Princeton, NJ-based NRG Energy Inc. and Houston-based Texas Genco LLC announced on Sunday Oct. 2 they had entered into a definitive agreement for NRG to acquire the outstanding equity of Texas Genco for $5.8 billion, including $4 billion cash and $1.8 billion in common and preferred stock. In addition, NRG said it will assume $2.5 billion of Texas Genco's debt. The announcement came a scant six months after the partnership of investment firms holding Texas Genco bought the merchant generating unit from CenterPoint Energy for $3.65 billion.
NRG said the acquisition when complete will create "the premier wholesale power generation company in the United States," providing the newly created company with the "broadest geographical reach" of any of the nation's merchant power plant operators. NRG looks to have generation assets in all of the key competitive wholesale power markets in the United States.
NRG expects to close the deal during the first quarter next year. It requires approvals from the Nuclear Regulatory Commission, Federal Energy Regulatory Commission, federal Justice Department and the Texas Public Utility Commission among others. Morgan Stanley is serving as NRG's exclusive financial adviser on the purchase.
The new company will have a total U.S. generation portfolio of 23,920 MW capacity and a diverse fuel, dispatch and geographical mix, including major coal, nuclear and natural gas-fired plants. What NRG defines as the key competitive wholesale electricity markets -- Northeast, South-Central, Texas and California -- are covered by the portfolio.
Noting that the new company is expected to create greater earnings and cash flow, NRG CEO David Crane called Texas Genco "an ideal strategic fit with NRG," noting that Texas Genco, like NRG, has similar people and asset strengths, "bolstering NRG's platform for growth and our ability to drive value for our shareholders."
In a similar prepared statement, Texas Genco's CEO Jack Fusco said both NRG and his company have "an unwavering focus on safety, teamwork, operational excellence, and value creation." He expects the combined company to set "new standards and achieve new heights."
NRG has 15,000 MW of power plants in the Northeast, South-Central and California, along with interests in power plants in Australia and Germany. Texas Genco is one of the largest wholesale power plant operators in the United States with 11,000 MW, selling its power supplies in the Texas wholesale market.
NRG's Crane characterized the deal as a "milestone" -- not just for his company but for the whole industry. "With Texas Genco, NRG can better provide low-cost stable and reliable energy solutions to the regions we serve." NRG is already touting the new company as having some of the lowest cost and environmentally cleanest generation in the key competitive wholesale markets.
NRG said it expects to finance the transaction through a combination of debt and equity that enables the new company to have a capital ratio within the targeted 45%-55% range by year-end 2006, Crane said. "Additionally, Texas Genco's collateral program will meaningfully enhance the company's liquidity position and hedging capacity."
The investment group owners of Texas Genco LLC, formerly known as GC Power Acquisition LLC, lost little time in turning over their investment. The group, composed in equal parts of affiliates of the Blackstone Group, Hellman & Friedman LLC, Kohlberg Kravis Roberts & Co. L.P. (KKR) and Texas Pacific Group, completed the purchase of Texas Genco in April of this year for $3.65 billion in cash, along with an agreement to buy-out Texas Genco's public shareholders.
The original agreement between CenterPoint and the Genco group was first announced a little over a year ago.
NRG, once the merchant power subsidiary of Xcel Energy, reorganized under Chapter 11 of the Bankruptcy code, emerging from the process at the end of 2003. As part of that reorganization Xcel transferred its interest in NRG to creditors.
For the six months ended June 30, NRG reported net income of $46.5 million, or 43 cents/diluted share, compared with earnings of $113.3 million, or $1.13/diluted share, for the same period in 2004. NRG said that the lower net results so far this year are due primarily to what it called the results of "West Coast Power (WCP), asset sales, and reduced generation due to outages."
The proposed merger marks the latest in a series of mega-deals in the energy sector announced since the end of 2004, starting with Exelon and Public Service Enterprise Group's proposed merger unveiled in December of that year, followed in 2005 by the proposed combination of Duke Energy and Cinergy and, separately, MidAmerican Energy Holdings Co.'s planned acquisition of PacifiCorp.
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