Reliant Energy Inc. (RRI) said Monday it will sell its Texas retail power business hit hard by credit-market turmoil, while posting a net loss in the fourth quarter on write-downs and hedging losses.

NRG Energy Inc. (NRG), which is fending off an unsolicited bid from Exelon Corp. (EXC), will buy the Houston company's Texas retail business - including the Reliant name - for $287.5 million in cash plus working capital. Reliant, which hasn't selected a new name, will focus on its wholesale generation business.

The retail power business in Texas was roiled last year by the rising cost of capital and volatile electricity prices. Reliant also faced the breakup of a key credit arrangement with Merrill Lynch.

NRG plans to approach the business differently, relying on the output of its own power plants to supply an estimated 1.8 million business and residential customers instead of purchasing power in the wholesale market.

NRG Chief Executive David Crane said in an interview that by owning the generation, the company will reduce costly collateral requirements, while cutting out the cost of investment banks that often serve as a middleman between generators and retail providers. NRG won't expand retail electricity outside Texas, but may acquire additional retailers in the state, Crane said in a conference call.

In addition, NRG reached an agreement with Merrill Lynch to provide collateral support at the retail enterprise for up to 18 months. Reliant said the deal would settle a lawsuit with Merrill, which disputes the company's termination of a $300 million credit line, claiming it triggers the default of an additional agreement.

"The transaction eliminates any uncertainty to the company's liquidity position," said Mark Jacobs, Reliant's chief executive, during a conference call Monday.

Shares of Reliant recently traded down 10% to $3.10 a piece, while NRG shares traded down 2% at $18.53 apiece.

 
   Exelon's Bid For NRG; Reliant's Future

The sale by Reliant, expected to close in the second quarter, comes as NRG's board fends off an unsolicited bid from Chicago-based Exelon. In November, Exelon launched an exchange offer to pay a fixed ratio of 0.485 Exelon share for each NRG share. Exelon went directly to shareholders after NRG's board dismissed the same offer, saying it "grossly undervalues" the company. The Chicago company said last week 51% of NRG's shareholders had tendered their shares in support of the proposed deal.

Exelon is evaluating the deal with Reliant, saying it could be a positive in its bid for NRG "under the right circumstances." NRG CEO Crane said the acquisition shows the value NRG holds in the current market, with the company able to act nimbly and make acquisitions that provide growth and shareholder value.

With the sale of its Texas business, Reliant's retail business consists only of a commercial and industrial marketer in Illinois. The company sold its northeastern electricity-marketing business to Hess Corp. (HES) in December. It continues to own about 14,000 megawatts of power plants selling power into regional markets in the Mid-Atlantic region, Midwest and California.

Reliant CEO Jacobs said the company continues a strategic review announced in October when the company put itself up for sale. He declined to comment during a conference call Monday on the next step for the review, or Reliant's plans for its growing cash reverse.

Reliant said Monday that it swung to a fourth-quarter net loss of $437.7 million, or $1.25 a share, from year-earlier net income of $227 million, or 64 cents a share. The prior year included $277 million in hedging gains. Revenue fell 2.9% to $2.58 billion, rising 8.9% in the retail business but slumping 35% at the wholesale end.

While the slumps in electricity demand and prices have weighed heavily on power producers' shares, strategies for how to handle the change in power prices vary from company to company. Compared with some of its peers, Reliant has less of its power sales locked up, making it more susceptible to changes in market prices.

Reliant slashed its 2009 and 2010 earnings target to reflect the planned divestiture and lower commodity prices, pegging its earnings before interest, taxes, depreciation and amortization, adjusted to reflect wholesale hedges and sales of assets and emission and exchange allowances, at $292 million for 2009, and at $529 million for 2010.

-By Mark Peters, Dow Jones Newswires; 201-938-4604; mark.peters@dowjones.com

(Mike Barris and Kerry E. Grace contributed to this report.)