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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \Mark_Haedic_Jan2002\Haedicke, Mark E.\Deleted Items X-Origin: Haedicke-M X-FileName: mhaedic (Non-Privileged).pst <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09 <http://secure.s= cientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/C= orner_TR.jpg<=09 =09 <http://secure.scientech.com/rci/wsimages/ia_banner02.gif<=09=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.sciente= ch.com/rci/details.asp?ProductID=3D971< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 =09 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_TR.jpg<=09 =09 SPONSORS <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/main/ad_redirect.asp?URL=3Dhttp://wwwthestructuregroup.com<; <http://secure.scientech.com/images/spacer.gif<; INFORMATION PRODUCTS <http://secure.scientech.com/specialpages/Generation_Technology_IAs.asp< = <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.c= om/specialpages/Generation_Technology_IAs.asp< <http://secure.scientech.c= om/images/spacer.gif< CONFERENCES <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/main/ad_redirect.asp?URL=3Dhttp://cpunmsu.edu/<;Center for Public Utilties The Basics: Practical Skills for a Changing Utility <http://secure.scientech.com/imag= es/spacer.gif< <http://secure.scientech.com/specialpages/New_Rate_Card.asp<= <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 December 19, 2001=20 Reliant Energy Proceeds with Corporate Restructuring, Bucking Turnaround of= Industry Trend=20 By Will McNamara Director, Electric Industry Analysis [News item from PRNewswire] Reliant Energy (NYSE: REI) shareholders approve= d on Dec. 17 a major step in a corporate restructuring that will ultimately= divide the company into a regulated energy-delivery company named CenterPo= int Energy and a competitive energy services provider called Reliant Resour= ces.=20 Analysis: It is somewhat surprising that Reliant Energy is proceeding with = its massive restructuring, which it acknowledges is being done to maximize = shareholder value, considering how dramatically the market has changed sinc= e the company first announced its plans about 17 months ago. In July 2000, = Reliant's plans to bifurcate its operations were just the latest in a strin= g of similar restructuring initiatives from companies such as Southern Co. = and Xcel Energy, both of which spun off high-growth, unregulated subsidiari= es into stand-alone companies in very successful IPOs. Fast forward a year = later and the splitting of regulated operations from unregulated operations= into two stand-alone companies no longer appears to be a sure-fire busines= s decision. For example, companies such as Constellation Energy and Alleghe= ny Energy, which announced plans to engage in this kind of restructuring ac= tivity after Reliant's announcements, now have backpedaled and put such pla= ns on hold. The details among the companies may be different, but the end r= esult is pretty much the same: splintering an integrated company into two o= perations to attract two sets of investors. At the onset of the plans, the = real appeal was to put unregulated power generation into a separately trade= d company and sell lots of stock. That sounded like a great idea last year = when the independent power producer (IPP) market was going gangbusters. Now= , demand and prices have dropped, and the merchant energy industry is shrou= ded in uncertainty. Into these rocky waters, Reliant Energy is about the on= ly company that still believes a major restructuring is presently a wise mo= ve.=20 As noted, Reliant's restructuring plans have been in motion for over a year= , so in fairness to the company, it may be making the decision to proceed w= ith the risky initiative in hopes that investors will still be receptive. T= he IPO of subsidiary Reliant Resources, held in May 2001, raised about $1.5= 6 billion and was considered one of the most successful offerings this year= . Reliant Energy presently owns a little more than 80 percent of Reliant Re= sources, whose business model is focused primarily on wholesale power marke= ting, maintaining generating and trading assets, and selling retail energy.= Quite naturally, Reliant is hoping for a repeat of that success when the s= pin-off is completed in the first quarter of 2002. Let's be clear about what Reliant is doing with this restructuring plan. Wh= at shareholders approved this week was the formation of a new holding compa= ny called CenterPoint Energy, which will include both the company's regulat= ed energy-delivery business and Reliant Resources. The creation of a new ho= lding company and accompanying name change are being characterized as inter= im steps that Reliant is taking toward the ultimate separation of the unreg= ulated and regulated businesses. After receiving regulatory approvals from = the IRS and SEC, shares of Reliant Energy will be automatically converted i= nto shares of CenterPoint Energy, which will trade under the symbol CEP on = the New York and Chicago Stock Exchanges. Trading for Reliant Energy, under= the symbol REI, will be discontinued at that point.=20 As the next step in the restructuring, pending an additional round of regul= atory approvals, CenterPoint Energy will spin off the regulated company by = distributing its shares of Reliant Resources to its shareholders, creating = two separately owned public companies. Ultimately, CenterPoint Energy will = own only the regulated side of the business, including electricity transmis= sion and distribution, natural-gas distribution, pipelines, and any power g= eneration facilities that remain regulated.=20 Reliant's motivations to divide itself into two companies are pretty straig= htforward. On one hand, the company is simply complying with the regulatory= mandates of Texas, which require that state utilities establish firewalls = between their operating companies and create separate businesses for genera= tion, energy services, distribution, etc. Yet, more importantly, Reliant is= turning the mandate into a potential financial opportunity by establishing= two public companies with dramatically different risk / reward profiles. T= he unregulated side will include such businesses as power generation, marke= ting and trading, and the European operations. The regulated side will incl= ude the businesses related to electricity and natural-gas distribution as w= ell as the company's U.S. interstate pipelines. Note that the company previ= ously indicated plans to sell its communications unit, which has struggled = amid a larger market downturn in this sector. Thus, once the restructuring = is completed, CenterPoint will be aimed at the traditional type of utility = investor, which expects steady returns and reliable dividend income, while = Reliant Resources will be more geared toward investors with a high toleranc= e for risk that want to take advantage of competitive opportunities in the = deregulating wholesale market.=20 Reliant Energy's CEO Steve Letbetter recently said he expects CenterPoint's= dividend payout to be comparable to other regulated utilities, suggesting = a payout greater than 50 percent of earnings per share. The company had alr= eady projected that CenterPoint's earnings per share for 2002 will fall in = the range of $1.17 to $1.22.=20 As I mentioned, however, economic conditions in the energy industry have ch= anged considerably since Reliant announced its restructuring plans over a y= ear ago, and the new industry climate may make the company's decisions to p= roceed with its plans a risky move. Again, I will point to the examples of = Constellation and Allegheny, which really seemed to be caught in the crossf= ire of the restructuring trend and are still sorting through residual fallo= ut. At the time of their original restructuring announcements, both Constel= lation and Allegheny had grounds to be fairly confident of their plans, con= sidering how high the valuations for independent generating companies were = running at that time.=20 Yet, in a fast-changing market, those valuations have dropped considerably = and the shares of both companies received some major hits related to this d= ecline. Constellation shares were trading at about $50 in May 2001, but pre= sently are priced at half that figure. Allegheny is down about 39 percent f= rom its high of $55 a share to $33. While the drop in share price that thes= e two companies have faced cannot be totally attributed to their restructur= ing plans, the important point is that companies that planned to restructur= e have done so to put more emphasis on their unregulated trading operations= , a sector that has been undervalued. This point can be supported by lookin= g at companies that have completed their restructuring processes (such as N= RG Energy and Mirant), which are trading at 40 to 50 percent below their 52= -week highs. Clearly, investor confidence in such companies has been eroded= . By the same token, shares of Reliant Energy are trading at about $24, dow= n from a 52-week high of $50, while shares of Reliant Resources are trading= at about $15, down from a high of $37.50. This could be related to investo= rs' concerns about the company's plans to proceed with restructuring in the= current market climate.=20 Moreover, a year ago the concept of utility restructuring to separate regul= ated operations from unregulated businesses seemed like a quick way for com= panies to cash in on the opportunities created by deregulated energy market= s. In fact, it was the expectation of companies involved in the restructuri= ng to gain a 20-plus P/E ratio for the unregulated company once it had been= split off from the regulated business. However, the actual process of rest= ructuring, which can take a year or more, is taking place under less-than-c= onducive market conditions, including a drop in energy prices, reduced dema= nd and warnings of an energy glut. The original purpose of the restructurin= g plans (that is, to give shareholders increased value) is no longer a guar= anteed result for companies that proceed with the separation plan, as Const= ellation and Allegheny clearly found. Only time will tell if Reliant's comp= leted restructuring plan will prove to be another success or another failur= e in the energy industry, but it is a fairly safe bet that Reliant is one o= f the last companies that will be riding the restructuring trend any time s= oon.=20 Ironically, one company that routinely has been praised for its strategy th= is year is Duke Energy (NYSE: DUK), which made a pointed decision to ignore= the restructuring trend and remain an integrated company. In addition to r= ecently being named Energy Company of the Year at the 2001 Financial Times = Global Energy Awards, Duke's financials remain quite strong. For the third = quarter 2001, Duke reported a 46-percent increase in ongoing earnings per s= hare, or $1.02 per share. Year-to-date earnings per share from ongoing oper= ations as of Sept. 30 were $2.30 compared to $1.63 for the same period last= year. For year-end 2001, Duke remains committed to delivering earnings gro= wth within a stated guidance of 10- to 15-percent compound annual growth in= earnings per share from a base of $2.10 in 2000. Looking ahead to 2002, Du= ke expects to earn toward the high end of the 10- to 15-percent range. When= asked to establish reasons for the company's success, Duke Energy CEO Rich= ard Priory mentioned the decision to remain an integrated company against a= trend of other companies splintering apart.=20 Other Reliant Resources News: Shareholders of Orion Power Holdings (NYSE: ORN) overwhelmingly approved th= e merger agreement between Orion and Reliant Resources, which was announced= last September. Under the agreement, Reliant is buying Orion for $26.80 pe= r share in a cash transaction valued at approximately $2.9 billion. Reliant= Resources will also assume approximately $1.8 billion of Orion Power's net= debt. The companies anticipate that the transaction will be completed in e= arly 2002, at which time Orion Power's business will be combined with Relia= nt Resources' domestic wholesale group.=20 When previously discussing this acquisition (please see the 9/28/01 IssueAl= ert available at www.scientech.com <http://secure.scientech.com/rci<;), I es= tablished five reasons why Reliant is buying Orion, which also support the = assessment that it is a strategic purchase. These reasons are as follows: 1= ) Reliant Resources gains Orion's generating assets, which support its own = expanding wholesale business; 2) Orion's assets are primarily located in th= e Northeast, particularly in New York, which (unlike Reliant's core territo= ry) offers a fully functional deregulated wholesale market; 3) Facing econo= mic downturns and the possible softening of demand, Reliant Resources' acqu= isition of Orion is expected to immediately keep earnings solid, while othe= r competitors are lowering their own earnings expectations; 4) The purchase= illustrates the spate of consolidation efforts that are taking place in th= e independent power producing market; and 5) The purchase supports Reliant = Resources' intentions to focus exclusively on North America and divest its = European assets.=20 _____ =20 Testimonials: "Thanks for your material. It is good and I enjoy reading it." Patrick McCormick Balch & Bingham, LLP "Christmas greetings, Will, from one of your readers in Australia. I must commend you on your articles. I find them not only useful in the det= ail but also thoughtful in the presentation. It has indeed been an exciting year. If anything, it proves that 'design' a= nd 'market' do not belong together - but bureaucrats and academic economist= s will never learn. Best regards, Margaret Beardow Benchmark Economics _____ =20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission and distribution, retail markets, new te= chnologies, I/T, renewable energy, regulatory affairs, community relations = and international issues. Contact consulting@scientech.com <http://consulti= ng@scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. 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SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D12/19/2001<;
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