Approximately $1.5 billion of debt affected
New York, January 25, 2019 -- Moody's Investors Service ("Moody's") today affirmed
Clearway Energy, Inc.'s (Clearway Energy) Ba2 Corporate
Family Rating and Clearway Energy Operating LLC's (Clearway Operating)
Ba2 senior unsecured rating. At the same time, we affirmed
Clearway Energy's speculative grade liquidity (SGL) at SGL-2.
The affirmations with stable outlook take place after Pacific Gas &
Electric Company's (PG&E, Caa3 negative) announcement
that it intends to file for a chapter 11 bankruptcy on or about January
29, 2019. Despite having been cleared of causing the Tubbs
fire by the California Department of Forestry and Fire Protection on January
24, 2019, PG&E affirmed its intention to file for bankruptcy.
Outlook Actions:
..Issuer: Clearway Energy Operating LLC
....Outlook, Remains Stable
..Issuer: Clearway Energy, Inc.
....Outlook, Remains Stable
Affirmations:
..Issuer: Clearway Energy Operating LLC
....Senior Unsecured Regular Bond/Debenture,
Affirmed Ba2(LGD4)
..Issuer: Clearway Energy, Inc.
.... Probability of Default Rating,
Affirmed Ba2-PD
.... Speculative Grade Liquidity Rating,
Affirmed SGL-2
.... Corporate Family Rating, Affirmed
Ba2
RATINGS RATIONALE
"Clearway Energy generates about 23% of its Corporate EBITDA
from PG&E-related power purchase agreements (PPAs) but the
involved projects are considerably levered, partially offsetting
the negative effect of potentially losing its cash flows."
said Toby Shea, VP - Senior Credit Officer. "By
eliminating related project cash flow and project debt, Clearway'
consolidated debt to EBITDA would only rise by 200 basis points,
from 6.5x, to 6.7x on a run rate basis, a level
that does not breach our downgrade threshold of 7.5x. "
Bankruptcy courts regularly reject above-market executory contracts,
which generally encompass PPAs. Rejecting above-market contracts
or repricing them to market rates benefits the bankruptcy estate because
it lowers the debtor's cost structure, which may translate
to more cash flows and stronger liquidity.
We are, however, uncertain if PG&E will reject or reprice
the PPAs during bankruptcy because PG&E's rates are regulated
by the California Public Utility Commission (CPUC) and rate regulation
creates a different set of economic incentives for the debtor.
PG&E currently has an effective regulatory mechanism to pass its PPA
costs to ratepayers dollar for dollar. If PG&E rejects or reprices
the PPAs, the CPUC might not allow PG&E to keep the savings.
PG&E does benefit from rejecting or repricing PPAs in that it will
have a lower cost structure, thus creating headroom for the cost
of new investments without raising rates. However, the CPUC
would most likely want PG&E to affirm the contracts so that generators
would feel confident to invest in renewable projects and support California's
climate change goals. The CPUC, therefore, may find
it objectionable to approve investments that were made possible by headroom
created by means that hurt its climate change goals.
Clearway Energy's credit quality reflects its low business risk
profile and the size and diversity of its portfolio. Cash flow
diversity is strong, with approximately 125 project assets and a
mix of renewable, gas and thermal assets. There is,
however, some geographic concentration, as about 70%
of cash flows are generated from projects in California.
Offsetting these strengths is Clearway Energy's high leverage.
We project the ratio of consolidated debt to EBITDA to be around 6 to
7 times while the CFO pre-WC to consolidated debt ratio to be around
9%, both of which were calculated on a P90 basis.
The leverage ratios for full year 2018 were slightly above its run rate
because of the timing of the company's corporate debt raise and
the deployment of the proceeds from that transaction.
Liquidity
Clearway Energy has good liquidity, as reflected in its SGL-2
speculative grade liquidity rating. It has only a modest amount
of capital expenditures in the near term and we expect it will generate
a strong free cash flow in 2019 and 2020, of about $300 million
per year. Additionally, as of September 30, 2018,
the company had $232 million of unrestricted cash on hand and a
$495 million revolving credit facility with $450 million
unused. As of October 31, 2018, there were no outstanding
borrowings and $45 million of letters of credit outstanding under
the credit facility.
Clearway Energy's revolving credit facility is sized to accommodate both
operational liquidity and also provide bridge funding for new acquisitions.
The revolving credit facility expires in April 2023 and contains a material
adverse change clause for new borrowings. Financial covenants include
corporate debt to corporate EBITDA of 5.5x and interest coverage
of 1.75x. Clearway Energy recorded a debt to EBITDA of 3.82x
and an interest coverage of 5.1x as of the third quarter of 2018
for compliance certificate purposes.
Rating Outlook
Clearway Energy's stable outlook reflects its projected consistent cash
flow and the diversity among individual projects. The stable outlook
incorporates our view that a potential rejection or renegotiation of its
PPAs with PG&E will not materially hit its credit metrics.
The stable outlook incorporates our expectation that Clearway Energy will
finance future acquisitions in a way that does not significantly increase
leverage or worsen liquidity.
Factors that Could Lead to an Upgrade
We may take positive rating action on Clearway Energy and Clearway Operating
should Clearway Energy's CFO Pre-WC to consolidated debt rise to
the mid-teens or should consolidated debt to EBITDA fall to 5.5x
or below.
Factors that Could Lead to a Downgrade
A negative rating action could occur should the company's consolidated
debt to EBITDA be sustained at above 7.5x, or if CFO Pre-W/C
to consolidated debt fall below 9%, or if the cash flow from
its projects proves to be more volatile or less resilient than our expectations.
A downgrade can also occur should the company modify its financing strategy
in a way that hurts credit quality, such as by using additional
leverage to finance growth.
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.
Toby Shea
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