Fitch Affirms NRG & Downgrades GenOn Following Merger Completion
NEW YORK -- December 18, 2012
Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of NRG Energy,
Inc. (NRG) at 'B+' and downgraded the IDR of GenOn Energy, Inc. (GenOn) to
'B-' from 'B'. Fitch's rating actions follow completion of the merger of GenOn
into NRG. Fitch has also downgraded the IDRs of GenOn Americas Generation, LLC
(GAG) and GenOn Mid-Atlantic, LLC's (GMA) to 'B' from 'B+'. GAG and GMA are
intermediate holding company subsidiaries of GenOn.
Fitch has removed NRG and GenOn entities from Rating Watch Negative. The
Rating Outlook is Stable for NRG and the GenOn entities. A complete list of
rating actions follows at the end of this release.
Fitch has determined that a weak linkage relationship exists between NRG and
GenOn and, therefore, the IDRs are being assigned to NRG and GenOn based on
the respective standalone credit profiles. As an excluded project subsidiary
of NRG, GenOn exhibits no specific, tangible legal ties with the parent. GenOn
and its subsidiaries do not guarantee NRG's debt nor any downstream guarantees
flow from NRG to GenOn or its subsidiaries. There are no cross default
provisions between NRG's debt and the debt at GenOn entities and GenOn's debt
is excluded from covenant calculation of NRG's debt.
Operational ties are limited by a shared services agreement between NRG and
GenOn that is expected to allocate a significant proportion of the synergy
benefits to NRG. The absence of common treasury and an arm's length bilateral
credit agreement between NRG and GenOn further limits the level of operational
integration between the two entities. Fitch does deem GenOn to hold strategic
importance for NRG, which is the basis of the merger transaction. Any
demonstrated tangible support by NRG towards GenOn, such as equity infusion or
intercompany loans could lead to ratings to be more closely linked in the
NRG's ratings are supported by a stronger post-merger business profile,
successful execution of an integrated wholesale/retail model in Texas, a
strong liquidity position, and the company's historically conservative hedging
strategy, which has enabled it to generate strong FCF despite a persistently
weak commodity environment. GenOn's generation portfolio lends geographic
diversity, size and scale benefits to NRG's fleet. GenOn's northeast and
western generation assets can provide physical backup to NRG's retail
aspirations in these markets, thereby lowering costs to compete.
NRG's other growth initiatives have been measured and largely driven by
renewable and repowering projects, whose economics are well supported by
long-term power purchase agreements and/ or low cost to entry. NRG has
aggressively expanded into solar projects over the last couple of years. Fitch
views NRG's current solar strategy as credit neutral.
Fitch expects the consolidated credit profile for NRG to be modestly weaker
post-merger through 2015. GenOn's financial profile weakens in 2015 with the
loss of above market hedges and lower capacity payments. The planned $1
billion debt reduction (of which ~$800 million has been completed) and $300
million of forecasted synergies and interest cost savings for the combined
entity provide only a partial offset. Fitch anticipates NRG's consolidated
funds from operations (FFO)-to-debt to be in the 13%-14% range and
Debt/adjusted EBITDA to be approximately 5.25x or higher by 2015, which is
modestly weaker compared to Fitch's guideline metrics of 15% FFO to debt and
5.0x Debt/adjusted EBITDA for a high-risk 'B+' rated issuer. These credit
metrics reflect deconsolidation of the three large solar projects that NRG is
pursuing with a conditional loan guarantee from the Department of Energy
(DOE), i.e. the Ivanpah, Agua Caliente, and California Valley Solar Ranch
Liquidity at NRG remains strong. As of Sept. 30, 2012, NRG had $2.7 billion of
adjusted liquidity, which reflects unrestricted cash and cash equivalents of
$1.6 billion and revolver availability of $1.1 billion. Fitch expects NRG to
generate upwards of $600 million in free cash flow in 2014. The free cash flow
outlook would continue to strengthen in Fitch's view driven by factors such as
gradual increase in natural gas prices, heat rate expansion due to tightening
supply conditions in regions such as Texas and higher capacity prices in the
Northeast driven by planned and anticipated coal plants retirements. In this
context, management's future capital allocation policies will be a key ratings
driver for NRG.
The one-notch downgrade in the IDRs of GenOn, GAG and GMA primarily reflects
the significant deterioration in credit metrics versus Fitch's expectations as
a result of the sharp secular fall and anticipated tepid recovery in natural
gas prices. Lower than expected capacity payments, compressed dark spreads,
expiring above market hedges, and deactivations and planned retirements of a
portion of its coal fleet are exerting considerable pressure on GenOn's cash
flows. Despite the $686 million in debt reduction as a result of the merger,
the capital structure remains highly leveraged. Fitch anticipates GenOn's
FFO-to-debt to be in the 7-9% range and Debt/adjusted EBITDA to be
approximately 7.5x by 2015.
GenOn's ratings are supported by strong liquidity that provides cushion to
sustain a prolonged trough in power prices. GenOn had approximately $1.7
billion of cash and cash equivalents as of Sept. 30, 2012 prior to the pay
down of the $686 million term loan. Liquidity is further supported by the $500
million bilateral credit agreement with NRG. Fitch has withdrawn the senior
secured debt rating at GenOn due to the pay down of the senior secured term
loan and the elimination of the $788 million bank credit facility.
The Stable Outlooks for NRG and the GenOn entities reflect strong liquidity to
withstand a sustained period of depressed natural gas prices, manageable debt
maturities, and greater diversity in generation portfolio post-merger. Fitch
also expects that the merger integration will be executed successfully and a
large proportion of anticipated synergy benefits will be realized.
The individual security issue ratings at NRG, GenOn, GMA and GAG are notched
above or below the IDR, as a result of the relative recovery prospects in a
hypothetical default scenario. Fitch values the power generation assets that
support the entity level debt using a net present value analysis. The
generation asset net present values vary significantly based on future gas
price assumptions and other variables, such as the discount rate and heat rate
forecasts in ERCOT, Northeast, Southeast and California.
For the net present valuation of generation assets used in Fitch's recovery
valuation case, Fitch uses the plant valuation provided by its third-party
power market consultant, Wood Mackenzie, as an input as well as Fitch's own
gas price deck and other assumptions. Fitch calculates the value of NRG's
retail business by applying a multiple to EBITDA expectations.
What could trigger a Rating Action:
--Positive rating actions on NRG, GenOn, GMA and GAG are not contemplated at
--Significant deterioration in power prices: A significant worsening of the
commodity environment could drive negative rating actions for NRG and the
--Capital allocation strategy: Capital allocation decisions by management will
be key ratings driver for NRG. Large shareholder friendly actions without
commensurate debt reduction could lead to negative rating actions. An
aggressive growth strategy focused on expansion of merchant generation assets
would also be a cause for concern.
--Environmental compliance: Trends in environment regulation are also a key
ratings driver given the still high coal exposure of the combined portfolio.
Fitch has affirmed the following ratings:
NRG Energy, Inc.
--IDR at 'B+';
--Senior secured term loan B at 'BB+/RR1';
--Senior secured revolving credit facility at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR2';
--Convertible preferred stock at 'B-/RR6'.
GenOn Energy, Inc.
--Short-term IDR at 'B'.
Fitch has downgraded the following ratings:
GenOn Energy, Inc.
--IDR to 'B-' from 'B';
--Senior unsecured notes to 'B+/RR2' from 'BB-/RR2'.
GenOn Americas Generation, LLC
--IDR to 'B' from 'B+';
--Senior unsecured notes to 'BB-/RR2' from 'BB/RR2'.
GenOn Mid-Atlantic, LLC
--IDR to 'B' from 'B+';
--Pass-through certificates to 'BB-/RR2' from 'BB/RR2'.
The Rating Outlook is Stable for all of the above ratings.
Fitch has withdrawn the following ratings:
GenOn Energy, Inc.
--Senior secured term loan B at 'BB/RR1';
--Senior secured revolver at 'BB/RR1'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Ratings and Notching Criteria for Utilities', Nov. 13, 2012;
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'Rating North American Utilities, Power, Gas and Water Companies', May 16,
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Utilities
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Rating North American Utilities, Power, Gas, and Water Companies
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