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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Steven J Kean X-To: Maureen McVicker X-cc: X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf ----- Forwarded by Steven J Kean/NA/Enron on 10/16/2000 10:39 AM ----- =09"IssueAlert" <IssueAlert@scientech.com< =0910/12/2000 06:56 AM =09=09=20 =09=09 To:=20 =09=09 cc:=20 =09=09 Subject: Reliant Energy: Splitting Business in Two to Maximize Share= holder=20 Value http://www.consultrci.com ************************************************************************=20 El Paso Global Networks plans to spend up to $2 billion in the next few=20 years on telecom acquisitions. Find out more about SCIENTECH'S=20 Telecommunications=20 InfoGrid at:=20 http://www.consultrci.com ************************************************************************ =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, October 12, 2000 Reliant Energy: Splitting Business in Two to Maximize Shareholder Value By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Reliant Energy announced the top-level executives for the two companies=20 that will emerge from its planned separation into two stand-alone, publicly= =20 separated companies. Steve Letbetter will serve as chairman and CEO of=20 the unregulated company. David McClanahan has been named president and=20 CEO of the regulated company, which will be created at the time of the=20 business separation. In July, Reliant Energy announced plans to separate=20 into two publicly traded companies in order to separate its unregulated=20 businesses from its regulated businesses. Following regulatory approval,=20 the company plans an initial public offering (IPO) of approximately 20=20 percent of the common stock of its unregulated operations by early 2001. ANALYSIS: In June 1999, Texas adopted legislation to allow retail competiti= on=20 beginning on Jan. 1, 2002, for the majority of customers within the state.= =20 Senate Bill 7 mandated that utilities in the state construct firewalls=20 between their operating companies. In other words, Texas utilities must=20 have separate companies=01*with separate financial records=01*for energy se= rvices,=20 distribution, generation, etc. In Texas, incumbent utilities must establish= =20 affiliated retail units that will serve customers who do not switch, but=20 these units must be completely separate from the T&D operation of the=20 incumbent=20 utility. At first, Reliant Energy resisted this mandate and lobbied to=20 keep its operations under one company. Thus, it was somewhat of a surprise= =20 when Reliant announced in July that not only would it be splitting into=20 two publicly traded companies, but also that it would be issuing an IPO=20 for the unregulated side of its operations. Currently, as one company with= =20 both regulated and unregulated operations, Reliant (NYSE: REI) is trading= =20 at about $45 13/16 (at market close on 10/11). Reliant has declined to=20 make any projections about pricing of the IPO of its unregulated businesses= ,=20 which it expects to issue in early 2001, until it submits an S1 filing=20 with the SEC later this year. Reliant expects the IPO to be followed by=20 a distribution to shareholders of the remaining stock of the unregulated=20 company (within 12 months of the IPO). Reliant's motivations to divide itself into two companies are pretty=20 straightforward.=20 On one hand, the company is simply complying with the regulatory mandates= =20 of Texas. Yet, more importantly, Reliant is turning the mandate into a=20 financial opportunity by establishing two public companies with dramaticall= y=20 different risk / reward profiles. The unregulated side will include such=20 businesses as power generation, marketing and trading, telecom, and the=20 European operations. The regulated side will include the businesses related= =20 to electricity and natural-gas distribution as well as the company's U.S.= =20 interstate pipelines. Reliant is a company that is seeking to maximize the opportunities that=20 deregulation is offering, both in the United States and internationally.=20 As an international energy delivery and energy services company, Reliant=20 makes about $15 billion in annual revenue and has assets totaling $30=20 billion.=20 The company's wholesale energy trading and marketing business is arguably= =20 within the top five (definitely within the top 10) in the United States,=20 supported by its nearly 27,000 MW of power generation assets.=20 As the company continues to transform itself from a traditional utility=20 into an aggressive energy services company, it recognizes that its=20 traditional=20 investors have tended to be fairly risk averse, preferring to invest in=20 the regulated activities of a conservative utility company. As Reliant=20 attempts to penetrate new competitive markets, it intends to make itself=20 an appealing investment opportunity for investors who are more "growth=20 oriented and tolerant of risk," (as described by Letbetter). The most=20 practical=20 way to maximize shareholder interest and boost stock value is for Reliant= =20 to bifurcate its operations, offering two options for capital investment.= =20 It's a trend that is becoming more common in the energy industry, especiall= y=20 with regard to high-risk ventures. For instance, Southern Company just=20 closed the IPO of its aggressive subsidiary Southern Energy (NYSE: SOE)=20 on Oct. 3. Southern Energy, a global energy company, has become one of=20 Southern Company's primary moneymakers (in the second-quarter alone, the=20 subsidiary reported $93 million in earnings). When the IPO of Southern=20 Energy closed, it brought total gross proceeds and a concurrent securities= =20 of approximately $1.81 billion to its parent. Southern Energy's current=20 stock price is running at $29 1/8 (at market close on 10/11). The IPO price= =20 of Southern Energy on 9/27 was $22. Another example is Northern States=20 Power (now part of Xcel Energy since it merged with New Century Energies),= =20 which this June spun off a portion of its NRG Energy subsidiary, an=20 independent=20 power producer. (See IssueAlert from 10/2/00 for more information). In=20 addition, the trend is visible in other industries as well. AT&T recently= =20 announced its plans to spin off its customer long-distance business to=20 shareholders. However, even though the financial rewards of such an IPO are enticing,=20 there are possible downsides to such a move as well. Moody's raised serious= =20 concerns about Reliant's announcement in particular. Specifically, Moody's= =20 says that Reliant's regulated unit could be left with heavy debt loads=20 after the structural split, which would hurt its own quality and bond=20 ratings.=20 Moody's has put both Reliant Energy Inc. and at least two of its subsidiari= es=20 on watch for possible downgrade from their Baa 1 status. Reliant remains=20 on watch for possible downgrade as of Oct. 11. Another risk is that as=20 more spin offs of non-generation units become commonplace, they may lose=20 their appeal on Wall Street. The average first-day gain for similar energy= =20 IPOs was 43 percent in the third quarter, compared to 96.5 percent in the= =20 first quarter, perhaps indicating that Wall Street is already becoming=20 less enamored with this strategy. Yet, these risks aren't dissuading Reliant from moving forward with its=20 plan. As the company retains but moves beyond its traditional electricity= =20 and natural-gas distribution businesses, Reliant's focus is to expand its= =20 current business portfolio. By splitting its two operations in two, Reliant= =20 can separate its vastly different regulated and unregulated cultures. The= =20 companies require totally different management approaches, one based more= =20 in regulatory relations and the other driven by entrepreneurial spirit.=20 The freedom Reliant gains from spinning off its operations into two separat= e=20 businesses=01*one high risk, one low risk=01*appears to make this a smart m= ove,=20 at least for now. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Discover a world of utilities information in our new e-zine, SourceBook=20 Online. Get a free SourceBook Weekly article at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let= =20 us know if we can help you with in-depth analyses or any other SCIENTECH=20 information products including e-commerce and telecom in the electric utili= ty=20 industry. If you would like to refer a colleague to receive our free, daily= =20 IssueAlerts, please reply to this email and include their full name and=20 email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH=20 consultants. The opinions expressed in SCIENTECH's IssueAlerts are not=20 intended to predict financial performance of companies discussed or to=20 be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e=20 in publishing its IssueAlerts is to offer an independent perspective=20 regarding=20 the key events occurring in the energy industry, based on its long-standing= =20 reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e=20 reply to this message and in the body of the email type "remove."
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