NRG To Buy Texas Genco For $5.8B
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NRG Energy, an American power producer that exited bankruptcy protection almost two years ago, agreed to buy electricity producer Texas Genco Holdings for about $5.8 billion.
NRG will enter Texas as the state’s second-biggest power producer. Four buyout firms that acquired Texas Genco in April 2004 would get $4 billion in cash and $1.8 billion in stock, Princeton, N.J.-based NRG Energy said. NRG will assume $2.5 billion of Texas Genco’s debt.
NRG’s total capacity will rise 72%. Costs for natural gas, which generates the most power in Texas, have doubled in the past year, driving up profit and demand for the half of Genco’s fleet that uses cheaper coal and nuclear energy.
The purchase will immediately increase profit after it closes in the first quarter, NRG said.
“NRG needed to be in Texas,” said Lasan Johong, a New York-based analyst with RBC Capital Markets, who rates the shares “neutral” and owns none. “To do that, they have overpaid.”
The purchase may increase per-share profit by 45% next year to about $3.50 from an earlier estimate of $2.40, Mr. Johong said. Net income will be as much as $530 million, up from his earlier estimate of as much as $200 million, Mr. Johong said. NRG’s net income in 2004 was $185.62 million, according to filings.
NRG is betting on natural gas prices above $6 per million British thermal units after 2010, when contracts for 82% of the Texas coal and nuclear output expire, Mr. Johong said. Gas traded Friday for $13.92 per million British thermal units in New York. The average for the past year was $7.63 per million Btu and the average for the preceding five years was $4.62.
NRG is paying less for Genco than investors value its current fleet, the chief executive of NRG, David Crane, said in an interview.
“Demand for electricity is growing faster in Texas than in other regions,” Mr. Crane said. “What’s important here is that Texas Genco and NRG both have multi-fuel portfolios in markets where gas sets the price of electricity.”
NRG will issue a combination of debt and equity to finance the purchase, Mr. Crane said. NRG has the option of issuing as many as 9 million new shares in lieu of cash to the sellers, the company said in its statement.
A $500 million tax benefit to be recorded when the transaction closes will cut the total price for Texas Genco, including debt, to $7.8 billion from $8.3 billion, Mr. Crane said.
Mr. Crane said he approached Kohlberg Kravis Roberts & Company, one of the four buyout firms that bought Texas Genco last year from Houston utility CenterPoint Energy, after learning the owners might be interested in selling the business to a rival.
“Texas is the only competitive market we’re not in,” Mr. Crane said. “If you’re going to be in, you’ve got to be one of the top three players.”
Texas Genco’s owners – KKR, the Blackstone Group, Texas Pacific Group, and Hellman & Friedman – said in June that the company might issue as much as $600 million in an initial share offering.
Morgan Stanley advised NRG, the company said. Goldman Sachs and Lehman Brothers Holdings advised Texas Genco.