NRG to acquire Texas Genco, issue $2.5 billion of debt, $500 million convertible preferreds

By Paul Deckelman

New York, Oct. 3 - NRG Energy Inc. announced plans Monday to acquire Texas Genco LLC in a deal which NRG's chief executive officer said would create "a powerhouse" in the merchant generating industry.

"The consolidation of the wholesale power generating industry begins today," NRG CEO David Crane declared on a conference call with analysts at which the deal was formally announced.

Princeton, N.J.-based NRG will pay $5.8 billion for Houston-based Texas Genco, $4 billion in cash and $1.8 billion in NRG shares representing about 25% of the combined company's stock; the current Texas Genco owners may also receive as much as $400 million of preferred stock. The company plans to raise the $4 billion cash portion of the purchase price through the placement of $2.5 billion of debt, a $500 million mandatory convertible preferred issue, and a $1 billion equity issue.

NRG will also assume about $2.5 billion of Texas Genco debt, for a total enterprise value of some $8.3 billion. Taking into account a $500 million present value tax benefit, it estimates the total consideration of the deal at $7.8 billion.

Crane said that the purchase price would be underwritten by Morgan Stanley and Citigroup "to the tune of $10 billion" as part of the interim financing.

NRG's chief financial officer, Robert Flexon, told the conference call that even with the acquisition of Texas GenCo and the resulting addition of new debt, NRG would be able "to maintain our capital structure within a targeted range," with consolidated net debt-to-capital of around 45% to 55%. Flexon termed this "our optimum capital structure," which the company had achieved over the past year, even as it was repurchasing over 20% its outstanding common shares, bringing down the total capital portion of the equation.

Post-closing, which is projected for next year's first quarter, NRG expects that net debt/capitalization ratio to be within the targeted range by year-end 2006.

"Prudent balance sheet management," the CFO said, "is the fundamental principle at NRG," which reorganized earlier in the decade, emerging from Chapter 11 in December 2003 as a stand-alone company under the leadership of the current management team.

Flexon said that the combination of NRG and Texas Genco would provide "scale to our balance sheet, adding financial flexibility and strength NRG could not realize on its own. We expect this to materialize in a more efficient collateral structure, improving liquidity, and a lower cost of capital, opening up more investment opportunities."

Financing plans

The CFO said that to finance the purchase price and achieve the proper capital structure and debt covenants for the combined company going forward, NRG intends to refinance its own and Texas Genco's existing first-lien debt and liquidity facilities, issue equity and equity-linked securities, such as the convertible preferred securities, through public offerings, and issue common stock and, potentially, preferred shares, to the current owners of Texas Genco, which is privately held. He gave no timetable for the financing.

Flexon said that the $10 billion interim financing backstop commitment by Morgan Stanley and Citigroup includes a $4.9 billion commitment for new liquidity facilities and a new Term Loan B, as well as a $5.1 billion bridge financing to the capital markets for debt, common stock and equity-linked offerings.

He further said that the anticipated covenant package for the new debt "should provide NRG with more flexibility than NRG current debt covenants" do. The new capital structure will give the company the flexibility to address both company's outstanding bonds should it be determined that a change-of-control offering is required.

Texas Genco has $1.125 billion of outstanding 6 7/8% senior notes maturing on Dec. 15, 2014. Those notes were heard to have jumped six points to around the 107.5 bid level in Monday's trading.

NRG has $1.725 billion of outstanding 8% second-priority bonds due Dec. 15, 2013, which were heard to have firmed about four points Monday to 110.25 bid.

Apart from the bonds, Texas Genco's capital structure includes some $1.625 billion of first-lien term loan B bank debt slated to come due on Dec. 31, 2011 and a $325 million first lien revolving credit bank facility maturing on Dec. 31, 2009.

NRG's capital structure, meantime, apart from its bonds, includes $697 million of first-priority term loan B bank debt maturing on Dec. 31, 2010, $800 million of first-priority term loan B bank debt maturing on Dec. 31, 2011, a $250 million first-priority revolving credit bank facility coming due on Dec. 31 2006, a $150 million revolver maturing on Dec. 31, 2007, and $400 million of outstanding convertible perpetual preferred stock.

Evaluating second-lien debt

In answer to an analyst's question about what the new permanent capital structure would look like, Flexon said that "we expect to have Texas Genco [coming] in underneath the energy holding company structure. We'll have new corporate-level first-lien debt. We're evaluating what we do with our [existing] second-lien positions.

"It will be one integrated financing package, so you will not have a bifurcated situation where you'd have the Genco first-lien outstanding, which could conflict with our first-lien; it will all be underneath the same holding company structure."

The company aims to have the flexibility to take out the Texas Genco bonds, the CFO said during the Q&A session.

He also said that NRG wants to get "covenants that are more representative of a company of this size, of this type of credit stature and cash-flow generation. We expect coming out of this also more flexible covenants than what we currently have."

He additionally said that during the capital transactions he outlined, "our intention will be to flex the various instruments of debt and equity, where appropriate, and use the proceeds in lieu of issuing the [up to $400 million] preferred shares" to Texas Genco's owners.

Flexon noted that the economic benefits of the deal - the creation of a larger, stronger player in the industry, with immediate earnings accretion, a prudently levered balance sheet and greater financial flexibility, "are not contingent on achieving synergies," nor are they "dependent on achieving a hockey-stick natural gas forecast." He also told an analyst during the question-and-answer portion of the proceedings following the formal presentation that achieving the desired debt-to-total capitalization target, or any other liquidity metric, is "absolutely" not dependent on any asset sales.

Crane pointed out that the two companies are "complementary," since they do not operate in the same geographic regions and thus, there is "no overlap." Texas Genco operates in eastern Texas, including the Lone Star State's two largest markets, Houston and Dallas, while NRG has operations in the Southeastern United States, in the Western States and in the Northeast.

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