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Reliant Resources reports third quarter loss of $791 million


HOUSTON, Nov. 12, 2003 — Reliant Resources Inc. reported a loss from continuing operations of $791 million, or $2.69 per share, for the third quarter of 2003, compared to income from continuing operations of $108 million, or $0.37 per share, for the same period of 2002.

Excluding the previously announced goodwill impairment and settlement with the Federal Energy Regulatory Commission (FERC), the company earned $218 million, or $0.74 per share, from continuing operations in the third quarter of 2003.

“Our retail business performed exceptionally well, and our wholesale business turned in a solid performance in spite of continued weak market conditions,” said Joel Staff, chairman and CEO. “We also moved forward with actions to enhance the future performance of our company. Our retail business has been very successful in adding customers both in Texas and in the Northeast. In relation to our wholesale business, we are making good progress in the strategic review of our asset portfolio and in creating a business model that is appropriate for the environment in which we are operating,” Staff added.

Reliant Resources’ 2003 third-quarter reported loss from continuing operations reflected a goodwill impairment of $985 million related to the company’s investment in its wholesale segment; a $37 million, pre-tax charge related to the settlement with the FERC of various outstanding western market investigations; and increased interest expense, resulting primarily from the company’s $1.1 billion capital market issuance in July 2003.

For the first nine months of 2003, the company reported a loss from continuing operations of $873 million, or $2.98 per share, compared to income from continuing operations of $299 million, or $1.02 per diluted share, for the same period of 2002. In addition to the factors listed above, 2003 year-to-date results reflected weaker results from the wholesale segment in the first half of 2003 compared to the same period in 2002 and increased interest expense. A more detailed discussion of the factors contributing to the third-quarter and year-to-date loss can be found below under “Segment Earnings Detailed.”

SEGMENT EARNINGS DETAILED

Retail Energy

The company’s retail energy segment produced earnings before interest and taxes (EBIT) of $371 million in the third quarter of 2003, compared to $241 million of EBIT in the third quarter of 2002. The improvement in third-quarter 2003 EBIT is a result of increased margins from the sales of electricity and from the true-up of estimates from prior periods, partially offset by increased ERCOT load-related fees. The year-over-year comparison was also affected by an $89 million charge in the third quarter of 2002 for a payment to CenterPoint Energy, Inc. That charge was not repeated in the third quarter of 2003.

Retail energy EBIT for the first nine months of 2003 was $496 million, compared to $489 million for the same period of 2002. In addition to the items discussed above, 2003 results include a $47 million accrual for a payment to CenterPoint Energy, compared to $89 million in 2002. Results for the first nine months of 2003 also reflect $29 million of higher costs due to increased staffing, customer-related costs and other administrative costs, as well as increased marketing costs and increased corporate overhead.

Due to a change in accounting rules (EITF No. 02-03), the results of operations related to the company’s contracted electricity sales to large commercial, industrial and institutional customers and the related supply costs are not comparable between 2002 and 2003. Prior to 2003, the company used mark-to-market accounting for earnings for a substantial portion of its contracted electricity sales. The company has discontinued the use of mark-to-market accounting for these contracts. Earnings related to contracted electricity sales are now recognized as the volumes are delivered.

As of September 30, 2003, the company’s retail energy segment had $42 million of unrealized gains recorded in prior years that will be realized and collected upon the delivery of related volumes ($15 million in the remainder of 2003 and $27 million in 2004 and beyond).

Wholesale Energy

The wholesale energy segment reported a loss before interest and taxes of $876 million in the third quarter of 2003, compared to EBIT of $91 million in the third quarter of 2002. Excluding the previously announced goodwill impairment and FERC settlement, the wholesale segment produced EBIT of $146 million.

The increase in EBIT, excluding the goodwill impairment and FERC settlement mentioned above, was primarily the result of reductions in general and administrative and operations and maintenance expenses, some of which were deferred into the fourth quarter of 2003. The year-over-year comparison was also impacted by a net $15 million refund reserve provision for California energy sales and a $37 million impairment charge related to turbines recorded in the 2002 period. Neither of these charges was repeated in 2003. Depreciation and amortization expense, in the third quarter of 2003, includes a $14 million charge related to the retirement of two generating units at the Sayreville power plant in New Jersey and two units at the Etiwanda power plant in California.

For the nine months ended September 30, 2003, wholesale energy’s EBIT was $114 million, excluding the goodwill impairment and FERC settlement referenced above, compared to EBIT of $218 million for the same period of 2002. In addition to the factors affecting third-quarter results, 2003 year-to-date results include: a trading loss of approximately $80 million; lower trading margins reflecting the significantly reduced scope of the company’s trading activities; the expiration of certain power sales contracts that benefited 2002 results; and increased operations and maintenance expenses. Partially offsetting the declines were the net reduction of California-related provisions of $75 million in 2003 and improved margins from the company’s Mid-Atlantic coal plants due to higher power prices driven by increased natural gas prices.

Other Operations

The company’s other operations segment recorded a loss before interest and taxes of $4 million for the third quarter of 2003, compared to a loss before interest and taxes of $50 million in the third quarter of 2002. Results for the third quarter of 2002 included a $47 million, non-cash charge related to the accounting settlement of certain benefit obligations associated with the company’s separation from CenterPoint Energy.

For the nine months ended September 30, 2003, the other operations segment recorded a loss before interest and taxes of $23 million, compared to a loss before interest and taxes of $60 million for the same period in 2002.

Interest Expense

Interest expense for the third quarter of 2003 was $154 million, compared to $93 million for the same period of 2002. The increase is primarily due to a $31 million write-off of deferred financing costs and increased interest rates resulting from the company’s capital market transactions in June and July of this year. The company also had higher levels of borrowing, higher interest rates and an increase in amortization of deferred financing costs related to the March 2003 refinancing of its bank debt.

Interest expense for the nine months ended September 30, 2003, was $365 million, compared to $178 million for the same period of 2002. The increase was due to the same factors mentioned above for the third quarter.

Discontinued Operations

Effective February 2003, Reliant Resources began reporting its European energy segment as discontinued operations. This is a result of the company’s agreement to sell its European energy operations to nv Nuon, a Netherlands-based electricity distributor. The company also reports results from the Desert Basin plant in discontinued operations as a result of its July 2003 agreement to sell the plant to the Salt River Project. The Desert Basin plant sale was completed in October.

The company recorded a loss from discontinued operations of $125 million for the third quarter of 2003, compared to a loss of $58 million for the same period of 2002. Included in the third-quarter 2003 loss from discontinued operations is a $53 million increase in the estimated loss on the anticipated disposition of the European energy segment and a $75 million loss on disposition of the Desert Basin plant.

The loss from discontinued operations for the first nine months of 2003 was $478 million, which included losses of $393 million on the anticipated disposition of the European energy segment and $75 million for the Desert Basin plant. For the same period of 2002, the company reported $24 million of income from discontinued operations.

Outlook for 2003

Excluding the previously announced goodwill impairment and FERC settlement charge referred to above, the company maintains its 2003 earnings outlook for adjusted income from continuing operations of $0.10 per share. In addition to the items mentioned above, the earnings outlook excludes the accrual for a payment to CenterPoint Energy under Texas deregulation legislation and the net reduction of California-related reserves and includes gains recorded in prior periods that will be realized/collected in 2003 (impact of transitioning from mark-to-market to accrual accounting [EITF Issue No. 02-03]).


2003 Earnings/Loss Per Share from Continuing Operations Outlook Reconciliation

Adjusted income from continuing operations outlook : $0.10

Accrual for payment to CenterPoint Energy under Texas deregulation legislation: (0.10)

Net reduction of California-related reserves: 0.19

October 2, 2003 FERC settlement: (0.08)

Gains recorded in prior periods that will be realized/collected in 2003 (EITF No. 02-03): (0.14)

Goodwill impairment: (3.36)

Loss from continuing operations outlook (on GAAP basis): $($3.39)

Reliant Resources, Inc. (NYSE: RRI – News), based in Houston, Texas, provides electricity and energy services to retail and wholesale customers in the U.S. and Europe, marketing those services under the Reliant Energy brand name. The company provides a complete suite of energy products and services to approximately 1.7 million electricity customers in Texas ranging from residences and small businesses to large commercial, industrial and institutional customers.

Reliant also serves large commercial and industrial clients in the PJM (Pennsylvania, New Jersey, Maryland) Interconnection. The company has approximately 20,000 megawatts of power generation capacity in operation, under construction or under contract in the U.S. and nearly 3,500 megawatts of power generation in operation in Western Europe. For more information, visit our web site at www.reliantresources.com.