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Investing.com -- S&P Global Ratings has revised its outlook for NRG Energy, Inc. (NYSE:NRG) to stable from positive, following the energy company’s proposal to acquire a portfolio from LS Power Equity Advisors (LS Power) for approximately $12.1 billion. The portfolio includes Lightning Power LLC, Linebacker Power LLC, and CPower Energy Ltd. NRG plans to finance the purchase by raising a mix of senior secured debt and senior unsecured notes, and issuing $2.8 billion of equity to LS Power.
The acquisition will enable NRG to fully match its generation to residential retail load in Texas, a move seen as credit positive. The deal also diversifies NRG’s geographic exposure with the Lightning assets, which are primarily in the Pennsylvania-New Jersey-Maryland (PJM) and New York Independent (LON:IOG) System Operator (NY-ISO) regions. The debt-to-EBITDA ratio is expected to be above 4x at closing, declining to the mid 3x area by 2026, as NRG benefits from a full year’s contribution from the LS Power assets.
S&P Global Ratings also affirmed its ’BB’ issuer credit rating on NRG, its ’BBB-’ issue-level rating on the company’s senior secured debt, its ’BB’ rating on the senior unsecured debt, and its ’B’ rating on the preferred stock. The recovery rating on the senior secured debt remains ’1’ (rounded estimate:95%), indicating an expectation of very high recovery. The recovery rating on the senior unsecured debt remains ’4’ (rounded estimate:30%).
The stable outlook reflects the expectation that leverage will be momentarily elevated at financial close, until NRG starts paying down debt with internally generated cash flows. The acquisition is expected to increase NRG’s owned generation to 24.3 gigawatts (GW) from 11.4 GW, and improve its geographic diversity. This move significantly reduces key risks associated with an asset-light model, where the company had to rely on third parties to service its retail obligation.
The acquisition marks a shift from NRG’s previous strategy of expanding the retail and home service offering while selling down generation assets. The company’s retail platform continues to perform well, with NRG remaining one of the largest retail providers in the U.S. in both the residential and commercial and industrial (C&I) segments. Its total customer count is about 8 million as of the end of 2024, including about 2.1 million Smart Home/Vivint subscribers.
With the LS Power assets, NRG’s capacity will be about 47% in ERCOT, 41% in PJM, and 8% in NY-ISO. This compares favorably with its current footprint, where about 81% of the capacity is in ERCOT and 18% in PJM. The company’s fuel diversity compares unfavorably with that of peers. Pro forma for the transaction, NRG’s fleet will still largely be carbon-fueled, albeit with lower exposure to coal assets. NRG’s natural gas capacity will be about 75% of the fleet, compared with about 47% previously. Inversely, its coal assets will represent about 25% of capacity, compared with about 53% currently.
The company’s development pipeline is largely geared toward dispatchable generation in ERCOT. It plans to start building the 415 MW TH Wharton, 689 MW Cedar Bayou 5, and 443 MW Greens Bayou 6, which will be partially financed with low-cost financing from the Texas Energy Fund (TEF). The company is also projecting robust maintenance capex of about $200 million-$300 million annually for the company, given the average age of the fleet is about 32 years.
S&P Global Ratings expects that NRG will delever following its acquisition of the LS Power portfolio. Leverage will momentarily rise above 4x at closing, and then decrease to the mid 3x area by 2026, as the company receives a full yearly contribution from the LS Power assets. This improvement is expected to be largely spurred by debt repayment, which should be supported by NRG’s strong free cash flow conversion rate.
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