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Reliant Energy Posts Continued Customer Growth, Affirms Northeast Mass Market Expansion

August 3, 2011
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Reliant Energy reported lower adjusted EBITDA for the quarter of $176 million, down from $195 million a year ago, on lower unit margins, parent NRG Energy reported this morning.

Second quarter net income for Reliant was $31 million, down from $277 million a year ago, reflecting a reversal in year-ago mark to market gains.

Reliant reported a $14 million decline in gross margins due to lower revenue pricing on customer acquisitions and renewals, and 2% fewer mass market customers versus the year-ago quarter. Partially offsetting the decline was a 9% increase in mass market customer usage (largely weather driven) and lower supply costs.

Reliant's results were also impacted by increased marketing costs related to advertising campaigns and sponsorship agreements.

Reliant reported its second straight quarter of sequential customer growth.

As of June 30, 2011, Reliant was serving 1.477 million mass market customers, up from 1.470 million as of March 31, 2011, though down from the year-ago 1.488 million.

The net gain of 7,000 mass market customers versus March 31, 2011 compares to a net gain of 11,000 mass market customers from December 31, 2010 through March 31, 2011, and a net loss of 9,000 customers from September 30, 2010 through December 31, 2010.

Reliant credited an increased focus on retention for the customer growth. Additional marketing efforts, new channel arrangements, and an improved conversion rate also aided net customer growth.

Reliant commercial and industrial customer count as of June 30, 2011 was 61,000, up from 60,000 as of March 31, 2011, though down from the year-ago 63,000.

Total Reliant customer count stood at 1.538 million as of June 30, 2011, versus 1.530 million as of March 31, 2011 and 1.551 million as of June 30, 2010.

NRG said that Reliant has become the largest REP in Texas in terms of sales volume. In an investor presentation, NRG reported Reliant volumes as 12,773 GWh for the quarter, and was not explicit that these volumes were ERCOT-only. TXU volumes for the second quarter were 11,890 GWh.

NRG also reiterated that it will grow Reliant in both the residential and commercial space, with regional expansion into PJM. Matters first reported Reliant's launch of residential offers in Maryland, Pennsylvania, New Jersey, and the District of Columbia, with license applications and/or residential license amendments pending in additional Northeast states such as New York and Connecticut, with its Illinois license expanded to residential customers at ComEd just this week (see 7/1).

Reliant said that it has just under 2 TWh in its Northeast non-residential book. Reliant has not yet turned up active residential marketing in the Northeast, though offers are listed on PA Power Switch.

Reliant reported that Northeast margins are lower than those in ERCOT, largely due to market structure.

Margins for the commercial and industrial business in the Northeast have compressed, in particular, due to competitive intensity, and Reliant will be disciplined in growing the non-residential business as a result.

NRG Energy CEO David Crane called the Northeast market "particularly ripe" for expansion, and said that Reliant and Green Mountain Energy have both seen positive early success in their to-date entry into the Northeast markets.

Executives also reported a "strong" improvement in Reliant bad debt during the second quarter, particularly in the mass market.

Green Mountain Energy was the largest driver in a $26 million improvement in the corporate segment Adjusted EBITDA for the quarter. NRG also said that Green Mountain is ahead of the planned Adjusted EBITDA and residential customer count.

Asked about the potential acquisition of generation, Crane said that, given current valuations in the market, he does not see NRG pursuing combined cycle gas plants, as Crane believes valuations are being pushed up by certain private investors, who do not need to be worried about near-term dilution, and who believe that the forward curves are about to turn and reflect higher prices. Crane also does not believe there is enough certainty surrounding coal plants, despite some recently issued final federal environment rules, to invest in coal generation.

Crane would like to increase NRG's conventional generation fleet in PJM, but does not see any current acquisition opportunities adding value.

Crane also reiterated NRG's focus on developing its distributed solar business.

On a consolidated basis, NRG Energy reported adjusted EBITDA of $517 million for the quarter, down from $693 million a year ago, on lower wholesale margins for NRG's ERCOT and Northeast generation. NRG net income was $621 million, versus $210 million a year ago, with the increase largely resulting from the reversal of tax liabilities following an audit.

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