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Announcement:

Moody's affirms ratings of NRG Energy and GenOn Energy on merger announcement

23 Jul 2012

Approximately $17 billion of securities affected.

New York, July 23, 2012 -- Moody's Investors Service today affirmed all of the ratings of NRG Energy, Inc. (NRG: Ba3 Corporate Family Rating) and of GenOn Energy, Inc., (GEN: B2 Corporate Family Rating) along with the debt instrument ratings at GEN subsidiaries, including GenOn Americas Generation, LLC (GENAG, B3 Senior Unsecured), GenOn Mid-Atlantic, LLC (GENMA, Ba1 Senior Secured) and GenOn REMA, LLC (GREMA, B1 Senior Secured) following the announcement of a stock for stock merger between NRG and GEN. Concurrent with this rating action, Moody's revised the outlook for GEN to positive from negative and revised the outlooks for GENAG, GENMA and GREMA to stable from negative, while maintaining the negative outlook for NRG.

"Under the proposed transaction, NRG would expand its geographic diversity and acquire 22 GW of capacity with an expectation that it could achieve yearly savings of $300 million, about twice GEN's recent operating profit" said A.J. Sabatelle, SVP, the lead analyst for NRG. "However, we are maintaining a negative outlook as the challenging macro environment for unregulated power companies continues to compress NRG's margins and weaken sustained cash flows. In addition, the transaction would add about $5 billion of debt, including lease debt, to the NRG family. Since many of the merger details will take months to finalize, we are maintaining our negative outlook on NRG until more definitive information is available, which we expect would be at or around the time that a shareholder vote is solicited."

"The positive rating outlook at GEN factors in our belief that post-merger, GEN would be part of a larger, somewhat stronger family, which should help to fund the negative free cash flow anticipated at GEN," said Bill Hunter, VP, the lead analyst for GEN. "However, GEN, combined with its subsidiaries, will be an excluded project subsidiary of NRG. As a result, we are revising GEN's outlook to positive based on a known reduction of GEN level debt post-merger, while revising the outlook of GENAG, GENMA and GREMA, which do not benefit from any change of control protections, to stable. Once merger approvals are obtained and the definitive structure, including the amount of the debt prepayment, are known, we should have a better vantage from which to assess the various entities of the NRG-GEN family, which could lead to subsequent rating actions."

Under the terms of the merger agreement, holders of GEN common stock would receive 0.1216 shares of NRG for each share of GEN, with GEN equity holders expected to own approximately 29% of NRG. From an organization perspective, GEN, upon closing, would become an excluded project finance subsidiary operating under a shared services agreement. For purposes of certain NRG debt agreements, this means that GEN and its subsidiaries will neither be guarantors of NRG debt nor not 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-default between the GEN family debt and NRG's debt.

Approximately $1 billion of consolidated debt is expected to be prepaid with cash on hand at or near closing, including GEN's senior secured term loan (approximately $683 million), for which a change of control is an event of default. We view the prepayment of such debt as favorable to the combined credit quality. In addition, approximately $2.5 billion of GEN senior unsecured notes have a right to put their debt to GEN at a price of 101 upon a change of control. The amount of unsecured notes that will be redeemed cannot be ascertained at the current time. NRG cites available liquidity sources of approximately $2.8 billion to satisfy potential redemptions, plus a newly committed $1.6 billion secured bridge facility. Moody's believes that NRG would seek to refinance a substantial portion of the tendered unsecured notes, presumably at the NRG level, in order to maintain its post-merger minimum cash goal of $900 million.

NRG's Ba3 Corporate Family Rating (CFR) primarily reflects its diversified fleet of wholesale power generation assets and the relatively strong historical credit metrics based upon margins underpinned by hedges, contracts or sales from its retail business. However, recent operating results have been negatively impacted by weak power prices and the continued decline in the price of natural gas. In light of continued low natural gas prices, a weak economic recovery, and continued fuel switching from coal to natural gas, we would anticipate NRG's performance to be similar to its most recent results for the next several years, leaving it weakly positioned in the Ba rating category.

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 plus 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 3/31/12, was approximately $2.4 billion, including credit facility availability of approximately $1.2 billion and unrestricted cash on hand of around $1.0 billion. NRG's liquidity is aided by the existence of standalone financing arrangements to fund the capital investments for the construction of solar generation power plants and the retrofitting of its natural gas-fired plants. Moody's anticipates that the decline in energy margins will reduce the headroom under the company's financial covenants but we anticipate the company to remain comfortably in compliance on a ongoing basis. We also observe that NRG owns assets that could be monetized for additional liquidity. To that end, last week NRG completed the sale of its 41% interest in Schkopau for approximately $174 million in expected net proceeds.

GEN's B2 Corporate Family Rating is based on a diversified portfolio of power plants, a meaningful percentage of hedged and contracted revenues, an apparently successful integration of its merger with Reliant Energy, and the combination of good liquidity and the stated importance of liquidity to senior management. These positive factors are balanced against high leverage, dependence on coal fired power plants in PJM for a majority of cash flows, volatile power prices that have been in a trough over the past six months due to the impact of shale gas, markedly decreased generation during the same period, and substantial announced plant retirements and deactivations due to increasingly stringent environmental regulations.

GEN's SGL-2 liquidity rating takes into account good internal sources ($1.7 billion of unrestricted cash on hand at 3/31/12 balanced against expectations for negative Free Cash Flow in 2012 and potentially in 2013), strong external sources ($532 million available under the syndicated corporate revolver), strong covenant compliance (GEN has ample room under its sole financial covenant, a senior secured leverage ratio), and limited alternate liquidity (sale of individual power plants would not harm the core business, but the company's assets are largely encumbered). While GEN is likely to meet its obligations over the next 12 months from internal sources, the company may rely on external sources of committed financing, including the Marsh Landing project loan facility. GEN's access to this substantial level of liquidity continues to be an important driver for its ratings during the current period of low natural gas prices. In light of expected near-term negative free cash flow, we anticipate that the level of unrestricted cash will decline over time and view the degree of cash burn as an important future determinant for the ratings, especially in the absence of a merger with NRG.

NRG's negative rating outlook reflects the margin erosion that is occurring in both NRG's wholesale and retail operations, which is contributing to financial performance more in line with a "B" rated unregulated power issuer. The negative rating outlook further considers the company's very large capital spending program anticipated over the next few years, particularly when compared to NRG's market capitalization of approximately $4.5 billion. While the GEN merger enables NRG to acquire substantial generating capacity and an important platform in PJM at an attractive price, the negative outlook recognizes the weaker condition of its merger partner that includes the addition of $5 billion of incremental debt (assuming that $1 billion of debt is prepaid).

The positive outlook for GEN's senior and unsecured debt is based on an expectation that the secured debt will be repaid on merger close and that the unsecured debt will have the option to be repaid. If we believe that it is likely that the merger with NRG will not occur, our outlook for GEN's secured and unsecured debt would likely be revised to negative. The stable outlooks for GENMA, GENAG and GREMA reflect the potential impact of a stronger corporate family combined with our expectation that none of this debt will be prepaid in conjunction with the merger. Since these entities continue to face headwinds due to the impact of shale gas on power prices, the potential for a long-term compression of coal-fired generators' gross margins, and the potential for further environmental regulations, these outlooks would likely be revised to negative if the merger with NRG appears to be unlikely. Nevertheless, we acknowledge that GEN has, even in the absence of a merger, prepared itself to withstand a multi-year period of low power prices by husbanding its liquidity and reducing costs, and that parts of its fleet are relatively well positioned in terms of location and environmental compliance. While forward curves indicate an expectation of higher power prices in the future, if these higher prices are not realized in the next 12-18 months and the merger is not realized, negative ratings actions could result.

Ratings Affirmed with Revised Outlook

Issuer: Genon Energy, Inc.

Corporate Family Rating: B2

Probability of Default Rating: B2

Senior Secured: B1, LGD 3 -- 32%

Senior Secured Bank Facility: B1, LGD 3 -- 32%

Senior Unsecured: B3, LGD 5 -- 77%

Speculative-Grade Liquidity Rating: SGL-2

Outlook: Revised to Positive from Negative

Issuer: GenOn Americas Generation, LLC

Senior Unsecured: B3, LGD 5 -- 77%

Outlook: Revised to Stable from Negative

Issuer: GenOn Mid-Atlantic, LLC

Senior Secured: Ba1, LGD 2 -- 15%

Outlook: Revised to Stable from Negative

Issuer: GenOn REMA, LLC

Senior Secured: B1, LGD 3 -- 32%

Outlook: Revised to Stable from Negative

Ratings Affirmed:

Issuer: NRG Energy, Inc

Corporate Family Rating: Ba3

Probability of Default Rating: Ba3

Senior Secured RC and TL: Baa3, LGD2 - 11%

Sussex County, Delaware Recovery Zone Facility Bonds Sr Secured Bonds: Baa3, LGD2 - 11%

Chautauqua (Cnty of) NY, Ind. Dev. Agency; Sr Sec Revenue Bonds due 2042: Baa3, LGD2 - 11%

The Delaware Economic Dev. Auth: Senior Secured Revenue Bonds due 2045: Baa3, LGD2 - 11%

Senior Unsecured: B1, LGD4 - 67%

Speculative-Grade Liquidity Rating: SGL-2

Outlook: Negative

In light of NRG's negative rating outlook, the substantial capital investment program, the continued weak market for unregulated power in most regions, and a pending merger with financially weaker GEN, limited prospects exist for NRG's ratings to be upgraded in the near-term. However, to the extent that management is able to complete the construction of its numerous solar project investments on a timely basis and integrate GEN while achieving the projected cost synergies, unregulated power margins show modest levels of improvement, future capital spending materially abates, and incremental debt is retired, the rating outlook could stabilize.

NRG's ratings could be downgraded should material problems surface with the company's growth strategies, if weaker than expected market conditions persist across NRG's generation fleet, if the cost synergies of proposed merger are not realized or if the company materially alters its capital allocation program in a way detrimental to creditors.

GEN's ratings could be upgraded if there were increased certainty that the merger with NRG will close and that senior and unsecured debt will be repaid. Ratings of GENAG, GENMA and GREMA could be upgraded if, upon a merger close with NRG, it became evident that NRG would treat these companies as core strategic holdings rather than non-recourse project-finance subsidiaries and if our loss given default analysis indicated a higher recovery percentage. In the absence of a merger, ratings of GEN, GENAG, GENMA and GREMA 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 we believed the likelihood of the merger were low and if power prices experienced over the past 6 months were to continue at or about the same levels for the next 6-12 months with no expectation of subsequent material improvement, if environmental regulations were to materially increase/accelerate Capex or expected plant shutdowns, if the liquidity cushion were materially eroded or management were to change its policy of maintaining sufficient liquidity. In addition, ratings could be downgraded if our expectation of sustained cash flows were to change, such that CFO pre-WC/Debt would be expected to be lower than 5% and FCF/Debt would be expected to be negative 10% or worse on a sustained basis.

Headquartered in Princeton, New Jersey, NRG Energy, Inc. (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 generating facilities in Australia.In total, NRG owns approximately 25,135 megawatts (MW) of electric generation, and has 1,450 MW under construction. NRG's retail businesses, Reliant Energy, Green Mountain Energy, and Energy Plus Holdings combined serve more than 2 million residential, business, commercial and industrial customers in Texas and, increasingly in select markets in the northeast US.

GenOn Energy, Inc., based in Houston, Texas, is a US merchant power holding company that was formed in December 2010 from the merger of Mirant Corporation (MIR) and Reliant Energy, Inc. (RRI). Total generation capacity of about 22,390 MW breaks down geographically as approximately 27% PJM East, 30% PJM West, 24% California, 11% New York-New England, and 8% Southeast and, by fuel type, as approximately 31% coal, 43% natural gas, 21% gas/oil and 5% oil.

The principal methodology used in this rating was Unregulated Utilities and Power Companies published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

William 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

A.J. Sabatelle
Senior Vice President
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 on merger announcement
No Related Data.
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