J.P.Morgan North America Credit Research

J.P.Morgan North America Credit Research 16 February 2012 • Short Circuit IPP February Monthly This is our initial high yield utility monthly. In it, we update our thoughts on the HY utilities we cover, provide credit and industry data and graphs, and summarize recent company and industry news. Over the last month, the Utilities sector underperformed the high yield index, returning 1.37% to HY's 2.74%. In the present monthly, we include an estimate of key IPPs sensitivity to a SI/MMBtu change in natural gas prices. Assuming constant heat rates, and due to their differing generation and hedge portfolio, we estimate that Edison is the most exposed, followed by GenOn and then NRG. Surprisingly, as a percentage of LTM EBITDA, TCEH is not as exposed as some other credits. • We estimate the impact on future revenues of changes in the PJM 2015/16 capacity auction prices. The most exposed credit (as measured by the revenue effect of a $25/MW-day price change divided by LTM EBITDA) is GEN (13%). GEN is followed by EME (8%), DYN (3%), CPN (2%), and NRG (<1%). • We reiterate our Overweight on NRG credit and update our NRG financial model in advance of earnings. We estimate that the company generated $384 million of EBITDA in 4Q11. We expect NRG will address the lower natural gas price environment and how it will impact, if at all, its timeline to refinance the 2017 notes and the company's shareholder friendly actions (i.e., dividends and share repurchases). We model a pick-up in shareholder friendly activities; this assumption may prove conservative if the company does not refinance the 2017 notes and given that NRG may flex the activities down to help guard cash. Despite these assumptions, and using the current natural gas forward price curve (NGA <CMDTY> <GO> CCRV <GO>), we expect gross recourse debt leverage would increase from 4.2x to 5.3x at the end of 2013, before falling to 4.3x at the end of 2014. We believe NRG Energy is set up to survive an extended period of low power prices. We are downgrading our recommendation for Edison Mission Energy to Neutral. We also update our Edison Mission Energy financial model. We believe Edison Mission is one of the most exposed credits in the high yield IPP universe to natural gas price declines. Using the current forward, while assuming that natural gas price decreases result in heat rate increases, we estimate that the company generates $77 million of adjusted EBITDA in 2012, $309 million in 2013, and $582 million in 2014. We estimate that the company would have $580 million of liquidity at the end of 2014, but this presupposes a full refinance of both the EME credit facility and the Midwest Generation credit facility. It also assumes that the 2013 notes are successfully refinanced. Although we value Edison Mission's assets on a $/KW basis, we still believe that the recovery has likely fallen over the last few months and that the notes now trade ahead of recovery value whereas we believe they traded at or around recovery value just a few months ago. Further, over that period, given the fall in power prices, we believe the likelihood of a recovery scenario arising, has increased. These factors arc behind our downgrade of the credit. US Credit Research Dave Katz. CFA AC Bayina Bashtaeva J.V. Mogan Securities LLC See page 58 for analyst certification and important disclosures. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this repot. Investors should consider this report as only a single factor in making their investment decision. EFTA00606159 Dave Kat. CFA North America Credit Research 16 February 2012 Table of Contents J.P. Morgan NRG Energy update 3 Edison Mission Energy update 6 Natural gas price sensitivity 9 PJM capacity auction 11 Industry news 13 Recent company news 14 In Case You Missed It: HY Utilities Reports 18 Utilities credit tracker — STW 19 Utilities credit tracker — YTW 20 Utilities credit tracker — dollar price 21 Comparative company analysis 22 Relative value analysis 23 Fuel Mix by Company 28 Domestic generation capacity rankings 30 Rankings 31 Individual bond trading history 32 Working Natural Gas Total Estimated Storage 42 Working Natural Gas Change in Estimated Storage Data...43 Natural gas futures prices ($/MMBtu) 44 Coal Production 49 Weekly Electricity Output 50 Electricity Output 51 Total Degree Days 52 Average Cooling Degree Days 53 Average Heating Degree Days 54 Generation Share Forecasts and Implied Capacity Factors 55 Estimated Generation by Fuel Type 56 Estimated Capacity Additions, 2007-2030 57 2 EFTA00606160 Dave Katz. CFA North America Credit Research 16 February 2012 NRG Energy update J.P.Morgan We have updated our NRG financial model in advance of earnings. We estimate that the company generated $384 million of EBITDA in the fourth quarter of 2011. Based on the current forward curve, we estimate NRG will generate $1.75 billion in 2012. We expect a more modest EIBTDA of $1.5 billion in 2013 as the company's hedges fall off. We expect EBITDA of $1.8 billion in 2014. On the conference call, we expect the company will spend time laying out how, if at all, NRG's strategy has changed in the current low natural gas price environment. We expect management will address its plans to refinance the 2017 notes. The notes became callable on 15-Jan-12, and can currently be called at a price of 103.688. On prior conference calls, management stated that it would refinance the 2017 notes in early 2012 so that all of its senior notes would have essentially the same covenants. The non-2017 notes and the credit agreement have a restricted payment basket that grows by adjusted EBITDA minus 140% of interest expense. This should build much more rapidly than the calculation under the 2017 notes, which is based on 50% of net income. We believe the company is likely to be fairly interest rate sensitive with regard to any new debt issuance. As such, we expect the notes are only now approaching trading levels that imply the company would undertake a refinance. Although we believe that the company has over $3 billion of secured debt capacity, we do not think that NRG would issue secured debt to refinance the 2017 notes. We believe our model is conservative from the point of view of a credit investor. We assume that the company refinances the 2017 notes and then completes $400 million of share repurchases and $30 million of dividends in 2012. We assume $400 million of share repurchases and $80 million of dividends in 2013. We believe these assumptions are conservative because in a low natural gas price environment, we would expect management would pull back somewhat on shareholder friendly activities. However, even with these assumptions, we still estimate that the company's liquidity ends 2013 at $1.5 billion, down from $1.9 billion at 3Q11. We expect gross recourse debt leverage would increase from 4.2x to 5.3x at the end of 2013, before falling to 4.3x at the end of 2014. Net recourse leverage would increase from 3.6x at the end of 3Q11 to 4.8x at the end of 2013, before dropping to 3.9x at the end of 2014. We believe NRG Energy is set up to survive an extended period of low power prices. As we have indicated above, we believe the company has the relatively easy option of decreasing shareholder friendly activities to guard cash. As such, we reiterate our Overweight on NRG Energy. 3 EFTA00606161 fill king m2l 1101 55 PE ®,« 4" "g xrd, an 1it■ I II: iv Igtia O els to9 *El If ila EC M.IE EMI; 3 6. 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As we indicate in the Natural gas price sensitivity section of this report, Edison Mission is the most notable credit in the high yield IPP space that does not provide an estimate of the effect of a $1/MMBtu change in natural gas prices. Further, we believe the company is unlikely to provide 2012 EBITDA estimates in conjunction with its earnings release/call given that the 2012 Southern California Edison General Rate Case remains open. As such, analysts am unlikely to have clarity into the impact of recent fonvard curve price changes in the short-term. Using the current forward curve (accessed in Bloomberg by NGA <CMDTY> <GO> CCRV <GO>) and assuming that natural gas price changes result in heat rate changes, we estimate that the company generates $77 million of adjusted EBITDA in 2012, $309 million in 2013, and $582 million in 2014. We estimate that the company would have $580 million of liquidity at the end of 2014, but this presupposes a full refinance of both the EME credit facility and the Midwest Generation credit facility. It also assumes that the 2013 notes are successfully refinanced. If the company were so inclined, it could likely refinance all three of these facilities as secured debt. Using 2013 EBITDA, this would imply secured gross leverage of 4.9x. Still, the ability to refinance has likely become more difficult as natural gas prices have fallen. Further, a refinance of all three as secured debt would layer the non-2013 notes. We value Edison Mission's assets on a $/KW basis (see our initiation linked here for our original valuation), and do not feel that valuations should move in anything approaching a 1:1 relationship to natural gas prices. However, we do feel that as natural gas prices fall, the recovery value of the company's assets falls as well. Recovery values also fall as it becomes more likely that the existing notes are layered. Thus, we believe it is more easily posited that Edison Mission's bonds now trade ahead of recovery value whereas we believe they traded at or around recovery value just a few months ago. Further, over that period, given the fall in power prices, we believe the likelihood of a recovery scenario arising, has increased. As such, we arc don ngrading our recommendation for Edison Mission Energy credit to Neutral from Overweight. 6 EFTA00606164 Dave Katz CFA North America Credit Research 16 Fetruary 2012 Edison Mission Energy X /044NOAL SU1101110 Rate 5.4444 Dont« Little 11040145% J.P.Morgan Mal /Na MYY 40.41 MW Ma/ /Nul Achd Admol mi I u1 Mal Meta bond. NOK blets E•1444 0104 ANS fil 04. 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IM UROA UR 22'2 a 11.133 23'1 114 1411 Ml 543034 os* ~av on ~Naiv 131% SPI 14.1 iztersie1233 le) ass% San Ifflie a« Canta Ihne J.P.Morgan 8 EFTA00606166 Dave Katz CFA North America Credit Research 16 February 2012 Natural gas price sensitivity J.P.Morgan Natural gas prices have fallen substantially over the last two years. The curve as of 31-Dec-11 averaged roughly $4.37 per MMBtu, compared to $6.96 per MMBtu as of 31-Dec-09, for the roughly six-year period from February 2012 through the end of 2017. However, following the end of the year, prices fell further and now average $4.10 per MMBtu over the same 2012 — 2017 period. The forward curve currently does not move above $4.00 per MMBtu until December 2013. Figure 1: RPM capacity sold in PJM base residual auction • price per MW•day POD, 19 CO SOW srm 11100 SOW $4 00 aeu am 0,000M tetyy#41„04/ 10Ntetet ytlinnt, 314Deo20 I 1 31.0eb.1010 —304n4010 - • 31.00e-200D Source: Company reports. Given the rapid and substantial decline in natural gas prices, we believe many investors will want to know the extent to which IPP's are exposed to natural gas price moves. There tends to be an inverse relationship between natural gas prices and heat rates. As natural gas prices fall, off-peak market heat rates rise as gas plants displace coal plants. As Calpine indicated on its conference call, some of its competitors' coal plants are now cycling daily while the company's combined cycles are now running baseload in several regions. In on-peak hours, a higher market heat rate is required to cover generators fixed charges incurred for starting and running plants. We believe that most IPPs do not account for this inverse relationship, instead providing sensitivities as if heat rates were fixed. As such, following the current fall in natural gas prices, we would expect IPPs to decrease their sensitivities to further equal moves in natural gas prices. We believe this was to some extent behind the a EFTA00606167 North America Credit Research 16 February 2012 J.P.Morgan decline in the sensitivity for a $1/MMBtu change in natural gas prices as disclosed in Calpine's 3Q1 I and 4Q II conference call slides. However, we also believe the decline was more pronounced than it would be at other 1PPs given Calpine's natural exposure to greater generation volumes as natural gas prices fall. Table 1: Calpine's estimated effect of a $11MMBtu decrease in natural gas prices (S mn) Sensitivity for SUMNIBtu decrease As of 3Q11 As of 4Q11 2012 $149 $61 2013 $340 $224 2014 $366 $271 Source: Company reports and . Morgan animates. GenOn, NRG and TXU provide data on their 3Q I I conference call presentations indicating the extent to which they are exposed to swings in natural gas prices. We have estimated Edison Mission Energy's sensitivity given that the company does not provide the data. As we have indicated, we believe the numbers below, especially for Edison Mission, likely overstate true exposure. In our models, we have attempted to adjust for heat rate effects. For example, our Edison Mission model does not show the same EBITDA sensitivity as indicated below. Table 2: Estimated effect of a 11/MMBtu decrease in natural gas prices ($ mn) from 3O11 data Sensitivity for SUM PrIBtu change EME GEN NRG TCEH 2012 $487 $97 $56 $15 2013 $561 $202 $344 $245 2014 $576 $230 $430 $395 2015 $455 $550 Source: Company reports and. Morgan estmates. Noe: NRG is for beset ad penmen senstentyon?/. We can then compare the data to the company's LTM EBITDA and liquidity. We note that the CPN data is from 4Q11 while the other credits are from 3Q1 I. Differing methodologies may make intercompany comparisons a bit apples-and-oranges, but we believe it is still a useful starting point. Table 3: Implied change in LTM EBITDA and liquidity for a S1IMMBtu change in natural gas prices Change in LTSI EBITDA as %or CITE EBITDA EME GEN NRG TCEII CPN 2012 83% 14% 3% 0% 4% 2013 95% 29% 18% 7% 13% 2014 98% 33% 23% 11% 16% 2015 24% IS% Change in Liquidils as *A or 1:161 EBITDA EDE GEN NRG 'WEN CPN 2012 22% 4% 3% 1% 3% 2013 25% 9% 18% 10% 11% 2014 26% 10% 22% 16% 13% 2015 24% 22% Source: Company newts ands Morgan esirreles Non: NIG is for baseioad generation senvowty only. TCEH equated 6131704 is as per the maintenance =want. CPN data is from 4011. Other company data is horn 3011. 10 EFTA00606168 Dave Katz. CFA NorthAmericaCreditilesearch 16 February 2012 PJM capacity auction J.P.Morgan As winter winds its wily way through our weary souls wailing its abnormally tepid laments, we believe investors will look forward to that which awaits on the vernal horizon. The PJM Reliability Pricing Model ("RPM") Base Residual Auction is set to open on 7-May-12 and close on 11-May-12. The results are scheduled to be posted on 18-May-12. The RPM capacity period runs from 1-Jun to 31-May of the following year. The May-12 auction will be for the period running from I-Jim-15 to 31-May-16. In the past few years, prices have varied substantially from one period to the next and within PJM's regions. As we illustrate for Edison Mission in the figure below, a producer with multiple plants can face drastically different prices from one year to the next and from one plant to the next, depending on the settlement price within PJM's regions. Figure 2: RPM capacity sold in PJM base residual auction • price per MW-day S250 S200 S150 S100 Soo SO J 2 rn 7 0 0 0 r r r Al Al Al o o 0 et et et in Source: Company repots. 47 ea M"U — Midwest Generation Homer City We believe investors will likely want to know key high yield IPP's exposure to 2015/2016 the auction. In the below table, using data from the 2014/15 auction, we estimated the effect of a $25/MW-day change in the PJM RPM capacity clearing price on Calpine, Dynegy, Edison Mission, GenOn, and NRG Energy (TXU does not have PJM exposure). We sort the table for relative exposure. 11 EFTA00606169 Dave Katz. CFA North America Credit Research 16 February 2012 J.PMorgan Table 4: Estimated revenue effect of a $25.1MWday change in PJM capacity 2015116 auction price sensitivity Sensitivity (Smn) for a as a % of S25/MW-day LTM LTM EBITDA (Smn) move EBITDA NRG Energy Inc $1.$73 S9 0.5% Calpine 51.726 S37 2.1% Dyncgy Holdings $399 S14 3.4% Edison Mission S707 S58 8.2% GenOn Energy $698 S$9 12.8% Source: Company repals and t Morgan esomales. As can be seen, as a percentage of company EBITDA, GenOn has the most exposure to swings in the settlement price, followed by Edison Mission. We believe NRG Energy has very little exposure to the PJM auction. We believe Calpine also has relatively modest exposure. t2 EFTA00606170 North America Credit Research 16 February 2012 Industry news J.P.Morgan On 26-Jan-12, FirstEnergy announced that its generation subsidiaries would retire six older coal-fired power plants with total capacity of 2,689 MW located in Ohio, Pennsylvania and Maryland by 1-Sep-12. The company attributed its decision to close the plants to the EPA's Mercury and Air Toxics Standards (MATS), which were recently finalized, and other environmental regulations. On 3-Feb-I2, TVA said that it elected to accelerate the idling schedule of the four units at its Johnsonville plant, with total capacity of 576 MW, "due to operational issues on the remaining units at Johnsonville and to reduce costs." On 7-Feb-12, the Midwest ISO said new clean air rules will force a shift from a primarily coal-driven generation base to one with more gas-fired power plants and renewables. MISO estimated $31 billion of retrofit and replacement costs that would place significant upward pressure on prices of up to $5/MWh, excluding potential pressure on gas prices. MISO said that in the medium-term, gas infrastructure in the Midwest would require $2 billion investment to meet resource adequacy needs (as much as 10 GW by 2016) in addition to harmonizing with the electricity markets. On 8-Feb-I2, FirstEnergy announced that its Monongahela Power Company subsidiary would be retiring three older coal-fired power plants with total capacity of 660 MW located in West Virginia by 1-Sep-12, citing high cost of compliance with the EPA's mercury rule and other environmental regulations. On 9-Feb-12, the U.S. Nuclear Regulatory Commission approved Southern Co.'s plan for the first licenses to build two nuclear reactors in Georgia. This is the first approval of a new U.S. nuclear project in more than 30 years. In 2010, the Energy Department in 2010 awarded Southern and its partners conditional approval for an $8.3 billion loan guarantee for the project. On 12-Feb-12, Public Utility Commission of Texas Chairman Donna Nelson said that the low cost of natural gas and power is removing the incentive to build baseload generation units in ERCOT, creating uncertainty as to whether Texas will have enough power to keep the lights on during peak periods of demand. 13 EFTA00606171 Dave Ke CFA North America Credit Research 16 February 2012 Recent company news J.P.Morgan • The AES Corporation (AES) On 3-Jan-12, AES announced that its subsidiary, AES Eastern Energy, had filed for Chapter II bankruptcy protection. AES Eastern Energy operates over 1,000 MW of capacity at four facilities in New York. AES Corporation did not expect the bankruptcy filing to impact its previously disclosed FYI I guidance metrics. On 5-Jan-12, Moody's said the DPL acquisition had strengthened AES global portfolio by improving the scale, diversity and cash flow quality of its existing North American asset base and was a factor in Moody's upgrade of AES' Corporate Family Rating to Ba3 from B1 on 28-Nov-11. Moody's commented that AES' Ba3 corporate rating reflected its high leverage, the structural subordination of its recourse debt to the significant amount of non-recourse debt in its consolidated capital structure, and the risks associated with the regulatory and legal regimes in the company's countries of operation. These factors were partially offset by AES' large number of subsidiaries, the subsidiaries' wide geographic distribution, the significant proportion of the subsidiaries' cash flows that were subject to stable regulation or long-term contracts, and the company's good liquidity prospects for the next twelve months. The stable rating outlook reflected Moody's expectations for predictable parent operating cash flows over the next several years as the company integratcs the DPL acquisition and completes certain construction projects, and that shareholder rewards programs would be neutral to the parent's credit quality. Moody's saw limited prospects for a rating upgrade, but said an upgrade was possible if AES' ratio of parent operating cash flows to parent level recourse debt exceeded 14% and cash coverage of parent interest expense was above 3.0x on a sustained basis. The rating could be downgraded if AES' parent level operating cash flow to parent level recourse debt fell below 10% for an extended period of time and a more aggressive financial policy focused on further increasing shareholder rewards was undertaken. On 3-Feb-12, The Valor Economico newspaper reported that Dobreve Energia SA, a Brazilian renewable energy developer, may sell wind projects with 205 MW of total capacity to utilities AES Corp, Energisa SA or EDF SA, citing unidentified financial market participants with knowledge of the negotiations. The newspaper said AES was at the most advanced stage of negotiations. The article also mentioned that the wind farms may receive investments totaling billion reais (around US$581 million). On 6-Feb-12, a Bloomberg article, citing radio Horizont in Sofia, said that Bulgaria's Maritsa East coal mines suspended production as the overflowing Maritsa river had flooded access to the mines. According to the radio/article, the three power plants that are serviced by the mines — AES Galabovo AD (run by AES Corp), Maritsa East-2 and ContourGlobal Maritsa East-3 — had reduced their output. • Calpine Corporation (CPN) On 27-Jan-12, Santa Rosa Press Democrat reported that Calpine's workers at The Geysers voted against union representation. 14 EFTA00606172 Dave Katz. CFA North America Credit Research 16 February 2012 J.P.Morgan On 3-Feb-12, Calpine filed comments with the EPA, objecting to a proposed settlement agreement between the EPA and a group of Demand Response providers that, according to Calpine, would allow emergency backup diesel generators to quadruple their allowed operating hours without having to install appropriate air emissions controls. Calpine asserted that in addition to the direct adverse impact on air quality, allowing these dirtier units to participate in the market as capacity resources would displace investment in far cleaner and more reliable generation. On the same day, the Sacramento Business Journal reported that Calpine had said it would have to shut down its Yuba City, CA gas-fired power plant if it does not secure financial help because it could not get a contract to sell power to a utility this year. CISO said it could not let the plant retire because it's need for capacity reasons. On 10-Feb-I2, Calpine reported 4Q11 adjusted EBITDA of $379 million, slightly above consensus' forecast of $373 million. Production increased 22% from the prior year to about 25 GWh. Total GWh generation declined 6% yly in the West region. Generation was up 48% yly in Texas, 5% yly in the Southeastern region, and 81% yly in the North region. We calculate free cash flow bum was $52 million after a $119 million stock repurchase during the quarter. Liquidity decreased $93 million sequentially to $2.0 billion. We estimate gross and net leverage ratios remained steady at 6.0x and 5.3; respectively. The company tightened its FYI2 adjusted EBITDA guidance to $1.6 billion to $1.725 billion from the previous $1.55 billion to $1.75 billion and adjusted free cash flow to $425- $550 million from the previous $375-$575 million. The new EBITDA guidance was in-line with consensus' forecast of $1.66 billion. • Dynegy Holdings LLC (DYN) On I 1-Jan-12, The U.S. Trustee appointed Susheel Kirpalani, a lawyer at Quinn Emanuel Urquhart & Sullivan LLP as an examiner to investigate the reorganization of Dynegy Inc. The appointment of the examiner followed a hearing last month in which U.S. Bankruptcy Judge Cecelia Morris in Poughkeepsie, New York, agreed that a probe into transactions leading up to the bankruptcy filing, and into whether creditors were harmed, was required. On 18-Jan-12, U.S. Bankruptcy Judge Cecelia Morris granted a motion by the court-appointed examiner in the Dynegy Holdings LLC bankruptcy to issue wide- ranging and expedited subpoenas. The examiner, Susheel Kirpalani, chairman of Quinn Emanuel Urquhart & Sulllivan LLP's bankruptcy and restructuring group in New York, has until March 12 to complete his report. On 13-Feb-I2, The Wall Street Journal reported that the U.S. trustee, Tracy Hope Davis, was objecting to Dynegy's disclosure statement, which must provide lenders and creditors the information they need to make an informed vote accepting or rejecting the Chapter II plan, saying "the examiner has not yet completed his investigation and issued his report, without which, the debtor cannot provide adequate disclosure." The trustee said there was not enough information about the reasons for retaining equity holders' interests when creditors were not receiving full payment, the impact on creditors of pending litigation with U.S. Bank and the reason for releasing the liabilities of Dynegy affiliates not in bankruptcy. 15 EFTA00606173 Dave Katz. CFA North America Credit Research 16 February 2012 J.P.Morgan • Edison Mission Energy (EIX) On 23-Jan-12, Edison Mission announced commissioning of the Pinnacle Wind Farm located on Green Mountain, near the Maryland -West Virginia border. The 23-turbine wind farm has a maximum generating capacity of 55 MW. The company said that the project would sell two-thirds of its output to the Maryland Department of General Services and one-third to the University of Maryland system. On 6-Jan-12, Edison Mission's subsidiary, Midwest Generation entered into a multi-year agreement for the transport of coal with the Union Pacific Railroad for a specified minimum amount of tons, effective 1-Jan-12. The company did not provide additional information on the agreement's details, which were expected to be provided in EME's 2011 10-K. In 2011, Midwest contracted to ship slightly over 17 million tons of coal around 1,200 miles from PRB mines. Our equity Surface Transportation analyst, Tom Wadewitz, estimates that costs could have increased around 50%, from $ I3.77/ton to $20.40/ton implying around a $115 million increases in the company's expenses. This was in-line with the estimates in our published EME model. On 14-Feb-I2, The Pittsburgh Post-Gazette reported that a coalition of five environmental groups filed notice on 13-Feb-12 that it would sue Edison International, citing unhealthy concentrations of sulfur dioxide emissions from the Homer City plant. The groups also released a Sierra Club report that questioned whether the $700 million in pollution controls that the company announced for the plant would reduce emissions enough to meet federal health- based limits. It called on Edison to instead invest in renewable wind and solar energy production facilities in central Pennsylvania. The 60-day notice of intent to sue was required by the U.S. Clean Air Act prior to the filing of a lawsuit in federal court and was delivered to the power plant owners Monday. • GenOn Energy, Inc. (GEN) On 11-Jan-12, GenOn announced that its board of directors had appointed former Secretary of Energy Spencer Abraham and former Federal Energy Regulatory Commission chair and Deputy Secretary of Energy Betsy Moler to serve as directors. On 6-Feb-12, the New Jersey Environmental Protection Department filed a motion in federal court to intervene in GenOn's challenge to the federal Clean Air Act permit regarding the company's Portland, PA plant. • NRG Energy (NRG) On 18-Jan-I2, NRG said that MidAmerican Energy Holdings Company had completed an acquisition of a 49% interest in NRG's 290 MW Agua Caliente solar project. On 2-Feb-12, NRG through its subsidiary, Louisiana Generating, entered into definitive agreements for an 11-year contract extension through 2025 to provide power to the Washington -St. Tammany Electric and Claiborne Electric cooperatives. Both cooperatives filed applications with the Louisiana Public Service Commission on I-Feb-12 seeking approval of the agreements. Together, the two contracts are for more than 450 MW of electrical load at peak demand. On 7-Feb-12, GCL-Poly Energy Holdings Ltd., China's biggest polysilicon 16 EFTA00606174 Dave Katz. CFA North America Credit Research 16 February 2012 J.P.Morgan maker, set up a venture named Sunora with NRG Solar LLC to build sun- powered projects as it seeks to diversify from producing raw materials. Sunora will build projects using GCL-Poly's photovoltaic system equipment. 17 EFTA00606175 Dave Nat. CFA North America Credit Research 16 February 2012 J.P.Morgan In Case You Missed It: HY Utilities Reports Date Title 3-Dec- I I NRG Energy: Initiating Credit Coverage with an Overweight - A Christmas Treat 04-Nov- I I Edison Mission Energy: The Timc Is Nigh to Adjudicate 2I-Sep- I I Edison Mission Energy: Go, EME, Go: Initiating with an Overweight la EFTA00606176 Dave Katz. CFA North America Credit Research 16 Fettuary 2012 Utilities credit tracker — STW ranked by Am/m Bond and J P1lorgan 11Y Index STM 31-Dee-10 13-Jan-12 Tlghtened(wldened)by 14-Feb-I2; Absolute Ragen: Absoluta-RYTEI EFH 6.500%2024 1,664 1,519 1,405 1 115 I 259 AES 7.750%2015 419 -170 367 103 I 52 AES 8.000% 2017 a 506 420 I 87 I 26 F111 10.875%. 2017 1.655 1506 1.4321 74; 223 EFH 6.550%2034 1,261 usa I 731 301 AES 5.0«0% 2020 397 484 415 70 (I8) NRG 7.625%20)8 749 681 I 67 I CPN 7.250% 2017 534 563 499 65 35 AES 7.375% 2021 446 387 1 59 A ES 9.750%2016 496 482 424 54 72 EFH 12.000%2017 1,794 1,507 1,449 I 58 I 345 AES 7.750%2014 425 377 323 : 54 102 EFH 10.000%2020 667 776 723 I 54 (56) EFII 10.000%2020 667 776 7'3 ; 54 ; (56) EIX 7.750%2016 a3 1,783 1,753 j 30 I (839) EIX 7.000% 2011 935 1.807 1.778 1 29 I (843) EFH 9.750%2019 856 831 j 25 I (121) EFH 9.750%2019 711 856 831 ; 25 : (121) NRG 8.500% 2019 756 734 22 I (188) CPN 7.500% 2021 442 531 510 : -1 (68) EIX 7.625%2027 1,277 1,256 I 21 1(478) NRG 7.375 -017 496 590 5,_ 17' (76) NRG 8250%2020 714 697 17 ; (186) EIX 7.200% 2019 863 1.615 1.602 13 (739) CPN 7.875%2023 529 517j 131 EFH 7.480%2017 877 960 949 : 11 ; (71) NRG 7375% 202 I 698 690 9 I EFH 7.460%2015 780 702 696 7 84 GEN 7.625%2014 775 751 I 4I (192) NRG 7.625°- 2019 722 724 : i2); GEN 9125%2031 2 ~IE~P 791 796 I (5) (251) CPN 7.875% 2020 498 554 560 1 7 ); (62) CPN 8.000%2019 IEES 558 574 I ( 1 6)I (431 GEN 8.500% 2021 516 774 821 : (47) (304) GEN 7.875%2017 an 818 947 I (128) (3361 GEN 9.500% 2018 689 86-1 9981 1134) (310) GEN 9.875%2020 5 845 985 i (140) (314 TXU 11.250% 2016 2.236 3,781 3.930 s 1149) 11.694) TXU 10.250%2015 agER __5,50S 5,6591 (151) (7009 TXU 10.250% 2015 2,489 5.508 5.659 ; (3.170) TXU 11.500%2020 ,462 (198)I _~; TXU 15.000%2021 1.435 2,602 3.514 ; (912); (2.079) Max Mln Mediae Averan 2189 397 671 881 5.508 377 776 1.198 5.659 323 774 1,220 115 345 (912) (3,170) 19 (98) (22) (415) HY Overall Index 583 710 652 57 (69I 111 Utility HY - IPPs 111. Integtated IJtililis HY Split BBB 111? BB 644 763 /48 941 409 422 479 724 935 365 375 438 23 (80) 5 (172)I 353 416 43 (12) 47 42 (22) HY Split BB 572 523 HY B 588 734 671 63 (83) HY Split B 922 879 (1s2)1 HYCCC 1.009 1.270 1.167 103 (158) Sontos: J.P.Morgan 19 EFTA00606177 Dave Katz. CFA North America Credit Research 16 February 2012 Utilities credit tracker — y-rw ranked by Arnim Bond and JPAlorgan Index YEW 30-Dee-11 13-Jan-12 Tightened by 14-Feb-12 4. lute A Absolute A yly EFH 6.500% 2024 17.46% 17.20% 16.14% 106 132 AES 7.750% 2015 5.17% 15'.. 4,251 1(X) 92 AES 8.000% 2017 5.93% 6.02% 5.17% 85 EFII 10.875% 2017 16.15% 16.02% 15.31", 85 AES 8.000% 2020 6.44% 6.36% 5.70% 66 NRG 7.6255.2018 7.849. 65 CPN 7.250%2017 5.76% 6.18% 5.57% 62 El- II 6.z>0% 2034 16.06% 15.15% 14.55.. 60 151 EFH 12.000%2017 15.58% 16.03% 15.47% 56 AES 9.750% 2016 4.91% 56 95 AES 7375%2021 6.21% 5.67% 54 EFII 10.000% 2020 51 47 EFH 10.000%2020 8.91% 8.96% 8.45% 51 47 AES 7.750% 2014 3.51% 50 32 CPN 7.875%2020 6.39% 6.44% 6.15% 30 25 E1X 7.7,0% 2016 16.57:4. 15.51 h 23 . 28 -166 E1X 7.000% 2017 17.26% 18.93% 18.66% 28 -140 CPN ROW:1.2019 6.76% 6.71% 6.4r. 24 29 EFH 9-750%2019 9.74% 9.51% 9.28% 23 46 EFII 9.750% 2019 9.74% 9.5I% 9.25% 23 46 NRG 8300%2019 8.157E 8.87% 8.6876 19 a. -53 CPN 7.5(X)% 2021 6.23% 6.30% 19 -7 NRG 8.250%2020 8.15% 8.71% 8.58a 12 IMF -44 E1X 7.625% 2027 14.27% 14.80% II -52 NRG 7.375%2017 4.80% 5.99% 5.8991n1 -109 E1X 7.200% 2019 16.06 4- 1,354, 10 -129 EFH 7480% 2017 10.42% 10.38% 10-2a 14 CPN 7.875%2023 6.73%. 6.64% 9 NRG 7.875%2021 8.71% 8.6 EFII 7.460% 2015 7.43°0 7.40% 3 3 GEN 7.625%2014 7.62% 7.85% 7.86% -23 NRG 7.625% 2019 8.5I":. 5.56% -6 GEN 9.125%2031 10.26% 10.26% 10.43% -17 -17 E1X 8.560% 2016 8.26%. 5.87% -38 -61 GEN 8.500%2021 9.58% 9.54% 10.06% -52 -48 GEN 7.87555 2017 8.69'„ 10.367, -130 -167 GEN 9.500%2018 9.24% 9.80% um. -137 -193 GEN 9.875% 2020 9.56% 11.49% -1.1) -193 TXU 11.250%2016 35.50% a. 38.56% 40.07% -151 -457 TXU 10.250%2015 49.13% 55.64% 57.18% -15.1 -805 TXU 10.250% 2015 49.13% 755.64% 57.18% -154 -805 TX11 11.500% 2020 16.20% 15.23% -203 ,EIX 7-500% 2013 9.77% 16.3714 -369 T -660, TXU 15.000% 2021 27.72% 36.89!% -917 Max Min Median Average 49.13% 3.84% 9.24% 1236% 55.64% 4.02% 8.96% 12.74% 57.18% 106 332% -369 8.87% 19 1222% -8 151 -805 -7 -84 HY Overall Int 8.14% 7.94% 7.36% HY 8.73%. 5.8(91:, 5.66% 20 7 HY - IPPs 10.38% 10.70% 10.67% 3 -29 HY - Integrated Utilities 5.74% 5.61% 5.13% 38 5I HY Split BB11~I r— SA9% 5.35% 4.89% 46 60 HY 1313 5.88% 5.7394 5.34% 39 5-1 HY Split BB 6.67% 6.51% 5.96% 55 71 HI B 8.08'!::, 7.444. 6-1 8-1 HY Split B 10.50% 10.05% 9.59% 46 91 HY CCC 14.00% 12.46% 102 154 Source:~ J.P.Morgan 20 EFTA00606178 Dave Katz. CFA North America Credit Research 16 February 2012 Utilities credit tracker — dollar price ranked by Arnim Bond dollar price 30-Dee-II 13-Jan-12 Price 14-Feb-12 Increased by IbM Absolute a mtnt Absolute AV TI) AES 8.000%2020 $110.00 $110.50 $115.00 $4.50 $5.00 AES 6.<XX1 4. 201 t 51 1 u.lX) 5109.50 5113.75 54,25 S3.75 AES 7.375%2021 S107.75 $108.25 $112.25 $4.00 $4.50 EIll 12.000"4.2017 S84.00 582,50 586.00 $3.50 52.(X) AES 7.750%2015 $108.75 $108.38 $111.75 $3.38 $3.00 EIJI 6 50(8'4.2024 544.50 $45.25 548.50 53.15 $4.0 NRG 7.625%2018 $100.00 $96.00 $99.00 $3.00 (51.00) EIII 10.000%2020 5105.00 5104.75 S107.38 $2.63 $2,38 EFH 10.000%2020 $105.00 $104.75 $107.38 $2.63 $2.38 EFH 10.875%2017 550.50 $81.00 S83.50 $2.50 5310 EFH 6.550%2034 $42.50 $45.25 $47.25 $2.00 $4.75 CPN 7.250% 2017 $105.00 $103.50 5105.50 Si®. S0.50 AES 9.750%2016 SI 14.50 $116.00 $118.00 $2.01) S3.50 CPN 8.000% 2019 $106.50 5106.75 5107.58 51.13 $1 .38 EFH 9.750%2019 MINA» $101.00 $102.00 $1.00 $2.00 EFH 9.750%2019 S100.00 $101.00 SI 02.00 $1.00 52.(X) NRG 8.500%2019 5101.50 $98.00 599.00~"Yrn ($2.50) ED( 7.000% 2017 565.00 561.00 562.00 51.00 i 53 010 E1X 7.750%2016 $73.00r $68.50 $69.50 I $1.002- ($3.50) CPN 7.500% 2021 5107.00 $105.50 $106.50 $1.00 '50 50i CPN 7.875%2020 $I07.752 -$107.50 $108.50 $1.00 $0.75 NRG X.251Y% 2020 5100.50 597.25 598.00 $0.75 IS2 50) AES 7.750%2014 $108.00 $107.50 $108.25 $0.75 $0.25 FAX 7.625% 2027 $59.00 556.50 557.00 50.50 152.001 EIX 7.200%2019 S62.50 $58.50 559.00 $0.50 (33.50) CPN 7.575% 2023 5107.50 $107.00 $107.50 $0.50 50.00 EFH 7.480%2017 $88.77 $88.99 $89.44 $0.45 $0.66 NFU, 7 M. ...O.] 597.50 $94.75 )95.00 $0.25 152501 EFH 7.460% 2015 $100.08 $100.08 $100.15 $0.07 $0.07 NRG 7.375 1 7 5103.75 S I 03.63 5103.63 50.00 i50 13i GEN 7.625%2014 $100.00 $99.50 599.50 $0.00 (50.50) NRG 7.625%2019 598.00 $95.25 595.00 (50.25) i 5300i TXU 10.250%2015 $35.50 $31.00 530.50 ($0.50) ($5.00) Dal 10.'50%'01 5 535.50 531.00 530.50 (50.50) S8001 TXU 11.250%2016 535.75 $32.00 $31.00 (51.00) (34.75) GEN 9.125% 2031 590.50 590.50 589.25 151.25/ 31.251 EIX 8360%2016 $101.00 $100.25 $99.00 ($1.25) ($2.00) GEN 8.500% 2021 593.25 593.50 590.50 153.00) 152751 EIX 7.500%2013 597.EO $93.50 589.75 ($3.75) ($7.25) GEN 7X75% 2017 596.50 595.00 590.00 155.00) iS6.50i GEN 9.500%2018 $101.25 $98.50 $92.25 ($6.25) (39.00) TM1 11.500% 2020 584.101 $78.25 571.00 157.25/ (513 86) GEN 9.875%2020 $101-50~$99.® 591.25 ($7.75) (510.25) TXU 15.000% 2021 555.00 $58.00 543.00 15150X) 1512.001 Max S4.50 $5.00 Min IS15.00) ($13.88) Median 50.75 ($030) Average i$0.031 ($133) Source a Morgan. J.P.Morgan 21 EFTA00606179 Dave Ka. CFA North America Credit Research 16 February 2012 Comparative company analysis Texas Energy Competitive GeriOn Edam Future Marie Energy. Inc. J.P.Morgan Cempany as Cap COPS Dynasty Mission' Holdings Holdings ' NRG Energy Eguty Mier AES CPN DYN Prat' Prhale) Node GEN PPG Bondi/dim AES CPN DYN EIX Ent TCEH GEN ham Income statement (LTII) Revamps $18003 $6.800 $1.798 $2259 $7.308 $7308 $3077 $8.783 EMMA $1645 $1.726 $399 $589 $5111 $3.488 $698 $1.873 EBITDAmegn 20% 25% 22% 26% 70% 48% 23% 21% Interest emense $1.554 $760 $376 $3:6 $3927 $3.441 $395 $667 Nel rr.orne l$1001 ($189) ($4321 ($32) (11.616) ($1.4591 (5737) $282 Cash Flow (LTIN CapEs $2614 $683 $248 $772 $503 $481 $418 $1.380 CFO $3402 5775 ($1971 $559 $1.095 $1.312 $131 $1.150 FCF $578 I$27) 44451 ($2031 $593 $831 ($287) ($8081 Catalafestiort Cash $3,392 $1252 $768 $1235 9330 $202 $1.746 $1.127 Resteled cash $2089 $194 $797 $15 $0 9) SO $441 Remune senke &el $1.050 $7.762 $5.614 54.160 536335 $30.172 $3237 $7.924 Remune Oat $6227 $7.762 SEW $4.150 $36235 $30.172 $4.087 $7.924 To:tide« $20.913 $10.425 $5.814 $5,034 $36235 $30.172 $4.087 $9.243 PAM:ely inlwest $3,624 5613 $0 $2 $92 WO SO SIM Prelerred equ $248 Shama:idea egaly $6,233 $4.301 $2.487 $2.732 e7±16 (7.602) $5.164 $7.770 Captaloalon $30,770 $14789 $0,301 $7,768 $28.671 $22,670 $9251 $17.478 Enterprise vale and Muldlty Stock pipe $13.43 $1536 $1.50 Prirale Patte P4,115 $226 $16.93 Catty /Terkel taptalaslon $10.502 $7293 $184 Prirate Partite Penh $1.744 $3.893 EnI&ptw vdue $31.647 $16.628 $5.230 $4.123 $35.777 $24.416 $4.085 $12.474 Lictadta $2877 $2013 $1.069 $2231 $3097 $2.461 $2282 $1.919 Creed Sbtria EBITDAtnteteu Ermine 2.3a 2.3x 1.1x 1.9x 1.3a MA 1.8x a& EBITDA • CmEx 1 Inkrest Erma 0.71 14x 0.4x 411 12t 001 0.7x 0.7x Reettne terry ertt Icier:pc 0.3a 4.5x 14.1x 71x 7.11 IN 4.8x 42( Recoste ertt Icier:pc 1.7a 4.5x 1494 71x 7.11 8.7x 5.9x 42( Total Mt( itierage 57a 6.0x 1494 8.5x nu 8.7x 5.9x SCa Net deb:Icier:4e 4.87 5.3x 12.64 6.44 6.9x 8.11< 3.4x 4.44 Remote seers &tots, 3% 52% 68% 54% 127% 133% 35% 45% Hexane &temp 20% 52% 70% 54% 127% 133% 44% 45% RES &tee» 68% 70% 70% 65% 127% 133% 44% 53% Net tlehficap 57% 82% 61% 49% 124% 132% 25% 47% EV/EMMA 8.71 9.8x 13.1x 7.0x Ikla 7.Cot 5.9x 67x Taal DebliEV 66% 83% 111% 122% 102% 124% 100% 75% EVAMerats 176% 245% 291% 162% 450% 334% 133% 142% Bend One ClescraPon 9030 Sr Ms INS Sr MI SIMS Sr Ns Sr NO &Ms 1$11660.10% Coupon 8.CCO% 7.500% 7.750% 7.200% 9.750% 9.93)% 7.625% Maluty 6/1/2020 91512021 9112019 9192019 101152019 10/112020 10150018 51152019 abating $825 $20:06.:58:093. $800 $875 $800 Ran 84308. $1.100 NRIO CaM/EP 82CCC 83fB INIEI6 Wet ptee 141519:9.00 63.75 59£0 cial$11135. 102.00 18.71;1)3% 9225 95.00 11607.35%u VS 510% 8.30% 16.46% 928% 11.17% 8.56% STY COP 8311» Mc 724bp Bond Two Cescrip1on Sr Ms Sr Ms &Mt Sr Mt Sr Ms Sr Ms SNO &Ns Coupon 7275% 7.875% 7.625% 7.625% 10.00)% 10.250% 9.875% 7275% Meaty 7/1/2021 1/15/2023 tonsrion 51542027 1852020 11/72015 101512033 5852021 ablaxIng $700 $550 $1.000 $1200 $1.232 Rath; 84383- B128- $175,4" C89133. Cane BIB $B11.92006 011en rime 112.25 1079) 63.00 57£0 Cial$101.7°63801. 29.75 91.25 9500 Veld 567% 864% 1347% 14.80% um 56.38% 11.49% 8.67% STY 3371) 5170 GM 125514 736bp 5719tp 9899 65019 Note EBI1DA is Adjusted EBITDA. Interest Expenses babe.: on UM vain. 1. NICIMMI Generation peasant* eamenams assumed reamrso Is Ginn Miasma 2 MOO M8,51,»InD841.313 ,01808» International. Enterprise alinne Mated us® e 70x EINTDA ~We 3. Energy Fume Hetdegs entorpme value eumated 'ega 7.0x EMMA multiple