Joel Staff, CEO of Reliant Energy, last Thursday said he expects retail power markets to expand across the U.S. over the next three to five years, adding that in the meantime, the company's retail business is serving as a "good cash flow source" for Reliant.
"I think we're positioning this company for growth and it's our belief that longer term...we're going to see expansion of the retail markets across the country and we think that that's when this will become a growth business," Staff said in a conference call with analysts following the company's release of first quarter 2005 financial results.
Earlier in the call, Reliant officials were asked to comment on what they think is the right size and scale necessary to be a player in the merchant generation space.
"There is some minimum amount that you need to be a player," Staff responded. "But I think the real issue for this industry is that it's really a very large industry. A lot of assets are going to be changing hands and I think what you will see is a relatively small number of very large players emerge and our expectation is Reliant will be one of those. To be talking about 40,000 or 50,000 megawatts over the next five years, I don't think is anything that's way out on a limb."
Reliant reported a loss from continuing operations of $25 million, or $0.08 per share, for the first quarter of 2005, compared to a loss from continuing operations of $42 million, or $0.14 per share, for the same period of 2004. The reported numbers include net, after-tax gains from unrealized energy derivatives totaling $80 million, or $0.27 per share in 2005, and $16 million, or $0.05 per share for 2004.
"Our retail gross margin was negatively impacted by hedging losses associated with our price-to-beat load this quarter, as we had previously discussed," said Staff in a prepared statement. "We expect these losses to be offset by hedging gains over the next two quarters." Staff added, "I am pleased that our cost structure and free cash flow continue to show improvement, and we are on-track to deliver on our free cash flow and adjusted EBITDA outlook."
Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization) was $59 million for the first quarter of 2005, compared to $116 million for the first quarter of 2004. The decline was primarily related to a reduction in retail gross margin, principally the result of the absence of favorable hedges recorded in the first quarter of 2004 and a hedging loss associated with the price-to-beat in the first quarter of 2005. The reduced retail gross margin was partially offset by lower operating expenses.
During the first quarter of 2005, the company reported an $11 million use of cash from operating activities, compared to operating cash flow from continuing operations of $91 million in 2004. The reported numbers include an increase in cash margin deposits totaling $226 million in 2005 and $76 million for 2004. Free cash flow from continuing operations for the first quarter of 2005 was $171 million, compared to $52 million in 2004. The improvement in free cash flow was primarily related to changes in working capital requirements and lower capital expenditures.
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