Reliant Energy Unit Startles Market with Accounting Issue

Nelson Antosh , Houston Chronicle

Knight Ridder/Tribune Business News ( February 06, 2002 )

Feb. 6--Reliant Resources, the unregulated power provider and trading unit of Reliant Energy, Tuesday surprised investors by announcing an accounting problem instead of its fourth-quarter earnings.

Investors who have become wary of accounting issues sold on the news, pushing the company's stock at one point in morning trading to $10.71 per share, the lowest since its $30 per share initial public offering last April.

The stock price recovered somewhat to close Tuesday at $11.95, down $1.87.

But analysts said this adds to the doubts about a young company at a time when the market has become extremely critical of any sign of dubious accounting.

"Any time you have accounting adjustments, it makes investors nervous," said Tom Burnett of Merger Insight. "They made the usual comforting statements, there is nothing to indicate they were misleading, but everybody is nervous in the post-Enron world."

Its parent, Reliant Energy, followed suit by announcing it will delay the earnings release that was scheduled today. It saw its stock price fall by $1.98 to close at $22.94.

Reliant Energy owns 82 percent of Reliant Resources, which is to be totally spun off within three weeks of gaining final approval from the Securities and Exchange Commission.

Company officials said Tuesday that the accounting problem involves purchases of natural gas and electric power that were made by its wholesale energy group during the second and third quarters of 2001.

These were carried on the books as cash-flow hedges, when in reality they didn't qualify under generally accepted accounting practices. They should have been in the "mark-to-market" book, the company now believes, said Chairman and Chief Executive Steve Letbetter in a conference call with analysts.

Mark-to-market profits show up on the books almost immediately, while gains from cash-flow hedging would have been spread out over three years. Companies typically hedge to protect themselves against drastic fluctuations in the price of commodities such as gas and electricity.

The net impact will be to boost the net income of the second and third quarters of 2001 by $100 million to $130 million, while taking this amount of earnings out of 2002 and 2003.

This changes the timing of the earnings but not the total amount, said Letbetter, plus it has no effect on cash flow.

Andre Meade of Commerzbank Securities said Tuesday's announcement further damages investor confidence in Reliant Resources, which has disappointed several times in its short history. Meade believes the stock -- which has dropped nearly 27 percent this year -- is trading below what the company is really worth, however.

Reliant spokeswoman Sandy Fruhman said the mistake was caught by the company's accounting staff during the year-end review of its books. They then notified outside auditors, legal counsel and the board's audit committee.

"I appreciate the uncertainty this creates for investors, but I believe this delay is the most prudent course of action to follow in today's environment," said Letbetter.

"There is really no true value lost -- it is all perception, as far as the restatement goes," said Jeff Dietert of Simmons & Company International. "I think it is illustrative of the difficulty in some of the accounting methodologies that companies have to use."

Chief Financial Officer Stephen Naeve predicted that profits for 2002 will be $1.80 to $2 per share, down from the $2.05 to $2.15 that was forecast just three months ago.

This will be mostly the impact of lower price volatility on the company's wholesale business, said Naeve. Its commercial and industrial business is performing above expectations, and the residential power outlook has been improved by hedging to lock in low natural gas prices.

Reliant Resources also said that it has given up on trying to sell its European business, consisting of power plants and a trading operation. It has 13 plants in the Netherlands, with total generating capacity of a modest 3,500 megawatts.

The company has been looking for a buyer since last September, but did not get an acceptable offer. Industry conditions in Europe have changed drastically since that time with recession fears, effects of the Enron bankruptcy and Dutch government rules that have slowed the pace of privatization. Nonetheless, Reliant said that it plans to expand its trading operations in Europe.