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Rating Action:

Moody's Revises GenOn's Outlook to Negative

05 Sep 2015

New York, September 05, 2015 -- Moody's Investors Service, ("Moody's") today affirmed GenOn Energy Inc.'s (GEN) corporate family rating (CFR) at B3 and revised its outlook to negative from stable.

"The negative outlook on GenOn reflects the sustained downward pressure on gas and power prices in the US unregulated markets", said Toby Shea, Senior Credit Officer. "Although the results of PJM's capacity market auction for 2018/2019 released on August 21, 2015 and the incremental capacity market auction for 2016/17 released on August 31, 2015 will both lead to an incremental improvement to GEN's cash flow, this will be insufficient to offset the declines in the broader energy markets" added Shea.

Affirmations:

..Issuer: GenOn Americas Generation, LLC

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD 5) from (LGD 4)

..Issuer: GenOn Energy, Inc.

.... Corporate Family Rating, Affirmed B3

.... Probability of Default Rating, Affirmed B3-PD

.... Issuer Rating, Affirmed NP

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

....Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD4)

..Issuer: GenOn Escrow Corp.

....Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD4)

..Issuer: GenOn Mid-Atlantic, LLC

....Senior Secured Pass-Through, Affirmed Ba3 (LGD1)

..Issuer: GenOn REMA, LLC

....Senior Secured Pass-Through, Affirmed B2 (LGD3)

Outlook Actions:

..Issuer: GenOn Americas Generation, LLC

....Outlook, Changed To Negative From Stable

..Issuer: GenOn Energy, Inc.

....Outlook, Changed To Negative From Stable

..Issuer: GenOn Mid-Atlantic, LLC

....Outlook, Changed To Negative From Stable

..Issuer: GenOn REMA, LLC

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

GEN's B3 CFR largely reflects its high debt burden relative to cash flow. The default risk at the parent company is exacerbated by dividend restrictions at its two ring-fenced subsidiaries: GenOn Mid-Atlantic, LLC (GenMA, Ba3) and NRG REMA, LLC (REMA, B2). We estimate that GEN averaged about $442 million of open EBITDAR annually over the past four years (2011-2014) and has a total adjusted debt and lease obligation of $4.5 billion (or $4.25 billion without accounting for debt discount and premiums.) GenMA and REMA, combined, contributed about $305 million of open EBITDAR and hold $1.3 billion of debt and lease obligations.

With some exceptions, GEN's portfolio is comprised mainly of peaking facilities and struggling coal plants. The exceptions are Hunterstown (810 MW) and REMA's interest in Keystone (283 MW) and Conemaugh (280 MW). Hunterstown is a combined cycle gas plant with about a 55% capacity factor while Keystone and Conemaugh are large coal plants that have continued to run at a high capacity factor despite the competition from cheap natural gas. All three plants are located in Pennsylvania and belong to the MAAC market within PJM. Within the GenMA portfolio, the 1,200 MW Morgantown coal plant appears to be the most valuable plant as it operated at around 60% capacity factor for 2014. The two other coal plants within the GenMA portfolio, Chalk Point and Dickerson have more marginal economics, with capacity factors of 43% and 25% respectively in 2014. The capacity factors are sourced from SNL Financial.

Our ratings also factor in NRG's approach in managing GEN as a non-recourse subsidiary. We believe that NRG will not develop new projects at GEN and only inject capital if the return justifies the incremental investment.

Liquidity

We expect GEN to have sufficient liquidity for the next 12 to 18 months but with cash traps in effect at REMA and GenMA, we expect GEN's cash balance excluding REMA and GenMA to decline over time.

In addition, REMA's liquidity could be challenged and may require GEN's support in 2016. Despite having a $322 million cash balance at the end of 2014 and only $307 million of lease debt outstanding, the company has decided to invest heavily in converting the 597 MW Shawville coal plant to burn gas, with most of the capital expenditure going toward building a gas pipeline to the plant. As a result, REMA's cash balance is likely to decline significantly as this project proceeds.

At the end of second quarter 2015, GEN reported a cash balance of $520 million, excluding GenMA and REMA's cash holdings of $217 million and $283 million, respectively. GEN also has access to a $500 million revolving credit facility provided by NRG. Currently, GEN has not drawn cash from its credit facility but a large portion of it (about $261 million at the end of second quarter 2015) is used for posting letters of credit to support business transactions. GEN generated positive free cash flow of $231 million and $101 million in 2013 and 2014 but free cash flow would have been negative $90 million and $539 million in those years without contributions from REMA and GMA.

GEN's next major debt maturity is a $725 million bond issuance due in June 2017. Based on current capital and commodity market conditions, GEN could have difficulty refinancing this debt maturity. However, GEN has various options that could bolster its liquidity before this maturity, including a reduction in its corporate services fee payable to NRG as more MWs are retired (~$200 million per year) and asset sales.

What Could Change the Rating - Up

The negative outlook limits the likelihood of a near term rating upgrade. Prospects for an upgrade would require a marked improvement in the merchant power markets and positive free cash flow generation without contributions from GenMA and REMA.

What Could Change the Rating - Down

We could downgrade the ratings if power market conditions do not improve or actions are not taken this year or in early 2016 to improve GEN's ability to meet its $725 million debt maturity due in June 2017.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Toby Shea
VP - Senior Credit Officer
Corporate 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
Corporate 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 Revises GenOn's Outlook to Negative
No Related Data.
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