Monday 28 August 2017 by Mary Anne Low Company updates

Talen Energy 2Q17 results – improvement on previous quarter despite weak macro environment

A summary of 2Q17 results:


Source: Talen Energy, FIIG Securities

*Third party independent analysts have significantly reduced their coverage on the company since 15 May 2017 due to lack of access given by the company

Key points:

  • Talen Energy Corporation continues to be challenged by the prevailing weak macro environment, including sustained lower energy prices. However, according to the company, such conditions have been offset by the faster paced material cost reductions (of USD140m cash cost savings) achieved to date
  • The successful execution of Talen Energy’s strategies – led by its new management – has resulted in a positive 2Q17 financial performance when compared to 1Q17
  • The company has indicated strategies to counter the weak macro environment: by continuing to achieve a leaner structure, including significantly reducing its legacy cost base to generate higher cash flows and improving flexibility while driving productivity, and selling non-core assets
  • 2Q17 adjusted EBITDA improved to USD140m, a 77% increase versus 1Q17 and an 11% increase when compared to per corresponding period (pcp). The improvement was primarily driven by continuing efforts to lower fixed costs (general & administration and plant level operations & maintenance costs), as indicated in Figure 1. However, 2Q17 was characterised by weak commodity margins due to lower capacity prices, which partly offset the cost savings achieved

Figure 1
Source: Talen Energy 
  • The company has a strong liquidity position, with USD1bn available at 30 June 2017
  • Talen Energy has recently extended the maturity of its debt portfolio, by converting USD98m (or 14% equivalent of the AUD703m debt outstanding) of its 2021 notes to its 2024 notes. The company’s management are of the view that the debt exchange was positive as it was cost effective, preserved the company’s cash and liquidity as it was a non-cash transaction, and preserved the secured debt’s priority position
  • While active management of Talen Energy’s debt maturities is credit positive, the recurring use of guaranteed debt to replace unsecured obligations to entice new lenders has weakened recovery prospects for unsecured debtholders, which are now increasingly subordinated within the capital structure
  • S&P’s negative outlook on Talen Energy’s ratings reflects the possibility that leverage could increase further and lead to a more unwieldy capital structure
  • The company achieved USD150m in sale of non-core assets to date

Outlook

Key highlights:

  • Additional cleared megawatts resulted in a year-on-year increase in projected revenue by USD55m to USD311m for 2020/2021, despite the 15% price reduction in the weakened Pennsylvania-Jersey-Maryland (PJM) Interconnection (Talen Energy’s key market) capacity market
  • Lowered FY17 midpoint adjusted EBITDA guidance by USD25m to USD590m, as it removed the FY17 contribution of the Mechanical Services businesses following its sale
  • On track to achieve savings in costs of USD250m in FY18
  • Expects further potential sale of non-core assets of USD325m in 2018

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