MOODY'S PLACES LONG-TERM SECURITIES RATINGS OF RELIANT ENERGY, INC. (A3 SR. SEC.) ON REVIEW FOR POTENTIAL DOWNGRADE; CONFIRMS P-2 CP RATING OF RELIANT ENERGY; CONFIRMS RATINGS OF RELIANT ENERGY RESOURCES (Baa1 SR. UNSEC.) WITH A STABLE OUTLOOK
Moody's has placed the securities ratings of Reliant Energy, Inc. (A3 sr. sec.) on review for potential downgrade in response to steps by management to transition toward a growth company. Excluded from the review is the P-2 short term commercial paper rating of Reliant Energy, Inc. Moody's confirms all ratings of Reliant Energy Resources (Baa1 sr. unsec.) with a stable outlook.
Reliant Energy continues the transition to an unregulated wholesale energy services provider which accelerated a year ago with the $2 bn purchase of the UNA (A3/Baa1 sr. unsec.) assets in Holland. Since that time, management has escalated the transition with the pending $2.1 bn acquisition of unregulated generation assets from Sithe Energy. Management anticipates that up to fifty percent of the Sithe purchase may be financed through a lease and 50% will initially be financed with an equity infusion from bank debt arranged for FinanceCo.
The 4,276 mw of the Sithe assets brings Reliant's unregulated generating capacity in the US to 9,300 mw. Along with 14,000 mw in Texas which will be deregulated in 2002, Reliant will own a portfolio of 23,300 mw in the US and 3,400 mw in Europe around which to trade electricity and natural gas in the energy services side of the business.
Cash inflow from pending asset sales in Latin America (an estimated $1 bn), from the possible sale of certain gas distribution companies and pipelines acquired in 1997 in the NorAm (renamed Reliant Energy Resources) acquisition, and proceeds from securitization of regulatory assets in Texas (an estimated $750 million) largely offsets the cash outflow associated with the transactions announced to date. However, Reliant's business risk profile has shifted.
Reliant remains acquisitive and will likely bid on additional large-scale generating portfolios as they come to market. Through these and other transactions, management estimates that energy services (wholesale power generation and electricity and gas trading) which provided 5% of 1998 EBIT, will provide 70% in the 2002-2004 timeframe. This strategy brings Reliant closer to its target earnings per share growth rate of 10-12%.
Reliant acquired NorAm Corporation in 1997 for $4.2 bn. Strategic alternatives for the acquired assets will be considered except for the Entex and the trading assets. Once generation is separated in 2002 from regulated businesses of the HLP division, Entex and HL&P distribution will constitute the regulated energy delivery business.
Moody's rates securities issued by Reliant Energy's HL&P division A3 sr. sec. and rates FinanceCo. the financing vehicle for certain growth investments, Baa1 sr. unsec. Driven by financing of the UNA acquisition, consolidated leverage escalated to 69% of total capital at year end 1999. (Adjusted for ZENS and ACES this figure is closer to 60%.) Upon the Sithe acquisition, leverage will increase until repayment with proceeds from asset sales. Management targets a debt to total capital ratio of approximately 50% in five years. While this may be appropriate for a Baa1 rated regulated utility, unregulated generating companies with this capital structure generally receive lower ratings. On balance, these initiatives heighten business, financial and event risk in the Reliant Energy credit profile.
In its review, Moody's will use a variety of tools and measures to determine whether Reliant's ratings are commensurate with its evolving risk profile. Tools include the senior implied ratings approach which assigns appropriate ratings throughout the corporate structure, and risk weighting anticipated dividends from operating subsidiaries, followed by notching down one or more categories due to structural subordination where appropriate. Measures include cash interest coverage on consolidated and de-consolidated bases and examination of indenture, bank loan and other covenants to determine limitations on subsidiary ability to upstream dividends. Moody's will also examine regulatory protections afforded the HL&P division.
Reliant Energy is headquartered in Houston, Texas.
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