Published: July 10, 2009
Exelon Offer Creates the Only Real, Meaningful Value Available to NRG Shareholders
CHICAGO - (BUSINESS WIRE) - Exelon Corporation (NYSE:EXC) announced today that it has mailed a
letter to shareholders of NRG Energy, Inc. with more information on its
increased offer to acquire NRG. The letter emphasizes that the offer
brings $2-3 billion in immediate value to NRG shareholders, and there is
nothing that NRG can do on a standalone basis to match that. In the
letter, Exelon urges NRG shareholders to vote the BLUE proxy card
to elect nine new independent directors who will foster negotiations.
The full text of the letter follows:
* * * *
Dear NRG Energy, Inc. Shareholder:
Exelon's offer to NRG shareholders is about real value - $2-3 billion
immediately and more in the future. We have increased our offer by over
12% after identifying an additional $1.5 billion in synergies and giving
credit to the real value that NRG has created through its acquisition of
Reliant's retail business. There is nothing that NRG can do on a
standalone basis that will give you as much. We are offering you
securities in a company whose value will also grow when power prices
recover, whose value rises rather than declines as carbon is priced into
the marketplace, and whose balance sheet is much stronger.
The only way you will be able to realize this value is if you and other
NRG shareholders take action now to elect nine new independent
directors to the NRG board. We urge you to vote today using the BLUE
proxy card - by telephone, by Internet or by signing, dating and
returning the BLUE proxy card in the postage-paid envelope
provided. Even if you have already voted by using the White card, you
can still change your vote by using the BLUE proxy card.
Exelon is prepared to discuss its offer with NRG at any time without
preconditions. Exelon has made a full and fair offer for NRG, taking
into account current market conditions as well as the additional
synergies we have found and NRG's acquisition of the Reliant retail
business. Election of nine new NRG directors will foster negotiations
that can lead to a mutually beneficial transaction. The election of less
than nine new directors will not demonstrate the shareholder conviction
that is essential to make a transaction happen.
EXELON'S OFFER IS REAL AND IMMEDIATE VALUE
You have received an avalanche of information about our offer from both
Exelon and NRG, especially in the last several weeks. There are six
areas that deserve a closer, objective look. These six areas go to the
heart of our value proposition.
1. Exelon has significant upside earnings
potential, while NRG faces revenue deterioration.
Between 2009 and 2011, we expect Exelon's gross margin to grow by
approximately $500 million due largely to the expiration of the
below-market power sales agreement between Exelon Generation and PECO
Energy Company. This projection is based upon forward market prices,
expected generation, and Exelon's existing hedges, including Exelon
Generation's successful bids in the recent Allegheny and PECO Energy
procurement auctions.
Based on NRG's own publicly-disclosed hedge position and current forward
prices, NRG is likely to experience a significant decline in EBITDA as
baseload energy revenues fall by roughly $700 million in 2011 compared
to 2009. Exelon disclosed this estimated decline in a July 2 SEC filing,
and NRG has not challenged it.
In 2009, 95% of the NRG baseload portfolio was sold forward at an
average price of $61/MWh, based on the average prices disclosed in NRG's
2008 Form 10-K. In 2011, NRG's average sales price will be
roughly $9/MWh lower:
-
67% of the portfolio already has been sold forward at $52/MWh, as
stated in NRG's 2008 Form 10-K.
-
Based on forward 2011 power and commodity market prices as of May 29,
2009, the remaining 33% will be sold at an average price of about
$53/MWh.
This deterioration in pricing for roughly 63 GWh of baseload energy,
combined with roughly 3 GWh in forecasted reduced baseload output, again
as disclosed in NRG's 2008 Form 10-K, produces an expected revenue
decline of approximately $700 million in 2011 compared to 2009.
2. The difference between NRG's and
Exelon's valuation of Reliant is much smaller than NRG asserts.
NRG claims the purchase of Reliant retail has resulted in an increase in
NRG's value of $4.50 per share, and that Exelon has ascribed only $1.00
per share of value to Reliant. In fact, we do not value Reliant retail
as highly as does NRG, but the difference between our valuations is much
narrower than NRG asserts.
We believe that the gross value of Reliant retail is about twice what
NRG paid for it, while NRG maintains that Reliant retail is worth $4.50
per share, about three times the purchase price paid only two months
ago. The difference between these values is not,
as NRG claims, over $3.50 per share. NRG's $4.50 per share value is not
net of purchase price and does not
include any cost for permanent collateral. Exelon's $1.00 per share
value is net of both the purchase price and collateral requirement.
Thus, NRG's repeated comparison of its valuation of $4.50 per share to
Exelon's $1.00 per share is a classic failure to compare "apples to
apples." Deducting the purchase price and permanent collateral from
NRG's gross number results in a valuation of just over $2.00 per share.
Moreover, Exelon's $1.00 per share valuation does not include
approximately 50 cents per share in net present value of synergies which
Exelon believes it can achieve in consolidating the two companies'
retail businesses.
NRG's recently updated guidance forecasts $400 million of Reliant retail
EBITDA in 2009. We believe this is only a temporary increase due to low
gas prices and an un-hedged position and is not indicative of the future
performance of the Reliant retail business. The low gas prices that made
Reliant retail valuable in the short term threaten both its value and
that of the rest of NRG's business in the longer term.
3. The transaction is equitable on a free
cash flow basis.
NRG asserts that it will contribute a disproportionate amount of free
cash flow relative to the ownership stake its shareholders will receive
in the combined company. We agree that NRG has attractive free cash
flow, but their estimate significantly overstates NRG's contribution to
the combined company.
NRG created a new definition of free cash flow - "recurring free cash
flow." In recurring free cash flow, NRG excludes both its environmental
and growth capital expenditures. NRG has significant environmental
capital expenditures looming in the coming years above the projected
expenditures that NRG has specifically quantified in its public
disclosures. In addition, NRG repeatedly stresses that its various
"growth" initiatives are the building blocks to its future prospects. If
those environmental and growth capital expenditures were to be included
in the analysis, NRG's cash flow would be much lower than the "recurring
free cash flow" that NRG's management is forecasting.
The free cash flow measure being used by NRG also fails to remove the
effects of leverage, which further overstates NRG's relative cash flow
contribution. Exelon determines value by performing a long-term
discounted cash flow (DCF) analysis for each asset. This approach
correctly accounts for leverage and riskiness of the cash flows,
includes all related costs, and reflects the long-term impact of key
factors like gas and carbon. One shorter-term measure which is more
consistent with our DCF approach is leverage-adjusted EBITDA. This
metric is routinely used by the financial community to analyze
acquisitions and correctly accounts for the impact of leverage. Based on
this metric, the cash flow contributions to the combined company by NRG
are clearly in line with Exelon's offer, as illustrated below.
4. NRG faces $1.3 - $2.3 billion of
environmental compliance costs, while Exelon has significant carbon
upside.
Pending federal initiatives will have a significant impact on NRG's
coal-fired power plants, which account for approximately 75% of NRG's
megawatt hours sold. These initiatives include aggressive enforcement
actions by the Obama administration of the Clean Air Act New Source
Review requirements on NOX and SO2 and the
Environmental Protection Agency's forthcoming Clean Air Interstate Rule
and Clean Air Mercury Rule, as well as the EPA's likely new requirements
relating to coal ash management. NRG will have to spend a significant
amount of money on capital improvements to address these new
requirements.
This is a fact that NRG recognizes. In its first quarter 2009 Form 10-Q,
NRG discusses these initiatives and states that it has prepared a
capital expenditure plan in anticipation of these upcoming requirements.
However, NRG does not disclose the estimated costs in its plan, leaving
it to others to estimate the costs. Based on publicly available
information about NRG's plants, our assessment of the impact of the
federal initiatives on those plants on a plant-by-plant basis, and third
party estimates of costs of compliance for each plant we evaluated,
Exelon determined that these initiatives will result in compliance costs
for NRG of $1.3 - $2.3 billion in excess of NRG's $1.2 billion of
planned expenditures for current environmental requirements as disclosed
in NRG's 2008 Form 10-K. Our estimate of these costs is included in our
valuation model for NRG. We disclosed these costs in a filing with the
SEC on July 2, 2009, and NRG has not taken issue with our analysis.
While NRG faces up to several billion dollars in environmental costs,
Exelon, with the largest nuclear fleet in the country, stands to benefit
more than any other generating company from whatever carbon legislation
is passed. We believe Exelon's EBITDA will increase $1.1 billion
annually if the Waxman-Markey legislation that passed the U.S. House of
Representatives on June 26, 2009 becomes law. As a stand-alone company,
NRG has little upside from carbon legislation. Any downside from carbon
legislation for NRG is separate and apart from the $1.3 - $2.3 billion
in additional environment compliance costs outlined above.
5. Exelon's low risk, low cost uprates
offer better value than NRG's high risk, high cost new nuclear build.
As the owner and operator of the largest and best run nuclear fleet in
the country, we know something about nuclear plants and the risks of
nuclear construction. While NRG has done much work on its STP 3 & 4 new
nuclear project and there is some value in the option inherent in that
project, the value of that option is overwhelmed by the associated
risks. Any NRG shareholder who values new nuclear output in a
carbon-constrained world should see much greater value in Exelon's
proposed nuclear uprates.
New nuclear projects are subject to substantial project execution and
cost escalation risks. The industry has inaccurately estimated the costs
of these projects in the past. NRG has no experience building a nuclear
plant, and its cost estimate of $3,200 per kW is far lower than the
consensus U.S. cost estimate of $4,000 - $4,500 per kW. In addition,
both the amount and sources of NRG's financing for the project are
uncertain and none of its major risk mitigation steps have been
implemented.
On the other hand, Exelon's nuclear uprate plan delivers more megawatts
than NRG's new build with little risk and at half the cost. Nuclear
uprates provide a substantially higher return at much lower financial
risk than new build and do not present the risk of new build cost
overruns and regulatory delays. This is evidenced by Exelon's success in
implementing over 1,100 MWs of prior uprates. The power from uprates
will come online sooner and our phased approach means we can defer
specific uprate projects if market conditions dictate. The value upside
in Exelon's existing fleet and uprates is substantially greater given
the little risk and higher return embedded in Exelon's nuclear fleet.
6. Real synergies equal real value.
We are confident that all $3.6 - $4 billion in net present value
synergies that we have identified can be achieved. Our analysis of
potential synergies was compiled by an Exelon team with significant
experience in the PECO-Unicom merger and other corporate transactions
and was assisted by the country's leading synergy consultants. More
importantly, our significant experience in cost reduction demonstrates
we will achieve these cost savings, and possibly even more. In cost
reduction programs in 2000-2001 and 2003-2004, we delivered annual
savings of over $250 million and $350 million, respectively, far
surpassing the initial targeted savings.
Our synergy estimates are based in large part on information taken from
NRG's published financial reports, publicly available
information, industry proxies and Exelon cost levels for similar areas.
NRG's functional baseline for the synergy analysis was calculated using
information from NRG's 2008 Form 10-K, resulting in approximately $1.3
billion of non-fuel O&M costs before any adjustments specific to NRG. We
then utilized a bottoms-up functional review, assessing discrete
operating areas. Our analysis was entirely consistent with our other
cost reduction programs that have yielded significant value to Exelon
shareholders.
In addition, the estimated level of synergies is consistent with those
observed in prior power sector transactions. On a combined basis, the
estimated synergies amount to 6-7% of total O&M for both companies,
which is less than the 9% observed in prior transactions and comparable
to that estimated by NRG in its hostile offer for Calpine.
VOTE THE BLUE PROXY CARD FOR ALL NINE INDEPENDENT CANDIDATES
Make no mistake - our offer is the only opportunity where you will see
meaningful, real shareholder value of an amount that makes a difference,
especially in a marketplace buffeted by volatile commodity prices,
regulatory challenges and credit constraints. NRG has no other means to
provide you the amount of value that our offer represents.
There is only one way to capture the immediate value of Exelon's
offer - you must vote for all nine independent candidates proposed by
Exelon.
Your vote is what counts. To elect directors who are committed to
looking out for your best interests, including pursuit of the value
inherent in a combination of Exelon and NRG, you should vote the BLUE
proxy card TODAY by telephone, by Internet, or by signing, dating
and returning the enclosed BLUE proxy card in the postage-paid
envelope provided. If you have already voted by using the White card,
use the BLUE to change your vote to support the only meaningful
value creation opportunity you have as an owner of NRG.
Thank you for your consideration.
Sincerely,
|
John W. Rowe
|
|
Chairman and Chief Executive Officer
|
|
Exelon Corporation
|
* * * *
Exelon announced on June 17, 2009, that it had filed its definitive
proxy materials with the Securities and Exchange Commission to solicit
proxies from NRG shareholders at the NRG annual meeting of shareholders
scheduled for July 21, 2009. Exelon urges all NRG shareholders to use
the BLUE proxy card to vote in favor of proposals to expand the
NRG board and elect nine new, independent and experienced directors who
will act in the shareholders' best interests to capture the highest
shareholder value possible.
Important Information
This press release relates, in part, to the offer (the "Offer" ) by
Exelon Corporation ("Exelon" ) through its direct wholly-owned
subsidiary, Exelon Xchange Corporation ("Xchange" ), to exchange each
issued and outstanding share of common stock (the "NRG shares" ) of NRG
Energy, Inc. ("NRG" ) for 0.545 of a share of Exelon common stock. This
press release is for informational purposes only and does not constitute
an offer to exchange, or a solicitation of an offer to exchange, NRG
shares, nor is it a substitute for the Tender Offer Statement on
Schedule TO or the Prospectus/Offer to Exchange included in the
Registration Statement on Form S-4 (Reg. No. 333-155278) (including the
Letter of Transmittal and related documents and as amended from time to
time, the "Exchange Offer Documents" ) previously filed by Exelon and
Xchange with the Securities and Exchange Commission (the "SEC" ). The
Offer is made only through the Exchange Offer Documents. Investors
and security holders are urged to read these documents and other
relevant materials as they become available, because they will contain
important information.
Exelon filed a preliminary proxy statement on Schedule 14A with the SEC
on April 17, 2009 in connection with its solicitation of proxies (the
"Preliminary Exelon Meeting Proxy Statement" ) for a meeting of Exelon
shareholders (the "Exelon Meeting" ) to be called in order to approve the
issuance of shares of Exelon common stock pursuant to the Offer. Exelon
expects to file a definitive proxy statement on Schedule 14A with the
SEC in connection with the solicitation of proxies for the Exelon
Meeting (the "Definitive Exelon Meeting Proxy Statement" ) and may file
other proxy solicitation material in connection therewith. Investors
and security holders are urged to read the Preliminary Exelon Meeting
Proxy Statement and the Definitive Exelon Meeting Proxy Statement and
other relevant materials as they become available, because they will
contain important information.
Investors and security holders can obtain copies of the materials
described above (and all other related documents filed with the SEC) at
no charge on the SEC's website: www.sec.gov.
Copies can also be obtained at no charge by directing a request for such
materials to Innisfree M&A Incorporated, 501 Madison Avenue, 20th Floor,
New York, New York 10022, toll free at 1-877-750-9501. Investors and
security holders may also read and copy any reports, statements and
other information filed by Exelon, Xchange or NRG with the SEC, at the
SEC public reference room at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 or visit the SEC's website for
further information on its public reference room.
Exelon and Xchange will be participants in the solicitation of proxies
from Exelon shareholders for the Exelon Meeting or any adjournment or
postponement thereof. In addition, certain directors and executive
officers of Exelon and Xchange may solicit proxies for the Exelon
Meeting. Information about Exelon and Exelon's directors and executive
officers is available in Schedule I to the Prospectus/Offer to Exchange.
Information about Xchange and Xchange's directors and executive officers
is available in Schedule II to the Prospectus/Offer to Exchange.
Information about any other participants will be included in the
Definitive Exelon Meeting Proxy Statement.
Forward Looking Statements
This communication includes forward-looking statements. There are a
number of risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements made herein. The
factors that could cause actual results to differ materially from these
forward-looking statements include Exelon's ability to achieve the
synergies contemplated by the proposed transaction, Exelon's ability to
promptly and effectively integrate the businesses of NRG and Exelon, and
the timing to consummate the proposed transaction and obtain required
regulatory approvals as well as those discussed in (1) the Exchange
Offer Documents; (2) Exelon's 2008 Annual Report on Form 10-K in (a)
ITEM 1A. Risk Factors, (b) ITEM 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations and (c) ITEM 8.
Financial Statements and Supplementary Data: Note 18; (3) Exelon's First
Quarter 2009 Quarterly Report on Form 10-Q in (a) Part II, Other
Information, ITEM 1A. Risk Factors and (b) Part I, Financial
Information, ITEM 1. Financial Statements: Note 13; and (4) other
factors discussed in Exelon's filings with the SEC. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which apply only as of the date of this communication.
Exelon does not undertake any obligation to publicly release any
revision to its forward-looking statements to reflect events or
circumstances after the date of this communication, except as required
by law.
Statements made in connection with the Offer are not subject to the safe
harbor protections provided to forward-looking statements under the
Private Securities Litigation Reform Act of 1995.
All information in this communication concerning NRG, including its
business, operations, and financial results, was obtained from public
sources. While Exelon has no knowledge that any such information is
inaccurate or incomplete, Exelon has not had the opportunity to verify
any of that information.
Exelon Corporation is one of the nation's largest electric utilities
with nearly $19 billion in annual revenues. The company has one of the
industry's largest portfolios of electricity generation capacity, with a
nationwide reach and strong positions in the Midwest and Mid-Atlantic.
Exelon distributes electricity to approximately 5.4 million customers in
northern Illinois and southeastern Pennsylvania and natural gas to
485,000 customers in the Philadelphia area. Exelon is headquartered in
Chicago and trades on the NYSE under the ticker EXC.
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Exelon Communications
Kathleen Cantillon
312-394-7417
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