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NRG, Exelon Battle for Hearts, Minds and Shareholders

With its board recommending that shareholders reject the unsolicited Exelon Corp. offer and proposed expansion of its board, Princeton, NJ-based NRG Energy Inc. has mailed proxy materials to shareholders for its July 21 annual meeting. Exelon, based in Chicago, responded less than a day later with a proxy mailing of its own.

After delaying for weeks in the midst of the $6.36 billion hostile Exelon offer, NRG earlier in June scheduled its annual shareholders meeting for next month. Shareholders of record last Monday (June 15) are entitled to vote. Exelon's board expansion proposal and proposed alternative director nominees are expected to be the major focus of the meeting.

Pushing back the deadline for its share exchange offer to Aug. 21, Exelon reported that at the end of last Tuesday (June 16) a little more than 33 million NRG common shares had been tendered, representing 12% of those outstanding. This total compared to a 51% figure released in late February. Also last week, Exelon announced major operating moves -- first, to upgrade some of its Illinois-based nuclear generating plants, and second, to downsize by 500 positions its workforce.

Exelon filed last Wednesday what it called its "definitive proxy materials" with the Securities and Exchange Commission to solicit votes from NRG shareholders, and it said in a letter addressed to those shareholders that it was offering them "an immediate premium" for their shares. Exelon asked for the NRG owners' votes for expanding the NRG board and a slate of nine director candidates offered by the energy holding company.

Exelon said that its initial solicitation marks just the first of "a series of communications" it intends to send, detailing what it believes is the "substantial value of an Exelon-NRG combination." The Exelon letter said the hostile combination holds "compelling and substantial value" for the NRG shareholders.

A merged company, according to Exelon, could better take advantage of economic cycles, manage changing regulatory requirements, come up with needed capital, and "succeed in an increasingly volatile energy market as the largest U.S. power company."

In contrast, NRG's proxy materials recommended that shareholders re-elect its "four experienced and highly qualified independent directors and support the board's ongoing efforts to create additional value." The directors also asked shareholders to disregard the Exelon alternative, blue-colored card, advocating the board's expansion to accommodate a slate of Exelon-selected directors.

In reiterating its recommendations for rejecting the Exelon offer of 0.485 shares in Exelon for each NRG share, NRG management listed "the most serious concerns" about the Exelon offer:

Further, NRG told its shareholders, "the value proposition has worsened as Exelon's performance and outlook have declined." With no floor under the offer prices, NRG's proxy said "as Exelon's stock price has declined, so has the value you would receive under its 'fixed exchange ratio' offer. During the last six months, Exelon's stock price has decreased by approximately 7%, resulting in a similar decrease in value for NRG stockholders."

Energy analysts at Tudor, Pickering, Holt & Co. Inc. told clients in a note last week that the Exelon bid was losing momentum among NRG shareholders, but Exelon management was nonplussed.

"These results were expected since they are entirely consistent with common practice," said William Von Hoene, Exelon general counsel. "Investors typically withdraw tendered shares between expiration dates and do not re-tender until very close to the next scheduled expiration date."

NRG pointed to the 12% figure as a sign that the offer is growing stale. "[Tuesday's] results show a marked deterioration in overall support for the Exelon exchange offer by NRG stockholders, and Exelon's decision to extend its exchange offer ahead of its scheduled expiration is recognition of this," NRG said.

Separately last Thursday, Exelon said it was shuffling its executive lineup and would eliminate 500 positions to cut costs. The move was sparked by the recession and "the need to reflect the commodity-driven nature" of the company's power generation markets.

Approximately 400 corporate support jobs, mostly located at headquarters, are to be eliminated. Utility ComEd is to eliminate 100 management positions. Exelon and ComEd expect to complete most job reductions by Aug. 31. Exelon is also planning changes to its compensation program, including executive salary freezes, as well as reduced annual and long-term incentive compensation.

"Major spending cuts" are intended to achieve approximately $350 million in operations and maintenance (O&M) savings in 2010, a nearly 3.5% reduction in O&M spending from 2009 levels, the company said.

Exelon CEO John Rowe said his company would "continue to perform at a very high level. By rethinking our executive team structure and streamlining corporate support functions, we will increase both our efficiency and our focus on operational excellence."

Exelon projects a nearly 3.5% decrease in year-over-year O&M spending, from approximately $4.5 billion in 2009 to $4.35 billion in 2010, representing more than $350 million of O&M savings in 2010 as Exelon anticipated a 4% increase in O&M absent the cutbacks. The company expects more than half of the cost savings to be sustainable. It expects a second quarter 2009 pre-tax charge for the jobs reduction of approximately $40 million.

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