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Reliant Energy Lowers Financial Outlook, Acts to Strengthen Financial Position
Monday September 29, 3:48 pm ET
Company Intends to End Credit-Enhanced Structure, New Financing Commitments Received


HOUSTON--(BUSINESS WIRE)--Reliant Energy today announced it is revising its 2008 outlook downward to reflect the financial impact of Hurricane Ike and lower commodity prices in its wholesale business.
In addition, the company and Merrill Lynch have agreed to take steps to end their credit-enhanced retail structure, given the current operating environment and Reliant’s decision to develop a new retail strategy aimed at lowering collateral requirements and providing more consistent earnings. The company has obtained commitments for $1 billion in new capital to support its business to facilitate the transition.

“Our retail results in 2008 have been disappointing, due in part to the recent impact of Hurricane Ike,” said Mark Jacobs, president and chief executive officer, Reliant Energy. “We have also faced unprecedented turmoil in the financial markets. To address these challenges, we have determined that terminating our credit-enhanced retail structure in an orderly manner is appropriate.”

“We have arranged for $1 billion of additional capital,” Jacobs added. “Combined with current liquidity of $1.2 billion, we will have adequate liquidity to facilitate the termination of the credit-enhanced retail structure. Certainly, conditions for raising additional capital are not favorable, however, on balance we believe these steps are in our best long-term interests.”

The company has lowered its retail contribution margin outlook for 2008 by $300 million to $350 million as a result of the effects of Hurricane Ike, including reduced sales volumes, the sale of excess supply during this time, updates to retail pricing assumptions and increased storm-related operating costs.

In response to its intention to terminate the credit-enhanced retail structure and current operating environment, Reliant is developing a new retail strategy aimed at lowering collateral requirements and providing more consistent earnings.

Commodity prices have fallen significantly since the company provided its most recent outlook. In addition, third quarter results were impacted by mild weather and reduced off-peak prices. The company estimates that its outlook for 2008 open wholesale contribution margin will be approximately $480 million lower than its previous outlook.

These outlook updates exclude any financial impact arising from termination of the credit-enhanced structure.

Reliant has arranged for $1 billion in additional capital consisting of a commitment for a $650 million term loan from GS Loan Partners and an agreement to issue $350 million of convertible preferred stock to the energy private equity firm of First Reserve Corporation.

Each of these arrangements is contingent upon completion of definitive agreements and, among other things, reaching definitive agreements with Merrill Lynch regarding termination of the credit-enhanced retail structure. Reliant and Merrill Lynch have agreed to use their commercially reasonable efforts to negotiate definitive agreements before October 31, 2008. Merrill Lynch has waived compliance with the minimum adjusted EBITDA covenant in the $300 million retail working capital facility through October 31, 2008, so long as all other covenants are complied with, and Reliant has agreed to not draw on the retail working capital facility. Included in the appendix to this release is a summary of material terms for the term loan and the convertible preferred stock to which the parties have agreed, subject to the completion of definitive agreements.

Reliant Energy, Inc. (NYSE:RRI - News) based in Houston, provides electricity and energy services to retail and wholesale customers in the United States. The company provides service to approximately 1.8 million retail electricity customers primarily in Texas, including residential and small business customers. Reliant also serves commercial, industrial, governmental and institutional customers in Delaware, Illinois, Maryland, New Jersey, New York, Pennsylvania and Washington, D.C.

The company is one of the largest independent power producers in the nation with more than 15,000 megawatts of power generation capacity across the United States. These strategically located generating assets use natural gas, fuel oil and coal. For more information, visit http://www.reliant.com.

This news release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements that contain projections, assumptions or estimates about our revenues, margins, capital structure and other financial items, our plans and objectives for future operations or about our future economic performance, financings or offerings. In many cases you can identify forward-looking statements by terminology such as “estimate,” “believe,” “may,” “plan(s),” “should,” “will,” “expect,” “outlook,” “commitment(s),” “taking steps,” “efforts” and other similar words. However, the absence of these words does not mean that the statements are not forward-looking.

Actual results may differ materially from those expressed or implied by forward-looking statements as a result of many factors or events, including, but not limited to, ongoing negotiations, legislative, regulatory and/or market developments, the outcome of pending lawsuits, governmental proceedings and investigations, the effects of competition, financial market conditions, access to capital, the timing and extent of changes in commodity prices and interest rates, weather conditions and other factors we discuss or refer to in the “Risk Factors” section of our filings with the Securities and Exchange Commission.

Each forward-looking statement speaks only as of the date of the particular statement and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Appendix to September 29, 2008 Release

Material Terms of New Financing Arrangements

The commitment with GS Loan Partners, dated September 29, 2008, for a $650 million senior secured term loan includes the following material terms:


November 2012 maturity;
issue at 4% closing payment;
initial interest at LIBOR plus 4.50% with LIBOR floor of 3.75%, or a base rate plus 3.50% with a base rate floor of 4.75%;
10% prepayment premium on the amount prepaid during the first year, 5% during the second year, 3% during the third year and no prepayment premium thereafter;
equally secured with the same collateral that secures Reliant’s revolving credit agreement, senior secured notes, and PEDFA Guarantees;
our subsidiaries, except those contractually prohibited from doing so, will be guarantors;
minimum availability and maximum hedging limitations; and
specified levels for the ratios of adjusted net secured debt and total debt to adjusted net earnings (loss) before interest expense, interest income, income taxes, depreciation and amortization (consolidated secured leverage and total leverage ratios).
The agreement with First Reserve Fund XII, L.P., dated September 29, 2008, providing for the purchase of 350,000 shares of Reliant convertible participating preferred stock at $1,000 per share provides for the following terms:


cumulative quarterly cash dividends, payable at 14% per annum;
convertible at lesser of $11 and lowest 20-day volume weighted average price of our common stock during the six months after closing, with a floor of $8.00;
holders may require redemption of the preferred stock upon a change of control at the greater of (i) face amount plus accrued and unpaid dividends, plus a make-whole premium if the redemption is before the fifth anniversary or (ii) the amount received by common stock holders on an as-converted basis;
we may redeem the preferred stock after the third anniversary for the face amount plus accrued and unpaid dividends, plus a make-whole premium if the redemption is before the fifth anniversary;
holders may require redemption any time after the seventh anniversary for the face amount plus accrued and unpaid dividends; and
First Reserve may designate one director to our board so long as it retains 50% of the initial convertible preferred stock or the common stock issued upon conversion.
Each of these financing arrangements is contingent upon, among other things, reaching the definitive agreements with Merrill Lynch regarding the unwind of the credit-enhanced retail structure described in the release. The above descriptions of these financing arrangements are not complete, and the Commitment Letter with GS Loan Partners and the letter agreement with First Reserve are attached as exhibits to the Form 8-K furnished to the Securities and Exchange Commission today.





Contact:
Reliant Energy, Houston
Pat Hammond, 713-497-7723 (media)
or
Dennis Barber, 713-497-3042 (investors)

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Source: Reliant Energy


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