affirms existing ratings, outlook stable

14 Nov 2017

New York, November 14, 2017 -- Moody's Investors Service ("Moody's") assigned a B1 rating to Talen Energy Supply, LLC's (Talen) proposed $400 million senior unsecured guaranteed notes due 2026. Proceeds will be used to prepay existing indebtedness including $400 million of senior unsecured notes due May 2018. Concurrently, Moody's affirmed Talen's existing ratings including its corporate family rating (CFR) at B1, its probability of default (PD) at B1-PD, its senior secured debt at Ba1, its senior unsecured guaranteed debt at B1, and its senior unsecured, nonguaranteed debt at B3. Talen's speculative grade liquidity rating (SGL) was affirmed at SGL-2. The outlook for Talen is stable.

RATINGS RATIONALE

Talen's B1 CFR reflects the inherent volatility of the merchant power markets in which it operates and the continuation of weak power prices and low demand in those markets. The rating considers credit positive actions taken by management to improve financial performance by focusing on cost reductions and operational improvements along with the proactive management of upcoming debt maturities. The increase of guaranteed debt in the capital structure continues to erode the benefit of their priority position and could eventually result in a lower rating if this trend continues. However given the amount of senior unsecured unguaranteed debt still remaining in the capital structure, this transaction has no impact to the guaranteed debt's current B1 rating.

Talen's portfolio is heavily weighted toward coal and nuclear assets which, as a result of their higher fixed cost structure, are more susceptible to margin compression as a result of lower power prices. Management has been making progress in reducing costs, and currently expects to have realized $475 million of operations, maintenance and capital expense savings over the 2017-2018 period (a decrease of over 15%). These efforts have been an important offset to persistently low wholesale market prices for energy and capacity in its regions. Continued focus in this area, and the anticipated repayment of upcoming debt maturities, will be a key factors in maintaining credit metrics near their current levels and sustaining the company's ratings.

Based on current market conditions, for the next few years, we anticipate Talen's ratio of cash from operations excluding changes in working capital (CFO pre-W/C) to total debt will generally remain near 10%, which is commensurate with the "B" scoring range in our rating methodology for unregulated power companies. The company has also been successful in monetizing non-core assets which has enhanced liquidity and improved financial flexibility.

Prior to this issuance, Talen's capital structure included about $1.4 billion of senior unsecured nonguaranteed debt; around $1.4 billion of senior unsecured guaranteed debt; about $1.1 billion of senior secured term loans; an approximate $1.4 billion secured revolving credit facility; and approximately $600 million of non-recourse debt.

The new notes will be guaranteed by the subsidiaries backing Talen's secured term loans and revolving credit facilities. These facilities were originally put in place in 2015 with the formation of Talen. The guarantors exclude the Sapphire Power Generation Holdings LLC entities (approximately 750 MW of gas-fired assets previously designated to be sold), the MACH Gen, LLC entities (about 2.4 GW of subsequently acquired gas-fired assets that support around $600 million of non-recourse debt), and the Colstrip coal units in Montana, which were previously lease financed.

Rating Outlook

The stable outlook considers the company's ongoing cost savings efforts and debt reduction plans, which have thus far mitigated ongoing weak power prices and poor merchant market conditions. The outlook reflects Moody's expectation that over the near to medium term Talen will continue to demonstrate cash flow credit metrics that are appropriate for the B1 CFR. For example, we expect a ratio of CFO pre-W/C to debt in the range of 10%, or 8% when including nuclear fuel as a cash expense, and we expect the company to remain free cash flow positive over the next year or two.

Factors that Could Lead to an Upgrade

It is not likely the CFR would move upward over the next 12-18 months. Longer term, if the ratio of CFO pre-W/C to debt were to be maintained in the mid-teens, there could be upward pressure on the rating.

Factors that Could Lead to a Downgrade

If there were to be an increase in leverage, operational challenges, or continued weak commodity prices such that we would expect the ratio of CFO pre-W/C to debt to fall below 7%, or the company to remain free cash flow negative, there could be downward pressure on Talen's CFR. If there were to be additional refinancings that replace unsecured debt with additional secured or guaranteed debt, or there is other erosion of the unsecured liability base, there could be pressure on the ratings of the secured or guaranteed notes.

Assignments:

..Issuer: Talen Energy Supply, LLC

....Guaranteed Senior Unsecured Regular Bond/Debenture, Assigned B1(LGD4)

Outlook Actions:

..Issuer: Talen Energy Supply, LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: Pennsylvania Economic Dev. Fin. Auth.

....Senior Unsecured Revenue Bonds, Affirmed B1 (LGD4)

..Issuer: Talen Energy Supply, LLC

.... Probability of Default Rating, Affirmed B1-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

.... Corporate Family Rating, Affirmed B1

....Senior Secured Bank Credit Facility, Affirmed Ba1(LGD2)

....Guaranteed Senior Unsecured Regular Bond/Debenture, Affirmed B1(LGD4)

....Senior Unsecured Regular Bond/Debenture, Affirmed B3(LGD5)

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Laura Schumacher
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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