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Rating Action:

Moody's affirms Clearway Energy's ratings; stable outlook

25 Jan 2019

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

No Related Data.
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