TMCnet News
Reliant and NRG silent on possible merger(Houston Chronicle Via Acquire Media NewsEdge) Nov. 22--According to SparkSpread.com, an online energy industry news site, senior NRG executives expressed interest in buying the Reliant business during an investor dinner at a financial conference in Phoenix last week. The report cited unidentified "market watchers." Both companies declined comment, but it isn't outside the realm of possibility. Since October Reliant has said it was looking into strategic options, including selling all or part of its business. And NRG, the second-largest power producer in Texas, has expressed interest in acquisitions recently, including an $11 billion offer for power plant operator Calpine earlier this year. But analysts are not sure an NRG-Reliant combination would make good business sense, and some wonder whether the move--if in fact it's under consideration--would be intended mostly as a defense against a hostile takeover bid by Chicago-based power giant Exelon Corp. For starters such a deal would essentially have NRG buying one of its biggest customers. Most of NRG's power plants are around Houston, and were once part of the former integrated utility Houston Light & Power. And while Reliant's 1.8 million customers are spread throughout the state, the greatest concentration is in Houston since it too spun out of HL&P. Carl Blake, an analyst with research firm Gimme Credit, said in a note to investors that Reliant's retail operation and NRG's Texas power plants could "nicely complement" each other. "But the [retail] segment has myriad competitive, regulatory, and operational issues, requires a lot of capital, and doesn't fit well with NRG's wholesale-focused strategy or its skill set," Blake wrote. Gordon Howald, director of utilities research for Calyon Securities, notes that top Texas electric retailer, TXU Energy, is owned by the same holding company that owns Luminant, the operator of many North Texas power plants. So an NRG-Reliant retail combination wouldn't be without precedent. "But it doesn't make a whole lot of sense for them to move away from their focus on the highly profitable wholesale power business," Howald said. Reliant has made money with its retail business, although 2008 has been a tough year for the retail power industry in Texas. An NRG-Reliant deal could make Exelon's hostile takeover bid somewhat more difficult, the analysts note, but entering into one risky deal is not the best way to go about avoiding another one. An NRG-Reliant deal could make Exelon's hostile takeover bid somewhat more difficult, the analysts note, but entering into one risky deal is not the best way to go about avoiding another one. "I hope they're not doing something ugly to stave off a takeover attempt from the outside," said Howald in an interview. Followed rebuff Shortly after NRG rebuffed Exelon's buyout bid on Nov. 9, Exelon started going directly to NRG equity and debt holders to convince them to go along. Exelon Executive Vice President Ruth Ann Gillis told Bloomberg on Friday that the investors were "supportive" of their bid, now worth about $5.1 billion based on NRG's stock price. But Blake and Howald believe NRG will continue to resist Exelon's advances because the company's stock price is steeply undervalued. "I don't know how much better positioned an (independent power producer) could be than NRG," Howald said, referring to the company's mix of power plants, balance sheet, cash flow and management. NRG shareholders might be tempted to sell out to Exelon as a way to get cash in tough times, but if the current credit crisis subsides in the next six months to a year, the power industry could make a strong rebound, Howald said. It's not just Wall Street that is watching the NRG/Exelon fight. During a hearing of the Texas Senate Committee on Business and Commerce in Austin this week, legislators grilled Public Utility Commission Chairman Barry Smitherman about what say, if any, the state would have over a deal. Smitherman said it appeared the only power the state had was to ensure the combined companies would have no more than 20 percent of the state's generation capacity, as required by the state's market rules. Concerns return It was a repeat of concerns raised in 2007 when lawmakers debated measures to give the PUC more authority to review the $32 billion purchase of TXU Corp by a group of private equity companies. Those measures fell by the wayside, however, when TXU's buyers promised to reduce electric rates. San Antonio's local utility, CPS Energy, is a partner in the South Texas Project expansion with NRG and is counting on it for future power needs. "We don't want to ... lose our place in line for federal action because of a financial transaction," she said, referring to the project's status as the first new reactor application received by the Nuclear Regulatory Commission in years. Other legislators said expected federal regulation of carbon dioxide emissions means Texas will want more of its future power needs met via new nuclear reactors if it hopes to avoid having to increase its reliance on pricey natural gas-fired power. "Since we're so determined that we need as much nuclear as possible in the future, wouldn't we be better off with two competing companies building nuclear plants instead of one consolidated company?" asked Sen. Kevin Eltife of Tyler. "I don't' think I can answer that," said Smitherman, given Wall Street's close scrutiny of the takeover attempt. Craig Nesbit, a spokesman for Exelon, said the decision on whether to build new nuclear reactors in Texas would not be based on a merger with NRG. Credit a big issue Rather the largest factor would be the availability of credit for the projects and federal loan guarantees that have been extended to the next generation of nuclear plants. "The combined companies would be stronger than either separately, but does that mean four new reactors would get built? Not necessarily. But that won't be the reason they do or they don't." [email protected] To see more of the Houston Chronicle, or to subscribe to the newspaper, go to http://www.HoustonChronicle.com. Copyright (c) 2008, Houston Chronicle Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |