Could this be a trend or just a sign of growing pains? ReliantEnergy, the Houston-based electric utility and energy servicescompany, took a hint from Williams’ move earlier this week, andannounced it will separate its regulated and unregulated businessesinto two publicly traded companies.

The move by Reliant would create two distinct investment options— one a traditional, regulated utility company and the second, anew, unregulated company operating in the growing markets createdby deregulation, which will include Reliant’s wholesale energymarketing and merchant power generation assets.

Energy pipeline and communications powerhouse Williams took thefirst steps to separate its energy division from its communicationsbusinesses earlier this week (see Daily GPI, July 25), a move that officials said wasthe best way to ensure that the businesses have the capital to “pursuesubstantial growth opportunities.”

Reliant is trying to do the same thing — ensure that its twodivisions, the regulated and the unregulated ones, can growindependently of each other.

The plan will be filed with the Texas Public Utility Commissionas part of an attempt to satisfy the Texas electric restructuringlaw, which requires the state electric market to open to fullcompetition on Jan. 1, 2002. Reliant filed a report on the divisionplan on the required Form 8-K with the Securities and ExchangeCommission yesterday.

Wall Street looked on the news with enthusiasm Thursday, sendingReliant’s stock higher than it’s been in more than a year. Itclosed up yesterday more than 5%, or $1.63, to $33.63. Reliant’sstock has risen steadily in recent months after falling to a low of$19.75 in March.

Steve Ledbetter, Reliant CEO, said the company’s unregulatedbusinesses appeal to a “different set of investors” than theregulated activities. “We expect the regulated company to be verysimilar to the company we have been for most of our history, and itshould appeal to our traditional type of investor.”

Also yesterday, Reliant reported its second-quarter earnings,beating Wall Street predictions by 18 cents, with a 75% increasemostly because of a surge in profits from its unregulated wholesaleenergy operations, as well as increased electricity demand at theHouston-area utility. Net income, excluding extraordinary items,rose 76 cents a share to $216 million, up from 43 cents per shareand $123 million in the second quarter of 1999. First Call/Thomsonhad predicted earnings per share of 58 cents.

When the company separates its businesses, the regulatedoperations will be structured like a holding company. The regulatedcompany will include local electricity and natural gas distributioncompanies, U.S. interstate pipelines and Latin American interests.Those interests include Reliant Energy HL&P/Entex, ReliantEnergy Arkla, Reliant Energy Entex and Reliant Energy Minnegasco.Its utilities supply power and gas to the Houston area, as well asparts 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 stockby late 2000 or early 2001. Following the public offering, theremaining stock will be distributed to shareholders within 12months. This more volatile company will incorporate all ofReliant’s unregulated power generation and related energy tradingand marketing operations, unregulated retail businesses andEuropean electricity generating and trading/marketing businesses.

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

Ledbetter said that the new unregulated utility is expected totake advantage of its existing and future investment opportunities”more effectively.” He expects the unregulated company to mostappeal to investors looking for growth and who are “more tolerantof risk.”

Reliant’s wholesale energy trading and marketing business ranksamong the top 10 in the United States in combined electricity andnatural gas volumes, and has a commanding presence in most of thecountry’s major power regions. It already has more than 22,000 MWof power generation in operation in the United States and westernEurope, with plans to add another 10,000 through acquisitions anddevelopment projects.

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

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