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Reliant Resources


is savoring a sweet victory.

The Houston energy company has just scored a multibillion-dollar loan package, billed by some as the biggest financing deal of the year. The company now has billions of dollars -- and plenty of precious time -- to strengthen a merchant energy operation that has fared miserably in the industrywide meltdown.

"This is fabulous," says Lasan Johong, an analyst at Blaylock & Partners who had long predicted that Reliant would get the financing it needs. "Overall, this deal is better than what I expected."

The deal, announced hours before a midnight deadline on Monday, provides Reliant with $6.2 billion -- including an extra $300 million credit line -- to satisfy its obligations and help fund its operations for the next several years. Unlike





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, which grasped at expensive short-term deals to fight off bankruptcy last summer, Reliant emerged from its negotiations with surprisingly favorable terms.

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The company must pay off only a small chunk of the package, the $300 million credit line, before the end of next year. From there, the company has until 2006 before the bulk of the payments start coming due.

But Karl Miller, an industry critic who leads an energy-related acquisition firm, insists that Reliant's problems are far from over. He points to serious charges against the company -- including alleged price manipulation in California -- and he calls the new financing little more than a "short-term solution to a long-term problem."

Reliant pledged virtually all of its available assets in order to secure the financing. It also offered the bank warrants for up to 2% of the company's stock. In the meantime, it will make generous interest payments -- equal to Libor plus 4% -- until the principal comes due.

Still, Reliant CEO Steve Letbetter sounded clearly pleased with the terms when announcing the long-awaited deal on Monday.

"This financing ... represents the final step in our actions to stabilize the company's capital structure," Letbetter said. "We greatly appreciate the support of our lenders that led to a mutually beneficial agreement."

Reliant shareholders, stunned by a regulatory setback last week, clearly appreciated the favorable news as well. They instantly bid the stock up to $4.75, sending it to a 33% jump in the opening minutes of trading.

With that bounce, the stock has more than recovered the huge ground it lost after a recent slap from the Federal Energy Regulatory Commission. In a high-profile meeting last Wednesday, FERC singled out Reliant for harsh punishment, threatening to yank the company's energy trading privileges absent further proof that the company did not engage in wrongdoing during the California energy crisis of 2000-01. That threat, which could be carried out in a matter of weeks, cut Reliant's shares by nearly half, to $2.25 last week.

Johong, for one, is still trying to sort out how badly the FERC ruling might hit Reliant's bottom line.

"If just the retail portion of their business gets hit, the cut to earnings should be no more than marginal," says Johong, who has a buy rating on the stock but doesn't own shares himself. "But if the entire corporation gets blocked from

trading, that could be a huge hit.

"We'll have to see the final form of the FERC ruling before we will know."

The company itself has so far downplayed the significance of the FERC warning, while fiercely denying that it engaged in any wrongdoing. But the credit rating agencies have expressed some concern. Both Standard & Poor's and Fitch last week downgraded Reliant to the speculative C category, signaling a heightened risk of default. They cited the FERC ruling -- and a potential setback with the banks that did not materialize -- as reasons for their actions.

Following news of Reliant's refinancing, Fitch revised its outlook on the company's credit from evolving to positive on Tuesday. The agency also promised to "refine" the company's credit rating in an upcoming review.