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Rating Action:

Moody's upgrades NRG's CFR to Ba1 from Ba2, outlook positive

13 Dec 2019

New York, December 13, 2019 -- Moody's Investors Service ("Moody's") today upgraded NRG Energy, Inc.'s (NRG) Corporate Family Rating (CFR) to Ba1 from Ba2, its senior unsecured rating to Ba2 from Ba3 and its senior secured tax exempt bonds to Baa2 from Baa3. Moody's also upgraded NRG's Probability of Default Rating (PDR) to Ba1-PD.

NRG's secured revolving credit facility and senior secured first lien notes were affirmed at Baa3 because they contain a fall-away security provision where the security interest would cease to be effective if two rating agencies raise the company's rating to investment grade.

See below for the full list of rating actions on NRG. Outlook is positive.

"NRG continues to pursue its financial objectives, thanks to the company's progress on lowering its debt leverage," said Toby Shea VP -- Sr. Credit Officer, "The positive outlook looks to the sustainability of NRG maintaining its financial strategy and risk management commitments over the next eighteen months."

RATINGS RATIONALE

NRG's credit quality reflects that of a large merchant generator with a strong retail supply business and a relatively low leverage of 2.5x to 2.75x debt to EBITDA. The company was upgraded twice in the last two years following the implementation of its transformation plan, which involved divesting non-core business, simplifying its corporate structure, enhancing cash flows and reducing leverage.

NRG's generation business provides a little more than half of its EBITDA (~55%). Even though NRG's generation asset base is comprised mainly of older gas and coal power plants that have a poor cost position, they are concentrated in Texas (75% of EBITDA), where the market has been fairly strong for the past two years.

A little less than half of NRG's EBITDA (~45%) is generated from its retail business. The profitability of the retail business is derived mainly from selling electricity to mass customers in Texas. NRG's mass retail operations are substantially more stable and profitable than the typical retail electricity business in the US because it has a strong competitive advantage on brands and retention of high-quality customers.

NRG's generation is a critical complement to the retail business' stability and profitability. The generation capacity provides the retail business with an important physical hedge, so that it is protected from price spikes during hot summer days or having to post large sums of trade collateral to hedge counterparties.

From an environmental risk perspective, NRG is most exposed to carbon regulations. NRG has elevated carbon transition risks within the power generation sector on account of its business model as an unregulated power generator with significant fossil fuel exposure. The company has about 60% of its capacity in gas or oil fired generation, 35% in coal and 5% in nuclear. NRG produced about 46 million tons of carbon dioxide equivalent in 2018, which is down 36% from 2014, due a market-driven shift from coal to gas generation.

NRG's exposure to carbon regulations in California is not very material to credit quality because these regions provide less than 10% of the company's EBITDA. Although there are no carbon regulations elsewhere in the US, NRG's power plants in Texas and Midwest US have been severely affected by the growth of cleaner fuels such as natural gas and renewables. The continued decline in the cost of renewables and battery storage poses a substantial ongoing pressure on power prices in markets where NRG operates.

NRG achieved an 18% CFO pre-WC to debt for 2018 with a net debt to EBITDA target of 3.0x and should produce 24% CFO pre-WC to debt for 2019. The improvement in the CFO pre-WC to debt ratio in 2019 mainly reflects management's commitment to lowering its leverage target to 2.5x to 2.75x net debt to EBITDA. Our CFO pre-WC to debt ratios are calculated by consolidating non-recourse project finance debt proportional to NRG's share of ownership. If NRG sells its non-recourse projects, which is likely to occur post the bankruptcy of Pacific Gas & Electric Company, its CFO pre-WC to debt ratio would increase by about 270 basis points.

Liquidity

NRG's SGL-1 speculative liquidity rating reflects very good liquidity. The company is expected 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 expects NRG to produce more than $1 billion of annual free cash flow.

NRG continues to possess good liquidity with full availability on its $2.6 billion secured revolving credit facility as of repayments on 7 November 2019. The revolving credit facility, which expires in May 2024, 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.

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 positive ratings outlook reflects management's commitment to maintain its net debt to EBITDA of 2.5x to 2.75x. The positive outlook also incorporates the favorable power price environment in Texas.

Factors that Could Lead to an Upgrade

We could consider an upgrade of NRG to investment grade should the company maintain its 2.5x to 2.75x net debt to EBITDA targets and sustain a CFO pre-WC to debt ratio above 23% starting 2020, and if commodity markets remain manageable.

Factors that Could Lead to a Downgrade

We could consider stabilizing the outlook or take a negative rating action if the company relaxes its debt leverage target. A downgrade is likely should its CFO Pre-WC to debt ratio fall below 18%.

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.

Upgrades:

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

....Senior Secured Revenue Bonds, Upgraded to Baa2 (LGD2) from Baa3 (LGD2)

..Issuer: Delaware Economic Development Authority

....Senior Secured Revenue Bonds, Upgraded to Baa2 (LGD2) from Baa3 (LGD2)

..Issuer: Fort Bend County Industrial Development Corp

....Senior Secured Revenue Bonds, Upgraded to Baa2 (LGD2) from Baa3 (LGD2)

..Issuer: NRG Energy, Inc.

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, Upgraded to Ba1 from Ba2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 from Ba3

..Issuer: Sussex (County of) DE

....Senior Secured Revenue Bonds, Upgraded to Baa2 (LGD2) from Baa3 (LGD2)

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

....Senior Secured Revenue Bonds, Upgraded to Baa2 (LGD2) from Baa3 (LGD2)

Outlook Actions:

..Issuer: NRG Energy, Inc.

....Outlook, Remains Positive

Affirmations:

..Issuer: NRG Energy, Inc.

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

....Senior Secured Regular Bond/Debenture, Affirmed Baa3 (LGD2)

REGULATORY DISCLOSURES

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.

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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