HOUSTON, Aug. 12, 2003 — Reliant Resources, Inc. reported a loss from continuing operations of $28 million, or $0.09 per share, for the second quarter of 2003, compared to income from continuing operations of $122 million, or $0.42 per share, for the same period of 2002.
The company also announced a cost-reduction plan that will be substantially implemented during the second half of 2003 and is expected to reduce annual operating expenses by approximately $140 million after the reductions have been fully implemented.
“Given the difficult business conditions, we are aggressively working towards improving our future financial performance by adjusting our business model and cost structure,” said Joel Staff, chairman and CEO. “We have just finalized a plan to reduce our operating costs by $140 million, and we expect to complete substantially all of the reductions by the end of the year.”
Reliant Resources’ 2003 second-quarter loss reflected reduced earnings from its retail segment, weak wholesale earnings and an increase in interest expense and amortization of financing costs associated with its $5.9 billion refinancing on March 31, 2003. For the first six months of 2003, the company reported a loss from continuing operations of $74 million, or $0.25 per share, compared to income from continuing operations of $203 million, or $0.70 per share, for the same period of 2002.
In addition to the factors listed above, 2003 year-to-date results were impacted by weaker results from the wholesale segment in the first quarter of 2003 compared to the same period in 2002 and increased interest expense. A more detailed discussion of the factors contributing to the second-quarter and year-to-date loss can be found below under “Segment Earnings Detailed.”
“In addition to our cost-reduction plan, we have made progress in other areas as well,” Staff continued. “We have built on the platform of stability created by our March bank refinancing by raising approximately $1.4 billion in the capital markets. We used $1.1 billion of the proceeds to pay down our bank debt, eliminating the only required amortization payment associated with our recent refinancing,” he explained. “We have implemented changes to strengthen our management team, focused our efforts to pursue a reasonable resolution of outstanding legal and regulatory issues, and enhanced our corporate governance processes.
“While our retail results in the second quarter were negatively impacted by rising natural gas prices, we expect to see an offset in the second half of the year from the recently approved increase in our price-to-beat and the hedges we have put in place,” Staff said. “We remain very pleased with the performance of our retail business both in terms of maintaining our position in the Houston market and gaining share elsewhere in Texas. Although extremely weak wholesale market conditions, exacerbated by mild weather in the East, continue to affect our earnings, I am confident that we are positioning the company for future success.”
SEGMENT EARNINGS DETAILED
The company’s retail energy segment produced earnings before interest and taxes (EBIT) of $101 million in the second quarter of 2003, compared to $202 million of EBIT in the second quarter of 2002.
The decline in second-quarter 2003 EBIT is a result of increased ERCOT load-related fees, revised estimates for electric sales and supply costs related to prior periods, increased supply costs driven primarily by higher energy prices, and higher expenses. In July, Reliant Energy Retail Services received approval from the Public Utility Commission of Texas to increase its “price-to-beat” for residential and small commercial customers in the Houston area to reflect increased natural gas prices. The factors discussed above were partially offset by the inclusion of margin from Texas generation assets added since last year.
Retail energy EBIT for the first half of 2003 was $124 million, compared to $248 million for the same period of 2002. In addition to the items discussed above, 2003 results include a $47 million accrual for a payment to CenterPoint Energy. Texas deregulation legislation requires an affiliated retail electric provider to make a payment in 2004, not to exceed $150 per customer, if 40 percent of the residential and small commercial customers’ load in the affiliated transmission and distribution utility’s service territory has not switched to an alternative electric provider by the end of 2003. Through the second quarter of 2003, Reliant Resources has recorded $175 million for the estimated payment the company expects to make to CenterPoint Energy in 2004. The accrual was based on the maximum payment of $150 per residential customer retained. The company does not anticipate making a payment for the small commercial class.
Due to a change in accounting rules (EITF No. 02-03), the results of operations related to our contracted electricity sales to large commercial, industrial and institutional customers and the related supply costs are not comparable between the first half of 2002 and 2003. However, the change in accounting rules did not materially impact the comparability of margins related to these contracted sales in the second quarter. Prior to 2003, the company used mark-to-market accounting for earnings from its contracted electricity sales.
The company has discontinued the use of mark-to-market accounting for these contracts. Earnings related to contracted electricity sales are now recognized as the volumes are delivered.
As of June 30, 2003, the company’s retail energy segment had $62 million of unrealized gains recorded in prior years that will be realized and collected upon the delivery of related volumes ($35 million in the remainder of 2003 and $27 million in 2004 and beyond).
The wholesale energy segment reported a loss before interest and taxes of $20 million in the second quarter of 2003 compared to EBIT of $31 million in the second quarter of 2002. The decrease was primarily the result of significantly lower trading margins reflecting the reduction in scope of the company’s trading activities; the expiration of favorable contracts that benefited 2002 results; continued weakness in wholesale energy market conditions and increased maintenance expenses. These items were partially offset by the absence of California-related reserves and charges associated with the cancellation of development projects, both of which impacted 2002 results, as well as reductions in general and administrative expenses from previous cost-reduction efforts.
For the six months ended June 30, 2003, wholesale energy reported a loss before interest and taxes of $17 million, compared to EBIT of $147 million for the same period of 2002. In addition to the factors affecting the second-quarter results, 2003 results include a trading loss of approximately $80 million and increased losses associated with hedge ineffectiveness. Partially offsetting the declines were the reduction in California-related provisions and improved margins from the coal plants in the Mid-Atlantic region due to higher power prices that resulted from increased natural gas prices.
The company’s other operations segment recorded a loss before interest and taxes of $9 million for the second quarter of 2003, compared to $1 million of EBIT in the second quarter of 2002. Results for the second quarter of 2003 included increased unallocated corporate overhead costs previously allocated to the European energy segment, which is now being reported as discontinued operations, and increased Texas franchise fees.
For the six months ended June 30, 2003, the other operations segment recorded a loss before interest and taxes of $19 million, compared to a loss before interest and taxes of $9 million for the same period in 2002.
Effective February 2003, Reliant Resources began reporting its European energy segment as discontinued operations. This is a result of the company’s agreement to sell its European energy operations to nv Nuon, a Netherlands-based electricity distributor. Reliant Resources expects to close this transaction in the third or early fourth quarter of 2003.
The company recorded income from discontinued operations of $21 million and a loss from discontinued operations of $360 million for the second quarter and first half of 2003, respectively. The year-to-date loss includes a $340 million charge related to the estimated loss on disposal. Income from discontinued operations in 2002 was $54 million for the second quarter and $69 million for the first half.
Outlook for 2003
The company is revising its 2003 earnings outlook for adjusted income from continuing operations to $0.10 per share due to weak wholesale market conditions and increased interest expense and accelerated amortization of bank fees resulting from the company’s recent capital market issuances. The earnings outlook excludes the accrual for payment to CenterPoint Energy under Texas deregulation legislation, ($0.10) and the net reduction of California-related reserves, $0.18 and includes gains recorded in prior periods that will be realized/collected in 2003 [impact of transitioning from mark-to-market to accrual accounting (EITF Issue No. 02-03)], ($0.13).
More information is available at www.reliantresources.com.
Reliant Resources, Inc., based in Houston, Texas, provides electricity and energy services to retail and wholesale customers in the U.S. and Europe, marketing those services under the Reliant Energy brand name. The company provides a complete suite of energy products and services to approximately 1.7 million electricity customers in Texas ranging from residences and small businesses to large commercial, industrial and institutional customers. Reliant also serves large commercial and industrial clients in the PJM (Pennsylvania, New Jersey, Maryland) Interconnection. The company has approximately 22,000 megawatts of power generation capacity in operation, under construction or under contract in the U.S. and nearly 3,500 megawatts of power generation in operation in Western Europe. For more information, visit our web site at www.reliantresources.com.