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NRG Becomes First Energy Merchant to File for Bankruptcy Since Enron
The Minneapolis-based merchant power subsidiary of Xcel Energy filed its long anticipated voluntary petition for reorganization in the U.S. Bankruptcy Court for the Southern District of New York. Several affiliates, including NRG Power Marketing and NRG Northeast Generating LLC, also filed for protection, but parent company Xcel was not pulled under.
Standard & Poor's Ratings Services revised its creditwatch implications for the long-term ratings on Xcel and its regulated utility subsidiaries to positive from developing and raised its short-term corporate credit and commercial paper ratings on the parent company to "A-2" from "A-3."
"All the creditors of subsidiary NRG Energy Inc. have signed the settlement agreement. Therefore, Xcel Energy is no longer in danger of being pulled into the bankruptcy of NRG," said S&P credit analyst Judith Waite.
The voluntary, prepackaged bankruptcy, which is nearly identical to the settlement agreement announced in March, limits Xcel's obligation to NRG creditors to $752 million. When the bankruptcy plan is filed, NRG will become the property of its creditors and will no longer be a subsidiary of Xcel, which also owns six utility subsidiaries that serve electric and natural gas customers in 12 states. As a result, Xcel will be a utility holding company with minimal nonregulated operations.
Xcel CEO Wayne Brunetti said the filing reduces the risks and uncertainty surrounding NRG, which have negatively affected Xcel's stock price. Xcel shares were at $14.10 on Wednesday up about 20 cents for the day but down from more than $23/share last summer.
"We believe the settlement contains terms that greatly reduce our exposure to any material claims," said Brunetti. The settlement payments should not require the issuance of additional equity. "We expect to finance the settlement with cash-on-hand at the Xcel Energy holding company level and with funds from the tax benefit associated with the write-off of our investment in NRG.
"It will free our management to concentrate its energies on running our core utility business and restoring our financial strength," he added. "It will improve our financial structure."
The bankruptcy filing had been expected at least since last fall when a credit rating downgrade triggered the need for about $1.3 billion in collateral payments by NRG to its creditors. The company engaged in lengthy negotiations since then with creditors and bondholders, and parent Xcel repeatedly warned investors that a bankruptcy filing should be expected. The company was able to settle in February with several former NRG executives to have their involuntary bankruptcy filing dismissed.
NRG has been desperately trying to unload about 12,000 MW of merchant power generation to shore up its finances and stay afloat but has struggled mainly because of the current power supply glut in the market. The company has $11.6 billion in debt, but only $10.9 billion in assets.
The voluntary bankruptcy plan incorporates the terms of an overall settlement announced in March in which NRG, Xcel and members of NRG's major creditor constituencies agreed that Xcel would pay NRG and its creditors of up to $752 million in three payments to restructure its debt: a $350 million payment once the NRG plan is effective, an additional $50 million possibly in Xcel common stock on Jan. 1, 2004 and up to $352 million in the second quarter of 2004.
The deal has been signed by Xcel, NRG, and holders of 40% in principal amount of NRG's long-term notes and bonds, along with two NRG banks that serve as co-chairs of the global steering committee for the NRG bank lenders. The agreement will become effective when it is approved by creditors holding an additional 10% in principal amount of NRG's long-term notes and bonds, and by a majority of NRG bank lenders representing at least two-thirds in principal amount of NRG's bank debt. Xcel said it expects the required signatures to be obtained "promptly."
Meanwhile, NRG last week secured a $250 million debtor-in-possession financing facility from General Electric Co. unit GE Capital Corp. and won approval of the financing from the bankruptcy court on Thursday. The company will use the interim financing to operate its generating assets in the Northeast until a final reorganization plan is approved. Separately, interim financing of roughly $70 million in cash collateral for projects in Louisiana was approved by the bankruptcy judge, who gave the parties three weeks to amend the terms of the plan to clarify certain excluded items.
NRG expects operations to continue as normal during the restructuring process. NRG also announced that it appointed a new top management team, including Leonard J. LoBiondo, senior managing director of corporate restructuring firm Kroll Zolfo Cooper LLC (KZC), as chief restructuring officer, John R. Boken, senior director of KZC, as interim president and COO, and Scott J. Davido, who has served as NRG's general counsel since October 2002, as chairman.
"By taking this important step, it is our goal to effectuate an agreement with our creditors in a quick and efficient manner, allowing NRG to restructure its debt with minimal disruption to our operations," said LoBiondo. "With many of our operational improvements in place and our plan of reorganization already filed with the court, NRG is well positioned to move through this process rapidly and to emerge from Chapter 11 as a strong, profitable company."
LoBiondo said the company already has taken steps to focus its business model and to address the financial issues presented by its considerable debt obligations. "The company's debt was incurred primarily during a five-year period of growth through construction and acquisitions," he noted. "NRG has moved to reduce its debt levels, improve its balance sheet and align its business strategy and operational structure with the current economic climate and energy market conditions."
In order for the settlement to be completed, the reorganization has to become effective before Dec. 15, Xcel said. It also must be approved by the court and regulators and Xcel must receive releases in favor of the deal from holders of at least 85% of the general unsecured claims held by NRG's creditors.
"Since many of the required conditions are not within Xcel Energy's control, we cannot state with certainty that the settlement will be effectuated," Brunetti said. "Nevertheless, I am optimistic at this time that the settlement will be implemented."
Brunetti also said the bankruptcy filing, along with the improvement of Xcel's common equity ratio, should improve its chances of getting a waiver from the SEC that would allow the company to declare and pay a dividend. The losses at NRG over the past year caused significant reductions in Xcel earnings. Under the Public Utility Holding Company Act, a registered holding company, such as Xcel, cannot declare or pay a dividend when retained earnings are less than the prospective dividend, unless the company receives a waiver from the SEC.
The company plans to pay a dividend of 75 cents/share this year. It reported a net loss of $5.26/share in 2002 -- an NRG net loss of $8.40/share was offset by utility earnings of $1.59/share and a $1.77/share tax benefit related to Xcel's investment in NRG. Xcel reported a gain of $2.30 in 2001.
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