New York, September 6, 2002 — Moody’s Investors Service Thursday lowered the debt ratings of Xcel Energy Inc. and NRG Energy, and several subsidiaries.
The ratings agency lowered Xcel Energy’s senior unsecured ratings to Baa3 from Baa2. NRG Energy’s senior unsecured ratings were lowered to Caa1 from B1.
Moody’s also lowered the debt ratings of Xcel’s operating subsidiaries Public Service Company of Colorado, Southwestern Public Service Company, Northern States Power Company (Minnesota), and Northern States Power Company (Wisconsin). The ratings of Xcel remain under review for possible downgrade.
On the NRG side, Moody’s lowered the debt ratings of three NRG related projects, NRG Northeast Generating LLC, NRG South Central Generating LLC, and LSP Energy Limited Partnership.
Ratings downgraded and under review for possible further downgrade include:
Xcel Energy, Inc.
* Issuer rating, senior unsecured debt, and syndicated bank credit facility, to Baa3 from Baa2;
* Preferred stock rating to Ba2 from Ba1;
* Shelf registration for senior unsecured debt to (P)Baa3 from (P)Baa2.
Xcel’s short term rating for commercial paper is lowered to Not Prime from Prime-3.
Xcel Energy ratings downgraded, and removed from review for possible downgrade include:
Public Service Company of Colorado
* Senior secured debt to Baa1 from A3;
* Issuer rating, senior unsecured debt and senior unsecured pollution control bonds to Baa2 from Baa1;
* Trust preferred stock of PSCO Capital Trust I to Baa3 from Baa2;
* Shelf registration for the issuance of debt securities to (P)Baa1, (P)Baa2, (P)Baa3, and (P)Ba1 from (P)A3, (P)Baa1, (P)Baa2, and (P)Baa3.
Southwestern Public Service Company
* Issuer rating and senior unsecured debt to Baa1 from A3;
* Trust preferred stock of Southwestern Public Service Capital I to Baa2 from Baa1;
* Shelf registration for the issuance of debt securities to (P)Baa1, (P)Baa2, and (P)Baa3 from (P)A3, (P)Baa1, and (P)Baa2.
Northern States Power Company (Minnesota)
* Senior secured debt and senior secured pollution control bonds, lowered to A3 from A2;
* Issuer rating, senior unsecured debt and senior unsecured pollution control bonds, lowered to Baa1 from A3;
* Trust preferred stock of NSP Financing I lowered to Baa2 from Baa1;
* Shelf registration for the issuance of secured and unsecured debt lowered to (P)A3 and (P)Baa1, from (P)A2 and (P)A3, respectively.
* Short-term rating for commercial paper to Prime-2 from Prime-1
Northern States Power Company (Wisconsin)
* Senior secured debt rated lowered to A3 from A2;
* Senior unsecured debt and senior unsecured pollution control bonds lowered to Baa1 from A3
NRG ratings downgraded and under review for possible downgrade include:
* NRG Energy, Inc. senior unsecured to Caa1 from B1, and Senior Implied to B3 from Ba3;
* NRG Energy Pass-Through Trust 2000-1 remarketable or redeemable securities to Caa1 from B1;
* NRG Energy Shelf Registration to (P)Caa1 from (P) B1, and (P)Caa3 from (P)B3;
* NRG Northeast Generating LLC (NRG Northeast) senior secured debt and issuer rating to B3 from Baa3;
* NRG South Central Generating LLC (NRG South Central) senior secured debt to B3 from Baa2, and issuer rating to B3 from Baa3;
* LSP Energy Limited Partnership (LSP Energy) senior secured debt to B1 from Baa3
Xcel’s rating action
The rating action on Xcel reflects the poor performance and financial difficulties of its subsidiary NRG Energy, Inc., in which Xcel has made substantial additional investments this year. Moody’s expects that the diminished value of Xcel’s investments in NRG investment will be further reflected in write-downs on Xcel’s balance as NRG makes substantial asset sales under financial pressure in a weak market.
Xcel has filed with the Securities and Exchange Commission a request 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 has provided approximately $500 million of capital into NRG Energy (NRG) and provides up to $300 million of guarantees to support NRG’s trading and marketing activities. Xcel is limited by conditions in its credit agreement and by Section 53 of PUHCA to providing no more than $400 million to NRG.
Xcel’s ability to provide additional support to NRG will, in Moody’s opinion, depend upon the progress NRG makes it completing asset sales and in working constructively with bank lenders. Moody’s notes Xcel’s syndicated loan agreement requires its Board of Directors to review the dividend policy before declaring any further dividends of Xcel common stock. The dividend policy is expected to be reviewed at a board meeting later this month.
Xcel’s rating remains under review for possible downgrade due to the continued uncertainty about NRG, the status of its dividend policy, and the potential for litigation claims, including those which have already been filed against Xcel relating to NRG.
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 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 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 and the banks has eased some of the immediate liquidity pressures at Xcel. The amendment eliminates a cross default provision that could have been triggered by an event of default at NRG and as mentioned, places a cap on the amount of support that Xcel can provide to NRG.
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’s dividend policy and concerns that credit quality may be weakened at the operating subsidiaries due to NRG related events.
NRG Energy’s rating action
The rating action on NRG Energy’s debt reflects 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 on-going waivers from NRG’s banks to avoid collateral calls.
While NRG was successful in obtaining a bank waiver through September 13, 2002 and may prove to be successful in obtaining subsequent waivers from the banks, the success of NRG’s strategy ultimately rests with its ability to successfully execute a substantial amount of asset sales over the next few months.
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 needed to satisfy the collateral calls, ease liquidity pressures, and reduce debt.
Xcel Energy, NRG’s parent, has the ability to provide up to $400 million of additional capital into NRG, but Moody’s believes that such funding is dependent, in large part, upon the progress NRG makes in selling assets, as well as the consent of NRG’s bank lenders. NRG’s ratings remain under review, reflecting the execution risk for its asset sales and delevering strategy.
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. Under the project bond indentures, a six-month debt service reserve must be provided from either cash, a letter of credit from an A2 or equivalent rated bank, or by a guarantor rated at least Baa3 or equivalent.
NRG had previously guaranteed both issuers’ six-month debt service reserve. As a condition to the waiver under its bank facility, NRG agreed not to fund both debt service reserves. In recent SEC filings by NRG Northeast and NRG South Central, NRG management expressed a belief that NRG’s lenders will consent to funding the debt service reserve accounts in advance of any potential acceleration, given the long-term inherent value of both assets to NRG.
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 debt service coverage ratio for LSP Energy is expected to remain below 1.2 times for the foreseeable future. LSP Energy’s debt service reserve is funded with cash and the plant is expected to generate sufficient cash flow over the next few years to satisfy annual payment obligations on a standalone basis.
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 could have adverse effects on these three issuers.
About Xcel Energy
Headquartered in Minneapolis, Xcel is a holding company for four operating utilities and wholly-owns NRG Energy, Inc.
About NRG Energy
Headquartered in Minneapolis, MN, NRG Energy, Inc. is a competitive electricity generation company and a wholly-owned subsidiary of Xcel Energy, Inc.