Fitch Initiates Rating Coverage for NRG Energy.

NEW YORK -- Fitch Ratings today has initiated rating coverage of NRG Energy, Inc. (NRG) by assigning a 'BB' rating to NRG's proposed $5.2 billion secured credit facility, consisting of a $3.2 billion secured term loan B and $2.0 billion of revolving credit/synthetic letter of credit facilities, a 'B' rating to NRG's proposed $3.6 billion issuance of senior unsecured notes, and a 'CCC+' rating to NRG's proposed issuance of $500 million mandatory convertible preferred stock. In addition, Fitch has assigned NRG a 'B' issuer default rating (IDR), as well as recovery ratings (RR) for the proposed debt instruments (RRs are detailed below). The Rating Outlook is Stable. The ratings have been initiated by Fitch as a service to investors.

Recovery ratings (RR) are as follows by Fitch:

NRG Energy, Inc.

--$3.2 billion secured term loan 'RR1';

--$1.0 billion secured revolving credit line 'RR1';

--$1.0 billion secured synthetic letter of credit 'RR1';

--$3.2 billion senior unsecured notes 'RR4';

--$500 million mandatory convertible preferred stock 'RR6'

The ratings assignment follows Fitch's analysis of NRG's pending acquisition of Texas Genco LLC (TGN) in a transaction initially valued at approximately $8.3 billion, which includes $2.5 billion of existing TGN net debt. Proceeds from the pending term loan B and senior note transactions along with the planned issuance of $1.0 billion of common stock and $500 million of mandatory convertible securities will be utilized by NRG to fund the $4.0 billion cash component of the acquisition and refinance substantially all of the existing corporate debt of both NRG and TGN. Consequently, NRG will emerge with a relatively flat capital structure with all debt residing at the parent holding company level with the exception of approximately $800 million of outstanding project level debt. The acquisition financing structure also includes the issuance of approximately $2.0 billion of equity issued directly to TGN's sellers, a private equity consortium consisting of The Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co., and Texas Pacific Group.

In assigning the ratings for NRG, Fitch considered the initial leveraging impact of the pending TGN purchase, the company's operating profile and future cash flow prospects, and the structural protections provided under the proposed secured credit facilities. Key credit strengths include NRG's attractive mix of low cost and efficient coal and nuclear baseload capacity, the near-term cash flow certainty provided by NRG/TGN's portfolio of medium-term power sales agreements and fuel price hedges, the anticipation that future capital spending related to potential environmental regulations will be manageable, and the transaction structure, which requires free cash flow to be offered to the lenders for term-loan reduction. Primary risk factors include the greater susceptibility of consolidated cash flows to changes in natural gas prices in 2009 and beyond, high initial leverage relative to the potential volatility embedded in NRG's earnings and cash flow, and a relatively aggressive corporate strategy, which could focus on further acquisitions and/or shareholder oriented activities.

Of NRG's approximately 23,000 megawatts of pro forma U.S. installed net generating capacity, about 38% or 8,800 megawatts consists of coal and nuclear baseload capacity sited in Texas and the Northeast and Southeast regions. In each of these regions, natural gas prices are expected to be the primary determinant of market clearing prices for power, most profoundly in Texas where natural gas will continue to be on the margin for most hours of the day. Given that baseload fuel and transportation costs are largely fixed for the next several years, future returns derived from the uncontracted portion of NRG's generating fleet will largely be influenced by the future direction of natural gas prices. Mitigating factors include the cash flow certainty provided by NRG's hedge position, which covers greater than 50% of NRG's pro forma consolidated net revenues through 2008. In addition, NRG's Northeast peaking fleet, which includes a number of older vintage gas- and oil-fired plants, should continue to benefit from ongoing installed capacity payments and reliability must-run contracts in transmission constrained regions such as New York City and southwestern Connecticut.

Near-term consolidated credit protection measures are expected to remain in line with the assigned ratings. Upon acquisition closing, NRG's consolidated debt leverage, as measured by total debt/EBITDA is expected to approximate 5.0 times (x). Under management's base-case scenario, which assumes current forward strip prices for natural gas and the dedication of all free cash flow to early debt retirement, credit ratios gradually strengthen with debt/EBITDA and EBITDA/interest approximating 4.5x and 2.6x, respectively, by year-end 2006. As part of its analysis, Fitch prepared a series of alternative projection scenarios to gauge TGN's performance in a less robust natural gas price environment. Specifically, Fitch's model incorporates an outlook for natural gas prices declining to $4.60 per mmBtu in 2010 compared with management's assumption in 2010 of approximately $7.50 per mmBtu. While the lower gas price model results in weaker cash flow results, particularly in the outer years when NRG's portfolio is less hedged, revised credit ratios under the alternative case remain within parameters for the current ratings.

The underlying ratings for NRG's individual debt instruments incorporate a recovery analysis under which Fitch utilized an independent power market model to derive individual values for NRG's domestic fossil fuel and nuclear plants based on the net present value of projected merchant net revenue streams. In addition, Fitch considered the value embedded in NRG's foreign generating assets and domestic thermal activities as well as potential liabilities stemming from environmental compliance spending across NRG's coal-generating fleet. The 'BB/RR1' rating for NRG's $5.2 billion secured credit package, which benefits from a first lien on most domestic generating assets, is three notches above the IDR and reflects the strong recovery prospects for these debt obligations, which exceeds 100% even under a low valuation scenario. The 'B/RR4' rating assigned to NRG's proposed $3.6 billion senior unsecured notes is equal to the IDR and reflects Fitch's expectation that these securities would receive average principal recovery under a hypothetical restructuring scenario. Under a hypothetical default scenario, a major variable influencing ongoing recovery prospects for senior unsecured creditors would be the ultimate level of junior lien collateral granted to NRG's trading counterparties on a post-acquisition basis. This arrangement has been in place at TGN throughout 2005 and covered net credit exposure of $2.16 billion as of Sept. 30, 2005. Fitch notes that this amount should naturally decline as power is delivered and TGN's below market hedges roll off or its natural gas prices decline.

The Stable Rating Outlook reflects NRG's substantially hedged baseload generation fleet, which should ensure a relatively predictable earnings and cash flow stream thus enabling a meaningful reduction in leverage and strengthening in credit ratios over the next few years. Factors leading to potential rating improvement over time would include deleveraging in line with management's near-term expectations and further forward sales and/or hedging of NRG's 2008-2010 uncontracted generating position. In addition, a reduction in current collateral postings combined with a reduction in second lien collateral arrangements granted to certain trading counterparties could result in an uplift to NRG's existing 'B' senior unsecured rating given the improved recovery implications for these securities. At the same time, a sustained drop in natural gas prices, the pursuit of further leveraged growth activities, and more stringent than anticipated environmental regulations would likely place downward pressure on NRG's ratings and/or Outlook.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria, and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The ratings have been initiated by Fitch as a service to investors.