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Rating Action:

Moody's Affirms Ratings of NRG Energy and GenOn Energy, Including NRG's Increased and Extended Senior Secured Debt Facilities

22 May 2013

Approximately $11 billion of debt securities affected

New York, May 22, 2013 -- Moody's Investors Service today affirmed the ratings of NRG Energy Inc. (NRG, Ba3 Corporate Family Rating) and its subsidiary GenOn Energy Inc. (GEN, Corporate Family Rating B2). Concurrent with these rating actions, Moody's assigned a rating of Baa3 to NRG's extended and re-priced approximately $2.3 billion Senior Secured Bank Revolving Credit maturing 2018 (extended from 2016) and to its re-priced and upsized Senior Secured Term Loan maturing 2018 (increased to $2.02 billion from $1.57 billion). NRG launched the refinancing of the Senior Secured Bank Facilities on 17 May 2013, and they are expected to close by the end of this month.

NRG has stated it expects to utilize the $450 million increase in the Term Loan for general corporate purposes, including approximately $120 million to finance 50% of its upcoming $244 million purchase of the Gregory Cogen plant located in Texas. GEN plans to issue an early redemption notice for its $575 million 7.625% senior unsecured notes due 2014, utilizing primarily its own cash on hand and, potentially, a drawing under the $500 million senior secured revolving credit that NRG made available to GEN in conjunction with their December 2012 merger. NRG may use a portion of its Term Loan to fund this potential drawing.

"The increase in NRG's Senior Secured debt somewhat dilutes the priority position of that debt class relative to junior debt classes, but not enough to cause a change in ratings at this time," said Bill Hunter, Vice President. "However, any further material increase in Senior Secured debt could alter that dynamic and our assessment of the cushion supporting the Senior Secured rating, potentially leading to a downgrade of the current Baa3 rating to sub-investment grade."

The affirmation of NRG's ratings and its stable outlook are based on the company's position as one of the largest non-utility power generators and retailers in the US, its regional diversity, an apparently successful operational integration of GEN (acquired in December, 2012) with a clear path to achieve at least the planned level of synergies, a reasonable stability in cash flows provided by long-term contracts and hedging, our generally positive view of the supply-demand balance in the Texas power market, an apparent stabilization of natural gas prices with incipient signs of some reversal in coal-to-gas switching, the near-term expected completion of a major round of construction of solar and natural gas-fired projects, and our expectation that future growth projects will have long-term contracts and will be financed in a disciplined manner with non-recourse debt. These positive factors are balanced against our belief that power prices in most markets will have only finite upside for many years due to the overhang of shale gas and a spotty economic recovery, an expectation that cash flow to debt metrics will be somewhat weak for the rating category in the intermediate term (although free cash flow before growth investments is expected to be reasonably strong), and a management team that has a track record of transformational mergers, is highly shareholder focused (including a recent increase in its dividend), is financially sophisticated and at times opportunistic vis a vis its creditors. The affirmation also acknowledges that, while NRG acquired substantial debt with its acquisition of GEN, it has taken steps to insulate itself from those obligations. In addition to its position as GEN's senior secured lender (NRG has the same collateral package that GEN's senior lenders had under the former bank facilities), NRG earns commitment fees and an interest margin from GEN that are substantially higher than the margins and fees NRG pays under its bank facilities.

The other key elements leading to separate Corporate Family Ratings for NRG and GEN include inter-company service contracts that permit NRG to garner most of the benefits of the anticipated cost synergies, and the continuation of GEN and GENMA as market-facing entities that will enter into their own third-party hedging contracts under existing collateral support and/or right-way hedging agreements without support from NRG. Since the merger with NRG, and including the planned early redemption of the 2014 notes, GEN will have used over $1.1 billion of its cash to prepay indebtedness, greatly reducing GEN's liquidity. As excluded project finance subsidiaries, GEN and its subsidiaries will neither be guarantors of NRG debt nor benefit from a guarantee by NRG. In addition, the GEN family debt will be excluded from some NRG covenant tests (as would any disposition of GEN's assets), and there will be no cross-defaults between the GEN family debt and NRG's debt. If NRG is consistent in this approach, we would expect that future maturities of GEN debt would also be re-financed at the GEN level. While support by NRG for a meaningful portion of GEN's obligations would be a clear sign that the Corporate Family Ratings should be merged, we will also periodically assess the value of GEN as part of the overall NRG family. This periodic assessment could lead to assigning a single merged Corporate Family Rating, even if arm's length financing arrangements were to continue.

GEN's B2 Corporate Family Rating and its stable outlook are based on a diversified portfolio of power plants, a meaningful percentage of hedged and contracted revenues, and decreased interest expense due to prepayments of debt that are expected to total approximately $1.25 billion from December 2012 through June 2013. These positive factors are balanced against diminished liquidity that we expect will be just sufficient to bridge a period of generally negative free cash flow through 2015 based on expected lean operating cash flows combined with continuing, albeit reduced, environmental capex, high leverage, lower volumes, margin compression, and substantial announced retirements and deactivations in its primarily coal-fired fleet due to increasingly stringent environmental regulations. The stable outlook for GEN acknowledges that it now part of a larger family with greater ability to pare its costs and extract value through a broader wholesale and retail power marketing organization.

NRG's speculative grade liquidity rating of SGL-2 reflects our expectation that the company will maintain a good liquidity profile over the next 4-quarter period as a result of internal cash flow generation combined with continued access to credit availability, sufficient headroom under the company's covenants and the ability to raise cash from asset sales, if necessary. Total liquidity at 31 March 2013 was approximately $2.0 billion (down from $2.3 billion at 31 December 2012), including credit facility availability of approximately $1.2 billion and approximately $0.8 billion of unrestricted cash (excluding GEN's cash and funds deposited by counterparties). NRG's liquidity is aided by the existence of standalone financing arrangements to fund the capital investments for the construction of solar generation and natural gas power plants and the use of a first-lien structure for certain hedges, which limits cash collateral calls. While we anticipate that the decline in energy margins will continue to reduce the headroom under the company's financial covenants, we believe that the company will remain in compliance on a ongoing basis. We also believe that NRG owns non-core assets that could be monetized for additional liquidity, if necessary. For example, in 2012 NRG completed the sale of its 41% interest in Schkopau for approximately $174 million. NRG has also monetized portions of its solar projects by bringing in minority investors.

GEN's SGL-3 liquidity rating takes into account an expectation of negative free cash flow over the next 12-24 months, combined with a materially reduced cash position in light of its planned prepayment of $575 million (face value) of debt maturities in 2014. Total liquidity at 31 March 2013 was approximately $1 billion, including credit facility availability of approximately $206 million and unrestricted cash (excluding our estimate of $30 million of cash held by GenOn REMA, LLC) of approximately $843 million. While the inter-company revolving credit contains no financial covenants, we view it as providing less certainty of liquidity than a similar third-party arrangement. Conversely, we view that GEN's alternate liquidity as better than it was pre-merger, since the sale of power plants securing the credit facility would require only the approval of NRG, rather than third party lenders. While we expect that GEN will be able to finance normal operating needs from internal sources over the next 12 months, management's stated goal of maintaining $200 million of liquidity (compared to GEN's unrestricted cash of about $1.8 billion at 30 September 2012, before the merger) distinctly reduces the margin of error. However, GEN faces no material debt maturities until 2017.

In light of NRG's somewhat weak metrics and the modest upside potential for unregulated power in most regions, limited prospects exist for NRG's ratings to be upgraded in the near-term. However, if NRG were able to generate higher than expected cash flows or reduce its debt such that its financial metrics were stronger on a sustainable basis, including a ratio of cash from operations before changes in working capital (CFO Pre-WC) to Debt (by which we mean NRG's consolidated debt, including debt of GEN and project debt in core businesses) that exceeded 15 % and free cash flow (including all capex) to Debt that exceeded 5%, ratings could be upgraded. Additional factors that would be important to a ratings upgrade include management's ability to keep all of its construction projects on time and within budget, delivering the projected cost synergies of approximately $300 million annually, modest levels of improvement in unregulated power margins, future capital spending at reasonable levels, and incremental debt retirement.

NRG's ratings could be downgraded if ratios were expected to deteriorate, such that on a sustained basis, Interest Coverage were below 1.8x, CFO Pre-WC/fully consolidated Debt were consistently below 10%, or free cash flow to debt excluding growth capex were below 5%. In addition, should material problems surface with the company's growth strategies, if there were weaker than expected market conditions across NRG's generation fleet, if the cost synergies of the GEN merger were not realized or if the company materially altered its capital allocation program in a manner detrimental to creditors, ratings could be downgraded. Based on our current financial forecast of NRG and GEN, NRG could be downgraded if the two Corporate Family Ratings were merged. If NRG's CFR and Probability of Default Rating (PDR) were to be downgraded from the current Ba3, the ratings on the senior secured obligations would in all likelihood be downgraded below investment grade. Furthermore, changes to the capital structure at NRG that caused any further material increase in the relative amount of secured debt while decreasing the relative amount of unsecured debt could result in a lower instrument rating for the senior secured obligations, even if NRG's fundamental credit quality remained unchanged.

GEN's ratings could be upgraded if the Corporate Family Ratings of GEN and NRG merged and GEN successfully refinanced its debt maturing in 2014. Alternately, ratings could be upgraded if there were a material improvement in forward capacity prices and/or energy prices (and especially the dark spread) that could be locked in, such that CFO pre-WC/Debt would be expected to exceed 10% and FCF/Debt would be expected to be flat or positive on a sustainable basis.

GEN's ratings could be downgraded if forward power prices and capacity prices deteriorated further, if additional environmental regulations were to materially increase capex or expected plant shutdowns, or if the liquidity cushion were materially eroded. In addition, ratings could be downgraded if our expectation of sustained cash flows were to change, such that the ratio CFO pre-WC/Debt would be expected to be in the low single digits and FCF excluding growth capex would be expected to be negative beyond the current period of environmental compliance spending.

Headquartered in Princeton, New Jersey, NRG owns and operates a portfolio of power-generating facilities, primarily in Texas and the Northeast, South Central and Western regions of the US. NRG also has ownership interests in a generating facility in Australia. As of 31 December 2012, NRG owned approximately 47,000 megawatts (MW) of electric generation, and had 1,780 MW under construction. NRG's retail businesses - Reliant Energy, Green Mountain Energy, and Energy Plus Holdings - serve more than 2 million residential, business, commercial and industrial customers on a combined basis in Texas and, increasingly, in certain markets in the northeast US. NRG acquired GEN on 14 December 2012.

Ratings Assigned:

Issuer: NRG Energy, Inc

Senior Secured Bank Revolving Credit: Baa3, LGD2 - 15%

Senior Secured Bank Term Loan: Baa3, LGD2 - 15%

Ratings Affirmed:

Issuer: NRG Energy, Inc

Corporate Family Rating: Ba3

Probability of Default Rating: Ba3-PD

Sussex County, Delaware Recovery Zone Facility Bonds Sr Secured Bonds: Baa3, LGD2 - 15%

Chautauqua (Cnty of) NY, Ind. Dev. Agency; Sr Sec Revenue Bonds due 2042: Baa3, LGD2 - 15%

Delaware Economic Dev. Auth: Senior Secured Revenue Bonds due 2045: Baa3, LGD2 - 15%

Fort Bend County Industrial Development Corporation Industrial Revenue Bonds Series 2012 and 2012B: Baa3, LGD2 - 15%

Senior Unsecured: B1, LGD4 - 65%

Outlook: Stable

Ratings Affirmed with Revised LGD Assessment:

Issuer: Genon Energy, Inc.

Corporate Family Rating: B2

Probability of Default Rating: B2-PD

Senior Unsecured: B2, LGD 4 -- 58% from LGD4 - 57%

Outlook: Stable

Speculative Liquidity Ratings:

NRG Speculative-Grade Liquidity Rating: Affirmed at SGL-2

GEN Speculative-Grade Liquidity Rating: Affirmed at SGL-3

The principal methodology used in this rating was the Unregulated Utilities and Power Companies published in August 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

William W. Hunter
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms Ratings of NRG Energy and GenOn Energy, Including NRG's Increased and Extended Senior Secured Debt Facilities
No Related Data.
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