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Rating Action:

MOODY'S ASSIGNS INDICATIVE RATINGS TO REGCO AND ITS SUBSIDIARIES, ENTITIES FORMED FROM THE SEPARATION OF RELIANT ENERGY INTO REGCO AND UNREGCO

08 Feb 2001
MOODY'S ASSIGNS INDICATIVE RATINGS TO REGCO AND ITS SUBSIDIARIES, ENTITIES FORMED FROM THE SEPARATION OF RELIANT ENERGY INTO REGCO AND UNREGCO New York, February 08, 2001 -- Moody's Investors Service has conducted a credit assessment of the plan by Reliant Energy, Inc. to separate into two companies, Regco and Unregco. As a result, Moody's has assigned indicative long-term ratings to Regco (Baa2 senior unsecured) and its subsidiaries: Reliant (WiresCo, A3 senior secured), FinanceCo (Baa1 senior unsecured) and Reliant Energy Resources Corp. (Resources, Baa2 senior unsecured.) Moody's has also assigned indicative P-2 short-term ratings to the commercial paper programs of Regco, FinanceCo, and Resources.

The indicative ratings are based strictly upon the proposed separation plan as presented to Moody's and will be reassessed upon modification to it. These indicative ratings do not apply to existing long and short-term ratings for the Reliant Energy family. Their debt ratings remain under review for possible downgrade, except for UNA's issuer rating and Reliant Energy, Inc. and Houston Industries Financeco LP's CP ratings, which are not under review. Once the Public Utility Commission of Texas issues the final order approving Reliant's business separation plan, Resources' rating will be downgraded from the current Baa1 rating to Baa2 indicated. Resources' Prime-2 CP rating will be confirmed. As the de-merger progresses, existing Reliant Energy ratings will be withdrawn and new ratings will be assigned to Regco, Unregco and their subsidiaries.

The Public Utility Commission of Texas orally approved Reliant's separation plan in January 2001. Assuming a final order by the Public Utility Commission of Texas in February, the de-merger will progress through a series of steps commencing with the IPO of 19.9% of the common stock of Unregco shortly thereafter. The remaining interest in Unregco will be distributed to shareholders as soon as the summer of 2001. At that point, Regco will consist of WiresCo, Resources and the Texas Genco. By mid-2004, Regco is expected to shed the Texas Genco, emerging as a distribution and pipeline company. As the Texas Genco houses no debt, it is not rated.

Regco is also using proceeds from asset sales, primarily in Latin America to repay debt primarily at FinanceCo. FinanceCo debt was reduced by $500 million in 2000 as a result of such sales. By 2002, FinanceCo debt will have been refinanced at Regco, the holding company, and FinanceCo ratings will be withdrawn.

Through 2004, Regco's credit profile will benefit from stranded cost recovery proceedings including securitization as provided in the 1999 law, SB7, to deregulate Texas electricity markets effective January 1, 2002. For this reason, the Texas Genco will remain with Regco at least through 2004. Unregco has an option to purchase 80.1% of the Texas Genco by January 10, 2004. Regco will use proceeds from the sale of the Texas Genco to repay debt.

The law provides for stranded cost recovery in 3 stages: 1) immediate securitization of regulatory assets, 2) an interim competitive transition charge (CTC) based on the "excess-cost-over-market" (ECOM) administrative model, and 3) a market based true-up in 2004 leading to further securitization and a CTC. To begin, Regco expects to securitize $750 million of regulatory assets in the first half of 2001, using the proceeds to retire additional debt at FinanceCo.

Regarding the interim CTC, the PUC has assumed $44/mwh as a market price for wholesale power in ERCOT, the "regulated ECOM price." This high level effectively negates the need to charge a CTC since no stranded costs result. The company's view of wholesale prices in ERCOT is much lower than the PUC's. The difference will be booked as non-cash ECOM earnings to be recovered via the 2004 true-up. The market-based true-up will be based upon the sale of 19.9% of the Texas Genco in 2002.

Moody's lowered to Baa2 the long-term rating for Resources (the former NorAm). Although the trading business will be moved to Unregco, Resources is more highly leveraged than in the past and will begin paying a dividend to Regco. The Baa1 had assumed strengthening financial performance which is no longer expected to materialize.

Reliant Energy is headquartered in Houston, Texas which is where Regco and Unregco will also be headquartered. Regco will register as a holding company under the Public Utility Holding Company of 1935.
No Related Data.
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