The Federal Energy Regulatory Commission (FERC) last Wednesday approved two significant energy mergers, Reliant Resources Inc.’s $2.9 billion acquisition of Orion Power Holdings Inc. and Northwest Natural Gas Co.’s $1.8 billion acquisition of Portland General Electric Co., the Oregon utility owned by bankrupt Enron Corp.

FERC said neither merger would impact competition, rates or regulation in their respective markets. In its review of the Northwest-Portland General merger, FERC concluded that the two companies are not competitors in any relevant wholesale power market and that the transaction would not eliminate a competitor nor harm competition. Northwest Natural is Oregon’s largest natural gas utility, while Portland General is the state’s biggest electric utility. FERC said the parties adequately proved that the combination of their gas transportation and power generation assets would not harm competition. The power generation served by Northwest’s gas pipelines is minimal, FERC said.

The two entities will be combined under a new holding company formed by Northwest. Approval of the deal, still being considered by the U.S. Securities and Exchange Commission.

Portland-based Northwest Natural Gas is a natural gas distribution company that serves about 530,000 customers in Oregon and Washington. The deal also includes $1.1 billion in assumed debt and preferred stock. Portland General serves 733,000 Oregon customers, owns 26,000 miles of transmission and distribution lines and 2,015 MW of generation.

The Reliant-Orion deal would make Houston-based Reliant the second largest unregulated electric generator in the United States. The planned transaction includes $2.1 billion in debt. Reliant Resources, which is 80% owned by Reliant Energy Inc., currently has about 18,000 MW of U.S. generation capacity on line or under development.

Fitch credit ratings service last Thursday lowered the rating on Reliant Resources (RRI) to BBB from BBB+, reflecting analysis of RRI’s plan for financing and integrating Orion Power Holdings Inc.

The transaction is valued at a total of $5 billion. Reliant’s cash payment in the transaction will not be offset by a corresponding asset sale as previously believed. Fitch said Reliant had terminated its effort to sell its Benelux power generation business in Europe due to a lack of adequate bids. The company has said it will reduce capital spending by $1.6 billion over the next five years instead. Fitch said it also examined Reliant’s delay in its 2001 earnings release for a recalculation of hedging, and found that would have a neutral impact on the company’s credit.

Fitch continues to have a “negative rating outlook” on the company because of the difficulty it may experience accessing debt and equity markets in the near-term due to “the more difficult and volatile capital market environment.”

On the upside, the ratings agency notes that the addition of the Orion assets “will significantly expand the scope of Reliant Resources’ existing Mid-Atlantic generating portfolio, including direct access to the New York City market. On a combined pro forma basis Reliant Resources will rank as one of the leading U.S. energy merchants with approximately 16,700 MW of net generating capacity.” The acquisition includes more baseload capacity and adds to fuel diversity in Reliant’s generating portfolio. It also adds some stable cash flow since about 50% of Orion’s capacity is under medium term contracts.

“Fitch views the primary risk associated with RRI’s wholesale generation business as its ongoing exposure to the volatile electric and natural gas commodity markets. In particular, the lack of liquidity in term markets constrains RRI’s ability to hedge forward for a significant [time].” It notes the company’s marketing arm is hedging that risk with physical and financial transactions and has locked in hedges for 50-60% of 2002 wholesale segment earnings and 40-50% of 2003 earnings.

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