Xcel Energy’s board has signed off on plans to commence an exchange offer under which Xcel Energy would acquire all of the outstanding publicly held shares of its subsidiary, NRG Energy Inc. Xcel Energy already owns 74% of NRG. More broadly, Xcel Energy laid out an ambitious plan for NRG this year, including the unloading of approximately $1.9 billion of existing assets, most of which are based in the international arena.
In the offer, NRG shareholders would receive 0.4846 shares of Xcel Energy common stock in a tax-free exchange for each outstanding share of NRG common stock. Based on a Feb. 14 closing price, the offer represents a 15% premium. In addition, following completion of the transaction, shareholders would be entitled to Xcel Energy’s current annual dividend of $1.50 per share.
NRG said that its Independent Directors Committee will evaluate Xcel Energy’s tender offer. The Independent Directors Committee is a standing committee of the NRG Board of Directors.
NRG also asked that its stockholders defer making a determination whether to accept or reject the offer until being advised of the independent directors’ recommendation. In accordance with applicable rules of the Securities and Exchange Commission, any recommendation would be made after Xcel Energy formally launches its tender offer.
David H. Peterson, NRG’s chairman, also clarified that Xcel Energy’s tender offer is an offer from Xcel Energy to NRG shareholders and is not based on any negotiations with NRG.
“We are confident that our decision to acquire the public shares of NRG is in the best interests of both the NRG and Xcel Energy shareholders,” said Wayne H. Brunetti, CEO of Xcel Energy.
The proposed transaction, however, drew the ire of one analyst participating in a conference call with company management. The analyst pressed Xcel Energy executives to explain how NRG shareholders stand to benefit from the price being offered for their shares. “It’s 40 to 50% below where the stock was trading just a month ago, never mind where the IPO price was, in a time when the industry is under the worst psychological pressure, never mind everything else,” the analyst said.
“We believe the proposal that we have, with the 15% premium, provides significant value to both sets of shareholders,” an Xcel Energy executive responded, which in turn elicited a fairly testy response from the analyst.
“It’s a huge discount relative to where the stock has been trading since it went public — a huge discount — so don’t make it look funny with the 15% premium off of last night’s close, when the generators have been in the cesspool as stocks,” she said. “That’s a very irrelevant comment,” the analyst added.
In 1989, NRG was developed as an independent power producer (IPP) to create additional shareholder value as a growth company. “NRG’s management has grown the company rapidly, and today it is the third largest IPP worldwide with nearly 20,000 MW of power generation,” Brunetti said. NRG completed public offerings in June 2000 and March 2001.
“However, numerous factors have recently led to significant erosion in the valuations within the IPP sector and resulted in a fundamental shift in market perception that has increased the cost of capital for these companies,” Brunetti said. “These events require a refocusing of NRG’s current business model. The new focus of NRG will be on managed growth with a stronger balance sheet, cost management and reduced dependence on external financing.”
The move is akin to UtiliCorp’s recent decision on repatriation of its Aquila spin-off, as the market for these higher risk entities has tightened. NRG’s stock price declined steadily since early 2001 when it traded above $30, dropping to about $10 currently.
Brunetti said Xcel Energy’s plans for NRG in 2002 include:
These actions are expected to reduce 2002 cash requirements by about $3 billion, Brunetti said. He noted that the company expects to capture other benefits, not included in the current projections, resulting from:
“These actions demonstrate our commitment to an investment-grade bond rating for NRG and a high quality rating at Xcel Energy,” Brunetti said.
Xcel Energy CFO Jim McIntyre said the acquisition of NRG should add about five cents per share to Xcel Energy’s 2002 earnings and about 10 cents per share in 2003 and beyond. “We plan to maintain Xcel Energy’s earnings guidance for 2002 at $2.40 to $2.50 per share, and we expect the annual earnings per share growth to average 7% to 9%, with NRG’s contribution growing about 15% per year,” he said.
“We view the annualized $1.50 per share dividend as a very important part of the Xcel Energy value proposition for investors. We are committed to maintaining that dividend even as we move to acquire the NRG minority shareholder interest,” McIntyre added.
Brunetti noted that this transaction supports Xcel Energy’s “balanced portfolio” strategy and enhances the stability of its energy merchant business.
Xcel Energy plans to begin the exchange offer as soon as practical. Completion of the offer will be conditioned upon NRG’s public shareholders tendering enough shares so that, when taken together with the shares of common stock that Xcel Energy currently holds, Xcel Energy would own at least 90% of NRG’s common stock. In order to satisfy this condition, which will not be waived, NRG shareholders must tender approximately 60% of the publicly held NRG shares currently outstanding.
Upon successful completion of the exchange, Xcel Energy will merge NRG with a wholly-owned subsidiary of Xcel Energy in a “short-form” merger. In the merger, each remaining share of NRG common stock will be exchanged (subject to the exercise of appraisal rights) for the same number of shares of Xcel Energy common stock as is exchanged in the exchange offer.
Lehman Brothers is acting as Xcel Energy’s financial advisor for the transaction.
In a conference call with investors, McIntyre elaborated on Xcel Energy’s approach to credit quality issues. “We want to maintain a high credit quality level at [the] Xcel Energy level and to remain investment-grade level at NRG,” he said. “We are committed to credit quality and will take all reasonable and appropriate actions.”
The CFO said that the company has discussed the transaction with credit ratings agencies, noting that Xcel Energy has had a “constructive and ongoing dialogue” with those agencies. “We expect that the actions that we are intending to take will strengthen both the Xcel Energy and the NRG balance sheet and we are sharing some of the ratios that we expect to occur as a result of this transaction.”
But Moody’s said that it had placed Xcel Energy’s long-term debt and preferred securities ratings under review for possible downgrade. The ratings agency said that the following ratings are affected: (i) Xcel Energy’s A3 issuer, senior unsecured long term and bank loan ratings and (ii) Xcel Energy’s Baa2 preferred stock rating.
The ratings agency said that it was taking this action to reflect possible pressure on Xcel Energy’s own credit profile associated with its planned restructuring of NRG’s finances and businesses. Separately, Moody’s said that it was continuing its review for possible downgrade of NRG.
Moody’s said its review will not affect Xcel Energy’s Prime-2 commercial paper rating. Nor will the review affect the ratings for Xcel Energy subsidiaries Public Service Co. of Colorado, Northern States Power Co. (Minnesota), Southwestern Public Service Co., Northern States Power Co. (Wisconsin), Borger Energy Associates L.P. or any of their affiliates.
Moody’s noted that it was placing Xcel Energy under review for possible downgrade to reflect the “probability” that the company will borrow funds at the holding company level both to carry out its planned actions and for additional funding should Xcel Energy decide to invest additional funds to improve NRG’s credit profile, or should some of Xcel Energy’s planned actions — such as the sale of certain NRG assets — generate less cash than expected.
Meanwhile, Brunetti used the call to detail some of the benefits that NRG investors can expect from the proposed transaction. Among other things, the Xcel Energy official cited enhanced credit quality, “which, absent this transaction, ratings downgrades appear highly likely with serious financial consequences.”
Brunetti noted that the Securities and Exchange Commission (SEC) will need to sign off on Xcel Energy’s bid to increase the amount it can invest in NRG under the Public Utility Holding Company Act of 1935. To that end, Xcel Energy will file the necessary papers at the SEC in early March.
Xcel Energy expects to close the transaction in April of this year.
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