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Rating Action:

Moody's places NRG Energy under review and announces other rating actions for GenOn Energy

14 Dec 2012

Approximately $12 billion of debt securities affected

NOTE: On March 11, 2013, the press release was revised as follows: Added the following as the third paragraph of the Regulatory Disclosures section: Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody’s Investors Service information. Revised release follows.

NOTE: On May 1, 2013, the press release was revised as follows: In the debt list under Ratings Placed Under Review for Downgrade, removed the Speculative-Grade Liquidity rating for Issuer: NRG Energy, Inc. Revised release follows.

New York, December 14, 2012 -- Moody's Investors Service today placed all of the ratings of NRG Energy Inc. (NRG, Ba3 Corporate Family Rating) and the Ba1 Senior Secured rating of GenOn Energy MidAtlantic, LLC (GENMA) under review for possible downgrade. Concurrent with these rating actions, Moody's affirmed the ratings of GenOn Energy Inc. (GEN, B2 Corporate Family Rating) and the debt instrument ratings of GenOn Americas Generation, LLC (GENAG, B3 Senior Unsecured) and GenOn REMA, LLC (GREMA, B1 Senior Secured), in anticipation of the expected closing in the next several days of the merger of NRG and GEN in an all-stock transaction. Additionally, Moody's has revised the outlook of GEN, GENAG, and GREMA to developing and has affirmed the Speculative Grade Liquidity Ratings of NRG and GEN at SGL-2.

RATINGS RATIONALE

"Our decision to maintain separate Corporate Family Ratings for NRG and GEN at this juncture is based on our assessment that NRG's intention, at least initially, is to conduct certain key aspects of the business between the entities on an arm's length basis, in order to reinforce GEN's status as an excluded project finance subsidiary", stated Bill Hunter, VP, the lead analyst for NRG and GEN. These key aspects include contractual liquidity agreements under which NRG will assume the role of senior secured lender to GEN as well as corporate service contracts that permit NRG to garner most of the benefits of the anticipated cost synergies other than interest reduction from expected debt prepayments. 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-default between the GEN family debt and NRG's debt.

"As the integration of GEN into NRG develops during 2013, we may obtain more clarity regarding the value of GEN as part of the NRG family that could lead to assigning a single merged Corporate Family Rating despite some of these initial arm's length arrangements," continued Hunter. "The developing outlook for GEN, GENAG and GREMA acknowledges that their standalone outlooks prior to the merger announcement were negative based on the continuing challenges facing the merchant power sector, but also acknowledges that a merged Corporate Family Rating would likely be higher than B2." Although GEN will prepay $684 million of debt in conjunction with the merger, its cash balance will be reduced by the amount of debt prepayment as well as severance and merger transaction costs, and GEN's senior unsecured creditors will be subordinate to the new inter-company secured revolving credit, expected to be in the range of $500 million. NRG's collateral as senior secured lender is expected to include mortgages on a portfolio of gas and coal fired assets as well as upstream guarantees from certain GEN subsidiaries.

The placement of NRG's ratings under review for possible downgrade is based on recent operating results that have been negatively impacted by weak power prices and the continued weakness in the price of natural gas, combined with substantial debt-financed capital expenditures. NRG benefits from a diversified fleet of wholesale power generation assets underpinned by hedges, contracts or sales from its retail business. However, in light of continued low natural gas prices, a weak economic recovery that has dampened demand for power, and our expectation that fuel switching from coal to natural gas will continue to negatively impact volumes and margins, we currently anticipate that the metrics that NRG will generate through 2014 will be similar to its most recent results, which are more aligned to a B rated power generator. Our review will focus on whether capacity constraints in NRG's core Texas market, in combination with construction completion of several greenfield renewable and natural gas power projects that will operate under long term power sales agreements, will provide sufficient certainty of an improvement in cash flows for us to regard the current trough in metrics as temporary and finite, or whether it represents a lower baseline for the company over the medium term. While we acknowledge that the approximately $5 billion of debt (including lease debt) acquired in the GEN merger will initially reside in excluded project finance subsidiaries, we will include GEN's debt in our analysis of NRG, since we view GEN as a core business. If we were to downgrade NRG's Corporate Family Rating, it would most likely cause a downgrade of all NRG's debt instrument ratings, including a downgrade of its Senior Secured debt to below investment grade.

The placement of GENMA's Ba1 Senior Secured rating under review for possible downgrade is based on recent operating results that were below our expectations through the third quarter of 2012, indicating that coal to gas switching has had a continued negative impact despite the company's hedge book, a mid-year rebound in natural gas prices off their earlier lows and a reasonably warm summer. While we acknowledge the locational value of these assets (situated near Washington, DC), based on recent transactions for scrubbed coal plants in eastern metropolitan markets, a four notch uplift above GEN's B2 Corporate Family Rating may no longer be warranted. In addition, while these assets were clearly the crown jewels of the GEN family, they may have less relative importance within the much larger NRG family.

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 30 September 2012, was approximately $2.7 billion, including credit facility availability of approximately $1.133 billion and unrestricted cash on hand of around $1.610 billion. 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. 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, earlier this year NRG completed the sale of its 41% interest in Schkopau for approximately $174 million.

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 2010 merger with Reliant Resources, and the combination of diminished but still relatively good liquidity after the merger with NRG, balanced against high leverage (albeit somewhat reduced by the planned prepayment of approximately $684 million of term loans), lower volumes, margin compression, and substantial announced retirements and deactivations in its primarily coal fired fleet due to increasingly stringent environmental regulations. GEN's liquidity was of considerable importance to prior senior management, and the maintenance of good stand-alone liquidity by NRG will be extremely important to GEN's ratings in light of its status as an excluded project finance subsidiary.

GEN's SGL-2 liquidity rating takes into account good internal sources (we estimate about $800 million of cash after merger close based on $1.8 billion of cash as of 9/30/12, balanced against expectations for negative Free Cash Flow in 2012 and potentially in 2013), good external sources (although GEN's new revolver will be bilateral with the parent, it will be indirectly backed by NRG's $2.3 billion syndicated revolver, and if the facility is in the expected range of $500 million, we estimate about $270 million available based on GEN's $228 million of LC usage at 9/30/12), strong covenant compliance (GEN had ample room under its existing sole financial covenant, a senior secured leverage ratio, and we assume that new covenants, if any, will be no more restrictive), and limited alternate liquidity (sale of individual power plants would not harm the core business, but the company's assets will remain 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 a substantial level of liquidity will continue 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. Consequently, the degree of cash burn will be an important future determinant for the ratings, especially if GEN continues for an extended period as an excluded project finance subsidiary of NRG.

In light of NRG's review for possible downgrade, its substantial capital investment program, the continued weak market for unregulated power in most regions, and its merger with the financially weaker GEN, limited prospects exist for NRG's ratings to be upgraded in the near-term. However, if we can obtain clarity that NRG's consolidated metrics, on a post-merger consolidated basis, will return to levels consistent with a low Ba rating in the relatively near term, NRG's outlook could stabilize. Additional factors that would be important to stabilizing the outlook include management's ability to keep the construction of its numerous solar project investments on time and on budget, a successful integration of GEN that achieves the projected cost synergies of approximately $300 million annually, modest levels of improvement in unregulated power margins, a material abatement of future capital spending, and incremental debt retirement.

NRG's ratings could be downgraded if, in our review, we were to conclude that the current trough in metrics will persist, such that, on a sustained basis, Interest Coverage were below 2x, CFO Pre-WC/Debt continued to be below 13%, or free cash flow to debt continued to be below 0%. In addition, should material problems surface with the company's growth strategies, if weaker than expected market conditions were to continue 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 way that is detrimental to creditors, ratings could be downgraded.

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 2011, NRG owned approximately 25,135 megawatts (MW) of electric generation, and had 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. On 22 July 2012, NRG announced a stock for stock merger with GEN. 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 and Reliant Resources, Inc. The combined entity, with an enterprise value estimated at $18 billion on the merger announcement date, will own approximately 47,000 MW of capacity.

Ratings Placer Under Review for Downgrade:

Issuer: NRG Energy, Inc

Corporate Family Rating: Ba3

Probability of Default Rating: Ba3

Senior Secured Bank Facility: Baa3, LGD2 - 15%

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 - 66%

Outlook: Revised to Under Review for Downgrade from Negative

Issuer: GenOn Mid-Atlantic, LLC

Senior Secured: Ba1, LGD 2 -- 15%

Outlook: Revised to Under Review for Downgrade from Stable

Ratings Affirmed with Revised Outlook and Revised LGD Assessment:

Issuer: Genon Energy, Inc.

Corporate Family Rating: B2

Probability of Default Rating: B2

Senior Unsecured: B3, LGD 5 -- 74% from LGD 5 -- 77%

Speculative-Grade Liquidity Rating: SGL-2

Outlook: Revised to Developing from Positive

Issuer: GenOn Americas Generation, LLC

Senior Unsecured: B3, LGD 5 -- 74% from LGD 5 - 77%

Outlook: Revised to Developing from Stable

Ratings Affirmed with Revised Outlook:

Issuer: GenOn REMA, LLC

Senior Secured: B1, LGD 3 -- 32%

Outlook: Revised to Developing from Stable

Ratings withdrawn:

Issuer: Genon Energy, Inc.

Senior Secured: B1, LGD 3 -- 32%

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

The principal methodology used in this rating was Unregulated Utilities and Power Companies published in August 2009 and 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 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.

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

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.

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.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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

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 places NRG Energy under review and announces other rating actions for GenOn Energy
No Related Data.
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