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Reliant Energy To Divide Regulated, Unregulated Business

Reliant Energy To Divide Regulated, Unregulated Business

Could this be a trend or just a sign of growing pains? Reliant Energy, the Houston-based electric utility and energy services company, took the torch from Williams, which made a similar announcement last week, and announced it will separate its regulated and unregulated businesses into two publicly traded companies.

The move by Reliant would create two distinct investment options --- one a traditional, regulated utility company and the second, a new, unregulated company operating in the growing markets created by deregulation, which will include Reliant's wholesale energy marketing and merchant power generation assets.

Energy pipeline and communications powerhouse Williams also took the first steps to separate its energy division from its communications businesses last week (see related story this issue) a move that officials said was the best way to ensure that the businesses have the capital to "pursue substantial growth opportunities."

Reliant is trying to do the same thing --- ensure that its two divisions, the regulated and the unregulated ones, can grow independently of each other.

The plan will be filed with the Texas Public Utility Commission as part of an attempt to satisfy the Texas electric restructuring law, which requires the state electric market to open to full competition on Jan. 1, 2002. Reliant filed a report on the division plan on the required Form 8-K with the Securities and Exchange Commission last Thursday.

Wall Street looked on the news with enthusiasm Thursday, sending Reliant's stock higher than it's been in more than a year. It closed on Thursday, the day of the announcement up more than 5%, or $1.63, to $33.63. Reliant's stock has risen steadily in recent months after falling to a low of $19.75 in March.

Steve Letbetter, Reliant CEO, said the company's unregulated businesses appeal to a "different set of investors" than the regulated activities. "We expect the regulated company to be very similar to the company we have been for most of our history, and it should appeal to our traditional type of investor."

Also last week, Reliant reported its second-quarter earnings, beating Wall Street predictions by 18 cents, with a 75% increase mostly because of a surge in profits from its unregulated wholesale energy operations, as well as increased electricity demand at the Houston-area utility. Net income, excluding extraordinary items, rose 76 cents a share to $216 million, up from 43 cents per share and $123 million in the second quarter of 1999. First Call/Thomson had predicted earnings per share of 58 cents.

When the company separates its businesses, the regulated operations will be structured like a holding company. The regulated company will include local electricity and natural gas distribution companies, U.S. interstate pipelines and Latin American interests. Those interests include Reliant Energy HL&P/Entex, Reliant Energy Arkla, Reliant Energy Entex and Reliant Energy Minnegasco. Its utilities supply power and gas to the Houston area, as well as parts of Arkansas, Louisiana, Oklahoma, Minnesota and Mississippi.

The unregulated business, which so far does not have a name, will be separated by an initial public offering of 20% of its stock by late 2000 or early 2001. Following the public offering, the remaining stock will be distributed to shareholders within 12 months. This more volatile company will incorporate all of Reliant's unregulated power generation and related energy trading and marketing operations, unregulated retail businesses and European electricity generating and trading/marketing businesses.

Plans are for the new unregulated company to receive cash from the holding company (Reliant) in 2004 that is equal to the value of the holding company's regulated Texas generation operations, including an option to buy out those operations.

Letbetter said that the new unregulated company is expected to take advantage of its existing and future investment opportunities "more effectively." He expects the unregulated company to most appeal to investors looking for growth and who are "more tolerant of risk."

Reliant's wholesale energy trading and marketing business ranks among the top 10 in the United States in combined electricity and natural gas volumes, and has a commanding presence in most of the country's major power regions. It already has more than 22,000 MW of power generation in operation in the United States and western Europe, with plans to add another 10,000 through acquisitions and development projects.

The company now serves more than four million electricity and natural gas customers in the United States, and also has interests in power distribution operations that serve almost 10 million customers in Latin America.

Carolyn Davis, Houston

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