Approximately $8.7 billion of debt securities outstanding
New York, March 19, 2021 -- Moody's Investors Service, ("Moody's") today
changed NRG Energy, Inc.'s (NRG) rating outlook to
stable from positive following the large loss incurred during February's
severe cold weather event in Texas. At the same time, Moody's
affirmed NRG's long-term ratings, including its Ba1
corporate family rating (CFR) and Ba1-PD probability of default
rating (PDR). Its Speculative Grade Liquidity Rating remains SGL-1.
See below for a complete list of rating actions.
RATINGS RATIONALE
"NRG's 2021 CFO pre-WC to debt ratio is likely to fall
to around 20% as it expects to lose about $750 million as
a result of the February winter storm," said Toby Shea,
VP -- Senior Credit Officer, "NRG's financial metrics
should recover close to pre-storm levels of 24% or better
in 2022, but positive momentum on the rating is unlikely until there
is some clarity on Texas power market reforms."[1]
NRG's loss does not appear to be caused by anything fundamentally
wrong with its operations or risk management but by a quickly unfolding
and fluid set of circumstances during the cold weather event. The
extreme cold weather resulted in mechanical failures at power plants and
coal handling issues, but various system-wide problems exacerbated
these issues over the course of several days. For instance,
natural gas production and deliveries were disrupted, limiting the
ability of gas plants to run even if they were mechanically sound.
We understand that the potential for severe price volatility is inherent
in the power sector. Although we do not expect an event with the
severity experienced in Texas to recur on a regular basis, we do
account for such potential in our credit analysis.
We view ESG factors to be a material driver of the change in NRG's
outlook to stable from positive. In particular, the power
outages that occurred last month have highlighted the social risk facing
NRG because we regard responsible production, which includes reliability
and community relations, as a key component of social risk within
our ESG analytical framework. Moreover, we consider the potential
for more extreme weather events as a form of environmental risk that must
be addressed and managed by the company.
NRG has exhibited strong CFO pre-WC to debt ratios over the past
two years, at approximately 28% in 2019 and 33% in
2020 (prior to the addition of $2.9 billion of acquisition
debt associated with Direct Energy), putting it in a strong position
to absorb these losses. The storm event will bring the CFO pre-WC
to debt ratio down to around 20% in 2021 from what would otherwise
have been about 29%. We expect NRG to use free cash flow
and asset sales to reduce about $1.2 billion of debt and
to return to a CFO pre-WC to debt ratio of 24% or above
after 2021. The timing and magnitude of the recovery in financial
metrics will depend partly on whether any reforms or changes are implemented
in the Texas power markets in response to the February outages.
NRG's credit quality reflects that of a large, diversified merchant
power company with a highly profitable retail supply segment and relatively
low target leverage ratio of 2.5x to 2.75x net debt to EBITDA.
Based on the company's guidance for 2021 before the February storm,
NRG would have generated about $2.5 billion of EBITDA and
$1.5 billion of free cash flow before growth without the
unexpected $750 million one-time loss. Its generation
business and retail business were expected to contribute about an equal
amount of both EBITDA and free cash flow.
NRG's business activity and generation base is currently concentrated
in Texas, which contributes about 60% of its EBITDA,
putting it in a vulnerable position when the Texas power market was so
severely disrupted. The Texas asset base is comprised mainly of
older gas and coal power plants that are environmentally undesirable and
have a poor cost position. Nevertheless, these assets are
important to NRG because they vastly reduce the amount of potential trade
collateral required for the retail operation as the company is able to
support the retail business with its own generation.
Within the retail business, NRG sells to both mass market customers
(predominantly residential) and large commercial and industrial (C&I)
customers. Mass customers account for about 60% of the EBITDA,
while C&I retail customers comprise about 40%.
Liquidity
NRG's SGL-1 speculative grade liquidity rating reflects very good
liquidity that will be sustained despite the large storm-related
loss. We expect the company to have the capacity to meet its obligations
over the coming 12 months through internal resources without relying on
external sources of committed financing.
Moody's still expects NRG to produce free cash flow over the next 12 months,
despite the $750 million loss. The company continues to
possess good external liquidity with $2.5 billion of availability
under its secured revolving credit facility and a $764 million
unrestricted cash balance as of March 15, 2021. The revolving
credit facility, which expires in May 2024, contains a material
adverse change clause for new borrowings, a credit negative,
although the bank group has not determined that the February winter storm
represented a material adverse change.
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 secured debt,
NRG is in compliance and should not have any problem continuing to meet
these requirements even with the $2.9 billion Direct Energy
acquisition debt incurred and $750 million of losses in Texas.
Excluding non-recourse maturities, NRG does not have any
major debt maturities until 2024, when $600 million of senior
secured notes are due.
Outlook
NRG's stable outlook reflects its strong long-term business
fundamentals and its ability to manage and absorb the large one-time
loss in February, although this will mean that the company will
operate with higher debt leverage in 2021. Its outlook could return
to positive should it pay down any debt incurred as a result of the loss
and continue to strengthen its credit and business risk profile.
Texas will likely take measures to counter the potential impact on grid
reliability of more severe weather events. A positive outlook will
be dependent on clarity as to what form these measures will take and how
they might affect NRG's credit quality.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that Could Lead to an Upgrade
We could consider positive rating action should the company meet and maintain
its net debt to EBITDA target of around 2.5x to 2.75x and
produce a CFO pre-WC to debt ratio of 24% or higher.
Such an action would also be conditioned on our expectation that Texas
will take the necessary corrective actions to address its reliability
issues in a manner that is not credit negative for NRG.
Factors that Could Lead to a Downgrade
We could consider a negative rating action if the company diverges from
its low debt leverage policy and its CFO pre-WC to debt ratio is
below 18% on a sustained basis. We could also take a negative
rating action should Texas fails to make changes to its power supply system
and market design in a way that adequately addresses the impact of extreme
weather events and does not increase NRG's business risk.
Affirmations:
..Issuer: NRG Energy, Inc.
.... Probability of Default Rating,
Affirmed Ba1-PD
.... Corporate Family Rating, Affirmed
Ba1
....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)
....Senior Secured Revenue Bonds, Affirmed
Baa2 (LGD2)
..Issuer: Fort Bend County Industrial Development
Corp
....Senior Secured Revenue Bonds, Affirmed
Baa2 (LGD2)
..Issuer: Sussex (County of) DE
....Senior Secured Revenue Bonds, Affirmed
Baa2 (LGD2)
..Issuer: Texas City Industrial Development Corp.,
TX
....Senior Secured Revenue Bonds, Affirmed
Baa2 (LGD2)
Outlook Actions:
..Issuer: NRG Energy, Inc.
....Outlook, Changed To Stable From
Positive
..Issuer: Alexander Funding Trust
....Outlook, Remains Stable
The principal methodology used in these ratings was Unregulated Utilities
and Unregulated Power Companies published in May 2017 and available at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389.
Alternatively, please see the Rating Methodologies page on www.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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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 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.
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 www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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 www.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 www.moodys.com.
REFERENCES/CITATIONS
[1] Form 8-K (SEC) 17-Mar-2021
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
