One day after Reliant Resources’ (RRI) credit ratings were cut another notch by Standard & Poor’s Ratings Services (S&P), the company made some progress in its struggle to reduce its debt burden and increase its liquidity with the sale of its European electric business to nv Nuon, a Netherlands-based electricity distributor. The $1.3 billion transaction includes 3,500 MW of generating capacity in the Netherlands and commercial operations related to the generating assets.

RRI said once the advice of the Dutch trade employee organization is received, the companies will execute a definitive stock purchase agreement. The company added that it will absorb a $900 million loss on the sale. However, it also will pay off the euro 600 million bank term loan at Reliant Energy Capital Europe that matures in March 2003. In addition, Nuon will assume the debt at Reliant Energy Power Generation Benelux (REPGB) that matures in July 2003.

“We are pleased to have reached this agreement. The sale is an important step in reshaping the capital structure of the company,” said Reliant Resources CEO Steve Letbetter. “It will increase our expected earnings per share going forward, it will meaningfully reduce our overall debt levels, and it will improve our liquidity by providing in excess of $500 million of cash after the repayment of associated debt.”

On Tuesday, RRI announced that its lenders agreed to extend a Feb.19 maturity date for its $2.9 billion Orion bridge loan until March 28. The company had previously reached an agreement in principle with its three agent banks on the restructuring of $5.9 billion of debt, including the $2.9 billion Orion bridge loan, and launched a debt restructuring proposal to a large group of participating banks in January. The extension of the Feb.19 maturity date will allow each of the banks additional time to review the terms of the restructuring proposal and obtain their internal approvals. The approval of 100% of the lenders is required for the transaction to be completed.

On Wednesday, S&P lowered its credit ratings on RRI and three subsidiaries: Reliant Energy Mid-Atlantic Power Holdings LLC (REMA), Orion Power Holdings Inc., and Reliant Energy Capital (Europe) Inc., to B- from B+, pending the refinancing of $5.9 billion of debt. The ratings remain on CreditWatch with developing implications. Orion Power’s senior unsecured rating was lowered to CCC from B-.

S&P noted that RRI faces the risk that some of its bank lenders may not agree to commit to the terms of its renegotiated debt restructuring proposal. Such an outcome could cause a default and result in a bankruptcy filing, the agency said. The company currently has no access to the capital markets and lacks adequate liquid funds to fully repay a $2.9 billion Orion bridge loan maturity on March 28. “If RRI is unable to obtain commitments from all of its bank lenders, it may resolve its credit situation in a bankruptcy filing.”

However, S&P affirmed its B+ rating on REPGB.

“While REPGB does not benefit from legal ring-fencing, the perceived economic disincentives for either RRI or its creditors to file this subsidiary into bankruptcy along with jurisdictional and geographic differences between RRI and REPGB allow Standard & Poor’s to maintain a differential in the ratings at this time,” the agency said.

After the sale went public Thursday, S&P immediately placed the ‘AA-‘ long-term and ‘A-1+’ short-term ratings on Nuon and its guaranteed subsidiary Nuon Finance on CreditWatch with negative implications. At the same time, the CreditWatch implications on the rating of the Dutch energy company REPGB was revised to positive from developing.

“The placement of Nuon on CreditWatch follows its proposal to acquire [REPGB],” S&P said in a statement. “The ratings on Nuon could be lowered to the ‘A’ category when the CreditWatch is resolved, although this will be subject to Standard & Poor’s review of further information.” The rating agency noted that the revision of the CreditWatch on REPGB reflects its likely integration into the Nuon group, which is rated more highly than RRI, and has an improved business position as the integrated supplier to a large number of end customers.

“From a business perspective, Nuon’s proposed increase in generation will strengthen its market position, increasing its generation capacity by 15 TWh and representing about 60% of total retail demand,” said S&P’s Daniela Katsiamakis. “From a financial viewpoint, however, the acquisition is expected to reduce Nuon’s financial flexibility, adding to the cash flow pressure already facing the company at the current rating level.”

Regarding the REPGB sale, RRI said the transaction includes cash receipts of approximately $1.2 billion at closing and a contingent payment based on future dividends or liquidation proceeds of NEA, the former coordinating entity for the Dutch generation sector. Pending Dutch and German competition approval, the sale is expected to close in approximately six months.

Of the $900 million loss, RRI said $500 million relates to impairment of goodwill, which will be recorded in 2002 results of operations. The company noted that the remainder of the loss will be reflected in 2003 results of operations as a loss on sale. Excluding the loss, Reliant believes the transaction is expected to be accretive to its earnings per share.

Reliant’s outstanding debt totaled $7.5 billion, including off balance sheet debt equivalents of $1.8 billion, as of Sept. 30, 2002. Standard & Poor’s said it believes that the possibility of a default and a bankruptcy filing within the next 12 months, and particularly within 60 days, is “not consistent with a default rating of B+.”

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