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Rating Action:

Moody's downgrades Talen Energy Supply to B1; outlook stable

07 Dec 2016

Approximately $5.4 billion of debt and credit facilities affected

New York, December 07, 2016 -- Moody's Investors Service ("Moody's") downgraded Talen Energy Supply, LLC's (Talen) corporate family rating (CFR) to B1 from Ba3 following the closing of its merger with an affiliate of Riverstone Holdings LLC (Riverstone, not rated). Concurrently, Moody's downgraded Talen's senior secured revolving credit facility to Ba1 from Baa3, its senior unsecured, unguaranteed obligations to B3 from B1 and upgraded its newly guaranteed senior unsecured obligations to Ba3 from B1. The rating outlook is stable.

Today's action concludes a Moody's ratings review that began in June 2016 following an announced plan for Riverstone to utilize essentially all of Talen's balance sheet cash to acquire the 65% of the company it did not already own. Total consideration for the transaction of around $1.3 billion was funded through a combination of unrestricted cash and a portion of proceeds from a newly issued $600 million senior secured term loan.

RATINGS RATIONALE

Talen's B1 CFR reflects its post-merger capital structure, which includes a cash balance of approximately $100 million reduced from over a $1 billion, and a consolidated funded debt level that is about 15% higher than envisioned prior to the merger announcement. Based on current market conditions for merchant power companies, we anticipate Talen's key cash flow to debt metric, the ratio of cash from operations excluding changes in working capital (CFO pre-W/C) to total adjusted debt, will remain near 10%, a level commensurate with the "B" scoring ranges in our rating methodology for unregulated power companies.

Given the commodity price environment and Talen's current leverage position, we also estimate that over the near to medium term, Talen's ratio of funded debt to EBITDA will be around 6x. In addition, we anticipate cash flow from operations after payments for maintenance capital expenditures and nuclear fuel will be under 5% and below that of other independent merchant generating peers such as NRG Energy, Inc. (Ba3 stable) and Calpine Corporation (Ba3 stable).

Updated capital structure and impact of subsidiary guarantees

In conjunction with the merger closing, Talen's first lien revolving credit facility was reduced to $1.4 billion from $1.85 billion and the subsidiaries guaranteeing the facility (which exclude the MACH Gen, LLC entities) now also guarantee Talen's $600 million 6.5% notes due 2025, as well as about $230 million of outstanding Pennsylvania Economic Development Financing Authority revenue bonds. Moody's views the guaranteed debt as having a higher priority of payment, and better recovery prospects, vis-a-vis the remaining unsecured obligations in the event of a potential bankruptcy, and rank them accordingly in the liability waterfall used in our loss given default framework. As a result, ratings of the guaranteed debt have been upgraded to Ba3 from B1 and the ratings of the unsecured, unguaranteed bonds have been downgraded two notches to B3 from B1.

Liquidity

Although Talen no longer has the benefit of over $1 billion of unrestricted cash, the company's liquidity position remains adequate. As of year-end 2016, the company expects to have about $100 million of cash on its balance sheet and we expect it to remain free cash flow neutral to slightly positive over the next 12-18 months. Talen's external sources of liquidity include its $1.4 billion secured revolving agreement (terminating June 2020), which remains sufficient to cover potential cash flow shortfalls and upcoming maturities. Talen's current capital program does not require extensive use of its credit facilities; however, the company is still evaluating additional projects, such as a coal plant co-firing, and gas plant optimizations that could require additional capital.

As of September 30, 2016, Talen's revolving credit facility usage included $350 million that was drawn to repay debt that matured in May, and approximately $195 million of letters of credit. The revolving credit facility loans will be repaid with proceeds of Talen's new $600 million secured term loan. Talen's $1.3 billion secured trading facility remains in place and can used to satisfy collateral posting needs, as of September 30th approximately $22 million was utilized. Talen's nearest long-term debt maturity is $400 million of notes due May 2018. In July of 2019, another $1.2 billion of debt obligations become due.

Rating Outlook

The stable outlook considers the company's updated capital structure and its ongoing cost savings efforts. The outlook reflects Moody's expectation that over the near to medium term Talen will 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% and we expect the company to remain free cash flow neutral to slightly positive.

Factors that Could Lead to an Upgrade

In view of the recent merger, and Talen's shift away from balance sheet strengthening efforts, it is not likely the corporate family rating 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 declines in commodity prices such that we would expect the ratio of CFO pre-W/C to debt to remain below 7%, or the company to remain free cash flow negative, there could be downward pressure on the rating. An increase in senior secured first lien debt would likely put downward pressure on the Ba3 ratings of the senior unsecured guaranteed debt obligations.

Downgrades:

..Issuer: Talen Energy Supply, LLC

.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD

.... Corporate Family Rating, Downgraded to B1 from Ba3

....Senior Secured Revolving Credit Facility, Downgraded to Ba1 (LGD2) from Baa3 (LGD1)

....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD5) from B1 (LGD4)

Upgrades:

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

....Backed Senior Unsecured Revenue Bonds, Upgraded to Ba3 (LGD3) from B1 (LGD4)

..Issuer: Talen Energy Supply, LLC

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 (LGD3) from B1 (LGD4)

Outlook Actions:

..Issuer: Talen Energy Supply, LLC

....Outlook, Changed To Stable From Rating Under Review

Affirmations:

..Issuer: Talen Energy Supply, LLC

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

....Senior Secured Term Loan B, Affirmed Ba1 (LGD2)

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Talen is an independent power producer with about 16 GW of generating capacity. Talen Energy Corporation, headquartered in Allentown, PA, is a privately owned holding company that owns 100% of Talen and conducts all its business activities through Talen.

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: 212-553-0376
SUBSCRIBERS: 212-553-1653

Jim Hempstead
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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