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Rating Action:

Moody's revises NRG Energy's Outlook to Positive

06 Oct 2017

New York, October 06, 2017 -- Moody's Investors Service, ("Moody's") today revised NRG Energy, Inc.'s (NRG) rating outlook to positive from stable and affirmed NRG's Ba3 Corporate Family Rating (CFR).

"NRG's transformation plan, which includes selling off about half of its assets and reducing its leverage, is credit positive," said Toby Shea VP -- Senior Credit Officer. "Our positive outlook reflects the view that the benefits of having lower leverage will outweigh the higher business risk associated with being a smaller, less contracted company."

RATINGS RATIONALE

NRG will be roughly half of its current size following the completion of the transformation plan. As a smaller company, NRG will lose the benefits of its scale and diversity of its cash flows while margins and earnings will become more market driven since most of its contracted cash flows will be divested. After the transformation, NRG will be more concentrated in Texas, as these business operations become the dominant cash flow contributor within NRG. Moody's sees the strategic benefits of maintaining the Texas businesses as an integrated operation with a generation base that matches the retail load.

"We see some strategic benefits by keeping these assets integrated. Low wholesale power prices in ERCOT are offset by large retail margins with sticky customers." added Shea.

According to NRG, the transformation plan will improve NRG's financial credit metrics because it will lower net debt/EBITDA to roughly 3.0x on a consolidated basis by the end of 2018. Based on the company's debt/EBITDA target, we forecast that NRG's CFO Pre-WC to debt ratio will improve from about 10% in 2017, to the mid-teens range in 2018 and around 20% in 2019. As a point of reference, our financial benchmarks for Ba rating category is between 12% and 20%.

To achieve the 3.0x net debt/EBITDA target ratio, NRG's transformation plan calls for a $240 million (or 14%) increase in holding company EBITDA. This goal appears daunting because NRG will shed roughly $565 million of holding company EBITDA associated with its planned divestment of GenOn Energy (ratings withdrawn) and asset sales. NRG plans to make up the difference through a combination of lower operating costs and higher revenues -- to the tune of roughly $805 million. That being said, should cost cuts and revenue-enhancement initiatives fall short, NRG is committed to use sales proceeds, estimated to be $2.5 billion to $4 billion, to reduce debt levels in order to achieve its 3.0x net debt to EBITDA target.

Liquidity Analysis

NRG's speculative grade liquidity rating is SGL-2. The company continues to possess good liquidity with $571 million of unrestricted cash on hand and $1.5 billion of unused capacity on its $2.5 billion secured revolving credit facility at the end of June 30, 2017. The only usage under the credit facility is related to the issuance of letters of credit. NRG's revolving credit facility, which expires in June 2021, contains a material adverse change clause.

We expect NRG to produce more than $500 million of after-dividend free cash flow in 2018, without assuming any proceeds from asset sales. Excluding non-recourse maturities, NRG does not have any major debt maturities until July 2022, when $992 million of senior notes becomes due.

Rating Outlook

The positive rating outlook reflects the company's deleveraging plan to achieve 3x net debt to EBITDA by the end of 2018.

Factors that Could Lead to an Upgrade

We will consider an upgrade to NRG's ratings should the company achieve CFO Pre-WC/debt in the mid-teens for 2018 on a sustainable basis.

Factors that Could Lead to a Downgrade

We would consider stabilizing the outlook or take a negative rating action if the company fails to follow through on its deleveraging plan. In particular, a downgrade is possible if NRG's ratio of CFO Pre-WC/debt falls below the low teens range for a period of time.

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

Jim Hempstead
MD - Utilities
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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