Reliant expects higher 3Q earnings

Reliant Energy said Wednesday it expects to beat analysts� expectations for third quarter earnings/share by 25-30%. Analysts� consensus projections for the third quarter were $1.07/ share, compared with 1999 third quarter results of 99�/share. Reliant attributes the improved results to increased earnings from its wholesale energy group, unique 'seasonal' dynamics in the US Southwest, and growth from regulated operations.

Reliant Energy Inc. said Wednesday it expects to beat analysts� expectations for third quarter earnings/share by 25-30%.

The Houston-based energy company said analysts� consensus projections for the third quarter were $1.07/ share, compared with 1999 third quarter results of 99�/share.

The company attributes the improved results to increased earnings from its wholesale energy group, unique �seasonal� dynamics in the US Southwest, and strong growth from regulated operations.

�California, that�s it in a word,� says Paul Freemont, analyst with Jefferies & Co. in New York. �The pricing just turned out better than what analysts had built in. That�s why there�s a surprise.�

Even though price caps on wholesale power transactions were imposed by California authorities this summer, Freemont explained, the huge electricity demand resulting from hotter than expected weather and a strong economy created a hungry market for Reliant�s California generation.

California authorities are contemplating an even further reduction of the price cap from $250/Mw-hr to $100/Mw-hr, Freemont says.

While Reliant's earnings are not expected to grow further from pricing in California, a second source of pricing growth could emerge next year from the Pennsylvania, New Jersey, and Maryland market (PJM), analysts say.

Reliant has unregulated generation in PJM, a market where a much higher $1,000/Mw-hr price cap has been instituted. This past summer PJM experienced very mild weather. With a normal summer in that region, Reliant stands to generate significant earnings that could offset any reduction in earnings from California, say experts.

Reliant�s earnings growth story, like others in the energy merchant group, is coming from the unregulated side of its business and volume growth on the regulated side, says Gerald Keenan, partner with PriceWaterhouseCoopers in Chicago.

�The unregulated sides of these businesses are starting to perform,� he says. �Their trading desks are doing well in a volatile market.�

Keenan notes that price can be serendipitous. Not all companies with unregulated generation and trading operations did well this summer, he says.

�They have to get some credit for making investments at the right time and being sophisticated in handling the volatility,� Keenan says.

The regulated utility side is also giving a lift to earnings from increases in volume in response to increased customer demand. Texas experienced another hot summer, setting new records in August, for example. It makes a huge difference to earnings, if sales volume growth jumps to 4-5% compared with the customary 2%. The demand story for electricity is just now being appreciated, says Keenan.

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