Talen Energy Supply LLC 'B+' Rating Affirmed On Debt Pay-Down And Improved Financial Policy; Outlook Negative

  • U.S. power and energy supply company Talen Energy Supply LLC (Talen) has paid down more debt than anticipated and our view of its financial policy has improved.
  • We affirmed our 'B+' issuer credit rating on Talen. The outlook remains negative.
  • We removed the issue-level rating on Talen's unsecured guaranteed notes from CreditWatch negative and lowered it to 'B', with a '5' recovery rating, from 'B+'.
  • We affirmed the 'BB' issue-level rating, with a '1' recovery rating, on the company's secured debt and the 'B-' issue-level rating, with a '6' recovery rating, on Talen's unsecured unguaranteed debt.
  • The negative outlook reflects our expectation that Talen's leverage metrics will remain elevated in 2019 and 2020 due to persistently weak power prices and lower capacity prices, and that any underperformance, dividend payment, or failure to meet our expectations outlined below could lead to a lower rating.
NEW YORK (S&P Global Ratings) March 22, 2019—S&P Global Ratings today took the 
above rating actions listed above. The rating actions reflect Talen's 
significant debt pay-down and our view of its improved financial policy. Since 
November 2018, Talen has repaid about $620 million of principal (predominantly 
unsecured unguaranteed notes) through a combination of tender offers and the 
project financing of its Lower Mount Bethel and Martins Creek assets. 
Specifically, the company used the $384 million of cash proceeds from the 
project financing and capacity on its corporate revolver to repay upcoming 
corporate debt maturities, capturing some discount through tenders of notes 
trading below par. Because these assets are now pledged for the benefit of 
lenders in the project financing, it has structurally subordinated exiting 
unsecured lenders, and recovery value for that class of debt has declined.
The negative outlook on Talen continues to reflect our expectation that its 
metrics will remain elevated due to persistently weak power prices and low 
cleared capacity prices in 2019 and 2020. We expect the company to have 
leverage above 6.0x during these two years, declining below 6.0x in 2021 and 
beyond. We also expect the company to maintain positive free cash flow and 
high availability under the revolving credit facility. 

We would likely lower our ratings on Talen if the company's leverage increases 
above 6.25x on a sustained basis in our forecasts, either due to diminished 
market conditions or more aggressive financial policies. Weaker market 
conditions could stem from a variety of factors, including lower-than-expected 
demand growth or greater-than-anticipated renewable penetration that weakens 
pricing for baseload generators. Policies that could weaken the company's 
credit quality include leveraging distributions and cost reductions that, 
while credit supportive in the near term, could weaken its operations over the 
longer term. Additionally, difficulty refinancing its debt on economic terms 
or any dividends to equity prior to 2021 could lead us to lower our ratings.

We could revise our outlook on Talen to stable if the company continues to 
reduce its costs on synergies stemming from its acquisition by Riverstone such 
that it offsets the weakness in the power markets and causes its leverage 
metric to decline to around 5.5x or less. While not contemplated in our base 
case, an assignment of ZECs to Susquehanna could also lead us to revise the 
outlook to stable. We would also need confidence that management does not plan 
to changes its stated  financial policies before revising our outlook on the 
company.
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