Multiple “irons in the fire” contribute to Reliant’s financial rating

Kathleen Davis, Associate Editor

Standard & Poor’s corporate finance group rated Reliant Energy Mid-Atlantic BBB, according to a recent teleconference on the subject. Currently, the main focus of Standard & Poor’s is the split between Reliant’s regulated and non-regulated businesses and that effect on Reliant’s credit rating.

Lease financing was the bottom line for Reliant’s current rating, with Reliant Energy Inc. rated BBB+ by Standard & Poor’s, who added a negative outlook due mostly to the money Reliant has been shelling out to expand its portfolio: $4 billion in total, with $2 billion in the Netherlands and $2 billion on the U.S. side.

“The outlook indicates that, unless debt is significantly reduced, the corporate credit rating will be lowered,” observed Judith Waite, an analyst with Standard & Poor’s.

With Texas lawmakers breathing down their Houston necks, Reliant went the route of spin-off-the “easiest” route according to Waite.

“This [the subsidiary creation] then leads to the obvious question for Reliant Mid-Atlantic lenders: What will be the rating of the unregulated company?” she continued.

Waite said, with a fair amount of certainty, that the unregulated power generation company-currently without a name-to be created under this action will be BBB for two major reasons. First, that most of this unnamed company’s assets and debts are Reliant’s lease debt, and, second, that Reliant has announced intentions to continue to be an energy trader. Standard & Poor’s, therefore, expects Reliant to jump through every hoop required to create a BBB rating.

“REMA [Reliant Energy Mid-Atlantic] has the necessary physical assets, personnel and risk management techniques to compete in the deregulated PJM market [Pennsylvania, New Jersey, Maryland] with a triple-B rating,” reaffirmed Arlene Spangler of Standard & Poor’s corporate utilities, project finance and energy ratings team.

And Reliant is indeed making a play in the PJM market, announcing intent to buy 21 power plants, with over 4,000 MW of combined capacity, from Sithe Energies. Reliant should also acquire nearly 20 sites to develop new capacity out of the Sithe deal, strengthening its domestic portfolio.

Other irons in the fire for Reliant include a European strategy involving UNA assets (in Holland), a venture between Reliant’s eBusiness group and to offer one-stop utility shopping for online customers and an investment in renewables-specifically wind and landfill gas.

From the financial side of the equation, Reliant may be the one to watch.

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