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

The acquisition, announced last September, received the last of its regulatory approvals Wednesday from the Federal Energy regulatory Commission and is expected to be closed soon.

The transaction is valued at approximately $5 billion, which includes the assumption of roughly $2 billion of outstanding Orion debt. 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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