Oct. 25, 2000Reliant Energy Inc. said Wednesday third-quarter earnings jumped 37% to $389 million or $1.34/diluted shares, as the company benefited from high electricity prices and strong demand in California this summer and strong demand in its headquarters city of Houston. Revenues almost doubled to $9.5 billion.
In a conference call with analysts, company executives projected earnings for the full year will be $2.85-$2.95/share and that earnings for 2001 will be flat, compared to 2000. Executives noted the projection is based on the hypothesis the company will remain intact. Reliant earlier reported plans to split into separate regulated and unregulated energy companies next year. The 2001 forecast is based upon temperatures in the Southwest and mid-Atlantic returning to normal next year, Chairman Steve Letbetter said, and the expense it will take to prepare for competition in Texas in 2002.
Analysts had raised their average estimate of Reliant’s third quarter earnings to $1.36/share, according to First Call/Thomson Financial, after Reliant said on Sept. 27 it would exceed the consensus estimate, which then stood at $1.07, by 25-30%. In noon trading on the New York Stock Exchange, Reliant stock was trading down 1 1/2 to 40 7/8.
In its recently filed plans for a $1.3 billion initial public offering (IPO) of 20% of the stock in Reliant Resources Inc., the company will become the receptacle for most Reliant operations with the exception of the regulated transmission and distribution operations.
The rest of the stock will be distributed later to Reliant shareholders. Letbetter said the company expects its deregulation plan to be approved by the Public Utility Commission of Texas before yearend and the IPO is on track for December.
Responding to questions about a $70 million corporate loss, executives said it was the result of expenses incurred in preparing for retail electric competition, including the cost of call center and other systems; costs associated with exiting retail gas markets in Pennsylvania, Ohio, and Atlanta; and eBusiness and communications startup costs.
Strong wholesale performance
Reliant said operating income rose over seven times to $319 million at its wholesale energy business, which includes unregulated power generation and trading and marketing in North America.
A shortage of power in California this summer, caused by high temperatures and a slow pace of new power plant construction, led to high wholesale power prices, said Joe Bob Perkins, president and chief operating officer of Reliant Energy Wholesale Group. Reliant has 3,800 Mw of electricity generating capacity in southern California.
Many units ran more than expected, Perkins said, exceeding their emissions limits.
“We bought more credits,” he said. “We held units together with bailing wire.”
Perkins attributed the improved performance to expansion of commercial assets and trading in several regions, as well as higher energy sales and energy prices due to unique seasonal dynamics in the Western markets. Increased operating margins were partially offset by higher operating expenses to support the infrastructure of the expanding wholesale business, he said.
Third quarter 2000 operating income of Reliant Energy HL&P, the company’s Houston electric utility unit, was $500 million, compared to $442 million for the same period of 1999. Letbetter said increased customer demand in the Houston metropolitan area and lower depreciation and amortization expense were the major reasons for the rise. He said Reliant Energy HL&P has added more than 47,000 customers in its service territory in the last 12 months. Firm kilowatt-hour sales for the third quarter of 2000 increased approximately 5% over the same period of 1999.
The company’s wholesale energy group, which includes unregulated power generation and gas and power trading and marketing activities in North America, reported third-quarter operating income of $319 million in 2000, compared to $43 million for the same period of 1999. Gross margins increased by $372 million over margins for the same period of last year.
Reliant Energy’s three natural gas distribution companies reported an operating loss of $15 million for the third quarter of 2000, up from an operating loss of $5 million for the same period of 1999. The company said increased expenses including employee benefits, information technology, and depreciation accounted for the increase.
Reliant Energy Europe contributed operating income of $15 million for the third quarter of 2000.
Letbetter said Reliant will take a $250 million loss on its Latin American properties, but now has $800 million in cash from sales of its various Latin American units to reinvest in core operations.