- Exelon raises the stakes for its hostile takeover of NRG
- NRG raises the costs of STP units 3 & 4, but CPS Energy stays in at 40%
- Exelon pulls out of Victoria, TX, NRC license process for two ABWRs
The nuclear industry in Texas more closely resembles the West of oil wildcatting days than corporate, button down corner offices. That's because Exelon, which is based on Chicago, is not going to accept "no" for an answer from NRG. Exelon has been trying to force an all stock hostile takeover of NRG since last October, but without so much as a hat tip from the object of its desire.
Instead, NRG has dug in its spurs, so to speak, and advised its shareholders not to accept a modest premium for the stock from Exelon. The firm has said repeatedly that Exelon’s previous all stock offer was “inadequate and uncertain.” However, NRG also said it was open to a deal at a fair price, and, undoubtedly, for cash.
Some of NRG's investors agreed, especially several with more than 5% of NRG's shares, and said the only way they'd participate in the deal is if Exelon sweetened it to their liking.
That's exactly what happened this week when Exelon Corp (NYSE:EXC) announced on July 2 an increase in its offer to acquire all of the outstanding NRG common stock in an all-stock transaction with a fixed exchange ratio of 0.545 of a share of Exelon common stock for each NRG (NYSE:NRG) share, a 12.4% increase over the initial exchange offer of 0.485. Exelon said its increased offer represents value of over $3 billion to NRG shareholders.
Exelon’s stock closed July 2 at $49.37/share. A swap of 0.545 shares for each share of NRG stock, which closed July 2 at $24.80/ share, would come in at $26.91. The difference of would be a 6.1% premium at the market close prices of 7/2.
The CFO class math gets a bit complex here. The size of the premium is not based on stock prices at market close, but on stock valuations offered by Exelon. For instance, the New York Times Dealbook Blog reported that Exelon addressed this difference by pricing NRG’s stock at $28.10/share which is a hypothetical price that exists only in the pages of Exelon’s corporate presentation.
So while Exelon has increased the amount of stock it is willing to offer for NRG’s hypothetically more valuable shares, the premium still remains quite modest and may not prod NRG’s investors to buy in to the deal. As these NRG stockholders have stated in the past, they see more of an upside associated with NRG’s expected growth in the future than they do with Exelon’s “bird-in-hand” all stock deal today.
The premium may not be very attractive to NRG stockholders given the performance of Exelon’s stock. It has been volatile dropping from a Feb 6 price of $57.81 to a March 11 price of $40.15 and then rising slowly since then to its close 7/2 of $49.37 down from a mid-day high of $51.00.
Exelon has another rabbit in its hat
Exelon also filed the SEC an investor presentation that will be used as part of the company’s proxy solicitation for the election of nine new, independent directors to the NRG board of directors. In the presentation, Exelon cited approximately $1.5 billion of additional newly identified synergies as the primary reason for the increase. The new offer also reflects the value of NRG’s recent acquisition of the Reliant Energy retail business.
“We listened to NRG investors and balanced their views with the best interests of Exelon shareholders. An exhaustive analysis by our internal team, informed by the best third-party experts, resulted in additional synergies, allowing us to increase our offer to NRG shareholders,” said John Rowe, chairman and chief executive officer of Exelon.
“This is our best and final offer, and we will use the time leading up to the NRG annual meeting on July 21 to communicate the value of our new offer to NRG shareholders, encouraging them to vote for nine new independent directors who can unlock that value.”
In the presentation, Exelon also shared details on its financing plan to maintain its investment grade credit ratings while optimizing long-term shareholder value. Exelon says it is confident, based on discussions with its outside advisors, that the company will be able to meet all financing needs associated with the transaction, including the re-financing of $4.7 billion of NRG’s senior notes and other NRG debt, if necessary, while maintaining investment grade credit ratings.
The Wall Street Journal reported July 3 that if the deal does go through, Exelon would issue $1.1 billion in new stock and sell $1.6 billion in assets. Exelon already had planned to sell several power plants as part of the deal but added NRG's Louisiana and international assets to its divestiture list.
The moves is designed to help Exelon protect its credit rating if the deal closes, credit analysts told the WSJ. Exelon told the newspaper it is confident it will retain its investment-grade ratings after the transaction, under which Exelon could have to refinance $4.7 billion of NRG's senior notes and other debt. Last month Exelon laid off 500 people for a cost savings of $350 million. More layoffs would likely occur at both companies if the deal closes July 21.
STP Units 3 & 4 may run $13 billion
When NRG filed its license application with the NRC in September 2007, it priced the cost of twin GE-Hitachi 1,350 MW reactors at $2,000/Kw. That price has gone up quite a bit since then. This week new estimates by CPS Energy of San Antonio, one of NRG’s investors, put the price at $13 billion, including interest, or $4,800/Kw more than two times the original estimates.
It’s a daunting set of numbers, but what’s interesting is that CPS Energy, which will own 40% of the new plant, feels nuclear energy is the most cost effective solution for its customers. CPS Energy must take its numbers to the city council in October.
This new estimate produced predictable cries of “foul” from green groups who claim renewables will cost less. However, Steve Bartley CPS general manager told the San Antonio Express, “We believe the long-term lowest price option is nuclear.”
The San Antonio utility will keep rates down by selling half of the capacity it will own, or 20%, on the wholesale electricity market. Construction of the two new plants will begin in 2012 and they will enter revenue service in 2015 and 2016.
Exelon mulls future of Victoria new build
While Exelon continued its hot pursuit of NRG and its current and future reactor operations, the Chicago utility was cooling off its activities in Victoria, TX, where it planned to build two GE-Hitachi ABWRs. The new plants would have sent electricity to San Antonio and Houston. However, Exelon clearly sees a faster time to market with its hostile takeover of NRG which will service the same markets.
Exelon has postponed work on its NRC COL application and instead will pursue an early site permit (ESP). This move will preserve Exelon’s options to develop the site for the next two decades. The Victoria site was one of two “greenfield” sites among COL applications submitted to the NRC last year.
Exelon Corp. said it has called off plans for now to build a new nuclear plant in Texas because of worries over the economy and the limits on federal loan guarantees.
Earlier this year it bid goodbye to GE-Hitachi’s new ESBWR reactor design when it learned the Department of Energy ranked its applications out of competitive range for loan guarantees. Switching to ABWRs didn’t improve Exelon’s chances. The result is the company is not going forward with the project absent the loan insurance.
"We just aren't in a place to pursue the nuclear project," John Rowe, Exelon's chairman and CEO, told The Associated Press.
Exelon said some activity may continue at its site in Victoria, but major preconstruction work such as road upgrades and site preparations will be deferred.
Under the ESP process, the NRC evaluates site safety, environmental impact and emergency planning regarding a proposed nuclear plant. By issuing an ESP for a specific site, the NRC is certifying that the site satisfies the criteria in these areas. If the company later chooses to pursue construction, the ESP becomes part of the COL application, which requires a separate review and approval by the NRC.
Exelon has informed the NRC that the company will not submit a revision to the COL application submitted in September 2008, which referenced the ESBWR. This move saves Exelon a boat load of money since the firm will not have to update the license application with new information about the ABWR reactor. That’s money it could probably use if it is successful in its hostile takeover of NRG.
Update 07/11/09
The New York Times reports a proxy firm has advised NRG shareholders not to accept Exelon's offer saying it is too low.
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