Cutting the credit rating of Reliant Resources Inc. (RRI) and related entities to “junk” status Friday, Standard & Poor’s Ratings Services (S&P) said the ratings for the companies will remain on negative CreditWatch until debt and credit facility questions can be resolved.

S&P said it has lowered the ratings on the Houston-based RRI, Orion Power Holdings and Reliant Energy Mid-Atlantic Power Holdings LLC. to “BB+” from “BBB-.” S&P said the ratings and CreditWatch negative status will remain in place pending the refinancing of holding company debt and credit facilities ($5.9 billion, including a $1.4 billion synthetic lease) and debt at Orion Power Holdings and its respective subsidiaries ($1.3 billion net of cash); $8 billion of consolidated debt was outstanding as of June 30.

“The ratings downgrades reflect expectations of a material weakening in financial debt protection ratios, primarily due to the expected, increased cost of financing associated with the renewal of the bank facilities,” S&P said in its note. “Furthermore, expected restrictions on upstreaming cash from Orion Power Holdings to RRI will detract from RRI’s ability to service debt at the holding company level. RRI’s financial profile is also weakened by the decline in wholesale operations, which is expected to be partially mitigated (through 2005) by the better-than-expected earnings from the company’s Texas retail operations.”

S&P said the legal separation of RRI and CenterPoint Energy Inc. (formerly Reliant Energy Inc.) scheduled for later this month should facilitate the current refinancing efforts at both companies.

Going forward, the ratings agency said it believes that RRI will be successful in refinancing its obligations, but will need to analyze the final terms of the Orion Power Holdings debt restructuring, as well as the terms of the global refinancing before any revision of rating or outlook.

On the news of the downgrade, Reliant Resources’ stock dropped 26 cents (almost 6%) to close at $4.10 in Friday trading.

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