Bloomberg News

Reliant Falls After `Unacceptable' Retail Performance

September 30, 2008

Reliant Energy Inc., the owner of power plants in nine U.S. states, had its biggest drop in six years in New York trading after the company cut its earnings projections and cited ``unacceptable'' performance in its retail electricity business.

Houston-based Reliant dropped $2.73, or 27 percent, to $7.35 in New York Stock Exchange composite trading (RRI:US). The decline was the company's biggest since July 2002, when investors shed the stock amid concern Reliant might run short of cash. The power producer has lost more than half of its market value since Sept. 15.

Reliant cut its forecast (RRI:US) for ``retail contribution margin,'' a measure of profit from its retail power business, by $300 million to $350 million, according to a statement after the close of regular trading yesterday. The company slashed its forecast for earnings from wholesale power sales by almost half.

``Our 2008 retail results are disappointing and unacceptable,'' Chief Executive Officer Mark Jacobs said today on a conference call with investors and analysts.

Reliant said in yesterday's statement that it arranged for $1 billion of additional capital (RRI:US), including a $650 million term loan from GS Loan Partners. The company will end its practice of using Merrill Lynch & Co. to provide guarantees and post collateral for power purchases and other transactions in its retail business, according to the statement.

Merrill Arrangement

Reliant decided to end the Merrill tie because ``it was no longer an attractive arrangement'' for either party, Jacobs said today. Merrill, the world's biggest brokerage firm, is being acquired by Bank of America Corp.

``The world has changed materially for both Merrill Lynch and Reliant Energy since the credit sleeve was put in place in 2006,'' Jacobs said. He said raising new capital ``was both expensive and challenging.''

Merrill provided a credit facility that allowed Reliant to draw as much as $300 million in working capital for retail operations. That agreement included a requirement that Reliant meet a minimum earnings target, a covenant that Merrill agreed to waive so long as the company didn't use any of the credit.

Reliant's move to get more capital was conservative, said Gordon Howald, an analyst with Calyon Securities in New York. Reliant put its total liquidity at $2.7 billion, including expected sources such as $500 million from the planned sale of a Nevada power plant.

`No Risk of Insolvency'

``There's no risk of insolvency here, and the market is almost treating this company as though there was a risk of that,'' Howald said.

Selling Reliant's retail power business isn't a ``reasonable'' option for now because it wouldn't fetch a good price under current market conditions, Howald said. He lowered his rating on Reliant shares to ``neutral'' from ``add'' and cut his 12-month target for the stock's price to $10 from $22.

``The market is just not going to pay for future cash-flow generation potential at this point in time,'' Howald said.

Texas opened its power industry to competition in 2002, forming a system in which former monopoly utility companies such as Reliant can be undercut on prices by other retailers.

Hurricane Ike contributed to an earnings shortfall from retail power sales, Reliant said. Ike struck the Texas coast on Sept. 13 and knocked out power service to more than 2 million homes and businesses in the Houston area, Reliant's home market.

To contact the reporter on this story: Edward Klump in Houston at eklump@bloomberg.net.

To contact the editor responsible for this story: Tony Cox at acox3@bloomberg.net.


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