Chautauqua (Cnty of) NY, Ind. Dev. Agency
Delaware Economic Development Authority
Fort Bend County Industrial Development Corp
GenOn Americas Generation, LLC
GenOn Energy, Inc.
GenOn Escrow Corp.
GenOn Mid-Atlantic, LLC
NRG Energy, Inc.
NRG REMA LLC
Sussex (County of) DE
Credit Opinion: NRG Energy, Inc.: Update following upgrade to Ba1
Credit Opinion: Sussex (County of) DE: Update to credit analysis following upgrade
Credit Opinion: NRG Energy, Inc.: Update following ratings upgrade
Credit Opinion: NRG Energy, Inc.: Update to credit analysis
Credit Opinion: NRG Energy, Inc.: A merchant power company undergoing a major transformation
Rating Action:
Moody's Confirms NRG Energy Ratings and Announces Other Rating Actions for GenOn Energy
Approximately $11 billion of debt securities affected
NOTE: On May 17, 2013, the press release was revised as follows: In the debt list, for issuer Genon Energy, Inc., the following corrections were made: (1) the outlook was corrected to "Revised to Stable from Developing" and (2) the Senior Unsecured debt was corrected to "Senior Unsecured: B2 , LGD 4 – 57% from B3, LGD 5 – 74%." Revised release follows.
New York, May 01, 2013 -- Moody's Investors Service today confirmed the ratings of NRG Energy Inc. (NRG, Ba3 Corporate Family Rating) and affirmed the Corporate Family Rating of GenOn Energy Inc. (GEN, B2). Concurrent with these rating actions, Moody's upgraded the Senior Unsecured debt instrument rating of GEN to B2 from B3, downgraded the Senior Secured debt instrument rating of GenOn Energy MidAtlantic, LLC (GENMA) to Ba2 from Ba1, downgraded the Senior Secured debt instrument rating of GenOn REMA, LLC (GREMA) to B2 from B1 and affirmed the Senior Unsecured debt instrument rating of GenOn Americas Generation, LLC (GENAG, B3). The ratings of NRG and GENMA had been placed under review for downgrade on 14 December 2012. Additionally, Moody's revised the outlook of NRG, GEN, GENAG, GENMA, and GREMA to stable, affirmed the Speculative Grade Liquidity (SGL) Rating of NRG at SGL-2 and revised the SGL Rating of GEN to SGL-3 from SGL-2.
RATINGS RATIONALE
The confirmation of NRG's ratings and its stable outlook are based on the company's position as one of the largest non-utility power generators and retailers in the US, its regional diversity, an apparently successful operational integration of GEN (acquired in December, 2012) with a clear path to achieve at least the planned level of synergies, a reasonable stability in cash flows provided by long-term contracts and hedging, our generally positive view of the supply-demand balance in the Texas power market, an apparent stabilization of natural gas prices with incipient signs of some reversal in coal-to-gas switching, the near-term expected completion of a major round of construction of solar and natural gas-fired projects, and our expectation that future growth projects will have long-term contracts and will be financed in a disciplined manner with non-recourse debt. These positive factors are balanced against our belief that power prices in most markets will have only finite upside for many years due to the overhang of shale gas and a spotty economic recovery, an expectation that cash flow to debt metrics will be somewhat weak for the rating category in the intermediate term (although free cash flow before growth investments is expected to be reasonably strong), and a management team that has a track record of transformational mergers, is highly shareholder focused (including a recent increase in its dividend), is financially sophisticated and at times opportunistic vis a vis its creditors. The confirmation also acknowledges that, while NRG acquired substantial debt with its acquisition of GEN, it has taken steps to insulate itself from those obligations. GEN's post-merger debt was about $5.5 billion.
"Continuing to maintain separate Corporate Family Ratings for NRG and GenOn Energy Inc. is based on certain key financing and structural elements that NRG put into place at the time of the merger, which lead us to conclude that the two parts of the company will have different risks of default, at least in the intermediate term," said Bill Hunter, VP, the lead analyst for NRG and GEN. "In general, we believe that a default at GEN would not necessarily lead to a default at NRG; however, a default at NRG would mostly likely also lead to a default at GEN." The key elements include an inter-company financing arrangement under which NRG has stepped into essentially the same collateral package as GEN's previous senior secured bank lenders, inter-company service contracts that permit NRG to garner most of the benefits of the anticipated cost synergies, and the continuation of GEN and GENMA as market-facing entities that will enter into their own third-party hedging contracts under existing collateral support and/or right-way hedging agreements without support from NRG. As excluded project finance subsidiaries, GEN and its subsidiaries will neither be guarantors of NRG debt nor benefit from a guarantee by NRG. In addition, the GEN family debt will be excluded from some NRG covenant tests (as would any disposition of GEN's assets), and there will be no cross-defaults between the GEN family debt and NRG's debt. If NRG is consistent in this approach, we would expect that maturities of GEN debt would be re-financed at the GEN level. While support by NRG for a meaningful portion of GEN's obligations would be a clear sign that the Corporate Family Ratings should be merged, we will also periodically assess the value of GEN as part of the overall NRG family. This periodic assessment could lead to assigning a single merged Corporate Family Rating, even if arm's length financing arrangements were to continue.
GEN's B2 Corporate Family Rating is based on a diversified portfolio of power plants, a meaningful percentage of hedged and contracted revenues, and diminished but reasonably good liquidity after the merger with NRG that we expect will be sufficient to bridge a period of generally negative free cash flow through 2015 based on expected lean operating cash flows combined with continuing, albeit reduced, environmental capex, balanced against high leverage, lower volumes, margin compression, and substantial announced retirements and deactivations in its primarily coal fired fleet due to increasingly stringent environmental regulations. GEN's liquidity was of considerable importance to prior senior management, and the maintenance of good stand-alone liquidity by NRG will be extremely important to GEN's ratings in light of its status as an excluded project finance subsidiary. The upgrade of GEN's senior unsecured debt to B2 from B3 is based on a substantially smaller amount of senior secured debt at GEN due to the prepayment of GEN's senior secured term loan and decrease in the amount of GEN's senior secured revolver.
The downgrade of GENMA's senior secured debt to Ba2 from Ba1 is based on our view that these assets, which were the crown jewels of the GEN family, have less relative importance within the much larger NRG family. While the locational value of these assets (situated near Washington, DC) is still substantial, more recent capacity auctions in PJM seem to point to a convergence of many of PJM's sub-markets. In addition, recent transactions for scrubbed coal plants in eastern and Midwestern metropolitan markets have occurred at relatively low values. Overall, a three notch uplift above GEN's B2 Corporate Family Rating appears more reasonable than the prior four notches.
The downgrade of GREMA's senior secured debt to B2 from B1 is based on the impact of increasingly stringent environmental mandates and a somewhat higher level of capacity reductions under NRG. Post-merger announced plant deactivations and lay-ups represent 53% of the fleet (69% of the coal fleet), including some units at two plants in PJM that GEN's management had announced would be retro-fitted.
The outlook for GENMA as well as the outlooks for GEN, GENAG and GREMA, which had been developing since the merger with NRG and were negative prior to its announcement, have been revised to stable. Notwithstanding structural separation from the parent, which limits upward ratings movement in the near term, the revision to a stable outlook acknowledges that these entities are now part of a larger family with greater ability to pare their costs and extract value through a broader wholesale and retail power marketing organization.
NRG's speculative grade liquidity rating of SGL-2 reflects our expectation that the company will maintain a good liquidity profile over the next 4-quarter period as a result of internal cash flow generation combined with continued access to credit availability, sufficient headroom under the company's covenants and the ability to raise cash from asset sales, if necessary. Total liquidity at 31 December 2012, was approximately $2.4 billion, including credit facility availability of approximately $1.1 billion and unrestricted cash (excluding GEN) of approximately $1.3 billion. NRG's liquidity is aided by the existence of standalone financing arrangements to fund the capital investments for the construction of solar generation and natural gas power plants and the use of a first-lien structure for certain hedges, which limits cash collateral calls. While we anticipate that the decline in energy margins will continue to reduce the headroom under the company's financial covenants, we believe that the company will remain in compliance on a ongoing basis. We also believe that NRG owns non-core assets that could be monetized for additional liquidity, if necessary. For example, in 2012 NRG completed the sale of its 41% interest in Schkopau for approximately $174 million. NRG has also monetized portions of its solar projects by bringing in minority investors.
GEN's SGL-3 liquidity rating, revised from SGL-2, takes into account an expectation of negative free cash flow over the next 12-24 months, combined with a materially reduced but still strong cash position that is offset by $575 million (face value) of debt maturities in 2014. Total liquidity at 31 December 2012, was approximately $1 billion, including credit facility availability of approximately $240 million and unrestricted cash (excluding GREMA) of approximately $800 million. While the inter-company revolving credit contains no financial covenants, we view it as providing less certainty of liquidity than a similar third-party arrangement. Conversely, we view that GEN's alternate liquidity has improved, since the sale of power plants securing the credit facility would require only the approval of NRG, rather than third party lenders. We expect that GEN will be able to finance its normal operating needs from internal sources, including drawing down its unrestricted cash, it will likely require access to credit markets to refinance the $575 million of 2014 notes while maintaining a sufficient level of cash to run its business. GEN's access to an adequate level of liquidity will continue to be an important driver for its ratings during the current period of low power prices in its core markets. The degree of cash burn will be an important future determinant for the ratings if GEN continues for an extended period as an excluded project finance subsidiary of NRG.
In light of NRG's somewhat weak metrics and the modest upside potential for unregulated power in most regions, limited prospects exist for NRG's ratings to be upgraded in the near-term. However, if NRG were able to generate higher than expected cash flows or reduce its debt such that its financial metrics were stronger on a sustainable basis, including a ratio of cash from operations before changes in working capital (CFO Pre-WC) to Debt (by which we mean NRG's consolidated debt, including debt of GEN and project debt in core businesses) that exceeded 15 % and free cash flow (including all capex) to Debt that exceeded 5%, ratings could be upgraded. Additional factors that would be important to a ratings upgrade include management's ability to keep all of its construction projects on time and within budget, delivering the projected cost synergies of approximately $300 million annually, modest levels of improvement in unregulated power margins, future capital spending at reasonable levels, and incremental debt retirement.
NRG's ratings could be downgraded if ratios were expected to deteriorate, such that on a sustained basis, Interest Coverage were below 1.8x, CFO Pre-WC/fully consolidated Debt were consistently below 10%, or free cash flow to debt excluding growth capex were below 5%. In addition, should material problems surface with the company's growth strategies, if there were weaker than expected market conditions across NRG's generation fleet, if the cost synergies of the GEN merger were not realized or if the company materially altered its capital allocation program in a manner detrimental to creditors, ratings could be downgraded. Based on our current financial forecast of NRG and GEN, NRG could be downgraded if the two Corporate Family Ratings were merged. If we were to downgrade NRG's Corporate Family Rating, it would most likely cause a downgrade for all of NRG's debt instrument ratings, including a downgrade of its Senior Secured debt to below investment grade.
GEN's ratings could be upgraded if the Corporate Family Ratings of GEN and NRG merged and GEN successfully refinanced its debt maturing in 2014. Alternately, ratings could be upgraded if there were a material improvement in forward capacity prices and/or energy prices (and especially the dark spread) that could be locked in, such that CFO pre-WC/Debt would be expected to exceed 10% and FCF/Debt would be expected to be flat or positive on a sustainable basis.
GEN's ratings could be downgraded if forward power prices and capacity prices deteriorated further, if additional environmental regulations were to materially increase capex or expected plant shutdowns, or if the liquidity cushion were materially eroded. In addition, ratings could be downgraded if our expectation of sustained cash flows were to change, such that the ratio CFO pre-WC/Debt would be expected to be in the low single digits and FCF excluding growth capex would be expected to be negative beyond the current period of environmental compliance spending.
Headquartered in Princeton, New Jersey, NRG owns and operates a portfolio of power-generating facilities, primarily in Texas and the Northeast, South Central and Western regions of the US. NRG also has ownership interests in a generating facility in Australia. As of 31 December 2012, NRG owned approximately 47,000 megawatts (MW) of electric generation, and had 1,780 MW under construction. NRG's retail businesses - Reliant Energy, Green Mountain Energy, and Energy Plus Holdings - serve more than 2 million residential, business, commercial and industrial customers on a combined basis in Texas and, increasingly, in certain markets in the northeast US. NRG acquired GEN on 14 December 2012.
Ratings Confirmed:
Issuer: NRG Energy, Inc
Corporate Family Rating: Ba3
Probability of Default Rating: Ba3-PD
Senior Secured Bank Facility: Baa3, LGD2 - 15%
Sussex County, Delaware Recovery Zone Facility Bonds Sr Secured Bonds: Baa3, LGD2 - 15%
Chautauqua (Cnty of) NY, Ind. Dev. Agency; Sr Sec Revenue Bonds due 2042: Baa3, LGD2 - 15%
Delaware Economic Dev. Auth: Senior Secured Revenue Bonds due 2045: Baa3, LGD2 - 15%
Fort Bend County Industrial Development Corporation Industrial Revenue Bonds Series 2012 and 2012B: Baa3, LGD2 - 15%
Senior Unsecured: B1, LGD4 - 65% from LGD4 -- 66%
Outlook: Revised to Stable from Under Review for Downgrade
Ratings Downgraded with Revised Outlook and Revised LGD Assessment:
Issuer: GenOn Mid-Atlantic, LLC
Senior Secured: Ba2, LGD 1 -- 4% from Ba1, LGD 2 -- 15%
Issuer: GenOn REMA, LLC
Senior Secured: B2, LGD 3 -- 44% from B1, LGD 3 -- 32%
Outlook: Revised to Stable from Developing
Ratings Upgraded with Revised LGD Assessment:
Issuer: Genon Energy, Inc.
Senior Unsecured: B2 , LGD 4 – 57% from B3, LGD 5 – 74%
Ratings Affirmed with Revised Outlook and Revised LGD Assessment:
Corporate Family Rating: B2
Probability of Default Rating: B2-PD
Issuer: GenOn Americas Generation, LLC
Senior Unsecured: B3, LGD 4 -- 58% from LGD 5 - 74%
Speculative Liquidity Ratings:
NRG Speculative-Grade Liquidity Rating: Affirmed at SGL-2
GEN Speculative-Grade Liquidity Rating: SGL-3 from SGL-2
The principal methodology used in this rating was the Unregulated Utilities and Power Companies published in August 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.
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William W. Hunter
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
William L. Hess
MD - Utilities