Coming off a tough month in which the company admitted that 10% of its energy trading revenues over the past three years came from “round-trip” transactions (see NGI, May 20), Reliant Resources CEO Steve Letbetter last week told the investment community that the company still expects to hit its 2002 earnings target of $1.80-2.00.

“Our model will produce solid results this year,” Letbetter said, adding that he was pleased with the way the Reliant Resources team has stayed focused on objectives despite current market conditions.

Regarding the “round-trip” trading investigations and the company’s restatement of its 2001 earnings, Reliant Resources President Stephen Naeve said the company is taking the issues “very seriously.” He added that the company does not control the timing or how the matters will proceed. “We are cooperating fully with all agencies.”

In addition to various lawsuits, Reliant Resources is under investigation by the U.S. Securities and Exchange Commission, the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC).

As for the California litigation involving market prices and conduct, Naeve said sole jurisdiction should reside with FERC, and that the California court ruling to that point should apply to all class actions still pending in California.

He added that the company believes that the CFTC does not have jurisdiction over the “round-trip” trades since trades were privately negotiated, bilateral transactions. Naeve said the trades were not reported on a real-time basis, so they could not have affected market prices. In addition, Naeve said the company did not profit from any of the deals.

While reaffirming its 2002 guidance of $1.80-2.00 per share, Naeve said results in 2003 “will be flat at best.” In 2004 and beyond, Naeve said he expects strong results due to anticipated price recovery, a significant retail position and a diversified portfolio of generation assets. He added that the company remains focused on the energy services business.

Naeve added that the pending spin-off of CenterPoint Energy should not be affected by the current investigations. In July 2000, Reliant Energy, which owns 80% of Reliant Resources, said it intended to split into two public companies: CenterPoint Energy and Reliant Resources. Reliant Energy’s shareholders approved the plan in December 2001. Under the plan, CenterPoint Energy would include only the regulated energy delivery businesses that currently are a part of Reliant Energy, while Reliant Resources would be involved in all of the unregulated activity.

Letbetter itemized Reliant Resources’ top five priorities in dealing with the current market turmoil.

“We must execute the spin [referring to the completion of the spin-off of Centerpoint],” Letbetter said. “We believe that the spin-off remains the right strategic step for both Reliant Resources and CenterPoint, and that each of us is well positioned for success in the respective market sectors. In separate entities, we believe that Reliant Resources and CenterPoint will both have better access to capital than as part of a combined group.” Letbetter said he expects approval from the Securities and Exchange Commission in the near term, with the completion of the spin-off shortly thereafter.

Letbetter said the company’s second priority is the finalization of its plans to replace its bank debt. He said the company is currently in negotiations to extend its bank agreements.

The third priority is to “successfully manage through a variety of regulatory and legal issues,” Letbetter said. While acknowledging that the company is cooperating fully with all regulatory agencies, the CEO said Reliant Resources will “vigorously” defend the private lawsuits. “The bottom line of all this is that I believe we will manage through these issues and still be able to run our businesses successfully.”

The fourth priority is to adjust Reliant Resources business to fully reflect current market conditions.”We are realigning our commercial activities to ensure that we use our capital in the most efficient and effective way, and we will continue to make appropriate changes to each of our business units as well as the corporate center,” the CEO said.

To hold this all together, Letbetter said the fifth priority is to have the right team, noting that the company currently needs to find a chief financial officer and a chief risk officer.

Letbetter noted three strengths that he believes position Reliant Resources well for today and for the future:

“There is no doubt that both the energy services industry, and Reliant as one of that industry’s key players, have entered a new era,” Letbetter concluded. “Let me assure you that we are committed to a future that follows our core business philosophy. We believe that with our asset position, commercial strategy and strong retail business, we have the foundation in place to build an even stronger future.”

Following the admission of round-trip trades in May, several frustrated shareholders of Reliant Energy Inc. urged Letbetter to resign, insinuating during an annual meeting in Houston that the utility giant has deteriorated since Letbetter took over as CEO in 1999 (see NGI, June 10). Calls for his resignation, as well as others from Reliant ‘s executive team, were not submitted to a formal vote.

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