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Rating Action:

Moody's assigns Baa3 to NRG's secured bank facility; Affirms ratings

21 Jul 2010

Approximately $ 8 Billion of Debt Securities and Bank Facilities Affected.

New York, July 21, 2010 -- Moody's Investors Service assigned a Baa3 rating to NRG Energy, Inc. (NRG) $875 million senior secured revolving credit facility and $1.8 billion senior secured term loan commitments and letter of credit (LC) facility both due August 31, 2015. Concurrent with this rating assignment, Moody's affirmed all of NRG's ratings, including its Corporate Family Rating (CFR) and Probability of Default Rating (PDR) at Ba3, its Baa3 rating on nearly $2 billion of senior secured term loans and secured tax-exempt bonds, its B1 rating on $5.4 billion of senior unsecured notes, and its speculative grade liquidity rating at SGL-1. NRG's rating outlook is stable.

NRG's Ba3 CFR reflects the relatively strong credit metrics based upon margins that have historically been underpinned by various intermediate term hedges or contracts. Through March 31, 2010, Moody's calculates the ratio of CFO pre-W/C (cash flow) to debt at more than 20%, the cash flow coverage of interest expense at more than 4.0x, and the ratio of free cash flow to debt at 15%. These financial metrics strongly position NRG in the "Ba" rating category and may suggest a higher CFR. However, the Ba3 CFR incorporates our concerns about the size and scope of the company's ambitious and multi-faceted capital investment program relative to its approximate $6 billion market capitalization along with management's history of implementing numerous shareholder focused capital strategies. With these hedges expiring and being replaced with arrangements that provide weaker than historical margins, key cash flow credit metrics over the intermediate term will weaken from recent levels thereby utilizing the portion of the financial flexibility incorporated today in the existing Ba3 CFR. The rating incorporates the value of operating a regionally diverse portfolio of unregulated generation assets with a particularly strong position in Texas and to a lesser extent, in PJM. NRG's market position in Texas has been enhanced by its 2009 acquisition of Reliant Energy which provides a natural hedge for its electric output and helps to reduce potential collateral requirements associated with the unregulated electric business.

The rating affirmation of NRG's speculative grade liquidity rating at SGL-1 reflects our expectation that NRG will maintain a very good liquidity profile over the next 4-quarter period as a result of its generation of strong internal cash flows, maintenance of significant cash balances plus continued access to substantial credit availability, and ample headroom under the company's covenants. Total liquidity at March 31, 2010 exceeded $3.2 billion, including credit facility availability of approximately $1.4 billion and unrestricted cash on hand of nearly $1.8 billion which reflects first quarter debt repayments of more than $400 million. The company's extension of an $875 million secured revolver and an $800 million LC facility due August 2015 coupled with the maintenance of a $500 million LC facility expiring February 2013, provides NRG with amply sized multi-year credit facilities. Over the next four quarters, we calculate NRG to be modestly cash flow positive even with expected lower cash flow generation and a substantial pick-up in maintenance, environmental and growth capital expenditures. Moody's anticipates the company continuing to remain comfortably in compliance with the covenants in its bank facilities and has demonstrated an ability to opportunistically enhance its liquidity profile from non-strategic asset sales.

In conjunction with the refinancing of the $875 million secured revolver facility, NRG amended and extended $1.8 billion of term loan commitments and LC facility, while amending certain of the terms and conditions of the secured credit agreement. The non-extended portions of the term loan commitments and LC facility aggregate $1.476 billion and mature on the originally scheduled date of February 1, 2013.

NRG's stable rating outlook reflects our expectations for strong cash flow over the next twelve to eighteen months due to an active hedging program which has been aided by the Reliant acquisition. While near-term credit metrics will weaken from 2009 levels, we anticipate the company's results to remain at the lower end of the "Ba" rating category, which effectively utilizes the degree of financial flexibility incorporated today in the ratings. The stable outlook recognizes the company's shareholder return strategy along with a sizeable capital investment program which we believe still provides NRG with exit strategies on certain large investments.

In light of the ambitious capital investment program being executed by the company at a time when downward pressure on margins and cash flows is likely to persist, limited prospects exist for the ratings to be upgraded in the near-term. However, to the extent that management reduced the size and scope of its growth capital investment program, did not greatly expand shareholder rewards programs, and used any free cash flow generation for debt reduction, the possibility of a rating upgrade could surface.

The rating could be downgraded should NRG's growth capital expenditure plans remain largely unchanged, particularly if the company's investment in South Texas Project (STP) 3&4 moves forward following the receipt of a Department of Energy loan guarantee. This is particularly relevant given the size and complexity of this construction project as well as the challenges that we believe may exist in NRG reducing further its ownership in STP 3&4. The rating could also be downgraded if weaker than expected market conditions persist across NRG's generation fleet causing cash flow to debt to fall below 12% for an extended period. To that end, should market fundamentals remain at weaker than anticipated levels for an extended period and there is no corresponding recalibration of future growth capital spending initiatives by management, the rating could be downgraded.

The last rating action on NRG occurred on January 21, 2010 when NRG's ratings were affirmed with a stable outlook.

The principal methodology used in rating NRG was Rating Methodology: Unregulated Utilities and Power Companies, published in August 2009 and available on www.moodys.com in the in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

The ratings for NRG's individual securities were determined using Moody's Loss Given Default (LGD) methodology. Based upon NRG's Ba3 CFR and Ba3 PDR, the LGD methodology suggests a Baa3 rating for NRG's senior secured debt. Importantly, Moody's observes that changes to the capital structure at NRG which increases the relative amount of secured debt while decreasing the relative amount of unsecured debt could result in lower instrument ratings for each of the senior secured classes of NRG debt.

Assignments:

..Issuer: NRG Energy, Inc.

....$875 Million Senior Secured Bank Credit Facility due August 31, 2015, Assigned Baa3, LGD2 13%

....$1.8 Billion Senior Secured Bank Credit Facility due August 31, 2015, Assigned Baa3, LGD2 13%

Withdrawals:

..Issuer: NRG Energy, Inc.

....$1.0 Billion Senior Secured Bank Credit Facility, Withdrawn, previously rated Baa3, LGD2, 14%

LGD Point Estimate Changes:

..Issuer: Chautauqua (Cnty of) NY, Ind. Dev. Agency

....Senior Secured Revenue Bonds, to LGD2, 13% from LGD2, 14%

..Issuer: NRG Energy, Inc.

....Senior Secured Bank Credit Facility, to LGD2, 13% from LGD2, 14%

....Senior Unsecured Regular Bond/Debenture, to LGD4, 68% from LGD4, 69%

Headquartered in Princeton, NRG owns approximately 24,000 MW of generating facilities, primarily in Texas and the northeast, south central and western regions of the US. NRG also owns generating facilities in Australia and Germany.

New York
A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Baa3 to NRG's secured bank facility; Affirms ratings
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