Fitch Affirms and Withdraws Ratings on NRG and GenOn Entities
NEW YORK -- December 17, 2013
Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of NRG Energy,
Inc. (NRG) at 'B+' and GenOn Energy, Inc. (GenOn) at 'B-'. Fitch has also
affirmed the IDRs of GenOn Americas Generation, LLC (GAG) and GenOn
Mid-Atlantic, LLC's (GMA) at 'B'. GAG and GMA are intermediate holding company
subsidiaries of GenOn. The Rating Outlook is Stable for NRG and the GenOn
Fitch is simultaneously withdrawing all the ratings for NRG, GenOn and GenOn's
subsidiaries. The level of information available through public disclosures is
insufficient for Fitch to support a rating for these entities. NRG's debt
structure has become complex over the last year driven by a series of
corporate transactions and increased use of non-recourse debt to finance
renewable and other conventional fuel projects. The acquisition of GenOn in
2012 and the recently announced proposed acquisition of Edison Mission Energy
(EME) are structured such that the target becomes an excluded project
subsidiary of NRG. NRG management provides forward-looking public disclosure
on a consolidated basis, which is inadequate to perform a rating analysis for
GenOn and its subsidiaries. At the same time, consolidated credit metrics
cannot be used to rate NRG's debt, in Fitch's view, since non-recourse debt
comprises approximately 50% of the total consolidated debt.
KEY RATING DRIVERS
The IDRs of NRG and GenOn are based on the respective standalone credit
profiles based on Fitch's assumption that there is a weak linkage between the
entities. 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 do 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. 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. Any demonstrated tangible support
by NRG towards GenOn, such as equity infusion or intercompany loans could be
deemed a sign of a tighter rating linkage.
NRG's major corporate transaction this year has been the formation and initial
public offering of NRG Yield Inc. (NRG Yield). NRG retains a 65.5% economic
and voting interest in NRG Yield. The assets that have been dropped down into
NRG Yield are renewable and natural gas fueled projects, whose economics are
well supported by long-term power purchase agreements. NRG Yield holds the
right of first refusal for six additional contracted assets currently owned by
NRG. To sustain its credit profile at the current rating level, Fitch would
expect NRG management to offset the loss of a stable, well-contracted stream
of cash flows with commensurate reduction in parental leverage.
Fitch does note that an emphasis on high distributions as well as a growing
stream of distributions at NRG Yield could create challenges for both the
company and its parent over the long term by having to ensure that assets are
available to drop down into NRG Yield. This could, in turn, cause NRG and/or
NRG Yield to pursue an aggressive acquisition-led strategy if organic growth
proves to be a challenge. In this vein, Fitch notes that the proposed
acquisition of EME could put pressure on NRG's credit metrics given the
acquisition price and the upfront partial debt funding unless the proceeds
from the drop down of contracted assets into NRG Yield are used for parent
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 free cash flow 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 provide physical backup to NRG's
retail aspirations in these markets, thereby lowering costs to compete. The
IDRs of GenOn, GAG and GMA primarily reflect a tepid power price environment,
compressed dark spreads, expiring above market hedges, and deactivations and
planned retirements of a portion of its coal fleet.
Fitch expects the consolidated credit profile for NRG to be modestly weaker
through 2015. GenOn's financial profile weakens in 2015 with the loss of
above-market hedges and lower capacity payments. On a consolidated basis,
Fitch anticipates NRG's funds flow from operations (FFO)-to-debt to be in the
12%-13% range and Debt/adjusted EBITDA to be in approximately 5.75x-6.00x
range by 2015, which is weak compared to Fitch's guideline metrics of 15%
FFO-to-debt and 5.0x Debt/adjusted EBITDA for a high-risk 'B+' rated issuer.
Fitch expects GenOn's FFO-to-debt to be in the 7%-10% range and Debt/adjusted
EBITDA to be approximately 7.0x by 2015.
Liquidity at NRG remains strong. As of Sept. 30, 2013, NRG had $3.7 billion of
liquidity, which reflects cash and cash equivalents of $2.4 billion and
revolver availability of $1.2 billion. Fitch expects NRG to generate upwards
of $1 billion in free cash flow in 2014-2015. These estimates do not reflect
the cash proceeds received from NRG Yield in return for assets to be dropped
down. In this context, management's future capital allocation policies will be
a key rating driver for NRG. GenOn had $825 million of unrestricted cash and
cash equivalents as of Sept. 30, 2013, with an additional $198 million
available under the $500 million intercompany revolver from NRG.
The Stable Outlooks for NRG, GenOn, GAG and GMA reflect strong liquidity to
withstand a sustained period of depressed natural gas prices, manageable debt
maturities, and greater diversity in generation portfolio.
The individual security issue ratings at NRG, GenOn, GAG and GMA 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 of NRG, GenOn, GAG and GMA using a
net present value analysis. 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. The generation asset net
present values (NPVs) vary significantly based on future gas price assumptions
and other variables, such as the discount rate and heat rate forecasts in the
deregulated markets, where the power generation assets are based. Fitch
calculates the value of NRG's retail business by applying a 5.0x multiple to
EBITDA expectations of $500 million.
Tough operating environment: Power prices continue to be depressed and show
only a modest recovery in tandem with natural gas prices in Fitch's base case
for most regions where NRG and GenOn and its subsidiaries operate. The only
exception is Texas, where reserve margins continue to fall and regulators
continue to debate structural changes that may lead to stronger price signals
to incentivize new generation. Worsening gas basis in PJM and potential for
tougher environmental rules in Maryland could render additional coal plants
uneconomic in GenOn's fleet. Competition continues to be intense in the retail
electricity markets and margins are under pressure. A meaningful worsening of
the current operating environment could adversely affect the credit profile of
NRG, GenOn, GAG and GMA.
Aggressive growth strategy: Fitch views the creation and partial spin-off of
NRG Yield and recently proposed EME acquisition as signs of the aggressive
growth strategy being pursued by management. The pricing of future drop downs
of contracted assets into NRG Yield and use of the proceeds remains uncertain.
Without a commensurate parent debt reduction, the proposed drop down of highly
contracted assets into NRG Yield would be detrimental to NRG's credit quality.
Capital allocation strategy: Capital allocation decisions by management will
be key rating drivers 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.
Fitch has affirmed and withdrawn the following ratings:
NRG Energy, Inc.
--Long-term 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.
--Long-term IDR at 'B-';
--Senior unsecured notes at 'B+/RR2';
--Short-term IDR at 'B'.
GenOn Americas Generation, LLC
--Long-term IDR at 'B';
--Senior unsecured notes at 'BB-/RR2'.
GenOn Mid-Atlantic, LLC
--Long-term IDR at 'B';
--Pass-through certificates at 'BB-/RR2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers'
(Nov. 19, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Shalini Mahajan, CFA, +1-212-908-0351
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Roshan Bains, +1-212-908-0211
Glen Grabelsky, +1-212-908-0577
Brian Bertsch, +1-212-908-0549 (New York)
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