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Rating Action:

Moody's upgrades NRG to Ba2, outlook positive

06 Dec 2018

Approximately $6.5 billion of debt affected

New York, December 06, 2018 -- Moody's Investors Service ("Moody's") today upgraded NRG Energy, Inc.'s (NRG) corporate family rating to Ba2 from Ba3 and its senior unsecured rating to Ba3 from B1. At the same time, we affirmed NRG's senior secured rating at Baa3. The rating outlook is positive. See below for the complete list of ratings and outlook actions for NRG.

"NRG's transformation plan is likely to produce lower debt leverage and a simpler capital structure," said Toby Shea VP -- Sr. Credit Officer, "As NRG executes on its plan, we see continued improvement in cash flow, which could lead to even higher ratings over the next twelve to eighteen months."

Upgrades:

..Issuer: NRG Energy, Inc.

.... Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD

.... Corporate Family Rating, Upgraded to Ba2 from Ba3

.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 (LGD5) from B1 (LGD4)

Affirmations:

..Issuer: Chautauqua (Cnty of) NY, Ind. Dev. Agency

....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 Baa3 (LGD2)

..Issuer: NRG Energy, Inc.

....Senior Secured Bank Credit Facility, Affirmed Baa3 (LGD2)

..Issuer: Sussex (County of) DE

....Senior Secured Revenue Bonds, Affirmed Baa3 (LGD2)

..Issuer: Texas City Industrial Development Corp., TX

....Senior Secured Revenue Bonds, Affirmed Baa3 (LGD2)

Outlook Actions:

..Issuer: NRG Energy, Inc.

....Outlook, Remains Positive

RATINGS RATIONALE

NRG is currently in the process of implementing its Transformational Plan, which involves selling roughly half of the company's assets and reducing debt leverage. We believe that the transformation plan will continue to improve the company's credit profile because the benefits of having lower leverage will outweigh the higher business risk associated with being a smaller, less contracted company.

As a smaller company, NRG will lose the scale and diversity benefits 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, where it has a large retail operation with matching generation capacity that generates about two thirds of segment EBITDA. The remaining one third will come from generation near Chicago and New York City and retail operations outside of Texas.

NRG's retail operation, which will contribute about 60% of segment EBITDA, buys power from the wholesale market or its generation affiliate on behalf of its end use customers. We generally view retail businesses as having high business risk, but NRG's retail operations in Texas, where it produces 85% of its retail EBITDA, are substantially more stable and profitable than typical retail electricity businesses across the US. NRG stands out as a market leader because it has a strong competitive advantage on pricing and customer retention.

According to NRG, the Transformation Plan will improve NRG's financial credit metrics, including lowering net debt/EBITDA to 3.0x on a corporate 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. However, there is execution risk associated with the plan because it involves mostly cash flow improvements through cost reductions and revenue enhancements, rather than debt reduction.

Liquidity Analysis

NRG's speculative grade liquidity rating is SGL-1. The company continues to possess good liquidity with $1.36 billion of unrestricted cash on hand and about $1.45 billion of unused capacity on its $2.4 billion secured revolving credit facility at September 30, 2018. 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 for new borrowings, a credit 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 secured debt, NRG is in compliance and should not have any problem meeting these requirements.

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 2023, when $1,857 million of term loan comes due.

Rating Outlook

The positive rating outlook reflects the company's deleveraging plan and the expectation that its cash flow to debt metrics will continue to improve in 2019.

Factors that Could Lead to an Upgrade

We could consider an upgrade of NRG's ratings should the company achieve CFO Pre-WC/debt in the high teens for 2019 on a sustainable basis.

Factors that Could Lead to a Downgrade

We could 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 fall to low teens range.

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.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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