Exelon's $6.2 Billion Bid for NRG Would Create Largest Power Utility in U.S.

By MATTHEW L. WALD, Bloomberg News
WASHINGTON - The Exelon Corporation's unsolicited bid to buy NRG Energy, a power generator based in Princeton, N.J., would create the largest power company in the country, in terms of assets, market capitalization and generation capacity, and would benefit shareholders of both companies, Exelon said on Monday.
"There is simply no doubt that scale is important in turbulent times, and it's important as the costs of growth continue to rise," Exelon's chairman, John W. Rowe, told analysts in a conference call, in which he cited the current credit crisis.
But the deal would raise credit challenges; Exelon is assuming that because of bond covenants, sale of NRG would require Exelon to refinance $8 billion in debt and that interest rates would run into double digits. Executives held out some hope, though, that they might be able to renegotiate with the current bondholders, rather than refinance.
The transaction would depress Exelon's credit rating but it would remain investment grade, company executives said, and would return within two or three years to its current level.
NRG, with 44 generating stations spread across Southern California, Texas, Pennsylvania, Delaware, New York and Connecticut, had no immediate comment except to say that it was evaluating the offer with its advisers.
The $6.2 billion bid is an all-stock offer, 0.485 share of Exelon for each share of NRG. The offer is a 37 percent premium over NRG's closing price last Friday, Exelon said.
While the market tumble has lured various bargain-seekers into the utility business, one analyst on the call, Steve Fleishman, of Catapult Capital Management, said that the ratio in stock price between the two companies had not changed much between the beginning of the credit crisis and last Friday, when the offer was priced. Both prices are now depressed, according to analysts.
Exelon, already one of the nation's largest electric companies, covers a broad swath of the Midwest and Middle Atlantic states, combining the assets of Commonwealth Edison and Philadelphia Electric. A successful deal would require Exelon to sell some assets in Texas and in the Pennsylvania or Delaware areas. But it would give the company very broad geographic diversity, Mr. Rowe said, and access to plants using a variety of fuels.
According to the Edison Electric Institute, the trade association of the investor-owned utilities, Exelon ranks sixth nationally in generating capacity and fourth in megawatt-hours produced; the merger would make it No. 1 in both categories. It has assets of $49.5 billion as of the end of last year, ranking third; combining with NRG's $19.3 billion in assets, it would also rank first, the institute said.
Exelon's operations focus heavily on nuclear- and coal-fired plants. NRG has several coal-powered plants assets in Texas, a major share of a twin-unit nuclear plant there and plants fired by natural gas and oil.
Joelle Frank, a spokeswoman for NRG, said the company had advised its shareholders to "take no action, pending review by NRG's board." NRG has hired Citigroup and Credit Suisse to advise it, she said.
Exelon said the combination would produce an enormous combined entity with investment-grade credit ratings and the financial strength to build new power plants. NRG ranks well for creditworthiness among independent power producers, but many experts say they think that its plan to build two new nuclear reactors adjacent to its South Texas reactors faces challenges.
"NRG's South Texas Project nuclear plant and the very valuable expansion rights could be worth more in the hands of Exelon," said John Kiani, a senior utilities and power analyst atDeutsche Bank.
A year ago, NRG asked the Nuclear Regulatory Commission for permission to build two nuclear reactors at a site 90 miles southwest of Houston, the first time since the mid-1970s that anyone had sought permission for a new nuclear power plant in the country. Exelon is one of the nation's largest and most successful nuclear operators. But the promised resurgence of nuclear power has been thrown into some doubt because of the credit crisis.
Mr. Kiani said the offer "materially undervalues" NRG. Both NRG and Exelon have sold their output in advance and will probably realize higher cash flows once those contracts expire, he said.
Another looming uncertainty is regulation of carbon emissions. Exelon, anticipating such regulation, has begun a project to lower emissions substantially within its service territory by 2020, and said it would devise a similar program for NRG. NRG is part of a coalition of companies seeking such regulation. If a schedule of emission limits is imposed, that could help Exelon, which has a huge fleet of zero-carbon nuclear plants. It would also create certainty for NRG.