Clearly unimpressed with NRG Energy’s efforts so far to unload more than 12,000 MW in power assets that it desperately needs to sell in order to shore up its finances, Moody’s Investors Service last Thursday lowered the debt ratings on the Minneapolis-based subsidiary of Xcel Energy. Fearing that Xcel Energy will get burned by the large amount of investments it has made in NRG Energy, Moody’s also lowered the debt ratings on Xcel Energy.

Last week’s action followed Standard & Poor’s decision to downgrade its credit ratings for NRG Energy to CCC from B-plus, citing NRG Energy’s urgent need to sell off a massive number of power generation assets in order to meet a $1.3 billion collateral payment deadline of Sept. 13 or convince lenders it will be able to make the payments soon (see NGI, Sept. 2).

For its part, Moody’s lowered the senior unsecured debt ratings of NRG Energy to Caa1 from B1 and the senior unsecured debt ratings of Xcel Energy to Baa3 from Baa2.

With respect to NRG Energy, ratings downgraded and under review for possible downgrade include:

Moody’s said the ratings action on NRG Energy’s debt reflected its weak cash flow relative to a high debt burden, a very weak liquidity position, “urgent need” for timely execution of asset sales in a weak market and dependence upon obtaining ongoing waivers from its banks to avoid collateral calls.

While NRG Energy was successful in obtaining a bank waiver through Sept. 13 and may prove to be successful in obtaining subsequent waivers from the banks, the success of NRG Energy’s strategy ultimately rests with its ability to successfully execute a substantial amount of asset sales over the next few months, the ratings agency said.

“While NRG is actively working toward this goal, the amount of completed and announced asset sales to date have been modest relative to the amount of capital that is needed to satisfy the collateral calls, ease liquidity pressures and reduce debt,” Moody’s said.

Lenders agreed last month to give NRG Energy a short extension on making collateral payments of between $1.1 billion and $1.3 billion, which were triggered by a credit rating downgrade to junk status earlier this summer. In order to meet those payments, NRG Energy plans to sell off about 12,300 MW of power generation, including its South Central U.S. power portfolio of about 7,420.1 MW of mostly gas-fired generation and its 4,880.2 MW of international power generation in Europe, the Asia-Pacific region and Latin America. The company anticipates raising more than $1.5 billion from the sales.

NRG Energy recently completed the sale of its 50% interest in the 192 MW coal-fired Collinsville Power Station on Queensland’s coast in Australia to a subsidiary of Transfield Services Ltd., an existing partner in the power plant.

Meanwhile, Moody’s said that Xcel Energy has the ability to provide up to $400 million of additional capital into NRG Energy, but the ratings agency thinks that such funding is dependent, in large part, upon the progress NRG Energy makes in selling assets, as well as the consent of NRG Energy’s bank lenders.

The ratings agency said that NRG Energy’s ratings remain under review, reflecting the execution risk for its asset sales and delevering strategy. The ratings of Xcel Energy also remain under review for possible downgrade.

Moody’s said the rating downgrade of Xcel Energy reflected the “poor performance and financial difficulties” of NRG Energy, in which Xcel Energy has made “substantial additional investments” this year. Moody’s expects that the diminished value of Xcel Energy’s investments in NRG Energy will be further reflected in write-downs on Xcel’s balance as NRG Energy makes substantial asset sales under financial pressure in a weak market.

Moody’s noted Xcel Energy has filed a request with the Securities and Exchange Commission to temporarily waive the requirement under the Public Utilities Holding Company Act of 1935 (PUHCA) that it maintain a 30% equity ratio on a consolidated basis.

Xcel Energy has provided approximately $500 million of capital into NRG Energy and provides up to $300 million of guarantees to support NRG Energy’s trading and marketing activities. Xcel Energy is limited by conditions in its credit agreement and by Section 53 of PUHCA to providing no more than $400 million to NRG Energy. Xcel Energy’s ability to provide additional support to NRG Energy will, in Moody’s opinion, depend upon the progress NRG Energy makes it completing asset sales and in working constructively with bank lenders.

Moody’s further noted Xcel Energy’s syndicated loan agreement requires its board of directors to review the dividend policy before declaring any further dividends of Xcel Energy common stock. The dividend policy is expected to be reviewed at a board meeting later this month.

Xcel Energy’s rating remains under review for possible downgrade due to the continued uncertainty about NRG Energy, the status of its dividend policy and the potential for litigation claims, including those that have already been filed against Xcel Energy relating to NRG Energy.

Moody’s notes that the Section 53 limitation in PUHCA and the specific language in the credit agreement caps the potential capital support that Xcel Energy can provide in the intermediate term, but does not limit its exposure to unfavorable litigation.

The rating action concerning the operating subsidiaries reflects Moody’s expectation of near-term pressure on the companies to dividend funds to help support the obligations of its parent. Moody’s said that the ratings “acknowledge the stand-alone financial strength of each of the operating subsidiaries, but balances this against the potential need for dividends to support the obligations of Xcel.”

A recent amendment reached among Xcel Energy and the banks has eased some of the immediate liquidity pressures at Xcel Energy, Moody’s added. The amendment eliminates a cross default provision that could have been triggered by an event of default at NRG Energy and as mentioned, places a cap on the amount of support that Xcel Energy can provide to NRG Energy.

Moody’s also lowered the debt ratings of three NRG-related projects, NRG Northeast Generating LLC, NRG South Central Generating LLC and LSP Energy Limited Partnership.

The downgrade of the debt of NRG Northeast and NRG South Central reflects the failure to satisfy the six-month debt service reserve requirement under the project bond indentures, as well as concerns that a bankruptcy of NRG could pose risks for these wholly-owned projects.

The downgrade of LSP Energy reflects ongoing weakness at the power plant caused by an extended outage which has reduced the amount of capacity payments received by the project, as well as concerns that the difficulties of NRG as owner and operator could have adverse affects for LSP Energy.

The ratings of all three project subsidiaries remain under review for further downgrade due to the weak and unstable credit position of the parent company. A bankruptcy filing by NRG Energy could have adverse effects on these three issuers.

NRG Energy, in a recent Securities and Exchange Commission filing, was unable to rule out the possibility of having to file for bankruptcy (see NGI, Aug. 19).

Moody’s also lowered the debt ratings of Xcel Energy’s operating subsidiaries Public Service Co. of Colorado, Southwestern Public Service Co., Northern States Power Co. (Minnesota) and Northern States Power Co. (Wisconsin).

The ratings for all of the operating utilities are removed from review for possible downgrade but have a negative rating outlook due to uncertainty about Xcel Energy’s dividend policy and concerns that credit quality may be weakened at the operating subsidiaries due to NRG Energy-related events.

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