S&P confirms Reliant, off watch, upgrades Orion

Standard & Poor's confirmed Reliant Resources Inc. including Reliant Energy Mid-Atlantic Power Holdings LLC's $210 million 8.554% passthrough certificates series A due 2020, $421 million 9.237% passthrough certificates series B due 2017 and $220 million 9.681% passthrough certificates series C due 2026, upgraded Orion Power Holdings Inc. including its $200 million 4.5% convertible senior notes due 2008 and $375 million 12% senior notes due 2010 to B- from CCC+ and removed all ratings from CreditWatch developing. The outlook is negative.

S&P said the upgrade to Orion reflects its analysis of the asset coverage at Orion and determination that while the Orion bonds are structurally subordinated to senior secured loans at Orion NY and Orion Midwest the asset coverage is adequate for only a one-notch differential. As the secured debt continues to decline at Orion NY and Orion Midwest, the rating differential will continue to reflect the improved position of the Orion bondholders vis a vis the secured debtholders.

S&P said Reliant's ratings and those of its major subsidiaries are based on the consolidated credit profile of the corporation, but also reflect the fact that monies are currently trapped at the Orion operating companies and cannot be relied on to service corporate-level debt.

The consolidated business profile incorporates the credit quality of the wholesale and retail operations that Reliant owns.

The wholesale operation is characterized by high business risk including regulatory uncertainty and volatile cash flows. While Reliant expects the wholesale operation to contribute approximately one-half of operating cash flow over the next five years, S&P said its own wholesale price outlook would suggest that the wholesale operation will contribute approximately 38% of operating cash flow.

Tempering the more volatile cash flows from the unregulated power sector is Reliant's investment in the Texas retail market. The retail operation benefits from a relatively supportive regulatory regime in Texas for primarily residential and small commercial customers, whereby the Price to Beat can be adjusted for changes in natural gas or power prices up to twice per year, S&P noted.

Reliant's financial profile has weakened considerably due to low margins in the wholesale business, higher interest costs, high leverage and restrictive covenants at its large Orion subsidiary. In 2002, Reliant's debt to total capital ratio was in the mid-50s and funds from operation (FFO) to total interest expense was about 4x. Going forward, however, S&P said it expects holding company FFO interest coverage to be in line with the rating level (below 2x) until cash traps at Orion are eliminated.

The negative outlook reflects the continued weak wholesale power market characterized by low margins, overcapacity, regulatory uncertainty, and uncertain cash flows from its wholesale asset base, partially offset by its Texas retail business, S&P said.

Fitch rates Continental convertibles CCC+

Fitch Ratings assigned a CCC+ rating to Continental Airlines, Inc.'s $150 million in convertible senior unsecured notes due 2023. The outlook is negative.

Fitch said the rating reflects Continental's exposure to future demand and cost shocks as a result of its highly leveraged capital structure and relatively weak liquidity position.

Although the airline has demonstrated an ability to tap the capital markets in an effort to bolster financial flexibility and create a stronger unrestricted cash balance, Continental has no remaining unencumbered assets to use as collateral in support of future debt financings, Fitch said.

Following the completion of the $150 million convertible offering and the receipt of $172 million in government cash reimbursement for security mandates funded since September 2001, Continental expects to report a quarter-ending unrestricted cash balance of approximately $1.4 billion as of June 30. In light of continuing uncertainty over the timing of a recovery in industry unit revenue, the additional cash on the balance sheet will provide a much-needed buffer against any future demand and fuel price shocks that could derail the airline's return to sustained positive operating cash flow and profitability, Fitch said.

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