Reliant Resources reports loss of $112 million for 2002


HOUSTON, Jan. 30, 2003 — Reliant Resources Inc. reported a loss of $112 million, or $0.39 per diluted share, for the fourth quarter of 2002, compared to net income for the same period of 2001 of $33 million, or $0.11 per diluted share.

Excluding special items detailed in the tables below, the loss in the fourth quarter of 2002 was $60 million, or $0.21 per diluted share, compared to earnings of $1 million for the same period in 2001.

Reliant Resources’ 2002 fourth-quarter loss before special items reflected a decline in wholesale earnings due to continued weakness in the wholesale markets, lower mark-to-market gross margin, a non-cash reduction of gross margin related to an adjustment of the Orion Power Holdings purchase price allocation, and an increase in reserves for California refunds.

Additionally, the company incurred an increase in interest expense, primarily associated with Orion Power Holdings. These items were partially offset by continued strong performance in the company’s retail electric operations in Texas following the start of full retail competition in January 2002 and contributions from the Orion Power Holdings assets, which were acquired in February 2002.

For the full year 2002, income before the cumulative effect of accounting change was $221 million, or $0.76 per diluted share, compared to $554 million, or $2.00 per diluted share, for the same period in 2001. Excluding special items detailed in the tables below, income in 2002 was $358 million, or $1.23 per diluted share, compared to $605 million, or $2.18 per diluted share, for the same period in 2001.

Reliant Resources’ 2002 earnings before special items declined due to reduced earnings from the wholesale segment, reflecting weak wholesale energy market conditions, reduced mark-to-market gross margin, a non-cash reduction of gross margin related to an adjustment of the Orion Power Holdings purchase price allocation, and expenses associated with plant cancellations, a plant closure and severance costs. Partially offsetting these declines were the strong performance of the company’s retail electric operations in Texas and contributions from Orion Power Holdings.

“While 2002 was a very challenging year for our company and our shareholders, our retail business in Texas buoyed the company in a very difficult wholesale market environment,” said Steve Letbetter, chairman and CEO. “We have sharpened our strategic focus and reduced our cost structure to align the company with the commercial opportunities in today’s market. In October, we refinanced our Orion bank debt for an additional three-year term. With respect to our U.S. and European bank debt, we have launched restructuring proposals to the respective bank groups. I would note that the approval of 100 percent of the lenders involved in these facilities is required to complete the transactions,” Letbetter added.

“We are working to position the company to survive the trough period in the business cycle and to benefit from future improvements in wholesale market conditions.”

Retail Energy

The company’s retail energy segment produced EBIT before special items of $70 million in the fourth quarter of 2002, compared to $1 million of EBIT before special items in the fourth quarter of 2001. For the full year 2002, the retail energy segment produced EBIT before special items of $648 million, compared to a loss before interest, taxes and special items of $10 million in 2001.

The opening of the Texas retail electricity market to competition in January 2002 was the primary driver of the increase in retail EBIT. As the designated affiliated retail electric providers in the Houston area, Reliant Energy Retail Services and Reliant Energy Solutions began serving approximately 1.7 million residential, commercial, industrial and institutional customers when the Texas retail electricity market opened to full competition in January 2002. These two units also began acquiring customers in other parts of Texas that are open to competition.

Effective for new transactions on or after October 26, 2002, the company discontinued the use of mark-to-market accounting for earnings from large commercial, industrial and institutional contracted customers under new accounting guidance issued by the Emerging Issues Task Force (EITF Issue No. 02-03). The earnings from these contracted customers will be recognized in future periods as the related volumes are delivered. The company estimates that the reported EBIT was approximately $15 million lower than would have been recognized under mark-to-market accounting for the fourth quarter of 2002.

Wholesale Energy

The wholesale energy segment reported a loss before interest and taxes of $99 million in the fourth quarter of 2002, compared to a loss before interest, taxes and special items of $20 million in the fourth quarter of 2001. For the full year 2002, the wholesale energy segment produced EBIT before special items of $202 million, compared to $912 million for 2001.

The increased fourth-quarter loss was primarily due to continued weakness in wholesale energy market conditions and lower mark-to-market gross margin. In addition, the company recorded a $45 million, non-cash reduction of gross margin related to an adjustment of the Orion Power Holdings purchase price allocation, a $30 million net increase in receivable reserves related to the California operations and severance charges of $8 million. Partially offsetting the declines were earnings from Orion Power Holdings, which was acquired in February 2002, business interruption insurance proceeds of $21 million related to the El Dorado and Coolwater power plants, and the absence of reserves related to Enron of $68 million, which were recorded in the fourth quarter of 2001.

Weak wholesale energy market conditions and lower mark-to-market gross margin contributed to the decrease in full-year earnings. Additionally, the company recorded $20 million in charges associated with employee severance costs, a $15 million write-off due to the closure of the Warren power plant located in Pennsylvania and a $17 million charge associated with the cancellation of power plant development projects. These factors were partially offset by contributions from Orion Power Holdings, business interruption insurance proceeds of $33 million related to the El Dorado and Coolwater power plants, and the absence of $68 million of reserves related to Enron mentioned above.

European Energy

The European energy segment produced EBIT of $15 million in the fourth quarter of 2002 compared to $2 million of EBIT before special items in the same period of 2001. Earnings in the fourth quarter of 2002 include a $6 million reserve related to the bankruptcy of TXU’s European business while earnings in the fourth quarter of 2001 included a $17 million reserve related to Enron.

For the full-year 2002, the European energy segment produced EBIT before special items of $17 million, compared to 2001 EBIT before special items of $49 million. In addition to the reserves mentioned above, 2002 EBIT was adversely impacted by unplanned plant outages totaling $10 million and reorganization costs of $8 million. Additionally, 2001 EBIT included a $30 million efficiency and energy payment from NEA, which was not repeated in 2002.

Other Operations

The company’s other operations segment recorded EBIT before special items of $3 million for the fourth quarter of 2002, compared to EBIT before special items of $10 million in the fourth quarter of 2001.

For the full year 2002, the other operations segment had a loss before interest, taxes and special items of $1 million, compared to a loss of $3 million for 2001.

Outlook for 2003

Reliant Resources is maintaining its guidance for 2003 net income of between $0.90 and $1.10 per diluted share. This guidance excludes the impact of transitioning from mark-to-market to accrual accounting as required by EITF Issue No. 02-03 and the accruals for payment to CenterPoint Energy under Texas deregulation legislation.

A replay of Reliant Resources’ conference call may be accessed at www.reliantresources.com.

Reliant Resources, based in Houston, Texas, provides electricity and energy services to wholesale and retail customers in the U.S. and Europe, marketing those services under the Reliant Energy brand name. The company has approximately 21,000 megawatts of power generation capacity in operation, under construction or under contract in the U.S. and approximately 3,500 megawatts of power generation in operation in Europe.

At the retail level, Reliant Resources provides a complete suite of energy products to electricity customers in Texas ranging from residences and small businesses to large commercial, institutional and industrial customers. For more information, visit our web site at www.reliantresources.com.

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