Fitch: RRI Energy's 'B' Rated IDR Remains on Watch Positive

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has maintained Rating Watch Positive on RRI Energy Inc. (RRI). Its ratings on RRI are as follows:

--Issuer Default Rating (IDR) at 'B';

--Senior secured debt at 'BB/RR1';

--Senior unsecured debt at 'B+/RR3';

--Short-term IDR at 'B'.

The ratings were originally placed on Rating Watch Positive on April 12, 2010 following the announcement of a stock-for-stock merger with Mirant Corp. (MIR; Fitch IDR of 'B+', with a Stable Outlook). No ratings actions have been taken on MIR's ratings and Outlook.

On April 11, 2010, RRI and MIR announced that they have entered into a definitive agreement to create GenOn Energy (GenOn) in a deal structured as an all-stock, tax-free merger. Under the terms of the merger agreement MIR shareholders will receive a fixed ratio of 2.835 shares of RRI stock for each share of MIR common stock they own. Following the close of transaction MIR will own approximately 54% of the equity of the combined company and RRI Energy stockholders will own approximately 46%. As a combined entity, GenOn will have approximately 24,700 megawatts (MW) of electric generating capacity and a pro forma market capitalization of $3.1 billion. The transaction is subject to customary closing conditions, including approval by the stockholders of RRI and MIR, U.S. antitrust approval, and approval, already received, by the Federal Energy Regulatory Commission and the New York State Public Service Commission.

RRI's ratings continue to reflect the challenging competitive generation environment Fitch expects for 2010 and 2011, tempered by steps taken by RRI to improve its balance sheet and hedge a portion of its commodity exposure. Fitch believes RRI's liquidity position remains adequate and that its business risk profile should improve, albeit slightly, following the closing of RRI's merger with MIR.

Fitch's concerns include the significant leverage and weak credit metrics at RRI and the generally poor operating environment for competitive generators, particularly those with significant concentrations of coal-fired generation. The ratings consider that any upside performance at RRI going forward is going to be strongly correlated to economic recovery and a return of power demand growth. In addition, RRI has significant exposure to potential legislation and there remains a high degree of uncertainty surrounding the possibility of Federal carbon legislation and the form and cost of any possible EPA regulation.

In association with the merger, GenOn plans on issuing approximately $2.9 billion in new debt to replace the following:

--$279 million in RRI secured bonds due 2014 (rated 'BB/RR1');

--$371 million in Pennsylvania Economic Development Financing Authority (PEDFA) Reliant Energy Seward, LLC Project secured notes due 2036 (rated 'BB/RR1').

--$500 million senior secured revolver due 2012 (rated 'BB/RR1') and;

--$250 million letter of credit facility due 2014 (rated 'BB/RR1').

--$307 million in Mirant North America (MNA) senior secured term loan due 2013 ('BB/RR1');

--$850 million in MNA 7.375% senior notes due 2013 (rated 'BB-/RR1');

--$755 million MNA revolving credit facility due 2012.

Remaining RRI debt will consist of its Reliant Energy Mid Atlantic lease obligations, as well as its:

--$575 million unsecured notes due 2014 (rated 'B+/RR3') and;

--$725 million unsecured notes due 2017 (rated 'B+/RR3').

Maintaining the continued Positive Rating Watch is indicative of Fitch's expectation that the merger will provide RRI with increased scale, access to an improved balance sheet, particularly Mirant's large cash balances, which are expected to remain above $2 billion, and increased operating efficiencies and higher recovery values for its legacy senior unsecured debt given the increased generating capacity. Following merger close Fitch expects to rate RRI's remaining unsecured notes, which are expected to be pari passu to a GenOn expected offering of $1.4 billion in senior unsecured notes rated 'BB-/RR1' due to the enhanced recovery prospects driven by the larger generation portfolio. Fitch notes, however, that any further rating action on RRI will be driven by the final details and closure of the merger transaction.

GenOn Energy is anticipated to enter into $2.9 billion in new financings to be used in connection with the proposed merger of RRI and MIR. Fitch expects to assign ratings to GenOn Energy and its proposed offerings as follows:

--IDR of 'B';

--$1 billion senior secured revolving credit facility at 'BB/RR1';

--$500 million senior secured term loan facility at 'BB/RR1';

--$1.4 billion in senior unsecured notes at 'BB-/RR1'.

Fitch's expected ratings of GenOn reflect the impact of increased collateral at the security level and the financial benefits of easily achievable synergies on the combined company's forecasted performance. The primary credit benefit of the merger transaction is the likely achievement of operating efficiency and cost savings projected by the management of both companies (estimated at $150 million per annum to be fully realized by 2012, following a restructuring charge of roughly $125 million spread over the next two years). Meanwhile, doubling the size of the generation portfolio by merging the two companies will result in a more efficient scale of operations, without materially altering the profile of the generating fleet. Additionally, both entities will bring to the merger high cash liquidity which the combined organization will have available to deal with debt maturities and future commodity market price fluctuation. The combined cash balance of the companies as of Dec. 31, 2009 was $2.9 billion. Fitch expects a greater focus on hedging and capacity contracts in an effort to ensure a predictable cash flow stream more in line with Mirant's past practices, which have focused on hedging on a rolling four- to five-year basis on both its power and fuel.

Mirroring the credit concerns facing both MIR and RRI, GenOn will continue to face ongoing challenges with weak wholesale power prices, environmental rules and compliance costs, and managing commodity price volatility. As with the other merchant generators, Fitch believes GenOn will be faced with a weak operating environment, which will limit upside performance in the near to medium term. GenOn's performance longer term is going to be strongly correlated to economic recovery and a meaningful return of power demand growth. Fitch believes that GenOn's hedging program will moderate earnings and cash flow volatility, but power-price forward curves indicate continued margin pressure for coal-fired generators such as GenOn. Should natural gas prices remain near current levels of $4 per billion cubic feet (Bcf), power prices will likely remain low, pressuring GenOn's operating margins and credit metrics. Additionally there remains a high degree of uncertainty surrounding Federal carbon legislation and the form and cost of EPA regulation of greenhouse gas emission, coal ash disposal, waste management, etc., which could have significant financial impact given GenOn's generation portfolio's composition, which is more heavily weighted toward coal-fired generation.

Additional information is available at 'www.fitchratings.com'.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:

'Corporate Rating Methodology', Aug. 16, 2010;

'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines', Aug. 22, 2007;

'Fitch's Approach to Rating Competitive Generators', July 24, 2007;

'Utilities Sector Notching and Recovery Ratings', March 16, 2010.

Related Research:

Utilities Sector Notching and Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030

Fitch's Approach to Rating Competitive Generators

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=333818

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