Moody’s downgrades Reliant Resources Inc. ratings to B3

New York, November 26, 2002 — Moody’s downgraded the senior implied rating, bank loan and issuer rating assigned to Reliant Resources to B3, leaving ratings on review for potential downgrade.

Given ties to the RRI rating, Moody’s also lowered the issuer rating assigned to Reliant Energy Capital Europe (RECE) to B3, leaving it on review for potential downgrade. Moody’s lowered the rating assigned to Reliant Energy Power Generation Benelux BV (REPGB) to B1 from Baa2 and assigned a negative outlook.

Moody’s lowered to Ba3 from Baa3 the secured rating assigned to Reliant-Energy Mid-Atlantic (REMA), leaving the rating on review for potential downgrade. Moody’s comfirmed the Ba3 unsecured rating assigned to Orion Power Holdings, leaving the Orion rating on review for potential downgrade.

The RRI downgrade reflects Moody’s view that RRI’s financial flexibility is limited in the face $5 bn of bank debt maturing in 2003. Maturing bank debt includes: $2.9 bn of RRI bridge bank debt maturing in February; $420 million of REPGB debt maturing in July; $600 million of RECE debt maturing in March; and $800 million of the $1.6 bn corporate revolver maturing in August. The company plans to launch a global refinancing of these facilities in the near term. We note that on October 29, Reliant refinanced $1.3 bn in secured bank debt at Orion Midwest and Orion New York for three years.

Moody’s said that the near term outlook for RRI’s wholesale business remains poor, driven by depressed wholesale prices both here and in Europe, constrained capacity markets, and poor credit conditions in the energy trading sector, all of which will pressure margins and challenge RRI’s ability to generate stable cash flow from operations. We note that in the near term, RRI’s retail business buffers poor performance in the wholesale business, but the company’s free cash flow is limited in relation to its high debt burden.

The downgrade of REPGB to B1 from Baa2 reflects the deterioration in the credit quality of the parent company, RRI. Moody’s has in the past viewed REPGB as a stand alone credit as the company pays no dividends to its parent nor services the acquisition debt at its parent, RECE; however the ring-fencing of REPGB is relatively uncertain. RRI is also considering having REPGB service the RECE bank debt, increasing the debt burden of this entity.

Moody’s confirmed the Orion Power Holdings rating at Ba3 and lowered the Reliant Energy Mid-Atlantic rating to Ba3. Both ratings remain on review for potential downgrade. Both REMA and Orion are stand-alone project financings. Cash flows to service the Orion Power Holdings bond remain structurally subordinated to $1.3 bn of Orion Midwest and Orion New York bank loans which were recently extended through 2005.

Going forward, the review for downgrade will focus on: 1) the company’s ability to refinance its bank debt and the terms of such refinancings; 2) the timing for stabilization of cash flow in the wholesale business; 3) the resolution of various government investigations into trading improprieties, including round trip trades; and 4) the impact of the Orion and REMA project financings should the parent be unable to refinance maturing bank debt.

Moody’s lowered the following ratings, all of which remain on review for further downgrade:
Reliant Resources, Inc. issuer rating to B3 from Ba3
Reliant Resources bank loan ratings to B3 from Ba3.
Reliant Resources senior implied rating to B3 from Ba3.
Reliant Energy Capital Europe issuer rating to B3 from Ba3.
Reliant Energy Mid-Atlantic senior secured rating to Ba3 from Baa3

Moody’s lowered the following rating and assigned a negative outlook:
Reliant Energy Power Generation Benelux B.V. issuer rating to B1 from Baa2.

Moody’s confirmed the following ratings, leaving them on review for potential downgrade:
Orion Power Holdings senior unsecured Ba3 rating
Reliant Energy is headquartered in Houston, Texas

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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