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NRG to Shareholders: Ignore Exelon Offer

NRG Energy Inc. last Tuesday confirmed that Exelon Corp. had mounted a hostile takeover attempt and noted that Exelon's offer is unchanged from a previous one that NRG management deemed unsatisfactory and rejected on Nov. 9.

"NRG stockholders are advised to take no action at this time pending the review of the proposed exchange offer by NRG's board of directors," the company said.

Additionally, NRG released a letter that its general counsel received from Exelon in which Exelon outlines its plans to seek expansion of the NRG board at its planned May 14 meeting. Exelon deputy general counsel Bruce Wilson wrote that the company will seek to place directors on "not less than 50% of the NRG board."

Last Friday NRG sought the dismissal of a lawsuit filed against it by Exelon alleging NRG's board failed to give the Exelon offer proper consideration.

Exelon said its exchange offer ensures that NRG investors have the opportunity to consider the merits of its proposal. "Exelon remains hopeful that NRG will ultimately recognize the value of working with Exelon in a direct and constructive fashion to complete this strategic transaction in a way that is tax-efficient, minimizes regulatory hurdles and produces the greatest value for shareholders of both companies," Exelon said.

Standard & Poor's Ratings Services (S&P) said its "BBB" long-term corporate credit rating on Exelon Corp. remains on CreditWatch with negative implications following a regulatory filing putting in motion the hostile takeover attempt.

"We have also placed our short-term 'A-2' ratings on Exelon on CreditWatch with negative implications," S&P said. "We note that the economic terms of the offer remain unchanged. While we have yet to receive a management plan, we expect to review one over the next several weeks. Our analysis will focus not only on the company's capitalization plan and deleveraging targets but also on management's risk appetite and growth strategy. Our analysis will incorporate transaction costs, synergy expectations, and credit implications of the structure used to effect any combination.

"An important consideration in the current credit markets is the potential refinancing, or repricing, of over $8 billion of NRG's debt that has change of control provisions. In its filing, Exelon has indicated that the business combination could be structured as a merger of Exelon with and into NRG that would avoid refinancing of up to $4.75 billion of NRG's senior notes that a change in control provision would otherwise require."

Moody's Investors Service placed the ratings of Exelon Corp. ("Baa1" senior unsecured) and subsidiaries Exelon Generation Co. ("A3" senior unsecured) and PECO Energy Co. ("A3" Issuer Rating) under review for possible downgrade, and placed the ratings of NRG Energy Inc. ("Ba3" corporate family rating) under review for possible upgrade following Exelon's exchange offer. Moody's affirmed the speculative liquidity rating of NRG at SGL-1, and the ratings of Exelon subsidiary Commonwealth Edison Co. ("Baa3" senior unsecured).

The exchange offer "increases the probability of the $6.2 billion acquisition of NRG being completed, which has the potential to substantially alter the current credit profile of Exelon, ExGen and NRG," said A.J. Sabatelle, a Moody's senior credit officer. "While uncertainties exist concerning the final legal structure, the terms of any related required financing, and the potential issues that may surface from Exelon commencing a hostile takeover, Moody's believes that a multi-notch rating change is possible for Exelon, ExGen and NRG."

Moody's said the consolidated credit metrics of Exelon and ExGen will weaken and that the business risk for the company will increase, including the assumption of environmental risks that exist at NRG. Conversely, the potential combination should have positive benefits for NRG creditors given Exelon's stronger balance sheet and the presumed value for a merchant wholesale power operation from being a part of a more diverse and larger organization, Moody's said.

Exelon made its $6.2 billion all-stock offer in October (see Power Market Today, Oct. 21). In a response to NRG's Nov. 9 letter rejecting Exelon's offer (see Power Market Today, Nov. 11), Exelon CEO John W. Rowe outlined his company's case for a combination with NRG (see Power Market Today, Nov. 12).

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