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Rating Action:

Moody's downgrades Talen guaranteed notes to B3 following capital structure change, CFR affirmed at B2, outlook stable

04 Dec 2018

Approximately $5.6 billion of debt and credit facilities outstanding

New York, December 04, 2018 -- Moody's Investors Service ("Moody's") downgraded the senior unsecured guaranteed ratings of Talen Energy Supply, LLC (Talen) to B3 from B2. The downgrade follows the refinancing of a portion of the company's senior unsecured unguaranteed debt with proceeds of a non-recourse financing of its Lower Mount Bethel and Martins Creek plants (LMBE-MC). At the same time, Moody's affirmed Talen's corporate family rating (CFR) at B2, its probability of default (PD) at B2-PD, its senior secured debt at Ba2, and its senior unsecured, unguaranteed debt at Caa1. The rating outlook for Talen is stable.

RATINGS RATIONALE

The downgrade of the senior unsecured guaranteed debt was driven by the reduction of unsecured debt cushion in the capital structure that supports the higher priority facilities. Talen's B2 CFR and stable outlook reflects the consolidated credit profile of the organization, which is not materially altered by the project financing. For 2019-2020, we expect the company's consolidated ratio of cash flow from operations excluding changes in working capital (CFO pre-WC) to debt to be in a range of 6%-8%. In addition, the ratings reflect Talen's elevated exposure to carbon transition risks, and its heavy reliance on fossil-fired generation.

The action follows Talen's closing of the $450 million LMBE-MC financing for its 600 MW natural gas-fired combined cycle Lower Mount Bethel, and 1,700 MW dual-fuel (gas/oil) Martins Creek, plants. Combined, Moody's expects the plants to generate approximately $100 million of annual earnings before interest, taxes and depreciation (EBITDA). The structure of the project financing removes the assets from the security/guarantee collateral provided to the existing corporate lenders. Proceeds from the LMBE-MC financing were used to retire approximately $421 million of Talen's unsecured unguaranteed debt currently due in 2021.

The LMBE-MC financing includes a $25 million revolving credit facility and adds a modest amount of consolidated leverage to Talen's balance sheet as $450 million of funded project finance debt was used to prepay $421 million of Talen corporate debt. A portion of the proceeds are being retained at the project level for capital expenditures. The additional leverage is mitigated by the resulting reduction in refinancing risk, and the amortizing nature of the project financing.

Similar to the treatment of Talen's other non-recourse debt, Moody's includes the debt and associated cash flow from the new project financing in the overall credit analysis when determining Talen's corporate family rating. However, given the non-recourse nature of these entities, Moody's excludes the project finance debt from Talen's liability structure when conducting a loss given default analysis.

Liquidity

Talen's SGL-2 reflects good liquidity for the next 12-18 months. The position is bolstered by external credit facilities. As of September 30, 2018, the company had an unrestricted cash balance of about $77 million, and usage under its $1.242 billion credit facility included an outstanding balance of $50 million and $167 million for letters of credit. The liquidity profile reflects our expectation that Talen will look to extend the maturity date of its secured revolver well in advance of its current 2022 termination date.

Talen's nearest long-term debt maturities include $17 million of notes due July 2019 which the company expects to repay with cash on hand. Talen's additional 2018 liquidity needs include a requirement by the Montana Department of Environmental Quality to provide financial assurance for its proportionate share of the decommissioning costs associated with the coal-fired Colstrip units. Talen's financial assurance requirement is currently estimated to be about $53 million in 2018 and $18 million in 2019, with an aggregate estimated range of $71 - $94 million, which Talen expects to satisfy via the posting of a surety bond.

Outlook

Talen's stable outlook reflects an expectation that, despite declining capacity revenue, management's continued focus on performance enhancement and cost control will support the company's credit quality such that its ratio of CFO pre-WC to debt that will remain above 5%.

Factors that Could Lead to an Upgrade

Given its declining revenue profile and relatively aggressive financial policies, it is not likely that the CFR will move upward over the next 12-18 months. Longer term, if there were to be operational enhancements, reductions in leverage, or an improvement in market conditions causing the ratio of CFO pre-WC to remain above 10%, there could be upward pressure on the ratings.

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 5% on a sustained basis, or if the company were to become significantly free cash flow negative for a prolonged period. In addition, if there were to be additional refinancing that replaces 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.

Outlook Actions:

..Issuer: Talen Energy Supply, LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: Talen Energy Supply, LLC

.... Probability of Default Rating, Affirmed B2-PD

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

.... Corporate Family Rating, Affirmed B2

....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1(LGD6 from LGD5)

Downgrades:

..Issuer: Talen Energy Supply, LLC

....Gtd. Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD4) from B2 (LGD4)

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

....Senior Unsecured Revenue Bonds, Downgraded to B3 (LGD4) from B2 (LGD4)

Talen Energy Supply, LLC is an independent power producer with about 15 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.

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

Michael G. Haggarty
Associate Managing Director
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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