Talen Energy Supply reported another quarter of year-over-year declines in EBITDA and revenue for 3Q18 on Monday (5 November), according to two sources familiar with the matter. Still, the northeastern power producer’s nearer-dated bonds strengthened as the results came somewhat in line with expectations and management narrowed its previously wide range for FY18 adjusted EBITDA guidance, they said.

Looking ahead, some investors are concerned that the company will continue to use its meager free cash flow to make dividend payments, along with concerns over its ability to address longer-dated maturities given its uneven earnings history, said the two sources and an additional source.

Talen’s USD 400m 9.5% senior guaranteed bonds due 2022 ticked up yesterday by more than half a point to trade at 102.25 yielding 8.535%, from 101.5 on 31 October, according to MarketAxess.

Meanwhile the unsecured bonds maturing 2025 and beyond have sharply higher yields. The USD 625m 10.5% senior guaranteed notes due 2026 traded yesterday at 88.25 to yield 13.061%, in line with recent levels, and the USD 593m 6.5% senior unsecured notes due 2025 traded at 74.75 yesterday to yield 12.198%, from 75.231 on 15 October.

The issuer’s longest-dated notes, a USD 300m 6% unsecured note due 2036, traded at 50.5 last week to yield 13.28%, according to MarketAxess. The company has approximately USD 1.44bn in unsecured bonds maturing 2025 or later.

The northeastern regional power company generated USD 257m in adjusted EBITDA, a 6.5% drop from the corresponding period last year, the sources said. Talen also reported a 17.5% decline in operating revenue to USD 685m this quarter from USD 830m in 3Q17. The company attributed the lower EBITDA and revenue to lower generation volume and a realized hedge loss of USD 64m, the sources said.

The company narrowed FY18 adjusted EBITDA guidance to USD 685m-USD 765m from previous guidance of USD 640m-USD 760m, according to two of the sources. The EBITDA figure compares to its current LTM figure of USD 799m and USD 860m as of the end of 1Q18.

Based on the new FY18 adjusted EBITDA guidance, Talen expects to generate USD 75m-USD 155m in adjusted EBITDA for 4Q18, two of the sources said.

“[Talen’s] done a decent job lately of paying down debt, but even with this new loan, they’re only pushing out maturities,” said one of the sources.

The Riverstone-owned company is marketing a USD 450m TLB due 2025 backed by two of its plants to fund a tender for three series of unsecured notes maturing in 2021-2024. Commitments are due 14 November.

Talen is levered about 1.35x through secured debt, and 4.8x through total debt of USD 3.852bn, based on estimated LTM EBITDA of USD 799m. Pro forma the loan deal and tender offer, secured debt would increase by USD 450m, or more than half a turn of leverage.

Free cash flow for the third quarter stands at roughly USD 107m, based on USD 257m in adjusted EBITDA, USD 56m of capex, USD 89m of interest expense and USD 6m of New MACH Gen interest expense, one of the sources pointed out.

Investors are speculating that Talen will use the proceeds from its expected pipeline sale and the free cash flow generated in fiscal year 2018 for a dividend, one of the sources said. Officially, the company said on the call that after its last dividend in 4Q17, it has no near-term plans to issue a dividend, the sources said.

Talen signed an agreement to sell its interests in the Interstate Energy Company pipeline for USD 189m and expected the transaction to close some time from 4Q18 to 1Q19, according to company documents. Due to pending regulatory approval, the company now expects the transaction to close in 1H19 for roughly USD 150m, said one of the sources.

The company, through Talen Montana, has also filed two lawsuits against PPL Corporation to recover USD 733m in alleged improper dividend payments, which, if granted, would provide additional liquidity and help address the company’s upcoming maturities, one of the sources said.

Talen was formed in 2015 when PPL Corp spun off its merchant business and combined it with other businesses owned by Riverstone Holdings. The PE firm ended up owning 35% of Talen’s stock while PPL shareholders were left with the other 65% stake. The private-equity firm then took the company private in December 2016 and used all of Talen’s balance sheet cash and a portion of proceeds from a newly issued USD 600m senior secured term loan to acquire the 65% stake in the company it did not already own.

As of 30 September, the company has USD 1.102bn of available liquidity through USD 77m of unrestricted balance sheet cash and remaining capacity under its roughly USD 1.242bn revolver, the sources said.

A Talen representative did not respond to a request for comment.

2018 Debtwire