Fitch Affirms NRG's Ratings Following Announcement of Hedge Reset Transaction.

NEW YORK -- Fitch Ratings has affirmed the issuer default and instrument ratings of NRG Energy following the company's announced hedge reset and capital allocation program. A complete list of affected ratings is below. The Rating Outlook is Stable.

The hedge reset program entails resetting existing power/gas hedges that were acquired along with the purchase of Texas Genco (Legacy Hedges), to reflect the current market prices and entering into new, longer-dated gas hedges. Given the high correlation between natural gas prices and power prices, and the greater liquidity and depth in the natural gas market, using natural gas derivatives provides a good hedge to the power generated from the company's Texas coal and nuclear plants. The last of the Legacy Hedges will expire in 2010. Given the natural gas prices prevailing at the time the Legacy Hedges were put into place as compared to prices today, these hedges are substantially out of the money.

The proposed transaction involves the following:

--Borrow $1.1 billion of unsecured debt;

--Use $1.1 billion of debt proceeds plus $250 million of cash on hand to reset the existing hedges to market;

--Add to hedged positions for years 2010 to 2012, and

--Increase share repurchase from $250 million to $500 million.

The hedge reset transaction will provide NRG with greater cash flow certainty by hedging its projected production into the 2012 time frame. With the existing hedges in place, the company currently has $1.7 billion in mark to market exposure under its second lien collateral structure. Consequently, existing counterparties (such as J. Aron) are reluctant to enter into longer dated hedging transactions as they already have significant mark to market exposure to NRG. By resetting the existing hedges to market, the company would eliminate the $1.7 billion of existing second lien exposure freeing the company to enter into hedges for the 2010 to 2012 time frame.

Resetting the Legacy Hedges at current market prices will substantially increase the company's cash flow. As such, this transaction has the perverse effect of improving cash flow-based coverage and leverage metrics for 2007-2010 in spite of the increase in total debt outstanding. In addition, by permitting longer dated hedges, the transaction provides greater cash flow certainty for the medium term. Off-setting in part these benefits is that by incurring the incremental debt, the company is, in effect, taking an obligation that would have amortized to zero over time (i.e. the mark-to-market position of the Legacy Hedges) and crystallized it into a bullet maturity.

The proposed transaction will not materially alter the company's business risk. The key risk for NRG remains a sustained outage at one of its large base load plants in Texas (STP, Limestone or Parrish) and this risk is unaffected as a result of this transaction. Although the ability to make interest payments during such an outage is modestly weakened, the incremental interest expense is small ($90 million to $100 million) as compared to available liquidity ($1.2 billion in cash and $850 million in unused revolver capacity). This increase in financial risk is offset by a reduction in NRG's business risk; by resetting the hedges at a higher price, the likelihood of having to cover a naked short gas position by buying higher price spot gas (i.e. because there was an outage at a baseload plant) is lower than it is currently since the Legacy Hedges are below market.

A second major business risk for the company is a sustained period of low natural gas prices. This risk is also unchanged as a result of the transaction. Moreover, with the longer hedges in place, the company would have greater time to address a long-term decline in natural gas price by retiring its term loan B debt.

As part of the proposed transaction, the company is seeking to increase its 2007 stock buyback plan from $250 million to $500 million. On August 1, 2006, Fitch affirmed NRG's IDR following the announcement of a $500 million stock repurchase via a non-recourse debt structure. The company created a subsidiary which raised $334 million in non-recourse debt from Credit Suisse. The company also injected $166 million. The purpose of the structure was to take advantage of the company's restricted payment basket. However, the structure was somewhat inefficient in that Credit Suisse had to take a short position in NRG's stock to hedge its exposure (i.e. delta hedge 30% to 40% of the stock held by the non-recourse subsidiary). This shorting activity muted the benefit of the share buyback from NRG's perspective. Going forward, the company plans to seek an amendment to allow greater restricted payments

NRG owns and operates a diverse portfolio of power-generating facilities, primarily in Texas and the Northeast, South Central and Western regions of the United States. Its operations include baseload, intermediate, peaking, and cogeneration facilities, thermal energy production and energy resource recovery facilities. NRG also has ownership interests in generating facilities in Australia and Germany.

Fitch affirms the following ratings with a Stable Outlook:

--Senior secured term loan B at 'BB'/'RR1';

--Senior secured revolving credit facility at 'BB'/'RR1';

--Senior notes to 'B+'/'RR3';

--Convertible preferred stock at 'CCC+'/'RR6';

--Issuer default rating (IDR) at 'B'.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.

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