Facing Significant Losses in 2008, Reliant Energy to Wind Down Commercial and Industrial Business Unit

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Researched by Industrial Info Resources (Sugar Land, Texas)--Reliant Energy Incorporated (NYSE:RRI) (Houston, Texas) recently announced its third-quarter 2008 earnings. The company reported a net income loss of $1.04 billion, compared with a gain of $162.4 million in 3Q07. The company's year-to-date net income stands at negative $302 million. "Retail results in 2008 have been far below our expectations," said President and CEO Mark Jacobs in a conference call. "In Q2, extreme weather combined with transmission constraints impacted our results, and in September, Hurricane Ike tore through the Texas Gulf Coast, leaving over 2 million customers without power and had significant consequences on the retail business."

In addition to the loss of sales and infrastructure damage caused by Ike, the hurricane also severely affected the company's natural-gas hedging strategy. Because of what Chief Operating Officer Brian Landrum described as "the hottest weather in 30 years, along with much higher natural gas prices" in 2Q08, the company was put in a position in which it had to purchase natural gas at much higher prices than expected. Hurricane Ike came in the wake of a large drop in wholesale power prices. When Ike eliminated much of the natural gas load available in the Houston area, the company was forced to sell natural gas at a significant loss.

Reliant is performing some financial restructuring, including the winding down of its commercial and industrial (C&I) segment. "C&I generates about 30% of retail contribution margin, but requires about 70% of the capital," said Landrum. "This level of margin is insufficient to cover the higher cost of capital to operate C&I using our balance sheet." The company will retain its mass market and residential segments, but will not renew commercial and industrial contracts.

"The mass segment earns about 70% of the retail margin that needs about 30% of the capital, which generates an attractive return," said Landon in a discussion of the company's future outlook. "C&I should earn between $50 million and $75 million in 2009 with a decline in 2010 to $25 million to $50 million due to the lack of new business to replace the expiring contract. The mass market segment is expected to earn $200 million to $250 million in contribution margin in 2009 and 2010."

Reliant has more than 14,000 megawatts of generating capacity across the U.S. and serves commercial, industrial, government and institutional customers in Deleware, Illinois, Maryland, New Jersey, New York, Pennsylvania and Washington, D.C., although most of the company's 1.8 million customers are in Texas. The company provides both retail and wholesale sales of electricity.

Industrial Info is currently tracking 24 projects of Reliant Energy and its subsidiaries with a combined total investment value $826 million. The projects are occurring in California, Florida, Nevada, Ohio and Pennsylvania. Pennsylvania is home to the substantial majority of these, with 14 projects with a combined investment of $778 million. One of the larger projects currently under way is the installation of two wet flue-gas desulfurization units at Reliant's Keystone Power Station in Shelocta, Pennsylvania, in order to reduce sulfur dioxide emissions. Construction of the $200 million project began in 2007 and is expected to be complete by the end of 2009. Information on this and other coal-fired plants and projects can be found in Industrial Info's Coal Fired Database.

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