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Rating Action:

Moody's lowers RRI Energy's Corporate Family Rating to B2; outlook stable

02 Sep 2010

Approximately $3 billion of debt securities affected

New York, September 02, 2010 -- Moody's Investors Service downgraded the long-term ratings of RRI Energy (RRI), including its Corporate Family Rating (CFR) to B2 from B1; its Probability of Default Rating (PDR) to B2 from B1, the ratings of its senior unsecured debt to B3 from B2 and the company's Issuer Rating to B3 from B1. The ratings of RRI's senior secured notes are affirmed at B1. The Ba1 ratings for the senior secured lease obligation bonds at Reliant Energy Mid-Atlantic Power Holdings (REMA) are also affirmed. RRI's speculative grade liquidity rating (SGL) is changed to SGL-2 from SGL-1. The rating outlook is stable.

Downgrades:

..Issuer: RRI Energy, Inc.

....Probability of Default Rating, Downgraded to B2 from B1

....Speculative Grade Liquidity Rating, Downgraded to SGL-2 from SGL-1

....Corporate Family Rating, Downgraded to B2 from B1

....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 from B2

..Issuer: Reliant Energy Mid-Atlantic Power Hldgs., LLC

....Senior Secured Pass-Through, Downgraded to LGD2, 13% from LGD2, 12%

Upgrades:

..Issuer: Pennsylvania Economic Dev. Fin. Auth.

....Senior Secured Revenue Bonds, Upgraded to LGD3, 41% from LGD3, 43%

..Issuer: RRI Energy, Inc.

....Senior Secured Regular Bond/Debenture, Upgraded to LGD3, 41% from LGD3, 43%

....Senior Unsecured Regular Bond/Debenture, Upgraded to LGD4, 69% from LGD5, 74%

RATINGS RATIONALE

The downgrade of RRI's CFR reflects our belief that RRI's ability to generate sufficient cash flows has been materially impacted by low commodity prices and a weak economy. Prospectively, we believe RRI's cash flows will continue to remain pressured due to current forward commodity cost expectations and continued weakness in economic conditions. We calculate the ratio of RRI's funds from operations (FFO) to debt for the twelve months ended June 2010 at approximately 3% and its interest coverage ratio at roughly 1.3x, well below our previous expectations. Today, we see little evidence for improvement in these cash flow related credit metrics over the next two years, largely due to the current state of the economy and low forward commodity prices.

RRI's speculative grade liquidity rating (SGL) was lowered to SGL-2 from SGL-1. While RRI continues to maintain a large cash balance and has good availability under its secured revolver, the company's ability to internally generate free cash flow is being negatively impacted by current market conditions.

The rating for Reliant Energy Mid-Atlantic Power Holdings' (REMA) senior secured lease obligation bonds is affirmed at Ba1. The Ba1 rating is one notch higher than the LGD-template implied rating and reflects favorable structural elements, such as a restricted payments test, which in Moody's view improves recovery prospects for these bonds in a default scenario.

Moody's acknowledges that RRI is currently engaged in a merger and acquisition transaction with Mirant Corporation (Mirant: B1 CFR / stable outlook). Mirant's ratings are not affected by today's rating actions on RRI. Nevertheless, based on the information available today, on a pro-forma combined basis, we believe it is likely that the combined entity (GenOn Energy) would likely be accorded a B2 CFR, and GenOn's pro-forma combined SGL rating would be repositioned at SGL-1, upon closing of the transaction. The expectation for an SGL-1 for GenOn reflects a sizeable cash balance at Mirant, along with its more robust near-term cash flow generation prospects. For the twelve months ended June 2010, Mirant generated a ratio of FFO to debt of roughly 18%.

The stable outlook for RRI reflects our view that although RRI's credit profile continues to exhibit weakness, primarily due to the current commodity market environment, there is a potential for some stabilization as a result of the anticipated transaction with Mirant. Also, RRI's relatively strong liquidity profile provides some insulation to fund negative free cash flow, although we see little evidence for commodity markets improving over the near-term.

In light of today's rating action and the current challenging outlook for electric generation margins, limited prospects exist for the rating to be upgraded in the foreseeable future.

The potential for additional downward rating pressure could occur on RRI's rating if the merger transaction with Mirant was not completed, based on current expectations for cash flow generation over the near-term.

Assuming a B2 CFR is assigned to the pro-forma GenOn and based on our current understanding of the company's financing plan and resulting capital structure, we believe it is unlikely that the ratings for Mirant's various existing debt instruments would change at merger completion, including Mirant Americas Generation, LLC (MAG) and Mirant Mid-Atlantic LLC (MIRNA) Ba1 senior secured lease obligation bonds, based on a similar assessment as performed at REMA.

However, depending on the ultimate terms and conditions as well as the final capital structure, there is a possibility for some debt instrument ratings to be impacted. For example, we understand that a sizeable amount of new senior unsecured debt is expected to be issued at GenOn, the parent holding company entity, in addition to a new senior secured credit facility and term loan. We incorporate a view that these new senior secured securities would benefit from certain upstream payment guarantees provided by certain assets and subsidiaries of RRI and Mirant, but that any Mirant upstream guarantees could be impacted by certain indenture limitations currently existing within the Mirant stand-alone capital structure.

Notwithstanding today's rating actions, we continue to view the proposed merger as a net credit benefit for both RRI and Mirant. The combination provides an incremental scale and diversity that neither company can attain on their own and a material amount of operating costs synergies have been identified and are expected to be captured over the near-term.

The last rating action for RRI occurred on April 12, 2010, when we affirmed the B1 CFR and stable rating outlook. For more information, please refer to Moody's credit opinion under www.Moodys.com.

The principal methodology used in rating RRI Energy, Inc. was Unregulated Utilities and Power Companies rating methodology published inAugust 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

RRI is a merchant generation company headquartered in Houston, Texas.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's Investors Service adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from reliable sources; however, Moody's Investors Service does not and cannot in every instance independently verify, audit or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
James Hempstead
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's lowers RRI Energy's Corporate Family Rating to B2; outlook stable
No Related Data.
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