<PAGE>   1
                                                                    EXHIBIT 10.4


                          TEXAS GENCO OPTION AGREEMENT

                                     between

                           RELIANT ENERGY CORPORATION

                                       and

                             RELIANT RESOURCES, INC.


<PAGE>   2


<TABLE>
<S>                                                                                               <C>
ARTICLE I Definitions............................................................................   1
   1.1   Definitions.............................................................................   1
ARTICLE II Organization of Genco LP and Genco....................................................   9
   2.1   Organization of Genco LP................................................................   9
   2.2   Genco Contracts.........................................................................   9
   2.3   Organization of Genco...................................................................   9
   2.4   Genco Employee Matters..................................................................   9
ARTICLE III Grant of Option......................................................................   9
   3.1   Grant of Option.........................................................................   9
   3.2   Exercise of Option......................................................................  10
   3.3   Requirement to Purchase Notes and Receivables...........................................  11
   3.4   Regulatory Conditions to Exercise.......................................................  12
   3.5   Regco Change in Control.................................................................  12
   3.6   Prohibitions on Market Activity.........................................................  12
   3.7   Distributions, etc. Pending the Option Closing Date.....................................  13
   3.8   Commitments Pending the Option Closing Date.............................................  13
   3.9   Regulatory Proceedings..................................................................  13
ARTICLE IV Representations and Warranties of REI.................................................  13
   4.1   Organization; Authorization, etc........................................................  13
   4.2   No Breach or Default....................................................................  13
   4.3   Matters Relating to Genco...............................................................  13
ARTICLE V Representations and Warranties of Resources............................................  14
   5.1   Organization, Authorization, etc........................................................  14
   5.2   No Breach or Default....................................................................  14
ARTICLE VI Covenants of REI and Regco............................................................  14
   6.1   Genco IPO or Genco Spin-off.............................................................  14
   6.2   Ownership; Encumbrances.................................................................  15
   6.3   Operation, etc. of Genco Assets prior to Genco Organization Date........................  15
   6.4   Pre-Genco Public Ownership Date Capital Contributions...................................  15
   6.5   Credit Arrangements.....................................................................  16
   6.6   Governance..............................................................................  16
ARTICLE VII Covenants of Genco...................................................................  16
   7.1   Ordinary Course of Business.............................................................  16
   7.2   Compliance with Laws....................................................................  16
   7.3   Payment of Taxes........................................................................  16
   7.4   Existence...............................................................................  17
   7.5   Maintenance of Insurance................................................................  17
   7.6   Operation and Maintenance and Capital Expenditures......................................  17
   7.7   Compliance with Contracts...............................................................  17
   7.8   No Issuances or Sales of Equity Securities, etc.........................................  18
   7.9   Dividends; No Repurchases of Capital Stock..............................................  18
   7.10  Indebtedness............................................................................  19
   7.11  Negative Pledge.........................................................................  19
   7.12  Other Negative Covenants................................................................  20
   7.13  Reporting Requirements..................................................................  21
   7.14  Obtain PUCT Final Order.................................................................  22
</TABLE>


<PAGE>   3


<TABLE>
<S>                                                                                               <C>
ARTICLE VIII Governance Matters..................................................................  22
   8.1   Board Composition.......................................................................  22
   8.2   Charter and By-law Amendments...........................................................  22
   8.3   Chief Executive Officer.................................................................  22
ARTICLE IX Tax Covenants of REI and Regco........................................................  23
ARTICLE X Tax Matters............................................................................  24
   10.1  Election Under Section 338(h)(10).......................................................  24
   10.2  Tax Returns.............................................................................  25
   10.3  Transfer Taxes..........................................................................  25
   10.4  Indemnification.........................................................................  26
   10.5  Computation of Tax Liabilities..........................................................  26
   10.6  Contest Provisions......................................................................  26
   10.7  Resource's Claiming, Receiving or Using of Refunds and Overpayments.....................  27
   10.8  Resolution of All Tax-Related Disputes..................................................  28
   10.9  Termination of Existing Tax Sharing Agreements..........................................  28
   10.10 Assistance and Cooperation..............................................................  28
ARTICLE XI Dispute Resolution....................................................................  29
ARTICLE XII Miscellaneous........................................................................  29
   12.1  Modifications to this Agreement Arising from Amendment of the Utilities Code............  29
   12.2  Amendments..............................................................................  30
   12.3  Successors and Assignment...............................................................  30
   12.4  Notices.................................................................................  30
   12.5  Governing Law...........................................................................  30
   12.6  Headings................................................................................  30
   12.7  Severability............................................................................  30
   12.8  Counterparts............................................................................  30
   12.9  Rights of the Parties...................................................................  30
   12.10 Reservation of Rights...................................................................  30
   12.11 Entire Agreement........................................................................  31
</TABLE>


<PAGE>   4


                          TEXAS GENCO OPTION AGREEMENT

                  This Agreement, dated as of December 31, 2000, between Reliant
Energy, Incorporated, a Texas corporation ("REI"), and Reliant Resources, Inc.,
a Delaware corporation ("Resources");

                  WHEREAS, Section 2.2(h) of the Master Separation Agreement (as
defined below) provides for this Agreement to be entered into prior to the sale
of shares of common stock of Resources to the public as provided therein;

                  NOW THEREFORE, the parties, in consideration of the premises
and for good and valuable consideration agree as follow:

                                    ARTICLE I
                                   Definitions

                  1.1 Definitions. The following terms used in this Agreement
have the meanings set forth below:

                  An "Affiliate" of any Person means another Person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person. For purposes of the
foregoing, "control", with respect to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through ownership of voting securities, or
by contract or otherwise. The fact that any Person may be deemed at any time an
Affiliate of another Person for purposes of the Utilities Code shall not create
any implication that such Persons are "affiliates" for purposes of this
Agreement. Notwithstanding anything herein to the contrary, no member of the
Resources Group shall be deemed an Affiliate of any member of the REI Group and
no member of the REI Group shall be deemed an Affiliate of any member of the
Resources Group.

                  "CERCLA" means the federal Comprehensive Environmental
Response, Compensation and Liability Act, as amended (42 U.S.C. Sections
9601-9675).

                  "Choice Date" means January 1, 2002 or such other date on
which retail electric customer choice begins in the traditional service
territory of Reliant Energy HL&P pursuant to Section 39.102 of the Utilities
Code.

                  "Control Premium Amount" has the meaning set forth in Section
3.1.

                  "Environmental Laws" means all applicable Federal, state and
local, provincial and foreign, civil and criminal laws, regulations, rules,
ordinances, codes, decrees, judgments, directives, or judicial or administrative
orders relating to pollution or protection of the environment, natural resources
or human health and safety, including, without limitation, laws relating to
Releases or threatened Releases of Hazardous Substances (including, without
limitation, Releases to ambient air, surface water, groundwater, land, surface
and subsurface strata) or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage,


                                       1
<PAGE>   5


Release, transport, disposal or handling of Hazardous Substances. "Environmental
Laws" include, without limitation, CERCLA, the Hazardous Materials
Transportation Act (49 U.S.C. Sections 1801 et seq.), the Resource Conservation
and Recovery Act (42 U.S.C. Sections 6901 et seq.), the Federal Water Pollution
Control Act (33 U.S.C. Sections 1251 et seq.), the Clean Air Act (42 U.S.C.
Sections 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Sections
2601 et seq.), the Oil Pollution Act (33 U.S.C. Sections 2701 et seq.), the
Emergency Planning and Community Right-to-Know Act (42 U.S.C. Sections 11001 et
seq.), the Occupational Safety and Health Act (29 U.S.C. Sections 651 et seq)
and all applicable state laws analogous to any of the above.

                  "Environmental Permits" means permits, certificates,
certifications, licenses, franchises and other governmental filings, notices,
authorizations, consents and approvals under Environmental Laws.

                  "Genco" means the corporation which will become the indirect
owner of all the partnership interests in Genco LP as provided in Section 2.3,
except that when used in Article VII, Genco shall mean such corporation or Genco
LP, as the context may require.

                  "Genco Assets" has the meaning assigned to that term in
Section 1.15 of the Master Separation Agreement, as such assets may exist from
time to time, including all additions thereto and betterments, improvements and
replacements thereof.

                  "Genco Common Stock" means the common stock, par value $.001
per share, of Genco.

                  "Genco GP LLC" means the limited liability company which will
become the 1% general partner of Genco LP.

                  "Genco IPO" means the sale of Genco Common Stock, either in a
primary offering by Genco or in a secondary offering by Regco, in an
underwritten public offering that results in Regco's ownership of the
outstanding Genco Common Stock being reduced from 100% to a percentage not
greater than 83% and not less than 80%.

                  "Genco Liabilities" has the meaning assigned to that term in
Section 1.18 of the Master Separation Agreement.

                  "Genco LP" means the limited partnership to which the Genco
Assets will be transferred as provided in Section 2.1.

                  "Genco LP LLC" means the limited liability company which will
become the 99% limited partner of Genco LP.

                  "Genco Organization Date" means the date the Genco Assets are
contributed to Genco LP and the Genco Liabilities are assumed by Genco LP as
provided in Section 2.1.

                  "Genco Public Ownership Date" means the date on which a Genco
Public Ownership Event occurs.


                                       2
<PAGE>   6


                  "Genco Public Ownership Event" means the first to occur of (a)
the closing of the first sale of Genco Common Stock to the underwriters pursuant
to a Genco IPO or (b) the distribution date for a Genco Spin-off that is a
distribution or the date shares are accepted for exchange in a Genco spin-off
accomplished by means of an exchange offer.

                  "Genco Spin-off" means either (a) a distribution by Regco with
respect to its outstanding Common Stock of at least 19%, but not more than 20%,
of the Genco Common Stock owned by it or (b) the consummation by Regco of an
exchange offer to holders of its outstanding common stock in which Regco
transfers at least 19%, but not more than 20%, of the Genco Common Stock owned
by it to such holders in exchange for Regco's common stock held by such holders,
in either case resulting in Regco's ownership of the outstanding Genco Common
Stock being reduced to a percentage not greater than 81% and not less than 80%.

                  "Good Operating Practices" mean any of the practices, methods
and acts engaged in or approved by a significant portion of the electric
generation industry or any of the practices, methods or acts which, in the
exercise of reasonable judgment in light of the facts known at the time the
decision was made, would have been expected to accomplish the desired result at
a reasonable cost consistent with reliability, safety and expedition during the
relevant time period. Good Operating Practices are not intended to be limited to
the optimum practices, methods or acts to the exclusion of all others, but
rather to be acceptable practices, methods or acts generally accepted in the
industry.

                  "Governmental Approvals" has the meaning assigned to that term
in the Master Separation Agreement.

                  "Governmental Authority" means any federal, state, local or
other governmental regulatory or administrative agency, commission, department,
board, or other governmental subdivision, court, tribunal, arbitrating body or
other governmental authority.

                  "Hazardous Substances" or "hazardous substances" means (a) any
petrochemical or petroleum products, coal ash, oil, radioactive materials, radon
gas, asbestos in any form that is friable, urea formaldehyde foam insulation and
transformers or other equipment that contain dielectric fluid which contains
levels of polychlorinated biphenyls in excess of 50 parts per million, (b) any
chemicals, materials or substances defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials," "hazardous
constituents," "restricted hazardous materials," "extremely hazardous
substances," "toxic substances," "contaminants," "pollutants," "toxic
pollutants" or words of similar meaning and regulatory effect under any
applicable Environmental Law; and (c) any other chemical, material or
substances, exposure to which is prohibited, limited or regulated by any
applicable Environmental Law.

                  "Indebtedness" of any Person means, (a) all obligations of
such Person for borrowed money, (b) all obligations of such Person evidenced by
bonds, debentures, notes or similar instruments, (c) all obligations of such
Person upon which interest charges are customarily paid, (d) all obligations of
such Person under conditional sale or other title retention agreements relating
to property or assets purchased by such Person, (e) all obligations of such
Person issued or assumed as the deferred purchase price of property or services,
(f) all


                                       3
<PAGE>   7


Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, or other encumbrance on property owned or acquired by such Person,
whether or not the obligations secured thereby have been assumed, (g) all
guarantees by such Person of Indebtedness of others, (h) all capital lease
obligations of such Person, and (i) all securities or other similar instruments
convertible or exchangeable into any of the foregoing, but excluding daily cash
overdrafts associated with routine cash operations.

                  "Independent Director" means a director of Genco who (a) meets
the independence requirements for audit committee members under the rules of the
principal national securities exchange or automated quotation system on which
the Genco Common Stock is listed or reported and (b) is not otherwise a
director, officer or employee of Regco or of Resources or of any of their
Subsidiaries.

                  "Investment" in any Person means any loan or advance to such
Person, any purchase or other acquisition of any capital stock or other
ownership or profit interest, warrants, rights, options, obligations or other
securities of such Person, any capital contribution to such Person or any other
investment in such Person, including, without limitation, any arrangement
pursuant to which the investor incurs Indebtedness of the types referred to in
clauses (f) or (g) of the definition of "Indebtedness" in respect of such
Person.

                  "Liabilities" means any and all Indebtedness, liabilities and
obligations, whether accrued, fixed or contingent, mature or inchoate, known or
unknown, reflected on a balance sheet or otherwise, including, but not limited
to, those arising under any law, rule, regulation, action, order, injunction or
consent decree of any Governmental Authority or any judgment of any court of any
kind or any award of any arbitrator of any kind, and those arising under any
contract, commitment or undertaking.

                  "Master Separation Agreement" means the Master Separation
Agreement dated as of December 31, 2000 between REI and Resources.

                  "Material Adverse Effect" means an effect that is or could be
expected to be materially adverse to the business, assets, condition (financial
or otherwise), prospects, properties or results of operations of Genco, or prior
to the Genco Organization Date, of the Genco Assets or the business and
operations conducted with the Genco Assets.

                  "Mortgage" means the Mortgage and Deed of Trust, dated
November 1, 1944 between Houston Lighting & Power Company and Chase Manhattan
Bank National Association (successor to South Texas Commercial National Bank of
Houston) as Trustee, as amended and supplemented.

                  "Option" means the option granted to Resources pursuant to
Article III of this Agreement.

                  "Option Closing Date" means the date on which delivery of and
payment for the Shares is made pursuant to Section 3.2 or Section 3.5, as
applicable.


                                       4
<PAGE>   8


                  "Option Exercise Date" means the date on which Resources gives
notice of exercise of the Option pursuant to Section 3.1.

                  "Option Expiration Date" means January 24, 2004.

                  "Option Period" means the period beginning at 8:00 a.m. on
January 10, 2004 and ending at 5:00 p.m., Houston time on the Option Expiration
Date, or such other period during which the Option may be exercised as may be
established pursuant to Section 3.5.

                  "Permits" means permits, certificates, certifications,
licenses, franchises and other filings, notices, authorizations, consents and
approvals of any Governmental Authority (other than Environmental Permits).

                  "Person" means and includes an individual, a partnership, a
joint venture, a corporation, a limited liability company, a trust, an
unincorporated organization or a Governmental Authority.

                  "Pricing Period" has the meaning specified in Section 3.1.

                  "PUCT" means the Public Utility Commission of Texas.

                  "Regco" means the corporation that will be organized by REI
and, by means of a merger of a wholly owned subsidiary of Regco with and into
REI, that will become a holding company for REI's regulated businesses, as
described in Article VI of the Master Separation Agreement; provided, however,
that if any provision of this Agreement referring to Regco applies at a time
when Regco has not become such a holding company, references to Regco in such
provision shall be deemed to refer to REI or the ultimate parent entity of REI,
as the case may be.

                  A "Regco Change in Control Event" shall be deemed to have
occurred upon the occurrence of any of the following events:

                  (a) 30% OWNERSHIP CHANGE: Any Person makes an acquisition of
         Outstanding Regco Voting Stock and is, immediately thereafter, the
         beneficial owner of 30% or more of the then Outstanding Regco Voting
         Stock, unless such acquisition is made directly from Regco in a
         transaction approved by a majority of the Incumbent Directors; or any
         group is formed that is or becomes the beneficial owner of 30% or more
         of the Outstanding Regco Voting Stock; or

                  (b) BOARD MAJORITY CHANGE: Individuals who are Incumbent
         Directors cease for any reason to constitute a majority of the members
         of the Regco Board; or

                  (c) MAJOR MERGERS AND ACQUISITIONS: Consummation of a Regco
         Business Combination unless, immediately following such Regco Business
         Combination, (i) all or substantially all of the individuals and
         entities that were the beneficial owners of the Outstanding Regco
         Voting Stock immediately prior to such Regco Business Combination
         beneficially own, directly or indirectly,


                                       5
<PAGE>   9


         more than 70% of the then outstanding shares of voting stock of the
         parent corporation resulting from such Regco Business Combination in
         substantially the same relative proportions as their ownership,
         immediately prior to such Regco Business Combination, of the
         Outstanding Regco Voting Stock, (ii) if the Regco Business Combination
         involves the issuance or payment by Regco of consideration to another
         entity or its shareholders, the total fair market value of such
         consideration plus the principal amount of the consolidated long-term
         debt of the entity or business being acquired (in each case, determined
         as of the date of consummation of such Regco Business Combination by a
         majority of the Incumbent Directors) does not exceed 50% of the sum of
         the fair market value of the Outstanding Regco Voting Stock plus the
         principal amount of Regco's consolidated long-term debt (in each case,
         determined immediately prior to such consummation by a majority of the
         Incumbent Directors), (iii) no Person (other than any corporation
         resulting from such Regco Business Combination) beneficially owns,
         directly or indirectly, 30% or more of the then outstanding shares of
         voting stock of the parent corporation resulting from such Regco
         Business Combination and (iv) a majority of the members of the board of
         directors of the parent corporation resulting from such Regco Business
         Combination were Incumbent Directors of Regco immediately prior to
         consummation of such Regco Business Combination; or

                  (d) MAJOR ASSET DISPOSITIONS: Consummation of a Major Regco
         Asset Disposition unless, immediately following such Major Regco Asset
         Disposition, (i) individuals and entities that were beneficial owners
         of the Outstanding Regco Voting Stock immediately prior to such Major
         Regco Asset Disposition beneficially own, directly or indirectly, more
         than 70% of the then outstanding shares of voting stock of Regco (if it
         continues to exist) and of the entity that acquires the largest portion
         of such assets (or the entity, if any, that owns a majority of the
         outstanding voting stock of such acquiring entity) and (ii) a majority
         of the members of the board of directors of Regco (if it continues to
         exist) and of the entity that acquires the largest portion of such
         assets (or the entity, if any, that owns a majority of the outstanding
         voting stock of such acquiring entity) were Incumbent Directors
         immediately prior to consummation of such Major Regco Asset
         Disposition.

For purposes of the foregoing,

                  (1) the term "beneficial owner" is used as it is defined for
         purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as
         amended (the "Exchange Act");

                  (2) the term "election contest" is used as it is defined for
         purposes of Rule 14a-11 under the Exchange Act;

                  (3) the term "group" is used as it is defined for purposes of
         Section 13(d)(3) of the Exchange Act;


                                       6
<PAGE>   10


                  (4) the term "Incumbent Director" means a director of Regco
         (x) who was a director of Regco immediately following the Restructuring
         Merger or (y) who becomes a director subsequent to the date of the
         Restructuring Merger and whose election, or nomination for election by
         Regco's stockholders, was approved by a vote of a majority of the
         Incumbent Directors at the time of such election or nomination, except
         that any such director shall not be deemed an Incumbent Director if his
         or her initial assumption of office occurs as a result of an actual or
         threatened election contest or other actual or threatened solicitation
         of proxies by or on behalf of a Person other than the Board;

                  (5) the term "Major Regco Asset Disposition" means the sale or
         other disposition in one transaction or a series of related
         transactions of 70% or more of the assets of Regco and its subsidiaries
         on a consolidated basis;

                  (6) the term "Outstanding Regco Voting Stock" means
         outstanding voting securities of Regco entitled to vote generally in
         the election of directors; and any specified percentage or portion of
         the Outstanding Regco Voting Stock (or of other voting stock) shall be
         determined based on the combined voting power of such securities;

                  (7) the term "parent corporation resulting from a Business
         Combination" means Regco if its stock is not acquired or converted in
         the Business Combination and otherwise means the entity which as a
         result of such Business Combination owns Regco or all or substantially
         all the Regco either directly or through one or more subsidiaries; and

                  (8) the term "Regco Board" means the board of directors of
         Regco; and

                  (9) the term "Regco Business Combination" means (x) a merger
         or consolidation involving Regco or its stock or (y) an acquisition by
         Regco, directly or through one or more subsidiaries, of another entity
         or its stock or assets;

and any specified percentage or portion of the assets of Regco shall be based on
fair market value, as determined by a majority of the Incumbent Directors.

                  "Regular Cash Dividends" means regular quarterly cash
dividends by Genco meeting the requirements of Section 7.9.

                  "Regulatory Conditions to Exercise" has the meaning set forth
in Section 3.4.

                  "Regulatory Conditions to Genco Public Ownership Event" has
the meaning set forth in Section 6.1.

                  "Release" means release, spill, leak, discharge, dispose of,
pump, pour, emit, empty, inject, leach, dump or allow to escape into or through
the environment.


                                       7
<PAGE>   11


                  "Restructuring Date" means the date on which the merger of a
wholly owned subsidiary of Regco with and into REI as provided in Section 6.2(g)
of the Master Separation Agreement becomes effective.

                  "Restructuring Merger" means the merger referred to in the
definition of Restructuring Date.

                  "SEC" shall mean the Securities and Exchange Commission.

                  "Shares" means the shares of Genco Common Stock subject to the
Option, which shall not include the Genco Common Stock sold or distributed in
the Genco Public Ownership Event.

                  "Subsidiary" of a Person means (i) any corporation,
association or other business entity of which 50% or more of the total voting
power of shares or other voting securities outstanding thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more of
the other subsidiaries of that Person (or a combination thereof) and (ii) any
partnership or limited liability company (a) the sole general partner or the
managing general partner or managing member of which is such Person or one or
more of the other Subsidiaries of such Person (or any combination thereof) or
(b) the only general partners or members of which are such Person or one or more
of the other Subsidiaries of such Person (or any combination thereof). For
purposes of this Agreement, however, neither Resources nor any Subsidiary of
Resources, nor Genco nor any Subsidiary of Genco shall be deemed to be a
Subsidiary of either REI or of Regco.

                  "Tax Returns" means all returns, declarations, reports,
statements and other documents required to be filed in respect of Taxes, and the
term "Tax Return" means any one of the foregoing Tax Returns.

                  "Taxes" mean all federal, state, local, foreign and other net
income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property, windfall
profits, fuel, gas import, customs, duties or other taxes, fees, assessments or
charges of any kind whatsoever imposed by any governmental entity, together with
any interest and any penalties, additions to tax or additional amounts with
respect thereto, and shall include all liability for the payment of any
consolidated or combined income taxes (including, without limitation, any United
States federal consolidated income tax liability) that is payable as a result of
being a member of, and which may be imposed upon, any affiliated group (as
defined in Section 1504(a) of the Code or other applicable law) of which Genco
is a member, and the term "Tax" means any one of the foregoing Taxes.

                  "Utilities Code" means the Utilities Code of Texas.


                                       8
<PAGE>   12


                                   ARTICLE II
                       Organization of Genco LP and Genco

                  2.1 Organization of Genco LP. REI agrees, prior to the
Restructuring Merger, and in any case no later than December 31, 2001, to cause
the Genco Assets to be contributed to Genco LP free and clear of the lien of the
Mortgage and all other liens and security interests securing any Indebtedness,
and to cause Genco LP to assume the Genco Liabilities, all pursuant to and in
accordance with Article VI and Section 8.1 of the Master Separation Agreement.
After giving effect to such transactions, all of the outstanding partnership
interests in Genco LP shall be owned initially by REI, indirectly through Genco
GP LLC and Genco LP LLC. On the Restructuring Date, Regco shall become the owner
of such partnership interests, indirectly through Genco GP LLC and Genco LP LLC.

                  2.2 Genco Contracts. On the Genco Organization Date, REI will
cause to be assigned to Genco the Technical Services Agreement between REI and
Resources and Genco will assume the obligations of REI thereunder.

                  2.3 Organization of Genco. Prior to the Genco Public Ownership
Date, Regco shall organize Genco and contribute to Genco all of Regco's
interests in Genco GP LLC and Genco LP LLC. Immediately following such
transactions, all outstanding shares of Genco Common Stock shall be owned by
Regco, unless at such time the Restructuring Merger shall not have been
effected, in which case all outstanding shares of Genco Common Stock shall be
owned by REI. In connection with the organization of Genco, REI shall cause
Genco's certificate of incorporation to contain a provision electing not to be
governed by Section 203 of the Delaware General Corporation Law or Articles
13.01 et seq. of the Texas Business Corporation Act, as applicable.

                  2.4 Genco Employee Matters. Effective no later than the
earlier of the Distribution Date and January 1, 2002, REI shall transfer to
Genco LP all personnel employed by REI who are assigned to generating plants and
other facilities owned by Genco LP, together with other employees identified by
REI as energy production employees who are directly supporting the functions of
Genco LP. Prior to such effective date, REI shall complete any necessary
consultations with labor organizations. In accordance with the Employee Matters
Agreement, REI shall cause benefit and welfare plans to be in place for
employees of Genco as of the effective date of the transfer of employment.

                                   ARTICLE III
                                 Grant of Option

                  3.1 Grant of Option. Subject to the terms and conditions and
in reliance on the representations and warranties herein set forth, REI hereby
grants to Resources the option to purchase, during the Option Period, all (but
not less than all) of the shares of Genco Common Stock owned by Regco at the
time of exercise (which shall not include the shares of Genco Common Stock sold
or distributed in the Genco Public Ownership Event) for an aggregate price equal
to the sum of (a) the product of (x) the average daily closing price per share
of the Genco Common Stock on the principal national securities exchange on which
the Genco Common Stock is traded over the 30 consecutive trading days out of the
120 trading days ending


                                       9
<PAGE>   13


January 9, 2004 (the "Pricing Period") which result in the highest average
closing price for any such 30 trading day period and (y) the number of shares of
Genco Common Stock so owned by Regco, (b) any applicable Control Premium Amount
and (c) any adjustment (whether positive or negative) required by Section 7.9.
The Option shall also be exercisable prior to the Option Period in the
circumstances set forth in Section 3.5 for the price and on the terms set forth
therein. The Control Premium Amount shall apply to the extent that the PUCT
includes a control premium in the valuation of Genco pursuant to Section
39.262(h)(3) of the Utilities Code, and shall equal the amount of the control
premium so determined to exist, but shall in no event exceed 10% of the amount
determined under clause (a) of the first sentence of this Section 3.1. In the
event of any stock dividend, stock split or combination affecting the Genco
Common Stock during the Pricing Period, appropriate proportionate adjustments
shall be made in the computation of the average daily closing price pursuant to
this Section 3.1.

                  Notwithstanding anything to the contrary herein, the Option
shall not be exercisable unless the Distribution (as defined in the Master
Separation Agreement) has occurred. If at any time the Option is exercisable
hereunder the Restructuring Date has not occurred, or for any other reason the
Genco Common Stock is held by REI or one or more other Subsidiaries of REI or
Regco rather than by Regco, the Option shall be an option to purchase all of the
Genco Common Stock held by REI or such other Subsidiary or Subsidiaries.

                  3.2 Exercise of Option. Resources may exercise the Option by
giving written notice thereof to Regco during the Option Period. Subject to
compliance with Section 3.3, and to satisfaction of the Regulatory Conditions to
Exercise, delivery of and payment for the Shares (assuming the Option has been
so exercised) shall be made at 10:00 A.M., Houston time, on the later of (a) the
third business day following the giving of such notice (or such other date as
the parties agree) and (b) the first business day following the satisfaction of
the Regulatory Conditions to Exercise (satisfaction of which shall be a
condition precedent to such delivery and payment) (which date shall be the
"Option Closing Date"), provided that if the amount of any Control Premium
Amount included in the exercise price has not been determined by Final Order of
the PUCT prior to the date for delivery and payment so determined, the payment
made on the date so determined shall exclude any Control Premium Amount and such
Control Premium Amount shall be paid in immediately available funds no later
than 5 business days after the PUCT issues a Final Order determining market
value under Section 39.262(h)(3) of the Utilities Code. Delivery of the Shares
shall be made to Resources against payment by Resources of the purchase price by
wire transfer payable in same-day funds to the account specified by Regco.
Delivery of the Shares shall be made by delivery to Resources of stock
certificates representing the Shares, accompanied by appropriate stock powers or
other instruments in proper form to effect such transfer. If Resources
determines prior to the Option Period and within one year prior to the
anticipated Option Closing Date that it intends in good faith, subject to
economic conditions and other reasonable assumptions identified at such time, to
exercise the Option, it and Regco shall make all appropriate regulatory filings,
including filings under the Hart-Scott-Rodino Antitrust Improvements Act
("H-S-R") and the Nuclear Regulatory Commission, with a view to obtaining
required approvals or expiration or termination of the applicable waiting period
prior to the Option Exercise Date. Regco and Resources shall use commercially
reasonable efforts to cause all other Regulatory Conditions to Exercise to be
satisfied as promptly as practicable after the Option Exercise Date.


                                       10
<PAGE>   14


                  If Resources exercises the Option and all other Regulatory
Conditions to Exercise have not been satisfied by the expiration or termination
of the H-S-R waiting period, Resources shall deposit the payment for the Shares
in an interest bearing account with an escrow agent mutually acceptable to
Resources and Regco, and Genco shall execute a power sales agreement with
Resources under which Genco shall sell to Resources or its designee all of
Genco's available capacity (after deducting requirements to satisfy prior
obligations and amounts it is required to sell to third parties under PUCT
rules) at market-based rates until the earlier of the Option Closing Date
described above and May 31, 2005. At the Option Closing Date, the escrow agent
holding the payment for the shares shall remit to Regco the entire amount
deposited by Resources, plus all interest accrued and unpaid to the Option
Closing Date, net of dividends paid to Regco during the period such funds are
held in escrow. During the continuation of the power sales agreement, Resources
shall be obligated to advance, on the same terms credit is extended by Regco
pursuant to Section 6.5, all amounts required by Genco for capital expenditures,
and shall also pay for power purchased under the power sales agreement pursuant
to the terms thereof. If the Option Closing Date has not occurred by May 31,
2005, the rights of the parties under this Agreement shall terminate (except for
the obligations of Regco to reimburse Resources as set forth in the next
sentence), the escrow shall be terminated and all funds deposited with the
escrow agent, together with interest accrued thereon, shall be paid to
Resources. Within five business days following such termination, Regco shall
cause Genco to repay, or shall otherwise reimburse Resources for, all unrepaid
advances made to fund Genco's capital expenditures during the continuation of
the power sales agreement as provided above.

                  3.3 Requirement to Purchase Notes and Receivables. It shall be
a condition to Resource's right to exercise the Option that Resources shall
purchase from Regco (or any Subsidiary of Regco, as applicable) any notes and
other receivables owed by Genco to Regco or any Subsidiary of Regco as of the
Option Closing Date (other than Indebtedness incurred pursuant to Section 6.5
which establishes specified terms for repayment, the repayment of which shall be
governed by the terms thereof), at an amount equal to the outstanding principal
amount thereof plus any accrued and unpaid interest thereon to such date. If
there are any notes or other receivables owed by Regco or any Subsidiary of
Regco to Genco as of the Option Closing Date, Resources shall assume the
obligations of the obligors on such notes and other receivables and in
consideration for the making of such assumption, Regco shall pay (or cause its
Subsidiary obligor to pay, as applicable) to Resources an amount equal to the
outstanding principal amount thereof plus any accrued and unpaid interest
thereon to such date. Regco shall provide an estimate of such amounts owed by
and to Genco and reasonably available supporting detail within two business days
following any request by Resources during the Option Period or during the ten
business days prior thereto, and within one business day after the giving of the
notice of exercise pursuant to Section 3.2. The estimated amounts notified to
Resources following the giving of the notice of exercise shall be paid by
Resources, or by Regco or the appropriate Subsidiary obligor, as applicable, in
same-day funds at the same time payment is made for the purchase of the Shares.
Any variation in the actual amounts outstanding as of the Option Closing Date
from the estimated amounts on the basis of which payment was made on the Option
Closing Date shall be determined as soon as practicable and payments made from
Resources to Regco, or from Regco to Resources, as applicable, so that the
amounts paid on the Option Closing Date, as adjusted to reflect such additional
payments, are equal to the amounts payable on the basis of the actual amounts
outstanding.


                                       11
<PAGE>   15


                  3.4 Regulatory Conditions to Exercise. (a) The purchase and
sale of the Shares pursuant to the exercise of the Option shall be subject to
the satisfaction of following conditions precedent (collectively, the
"Regulatory Conditions to Exercise"):

                  (i) any applicable waiting period under the Hart-Scott-Rodino
         Antitrust Improvements Act shall have expired or been terminated; and

                  (ii) any approval by the SEC, the Nuclear Regulatory
         Commission or any other regulatory agency then having jurisdiction over
         the transfer of the Shares upon exercise of the Option or the ownership
         by Resources of the Shares that is required by law to be obtained prior
         to the transfer of the Shares or in order for Resources to exercise
         full rights of ownership with respect thereto shall have been obtained
         and shall be in full force and effect.

                  (b) Regco shall use its best efforts to expedite all
regulatory approvals, including initiation of share transfer approval
proceedings before the Nuclear Regulatory Commission prior to the Option
Exercise Date as soon as reasonably practical after receiving a non-binding
notice from Resources prior to the commencement of the Option Period stating
that the current intention of Resources is to exercise the Option.

                  3.5 Regco Change in Control. If a Regco Change in Control
Event occurs, and the Pricing Period specified in Section 3.1 has not been
completed, then the Option shall become exercisable on the terms specified in
this Section 3.5, including the modifications set forth in this Section 3.5 to
the determination of the exercise price therefor and the time and manner of
payment of the exercise price. In such event, Resources may exercise the option
by giving written notice thereof to Regco at any time after the occurrence of
the Regco Change in Control Event (provided the Genco Public Ownership Date has
occurred and at least 30 trading days have occurred thereafter) and prior to the
Option Expiration Date. If the Pricing Period has not been completed at the time
the notice of exercise is given, the option price payable on the Option Closing
Date shall be determined on the same basis as set forth in Section 3.1 except
that the Pricing Period shall be the 30 consecutive trading days out of the 120
trading days (or if there have not been 120 trading days, out of such shorter
period during which trading has occurred) ending on the date the notice of
exercise is given. At such time as the Option Period would have commenced absent
the occurrence of a Regco Change in Control Event a computation of the exercise
price shall be made in accordance with Section 3.1, including the determination
of any Control Premium Amount, and if that computation results in an exercise
price lower than has been paid by Resources on the Option Closing Date, the
difference shall be repaid by Regco to Resources as an adjustment to the
exercise price. There shall be no such adjustment if such computation results in
an exercise price higher than that paid on the Option Closing Date. Except as
modified by this Section 3.5, the provisions of Article III shall apply to any
exercise of the Option pursuant to this Section 3.5.

                  3.6 Prohibitions on Market Activity. Prior to the Option
Exercise Date or, if the option is not exercised, the Option Expiration Date,
neither REI, Resources nor Genco shall, directly or indirectly through any
Subsidiary or other Person, purchase, sell, contract to purchase or sell, or
otherwise acquire or dispose of, any shares of Genco Common Stock or any
options,


                                       12
<PAGE>   16


warrants, rights, convertible securities or other securities convertible into or
exercisable or exchangeable for Genco Common Stock.

                  3.7 Distributions, etc. Pending the Option Closing Date. On
and after the commencement of the Pricing Period through and including the
Option Closing Date, Genco shall not declare any dividend or other distribution
with respect to the Genco Common Stock except for Regular Quarterly Dividends
consistent with past practices.

                  3.8 Commitments Pending the Option Closing Date. On and after
the Option Exercise Date through and including the Option Closing Date, Genco
shall not enter into any long term contract or commitment for the purchase of
fuel or for the purchase or sale of power (including any such contract or
commitment reasonably expected to require performance or payment after the
Option Closing Date) without prior consultation with, and the consent of,
Resources, such consent not to be unreasonably withheld.

                  3.9 Regulatory Proceedings. To the extent permitted by court
or agency rules, Resources shall be entitled to participate jointly with Regco
in all Regulatory Proceedings (as defined in the Master Separation Agreement)
pertaining in any way to the value of Genco or to the Option.

                                   ARTICLE IV
                      Representations and Warranties of REI

                  REI hereby represents and warrants to Resources as follows:

                  4.1 Organization; Authorization, etc.. REI is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Texas. All necessary corporate action on the part of REI to authorize
the entering into and performance of this Agreement has been duly and validly
taken. This Agreement is a valid and binding obligation of REI.

                  4.2 No Breach or Default. None of the execution, delivery or
performance of this Agreement by REI or the assumption or performance by Regco
of the obligations hereunder required to be performed by it will constitute a
breach of or a default under any provision of the articles of incorporation or
bylaws of REI or similar constituent documents of Regco or of any note,
mortgage, indenture, loan or credit agreement, contract or other agreement to
which either REI or Regco is a party or by which either of them is bound or to
which any material assets or property of either of them is subject.

                  4.3 Matters Relating to Genco. On and following the Genco
Organization Date, Genco will be duly organized, validly existing and in good
standing under the laws of its state of incorporation. All the outstanding
shares of Genco Common Stock issued prior to the purchase by Resources of the
Shares pursuant to the exercise of the Option will be duly authorized and
validly issued, fully paid and nonassessable and free of any preemptive or
similar rights. All the partnership interests of Genco LP will be validly
issued, and following the transactions described in Section 2.3, Genco will be
the sole beneficial owner thereof (indirectly through Genco GP LLC and Genco LP
LLC). At all times during the Option Period and prior to


                                       13
<PAGE>   17


the Option Closing Date Regco will be the record and beneficial owner of the
Shares free and clear of all liens, encumbrances, equities and claims, and
assuming that Resources acquires the Shares upon payment therefor as provided in
Section 3.2 without notice of any adverse claim (within the meaning of Section
8.105 of the Texas Business and Commerce Code (the "UCC")), no action based on
an adverse claim (within the meaning of Section 8.105 of the UCC) may be
asserted against Resources with respect to the Shares.

                                    ARTICLE V
                   Representations and Warranties of Resources

                  Resources hereby represents and warrants to REI as follows:

                  5.1 Organization, Authorization, etc.. Resources is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. All necessary corporate action on the part of
Resources to authorize the entering into and performance of this Agreement has
been duly and validly taken. This Agreement is a valid and binding obligation of
Resources.

                  5.2 No Breach or Default. None of the execution, delivery or
performance of this Agreement by Resources will constitute a breach of or a
default under any provision of the certificate of incorporation or bylaws of
Resources or of any note, mortgage, indenture, loan or credit agreement,
contract or other agreement to which Resources is a party or by which it is
bound or to which any of its material assets or property is subject.

                                   ARTICLE VI
                           Covenants of REI and Regco

                  REI covenants and agrees, for itself and on behalf of Regco,
to comply with the covenants set forth in this Article VI until the Option
Closing Date or, if the Option is not exercised, the Option Expiration Date. In
connection with the transactions occurring on the Restructuring Date, REI
covenants and agrees to cause Regco to expressly assume the obligations under
this Agreement required to be performed by REI and by Regco.

                  6.1 Genco IPO or Genco Spin-off. Regco will use its best
efforts to satisfy all Regulatory Conditions to Genco Public Ownership Event on
or prior to June 30, 2002. Subject only to the satisfaction of such conditions,
Regco will cause a Genco Public Ownership Event to occur on or prior to June 30,
2002. The "Regulatory Conditions to Genco Public Ownership Event" are that:

                  (a) Any material Governmental Approvals necessary under
         applicable law to effect the Genco Public Ownership Event shall have
         been obtained and be in full force and effect; and

                  (b) No order, injunction or decree issued by any court or
         agency of competent jurisdiction preventing the consummation of the
         Genco Public Ownership Event shall be in effect.


                                       14
<PAGE>   18


                  6.2 Ownership; Encumbrances. From the Genco Organization Date
through and including the Option Closing Date or, if the Option is not
exercised, the Option Expiration Date, Regco will not (a) sell, contract to
sell, grant or enter into any option providing for the sale of, or otherwise
transfer or dispose of, directly or indirectly, any partnership interests in
Genco LP or any Subsidiary of Genco LP or Genco (other than transfers thereof
pursuant to the restructuring transactions expressly contemplated herein) or any
Genco Common Stock or any options, warrants, rights, convertible securities or
other securities convertible into or exercisable or exchangeable for such
partnership interests or Genco Common Stock, other than pursuant to (i) the
Genco IPO or the Genco Spin-off (ii) the sale of the Shares pursuant to the
Option or (iii) in the event the Genco Public Ownership Event is a Genco IPO
which does not result in Regco's ownership of the outstanding Genco Common Stock
being reduced to 81% or less, the sale prior to the commencement of the Pricing
Period of Shares in an amount sufficient to result in a reduction of Regco's
ownership of the outstanding Genco Common Stock to such level, but not below
80%, so that Regco may use the partial stock valuation method specified in
Section 39.262(h)(3) of the Utilities Code or (b) mortgage, pledge, assign or
encumber any partnership interests in Genco LP or Genco (or any Subsidiary of
Genco LP or Genco), or any Genco Common Stock.

                  6.3 Operation, etc. of Genco Assets prior to Genco
Organization Date. Prior to the Genco Organization Date, REI will:

                           6.3.1 Operate the Genco Assets and the business
                  conducted therewith in the ordinary course of business
                  consistent with past practices and Good Operating Practices;

                           6.3.2 Comply with all applicable laws and regulations
                  applicable to the Genco Assets, including without limitation
                  all Environmental Laws, except where failure to do so would
                  not result in a Material Adverse Effect;

                           6.3.3 With respect to the Genco Assets, comply with
                  Sections 7.5, 7.6, 7.7, 7.8, 7.9 and 7.12 as though named
                  therein as Genco.

                           6.3.4 Not pledge, mortgage, hypothecate or grant a
                  security interest in, or permit any mortgage, pledge, security
                  interest or other lien upon any Genco Assets to secure any
                  Indebtedness except pursuant to the Mortgage.

                  6.4 Pre-Genco Public Ownership Date Capital Contributions.
Following the Genco Organization Date and prior to the Genco Public Ownership
Date, Regco will lend to, or contribute to the capital of, Genco LP (and after
its organization Genco, which Regco shall cause to make corresponding loans or
capital contributions to Genco LP) from time to time such funds as may be
necessary, together with other funds of Genco LP (and Genco, as applicable), to
enable Genco LP (and Genco, as applicable) to operate its business in the
ordinary course consistent with past practices and Good Operating Practices, to
satisfy its debts and other obligations and to fulfill its covenants set forth
in Article VII of this Agreement. On or prior to the Genco Public Ownership
Date, Regco shall take such commercially reasonable action as may be appropriate
(which actions may include without limitation contributions to the capital of
Genco, causing Genco to declare and pay dividends, lending funds to Genco or
arranging for


                                       15
<PAGE>   19


Genco to borrow from others, or causing Genco to repay loans theretofore made)
to cause Genco to have a capital structure appropriate, in the judgment of
Regco's board of directors, for the satisfactory marketing of Genco Common Stock
in a Genco IPO or to establish a satisfactory trading market for the Genco
Common Stock following a Genco Spin-off, as applicable. Except as provided in
this Section 6.4, Regco shall have no obligation to contribute to the capital of
Genco or otherwise provide equity to Genco.

                  6.5 Credit Arrangements. On or prior to the Genco Public
Ownership Date, Regco shall establish commercially reasonable terms and
conditions (which shall be determined by Regco on the basis of its judgment as
to the terms Genco could obtain from an unaffiliated lender) under which it will
lend funds to Genco from time to time upon the request of Genco on or prior to
the earlier of the Option Closing Date and the Option Expiration Date.

                  6.6 Governance. From and after the Genco Public Ownership Date
until the Option Closing Date or, if the Option is not exercised, the Option
Expiration Date, Regco shall comply with the provisions applicable to it
contained in Article VIII and shall exercise its rights as a stockholder of
Genco and otherwise use its best efforts to enable and cause Genco to comply
with the provisions applicable to it contained in Article VIII.

                                   ARTICLE VII
                               Covenants of Genco

                  REI shall cause Genco, in connection with the organization of
Genco pursuant to Article II, to execute and deliver an undertaking in favor of
Resources to observe and comply with the covenants set forth in this Article VII
expressed as obligations of Genco. Prior to the Genco Public Ownership Date,
Regco shall cause Genco LP to observe and comply with such covenants. All
covenants contained in this Agreement that do not by their terms terminate or
cease to apply at an earlier date shall terminate upon the Option Closing Date
or, if the option is not exercised, on the Option Expiration Date.

                  7.1 Ordinary Course of Business. On and after the Genco
Organization Date, Genco will conduct, and cause each of its Subsidiaries to
conduct, its business in the ordinary course, consistent with its past practices
and those of REI and with Good Operating Practices.

                  7.2 Compliance with Laws. On and after the Genco Organization
Date, Genco will comply, and will cause each of its Subsidiaries to comply, with
all applicable laws and regulations applicable to Genco or the Genco Assets,
including without limitation all Environmental Laws, except where failure to do
so would not result in a Material Adverse Effect and is consistent in all
material respects with Good Operating Practices.

                  7.3 Payment of Taxes. On and after the Genco Organization
Date, Genco will pay or discharge or cause to be paid or discharged, before the
same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon Genco or any of its Subsidiaries or
upon the income, profits or property of Genco or any of its Subsidiaries, and
(2) all material lawful claims for labor, materials and supplies which, if
unpaid, might by law become a lien upon the property of Genco or any of its
Subsidiaries; provided, however, that Genco shall not be required to pay or
discharge or cause to be paid, or discharged any such tax,


                                       16
<PAGE>   20


assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings.

                  7.4 Existence. On and after the Genco Organization Date, Genco
and Genco LP will each do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence or partnership
existence, as the case may be.

                  7.5 Maintenance of Insurance. Genco shall maintain insurance
coverage for Genco and its Subsidiaries with responsible and reputable insurance
companies or associations in such amounts and covering such risks as is
customarily carried by companies engaged in the electric generation industry and
owning similar assets in the same general areas in which Genco operates.

                  7.6 Operation and Maintenance and Capital Expenditures. (a)
Genco shall operate and maintain the Genco Assets in the ordinary course of
business in a manner consistent with past practices (including the past
practices of REI) and in that connection shall, subject to Section 7.6(b), make
expenditures for operation, maintenance and repair of the Genco Assets and for
additions to and replacements, betterments and improvements of property, plant
and equipment included therein, such as are necessary to maintain and keep them
in good condition, repair and working order, supplied with all necessary
equipment, and capable of operation in compliance in all material respects with
all applicable laws (including Environmental Laws), all in a manner consistent
with good electric generation industry business practices, reliability, safety
and expedition. Genco shall not abandon or permanently retire any of its
generation units, but may mothball units if and to the extent its Board of
Directors determines in good faith that it is economically warranted to do so.

                  (b) Capital expenditures for environmental compliance projects
reflected in the estimated expenditures set forth on Schedule 7.6(b), shall be
made unless and to the extent (i) such expenditures are determined by final
order of the PUCT no longer subject to rehearing by the PUCT not to be
recoverable as stranded costs under the Utilities Code, in which case Genco may
cease making such expenditures as are determined not to be recoverable and shall
promptly give notice to Resources of any determination to cease making such
expenditures and the basis therefor or (ii) such expenditures relate to
generation units Genco has determined, in accordance with Good Operating
Practices, to mothball, provided that prior to ceasing such expenditures Genco
shall have provided Resources with its written analysis in reasonable detail
supporting the decision to mothball the unit. It is understood that the amounts
set forth on Schedule 7.6(b) are current estimates and that actual required
expenditures for the projects may be greater or less than such amounts.

                  7.7 Compliance with Contracts. Genco will observe and comply
in all material respects with its covenants and obligations contained in the
agreements specified in Section 2.2. Genco will, except to the extent failure to
do so would be consistent with Good Operating Practices and would not have a
Material Adverse Effect, comply, and cause each of its Subsidiaries to comply,
in all material respects with all other material contracts for fuel supply and
the purchase or sale of power.


                                       17
<PAGE>   21


                  7.8 No Issuances or Sales of Equity Securities, etc. Neither
Genco LP, Genco nor any of their respective Subsidiaries will issue, sell,
pledge, dispose of or encumber, or authorize or propose the issuance, sale,
pledge, disposition or encumbrance of, directly or indirectly, any of Genco LP's
partnership interests or any shares of Genco's capital stock of any class or any
options, warrants, rights or convertible securities or other securities
convertible into or exercisable or exchangeable for any such partnership
interests or shares of Genco's capital stock, other than (a) the issuance of
partnership interests issued upon Genco's organization as described in Article
II and related transfers thereof in connection with such organization, (b) Genco
Common Stock initially issued to Regco as provided in Section 2.3 and thereafter
issued to the holders of Genco Common Stock in respect thereof in connection
with any reclassification, stock dividend or stock split, (c) Genco Common Stock
sold by Genco in the IPO, (d) the sale of Shares pursuant to the Option, or (e)
in the event the Genco Public Ownership Event is a Genco IPO which does not
result in Regco's ownership of the outstanding Genco Common Stock being reduced
to 81% or less, the sale prior to the commencement of the Pricing Period of
Shares, in an amount sufficient to result in a Reduction of Regco's ownership of
the outstanding Genco Common Stock to such level, but not below 80%, so that
Regco may use the partial stock valuation method specified in Section
39.262(h)(3) of the Utilities Code.

                  7.9 Dividends; No Repurchases of Capital Stock. For the period
beginning on the Genco Public Ownership Date and extending through the end of
the Pricing Period, Genco shall establish a dividend policy under which it will
distribute to its shareholders through regular quarterly cash dividends
complying with this Section 7.9 ("Regular Cash Dividends") all its annual
earnings which it may lawfully distribute to shareholders under corporate law or
applicable regulatory restrictions. The goal of such policy shall be to pay out
through dividends all earnings and at the same time maintain consistent levels
of dividend payments during the year without requiring unusual or large
payments. To implement such payment policy, the initial Genco dividend set at
the Genco Public Ownership Date shall be based on estimated earnings for the
remainder of the calendar year in which the Genco Public Ownership Date occurs.
To the extent that dividends paid for any year are greater or less than actual
earnings for that year (or, in the case of the year in which the Genco Public
Ownership Event occurs, the portion of the year after the occurrence of the
Genco Public Ownership Event), the Regular Cash Dividend for the ensuing
calendar year shall be increased or decreased as appropriate to reflect that
overage or underage in earnings paid out.

                  If Resources exercises the Option, the purchase price for the
Shares shall be adjusted for the difference between:

                  (a) the actual earnings per share of Genco from the Genco
         Public Ownership Date to the earlier of (x) the Option Closing Date or
         (y) if the Option Closing Date is delayed as contemplated in Section
         3.2, the date Resources deposits payment for the Shares with an escrow
         agent pursuant to such Section multiplied by the number of Shares, and

                  (b) the dividends per share paid by Genco to Regco during such
         period multiplied by the number of Shares.


                                       18
<PAGE>   22


                  To the extent such dividends have been less than such
earnings, the Option Price shall be adjusted upward for the difference, and to
the extent such dividends exceed such earnings, the option price shall be
credited with that difference. If and to the extent financial statements are not
available to permit the earnings for such period to be calculated at the date
such payment is to be made, the payment shall be made as promptly thereafter as
practicable. Earnings for any portion of a fiscal quarter shall be calculated by
pro rating earnings for the entire quarter based on the number of days in that
portion.

                  From and after the Genco Public Ownership Date, Genco will not
declare, set aside or pay any dividend payable in cash, stock or property,
except for (a) Regular Cash Dividends, or (b) dividends payable solely in Genco
Common Stock for which, if occurring during the Pricing Period, an adjustment is
made pursuant to Section 3.1. Genco will not, and will not permit any of its
Subsidiaries to, purchase or otherwise acquire for value any shares of Genco
Common Stock.

                  7.10 Indebtedness. Following the Genco Public Ownership Date,
Genco will not, and will not permit any of its Subsidiaries to, incur, assume or
otherwise become liable in respect of any Indebtedness except to satisfy
requirements for operating and maintenance expenditures and capital expenditures
in accordance with the terms of this Agreement, to meet working capital needs
and to refund or refinance Indebtedness incurred for any of the foregoing
purposes. Genco will not, and will not permit and of its Subsidiaries to, incur,
assume or otherwise become liable in respect of any Indebtedness incurred for
the purpose of making any expenditure in violation of Section 7.12.

                  7.11 Negative Pledge. Genco will not pledge, mortgage,
hypothecate or grant a security interest in, or permit any mortgage, pledge,
security interest or other lien upon, any Genco Assets to secure any
Indebtedness, provided, however, that this restriction shall not apply to or
prevent the creation or existence of:

                  (a) any mortgage, pledge, security interest, lien or
         encumbrance upon any property or assets created at the time of the
         acquisition of such property or assets by Genco or within one year
         after such time to secure all or a portion of the purchase price for
         such property or assets;

                  (b) any mortgage, pledge, security interest, lien or
         encumbrance upon any property or assets existing thereon at the time of
         the acquisition thereof by Genco (whether or not the obligations
         secured thereby are assumed by Genco or any Subsidiary);

                  (c) any extension, renewal or refunding of any mortgage,
         pledge, security interest, lien or encumbrance permitted by subsection
         (a) or (b) above on substantially the same property or assets
         theretofore subject thereto;

                  (d) any mortgage, pledge, security interest, lien or
         encumbrance in favor of Genco; or

                  (e) any mortgage, pledge, security interest, lien or
         encumbrance created or assumed by Genco in connection with the issuance
         of debt securities


                                       19
<PAGE>   23


         the interest on which is excludable from gross income of the holder of
         such security pursuant to the Internal Revenue Code of 1986, as
         amended, for the purpose of financing, in whole or in part, the
         acquisition or construction of property or assets to be used by Genco.

                  For the purpose of this Section 7.11, "security interest"
shall include the interest of the lessor under a lease with a term of three
years or more that should be, in accordance with generally accepted accounting
principles, recorded as a capital lease, and any such lease of property or
assets not acquired from Genco in contemplation of such lease shall be treated
as though the lessee had purchased such property or assets from the lessor.

                  7.12 Other Negative Covenants. Genco will not, except as (x)
contemplated by this Agreement, (y) described in Schedule 7.12, or (z) required
under applicable law or by any Governmental Authority:

                           7.12.1 Make any material change in the levels of
                  inventories customarily maintained by Genco or, prior to the
                  Genco Organization Date, REI with respect to the Genco Assets,
                  other than changes which are consistent with Good Operating
                  Practices.

                           7.12.2 Sell, lease (as lessor), encumber, pledge,
                  transfer or otherwise dispose of, any material Genco Assets
                  individually or in the aggregate (except for Genco Assets
                  used, consumed or replaced in the ordinary course of business
                  consistent with past practices of Genco or, prior to the Genco
                  Organization Date, REI and Good Operating Practices) other
                  than encumbrances not securing any Indebtedness that arise in
                  the ordinary course of business and do not detract from or
                  interfere with in any material respect the value or use of
                  such assets and pledges, mortgages, security interests or
                  other liens securing Indebtedness of Genco or a Subsidiary of
                  Genco permitted under Section 7.11.

                           7.12.3 Modify, amend or voluntarily terminate prior
                  to the applicable expiration date any agreements or real
                  property leases of Genco (or, prior to the Genco Organization
                  Date, applicable to the Genco Assets) or any of the Permits or
                  Environmental Permits associated with the Genco Assets in any
                  material respect, other than (a) in the ordinary course of
                  business, to the extent consistent with the past practices of
                  Genco or REI and with Good Operating Practices, or (b) with
                  cause, to the extent consistent with past practices of Genco
                  or REI or with Good Operating Practices.

                           7.12.4 Merge or consolidate with or into, or convey,
                  transfer, lease or otherwise dispose of (whether in one
                  transaction or a series of related transactions) all or any
                  substantial portion of its properties or assets (whether now
                  owned or hereafter acquired) to, any Person.

                           7.12.5 Make any material change in the nature of its
                  business as carried on at the date hereof.


                                       20
<PAGE>   24


                           7.12.6 Not make any loan or advance to, or engage in
                  any transaction with, an Affiliate of Genco except (a) on
                  terms no less favorable to Genco than could be obtained in a
                  comparable arm's-length transaction with a Person not an
                  Affiliate of Genco, (b) transactions permitted by agreements
                  specifically identified herein or in the Master Separation
                  Agreement, (c) the payment of reasonable compensation to the
                  directors and officers of Genco and (d) loans, advances, or
                  equity contributions to Subsidiaries of Genco all of the
                  capital stock of which is owned, directly or indirectly
                  through another Subsidiary or Subsidiaries, by Genco.

                           7.12.7 Construct or acquire new generation plants or
                  capacity.

                           7.12.8 Become a general partner in any general or
                  limited partnership or joint venture.

                           7.12.9 Engage in hedging transactions or other
                  transactions in contracts or financial instruments under which
                  Genco is exposed to market risk related to commodity prices,
                  interest rates or currency exchange rates except in compliance
                  with Regco's policies regarding such transactions.

                           7.12.10 Except as otherwise provided herein, enter
                  into any written or oral contract, agreement, commitment or
                  arrangement with respect to any of the proscribed transactions
                  set forth in the foregoing Section 7.12.1 through 7.12.9.

                  7.13 Reporting Requirements. Genco (or, prior to the Genco
Organization Date, REI) will furnish to Resources:

                           7.13.1 Beginning on the Genco Organization Date, as
                  soon as available and in any event within 15 days after the
                  end of each quarter, a balance sheet of Genco LP as of the end
                  of such quarter and statements of income and cash flows of
                  Genco LP for the period beginning at the end of the last
                  fiscal year and ending with the end of such quarter, duly
                  certified by its principal accounting officer as having been
                  prepared in accordance with generally accepted accounting
                  principles, provided that following the date on which Genco
                  becomes the indirect beneficial owner of all interests in
                  Genco LP, such statements shall be those of Genco rather than
                  Genco LP;

                           7.13.2 Beginning on the Genco Organization Date, as
                  soon as available and in any event within 90 days after the
                  end of each fiscal year of Genco LP, a balance sheet of Genco
                  LP as of the end of such year and statements of income and
                  cash flows of Genco LP for the year then ended, accompanied by
                  a report of Genco LP's independent public accountants;
                  provided that following the date on which Genco becomes the
                  indirect beneficial owner of all the interests in Genco LP,
                  such statements shall be those of Genco rather than Genco LP;
                  and

                           7.13.3 Beginning on the Genco Public Ownership Date,
                  promptly after the sending or filing thereof, copies of all
                  reports that Genco sends to any of its


                                       21
<PAGE>   25


                  security holders, and copies of all reports, registration
                  statements or other statements that Genco files with the
                  Securities and Exchange Commission.

                  7.14 Obtain PUCT Final Order. Genco will use its best efforts
to obtain prior to the beginning of the Option Period any and all Final Orders
(as such term is defined in the Master Separation Agreement) from the PUCT and
any other necessary Governmental Authority necessary for (i) the facilities (as
such term is used in Section 32 of the Public Utility Holding Company Act of
1935, as amended) of Genco to become eligible facilities (as such term is
defined in such Act) and (ii) Genco to become an "exempt wholesale generator"
under such Act, which Final Orders shall include, without limitation, the
determinations required by Section 32(c) of such Act.

                                  ARTICLE VIII
                               Governance Matters

                  8.1 Board Composition. At least three persons who qualify as
Independent Directors shall be appointed to the Board of Directors of Genco no
later than three months following the Genco Public Ownership Date, provided that
to the extent permitted by applicable stock exchange and other requirements two
Independent Directors may be so designated no later than such time and the
appointment of the third Independent Director may be delayed until a date no
later than twelve months following the Genco Public Ownership Date. Thereafter,
Regco shall use reasonable efforts (including voting its shares of Genco Common
Stock) to ensure that the Board of Directors of Genco includes at least three
Independent Directors at all times prior to the Option Closing Date or, if the
Option is not exercised, the Option Expiration Date.

                  8.2 Charter and By-law Amendments. The certificate or articles
of incorporation and by-laws of Genco shall not authorize any class of stock
other than the Genco Common Stock, or provide for a board of directors divided
into classes or contain any provisions requiring a higher vote of the Genco
Common Stock on any matter than is required by applicable law or any provisions
which would impose restrictions or have any other effects set forth in Section
5.3 of the Master Separation Agreement with respect to Resources as a
stockholder of Genco or a Person who may become a stockholder of Genco. Prior to
the Option Closing Date or, if the Option is not exercised, the Option
Expiration Date, Genco shall not amend its certificate or articles of
incorporation or bylaws or adopt any shareholder rights plan, except for (a)
amendments to conform to requirements of any national securities exchange or
transactions reporting system on which the Genco Common Stock is listed or
quoted or (b) amendments which (i) are not adverse to Regco in any material
respect, (ii) would not result in disparate treatment of Resources as a
stockholder or as a Person who may become a stockholder following exercise of
the Option and (iii) would not have any of the other effects set forth in
Section 5.3 of the Master Separation Agreement.

                  8.3 Chief Executive Officer. From and after the Genco Public
Ownership Date and prior to the Option Closing Date or, if the Option is not
exercised, the Option Expiration Date, the Chief Executive Officer of Genco
shall at all times be a full time employee of Genco.


                                       22
<PAGE>   26


                                   ARTICLE IX
                         Tax Covenants of REI and Regco

                  REI covenants and agrees, for itself and on behalf of Regco,
to comply with the covenants set forth in this Article IX until the Option
Closing Date or, if the Option is not exercised, the Option Expiration Date. In
connection with the transactions occurring on the Restructuring Date, REI
covenants and agrees to cause Regco to expressly assume the obligations under
this Agreement required to be performed by REI and by Regco.

                  9.1 Except as set forth on Schedule 9.1, on the Option Closing
Date, there will be no liens for Taxes (other than for current Taxes not yet due
and payable) on any of the assets of REI, Regco or any Subsidiary of REI or
Regco.

                  9.2 On the Option Closing Date, except as set forth on
Schedule 9.2, no property owned by REI, Regco or any subsidiary of REI or Regco
(i) will be property required to be treated as being owned by another person
pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of
1954, as amended and in effect immediately prior to the enactment of the Tax
Reform Act of 1986, (ii) will constitute "tax-exempt use property" within the
meaning of Section 168(h)(1) of the Internal Revenue Code of 1986 (the "Code")
or (iii) will be "tax-exempt bond financed property" within the meaning of
Section 168(g) of the Code.

                  9.3 On the Option Closing Date, Genco will not be a foreign
person within the meaning of Section 1445 of the Code.

                  9.4 On the Option Closing Date, Genco will be a member of a
"selling consolidated group" as such term is defined in Treasury Regulation
Section 1.338(h)(10)-1(c).

                  9.5 Except as set forth on Schedule 9.5, on the Option Closing
Date, none of REI, Regco or any Subsidiary of REI or Regco will be a party to,
be bound by or have any obligations under any Tax sharing agreement, any Tax
indemnification agreement or similar contract or arrangement.

                  9.6 Except as set forth on Schedule 9.6, on the Option Closing
Date, no tax audits or other administrative proceedings or court proceedings
will be presently pending with regard to any Taxes for which Genco or any
Subsidiary of Genco will be liable except for audits or proceedings which would
not have a Material Adverse Effect.

                  9.7 Except as would not have, individually or in the
aggregate, a Material Adverse Effect, on the Option Closing Date, none of REI,
Regco or any Subsidiary of REI or Regco will have executed or entered into (or
prior to the close of business on the Option Closing Date will execute or enter
into) with any taxing authority (i) any agreement, waiver or other document
extending or having the effect of extending or waiving the period for
assessments or collection of any Taxes for which Genco or any Subsidiary of
Genco would or could be liable or (ii) any closing agreement pursuant to Section
7121 of the Code, or any predecessor provision thereof or any similar provision
of state, local or foreign Tax law that relates to the assets or operations of
Genco or any Subsidiary of Genco.


                                       23
<PAGE>   27


                  9.8 Except as would not have, individually or in the
aggregate, a Material Adverse Effect, on the Option Closing Date, none of Genco
or any Subsidiary of Genco will have made any payments, will be obligated to
make any payments, or will be a party to any agreement or other arrangement that
could obligate it to make any payments that would not be deductible under
Section 280G of the Code.

                  9.9 Except as would not have, individually or in the
aggregate, a Material Adverse Effect, on the Option Closing Date, each of Genco
and any Subsidiary of Genco will have collected and withheld all Taxes that it
will have been required to collect or withhold and will have timely submitted
all such collected and withheld Taxes to the appropriate authorities. Each of
Genco or any Subsidiary of Genco will have complied and will be in compliance
with all applicable laws, rules and regulations relating to the payment,
withholding and information reporting requirements relating to any Taxes
required to be collected or withheld.

                  9.10 On the Option Closing Date, none of Genco or any
Subsidiary of Genco will have made an election or filed a consent under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by such entity.

                  9.11 On the Option Closing Date, no claim will ever have been
made by an authority in a jurisdiction where any of Genco or any Subsidiary of
Genco did not or will not have filed Tax returns that such Company or such
Subsidiary of any Company will be or may be subject to taxation by that
jurisdiction.

                  9.12 REI will take all necessary actions to ensure that each
of Sections 9.1 to 9.11 are true on the Option Closing Date.

                                    ARTICLE X
                                   Tax Matters

                  10.1 Election Under Section 338(h)(10).

                  (a) REI, for itself and on behalf of Regco ("Seller"), and
         Resources shall make a joint election for Genco under Section
         338(h)(10) of the Code and under any comparable provisions of state or
         local law (an "Election") with respect to the purchase of the Genco
         Common Stock. Seller and Resources shall mutually execute and complete
         copies of IRS Form 8023 and any similar state or local forms no later
         than 60 days prior to the due date (including extensions) for filing
         such forms or the Tax Returns to which such forms must be attached. If
         any changes are required in these forms as a result of information that
         is first available after such forms are prepared, the parties will
         promptly agree on such changes.

                  (b) Resources shall prepare and submit to Seller a proposed
         allocation of the Modified Adjusted Deemed Sales Price (as defined in
         Treasury Regulation Section 1.338(h)(10)-1(f)) for Genco among the
         assets of Genco as soon as practicable after the Option Closing Date.
         Seller shall approve and agree to the


                                       24
<PAGE>   28


         proposed allocation unless Seller reasonably determines that the
         proposed allocation is improper. Neither Resources nor Seller shall
         take any action inconsistent with, or fail to take any action necessary
         for, the validity of the Election, and, if an allocation schedule is
         agreed to by Resources and Seller, Resources and Seller shall adopt and
         utilize the asset values as determined on the allocation schedule for
         the purpose of all Tax Returns filed by them unless otherwise required
         by applicable law.

                  10.2 Tax Returns. Seller shall cause Genco and its
Subsidiaries to prepare and file at the Seller's expense (i) all Tax Returns of
Genco and its Subsidiaries which are required to be filed (taking into account
extensions of time to file) on or before the Option Closing Date and (ii) all
federal and state income and franchise Tax Returns of Genco and its Subsidiaries
for all periods ending on or prior to the Option Closing Date. Resources shall
prepare and file (or cause to be prepared and filed) at its own expense all
other Tax Returns of Genco and its Subsidiaries. If either Resources, on the one
hand, or Seller, on the other hand, may be liable for any material portion of
the Tax payable in connection with any Tax Return to be filed by the other, the
party responsible under this Section 10.2 for filing such return (the
"Preparer") shall prepare and deliver to the other party (the "Payor") a copy of
such return and any schedules, work papers and other documentation then
available that are relevant to the preparation of the portion of such return for
which the Payor is or may be liable hereunder not later than 30 days before the
Due Date (as defined in Section 10.12 of this Agreement). The Preparer shall not
file such return until the earlier of either the receipt of written notice from
the Payor indicating the Payor's consent thereto, or the Due Date. The Payor
shall have the option of providing to the Preparer, at any time at least 15 days
prior to the Due Date, written instructions as to how the Payor wants any, or
all, of the items for which it may be liable reflected on such Tax Return. The
Preparer shall, in preparing such return, cause the items for which the Payor is
liable hereunder to be reflected in accordance with the Payor's instructions
(unless, in the opinion of nationally recognized tax counsel to the Preparer,
complying with the Payor's instructions would likely subject the Preparer to any
criminal penalty or to civil penalties) and, in the absence of having received
such instructions, in accordance with past practice.

                  If the Preparer fails to satisfy its obligations pursuant to
this Section 10.2, the Payor shall have no obligation to indemnify the Preparer
for any Taxes which are reflected on any such Tax Return if and to the extent
the Payor was actually prejudiced by such failure, and shall retain any and all
remedies it may otherwise have which arise out of such failure.

                  10.3 Transfer Taxes. All excise, transfer, stamp, documentary,
filing, recordation and other similar taxes, together with any interest,
additions or penalties with respect thereto and any interest in respect of such
additions or penalties, resulting directly from the sale and transfer by Seller
to Resources of the Genco Common Stock (the "Transfer Taxes"), shall be borne
50% by Resources and 50% by Seller. Notwithstanding Section 10.2 of this
Agreement, which shall not apply to Tax Returns relating to Transfer Taxes, any
Tax Returns that must be filed in connection with Transfer Taxes shall be
prepared and filed when due by Resources, and Resources will use its reasonable
efforts to provide such Tax Returns to Seller at least 10 days prior to the Due
Date for such Tax Returns.


                                       25
<PAGE>   29


                  10.4 Indemnification.

                  (a) Seller's Indemnification of Resources. Seller shall
         indemnify Resources from, against and in respect of (A) any Taxes
         imposed on Genco or any Subsidiary of Genco with respect to any taxable
         period, or portion thereof, ending on or before the Option Closing
         Date; and (B) any Transfer Taxes for which Seller is liable pursuant to
         Section 10.3 hereof.

                  (b) Resource's Indemnification of Seller. Resources shall
         indemnify Seller from, against and in respect of any liability of
         Seller or its Subsidiaries for (A) any Taxes imposed on Genco or any
         Subsidiary of Genco with respect to any taxable period, or portion
         thereof, beginning on or after the Option Closing Date; and (B) any
         Transfer Taxes for which Resources is liable pursuant to Section 10.3
         hereof.

                  10.5 Computation of Tax Liabilities.

                  (a) Proration of Taxes and Earnings and Profits. To the extent
         permitted by law or administrative practice, the taxable years of Genco
         and its Subsidiaries shall end on and include the Option Closing Date.
         Whenever it is necessary to determine the liability for Taxes, or the
         earnings and profits, of Genco or any Subsidiary of Genco for a portion
         of a taxable year or period that begins before and ends after the
         Option Closing Date, the determination of the Taxes or the earnings and
         profits for the portion of the year or period ending on, and the
         portion of the year or period beginning after, the Option Closing Date
         shall be determined by assuming that the taxable year or period ended
         on and included the Option Closing Date, except that exemptions,
         allowances or deductions that are calculated on an annual basis and
         annual property taxes shall be prorated on the basis of the number of
         days in the annual period elapsed through the Option Closing Date as
         compared to the number of days in the annual period elapsing after the
         Option Closing Date.

                  (b) Standalone Basis. Whenever it is necessary to determine
         the liability of Genco or any Subsidiary of Genco for Taxes, such
         liability shall be computed as if Genco or such Subsidiary of Genco was
         not a member of Seller's consolidated, affiliated, combined or unitary
         group for Tax purposes.

                  10.6 Contest Provisions.

                  (a) Notification of Contests. Each of Resources, on the one
         hand, and Seller, on the other hand (the "Recipient"), shall notify the
         Vice President - Taxes or chief tax officer of the other party in
         writing within 45 days of receipt by the Recipient of written notice of
         any pending or threatened audits, adjustments or assessments (a "Tax
         Audit") which are likely to affect the liability for Taxes of such
         other party. If the Recipient fails to give such prompt notice to the
         other party, it shall not be entitled to indemnification for any Taxes
         arising in


                                       26
<PAGE>   30


         connection with such Tax Audit if and to the extent that such other
         party is actually prejudiced by such failure to give notice.

                  (b) Which Party Controls.

                  (1) Seller's Items. If such Tax Audit relates to any taxable
         period, or portion thereof, ending on or before the Option Closing Date
         or for any Taxes for which Seller is liable in full hereunder, Seller
         shall at its expense control the defense and settlement of such Tax
         Audit.

                  (2) Resource's Items. If such Tax Audit relates to any taxable
         period, or portion thereof, beginning on or after the Option Closing
         Date or for any Taxes for which Resources is liable in full hereunder,
         Resources shall at its expense control the defense and settlement of
         such Tax Audit.

                  (3) Combined and Mixed Items. If such Tax Audit relates to
         Taxes for which both Seller and Resources are liable hereunder, to the
         extent practicable such Tax Items (as defined in Section 10.12 of this
         Agreement) will be distinguished and each party will control the
         defense and settlement of those Taxes for which it is so liable. If
         such Tax Audit relates to a taxable period, or portion thereof,
         beginning before and ending after the Option Closing Date and any Tax
         Item cannot be identified as being a liability of only one party or
         cannot be separated from a Tax Item for which the other party is
         liable, the party which has the greater potential liability for those
         Tax Items that cannot be so attributed or separated (or both) shall
         control the defense of the Tax Audit, provided that such party defends
         the items as reported on the relevant Tax Return and provided further
         that no such matter shall be settled without the written consent of
         both parties, not to be unreasonably withheld.

                  (4) Participation Rights. Any party whose liability for Taxes
         may be affected by a Tax Audit shall be entitled to participate at its
         expense in such defense and to employ counsel of its choice at its
         expense.

                  10.7 Resource's Claiming, Receiving or Using of Refunds and
Overpayments. If after the Closing, Resources, Genco, or any Subsidiary of Genco
(A) receives any refund or (B) utilizes the benefit of any overpayment of Taxes
which, in each case (A) and (B), (x) relates to Taxes paid by Seller or Genco,
or any Subsidiary of Genco with respect to a taxable period, or portion thereof,
ending on or before the Option Closing Date, or (y) is the subject of
indemnification by Seller pursuant to this Agreement, Resources shall promptly
transfer, or cause to be transferred, to Seller the entire amount of the refund
or overpayment (including interest) resolved or utilized by Resources, Genco, or
any Subsidiary of Genco. Resources agrees to notify Seller within 15 days
following the discovery of a right to claim any such refund or overpayment and
the receipt of any such refund or utilization of any such overpayment. Resources
agrees to claim any such refund or to utilize any such overpayment as soon as
possible and to furnish to Seller all information, records and assistance
necessary to verify the amount of the refund or overpayment.


                                       27
<PAGE>   31


                  10.8 Resolution of All Tax-Related Disputes. In the event that
Seller and Resources cannot agree on the calculation of any amount relating to
Taxes or the interpretation or application of any provision of this Agreement
relating to Taxes, such dispute shall be resolved by a nationally recognized
accounting firm mutually acceptable to Seller and Resources, whose decision
shall be final and binding upon all Persons involved and whose expenses shall be
shared equally by Seller, on the one hand, and Resources on the other hand.

                  10.9 Termination of Existing Tax Sharing Agreements. Any and
all existing Tax sharing agreements or arrangements, written or unwritten,
binding Genco or any Subsidiary of Genco, shall be terminated as of the Option
Closing Date.

                  10.10 Assistance and Cooperation. The parties agree that,
after the Option Closing Date:

                  (a) Resources, on the one hand, and Seller, on the other hand,
         shall each assist the other (and cause its respective Affiliates to
         assist) the other party in preparing any Tax Returns which such other
         party is responsible for preparing and filing;

                  (b) Resources, on the one hand, and Seller, on the other hand,
         shall cooperate fully in preparing for any Tax audits, or disputes with
         taxing authorities, relating to any Tax Returns or Taxes of Genco or
         any Subsidiary of Genco.

                  (c) Resources, on the one hand, and Seller, on the other hand,
         shall make available to each other upon written request and to any
         taxing authority as reasonably requested in writing all relevant books
         and records relating to Tax Returns or Taxes of Genco or a Subsidiary
         of Genco. Any such information shall be kept strictly confidential;

                  (d) Resources, on the one hand, and Seller, on the other hand,
         shall promptly furnish the other party with copies of all relevant
         correspondence received from any taxing authority in connection with
         any Tax Audit or information request relating to Taxes for which such
         other party may have an indemnification obligation under this
         Agreement; and

                  (e) Except as otherwise provided herein, the party requesting
         assistance or cooperation shall bear the other party's out-of-pocket
         expenses in complying with such request to the extent that those
         expenses are attributable to fees and other costs of unaffiliated
         third-party service providers.

                  10.11 This Article X alone shall govern the procedure for all
Tax indemnification claims, notwithstanding any provision of Article XI or of
Article IX of the Master Separation Agreement.

                  10.12 For purposes of this Agreement, "Due Date" shall mean,
with respect to any Tax Return, the date such return is due to be filed (taking
into account any valid extensions);


                                       28
<PAGE>   32


and "Tax Item" shall mean, with respect to Taxes, any item of income, gain
deduction, loss or credit or other tax attribute.

                                   ARTICLE XI
                               Dispute Resolution

                  11.1 If a dispute, claim or controversy arises out of or in
connection with this Agreement, the parties agree to use the procedures set
forth in Article IX of the Master Separation Agreement, in lieu of either party
pursuing other available remedies, to resolve the same.

                  11.2 Notwithstanding Section 11.1 or any other provision
hereof, it is understood and agreed that Resources would suffer irreparable harm
by reason of any failure of Regco to perform its obligations under Article III
or Section 6.1, and that Resources shall therefore be entitled, in addition to
and not in limitation of all other remedies, to the remedy of specific
performance with respect to any breach or default by Regco of its obligations
under Article III or Section 6.1. This provision shall take precedence over any
other dispute resolution, remedial or other provision of the Master Separation
Agreement, this Agreement, or any other agreement or contract between the
parties.

                                   ARTICLE XII
                                  Miscellaneous

                  12.1 Modifications to this Agreement Arising from Amendment of
the Utilities Code. To the extent any change effective after the date of this
Agreement to any provision of the Utilities Code (including without limitation
Section 39.262(c) or Section 39.262(h)(3)) accelerates or allows the
acceleration of the filing required by Section 39.262(c) or shortens or
otherwise modifies the 30-trading day period or the 120-trading day period for
the partial stock valuation method in Section 39.262(h)(3) or such other section
that may be used to perform the market valuation of Texas Genco, the dates and
periods set forth in this Agreement shall be adjusted by agreement of the
parties in order to preserve the essential regulatory and other objectives of
the transaction intended by the parties.


                                       29
<PAGE>   33


                  12.2 Amendments. This Agreement shall not be supplemented,
amended or modified in any manner whatsoever (including by course of dealing or
of performance or usage of trade) except in writing signed by the parties.

                  12.3 Successors and Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns. No party shall assign this Agreement or any
rights herein without the prior written consent of the other party, which may be
withheld for any or no reason.

                  12.4 Notices. Unless expressly provided herein, all notices,
claims, certificates, requests, demands and other communications hereunder shall
be in writing and shall be deemed to be duly given (i) when personally delivered
or (ii) if mailed registered or certified mail, postage prepaid, return receipt
requested, on the date the return receipt is executed or the letter refused by
the addressee or its agent or (iii) if sent by overnight courier which delivers
only upon the signed receipt of the addressee, on the date the receipt
acknowledgment is executed or refused by the addressee or its agent or (iv) if
sent by facsimile or other generally accepted means of electronic transmission,
on the date confirmation of transmission is received (provided that a copy of
any notice delivered pursuant to this clause (iv) shall also be sent pursuant to
clause (ii) or (iii)), addressed to the attention of the addressee's General
Counsel at the address of its principal executive office or to such other
address or facsimile number for a party as it shall have specified by like
notice.

                  12.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.

                  12.6 Headings. The various headings used in this Agreement are
for convenience only and are not to be used in interpreting the text of the
Articles or Sections in which they appear or to which they relate.

                  12.7 Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law. If any portion of this Agreement is declared invalid for
any reason, such declaration shall have no effect upon the remaining portions of
this Agreement, which shall continue in full force and effect as if this
Agreement had been executed with the invalid portions thereof deleted.

                  12.8 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, and all of which
shall constitute one and the same instrument.

                  12.9 Rights of the Parties. Nothing expressed or implied in
this Agreement is intended or will be construed to confer upon or give any
person or entity, other than the Parties and their respective Subsidiaries and
Affiliates, as the case may be, any rights or remedies under or by reason of
this Agreement or any transaction contemplated thereby.

                  12.10 Reservation of Rights. The waiver by either party of any
of its rights or remedies afforded hereunder or at law is without prejudice and
shall not operate to waive any other rights or remedies which that party shall
have available to it, nor shall such waiver operate to waive the party's rights
to any remedies due to a future breach, whether of a similar or


                                       30
<PAGE>   34


different nature. The failure or delay of a party in exercising any rights
granted to it hereunder shall not constitute a waiver of any such right and that
party may exercise that right at any time. Any single or partial exercise of any
particular right by a party shall exhaust the same or constitute a waiver of any
other right.

                  12.11 Entire Agreement. All understandings, representations,
warranties and agreements, if any, heretofore existing between the parties
regarding the subject matter hereof are merged into this Agreement, which fully
and completely express the agreement of the parties with respect to the subject
matter hereof.

                  IN WITNESS WHEREOF, the undersigned, by their officers
thereunto duly authorized, have executed this Agreement as of the day and year
first above written.


                                       RELIANT ENERGY, INCORPORATED



                                       By
                                         --------------------------



                                       RELIANT RESOURCES, INC.



                                       By
                                         --------------------------


                                       31