Reliant Financing Shows Tight Capital Markets (RRI)

Reliant Energy Inc. (NYSE: RRI) is looking like a classic example of how things are changing in the credit markets.  The electricity and energy services provider lowered its guidance because of Hurricane Ike and lower power prices.  It is also raising $1 billion in new capital to be combined with $1.2 billion in existing liquidity as collateral on existing contracts covered under credit enhanced retail structures with Merrill Lynch.  That is being unwound.

The company lowered its forecast for 2008’s retail margin to about $350million from its previous forecast of $672 million.  Its 2008 openwholesale margin will also now be about $519 million rather than $999million it previously forecast.

It looks like $650 million of the new financing is coming from GS LoanPartners and it is selling $350 million in convertible preferred stockto private equity house First Reserve.  Traditionally this could havecome from credit lines or short-term paper or from a quick equitysale if it didn’t want to just sell a 7-year note.  We aren’t in traditional times and utility and power generation companies are experiencing some of the same tightness of capital from the markets.  Reliant’s president Mark Jacobs even noted how conditions for raisingadditional capital are not favorable, yet his comments also show thatthe company needs the funds. 

Reliant shares closed at $10.08 yesterday and shares are trading downaround $9.60 in pre-market trading.  Where this stock opens will becrucial on a technical basis as its 52-week trading range is $9.60 to$28.74.

Jon C. Ogg
September 30, 2008