Document:

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                                                                  EXHIBIT 10.4

                          TEXAS GENCO OPTION AGREEMENT

                                     between

                           RELIANT ENERGY CORPORATION

                                       and

                             RELIANT RESOURCES, INC.

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<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
ARTICLE VIII  Governance Matters..................................................22
</TABLE>

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<TABLE>

<S>                                                                              <C>
   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........................................22
ARTICLE X   Tax Matters...........................................................24
   10.1     Election Under Section 338(h)(10).....................................24
   10.2     Tax Returns...........................................................24
   10.3     Transfer Taxes........................................................25
   10.4     Indemnification.......................................................25
   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................................27
   10.9     Termination of Existing Tax Sharing Agreements........................27
   10.10    Assistance and Cooperation............................................27
ARTICLE XI  Dispute Resolution....................................................28
ARTICLE XII  Miscellaneous........................................................29
   12.1     Amendments............................................................29
   12.2     Successors and Assignment.............................................29
   12.3     Notices...............................................................29
   12.4     Governing Law.........................................................29
   12.5     Headings..............................................................29
   12.6     Severability..........................................................29
   12.7     Counterparts..........................................................29
   12.8     Rights of the Parties.................................................30
   12.9     Reservation of Rights.................................................30
   12.10    Entire Agreement......................................................30

</TABLE>

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                          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.ss.ss.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,

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

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         "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

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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.

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         "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,

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     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;

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         (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.

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         "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.

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                                   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 under the General Corporation Law of Delaware 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.

         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 January 9, 2004 (the "Pricing Period") which result in
the highest average closing price for any

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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, Resourcess 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 the State of Delaware. 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 that year are greater or less than actual
earnings for that year, 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 through 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
     shares owned by Regco, and

         (b) the dividends paid by Genco to Regco to that date.

         To the extent dividends paid for each Share have been less than the per
share earnings of Genco, the Option Price shall be adjusted upward for the
difference, and to the extent dividends paid exceed actual earnings to that
date, the option price shall be credited with that difference.

                                       18
<PAGE>   22

         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 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

                                       19
<PAGE>   23

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.

              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

                                       20
<PAGE>   24

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

                                       21
<PAGE>   25

                                  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 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 the Delaware General Corporation 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 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.

                                   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.

                                       22
<PAGE>   26
         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.

         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.

                                       23
<PAGE>   27

         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 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.

                                       24
<PAGE>   28

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.

         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.

                                       25
<PAGE>   29

         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 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

                                       26
<PAGE>   30

     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.

         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

                                       27
<PAGE>   31

     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); 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

                                       28
<PAGE>   32

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 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.

         12.2 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.

         12.3 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.

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

         12.5 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.

         12.6 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.

         12.7 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.

                                       29
<PAGE>   33

         12.8 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.

         12.9 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 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.

         12.10 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
                                       ----------------------------------------

                                       30<PAGE>   1
                                                                  EXHIBIT 10.5

                           EMPLOYEE MATTERS AGREEMENT

                                     BETWEEN

                          RELIANT ENERGY, INCORPORATED

                                       AND

                             RELIANT RESOURCES, INC.

<PAGE>   2

                                TABLE OF CONTENTS
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ARTICLE I. DEFINITIONS......................................................................1
         1.01         ACTION................................................................2
         1.02         AFFILIATES............................................................2
         1.03         AGREEMENT.............................................................2
         1.04         AICP..................................................................2
         1.05         ANCILLARY AGREEMENTS..................................................2
         1.06         ASO CONTRACTS.........................................................2
         1.07         BENEFIT RESTORATION PLAN..............................................2
         1.08         COBRA.................................................................2
         1.09         CODE..................................................................2
         1.10         COMMON STOCK..........................................................2
         1.11         DEFERRED COMPENSATION PLAN............................................2
         1.12         DISTRIBUTION..........................................................3
         1.13         DISTRIBUTION DATE.....................................................3
         1.14         DISTRIBUTION RATIO....................................................3
         1.15         DOL...................................................................3
         1.16         EMPLOYMENT LIABILITIES................................................3
         1.17         ERISA.................................................................3
         1.18         ESOP..................................................................3
         1.19         EXECUTIVE PLANS.......................................................3
         1.20         FLEXIBLE BENEFITS PLAN................................................4
         1.21         FMLA..................................................................4
         1.22         FOREIGN PLAN..........................................................4
         1.23         FRINGE BENEFITS.......................................................4
         1.24         GOVERNMENTAL AUTHORITY................................................4
         1.25         GROUP INSURANCE POLICIES..............................................4
         1.26         HCFA..................................................................4
         1.27         HEALTH AND WELFARE PLANS..............................................4
         1.28         HEALTH PLANS..........................................................4
         1.29         HMO...................................................................5
         1.30         HMO AGREEMENTS........................................................5
         1.31         IPO...................................................................5
         1.32         IPO CLOSING DATE......................................................5
         1.33         IRS...................................................................5
         1.34         LEAVE OF ABSENCE PROGRAMS.............................................5
         1.35         LIABILITIES...........................................................5
         1.36         LICP..................................................................5
         1.37         LTIP..................................................................5
         1.38         NEW REI OPTION........................................................5
         1.39         NORAM RABBI TRUSTS....................................................5
         1.40         OPTION................................................................6
         1.41         OUTSOURCE.............................................................6
         1.42         PARTICIPATING COMPANY.................................................6
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         1.43         PBGC..................................................................6
         1.44         PERSON................................................................6
         1.45         PLAN..................................................................6
         1.46         QDRO..................................................................6
         1.47         QMCSO.................................................................6
         1.48         RECORD DATE...........................................................6
         1.49         REI...................................................................6
         1.50         REI EMPLOYEE..........................................................7
         1.51         REI GROUP.............................................................7
         1.52         REI STOCK VALUE.......................................................7
         1.53         REI TERMINATED EMPLOYEE...............................................7
         1.54         REI WCP...............................................................7
         1.55         RESOURCES.............................................................7
         1.56         RESOURCES EMPLOYEE....................................................7
         1.57         RESOURCES GROUP.......................................................7
         1.58         RESOURCES RETIRED EMPLOYEE............................................7
         1.59         RESOURCES STOCK VALUE.................................................8
         1.60         RESOURCES TERMINATED EMPLOYEE.........................................8
         1.61         RESOURCES UNION EMPLOYEES.............................................8
         1.62         RESOURCES WCP CLAIMS..................................................8
         1.63         RETIREMENT PLAN.......................................................8
         1.64         SAVINGS PLAN..........................................................8
         1.65         SAVINGS RESTORATION PLAN..............................................8
         1.66         SEC...................................................................8
         1.67         SEPARATION............................................................9
         1.68         SEPARATION AGREEMENT..................................................9
         1.69         SEPARATION DATE.......................................................9
         1.70         SEVERANCE PLANS.......................................................9
         1.71         STOCK PLAN............................................................9
         1.72         STOCK PURCHASE PLAN...................................................9
         1.73         SUBSIDIARY............................................................9
         1.74         TAX ALLOCATION AGREEMENT..............................................9
         1.75         UNION PLANS...........................................................9

ARTICLE II. GENERAL PRINCIPLES..............................................................9
         2.01         ASSUMPTION OF RESOURCES LIABILITIES...................................9
         2.02         EMPLOYMENT LIABILITIES INDEMNIFICATION...............................10
         2.03         ESTABLISHMENT OF RESOURCES PLANS.....................................12
         2.04         RESOURCES'S PARTICIPATION IN REI PLANS...............................13
         2.05         TERMS OF PARTICIPATION BY RESOURCES EMPLOYEES IN RESOURCES PLANS.....15
         2.06         FOREIGN PLANS........................................................15
         2.07         UNION PLANS..........................................................15
         2.08         RELIANT ENERGY TEGCO, INC. EMPLOYEES.................................16
         2.09         VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS........................16
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ARTICLE III. DEFINED BENEFIT PLAN..........................................................16
         3.01         RESOURCES EMPLOYEES' PARTICIPATION IN RETIREMENT PLAN................16

ARTICLE IV. DEFINED CONTRIBUTION PLAN......................................................17
         4.01         RESOURCES SAVINGS PLAN...............................................17
         4.02         ESOP.................................................................17
         4.03         REMA SAVINGS PLAN....................................................17
         4.04         RESOURCES RETIRED EMPLOYEES..........................................18

ARTICLE V. EXECUTIVE AND OTHER PLANS.......................................................18
         5.01         EXECUTIVE PLANS......................................................18
         5.02         DEFERRED COMPENSATION PLAN...........................................18
         5.03         BENEFIT AND SAVINGS RESTORATION PLANS................................19
         5.04         RABBI TRUSTS.........................................................20
         5.05         SEVERANCE PLANS......................................................20

ARTICLE VI. HEALTH AND WELFARE PLANS.......................................................20
         6.01         ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES....................20
         6.02         CLAIMS FOR HEALTH AND WELFARE PLANS..................................21
         6.03         POST-DISTRIBUTION TRANSITIONAL ARRANGEMENTS..........................22
         6.04         VENDOR AND INSURANCE ARRANGEMENTS....................................23
         6.05         COBRA AND HIPPA......................................................23
         6.06         LEAVE OF ABSENCE PROGRAMS AND FMLA...................................24
         6.07         REI WORKERS' COMPENSATION PROGRAM....................................24

ARTICLE VII. EQUITY AND OTHER COMPENSATION.................................................25
         7.01         REI OPTIONS..........................................................25
         7.02         REI PERFORMANCE SHARES...............................................27
         7.03         STOCK PURCHASE PLAN..................................................27
         7.04         RESOURCES LONG-TERM INCENTIVE PLAN...................................27
         7.05         RESOURCES ANNUAL INCENTIVE COMPENSATION PLAN.........................27

ARTICLE VIII. FRINGE AND OTHER BENEFITS....................................................27
         8.01         FRINGE BENEFITS......................................................27
         8.02         APPLIANCE LOANS......................................................28
         8.03         CHAIRMAN'S SCHOLARSHIP FUNDS.........................................28
         8.04         REI FOUNDATION.......................................................28
         8.05         OTHER BENEFITS.......................................................28

ARTICLE IX.................................................................................28
         9.01         TRANSITION SERVICES AGREEMENT........................................28
         9.02         PAYMENT OF LIABILITIES, PLAN EXPENSES AND RELATED MATTERS............28
         9.03         SHARING OF PARTICIPANT INFORMATION...................................29
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         9.04         REPORTING AND DISCLOSURE COMMUNICATIONS TO PARTICIPANTS..............29
         9.05         AUDITS REGARDING VENDOR CONTRACTS....................................29
         9.06         BENEFICIARY DESIGNATIONS.............................................30
         9.07         REQUESTS FOR IRS AND DOL OPINIONS....................................30
         9.08         FIDUCIARY MATTERS....................................................30
         9.09         CONSENT OF THIRD PARTIES.............................................30
         9.10         TAX COOPERATION......................................................30
         9.11         PLAN RETURNS.........................................................30

ARTICLE X. EMPLOYMENT-RELATED MATTERS......................................................31
         10.01        TERMS OF RESOURCES EMPLOYMENT........................................31
         10.02        HR DATA SUPPORT SYSTEMS..............................................31
         10.03        EMPLOYMENT OF EMPLOYEES WITH U.S. WORK VISAS.........................31
         10.04        CONFIDENTIALITY AND PROPRIETARY INFORMATION..........................31
         10.05        ACCRUED PAYROLL, BONUSES, PROFIT SHARING AND COMMISSIONS.............35
         10.06        PAYROLL AND WITHHOLDING..............................................35
         10.07        PERSONNEL AND PAY RECORDS............................................36
         10.08        NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES..........36

ARTICLE XI. GENERAL PROVISIONS.............................................................36
         11.01        EFFECT IF IPO AND/OR DISTRIBUTION DOES NOT OCCUR.....................36
         11.02        RELATIONSHIP OF PARTIES..............................................37
         11.03        AFFILIATED COMPANIES.................................................37
         11.04        INCORPORATION OF SEPARATION AGREEMENT PROVISIONS.....................37
         11.05        GOVERNING LAW........................................................37
         11.06        SEVERABILITY.........................................................37
         11.07        AMENDMENT............................................................38
         11.08        TERMINATION..........................................................38
         11.09        CONFLICT.............................................................38
         11.10        COUNTERPARTS.........................................................38

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                           EMPLOYEE MATTERS AGREEMENT

     This EMPLOYEE MATTERS AGREEMENT (this "Agreement") is entered into as of
December 31, 2000, between Reliant Energy, Incorporated, a Texas corporation
("REI"), and Reliant Resources, Inc., a Delaware corporation ("Resources").
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in Article I hereof.

                                    RECITALS

     WHEREAS, the Board of Directors of REI and Resources have each determined
that it would be appropriate and desirable for REI to separate the Resources
Group from the REI Group;

     WHEREAS, REI and Resources currently contemplate that Resources will make
an initial public offering ("IPO") of an amount of its common stock pursuant to
a registration statement on Form S-1 filed pursuant to the Securities Act of
1933, as amended, that will reduce REI's ownership of Resources by less than
20%;

     WHEREAS, REI currently contemplates that, following the IPO, REI's
successor holding company will distribute to the holders of its common stock, by
means of a pro rata distribution, all of the shares of Resources common stock it
then owns (the "Distribution");

     WHEREAS, in furtherance of the foregoing, REI and Resources have agreed to
enter into this Agreement to allocate between them assets, liabilities and
responsibilities with respect to certain employee compensation, benefit plans
and programs, and certain employment matters; and

     NOW, THEREFORE, in consideration of the foregoing and the covenants and
agreements set forth below, the parties hereto agree as follows:

                                   ARTICLE I.

                                   DEFINITIONS

     Wherever used in this Agreement, the following terms shall have the
meanings indicated below, unless a different meaning is plainly required by the
context. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to such terms in the Separation Agreement. The singular shall
include the plural, unless the context indicates otherwise. Headings of sections
are used for convenience of reference only, and in case of conflict, the text of
this Agreement, rather than such headings, shall control:

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     1.01 ACTION. "Action" means any demand, action, suit, countersuit,
arbitration, inquiry, proceeding or investigation by or before any federal,
state, local, foreign or international Governmental Authority or any arbitration
or mediation tribunal.

     1.02 AFFILIATES. "Affiliates" shall have the meaning set forth in the
Separation Agreement.

     1.03 AGREEMENT. "Agreement" means this Employee Matters Agreement,
including all the Addenda, Schedules and Exhibits hereto, and all amendments
made hereto from time to time.

     1.04 AICP. "AICP," when immediately preceded by "REI," means the Reliant
Energy, Incorporated Annual Incentive Compensation Plan, as amended and restated
effective January 1, 1999. When immediately preceded by "Resources," "AICP"
means the annual incentive compensation plan to be established by Resources
pursuant to Sections 2.03 and 7.05.

     1.05 ANCILLARY AGREEMENTS. "Ancillary Agreements" shall have the meaning
set forth in the Separation Agreement.

     1.06 ASO CONTRACTS. "ASO Contracts" is defined in Subsection 6.04(a) and
Schedule 6.04(a).

     1.07 BENEFIT RESTORATION PLAN. "Benefit Restoration Plan," when immediately
preceded by "REI," means the Reliant Energy, Incorporated Benefit Restoration
Plan, as established effective June 1, 1985 and thereafter amended from time to
time. When immediately preceded by "Resources," "Benefit Restoration Plan" means
the frozen Resources Benefit Restoration Plan to be established by Resources
pursuant to Sections 2.03 and 5.03.

     1.08 COBRA. "COBRA" means the continuation coverage requirements for "group
health plans" under Title X of the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended from time to time, and as codified in Code Section 4980B
and ERISA Sections 601 through 608.

     1.09 CODE. "Code" means the Internal Revenue Code of 1986, as amended from
time to time.

     1.10 COMMON STOCK. "Common Stock," when immediately preceded by "REI,"
means the common stock, without par value of REI. When immediately preceded by
"Resources," "Common Stock" means the common stock, par value $.001 per share,
of Resources.

     1.11 DEFERRED COMPENSATION PLAN. "Deferred Compensation Plan," when
immediately preceded by "REI," means the Reliant Energy, Incorporated Deferred
Compensation Plan, as established effective September 1, 1985, the Reliant
Energy, Incorporated Deferred Compensation Plan, as amended and restated
effective January 1, 1989, and the Reliant Energy, Incorporated Deferred
Compensation Plan, as amended and restated effective January 1, 1991, each such
plan as thereafter amended from time to time. Depending on the context, "REI

                                      -2-
<PAGE>   8

Deferred Compensation Plan" shall mean all of such plans or a particular one of
such plans. When immediately preceded by "Resources," "Deferred Compensation
Plan" means the deferred compensation plan to be established by Resources
pursuant to Sections 2.03 and 5.02 that corresponds to the REI Deferred
Compensation Plan.

     1.12 DISTRIBUTION. "Distribution" has the meaning set forth in the Recitals
hereof, as the same is further described in the Separation Agreement.

     1.13 DISTRIBUTION DATE. "Distribution Date" shall have the meaning set
forth in the Separation Agreement.

     1.14 DISTRIBUTION RATIO. "Distribution Ratio" means the number of shares of
Resources Common Stock each holder of REI Common Stock on the Record Date (or
such holder's designated transferee or transferees) will be entitled to receive
in the Distribution determined by multiplying the number of shares of REI Common
Stock held by such holder on the Record Date by a fraction, the numerator of
which is the number of shares of Resources Common Stock beneficially owned by
REI on the Record Date and the denominator of which is the number of shares of
REI Common Stock outstanding on the Record Date.

     1.15 DOL. "DOL" means the United States Department of Labor.

     1.16 EMPLOYMENT LIABILITIES. "Employment Liabilities" means all claims,
causes of action, demands, liabilities, debts or damages (known or unknown)
related to all employment matters addressed in this Agreement, including but not
limited to claims arising under federal, state or local statute (including,
without limitation, Title VII of the Civil Rights Act of 1964, as amended
("Title VII"); the Age Discrimination in Employment Act of 1967, including the
Older Workers Benefit Protection Act of 1990 ("ADEA"); the Civil Rights Act of
1866, as amended, the Civil Rights Act of 1991, the Americans with Disabilities
Act of 1990 ("ADA"), the Energy Reorganization Act, as amended, 42 U.S.C. ss.
5851; the Workers Adjustment and Retraining Notification Act of 1988; the
Pregnancy Discrimination Act of 1978; ERISA; FMLA; the Fair Labor Standards Act;
the Occupational Safety and Health Act; the Equal Pay Act); claims in connection
with workers' compensation or "whistle blower" statutes and/or contract, tort,
defamation, slander, wrongful termination or any other state or federal
regulatory, statutory or common law or local ordinance.

     1.17 ERISA. "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.

     1.18 ESOP "ESOP" means the employee stock ownership plan portion of the REI
Savings Plan.

     1.19 EXECUTIVE PLANS. "Executive Plans," when immediately preceded by
"REI," means the Houston Industries Incorporated Executive Life Insurance Plan
and the Houston Industries Incorporated Executive Benefits Plan. When
immediately preceded by "Resources," "Executive Plans" means the Resources
executive plans to be established pursuant to Sections 2.03 and 5.01 that
correspond to the respective REI Executive Plans.

                                      -3-
<PAGE>   9

     1.20 FLEXIBLE BENEFITS PLAN. "Flexible Benefits Plan," when immediately
preceded by "REI," means the Reliant Energy, Incorporated Flexible Benefits
Plan. When immediately preceded by "Resources," Flexible Benefits Plan means the
flexible benefits plan to be established by Resources pursuant to Section 2.03
and Article VI that corresponds to the REI Flexible Benefits Plan.

     1.21 FMLA. "FMLA" means the Family and Medical Leave Act of 1993, as
amended from time to time.

     1.22 FOREIGN PLAN. "Foreign Plan" means those Resources Plans maintained by
Resources for the benefit of its non-expatriate employees outside the U.S.

     1.23 FRINGE BENEFITS. "Fringe Benefits," when immediately preceded by
"REI," means the REI fringe benefits, plans, programs and arrangements sponsored
and maintained by REI (as set forth in Article VIII). When immediately preceded
by "Resources," "Fringe Benefits" means the fringe benefits, plans, programs and
arrangements established or to be established by Resources pursuant to Section
2.03 and Article VIII that correspond to the respective REI Fringe Benefits.

     1.24 GOVERNMENTAL AUTHORITY. "Governmental Authority" shall mean any
federal, state, local, foreign or international court, government, department,
commission, board, bureau, agency, official or other regulatory, administrative
or governmental authority.

     1.25 GROUP INSURANCE POLICIES. "Group Insurance Policies" is defined in
Subsection 6.04(b) and the Schedule thereto.

     1.26 HCFA. "HCFA" means the United States Health Care Financing
Administration.

     1.27 HEALTH AND WELFARE PLANS. "Health and Welfare Plans," when immediately
preceded by "REI," means the REI Health Plans, the REI Flexible Benefits Plan,
and the health and welfare plans listed on Schedule 1.27 established and
maintained by REI for the benefit of employees and retirees of any member of the
REI Group, and such other welfare plans or programs as may apply to such
employees and retirees as of the Distribution Date. When immediately preceded by
"Resources," "Health and Welfare Plans" means the Resources Health Plans, the
Resources Flexible Benefits Plan, and the health and welfare plans to be
established by Resources pursuant to Section 2.03 and Article VI that correspond
to the respective REI Health and Welfare Plans.

     1.28 HEALTH PLANS. "Health Plans," when immediately preceded by "REI,"
means the Plans set forth on Schedule 1.28, and any similar or successor plans,
programs or arrangements. When immediately preceded by "Resources," "Health
Plans" means the health plans, programs and arrangements to be established by
Resources pursuant to Section 2.03 and Article VI that correspond to the
respective REI Health Plans.

                                      -4-
<PAGE>   10

     1.29 HMO. "HMO" means a health maintenance organization that provides
benefits under the REI Health Plans or the Resources Health Plans.

     1.30 HMO AGREEMENTS. "HMO Agreements" is defined in Subsection 6.04(c) and
Schedule 6.04(c).

     1.31 IPO. "IPO" has the meaning set forth in the Recitals hereof, as the
same is further described in the Separation Agreement.

     1.32 IPO CLOSING DATE. "IPO Closing Date" means the first date on which the
proceeds of any sale of Resources Common Stock to the underwriters in the IPO
are received.

     1.33 IRS. "IRS" means the United States Internal Revenue Service.

     1.34 LEAVE OF ABSENCE PROGRAMS. "Leave of Absence Programs," when
immediately preceded by "REI," means the personal, medical, military and FMLA
leave offered from time to time under the personnel policies and practices of
REI. When immediately preceded by "Resources," "Leave of Absence Programs" means
the leave of absence programs established and maintained by Resources.

     1.35 LIABILITIES. "Liabilities" shall mean any and all Indebtedness (as
such term is defined in the Separation Agreement), 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.

     1.36 LICP. "LICP" means the 1994 Houston Industries Incorporated Long-Term
Incentive Compensation Plan and the Houston Industries Incorporated Long-Term
Incentive Compensation Plan (Established Effective as of January 1, 1989), each
such plan as thereafter amended from time to time.

     1.37 LTIP. "LTIP" means the Long-Term Incentive Plan of Reliant Resources,
Inc. as described in Section 7.04.

     1.38 NEW REI OPTION. "New REI Option" shall have the meaning set forth in
Section 7.01.

     1.39 NORAM RABBI TRUSTS. "NorAm Rabbi Trusts" means that certain trust
agreement dated as of August 8, 1989 by and between Arkla, Inc. and Boatmen's
Trust Company (also referred to as "Trust Agreement No. 1"), that certain trust
agreement dated as of August 8, 1989 by and between Arkla, Inc. and Boatmen's
Trust Company (also referred to as "Trust Agreement No. 2") and that certain
trust agreement dated as of August 8, 1989 by and between Arkla, Inc. and
Boatmen's Trust Company (also referred to as "Trust Agreement No. 3").

                                      -5-
<PAGE>   11

     1.40 OPTION. "Option," when immediately preceded by "REI," means an option
to purchase REI common stock pursuant to a Stock Plan. When immediately preceded
by "Resources," "Option" means an option to purchase Resources common stock
pursuant to a plan providing such benefits to be established by Resources
pursuant to Section 2.03 and Article VII.

     1.41 OUTSOURCE. "Outsource" is defined in Subsection 6.02(b).

     1.42 PARTICIPATING COMPANY. "Participating Company" means: (a) REI; (b) any
Person (other than an individual) that REI has approved for participation in,
has accepted participation in, and which is participating in, a Plan sponsored
by REI; or (c) any Person (other than an individual) which, by the terms of such
a Plan, participates in such a Plan sponsored by REI or any employees of which,
by the terms of such a Plan, participate in or are covered by such a Plan.

     1.43 PBGC. "PBGC" means the Pension Benefit Guaranty Corporation.

     1.44 PERSON. "Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.

     1.45 PLAN. "Plan," depending on the context, may mean any plan, policy,
program, payroll practice, arrangement, contract, trust, insurance policy, or
any agreement or funding vehicle providing compensation or benefits to
employees, former employees or directors of REI or Resources.

     1.46 QDRO. "QDRO" means a domestic relations order which qualifies under
Code Section 414(p) and ERISA Section 206(d) and which creates or recognizes an
alternate payee's right to, or assigns to an alternate payee, all or a portion
of the benefits payable to a participant under the REI Savings Plan or the
Retirement Plan.

     1.47 QMCSO. "QMCSO" means a medical child support order which qualifies
under ERISA Section 609(a) and which creates or recognizes the existence of an
alternate recipient's right to, or assigns to an alternate recipient the right
to, receive benefits for which a participant or beneficiary is eligible under
any of the Health Plans.

     1.48 RECORD DATE. "Record Date" means the close of business on the date to
be determined by the Board of Directors of REI as the record date for
determining the shareholders of REI entitled to receive shares of Resources
Common Stock in the Distribution.

     1.49 REI. "REI" means Reliant Energy, Incorporated a Texas corporation. In
all such instances in which REI is referred to in this Agreement, it shall also
be deemed to include a reference to each member of the REI Group, unless it
specifically provides otherwise; REI shall be solely responsible to Resources
for ensuring that each member of the REI Group complies with the applicable
terms of this Agreement.

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     1.50 REI EMPLOYEE. "REI Employee" means an individual who, on the
Distribution Date, is or was employed with any member of the REI Group and is
not a Resources Employee.

     1.51 REI GROUP. "REI Group" shall have the meaning set forth in the
Separation Agreement.

     1.52 REI STOCK VALUE. "REI Stock Value" means the average over the five
trading days immediately preceding the Distribution Date of the high and low
sales price (with dividend) of a share of REI Common Stock on the New York Stock
Exchange - Composite Transactions reporting system, as reported in The Wall
Street Journal on each of the five trading days immediately preceding the
Distribution Date.

     1.53 REI TERMINATED EMPLOYEE. "REI Terminated Employee" means any
individual who is a former employee of any member of the REI Group and who, on
the Distribution Date, is not a Resources Employee.

     1.54 REI WCP. "REI WCP" means the REI Workers' Compensation Program,
comprised of the various arrangements established by a member of the REI Group
to comply with the workers' compensation requirements of the states in which the
REI Group conducts business.

     1.55 RESOURCES. "Resources" means Reliant Resources, Inc., a Delaware
corporation. In all such instances in which Resources is referred to in this
Agreement, it shall also be deemed to include a reference to each member of the
Resources Group, unless it specifically provides otherwise; Resources shall be
solely responsible to REI for ensuring that each member of the Resources Group
complies with the applicable terms of this Agreement.

     1.56 RESOURCES EMPLOYEE. "Resources Employee" means any individual who, as
of the Distribution Date, is: (a) either actively employed by, or on a leave of
absence from, any member of the Resources Group; (b) a Resources Terminated
Employee; (c) an alternate payee under a QDRO, alternate recipient under a
QMCSO, beneficiary, covered dependent, or qualified beneficiary (as such term is
defined under COBRA), of an employee described in Subsection (a) or (b) above;
or (d) an employee or group of employees designated by REI and Resources, by
mutual agreement, as Resources Employees; but not (e) a Resources Retired
Employee. An employee may be a Resources Employee pursuant to this Section
regardless of whether such employee is, as of the Distribution Date, alive,
actively employed, on a temporary leave of absence from active employment, on
layoff, terminated from employment, retired or on any other type of employment
or post-employment status relative to a REI Plan, and regardless of whether, as
of the Distribution Date, such employee is then receiving any benefits from a
REI Plan.

     1.57 RESOURCES GROUP. "Resources Group" shall have the meaning set forth in
the Separation Agreement.

     1.58 RESOURCES RETIRED EMPLOYEE. "Resources Retired Employee" means any
individual who would have qualified as a Resources Employee but who retired on
or

                                      -7-
<PAGE>   13

after January 1, 2001 and on or before the Distribution Date and who is
identified as a Resources Retired Employee by mutual agreement between Resources
and REI on or before the Distribution Date.

     1.59 RESOURCES STOCK VALUE. "Resources Stock Value" means the average of
the high and low sales price of a share of Resources Common Stock on the New
York Stock Exchange - Composite Transactions reporting system, as reported in
The Wall Street Journal, for each of the five trading days immediately preceding
the Distribution Date.

     1.60 RESOURCES TERMINATED EMPLOYEE. "Resources Terminated Employee" means
any individual who is a former employee of any member of the REI Group who was
terminated from any member of the Resources Group on or after January 1, 2001
and on or before the Distribution Date. Notwithstanding the foregoing,
"Resources Terminated Employee" shall not, unless otherwise expressly provided
to the contrary in this Agreement, include: (a) an individual who is a REI
Employee at the Distribution Date; (b) an individual who is otherwise a
Resources Terminated Employee, but who is subsequently employed by any member of
the REI Group on or prior to the Distribution Date; or (c) a Resources Retired
Employee.

     1.61 RESOURCES UNION EMPLOYEES. "Resources Union Employees" mean Resources
Employees whose employment is covered by the terms of a collective bargaining
agreement.

     1.62 RESOURCES WCP CLAIMS. "Resources WCP Claims" is defined in Subsection
6.07(a)(i).

     1.63 RETIREMENT PLAN. "Retirement Plan" means the Reliant Energy,
Incorporated Retirement Plan, a defined benefit plan.

     1.64 SAVINGS PLAN. "Savings Plan" when immediately preceded by "REI," means
the Reliant Energy, Incorporated Savings Plan, a defined contribution plan. When
immediately preceded by "Resources," " Savings Plan" means the savings plan to
be established by Resources pursuant to Sections 2.03 and 4.01. When immediately
preceded by "REMA," "Savings Plan" means the Reliant Energy Mid-Atlantic Savings
Plan for Non-Union Employees, a defined contribution plan.

     1.65 SAVINGS RESTORATION PLAN. "Savings Restoration Plan," when immediately
preceded by REI, means the Reliant Energy, Incorporated Savings Restoration
Plan, as established effective January 1, 1991 and thereafter amended from time
to time. When immediately preceded by "Resources," "Savings Restoration Plan"
means the plan to be established by Resources pursuant to Section 5.03(b) which
corresponds to the REI Savings Restoration Plan.

     1.66 SEC. "SEC" means the United States Securities and Exchange Commission.

                                      -8-
<PAGE>   14

     1.67 SEPARATION. "Separation" shall have the meaning set forth in the
Separation Agreement.

     1.68 SEPARATION AGREEMENT. "Separation Agreement" means the Master
Separation Agreement between REI and Resources entered into as of December 31,
2000 of which this Agreement is an Exhibit.

     1.69 SEPARATION DATE. "Separation Date" shall have the meaning set forth in
the Separation Agreement.

     1.70 SEVERANCE PLANS. "Severance Plans," when immediately preceded by
"REI," means the severance pay plans established and maintained by REI. When
immediately preceded by "Resources," "Severance Plans" means the severance pay
plans established and maintained by Resources.

     1.71 STOCK PLAN. "Stock Plan," when immediately preceded by "REI," means
the LICP, the Houston Industries, Incorporated Stock Plan for Outside Directors,
the Reliant Energy, Incorporated Business Unit Performance Share Plan, and the
Reliant Energy, Incorporated and Subsidiaries Common Stock Participation Plan
for Designated New Employees and Non-Officer Employees.

     1.72 STOCK PURCHASE PLAN. "Stock Purchase Plan" means the Reliant
Resources, Inc. Employee Stock Purchase Plan as established by Resources
pursuant to Section 7.03.

     1.73 SUBSIDIARY. "Subsidiary" shall have the meaning set forth in the
Separation Agreement.

     1.74 TAX ALLOCATION AGREEMENT. "Tax Allocation Agreement" means the
Ancillary Agreement which is attached as an exhibit to the Separation Agreement.

     1.75 UNION PLANS. "Union Plans," means all Plans maintained by REI or
Resources for the benefit of certain of their bargaining unit employees.

                                  ARTICLE II.

                               GENERAL PRINCIPLES

     2.01 ASSUMPTION OF RESOURCES LIABILITIES. Except as specified otherwise in
this Agreement, or as mutually agreed upon by Resources and REI from time to
time, REI hereby assumes and agrees to pay, perform, fulfill and discharge, in
accordance with their respective terms, subject to Section 9.02 and to the
indemnification provisions of Section 2.02, all Liabilities to or relating to
Resources Retired Employees, to the extent relating to, arising out of or
resulting from former employment with any member of the REI Group and/or the
Resources Group (including Liabilities arising under or relating to REI Plans
and Resources Plans). Except as specified otherwise in this Agreement, or as
mutually agreed upon by Resources and REI from time to time, Resources hereby
assumes and agrees to pay, perform, fulfill and discharge, in accordance with
their respective terms, all of the following: (a) subject to Section 9.02 and to
the indemnification provisions of Section 2.02, all Liabilities to or relating
to Resources Employees, in each case relating to, arising out of or resulting
from employment by any member of the REI Group before the Distribution Date,
(including Liabilities arising under or relating to REI Plans and Resources

                                      -9-
<PAGE>   15

Plans); (b) subject to Section 9.02 and to the indemnification provisions of
Section 2.02, all other Liabilities to or relating to employees of any member of
the Resources Group, to the extent relating to, arising out of or resulting from
future, present or former employment with any member of the Resources Group
(including Liabilities arising under or relating to REI Plans and Resources
Plans); (c) subject to Section 9.02 and to the indemnification provisions of
Section 2.02, all Liabilities relating to, arising out of or resulting from any
other actual or alleged employment relationship with any member of the Resources
Group; and (d) subject to Section 9.02 and to the indemnification provisions of
Section 2.02, all other Liabilities relating to, arising out of or resulting
from obligations, liabilities and responsibilities expressly assumed or retained
by any member of the Resources Group or a Resources Plan, pursuant to this
Agreement.

     2.02 EMPLOYMENT LIABILITIES INDEMNIFICATION

         (a) Indemnification by Resources. Except as otherwise provided in this
Agreement, including Subsection 2.02(c), Resources shall, for itself and as
agent for each member of the Resources Group, indemnify, defend (or, where
applicable, pay the defense costs for) and hold harmless the REI Indemnitees (as
such term is defined in the Separation Agreement) from and against any and all
Employment Liabilities that any third party seeks to impose upon the REI
Indemnitees, or which are imposed upon the REI Indemnitees, if and to the extent
such Employment Liabilities relate to, arise out of or result from any of the
following items (without duplication):

             (i)   any acts or omissions or alleged acts or omissions by or on
                   behalf of any member or person employed by a member of the
                   Resources Group in the conduct of the Resources Business;

             (ii)  any claim by an officer of any member of the Resources Group
                   (who is an officer as of the IPO Closing Date) against any
                   member or employee of any member of the REI Group except with
                   respect to benefit obligations of Resources Employees assumed
                   by REI pursuant to a specific provision of this Agreement;
                   and

             (iii) any breach by Resources or any member or person employed by a
                   member of the

                                      -10-
<PAGE>   16

                   Resources Group of this Agreement, the Separation Agreement
                   or any other Ancillary Agreement.

     In the event that any member of the Resources Group makes a payment to the
REI Indemnitees hereunder, and the Employment Liability on account of which such
payment was made is subsequently diminished, either directly or through a
third-party recovery, REI will promptly repay (or will procure a REI Indemnitee
to promptly repay) such member of the Resources Group the amount by which the
payment made by such member of the Resources Group exceeds the actual cost of
the associated indemnified Employment Liability.

         (b) Indemnification by REI. Except as otherwise provided in this
Agreement, including Subsection 2.02(c), REI shall, for itself and as agent for
each member of the REI Group, indemnify, defend (or, where applicable, pay the
defense costs for) and hold harmless the Resources Indemnitees (as such term is
defined in the Separation Agreement) from and against any and all Employment
Liabilities that any third party seeks to impose upon the Resources Indemnitees,
or which are imposed upon the Resources Indemnitees, if and to the extent such
Employment Liabilities relate to, arise out of or result from any of the
following items (without duplication):

             (i)   any acts or omissions or alleged acts or omissions by or on
                   behalf of any member or person employed by a member of the
                   REI Group in the conduct of the REI Business;

             (ii)  any claim by an officer of any member of the REI Group (who
                   is an officer as of the IPO Closing Date) against any member
                   or employee of any member of the Resources Group; and

             (iii) any breach by REI or any member or person employed by a
                   member of the REI Group of this Agreement, the Separation
                   Agreement or any other Ancillary Agreement.

     In the event that any member of the REI Group makes a payment to the
Resources Indemnitees hereunder, and the Employment Liability on account of
which such payment was made is subsequently diminished, either directly or
through a third-party recovery, Resources will promptly repay (or will procure a
Resources Indemnitee to promptly repay) such member of the REI Group the amount
by which the payment made by such member of the REI Group exceeds the actual
cost of the indemnified Employment Liability.

         (c) Exceptions. In accordance with the current practice in effect as of
the execution of the Agreement, with respect to claims for benefits or
compensation, if an underlying act or omission as contemplated in Subsections
2.02(a) or 2.02(b) occurs and

                                      -11-
<PAGE>   17

such act or omission constitutes the principal basis for such a claim, then
Subsection 2.02(a) or (b) shall apply, as applicable, to establish
indemnification obligations. If, however, no specific act or omission occurs
that is attributable to REI or Resources and the principal underlying basis for
a claim for benefits or compensation involves plan administration or other
similar systemic type activities related to maintenance of plans,
notwithstanding Subsections 2.02(a) and (b), in accordance with the current
practice in effect as of the execution of the Agreement, Resources and REI shall
be responsible for their pro rata allocated share of costs to defend such claim.
In addition, if a claim relates specifically to the transfer or other movement
of employment between REI and Resources in connection with the Separation and to
the employee benefit changes made in connection therewith, then notwithstanding
Subsections 2.02(a) and (b), in accordance with the current practice in effect
as of the execution of the Agreement, Resources and REI shall be responsible for
their pro rata allocated share of costs to defend such claim.

         (d) Relationship to Article III of Separation Agreement.

             (i)   Unless expressly modified in this Section 2.02, all other
                   provisions of Article III of the Separation Agreement will
                   apply to an indemnifiable claim.

             (ii)  Any claim which is not an Employment Liability will only be
                   subject to the provisions of the Separation Agreement.

     2.03 ESTABLISHMENT OF RESOURCES PLANS.

         (a) Health and Welfare Plans and Retiree Medical. Except as specified
     otherwise in this Agreement, effective as of the Distribution Date or such
     other date(s) as REI and Resources may mutually agree, Resources shall
     establish the Resources Health and Welfare Plans. The foregoing Resources
     Health and Welfare Plans as in effect as of the Distribution Date shall be
     substantially comparable to the REI Plans as in effect on the Distribution
     Date; provided, however, that Resources shall not establish a substantially
     comparable retiree life or retiree medical program (except as may be
     required for certain, if any, Resources Union Employees) but shall, in its
     discretion, make available a group insurance arrangement through which
     eligible retired employees of the members of the Resources Group may
     purchase retiree medical insurance at group rates.

         (b) Savings Plan and Fringe Benefits. Except as specified otherwise in
     this Agreement, effective as of the Distribution Date or such other date(s)
     as REI and Resources may mutually agree, Resources shall establish the
     Resources Savings Plan as more fully described in Article IV and the
     Resources Fringe Benefits as more fully described in Article VIII.

                                      -12-
<PAGE>   18

         (c) Equity and Other Compensation. Except as specified otherwise in
     this Agreement, effective as of January 1, 2001, or such other date(s) as
     REI and Resources may mutually agree, Resources shall establish the
     Resources AICP, the Resources Stock Purchase Plan and the LTIP, and
     effective as of the Distribution Date or such other date(s) as REI and
     Resources may mutually agree, Resources shall establish such Plans as may
     be determined to be appropriate, including, without limitation, the
     Resources Deferred Compensation Plan, Resources Savings Restoration Plan,
     Resources Benefit Restoration Plan and Resources Executive Plans. The
     foregoing Resources Plans shall be substantially comparable to the REI
     Plans as in effect on the Distribution Date.

         (d) Resources Under No Obligation to Maintain Plans. Except as
     specified otherwise in this Agreement, nothing in this Agreement shall
     preclude Resources, at any time from amending, merging, modifying,
     terminating, eliminating, reducing, or otherwise altering in any respect
     any Resources Plan, any benefit under any Resources Plan or any trust,
     insurance policy or funding vehicle related to any Resources Plan (to the
     extent permitted by law).

     2.04 RESOURCES'S PARTICIPATION IN REI PLANS.

         (a) Participation in REI Plans.

             (i)   Except as specified otherwise in this Agreement, or as REI
                   and Resources may mutually agree, Resources shall adopt as a
                   Participating Company the REI Plans in effect as of January
                   1, 2001, to the extent that Resources has not yet established
                   substantially comparable Plans. Effective as of any date on
                   or after January 1, 2001 and before the Distribution Date (or
                   such other date as REI and Resources may mutually agree
                   upon), any member of the Resources Group not described in the
                   preceding sentence may, at its request and with the consent
                   of REI and Resources, become a Participating Company in any
                   or all of the REI Plans, to the extent that Resources has not
                   yet established a substantially comparable Plan.

             (ii)  On and after the Distribution Date, Resources Retired
                   Employees shall continue to participate in the REI Plans for
                   which they are eligible as of the Distribution Date,
                   including, but not limited to, the Retirement Plan, REI
                   Savings Plan and any REI Plan as provided in Article V.

         (b) REI's General Obligations as Plan Sponsor.

                                      -13-
<PAGE>   19

             (i)   To the extent that Resources is a Participating Company in
                   any REI Plan(s), REI shall continue to administer, or cause
                   to be administered, in accordance with their terms and
                   applicable law, such REI Plan(s), and shall have the sole and
                   absolute discretion and authority to interpret the REI
                   Plan(s), as set forth therein. REI shall not, without first
                   consulting with Resources, amend or terminate any material
                   feature of any REI Plan in which Resources is a Participating
                   Company, except to the extent such amendment or termination
                   would not affect any benefits of Resources Employees under
                   such Plan or as may be necessary or appropriate to comply
                   with applicable law.

             (ii)  With regard to Resources Retired Employees participating in
                   REI Plans after the Distribution Date, REI shall continue to
                   administer, or cause to be administered, in accordance with
                   their terms and applicable law, such REI Plans, and shall
                   have sole and absolute discretion and authority to interpret
                   such Plans or amend or terminate such Plans, as set forth
                   therein.

         (c) Resources's General Obligations as Participating Company. Resources
     shall perform with respect to its participation in the REI Plans, the
     duties of a Participating Company as set forth in each such Plan or any
     procedures adopted pursuant thereto, including (without limitation): (i)
     assisting in the administration of claims, to the extent requested by the
     claims administrator of the applicable REI Plan; (ii) cooperating fully
     with REI Plan auditors, benefit personnel and benefit vendors; (iii)
     preserving the confidentiality of all financial arrangements REI has or may
     have with any vendors, claims administrators, trustees or any other entity
     or individual with whom REI has entered into an agreement relating to the
     REI Plans; and (iv) preserving the confidentiality of participant
     information (including, without limitation, health information in relation
     to FMLA leaves) to the extent not specified otherwise in this Agreement.

         (d) Termination of Participating Company Status. Except as specified
     otherwise in this Agreement or otherwise may be mutually agreed upon by REI
     and Resources, effective as of the Distribution Date or such other date as
     Resources establishes a substantially comparable Plan (as specified in
     Section 2.03 or otherwise in this Agreement), Resources shall automatically
     cease to be a Participating Company in the corresponding REI Plan.

                                      -14-
<PAGE>   20

     2.05 TERMS OF PARTICIPATION BY RESOURCES EMPLOYEES IN RESOURCES PLANS.

     (a) Non-Duplication of Benefits. As of the Distribution Date or such other
         date that applies to the particular Resources Plan, the separate
         Resources Plans shall be, with respect to employees of the Resources
         Group, in all respects the successors in interest to, and shall not
         provide benefits that duplicate benefits provided by, the corresponding
         REI Plans. REI and Resources shall mutually agree, if necessary, on
         methods and procedures, including amending the respective Plan
         documents, to prevent employees of the Resources Group from receiving
         duplicate benefits from the REI Plans and the Resources Plans.

     (b) Service Credit. Except as specified otherwise in this Agreement, with
         respect to Resources Employees, each Resources Plan shall provide that
         all service, all compensation and all other benefit-affecting
         determinations that, as of the Distribution Date, were recognized under
         the corresponding REI Plan shall, as of the Distribution Date, receive
         full recognition and credit and be taken into account under such
         Resources Plan to the same extent as if such items occurred under such
         Resources Plan, except to the extent that duplication of benefits would
         result. The service crediting provisions shall be subject to any
         respectively applicable "service bridging," "break in service,"
         "employment date," or "eligibility date" rules under the Resources
         Plans and the REI Plans.

     2.06 FOREIGN PLANS. Resources intends to maintain all Foreign Plans in
existence as of January 1, 2001 in its discretion in accordance with the
applicable plan documents and applicable laws.

     2.07 UNION PLANS. REI and/or Resources shall continue to maintain all Union
Plans in existence as of January 1, 2001 up to and after the Distribution Date
as required by the terms of the applicable collective bargaining agreements and
in accordance with the terms of those plans and subject to collective
bargaining. For example, but not by way of limitation, Resources will establish
qualified plans which mirror the Retirement Plan and REI Savings Plan for the
benefit of certain Resources Union Employees, and will assume the sponsorship of
certain other tax qualified plans for the benefit of certain other Resources
Union Employees.

                                      -15-
<PAGE>   21

     2.08 RELIANT ENERGY TEGCO, INC. EMPLOYEES. Notwithstanding any provision of
this Agreement to the contrary, effective as of January 1, 2001 through the
Distribution Date, non-union employees of Reliant Energy Tegco, Inc., a wholly
owned subsidiary of REI, shall participate in all employee benefit plans
sponsored by REI and/or Resources in the same manner and to the same extent as
such employees would participate in such plans if such employees were employed
by a member of the Resources Group rather than a member of the REI Group.

     2.09 VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS. REI shall continue to
sponsor and shall assume all assets and Liabilities associated with and shall
retain the Houston Industries Incorporated Group Welfare Benefits Trust
Agreement (as amended and restated effective January 1, 1989), Houston Lighting
and Power Company Union Retirees' Medical and Dental Benefits Trust Agreement
(effective December 1, 1995), Houston Lighting and Power Company Non-Union
Retirees' Medical and Dental Benefits Trust Agreement (effective December 1,
1995) and the Houston Lighting and Power Company Retirees' Life Insurance
Benefits Trust Agreement (effective December 1, 1995).

                                  ARTICLE III.

                              DEFINED BENEFIT PLAN

     3.01 RESOURCES EMPLOYEES' PARTICIPATION IN RETIREMENT PLAN. Effective as of
February 5, 2001, REI shall amend the Retirement Plan to provide that employees
who become employed by any member of the Resources Group on or after February 5,
2001 shall not be eligible to participate in the Retirement Plan. Effective as
of March 1, 2001, REI shall amend the Retirement Plan to provide that eligible
employees of any member of the Resources Group shall be fully vested in their
Cash Balance Accounts (as such term is defined in the Retirement Plan) under the
Retirement Plan and to provide that such employees shall no longer participate
in the Retirement Plan on and after such date. In addition, the Retirement Plan
shall be amended to generally provide a transition benefit for certain eligible
employees of the members of the Resources Group who, as of December 31, 2000,
were participating in the Retirement Plan, were eligible for a Grandfathered
Benefit under Section 7.6(a) of the Retirement Plan and generally had attained
the age of 42 and completed at least five years of Vesting Service (as such term
is defined in the Retirement Plan) under the Retirement Plan to reflect the
loss, if any, of such participants' Grandfathered Benefit under Section 7.6(a)
of the Retirement Plan and the value of such participants' retiree medical
accounts. Such transition benefit, if any, will be added to each such eligible
participant's Cash Balance Account under the Retirement Plan or the REI Benefit
Restoration Plan to the extent the benefit limitations of the Code prevent such
transition benefit from being paid under the Retirement Plan. Such transition
benefit shall not include extra age and/or service which may be provided under
an employment, severance or supplemental pension agreement with an employee of
any member of the Resources Group. Effective as of the IPO Closing Date, REI
shall assume all Liabilities to or relating to the employees of any member of
the Resources Group and the Resources Retired Employees under the Retirement
Plan. Notwithstanding the foregoing to the contrary, this Section 3.01 shall not
apply to Resources Union Employees.

                                      -16-
<PAGE>   22

                                  ARTICLE IV.

                            DEFINED CONTRIBUTION PLAN

     4.01 RESOURCES SAVINGS PLAN. Effective as of March 1, 2001, the account
balances of the employees of the members of the Resources Group who participate
in the REI Savings Plan shall be fully vested, and Resources, as a Participating
Company in the REI Savings Plan, shall be responsible for providing in cash
and/or Resources Common Stock a fully vested employer matching contribution on
up to 6% of each such employee's eligible covered compensation. In addition,
Resources may provide a fully vested discretionary employer contribution at the
end of each plan year based upon such employees' eligible covered compensation
and/or a fully vested discretionary employer contribution each payroll period
based upon the first $85,000 of each such employee's eligible covered
compensation for the year 2001. Effective as of the Distribution Date, Resources
shall establish, or cause to be established, a trust, which is intended to be
qualified under Code Section 401(a), exempt from taxation under Code Section
501(a)(1), and forming the separate Resources Savings Plan. Except as provided
in this Article IV, such Resources Savings Plan shall be substantially
comparable to the REI Savings Plan as applicable to employees of members of the
Resources Group immediately prior to the Distribution Date. As soon as
reasonably practicable following the Distribution Date, REI shall cause to be
determined for the REI Savings Plan the amount of assets to be transferred from
the REI Savings Plan to the Resources Savings Plan. Such amount shall be equal
to the greater of (a) the amount required under Code Section 414(l), or (b) the
amount within the sub-account(s) within the Reliant Energy, Incorporated Savings
Trust that has been separately maintained and accounted for on behalf of
employees of the members of the Resources Group less the amount attributable to
Resources Retired Employees. Notwithstanding the foregoing to the contrary, this
Section 4.01 shall not apply to Resources Union Employees.

     4.02 ESOP. On and after the Distribution Date, Resources Employees shall no
longer participate in the ESOP, and the Resources Savings Plan shall not contain
an ESOP. Therefore, the ESOP shall continue as a component of the REI Savings
Plan. After the Distribution Date, the ESOP will hold shares of Resources Common
Stock, and applicable law generally prohibits such plans from holding securities
that are not "qualifying employer securities" within the meaning of Code Section
4975(e)(8) for more than 90 days after the Distribution Date unless an extension
is granted by the IRS. Accordingly, REI will request that the IRS grant an
extension of such 90-day period to such a time as the REI Savings Plan's
independent fiduciary deems prudent and the IRS deems acceptable to allow the
independent fiduciary to dispose of the Resources Common Stock received by the
ESOP on account of the Distribution and to reinvest in qualifying employer
securities in a manner consistent with the best interests of the ESOP
participants. Notwithstanding the foregoing to the contrary, this Section 4.02
shall not apply to Resources Union Employees who may be eligible to participate
in the ESOP.

     4.03 REMA SAVINGS PLAN. Effective as of March 1, 2001, REI shall amend the
REMA Savings Plan to provide the same benefit structure for eligible employees
under the REMA Savings Plan as will be provided as of such date for eligible
non-union employees of the members of the Resources Group participating in the
REI Savings Plan (as

                                      -17-
<PAGE>   23

described in Section 4.01). Effective as of the Distribution Date, Resources
shall assume the sponsorship of the REMA Savings Plan and shall merge such plan
into the Resources Savings Plan as soon as practicable following the
Distribution Date.

     4.04 RESOURCES RETIRED EMPLOYEES. Notwithstanding the above, account
balances of Resources Retired Employees, if any, shall remain in the REI Savings
Plan after the Distribution Date.

                                   ARTICLE V.

                            EXECUTIVE AND OTHER PLANS

     5.01 EXECUTIVE PLANS.

         (a) Establishment of Resources Executive Plans. Effective as of the
     Distribution Date or such other date as REI and Resources may mutually
     agree, Resources shall establish the Resources Executive Plans which shall
     be substantially comparable to the REI Executive Plans. As of the
     Distribution Date, Resources shall assume all Liabilities to or relating to
     the Resources Employees under the REI Executive Plans, and REI shall
     transfer the split dollar life insurance policies under the Executive Life
     Insurance Plan attributable to such Resources Employees to Resources. As of
     the Distribution Date, REI shall assume all Liabilities to or relating to
     Resources Retired Employees under the REI Executive Plans.

         (b) Participation in Executive Plans. Effective as of the Distribution
     Date or such other date as Resources establishes the Resources Executive
     Plans, eligible Resources Employees determined in accordance with the terms
     of the applicable plans shall only be eligible to participate in the
     Resources Executive Plans.

     5.02 DEFERRED COMPENSATION PLAN.

         (a) Establishment of Resources Deferred Compensation Plan. Effective as
     of the Distribution Date or such other date as REI and Resources may
     mutually agree, Resources shall establish the Resources Deferred
     Compensation Plan which shall be substantially comparable to the REI
     Deferred Compensation Plan. As of the Distribution Date, Resources shall
     assume all Liabilities to or relating to the Resources Employees under the
     REI Deferred Compensation Plan; provided, however, that REI shall transfer
     a cash amount equal to the cost of such Liabilities transferred to
     Resources as soon as practicable following the Distribution Date. As of the
     Distribution Date, REI shall assume all Liabilities to or relating to
     Resources Retired Employees, and all corporate owned life insurance
     policies associated with the REI Deferred Compensation Plan shall remain at
     REI.

                                      -18-
<PAGE>   24

         (b) Participation in Deferred Compensation Plan. Resources Employees
     who consent to an amendment to treat their employment with Resources as
     continued employment under the REI Deferred Compensation Plan shall not be
     treated as terminated employees under such Plan(s) as of the Distribution
     Date. Effective as of the Distribution Date or such other date as Resources
     establishes the Resources Deferred Compensation Plan, eligible Resources
     Employees determined in accordance with the terms of the Plan shall only be
     eligible to participate prospectively in the Resources Deferred
     Compensation Plan.

     5.03 BENEFIT AND SAVINGS RESTORATION PLANS.

         (a) Benefit Restoration Plan. Effective as of March 1, 2001, employees
     of the members of the Resources Group shall no longer accrue benefits under
     the REI Benefit Restoration Plan. Effective as of the Distribution Date or
     such other date as REI and Resources may mutually agree, Resources shall
     establish a frozen Resources Benefit Restoration Plan which shall be
     substantially comparable to the REI Benefit Restoration Plan. As of the
     Distribution Date, Resources shall assume all Liabilities to or relating to
     the Resources Employees under the REI Benefit Restoration Plan (except
     Liabilities under the REI Benefit Restoration Plan associated with the
     transition benefit described in Section 3.01); provided, however, that REI
     shall transfer a cash amount equal to the cost of such Liabilities
     transferred to Resources as soon as practicable following the Distribution
     Date. Also, as of the Distribution Date, Resources shall assume all
     Liabilities under the REI Benefit Restoration Plan associated with the
     transition benefit described in Section 3.01; provided, however, that REI
     shall transfer a cash amount equal to two-thirds (2/3) of the cost of such
     Liabilities transferred to Resources as soon as practicable following the
     Distribution Date. As of the Distribution Date, REI shall assume all
     Liabilities to or relating to the Resources Retired Employees under the REI
     Benefit Restoration Plan; provided, however that Resources shall
     irrevocably and unconditionally guarantee, in the event that REI becomes
     insolvent, the due and punctual payment and satisfaction, when and as due,
     of all Liabilities relating to the REI Benefit Restoration Plan for all
     persons who have the status of retirees under the REI Benefit Restoration
     Plan as of the Distribution Date. For purposes of this Section 5.03(a), the
     Liabilities under the REI Benefit Restoration Plan include any supplemental
     pension benefits provided under an employment, severance or supplemental
     pension agreement with (i) an employee of any member of the Resources Group
     and (ii) any person who has the status of a retiree under the REI Benefit
     Restoration Plan as of the Distribution Date.

     (b) Savings Restoration Plan.

             (i)   Establishment of Resources Savings Restoration Plan.
                   Effective as of the Distribution Date or such other date as
                   REI

                                      -19-
<PAGE>   25

                   and Resources may mutually agree, Resources shall establish
                   the Resources Savings Restoration Plan which shall be
                   substantially comparable to the REI Savings Restoration Plan.
                   As of the Distribution Date, Resources shall assume all
                   Liabilities to or relating to the Resources Employees under
                   the REI Savings Restoration Plan. As of the Distribution
                   Date, REI shall assume all Liabilities to or relating to the
                   Resources Retired Employees under the REI Savings Restoration
                   Plan.

             (ii)  Participation in the Resources Savings Restoration Plan.
                   Effective as of the Distribution Date or such other date as
                   Resources establishes the Resources Savings Restoration Plan,
                   eligible Resources Employees determined in accordance with
                   the terms of the applicable Plan shall only be eligible to
                   participate in the Resources Savings Restoration Plan.

     5.04 RABBI TRUSTS. Effective as of the Distribution Date, or such other
date as REI and Resources may mutually agree, Resources may establish a Rabbi
Trust, which shall be substantially similar to the Reliant Energy, Incorporated
Executive Deferred Compensation Trust. Effective as of the Distribution Date,
REI shall continue to sponsor and shall assume all assets and Liabilities
relating to the NorAm Rabbi Trusts.

     5.05 SEVERANCE PLANS. Resources shall establish such severance plans as it
deems necessary in its discretion. The REI Severance Plans shall provide that no
Resources Employee shall become eligible for severance benefits on account of
Resources ceasing to be a Subsidiary of REI as of the Distribution Date.

                                   ARTICLE VI.

                            HEALTH AND WELFARE PLANS

     6.01 ASSUMPTION OF HEALTH AND WELFARE PLAN LIABILITIES.

         (a) General - Health and Welfare Plans. Each REI Health and Welfare
     Plan shall retain all Liabilities incurred through the Distribution Date or
     such other date as REI and Resources may mutually agree under each such REI
     Health and Welfare Plan, whether or not claims are filed before the
     Distribution Date, by or on behalf of Resources Employees or their spouses
     or dependents. Resources shall indemnify each such plan against the
     pre-Distribution Date

                                      -20-
<PAGE>   26

     Liabilities by paying the current cost of coverage associated with such
     Resources Employees or their spouses or dependents, to the extent not
     already paid.

         (b) Substantially Similar Self-Insured Plans. Any Health and Welfare
     Plan self-insured by REI and substantially similar to any Resources Health
     and Welfare Plan established as of the Distribution Date, or such other
     date as agreed upon by REI and Resources, shall cease to be responsible for
     Liabilities to or relating to Resources Employees under the REI Health and
     Welfare Plans as of the Distribution Date, and the corresponding Resources
     Health and Welfare Plans shall assume such Liabilities as of the
     Distribution Date.

         (c) Retiree Life and Medical. Effective as of March 1, 2001, employees
     of the members of the Resources Group shall no longer be eligible to
     participate in REI's retiree life insurance plan and retiree medical plan,
     and REI shall assume all Liabilities under REI's retiree medical plan for
     certain eligible employees of the members of the Resources Group who as of
     March 1, 2001 have generally attained the age of 55 with at least 5 years
     of service after age 50 under such Plan, provided, however, that such
     employees shall not accrue any additional benefits under such Plan. Except
     as otherwise expressly provided above, no other employee of any member of
     the Resources Group shall be entitled to benefits under the REI retiree
     medical plan. Also, effective as of March 1, 2001, Resources shall make
     available a non-subsidized group insurance arrangement through which
     eligible retired employees of the members of the Resources Group may
     purchase retiree medical insurance at group rates. Notwithstanding the
     foregoing to the contrary, Resources shall maintain any retiree medical and
     retiree life insurance for certain Resources Union Employees as may be
     required pursuant to Section 2.07.

     6.02 CLAIMS FOR HEALTH AND WELFARE PLANS.

         (a) Administration of REI Claims. REI shall administer claims incurred
     under the REI Health and Welfare Plans by Resources Employees before the
     Distribution Date, but only to the extent that Resources has not, before
     the Distribution Date, established and assumed administrative
     responsibility for a comparable Plan. Any determination made or settlements
     entered into by REI with respect to such claims shall be final and binding.

         (b) Outsourcing of Claims by REI. REI shall have the right to engage a
     third party administrator, vendor, or insurance company to administer
     ("Outsource") claims incurred under the REI Health and Welfare Plans,
     including claims incurred by employees of the members of the Resources
     Group before the Distribution Date. REI may determine the manner and extent
     of such Outsourcing, including the selection of one or more third party
     administrators, vendors, or insurance companies and the ability to transfer
     the liability for such claims to one or more independent insurance
     companies. REI has Outsourced

                                      -21-
<PAGE>   27

     administration of many REI Health and Welfare Plans, as set forth in
     Section 6.04 and the Schedule thereto.

         (c) Outsourcing of Claims by Resources. REI shall use its commercially
     reasonable best efforts for and on behalf of Resources to negotiate for
     Outsourcing arrangements with its third party administrators, vendors, or
     insurance companies with comparable features to each of REI's current
     Outsourcing arrangements.

     6.03 POST-DISTRIBUTION TRANSITIONAL ARRANGEMENTS.

         (a) Continuance of Elections, Co-Payments and Maximum Benefits.

              (i) As of the Distribution Date or such other date as REI and
         Resources may mutually agree, Resources shall cause the Resources
         Health and Welfare Plans to maintain substantially comparable coverage
         and contribution elections, if any, made by Resources Employees under
         the REI Health and Welfare Plans and apply such elections under the
         Resources Health and Welfare Plans for the remainder of the period or
         periods, if any, for which such elections are by their terms
         applicable. The transfer or other movement of employment between REI
         and Resources in connection with the Distribution shall constitute
         neither a "status change" under the REI Health and Welfare Plans or the
         Resources Health and Welfare Plans nor a "qualifying event," as defined
         under COBRA.

              (ii) On and after the Distribution Date, Resources shall cause the
         Resources Health Plans to recognize and give credit for all benefits
         paid to Resources Employees under the REI Health Plans for (A) all
         amounts applied to deductibles, out of pocket maximums, co-payments and
         other applicable benefit coverage limits with respect to which such
         expenses have been incurred by Resources Employees under the REI Health
         Plans for the remainder of the calendar year in which the Distribution
         Date occurs and (B) all benefits paid to Resources Employees under the
         REI Health Plans for purposes of determining when such persons have
         reached their lifetime maximum benefits under the Resources Health
         Plans. Notwithstanding the above, Resources's obligations under this
         Subsection 6.03(a)(ii) shall be limited by the market availability of
         health insurance products or other arrangements satisfying the criteria
         described above. Resources shall use its commercially reasonable best
         efforts to locate and engage the services of a vendor whose policies or
         other arrangements meet the requirements above.

                                      -22-
<PAGE>   28

         (b) Flexible Benefits Plan. To the extent any Resources Employee
     contributed to an account under the REI Flexible Benefits Plan during the
     calendar year that includes the Distribution Date, then effective as of the
     Distribution Date, REI shall transfer to the Resources Flexible Benefits
     Plan the account balances of Resources Employees for such calendar year
     under the REI Flexible Benefits Plan, regardless of whether the account
     balance is positive or negative.

         (c) HCFA Administration. As of the Distribution Date, Resources shall
     assume all Liabilities relating to, arising out of or resulting from claims
     verified by REI or Resources under the HCFA data match reports that relate
     to Resources Employees.

     6.04 VENDOR AND INSURANCE ARRANGEMENTS. REI shall use its commercially
reasonable best efforts for and on behalf of Resources to negotiate for,
effective as of the Distribution Date or such other date as REI and Resources
mutually agree upon: (a) third party ASO Contracts with comparable features and
costs to the ASO Contracts entered into by REI, as set forth in Schedule 6.04(a)
(the "ASO Contracts"); (b) Group Insurance Policies with comparable features and
costs to the Group Insurance Policies entered into by REI, as set forth in
Schedule 6.04(b) (the "Group Insurance Policies"); (c) HMO Agreements with
comparable features and costs to the HMO Agreements entered into by REI, as set
forth in Schedule 6.04(c) (the HMO Agreements"), and (d) competitive premium
rates for all Resources Health and Welfare Plans. In each case, Resources shall,
as of the Distribution Date or such other date as REI and Resources mutually
agree upon, establish, adopt and/or implement acceptable contracts, agreements
or arrangements. In accordance with Section 9.03, REI shall on or before the
Distribution Date provide upon the request of Resources, copies of such
contracts or successor arrangements thereto identified in Schedules 6.04(a), (b)
and (c).

     6.05 COBRA AND HIPPA. REI shall be responsible, through the Distribution
Date, for compliance with the health care continuation coverage requirements of
COBRA, the portability requirements under the Health Insurance Portability and
Accountability Act of 1996 ("HIPPA") and the REI Health and Welfare Plans with
respect to employees of the members of the Resources Group and qualified
beneficiaries (as such term is defined under COBRA). REI shall provide all
necessary notices, or cause the notices to be provided, as soon as
administratively practical, but in no event later than required under COBRA.
Resources shall be responsible for providing REI or its agents with all
necessary employee change notices and related information for covered
dependents, spouses, qualified beneficiaries (as such term is defined under
COBRA), and alternate recipients pursuant to QMCSO, in accordance with
applicable REI COBRA policies and procedures. As soon as administratively
practicable after the Distribution Date, REI shall provide Resources, through
hard copy, electronic format or such other mechanism as is appropriate under the
circumstances, with a list of all qualified beneficiaries (as such term is
defined under COBRA) that relate to the members of the Resources Group and the
relevant information pertaining to their coverage elections. Effective as of the
Distribution Date, Resources shall be solely responsible for compliance with the
health care continuation coverage requirements of COBRA and the portability
requirements under HIPPA

                                      -23-
<PAGE>   29

for the Resources Health and Welfare Plans for Resources Employees and their
qualified beneficiaries (as such term is defined under COBRA).

     6.06 LEAVE OF ABSENCE PROGRAMS AND FMLA.

         (a) Allocation of Responsibilities After Distribution Date. Effective
     as of the Distribution Date, Resources shall establish the Resources Leave
     of Absence Programs and FMLA programs and shall be responsible for
     administering leaves of absence and complying with FMLA with respect to
     Resources Employees.

         (b) Disclosure. As soon as administratively practicable after the
     Distribution Date, REI shall provide to Resources copies of all records
     pertaining to the leaves of absence and FMLA with respect to all Resources
     Employees to the extent such records have not been previously provided.

     6.07 REI WORKERS' COMPENSATION PROGRAM.

         (a) ADMINISTRATION OF CLAIMS.

              (i) Through the Distribution Date or such other date as REI and
         Resources may mutually agree, REI shall continue to be responsible for
         the administration of all claims that (A) are, or have been, incurred
         under the REI WCP before the Distribution Date by employees of the
         Resources Group ("Resources WCP Claims"), and (B) have been
         historically administered by REI or its third party administrator.
         However, REI will advise Resources of and secure approval for any
         material changes to current policy or practice with respect to the
         administration of Resources WCP Claims.

              (ii) Effective as of the Distribution Date or such other date as
         REI and Resources may mutually agree, Resources shall be responsible
         for the administration of all Resources WCP Claims.

              (iii) Each party shall fully cooperate with the other with respect
         to the administration and reporting of Resources WCP Claims, the
         payment of Resources WCP Claims determined to be payable, and the
         transfer of the administration of any Resources WCP Claims to the other
         party.

         (b) SELF-INSURANCE STATUS.

              REI shall maintain and amend, as necessary, its certificates of
      self-insurance and any other applicable policies to include Resources
      until the Distribution Date, and Resources shall fully cooperate with REI
      in obtaining such amendments. REI shall use its commercially reasonable

                                      -24-
<PAGE>   30

      best efforts to obtain self-insurance status for workers' compensation
      for Resources effective as of the Distribution Date in those
      jurisdictions in which Resources conducts business, in which REI is
      self-insured, and where REI and Resources mutually agree that such status
      is beneficial to Resources. Resources hereby authorizes REI to take all
      actions necessary and appropriate on its behalf in order to obtain such
      self-insurance status. All costs incurred by REI in amending such
      certificates, including without limitation filing fees, adjustments of
      security and excess loss policies and amendments of safety programs,
      shall be shared pro rata by REI and Resources.

         (c) INSURANCE POLICY.

              (i) Effective as of the Distribution Date, in all states other
         than those states where Resources is to be self-insured pursuant to
         Subsection 6.07(b) above, REI shall use its commercially reasonable
         best efforts to negotiate for workers' compensation insurance policies
         on behalf of Resources from the issuing insurance companies (as set
         forth in the relevant portion of Schedule 6.04(b)) or different
         insurance companies which are comparable to the policies previously
         maintained by REI; provided that the retention under such Resources
         policies shall be as determined by Resources.

              (ii) REI shall use its commercially reasonable best efforts to
         cause the premium rates for all workers' compensation insurance
         policies for both REI and Resources in effect for periods through the
         Distribution Date to be based on the aggregate number of employees
         covered under the workers' compensation insurance policies of both REI
         and Resources. Any premiums due under the separate workers'
         compensation insurance issued to Resources shall be payable by
         Resources.

                                  ARTICLE VII.

                          EQUITY AND OTHER COMPENSATION

     7.01 REI OPTIONS.

         (a) Option Conversion. Outstanding REI Options that are unexercised and
unexpired as of the Distribution Date (with the exception of those REI Options
granted under the LICP to employees of any member of the REI Group in the year
2001 but effective as of the IPO Closing Date) shall be replaced with two
options, subject to specific country tax and legal requirements, one a New REI
Option and one a Resources Option as follows. In general, a REI Option that
qualifies as an incentive stock option under the Code will be replaced

                                      -25-
<PAGE>   31

with a New REI Option and a Resources Option which will qualify as incentive
stock options, provided, however, that in order for incentive stock options to
remain qualified and retain their tax benefits under the Code, the adjustment
formulas described below may be required to be altered. With respect to each New
REI Option, (i) the number of shares of REI Common Stock subject to such New REI
Option shall equal the number of shares of REI Common Stock subject to the REI
Option immediately before the Distribution Date, and (ii) the per-share exercise
price of such New REI Option shall equal the per-share exercise price of the REI
Option immediately prior to the Distribution Date multiplied by 1 minus a
fraction, the numerator of which is the Distribution Ratio multiplied by the
Resources Stock Value and the denominator of which is the REI Stock Value. With
respect to each Resources Option, (i) the number of shares of Resources Common
Stock subject to such Resources Option, shall equal the number of shares of REI
Common Stock subject to the REI Option immediately before the Distribution Date
multiplied by the Distribution Ratio, and (ii) the per-share exercise price of
such Resources Option shall equal the Resources Stock Value multiplied by a
fraction, the numerator of which is the per-share exercise price of the REI
Option immediately prior to the Distribution Date and the denominator of which
is the REI Stock Value. The exercise price per share of each such New REI Option
and Resources Option will be determined such that, immediately following the
Distribution Date, the difference between the exercise price of each option and
the fair market value of the shares underlying each option approximately equals,
in the aggregate, the difference between the exercise price of each REI Option
and the fair market value per share of REI Common Stock (with dividend)
immediately prior to the Distribution Date. In addition, the ratio of the
exercise price of the New REI Options to the fair market value of REI's Common
Stock immediately after the Distribution Date, and the ratio of the exercise
price of the Resources Options to the fair market value of Resources's Common
Stock immediately after the Distribution Date, will both approximately equal the
ratio of the exercise price of the REI Options to the fair market value of REI's
Common Stock (with dividend) immediately prior to the Distribution Date.
Employment with Resources will be treated as employment with REI for purposes of
the New REI Options, and employment with REI will be treated as employment with
Resources for purposes of the Resources Options. Other than the adjustments
described in this Section 7.01(a), all other terms and conditions applicable to
the REI Options (including, but not limited to, the vesting schedule) shall
remain applicable to the New REI Options and the Resources Options following the
Distribution Date, and the Resources Options shall be issued pursuant to a
separate mirror transition option plan adopted specifically for the purpose of
issuing the Resources Options described in this Section 7.01.

         (b) Certain Non-U.S. Optionees. Except as may otherwise be agreed upon
by REI and Resources, this Section 7.01 shall govern the treatment of REI
Options held by Non-U.S. Resources Employees. In the event it is determined that
the local law applicable to any Non-U.S. Optionee requires a different
treatment, REI and Resources shall take such steps as is required to

                                      -26-
<PAGE>   32

comply with local law or may cash-out those Options that cannot reasonably be
conformed.

     7.02 REI PERFORMANCE SHARES. Performance shares (or bookkeeping units
representing such shares) outstanding under the LICP and the Reliant Energy,
Incorporated Business Unit Performance Share Plan shall vest for the performance
cycle ending December 31, 2000 according to the terms and conditions of the
applicable Plan. Assuming the Distribution Date occurs during the calendar year
2001, the Plan administrator shall determine, as of the Distribution Date, the
level at which the performance objectives have or would have been achieved
through the end of the performance cycle ending December 31, 2001 and shall vest
the outstanding performance shares for such cycle as of the Distribution Date as
though such performance objectives were achieved at that level. Also assuming
the Distribution Date occurs during calendar year 2001, as of the Distribution
Date, the Plan administrator shall convert outstanding performance shares (or
bookkeeping units representing such shares) for the performance cycle ending
December 31, 2002 to a number of time-based restricted shares equal to the
number of performance shares that would have vested if the performance
objectives for the performance cycle were achieved at the maximum level. Such
time based restricted shares shall vest if the participant holding such award
remains continuously employed with Resources or REI through December 31, 2002.
Holders of such time-based restricted shares on the Distribution Date shall
receive shares of Resources Common Stock (or bookkeeping units representing such
shares) in the same ratio as REI shareholders, but such Resources Common Stock
shall be subject to the same time-based vesting schedule and the other terms and
conditions of the applicable Plan under which they were granted.

     7.03 STOCK PURCHASE PLAN. Effective January 1, 2001, Resources shall
establish a Stock Purchase Plan for the benefit of employees of the members of
the Resources Group which shall be comparable to the plan set forth in Schedule
7.03.

     7.04 RESOURCES LONG-TERM INCENTIVE PLAN. Effective on or before January 1,
2001, or such other date as REI and Resources may mutually agree, Resources
shall establish the LTIP for the benefit of employees of the members of the
Resources Group which shall be comparable to the plan set forth in Schedule
7.04. The LTIP is intended to comply with Code Section 162(m).

     7.05 RESOURCES ANNUAL INCENTIVE COMPENSATION PLAN. Effective on or before
January 1, 2001, or such other date as REI and Resources may mutually agree,
Resources shall establish the Resources AICP for the benefit of employees of the
members of the Resources Group which shall be comparable to the plan set forth
in Schedule 7.05. The AICP is intended to comply with Code Section 162(m).

                                 ARTICLE VIII.

                            FRINGE AND OTHER BENEFITS

     8.01 FRINGE BENEFITS. Employees of the Resources Group shall continue to
participate in REI's employee assistance program, educational assistance
program, executive

                                      -27-
<PAGE>   33

financial planning program and relocation program and shall continue to have
access to the credit union, The Employee Association and the Wellness Activity
Center (collectively, the "REI Fringe Benefits") through the Distribution Date
or such other date as REI and Resources may mutually agree. Effective as of the
Distribution Date, Resources shall establish the Resources Fringe Benefits which
Resources deems appropriate in its sole discretion. Effective as of the
Distribution Date, eligible Resources Employees determined in accordance with
the terms of the applicable plans or programs shall only be eligible to
participate in the Resources Fringe Benefits.

     8.02 APPLIANCE LOANS. Effective as of the Distribution Date, Resources will
purchase or cause to be purchased, for an amount equal to the outstanding
principal amount thereof plus accrued and unpaid interest thereon through the
Distribution Date, all outstanding loans on the Distribution Date made by REI to
Resources Employees under any REI appliance purchase program. From and after the
Distribution Date, REI shall have no further responsibility for such loans or
for the administration of this program with respect to Resources Employees.

     8.03 CHAIRMAN'S SCHOLARSHIP FUNDS. The chairman's scholarship funds shall
remain at REI through and after the Distribution Date.

     8.04 REI FOUNDATION. Effective as of January 1, 2001, sponsorship of the
REI Foundation shall be transferred to Resources.

     8.05 OTHER BENEFITS. To the extent that REI maintains, sponsors or provides
other fringe benefits for its employees not specifically identified in Section
8.01, then REI shall, to the extent permitted by law, continue to make such
benefits available to employees of the Resources Group on substantially similar
terms and conditions as are offered to the employees of any member of the REI
Group through the Distribution Date or such other date upon which Resources and
REI mutually agree. Resources and REI agree to make commercially reasonable best
efforts to mutually agree on whether, when, and on what terms any member of the
Resources Group shall maintain, sponsor or offer fringe benefits.

                                   ARTICLE IX.

     9.01 TRANSITION SERVICES AGREEMENT. On or about the date hereof, REI and
Resources shall enter into the Transition Services Agreement covering the
provisions of various services to be provided by REI to Resources. The
provisions of this Agreement shall be subject to the provisions of such
Transition Services Agreement.

     9.02 PAYMENT OF LIABILITIES, PLAN EXPENSES AND RELATED MATTERS.

         (a) Shared Costs. Resources shall pay its share, as determined by REI
     in good faith, of any contributions made to any trust maintained in
     connection with a REI Plan while Resources is a Participating Company in
     any such REI Plan.

                                      -28-
<PAGE>   34

         (b) Contributions to Trusts. With respect to REI Plans to which
     employees of Resources make contributions, REI shall use reasonable
     procedures to determine Resources Liabilities associated with such Plans,
     taking into account such contributions, settlements, refunds and similar
     payments.

         (c) Administrative Expenses Not Chargeable to a Trust. To the extent
     not charged pursuant to this Article IX, and to the extent not otherwise
     agreed to by REI and Resources, and to the extent not chargeable to a trust
     established in connection with a REI Plan, Resources shall be responsible,
     through either direct payment or reimbursement to REI, for its allocable
     share of expenses incurred by REI in the administration of (i) the REI
     Plans while Resources participates in such Plans, and (ii) the Resources
     Plans, to the extent REI administers such Plans. For this purpose,
     Resources's allocable share of such expenses shall be calculated in
     accordance with current practice in effect as of the date of this
     Agreement.

     9.03 SHARING OF PARTICIPANT INFORMATION. In accordance with the applicable
provisions of the Separation Agreement, REI and Resources shall share, or cause
to be shared, all participant information that is necessary or appropriate for
the efficient and accurate administration of each of the REI Plans and the
Resources Plans during the respective periods applicable to such Plans as
Resources and REI may mutually agree. REI and Resources and their respective
authorized agents shall, subject to applicable laws of confidentiality and data
protection, be given reasonable and timely access to, and may make copies of,
all information relating to the subjects of this Agreement in the custody of the
other party or its agents, to the extent necessary or appropriate for such
administration.

     9.04 REPORTING AND DISCLOSURE COMMUNICATIONS TO PARTICIPANTS. While
Resources is a Participating Company in the REI Plans, REI shall take, or cause
to be taken, all actions necessary or appropriate to facilitate the distribution
of all REI Plan-related communications and materials to employees, participants
and beneficiaries, including (without limitation) summary plan descriptions and
related summaries of material modification(s), summary annual reports,
investment information, prospectuses, notices and enrollment material for the
REI Plans. Resources shall provide all information needed by REI to facilitate
such REI Plan-related communications. Resources shall take, or cause to be
taken, all actions necessary or appropriate to facilitate the distribution of
all Resources Plan-related communications and materials to employees,
participants and beneficiaries. Resources shall assist, and Resources shall
cause each other applicable member of the Resources Group to assist, REI in
complying with all reporting and disclosure requirements of ERISA, including the
preparation of Form Series 5500 annual reports, for the REI Plans, where
applicable.

     9.05 AUDITS REGARDING VENDOR CONTRACTS. From the period beginning as of the
Distribution Date or such other date as REI and Resources mutually agree upon
and ending on such date as REI and Resources may mutually agree, REI and
Resources and their duly authorized representatives shall have the right to
conduct joint audits with respect to any vendor contracts that relate to both
the REI Health and Welfare Plans and the Resources Health and Welfare Plans. The
scope of such audits shall remain consistent with the current

                                      -29-
<PAGE>   35

practices and all documents and other information currently made available for
review shall continue to be made available. REI and Resources shall agree on the
performance standards, audit methodology, auditing policy and quality measures,
reporting requirements, and the manner in which costs incurred in connection
with such audits will be shared.

     9.06 BENEFICIARY DESIGNATIONS. Subject to Section 9.09, all beneficiary
designations made by employees of the Resources Group for the REI Plans (other
than the Retirement Plan, except to the extent Resources may be required to
establish or assume the sponsorship of a retirement plan(s) pursuant to Section
2.07) shall be transferred to and be in full force and effect under the
corresponding Resources Plans until such time, if ever, any such beneficiary
designations are replaced or revoked by the employees of the Resources Group who
made the beneficiary designations. All beneficiary designations made by
Resources Retired Employees for the Resources Plans shall be transferred to and
be in full force and effect under the corresponding REI Plans until such time,
if ever, any such beneficiary designations are replaced or revoked by the
Resources Retired Employees who made the beneficiary designations.

     9.07 REQUESTS FOR IRS AND DOL OPINIONS. REI and Resources shall make such
applications to regulatory agencies, including the IRS and DOL, as may be
necessary or appropriate. Resources and REI shall cooperate fully with one
another on any issue relating to the transactions contemplated by this Agreement
for which REI and/or Resources elects to seek a determination letter or private
letter ruling from the IRS or an advisory opinion from the DOL.

     9.08 FIDUCIARY MATTERS. REI and Resources each acknowledge that actions
contemplated to be taken pursuant to this Agreement may be subject to fiduciary
duties or standards of conduct under ERISA or other applicable law, and no party
shall be deemed to be in violation of this Agreement if such party fails to
comply with any provisions hereof based upon such party's good faith
determination that to do so would violate such a fiduciary duty or standard.

     9.09 CONSENT OF THIRD PARTIES. If any provision of this Agreement is
dependent on the consent of any third party (such as a vendor) and such consent
is withheld, REI and Resources shall use their commercially reasonable best
efforts to implement the applicable provisions of this Agreement. If any
provision of this Agreement cannot be implemented due to the failure of such
third party to consent, REI and Resources shall negotiate in good faith to
implement the provision in a mutually satisfactory manner.

     9.10 TAX COOPERATION. In connection with the interpretation and
administration of this Agreement, REI and Resources shall take into account the
agreements and policies established pursuant to the Separation Agreement and the
Tax Allocation Agreement.

     9.11 PLAN RETURNS. Plan Returns shall be filed or caused to be filed by REI
or Resources as the case may be in accordance with the principles established in
the Tax Allocation Agreement. For purposes of this Section 9.11, "Plan Returns"
means any return, report, certificate, form or similar statement or document
required to be filed with a government

                                      -30-
<PAGE>   36

agency with respect to an employee benefit plan governed by the ERISA, or a
program governed by Section 6039D of the Code.

                                   ARTICLE X.

                           EMPLOYMENT-RELATED MATTERS

     10.01 TERMS OF RESOURCES EMPLOYMENT. Employees of the Resources Group shall
be required to execute a new agreement regarding confidential information and
proprietary developments in a form approved by Resources. In addition, nothing
in the Separation Agreement, this Agreement, or any Ancillary Agreement should
be construed to change the at-will status of any of the employees of any member
of the REI Group or the Resources Group.

     10.02 HR DATA SUPPORT SYSTEMS. REI shall provide human resources data
support for employees of the members of the Resources Group in accordance with
the terms of the Transition Services Agreement.

     10.03 EMPLOYMENT OF EMPLOYEES WITH U.S. WORK VISAS. Resources will comply
with all immigration laws and regulations of the Unites States of America as
such laws and regulations applied to employees of any member of the REI Group in
the United States of America pursuant to a work or training visa regardless of
visa category. Resources expressly assumes all obligations, liabilities and
undertakings arising from or under attestations made in each certified and
effective Labor Condition Application filed by REI. Resources shall file amended
petitions with the Immigration and Naturalization Service, as may be necessary
or appropriate. In such cases, the foreign national employee will remain
employed by a member of the REI Group and continue to participate in the REI
Plans until such amended petitions have been approved.

     10.04 CONFIDENTIALITY AND PROPRIETARY INFORMATION.

         (a) No provision of the Separation Agreement or any Ancillary Agreement
     shall be deemed to release any individual for any violation of the REI
     non-competition guideline or any agreement or policy pertaining to
     confidential or proprietary information of any member of the REI Group or
     Resources Group, or otherwise relieve any individual of his or her
     obligations under such non-competition guideline, agreement, or policy.

         (b) Employee Agreements. As used in this Section 10.04(b), "Employee
     Agreement" means any employment, severance, supplemental pension agreement
     or confidentiality agreement, and any corresponding agreements executed by
     REI or Resources employees in connection with their employment. Nothing in
     this Agreement, the Separation Agreement or any other Ancillary Agreement
     shall be deemed to supercede any provision regarding the conduct of
     employees mandated by the Federal Energy Regulatory Commission or any other
     applicable regulatory authority.

                                      -31-
<PAGE>   37

              (i) Survival of REI Employee Agreement Obligations and REI's
         Common Law Rights. The REI Employee Agreements of all Resources
         Employees and all former REI employees transferred to Resources on or
         before the Distribution Date shall remain in full force and effect
         according to their terms, and all Liabilities thereunder shall be
         assumed by Resources. Notwithstanding the foregoing to the contrary,
         none of the following acts committed by former REI or Resources
         employees within the scope of their Resources employment shall
         constitute a breach of such REI Employee Agreements: (i) the use or
         disclosure of Confidential Information (as that term is defined in the
         REI Employee Agreement) for or on behalf of Resources, if such
         disclosure is consistent with the assignment or license of rights,
         businesses and assets granted to Resources and restrictions imposed on
         Resources under the Separation Agreement, any other Ancillary Agreement
         or any other agreement between the parties, and (ii) the rendering of
         any services, directly or indirectly, to Resources to the extent such
         services are consistent with the assignment or license of rights,
         businesses and assets granted to Resources and the restrictions imposed
         on Resources under the Separation Agreement, any other Ancillary
         Agreement or any other agreement between the parties. Further, REI
         retains any rights it has under statute or common law with respect to
         actions by its former employees to the extent such actions are
         inconsistent with the assignment or license of rights, businesses and
         assets granted to Resources and restrictions imposed on Resources under
         the Separation Agreement, any other Ancillary Agreement or any other
         agreement between the parties.

              (ii) Survival of Resources's Employee Agreement Obligations and
         Resources's Common Law Rights. The Resources Employee Agreements of all
         REI Employees and all former Resources employees transferred to REI on
         or before the Distribution Date shall remain in full force and effect
         according to their terms; provided, however, that none of the following
         acts committed by former Resources or REI employees within the scope of
         their REI employment shall constitute a breach of such Resources
         Employee Agreements: (i) the use or disclosure of Confidential
         Information (as that term is defined in the REI Employee Agreement) for
         or on behalf of REI, if such disclosure is consistent with the rights,
         businesses and assets retained by REI and restrictions

                                      -32-
<PAGE>   38

         imposed on REI under the Separation Agreement, any other Ancillary
         Agreement or any other agreement between the parties, and (ii) the
         rendering of any services, directly or indirectly, to REI to the extent
         such services are consistent with the rights, businesses and assets
         retained by REI and the restrictions imposed on REI under the
         Separation Agreement, any other Ancillary Agreement or any other
         agreement between the parties. Further, Resources retains any rights it
         has under statute or common law with respect to actions by its former
         employees to the extent such actions are inconsistent with the rights,
         businesses and assets retained by REI and restrictions imposed on REI
         under the Separation Agreement, any other Ancillary Agreement or any
         other agreement between the parties.

              (iii) Assignment, Cooperation for Compliance and Enforcement.

                  (A)(1) REI retains all rights under the REI Employee
      Agreements of all former REI employees necessary to permit REI to protect
      the rights and interests of REI, but hereby transfers and assigns to
      Resources its rights under the REI Employee Agreements of all former REI
      employees to the extent required to permit Resources to enjoin, restrain,
      recover damages from or obtain specific performance of the REI Employee
      Agreements or obtain other remedies against any employee who breaches his
      or her REI Employee Agreement, and to the extent necessary to permit
      Resources to protect its rights and interests.

                  (2) REI and Resources agree, at their own respective cost and
      expense, to use their reasonable efforts to cooperate as follows: (A)
      Resources shall advise REI of: (1) any violation(s) of the REI Employee
      Agreements by Resources or former REI employees, and (2) any violation(s)
      of the Resources Employee Agreements which affect REI's rights; and (B)
      REI shall advise Resources of any violation(s) of the REI Employee
      Agreements by current or former REI employees which affect Resources's
      rights; provided, however, that the foregoing obligations shall only apply
      to violation(s) which become known to an attorney within the legal
      department of the party obligated to provide notice thereof.

                  (3) REI and Resources each may separately enforce the REI
      Employee Agreements of Resources and former REI employees to the extent
      necessary to reasonably protect their respective interests, provided,
      however, that (i) Resources shall not commence any litigation relating
      thereto without first consulting with REI's General Counsel or his or her
      designee and (ii) REI shall not commence any litigation relating thereto
      against any former REI employee who is at the time an employee of the
      Resources Group without first consulting with Resources's General Counsel
      or his or her designee. If either party, in seeking to enforce any REI
      Employee Agreement, notifies the other party that it requires, or desires,
      the other party to join in such action, then the other party shall do so.
      In addition, if either party commences or becomes a party to any action to
      enforce a REI Employee Agreement of an employee of the

                                      -33-
<PAGE>   39

      Resources Group or former REI employee, the other party shall, whether or
      not it becomes a party to the action, cooperate with the other party by
      making available its files and employees who have information or knowledge
      relevant to the dispute, subject to appropriate measures to protect the
      confidentiality of any proprietary or confidential information that may be
      disclosed in the course of such cooperation or action and subject to any
      relevant privacy laws and regulations. Any such action shall be conducted
      at the expense of the party bringing the action and the parties shall
      agree on a case by case basis on compensation, if any, of the other party
      for the value of the time of such other party's employees as reasonably
      required in connection with the action.

                  (B)(1) Resources retains all rights under the Resources
      Employee Agreements of all former Resources employees necessary to permit
      Resources to protect the rights and interests of Resources, but hereby
      transfers and assigns to REI its rights under the Resources Employee
      Agreements of all former Resources employees to the extent required to
      permit REI to enjoin, restrain, recover damages from or obtain specific
      performance of the Resources Employee Agreements or obtain other remedies
      against any employee who breaches his or her Resources Employee Agreement,
      and to the extent necessary to permit REI to protect its rights and
      interests.

                  (2) REI and Resources agree, at their own respective cost and
      expense, to use their reasonable efforts to cooperate as follows: (A) REI
      shall advise Resources of: (1) any violation(s) of the Resources Employee
      Agreements by REI or former Resources employees, and (2) any violation(s)
      of the REI Employee Agreements which affect Resources's rights; and (B)
      Resources shall advise REI of any violations of the Resources Employee
      Agreements by current or former Resources employees which affect REI's
      rights; provided, however, that the foregoing obligations shall only apply
      to violations which become known to an attorney within the legal
      department of the party obligated to provide notice thereof.

                  (3) REI and Resources each may separately enforce the REI
      Employee Agreements of REI and former Resources employees to the extent
      necessary to reasonably protect their respective interests, provided,
      however, that (i) REI shall not commence any litigation relating thereto
      without first consulting with Resources's General Counsel or his or her
      designee and (ii) Resources shall not commence any litigation relating
      thereto against any former Resources employee who is at the time a REI
      Employee without first consulting with REI's General Counsel or his or her
      designee. If either party, in seeking to enforce any Resources Employee
      Agreement, notifies the other party that it requires, or desires, the
      other party to join in such action, then the other party shall do so. In

                                      -34-
<PAGE>   40

      addition, if either party commences or becomes a party to any action to
      enforce a Resources Employee Agreement of a REI Employee or former
      Resources employee, the other party shall, whether or not it becomes a
      party to the action, cooperate with the other party by making available
      its files and employees who have information or knowledge relevant to the
      dispute, subject to appropriate measures to protect the confidentiality of
      any proprietary or confidential information that may be disclosed in the
      course of such cooperation or action and subject to any relevant privacy
      laws and regulations. Any such action shall be conducted at the expense of
      the party bringing the action and the parties shall agree on a case by
      case basis on compensation, if any, of the other party for the value of
      the time of such other party's employees as reasonably required in
      connection with the action.

                  (C) REI and Resources understand and acknowledge that matters
      relating to the making, performance, enforcement, assignment and
      termination of employee agreements are typically governed by the laws and
      regulations of the national, federal, state or local governmental unit
      where an employee resides, or where an employee's services are rendered,
      and that such laws and regulations may supersede or limit the
      applicability or enforceability of this Section 10.04. In such
      circumstances, REI and Resources agree to take action with respect to the
      employee agreements that best accomplishes the parties' objectives as set
      forth in this Section 10.04 and that is consistent with applicable law.

     10.05 ACCRUED PAYROLL, BONUSES, PROFIT SHARING AND COMMISSIONS. Except as
otherwise specified in an Ancillary Agreement, Resources shall be responsible
for all Liabilities relating to, arising out of, or attributable to payroll,
bonuses, profit sharing and commissions accrued by employees of Resources
through the Distribution Date. REI and Resources shall agree on the manner and
method of payment for all payroll, bonuses, profit sharing and commissions
agreed to on behalf of employees who have been employed by Resources on or
before the Distribution Date. REI shall provide or cause to be provided to
Resources in the same manner as in effect on the date of this Agreement all
payroll services as required in the Transition Services Agreement.

     10.06 PAYROLL AND WITHHOLDING.

         (a) Income Reporting, Withholding. REI shall perform in the same manner
as in effect on the date of this Agreement the income reporting and withholding
function under Resources's employer identification number for employees of the
Resources Group and other service providers as required by the Transition
Services Agreement.

         (b) Delivery of, and Access to, Documents and Other Information.
Concurrently with the Distribution Date, REI shall cause to be delivered to
Resources, the employee information set forth on all IRS Forms W-4 executed by
REI Employees designated as Resources Employees as of the Distribution Date. For
the period ending on the Distribution Date

                                      -35-
<PAGE>   41

(and for such additional period as REI and Resources may mutually agree), REI
shall make reasonably available to Resources all forms, documents or
information, no matter in what format stored, relating to compensation or
payments made to any employee or service provider of Resources. Such information
may include, but is not limited to, information concerning employee payroll
deductions, payroll adjustments, records of time worked, tax records (e.g., IRS
Forms W-2, W-4, 940 and 941), and information concerning garnishment of wages or
other payments.

         (c) Consistency of Tax Positions; Duplication. REI and Resources shall
individually and collectively make commercially reasonable best efforts to avoid
unnecessarily duplicated federal, state or local payroll taxes, insurance or
workers' compensation contributions, or unemployment contributions arising on or
after the Distribution Date. REI and Resources shall take consistent reporting
and withholding positions with respect to any such taxes or contributions.

     10.07 PERSONNEL AND PAY RECORDS. For the period beginning on the date of
this Agreement and ending on the Distribution Date (and for such additional
period as REI and Resources may mutually agree), REI shall make reasonably
available to Resources for review and reproduction, subject to applicable laws
on confidentiality and data protection, all current and historic forms,
documents or information, no matter in what format stored, relating to
pre-Distribution Date personnel and medical records. Such forms, documents or
information may include, but is not limited to: (a) information regarding
ranking or promotions of employees of the Resources Group; (b) the existence and
nature of garnishment orders or other judicial or administrative actions or
orders affecting an employee's or service provider's compensation; and (c)
performance evaluations.

     10.08 NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES. No
provision of this Agreement, the Separation Agreement, or any Ancillary
Agreement shall be construed to create any right, or accelerate entitlement, to
any compensation or benefit whatsoever on the part of any Resources Employee or
other future, present or former employee of REI or Resources under any REI Plan
or Resources Plan or otherwise. Without limiting the generality of the
foregoing: (a) except as otherwise provided in this agreement or applicable
provisions of Plans, neither the Distribution nor the termination of the
Participating Company status of Resources or any member of the Resources Group
shall cause any employee to be deemed to have incurred a termination of
employment; and (b) no transfer of employment between REI and Resources before
the Distribution Date shall be deemed a termination of employment for any
purpose hereunder.

                                  ARTICLE XI.

                               GENERAL PROVISIONS

     11.01 EFFECT IF IPO AND/OR DISTRIBUTION DOES NOT OCCUR. Subject to Section
11.08, if the IPO and/or Distribution does not occur, then all actions and
events that are, under this Agreement, to be taken or occur effective as of the
IPO Closing Date,

                                      -36-
<PAGE>   42

and/or Distribution Date, or otherwise in connection with the IPO and/or
Distribution, shall not be taken or occur except to the extent specifically
agreed by Resources and REI.

     11.02 RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be deemed or
construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, the
understanding and agreement being that no provision contained herein, and no act
of the parties, shall be deemed to create any relationship between the parties
other than the relationship set forth herein. This Agreement shall be binding
upon and inure solely to the benefit of and be enforceable by each party and its
respective successors and permitted assigns. Nothing in this Agreement, express
or implied, is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.

     11.03 AFFILIATED COMPANIES. Each of REI and Resources shall cause to be
performed, and hereby guarantee the performance of, any and all actions of any
and all members of the REI Group or the Resources Group, respectively.

     11.04 INCORPORATION OF SEPARATION AGREEMENT PROVISIONS. If a dispute, claim
or controversy results from or arises out of or in connection with this
Agreement, the parties agree to use the procedures set forth in Article IX of
the Separation Agreement in lieu of other available remedies, to resolve same.
The provisions of Article IX (Arbitration and Dispute Resolution), and Sections
5.5 (Issuance of Stock), 10.2 (Further Instruments), 10.5 (Audit Rights), 10.8
(Governmental Approvals), 11.1 (Limitation of Liability), 11.5 (Notices), 11.7
(Binding Effect; Assignment) and 11.11 (Authority) of the Separation Agreement
are hereby incorporated herein by reference, and unless otherwise expressly
specified herein, such provisions shall apply as if fully set forth herein
(references in this Section 11.04 to an "Article" or "Section" shall mean
Articles or Sections of the Separation Agreement, and, except as expressly set
forth herein, references in the material incorporated herein by reference shall
be references to the Separation Agreement).

     11.05 GOVERNING LAW. To the extent not preempted by applicable federal law,
this Agreement shall be governed by, construed and interpreted in accordance
with the laws of the State of Texas, irrespective of the choice of law
principles of the State of Texas, as to all matters, including matters of
validity, construction, effect, performance and remedies.

     11.06 SEVERABILITY. If any term or other provision of this Agreement is
determined to be invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to either party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible and in an
acceptable manner to the end that transactions contemplated hereby are fulfilled
to the fullest possible extent.

                                      -37-
<PAGE>   43

     11.07 AMENDMENT. The Boards of Directors of Resources and REI may mutually
agree to amend the provisions of this Agreement at any time or times, either
prospectively or retroactively, to such extent and in such manner as the Boards
mutually deem advisable. Each Board may delegate its amendment power, in whole
or in part, to one or more Persons or committees as it deems advisable.
Accordingly, each Board hereby gives the chief executive officer of Resources
and the chief executive officer of REI the full power and authority to mutually
adopt an amendment to this Agreement (subject to each of their authority to
amend Plans).

     11.08 TERMINATION. This Agreement may be terminated and the Distribution
abandoned at any time prior to the IPO Closing Date by REI in its sole
discretion. This Agreement may be terminated at any time after the IPO Closing
Date and before the Distribution Date by mutual consent of REI and Resources. In
the event of termination pursuant to this Section, no party shall have any
liability of any kind under this Agreement to the other party.

     11.09 CONFLICT. In the event of any conflict between the provisions of this
Agreement and the Separation Agreement, any Ancillary Agreement, or Plan, the
provisions of this Agreement shall control.

     11.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same Agreement.

                                      -38-
<PAGE>   44

     IN WITNESS WHEREOF, each of the parties have caused this Employee Matters
Agreement to be executed on its behalf by its officers thereunto duly authorized
on the day and year first above written.

                                     RELIANT ENERGY, INCORPORATED

                                     By:
                                        --------------------------------------
                                     Name:

                                            Title:
                                                  ----------------------------

                                     RELIANT RESOURCES, INC.

                                     By:
                                        --------------------------------------
                                     Name:

                                            Title:
                                                  ----------------------------

                                      39

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