Rating Action: Moody's affirms NRG's Ba1 CFR; outlook positive
Global Credit Research - 24 Jul 2020
Approximately $7 billion of debt securities affected
New York, July 24, 2020 -- Moody's Investors Service ("Moody's") today affirmed NRG Energy, Inc.'s (NRG) corporate family rating (CFR) of Ba1 with a positive outlook. Moody's also affirmed the ratings on all of NRG's outstanding debt, including the Ba2 rating on senior unsecured bonds, Baa3 rating on senior secured bonds with fall-away security provisions, and Baa2 rating on senior secured bonds without the fall-away feature. NRG's SGL-1 speculative grade liquidity rating is unchanged. See the rating list below for the complete detail of all the rating actions.
The rating affirmation follows NRG's announcement that it will acquire Centrica plc's (Baa2 stable) retail, trading and marketing subsidiary Direct Energy LP for $3.6 billion. NRG expects the transaction to close in the fourth quarter of this year, and the purchase will be funded initially with $2.36 billion debt and $0.75 billion of preferred shares. NRG has committed to reduce this additional leverage and meet its previously targeted net debt to EBITDA ratio of 2.5x to 2.75x by the end of 2021. Our expectation that NRG management will meet its commitment to reduce its leverage ratio is a key driver of the rating affirmation and the maintenance of a positive outlook and is an important corporate governance consideration.
"The acquisition of Direct Energy will raise NRG's business risk, but not enough to knock it off its trajectory towards an investment-grade rating", said Toby Shea VP -- Senior Credit Officer., "However, any consideration of an upgrade will only occur after NRG has paid down the additional debt incurred as a result of the acquisition."
NRG's credit quality reflects that of a large, diversified merchant power company with a highly profitable retail supply segment and relatively low leverage of 2.5x to 2.75x debt to EBITDA, which will temporarily increase when this transaction closes later this year. Based on the company's guidance for 2020, NRG will generate about $2 billion of EBITDA, with its generation business and retail business contributing about an equal amount. NRG's business activity is currently concentrated in Texas, contributing about 70% of its EBITDA. Acquiring Direct Energy will reduce this Texas concentration to 60%, a credit positive.
Within the retail business, NRG sells to both mass customers (predominantly residential) and large commercial and industrial (C&I) customers, but mass customers account for vast majority (>90%) of the EBITDA. Adding Direct Energy will likely add about $400 million of EBITDA to NRG's retail operation. However, less profitable C&I retail customers comprise a more substantial share of Direct Energy's retail business -- at about 40%.
NRG's generation business is more volatile than its retail operations. The 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 trade collateral required for the retail operation. NRG has some generation in excess of its retail load that may be used to serve Direct Energy's retail load. However, the match is imperfect as Direct Energy will add retail load in Texas and Alberta, Canada, where NRG currently does not have excess generation.
Direct Energy has an energy asset management business that will, in our view, represent a step increase in NRG's business risk associated with wholesale trading. Even though the business will represent less than 5% of NRG's total EBITDA, the trading risk involved will be disproportionately more significant. In this business, utilities and plant owners outsource their plant operation to Direct Energy under asset management agreements. The associated trading risk arises when Direct Energy uses the market insight gained as a plant operator to try to turn a profit by taking a trade position.
The rapid spread of the coronavirus outbreak, severe global economic shock, low oil prices and asset price volatility are creating a severe and extensive credit shock across many sectors, regions, and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. However, we do not consider the impact of the coronavirus outbreak to be a material credit driver for NRG.
We expect the ongoing effects of coronavirus outbreak and low oil prices to be manageable for NRG. The company has indicated that lower demand and uncollectable bills may amount to $50 million for 2020. We generally expect the business environment to recover close to normal in 2021. Forward power prices for 2021 have also held up thus far, an important credit consideration.
As events related to the coronavirus continue, we are taking into consideration a wider range of potential outcomes, including more severe downside scenarios. The effects of the pandemic could result in financial metrics that are weaker than expected; however, we see these issues as temporary and not reflective of the long-term financial or credit profile of NRG.
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 free cash flow over the next 12 months, not including any additional free cash flow from Direct Energy. The company continues to possess good external liquidity with full availability on its $2.6 billion secured revolving credit facility. 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 even in light of the Direct Energy acquisition.
Excluding non-recourse maturities, NRG does not have any major debt maturities until 2024, when $600 million of senior secured notes are due.
NRG has indicated that it will obtain another $3.5 billion of liquidity facilities, including cash-collateralized credit facilities, that can only be used to issue letters of credit, to account for the operational needs of Direct Energy. This amount is sized conservatively and we expect NRG to pare it down after it has the opportunity to integrate Direct Energy's operations and rationalize its trading relationships.
NRG's positive outlook reflects management's commitment to bring its net debt to EBITDA ratio back to 2.5x to 2.75x by the end of 2021. It considers our expectation that the company will continue its financial deleveraging and risk management strategy over the next 18 months as it digests the Direct Energy acquisition. The positive outlook also incorporates the favorable forward power price environment in Texas and the limited impact of the coronavirus pandemic on NRG.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that Could Lead to an Upgrade
We could consider an upgrade of NRG to investment grade should the company meet its 2.5x to 2.75x net debt to EBITDA target and sustain a CFO pre-WC to debt ratio of 24% or above.
Factors that Could Lead to a Downgrade
We could consider stabilizing the outlook or taking a negative rating action if
- the company fails to meet its target debt leverage ratios
- the integration of the Direct Energy acquisition is poorly executed, or
- trading or other risks at Direct Energy turn out to be higher than we expect
A downgrade is also likely should its CFO pre-WC to debt ratio fall below 18%.
NRG Energy, Inc. is a major energy provider headquartered in Princeton, NJ. The company provides electricity, natural gas and other energy solutions to more than 3.7 million residential, small business, and commercial and industrial customers through its various brands and 22.8 GW of generating capacity.
Affirmations: ..Issuer: NRG Energy, Inc.
....Corporate Family Rating, Affirmed Ba1
....Probability of Default Rating, Affirmed Ba1-PD
....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD5)
....Senior Secured Regular Bond/Debenture, Affirmed Baa3 (LGD2)
....Senior Secured Bank Credit Facility, Affirmed Baa3 (LGD2)
..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 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)
..Issuer: NRG Energy, Inc.
....Outlook, Remains Positive
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.
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_1133569.
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.
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
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