Homer City Generation, L.P. -- Moody's assigns (P)Caa1 ratings to Homer City Generation's senior secured notes. Outlook is stable

New York, December 03, 2012 -- Moody's Investors Service has assigned a provisional (P)Caa1 rating to Homer City Generation's (Homer City or Project) $640 million of senior secured notes. The outlook is stable.

Moody's understands that the senior secured notes will be issued to Homer City Funding LLC's senior secured creditors in exchange for Homer City Funding's senior secured notes as part of the reorganization plan contemplated for the bankruptcy of Homer City Funding LLC. At emergence, the total amount of indebtedness effectively encumbering the project asset remains the same. The provisional ratings are assigned pending the borrower's emergence from its prepackaged bankruptcy, which is expected in December 2012, and the closing of the proposed financing.

RATINGS RATIONALE

The (P)Caa1 rating on Homer City's senior secured notes considers the Project's expected emergence from bankruptcy with no reduction in debt, full merchant energy exposure, and ability of the owner, an affiliate of General Electric Capital Corporation (GECC) to terminate the construction of the new flue gas desulfurization (FGD) equipment on Units 1 & 2 of Homer City at its discretion. The project's credit quality is also negatively affected by expected debt service coverage ratios that are less than 1.0 times in two of the next three years under management's base case, a history of operating problems, diminished competitive position in a challenging market environment, and limited project finance protections. The Caa1 rating further recognizes that an affiliate of Edison Mission Energy (EME: Ca negative) will act as energy manager for Homer City upon its planned emergence from bankruptcy.

The rating also acknowledges the considerable expected equity contribution of around $700 million to $750 million by a GECC affiliate to fund construction costs for new FGD equipment on Units 1 & 2, access to relatively attractive markets in PJM, and existing cash balance at the project of around $85 million at September 30, 2012. This investment by the GECC affiliate enhances recovery prospects for senior secured Homer City creditors. Additional considerations in assigning the rating include the known capacity prices through May 2016, NRG Energy, Inc.'s (NRG) expected role as operations and maintenance (O&M) provider, and a $75 million uncommitted revolving credit facility provided by GECC.

Moody's recognizes that a payment default on the senior secured notes should not occur before the first mandatory debt service payment on October 1, 2014 as the restructuring agreements defers principal payments during this period with the project having a payment in kind (PIK) feature for interest payments. While this greatly reduces default risk over the next 21 months, the debt balance at Homer City is likely to increase by $111 million to $751 million from $640 million, a 17% increase based on the terms of the restructuring agreement, if the project utilizes its PIK feature. The higher debt balance also incorporates the deferred October 1, 2012 payment.

Key Credit Strengths

- An affiliate of GECC is expected to fund the cost of emissions control equipment and at least a portion of related improvements estimated at a sizeable $700 million to $750 million for Homer City Unit 1 & 2, enhancing recovery prospects for creditors.

- The Project had approximately $85 million in cash at the end of September 2012.

- The Project is located in a relatively attractive market in PJM.

- The $75 million uncommitted working capital facility provides incremental liquidity albeit any funding is at the sole discretion of GECC.

- NRG, an operator of multiple coal fired plants, is expected to serve as O&M operator for the project.

- The project's capacity revenues represent a stable source of revenues through May 2016.

- Partial project finance features exist including 1st lien on assets (except inventory & receivables) and limitation of indebtedness.

- Terms of the restructuring agreement substantially reduces payment default risk for the next 21 months, a period when substantial required environmentally related capital investment will occur.

Key Credit Weaknesses

- Other than the capacity revenues in place through May 2016, Homer City has no meaningful energy hedges, thereby additional substantial volatility to cash flows.

- The project's competitive position has been severely weakened given low natural gas prices and higher coal prices as demonstrated by minimal gross energy margin for the first nine months of 2012.

- The debt balance at emergence from bankruptcy is unchanged and is expected to increase by 17% to $751 million from $640 million under the terms of the restructuring agreement if the interest PIK feature is utilized.

- The Project's financial resiliency is low with a forecasted debt service coverage ratio of less than 1.0x in two of the next three years under the management's case.

- History of operational problems resulted in availability averaging around 80% and forced outage rate of 11% from 2009 through 2011.

- Project cash can be used to fund balance of plant improvements and while unlikely, GECC has the sole discretion to terminate at any time the construction of the FGD equipment for Unit 1 & 2.

- Edison Mission Marketing and Trading, a subsidiary of EME, serves as energy manager. On November 15th, EME announced that it had not made required interest payments on three series of unsecured debt.

- Project finance structure contains weaknesses such as no upfront funding of the debt service reserve, no cash flow waterfall, limited backward only looking distribution test, bondholders' second lien on inventory and receivables, and various broad exceptions to the change of control restriction.

Homer City's stable outlook reflects the expected large investment by GECC and the expectation that the FGD will be built on time and on budget. The stable outlook further considers the reduced prospects for payment default occurring during the next 21 months given the terms of the restructuring, which defers principal repayments and gives Homer City the ability to PIK interest expense.

In light of the challenging power market, the likely increase in total indebtedness at Homer City, and the ongoing construction of the required FGDs, limited prospects exist for a rating upgrade in the near term. Positive trends that could lead to an upgrade include completion of the FGD for Units 1 & 2, implementation of a meaningful energy hedging program, and if debt service coverage ratio can exceed 1.1 times on a sustained basis.

The rating could be downgraded if the Project does not build the FGD, if the $75 million working capital facility is no longer available or if GECC substantially sells off its interest in the project.

The ratings are predicated upon final documentation in accordance with Moody's current understanding of the transaction and debtor's emergence from bankruptcy.

Homer City Generation, an affiliate of GECC, is a special purpose company that is expected to own a 1,884 MW coal-fired plant in Homer City, PA. Homer City Generation is expected to obtain the economic benefit and majority ownership of all the operating assets once the project completes its restructuring.

The principal methodology used in this rating was Power Generation Projects published in December 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Clifford J Kim Vice President - Senior Analyst Project Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653A.J. Sabatelle Senior Vice President Project Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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