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Rating Action:

Moody's downgrades Reliant Energy's SGL rating to SGL-2

01 Dec 2008
Moody's downgrades Reliant Energy's SGL rating to SGL-2

New York, December 01, 2008 -- Moody's Investors Service changed the speculative grade liquidity (SGL) rating for Reliant Energy (Ba3 Corporate Family Rating / on review for possible downgrade) to SGL-2 from SGL-1. The revision in Reliant's SGL rating primarily reflects the company's recent decision to end its efforts to secure approximately $1.0 billion in additional financing, thereby eliminating a potential source of liquidity at a time when the company's overall liquidity needs continue to remain uncertain. The last rating action for Reliant was September 29th 2008, when Moody's placed the Ba3 Corporate Family Rating (CFR) for Reliant Energy (Reliant) and the ratings of its subsidiaries, Orion Power Holdings and Reliant Energy Mid-Atlantic Power Holdings, on review for possible downgrade.

Reliant's near-term liquidity needs are unclear at this time, primarily due to the pending termination of a special retail collateral arrangement with Merrill Lynch. This arrangement, which provided natural gas hedging and collateral posting services for Reliant's retail electric provider (REP) business activities, has been in place since late 2006. On September 29, 2008, Reliant announced that it would terminate the credit-enhanced retail liquidity structure with Merrill Lynch. As a result, Reliant may re-assume its collateral posting requirements, thereby significantly increasing its overall liquidity uses.

As of October 31, 2008, Reliant had approximately $1,250 million of cash on its balance sheet and generated approximately $800 million of cash flow from operations (CFO) for the latest twelve months ended September 2008. Historically, CFO has been relatively volatile for Reliant, in part due to its hedging strategies and in part due to changing strategic objectives. For example, Reliant generated roughly $975 million, $220 million, ($810) million and $1,380 million in CFO for the years ended 2003, 2004, 2005 and 2006, respectively.

In late 2006, Reliant entered into a credit-enhanced retail liquidity structure with Merrill Lynch to assist with its natural gas hedging strategies and collateral posting requirements. Partly as a result of eliminating the need to post large amounts of cash as collateral, the volatility associated with the CFO began to moderate. For example, Reliant generated roughly $856 million of CFO in 2007 and 1,125 million, $1,050 million and $800 million for the latest twelve months ended March 2008, June 2008 and September 2008, respectively.

On a conservative basis, Moody's expects Reliant to generate roughly $700 million in CFO over the next twelve months. While the company does not provide any projected guidance for CFO, it does report projected EBITDA, which we do not consider to be a meaningful indicator of either liquidity or credit quality. Moody's observes that Reliant's CFO has ranged between 42% and 123% of adjusted EBITDA over the recent few quarterly reporting periods. Prospectively, Reliant claims that it expects to generate approximately $300 million, $750 million and $850 million in adjusted EBITDA for the years ending 2008, 2009 and 2010, respectively.

Reliant has a $500 million senior secured revolving credit facility (expires in 2012) which has approximately $450 million of availability, as of September 2008. The facility is secured by a pledge of roughly all of Reliant's subsidiary stock, including Orion Power Holdings (Ba3 senior unsecured / on review for possible downgrade) and Reliant Energy Mid-Atlantic Holdings (REMA, Ba1 senior secured / on review for possible downgrade) as well as most of its remaining unencumbered assets.

The secured credit facility contains a consolidated secured leverage ratio of no more than 4.0x and according to management, Reliant has a significant amount of cushion under this covenant as of the twelve months ended September 30, 2008 calculation. Prospectively, Moody's is concerned that the cushion associated with this covenant will begin to erode over the near-term.

In our opinion, Reliant does not have a material amount of alternative liquidity sources at its disposal. While some assets could be sold in the near-term, we believe the more valuable assets might require a significant amount of structuring and negotiation in order to execute a transaction in a timely manner.

Reliant's CFR of Ba3 and the ratings of its subsidiaries, Orion Power Holdings and Reliant Energy Mid-Atlantic Power Holdings, continue to remain under review for possible downgrade. Reliant's ratings are assigned by evaluating factors believed to be relevant to the credit profile, such as i) the business risk and competitive position of Reliant versus others within its industry or sector, ii) the capital structure and financial risk of Reliant, iii) the projected performance of Reliant over the near to intermediate term, and iv) Reliant's history of achieving consistent operating performance and meeting financial plan goals. These attributes are compared against other issuers both within and outside of Reliant's core peer group.

Reliant Energy is a large wholesale merchant generator with approximately 16 GWs of generating capacity diversified across several market regions in the U.S. In addition, Reliant is a large retail electric provider in Texas, serving almost 2 million customers, primarily in the greater Houston, Texas region. Reliant reported approximately $12.5 billion in revenues for the twelve months ended September 2008 and is headquartered in Houston, Texas.

New York
William L. Hess
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
James Hempstead
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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