has cleared a major hurdle toward a spinoff that will allow the company to break out of the embattled energy trading sector.
Houston-based Reliant said Monday that it has received regulatory permission to move forward with its summer spinoff of
, a subsidiary that currently operates Reliant's unregulated energy marketing and trading activities. That blessing, offered by the
Securities and Exchange Commission
, came after Reliant restated three years' worth of earnings on Friday, revising revenues and expenses downward to eliminate the effect of roundtrip energy trades.
The SEC is investigating Reliant Resources and several other energy traders for the use of roundtrip energy trades, which inflate revenue and trading volumes but bring no real economic benefit to the companies swapping power.
Carol Coale, an analyst at Prudential Securities in Houston, said the SEC's blessing of the spinoff -- issued in the midst of a formal investigation -- came as "more of a relief" than a surprise. She remains concerned about the plight of Reliant Resources as a standalone company, however.
"This is a positive step in completing the direction of the spinoff," Coale said. "But it's still unclear what the future of the energy trading business will be."
Following the spinoff, Reliant will operate its regulated energy businesses under the new name of CenterPoint Energy. Reliant Resources will conduct business in deregulated energy markets under its current name.
Reliant said it simply needs action by the Internal Revenue Service, extending a January ruling that the spinoff will be tax-free, to move forward with the transaction.
After the SEC ruling was announced, shares of Reliant climbed 65 cents to $16.70 in late-morning trading. Reliant Resources dipped 4 cents to $8.64.
Coale, who owns neither stock, has a hold rating on Reliant but doesn't rate Reliant Resources.
Reliant on Monday described the separation as a positive move for both companies.
"The companies have different markets, different strategies and different aspirations," said Reliant Chief Executive Steve Letbetter. "By moving forward as independent companies, each will be able to focus its full energies on what it does best.
"In addition, each company should have enhanced access to capital as separate entities."
The restructuring will allow Reliant to escape responsibility for a $4 billion debt load currently carried by the subsidiary. Coale had earlier expressed concerns that any additional debt could threaten Reliant's investment-grade rating, which is one notch above "junk" status.
For now, both companies are in the process of renegotiating credit lines that are critical to their operation.
Reliant Resources is attempting to renegotiate a $1.2 billion credit line that matures this summer, while Reliant is scrambling to renew a $4.7 billion facility set to expire on Friday.
Peter Cohan, a Massachusetts author and investment strategist, said Reliant is poised to benefit most from this summer's spinoff.
"The spinoff lets Reliant dump the business equivalent of toxic waste -- an operation plagued by accounting questions, marginally ethical behavior and difficulties in attracting financing," says Cohan, who has no financial stake in either company. "Until these problems in energy marketing and trading are cleaned up, shareholders in the spinoff are unlikely to prosper."
Cohan pointed out that Reliant's EM&T operations were responsible for $7.8 billion worth of overstated revenue between 1999 and 2001.
On Friday, Reliant revised its revenues from $46.2 billion to $40.8 billion for 2001; from $29.3 billion to $28.3 billion for 2000; and from $15.2 billion to $13.8 billion for 1999.
The company also restated its expenses for those same years, reducing them from $44.2 billion to $38.3 billion in 2001; from $27.5 billion to $26.4 billion in 2000; and from $13.9 billion to $12.5 billion in 1999.