Fitch Rates Reliant Resources $1.1B Secured Notes 'B+'; Rating Outlook Stable.

Business Editors

NEW YORK--(BUSINESS WIRE)--June 27, 2003

Reliant Resources, Inc.'s (RRI) $550 million 9.25% senior secured notes due 2010 and $550 million 9.50% senior secured notes due 2013 are rated 'B+' by Fitch Ratings. The Rating Outlook is Stable.

Net proceeds from the new issuance will be utilized to repay a portion of RRI's $3.8 billion senior secured term loan. Importantly, the expected pay down of bank debt eliminates a $500 million May 2006 mandatory principal payment required under RRI's credit facility. As a result, RRI will not have any significant corporate level debt maturities until the final maturity of the bank credit facility on March 15, 2007. In addition, the bank debt pay down removes soft amortization targets in 2004 and 2005.

The notes will rank pari passu with RRI's $5.9 billion secured credit facility and will be secured by all previously unencumbered assets including a lien on approximately 9,200 megawatts of electric generating capacity and the pledge of certain subsidiary stock including RRI's Texas retail business, Orion Power Holdings, and REMA. In Fitch's view, the secured creditors have reasonable asset protection, but the margin of protection is slimmer than in other comparable transactions due to the extremely high proportion of secured debt relative to total corporate debt and obligations.

The rating recognizes the weak performance of RRI's wholesale merchant power segment and the high debt leverage stemming from the 2002 acquisition of Orion Power Holdings. Wholesale segment performance is expected to remain depressed through 2003-2004 due to weak supply/demand fundamentals and losses in 2003 associated with the wind down of speculative trading activities. Because the vast majority of RRI's generating portfolio is unhedged beyond 2004 a recovery in wholesale performance is dependent on a recovery in spark spreads and/or RRI's ability to secure a higher percentage of long-term power sales agreements at favorable prices. Fitch notes that the potential exercise of the Texas Genco purchase option in 2004, while providing a physical hedge for RRI's retail business, would further expose RRI to cyclical wholesale power markets particularly in the over-supplied ERCOT region.

A positive consideration is the ongoing profitability and strong cash flow contributed by RRI's Texas based retail electric operations. Since the implementation of Texas electric deregulation in January 2002, retail operations have performed as designed, providing a partial hedge against wholesale earnings volatility. In particular, retail margins have benefited from RRI's ability to lock in favorable natural gas and capacity prices. In addition, customer loss has been lower than originally anticipated. Although retail should be a significant source of free cash flow for RRI in the near-term, the earnings sustainability of this business could be impaired over time by increased competition and less favorable wholesale power pricing dynamics.

RRI's current financial profile is overly leveraged, especially given cyclical commodity market conditions which have significantly reduced realized returns on the company's generating portfolio. Consolidated gross debt to EBITDA, adjusted to include off-balance sheet debt and certain non-recourse project financings, currently approximates 6.0 times (x). In addition, RRI's consolidated capital structure includes more than $2 billion of secured subsidiary debt and lease obligations with terms that could limit RRI's ability to upstream cash dividends for debt service at the corporate level.

The March 2003 show cause order issued by the Federal Energy Regulatory Commission (FERC) related to RRI's energy trading activities in the West currently remains unresolved. Under the order, RRI has to effectively 'show cause' why FERC should not revoke their market-based rate authority due to RRI's alleged participation in energy price manipulation at the Palo Verde power trading hub. Although the mechanics of revocation of market-based rate authority are unclear, it would not necessarily preclude RRI from participating in the wholesale power markets nor from entering into bilateral power contracts. However, the company's returns could ultimately be capped at cost-of-service tariffs. The current stable outlook reflects Fitch's expectation that this and other regulatory investigations will ultimately be settled in a manner which will not have a substantially adverse near-term impact on RRI's liquidity position. Any unexpected severe penalties would be a negative credit event and would likely result in a change in RRI's rating and/or Outlook.