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Rating Action:

Moody's downgrades Talen to B2, outlook stable

18 Jun 2018

Approximately $5.8 billion of debt and credit facilities outstanding

New York, June 18, 2018 -- Moody's Investors Service ("Moody's") downgraded the ratings of Talen Energy Supply, LLC (Talen) including its corporate family rating (CFR) to B2 from B1, its probability of default (PD) to B2-PD from B1-PD, its senior secured debt to Ba2 from Ba1, its senior unsecured guaranteed debt to B2 from B1, its senior unsecured, nonguaranteed debt to Caa1 from B3. Concurrently, Moody's assigned a rating of B2 to approximately $131 million of guaranteed revenue bonds issued by the Pennsylvania Economic Development Finance Authority (PEDFA) that are being remarketed by Talen. The outlook for Talen is stable.

RATINGS RATIONALE

The downgrade follows Talen's plans to remarket, rather than repay, its upcoming PEDFA obligations. In addition, the downgrade considers the results of the most recent (2021/2022) PJM Interconnection (PJM) capacity auction as well as the planned restructuring of its New MACH Gen non-recourse subsidiary. The B2 CFR is driven by the company's relatively aggressive financial policies in the face of challenging market conditions that will continue to negatively impact revenue and cash flow.

The decision to remarket the PEDFA bonds is the latest corporate action that is contrary to Moody's prior expectations that the company would be more balanced with its shareholder rewards programs. At year-end 2017, Talen paid a special dividend to shareholders and kept open the potential for additional payments to shareholders. More recently, Talen voluntarily filed its non-recourse New MACH Gen subsidiary into a prepackaged reorganization under Chapter 11 of the U.S. Bankruptcy Code. Although the reorganization of New MACH Gen lowers the company's consolidated leverage position, the transaction represents further evidence of a financial policy that favors shareholders rather than creditors (albeit non-recourse creditors). The expected debt reduction is also slightly below Moody's prior expectations.

Currently, approximately 70% of Talen's generating portfolio is located in the PJM market, where capacity revenues are established on a three year forward basis. Although the company has been successful in reducing costs and enhancing the performance of its assets, based on known capacity auction results and current market prices for energy, Moody's expects Talen's ratio of cash flow from operations excluding changes in working capital (CFO pre-WC) to debt to remain near 10% in 2018, but to fall below 7% beginning in 2019. When including nuclear fuel as a cash operating expense, these ratios are about 150-200 basis points lower. In addition, beyond 2018, Moody's expects the company will be challenged to remain free cash flow positive.

The most recent PJM capacity auction results for the 2021/2022 delivery year will increase Talen's revenues for that period; however, cash flow based credit metrics are not likely to return to current levels. For 2017, Moody's calculates a ratio of CFO pre-WC/debt of about 11%.

Talen's upcoming additional cash needs include the potential conversion of its Montour coal-fired plant to either a natural gas or dual-fuel fired facility. The project is currently estimated to cost about $200 million including the cost of a natural gas pipeline. The source of capital for the project will likely be determined in conjunction with a decision to move forward, but could include additional debt or debt like financing. While Talen is likely to generate excess cash flow from operations and non-core asset sales in 2018, the company will evaluate the option of retaining these funds for capital investment against alternatives, including returning capital to shareholders.

Liquidity

Talen's SGL-2 reflects adequate liquidity for the next 12-18 months. The position is bolstered by external credit facilities that provide support in the latter part of the forecast period. As of March 31, 2018, the company had an unrestricted cash balance of about $64 million and usage under its $1.242 billion credit facility was limited to $158 million for letters of credit. Moody's expects the company will remain free cash flow positive in 2018, and to be slightly (under $100 million) negative in 2019.

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 (estimated between $50 - $65 million), for its proportionate share of decommissioning costs associated with the coal-fired Colstrip Units 1 and 2 that are scheduled to cease operations by July 2022.

Outlook

Talen's stable outlook reflects our expectation that the company will continue to focus on cost control and operational efficiencies, such that on average, its ratio of CFO pre-WC to debt will remain above 5%.

Factors that Could Lead to an Upgrade

Although not likely given the recent downgrade, 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 weaker than expected commodity prices such that we would expect the ratio of CFO pre-W/C to debt to fall below 5% on a sustained basis. 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.

..Issuer: Talen Energy Supply, LLC

.... Probability of Default Rating, Downgraded to B2-PD from B1-PD

.... Corporate Family Rating, Downgraded to B2 from B1

....Senior Secured Bank Credit Facilities, Downgraded to Ba2 (LGD2) from Ba1 (LGD2)

....Gtd. Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD4) from B1 (LGD4)

....Senior Unsecured Regular Bonds/Debentures, Downgraded to Caa1 (LGD5) from B3 (LGD5)

Outlook Actions:

..Issuer: Talen Energy Supply, LLC

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: Talen Energy Supply, LLC

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

Downgrades:

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

....Senior Unsecured Revenue Bonds, Downgraded to B2 (LGD4) from B1 (LGD4)

Assignments:

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

....Senior Unsecured Revenue Bonds Series 2009B, Assigned B2 (LGD4)

....Senior Unsecured Revenue Bonds Series 2009C, Assigned B2 (LGD4)

Talen Energy Supply, LLC 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.

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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