Approximately $8 billion of debt securities affected
NOTE: On February 13, 2023, the press release was corrected as follows: In the debt list, the list of Outlook Actions was changed to include “Issuer: Alexander Funding Trust; Outlook, Remains Stable.” Revised release follows.
New York, December 06, 2022 -- Moody's Investors Service ("Moody's") today affirmed NRG Energy, Inc.'s (NRG) ratings, including its Ba1 corporate family rating (CFR), Baa3 senior secured rating, and Ba2 senior unsecured rating. The ratings affirmation follows the announcement that it will acquire Vivint Smart Home, Inc. (Vivint), a home monitoring business, for $2.8 billion in an all-cash transaction, with financial closing expected in the first quarter of 2023. In addition, Moody's has downgraded NRG's speculative grade liquidity rating to SGL-2 from SGL-1. NRG's outlook remains stable. See below for a complete list of rating actions.
Affirmations:
..Issuer: NRG Energy, Inc.
.... Corporate Family Rating, Affirmed Ba1
.... Probability of Default Rating, Affirmed Ba1-PD
....Senior Secured Bank Credit Facility, Affirmed Baa3 (LGD2)
....Senior Secured Regular Bond/Debenture, Affirmed Baa3 (LGD2)
....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD5)
..Issuer: Alexander Funding Trust
....Senior Secured Regular Bond/Debenture, Affirmed Baa3
Issuer: Chautauqua (Cnty of) NY, Ind. Dev. Agency
....Senior Secured Revenue Bonds, Affirmed Baa2 (LGD2)
..Issuer: Chautauqua Co. Capital Resource Corp., NY
....Senior Secured Revenue Bonds, Affirmed Baa3 (LGD2)
..Issuer: Delaware Economic Development Authority
....Senior Secured Revenue Bonds, Affirmed Baa3 (LGD2)
Issuer: Fort Bend County Industrial Development Corp
....Senior Secured Revenue Bonds, Affirmed Baa2 (LGD2)
..Issuer: Texas City Industrial Development Corp., TX
....Senior Secured Revenue Bonds, Affirmed Baa2 (LGD2)
Downgrades:
....Speculative Grade Liquidity Rating, Downgrade to SGL-2 from SGL-1
Outlook Actions:
..Issuer: NRG Energy, Inc.
....Outlook, Remains Stable
..Issuer: Alexander Funding Trust
....Outlook, Remains Stable
RATINGS RATIONALE
"The affirmation of NRG's ratings with a stable outlook following the Vivint acquisition announcement reflects the company's current strong financial positioning at the Ba1 rating level, which gives it sufficient cushion and flexibility to manage the additional debt burden that the acquisition will entail" said Toby Shea, VP ? Sr. Credit Officer, "Nevertheless, NRG's credit quality will be weaker following the acquisition because NRG is acquiring an entity with a lower credit profile and financed with a significant amount of acquisition debt, which will use up much of this financial cushion", added Shea. NRG plans to mitigate the financial impact of the acquisition on its balance sheet by issuing a significant amount of preferred equity to finance the transaction, an important credit consideration.
Moody's views the Vivint acquisition as manageable and neutral to NRG's overall business risk profile, despite the company's entrance into a completely new business line. Even though the home monitoring business is adjacent to and may be complementary to NRG's existing energy retail business, we believe that there is still some integration and execution risk because the home monitoring business has its own set of business and competitive dynamics. On the other hand, the business should produce steady cash flow, will increase NRG's size and scale by about 20%, and create significant geographic and product diversification for the organization.
Vivint relies highly on cash flow from residential customers, which is characterized by high visibility, even though customer acquisition costs can be substantial in the home monitoring business. Moody's notes that Vivint's business and cash flow have been on an upward trajectory over the past few years while it has also exhibited a declining attrition rate. The combination with NRG has the potential to boost cash flow due to the cross-selling opportunities, stickier customers resulting from product bundling, and greater operational efficiency. Even if the home monitoring business faces headwinds due to an economic downturn or a rise in competitive pressures in the future, Vivint's earnings and cash flow are unlikely to experience a sudden decline due to the strength of its existing, contracted customer base and its ability to cut back on growth spending if necessary.
Moody's expects NRG's CFO pre-WC to debt to fall from 25% to 15% immediately following the transaction due to amount of acquisition debt incurred, a level that is weak and no longer strongly positioned for its current Ba1 CFR. But with the company's planned $1 billion of debt reduction over the course of 2023, its CFO pre-WC to debt should rise slightly to 16% by the end of 2023 and further improve to 20% in 2024 due to a combination of cash flow improvement and $375 million of additional debt reduction. This improvement will also depend on the successful execution and integration of the Vivint acquisition.
Liquidity
The downgrade of NRG's Speculative Grade Liquidity rating to SGL-2 from SGL-1 reflects the modest impact of the Vivint acquisition on the organization's currently very good liquidity position since NRG will likely fund some of the acquisition cost with cash on hand and draws on its revolving credit capacity.
The company produces strong positive free cash flow (NRG expects free cash flow before growth to be about $1.29 billion for 2022). Available liquidity at the end of the third quarter of 2022 was about $2.8 billion.
NRG has a total of $6.4 billion of liquidity facilities, including its $3.7 billion revolving credit facility, $1 billion receivables securitization facilities, and $900 million of Pre-capitalized Trust Securities (P-Caps). At the end of the third quarter of 2022, NRG used $1.5 billion of the $3.7 billion revolving credit facility for letter of credit postings but did not have any cash draws. The $1 billion receivable securitization facility and the $900 million P-Cap facility were almost fully utilized for letter of credit postings.
The revolving credit facility, which expires in May 2024, contains a material adverse change clause for new borrowings, a credit and liquidity negative. NRG has financial covenants in its revolving credit facilities and term loan that require the company to maintain a corporate debt-to-EBITDA ratio of 4x or below and an interest coverage ratio of 1.75x. Because these ratios are calculated to only cover the secured debt, NRG is comfortably in compliance and should not have any problem continuing to meet these requirements.
NRG does not have any major debt maturities until 2024 when $600 million of senior secured notes are due.
The amount of incremental liquidity needed for Vivint's business operations is relatively small compared to NRG as a whole. As a result, adding Vivint's business will not have a significant impact on NRG's overall demand for liquidity.
Outlook
NRG's stable outlook reflects a retail energy business that is stable and growing, a wholesale power business that is in the midst of a cyclical upswing, and our expectation that financial metrics will recover in 2023 and 2024 following s decline immediately following the Vivint acquisition as the company pays off much of the acquisition. The stable outlook also reflects Vivint's business, which involves home security and monitoring, and has recently been on an upward trajectory.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade
NRG's near-term prospect for an upgrade is more limited than previously because acquiring Vivint will involve significant integration risk and acquisition debt. However, assuming that NRG's business risk does not increase materially and the Vivint acquisition is successful, NRG will need to achieve a CFO pre-WC to debt of 25% on a sustained basis to attain an investment-grade corporate family rating.
Factors that could lead to a downgrade
Moody's could take negative rating action on NRG should business conditions in the retail or wholesale power markets deteriorate, the Vivint acquisition becomes a material drag on cash flow, or the planned debt reduction does not occur as anticipated. To maintain its current ratings, Moody's expects NRG to achieve a CFO pre-WC to debt metric of 16% by the end of 2023 and at least 18% starting in 2024.
Company Profile
NRG is among the top three unregulated power companies in the US and is headquartered in Houston, Texas. The company owns 16 GW of generation capacity and sells power to approximately 5.5 million home customers as well as commercial, industrial, and wholesale customers. Vivint will add 1.9 million home customers to NRG's existing customer base.
The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://ratings.moodys.com/api/rmc-documents/75129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.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 issuer/deal page on https://ratings.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