CORRECTED-S&P may cut NRG Energy Inc corporate credit rating

(Corrects headline to cut from raise)
(The following statement was released by the rating agency)

Overview
-- U.S. independent power producer NRG Energy Inc. and GenOn Energy Inc.
announced that they have signed a definitive agreement to combine the two
companies in a $5.8 billion stock-for-stock tax-free transaction.
-- We placed the 'BB-' corporate credit rating on NRG on CreditWatch with
negative implications.
-- The CreditWatch listing indicates that we could either lower or affirm
the ratings.

Rating Action
On July 23, 2012, Standard & Poor's Ratings Services placed its 'BB-'
corporate credit rating on NRG Energy Inc. on CreditWatch with negative
implications. The CreditWatch listing indicates that we could either lower or
affirm the ratings following the completion of our review. Princeton,
N.J.-based NRG had about $10.1 billion of long-term debt as of March 31, 2012.
Nonrecourse corporate debt was $7.95 billion.

Rationale
The CreditWatch listings follow the announcement that NRG and GenOn Energy
Inc. have agreed to merge in an all-stock transaction offer at an exchange
ratio of 0.1216 shares of NRG for each share of GenOn, or a premium of about
20% on GenOn's closing price on July 20, 2012. According to the merger terms,
GenOn will combine with and into an excluded project subsidiary of NRG (a
nonguarantor).

We expect the transaction to require regulatory approvals from Texas, New
York, and the Federal Energy Regulatory Commission. The companies will also
submit notice of the merger to the California Public Utilities Commission and
the U.S. Nuclear Regulatory Commission as well as premerger notification to
the U.S. Dept. of Justice and the Federal Trade Commission under the
Hart-Scott-Rodino Act.

The structure permitted under indentures requires no debtholder approvals from
either NRG or GenOn debtholders. While GenOn's debt will to remain nonrecourse
with respect to NRG's first-lien facilities, we will consolidate GenOn's debt
while assessing the combined company. A shared services agreement between both
companies will enable the value of synergies to be captured by NRG at the
parent level. The companies expect the merger to close in the first quarter of
2013. Following the exchange, NRG's existing shareholders will own about 71%
of the pro forma company.

Given that GenOn's business risk profile is weaker than that of NRG, the
business risk profile of the combination could weaken. Still, offsetting
factors include benefits of scope and scale that provide a power generation
platform for NRG's retail business to expand in the Northeast. We will
reassess the pro forma company's strategy to establish the pro forma's
business risk profile.

There are both negatives and positives from a credit perspective that will
influence a final outcome:
-- The combined company will have a capacity of more than 47 gigawatts
and offer geographical diversity and scale across several markets, providing
the combination the opportunity to participate in PJM Interconnection,
California, Electric Reliability Council of Texas (ERCOT), and New England
Power Pool--the largest deregulated power markets in the U.S.
-- The combination will have an improved dispatch profile with a better
mix of base load, mid-merit, and peaking facilities in regions where it owns
generation with the ability to better capitalize on wholesale market
movements, in our view.
-- The combined company's financial measures are weaker than NRG's
without any delevering as part of the merger. Management proposes to reduce
debt at the pro forma company by a minimum $1 billion, which may offset the
weaker financials. Each company currently has significant excess cash on hand
and the stand-alone NRG continues to generate free cash flow, even under our
price deck.
-- Under the terms of GenOn Energy Holdings Inc.s debt, about $2.5
billion in senior unsecured notes and $690 million in term loans have a
change-of-control acceleration event at the option of the lenders. An
acquisition may require refinancing or repricing of this debt. Management
proposes to retire the current outstanding $690 million term loan at GenOn.
The combination will have cash-on-hand and a $1.6 billion bridge loan to
address additional liquidity requirements should lenders exercise the put
option.
-- Management estimates that the pro forma combination will drive $300
million in annual transaction benefits, and merger savings are estimated at a
significant 43% of GenOn's current EBITDA levels.
-- While management has identified $200 million of measurable and
actionable merger synergies, it will have to demonstrate its ability to
harness the expected synergies. Reduced leverage of at least $1 billion and
other collateral synergies should drive an additional $100 million of annual
incremental cash flow benefits.
-- The current plan includes the elimination of GenOn's existing $788
million revolving credit facility. We will assess if the existing $2.3 billion
credit facility and excess cash on hand will be adequate to support the
combined business.

Current ratings on NRG predominantly reflect the company's fundamental
exposure to volatile commodity markets and weakening financial risk profile,
balanced by a hedging program and ongoing efforts by the company to reduce the
influence of natural gas price volatility on its cash flows. In addition, the
presence of the retail business--which is somewhat countercyclical to
wholesale generation--gives the company a "fair" business risk profile. The
recovery rating on the senior secured and senior unsecured notes is '1' and
'3', representing very high recovery of principal (90% to 100%) and meaningful
recovery of principal (50% to 70% recovery), respectively.

While the company expects expanding heat rates in ERCOT, improved New York
capacity prices, and higher heat rates in the West to offset the drag on
margins, we believe execution risks are meaningful, given the setback NRG had
in its retail operations in Texas last summer due to extended hot weather. We
also believe weather-driven demand remains weak, and that the commodity
environment is uncertain resulting in an increasing pressure on NRG's
financial profile. We expect NRG to maintain an appropriate financial profile,
for which a key factor will be the bounce-back of power markets in its key
Texas market, and how NRG manages its capital allocation between growth, debt
pay-down, and capital returns to shareholders.

NRG's trailing 12-month performance ended June 2012 will likely lag our
expectation despite a strong second quarter. That, and the backwardated EBITDA
profile for 2012, have resulted in adjusted FFO to debt declining to about 11%
for the 12 months ended December 2011 (these ratios deconsolidate the solar
business) and still remain low at about 12% by year-end 2012. Despite weaker
financials, we still view NRG's financial risk profile is "aggressive" because
we believe ratios will likely improve in 2012 as a result of heat-rate
expansion in the ERCOT region and as solar investments commence distributions.

In our forecast we stress market heat rates and gas prices. We assume natural
gas prices remain low ($2.00 and $2.75 per million Btu (mmBtu) in 2012 and
2013, respectively) and market heat rates lower by about 1,000 Btu per
kilowatt-hour (kWh) than current implied forwards. We expect adjusted funds
from operations (FFO) interest coverage and adjusted FFO to debt of about 2.3x
and 13%, respectively, in the 2012-2014 period. Important from the weakening
financial risk profile perspective is that the company remains free cash flow
positive (when we deconsolidate the solar projects) under our price
sensitivities, with free cash flow estimates at a low of $200 million in 2012,
but rising to about $300 million by 2014. Debt/EBITDA also remains under 5.5x
through 2014, even under Standard & Poor's sensitivity. Notably, leverage does
not decline as much as in earlier years due to the elimination of the 50%
excess cash flow sweep as part of the refinancing of NRG's first-lien
facilities.

NRG's hedging program has been strong in the past two years and has allowed
the company to maintain a relatively stronger financial profile compared with
other independent power producers. However, while NRG has aggressively hedged
its base-load generation into 2015, these hedges are at significantly lower
prices resulting in a backwardated EBITDA for its wholesale business.
Magnifying this challenge is NRG's large investment program in gas and solar
power projects. However, these projects will supplant the above-mentioned
decline in cash flows with contracted cash flows. On the flip side, the
inability of the ERCOT market to motivate generators to build adequate
capacity is resulting in heat-rate expansion and periods of scarcity, which
NRG will benefit from. On balance, despite the fact that Texas accounts for
about 80% of NRG's operating income, the roll-off of hedges and the low
natural gas prices will mean that cash flows in 2012-2013 will be weaker than
in 2009-2010.

The company's financial policy has changed to subsume a broader stakeholder
approach. The company reduced corporate debt by $580 million in 2011, but also
completed $430 million in share repurchases. Now, the company has established
a dividend plan as the primary vehicle for returning capital to shareholders.
While the refinancing of the term loan B and credit facility eliminated the
50% cash sweep and modified distribution covenants that would allow NRG to
increase capital returns to shareholders, the 2017 notes still somewhat
constrain dividends.

Liquidity
We consider NRG's liquidity to be "strong". The company has abundant liquidity
for its operations as well as to fund growth investments over the next 12 to
24 months, even in the event of moderate, unforeseen EBITDA declines. As of
March 31, 2012, the company had about $1 billion of cash on hand and $1.1
billion available under its bank and letter of credit (LOC) facilities. The
increase in available liquidity was due to $304 million reduction in LOCs due
to the sale of 49% interest in Agua Caliente to MidAmerican Energy and the
addition of the NRG Repowering credit facility, both in January 2012. The sale
of Schkopau, the German fossil unit, resulted in $174 million in net proceeds
and has expanded the restricted payment basket and the company has instituted
the first quarterly dividend of 9 cents per share (or about $80 million
annually).

Overall, NRG's ratio of sources to uses is strong at more than 2.4x over the
next 12 months, substantially more than the 1.2x required for the "adequate"
category, and sources substantially exceed uses even with a 20% decline in
EBITDA. NRG's ability to use "right-way risk" asset pledges to collateralize
counterparties in lieu of cash or LOCs significantly mitigates liquidity risks
when commodity prices rise. The EBITDA cushion in NRG's covenants is about
25%. NRG has a generally satisfactory standing in credit markets, but credit
default swap spreads have widened as gas prices have declined. Management has
been prudent about liquidity, having maintained substantial cash balances in
addition to unused bank lines and right-way-risk facilities during the past
two years. In July 2011, NRG replaced its senior credit facility, consisting
of its term loan facility, revolving credit facility, and funded LOC facility,
with a new senior secured facility that included a $2.3 billion revolver
maturing July 2016 and $1.6 billion term loan maturing July 2018.

Recovery analysis
NRG's first-lien credit facilities carry a recovery rating of '1' (90% to 100%
recovery if a payment default occurs) and are rated two notches above the
company's 'BB-' corporate credit rating. Unsecured debt carries a recovery
rating of '3' (50% to 70% recovery in the event of a payment default) and is
rated the same as the corporate credit rating.

CreditWatch
We may resolve the CreditWatch placement before the consummation of the
transaction following more detailed analysis of management's capitalization
plan and business strategy, but we could resolve the CreditWatch at or near
the time of the transaction's completion. We will provide CreditWatch updates
from time to time as appropriate.

Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- Credit FAQ: Standard & Poor's New Approach To Speculative-Grade
Ratings, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Placed On CreditWatch Negative
NRG Energy Inc.
To From
Corporate Credit Rating BB-/Watch Neg/-- BB-/Negative/--
Senior Secured BB+/Watch Neg BB+
Recovery Rating 1
Senior Unsecured BB-/Watch Neg BB-
Recovery Rating 3

(Caryn Trokie, New York Ratings Unit)