Ann de Rouffignac
HOUSTON, Feb. 5, 2002 — Reliant Resources Inc. Tuesday said it will cancel or defer power plant projects scheduled to go on line in 2003 and will also issue $400 million in new equity.
Power plants planned to be on line in 2002 will be completed as scheduled. Reliant Resources, an 80% owned affiliate of Reliant Energy Inc., did not detail which power plants in what regions would be canceled. The plan involves reducing capital expenditures $900 million in 2002 and $400 million in 2003.
The plans will help strengthen the balance sheet and keep the debt to capital ratio at 50/50, the Houston power producer and marketer said. Earlier, the company delayed the release of fourth quarter earnings and lowered 2002 earnings estimates based on accounting errors in the 2001 second and third quarters.
As a result, earnings for the second and third quarters will increase from $100 million to $130 million, it said. Cash flow will not be affected, the company said. The company lowered its estimate of 2002 earnings to $1.80-$2/share from $2.05-2.15/share.
The reduced earnings guidance for 2002 resulted in part from an anticipated reduction of $200 million in earnings before interest and taxes for the wholesale trading group, said Stephen Naeve, chief financial officer, in a conference call.
Half is the result of a Federal Energy Regulatory Commission order that eliminated earnings from ancillary services in the western markets, he said. Another $70 million of the decrease is the result of a reduced spark spread from low forward electricity prices.
Shares of Reliant Resources were trading down 13.17% to $12 on the New York Stock Exchange at mid-day. More than 2 million shares had traded, compared to an average volume of 622,590 shares.
It said the accounting errors were reported to the company’s outside auditors and audit committees of the board of directors. The audit committees are directing the review of the accounting of these transactions, Reliant said.
Company executives said 90% of the wholesale trading operations earnings came from transactions that were realized when delivery obligations were met. These transactions are accounted for by conventional accrual accounting.
The balance of trading operation consists of longer term transactions using “mark-to-market” accounting. But the cash and earnings from 80% of the mark-to-market transactions are realized in less than 1 year, he said.
“Our book is not subject to as much uncertainty in valuation and has less risk for liquidity,” Naeve said. “We don’t swing a big VAR (value at risk) stick and make big bets.” VAR is a method of measuring the risk of a trading portfolio.
Naeve also said Reliant had no debt with equity triggers or ratings agency triggers. He said in a worst case scenario Reliant Resources has sufficient liquidity, including $800 million of cash on hand and $1.3 billion of available credit, to meet any increased collateral demands or margin calls on commercial contracts.
Separately, Reliant said it would retain its Dutch utility NV UNA, which has 3,476 Mw of generating capacity. In September, Reliant put the Dutch power company up for sale. Reliant said it did not receive “acceptable offers” for its European business.