-----Original Message-----
From: Stein, Neil [mailto:neil.stein@csfb.com]
Sent: Friday, September 28, 2001 7:02 AM
To: undisclosed-recipients
Subject: RRI: Analysis of Orion Power Acquisition; Maintaining
BelowConse nsus Estimates; Reducing Target Price


 <<RRI092701.pdf>> 
Good Morning,

Attached, please find our FC note on Reliant Resources.

Summary:
	1. On September 27, 2001, RRI announced it would acquire Orion Power
for $26.80 in an all-cash transaction.
	?	2. In our view this deal has very positive implications for
the sector.  The purchase price is essentially in-line with our estimate of
the private market value of ORN's asset portfolio ($26.83).  Overall, the
deal gives us addition confidence in our valuation framework and reinforces
our view that valuations in the sector are extremely attractive.  
	?	3. RRI is leaving unchanged its 2002 EPS guidance of
$2.05-$2.15.  In doing so, RRI noted that the earnings contribution from
this deal (+$0.30) will offset the negative impact of sluggish conditions in
the Western power markets.  
	?	4. Our 2001 and 2002 EPS estimates remain unchanged at $1.62
and $1.95.  Our 2002 estimate continues to be below company guidance, giving
us comfort in our forecast.  
	?	5. Importantly, for 2002 RRI's Western generation assets are
currently less than 50% hedged, which is well below the company's peers
including CPN (Strong Buy, $19.75) and MIR (Buy, $19.60).  As such, the
company is relatively more exposed to commodity price volatility in that
region of the country.    
6. We are reducing our target price to $30 from $40.  We derive this
valuation from our Discounted Cash Flow (DCF) analysis, which employs an
11.4% discount rate.  Our revised target price reflects: 1. The $2.9 billion
acquisition expenditure; 2. The $1.8 billion of assumed net debt; 3. The
incremental earnings and synergies associated with the deal; and, 4. The
earnings shortfall at RRI's Western operations and slower overall growth
prospects for the business.  

Regards,

Neil Stein   212/325-4217

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