RRI Energy reduces its secured debt by $220 million year to date

By Jennifer Lanning Drey

Portland, Ore., Nov. 5 - RRI Energy, Inc. has reduced secured debt by more than $220 million in 2009 through a recently completed tender offer and open market purchases, allowing the company greater flexibility under its financial covenants, Mark Jacobs, the company's chief executive officer, said Thursday during its third-quarter earnings conference call.

"This has been a component of our strategy to manage the financial covenant in our corporate revolver, in addition to being consistent with our strategy to redeploy cash to reach target debt levels," he said.

The company has earmarked $400 million to cover the maturity of its Orion Power Holdings, Inc. notes in May 2010, which will be its "next big deleveraging," Rick Dobson, RRI's chief financial officer, said during the call.

Upon retirement of the Orion notes, RRI's gross debt will be approximately $2.4 billion, or about $700 million above the top of its long-term gross debt target, he said.

In the meantime, "You could see some deleveraging, but it won't be a huge number," Dobson said during the question-and-answer portion of the call.

At the end of October, RRI had about $1.7 billion of available liquidity, which included $1.1 billion of cash, Jacobs reported.

The CEO also noted that RRI's primary focus remains on managing risk.

"In light of the uncertainty in the current market environment, it is without question our highest priority," he said.

Ensuring cash flow breakeven

Also based on continued uncertainty in the market, RRI has implemented what Jacobs called a "modest" hedging program for 2010 and 2011 that is designed to "provide a high degree of certainty of free cash flow breakeven or better, even if market conditions substantially worsen."

The company is evaluating plans for a similar hedging program in 2012, Dobson said.

"Bottom line, I believe we're well positioned to manage through the current market, even if conditions further deteriorate," Jacobs said.

"While current market conditions are depressed, the market will recover. But the timing of a recovery is uncertain, and it's possible that things will get worse before they get better," he later added.

Adjusted EBITDA falls

In the third quarter, lower unit margins and reduced demand combined with coal purchases made at prices above the current market resulted in RRI posting quarterly adjusted EBITDA of $100 million. The figure was down from $350 million in the same period in 2008, Dobson said.

Free cash flow used in continuing operations during the first nine months of 2009 was $179 million, compared to free cash flow provided by continuing operations of $298 million in the same period in 2008.

The company expects to post full-year adjusted EBITDA of $56 million for 2009 and then see improvement in 2010 due to stronger commodity prices, the full-year impact of its corporate cost realignment and the roll-off of out-of-the-money coal purchases, Dobson said.

Free cash flow is expected to be $167 million in 2010.

Reliant is a Houston-based provider of electricity and energy services.

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