In a huge consolidation of coal-fired independent power generation, NRG Energy (NYSE: NRG) and GenOn Energy (NYSE: GEN) said July 22 that they plan to merge, creating the largest competitive power generation company in the U.S.
This is a stock-for-stock tax-free transaction, creating the largest competitive generator in the United States with a diverse fleet of about 47,000 MW with asset concentrations in the East, Gulf Coast and West and a combined enterprise value of $18bn.
“This combination ushers in a new era of scale, scope, and market and fuel diversification in the competitive power industry,” said NRG President and CEO David Crane, who will continue his present positions with the combined company. “The greater depth and breadth gained through the combination with GenOn will put NRG in a uniquely strong position to fulfill the needs of American energy consumers in the 21st century.”
The transaction will enhance annual combined company EBITDA by $200m by 2014 by realizing cost and operational efficiency synergies. In addition, the transaction will enable the combined company to reduce its interest and liquidity costs, and realize other balance sheet efficiencies, in aggregate, of $100m per year. As a result, total recurring FCF benefits generated by this transaction will be approximately $300m per year.
“This combination will deliver immediate value to the shareholders of both companies who will benefit from the combined company’s merger synergies, balance sheet efficiencies, increased scale and additional geographic diversity,” said GenOn Chairman and CEO, Edward Muller, who will join the NRG Board of Directors as Vice Chairman.
The combined company, which will retain the name NRG Energy, will become the largest competitive power generation company in America with approximately 47,000 MW of fossil fuel, nuclear, solar and wind capacity across the merit order, situated almost entirely in the three premier competitive energy markets in the U.S. The combined fleet generates more than 104 terawatt-hours (TWh) of electricity annually.
The combined company will continue the work of NRG and GenOn in reducing emissions from their existing conventional fleets. NRG and GenOn combined have invested over $3bn since 2000 to reduce emissions. This investment has helped NRG reduce SO2 emissions by 56% and NOx emissions by 64% below 2000 levels and GenOn reduce SO2 emissions by 90% and NOx emissions by 78% below 1990 levels.
NRG and GenOn expect to close the merger by the first quarter of 2013. The transaction is subject to customary closing conditions and regulatory approvals, including approval by shareholders of both companies, the Federal Energy Regulatory Commission, the New York Public Service Commission and the Public Utility Commission of Texas. The companies will also submit notice of the merger to the California Public Utilities Commission and the U.S. Nuclear Regulatory Commission as well as pre-merger notification to the U.S. Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Act. Due to the complementary nature of the two generation portfolios, the merger is not expected to result in any market power issues.
Both companies, particularly GenOn, plan to shut coal capacity
Both companies have huge – though shrinking – coal-fired fleets. For example, NRG Energy plans to repower the coal-fired Dunkirk power plant with natural gas, NRG told the New York Power Authority (NYPA) in recent project proposals lodged under the New York Energy Highway Task Force Project. NRG said it plans to build, own, and operate the Dunkirk Gas Turbines, a new, natural gas combined cycle gas turbine (CCGT) power plant located in the New York ISO Zone A.
NRG’s Dunkirk Power LLC unit separately filed with FERC on July 12 a plan to temporarily keep part of the money-losing Dunkirk coal plant in operation to meet regional electric system reliability needs. Despite significant investments by NRG Energy over the past several years, the facility is not currently economic to operate, it said. On March 14, Dunkirk submitted a 180-day notice to the New York Public Service Commission that Dunkirk intends to cease operations at midnight on Sept. 10. The company noted that its plans are to mothball the plant for later possible restart, not retire it. The four coal units at Dunkirk were placed in service between 1950 and 1960, which it makes it one of a type of older coal plant nationwide that has a bullseye on it due to a combination of age and new environmental regulations.
NRG has estimated that environmental capital expenditures in the 2012-2016 period will be about $553m, based on current expectations on regulatory requirements. “These costs are primarily associated with mercury controls to satisfy the Mercury and Air Toxics Standards, or MATS, on the Company’s Big Cajun II, W.A. Parish and Limestone facilities and a number of intake modification projects across the fleet under state or proposed federal 316(b) [cooling water]rules,” said NRG Energy’s May 3 Form 10-Q filing. “NRG continues to explore cost effective compliance alternatives to reduce costs. While this estimate reflects anticipated schedules and controls related to the proposed 316(b) Rule, the full impact on the scope and timing of environmental retrofits from any new or revised regulations cannot be determined until these rules are final and any legal challenges are reviewed. However, NRG believes it is positioned to meet more stringent environmental regulations through its planned capital expenditures, existing controls, and increasing generation from renewable resources.”
Big Cajun II is a 1,495-MW coal plant in Louisiana, while W A Parish (2,490 MW) and Limestone (1,690 MW) are coal plants in Texas.
NRG’s Feb. 28 Form 10-K annual report shows the company with 4,190 MW of coal generation in Texas, 1,600 MW in the Northeast and 1,495 MW in South Central, for a total of 7,300 MW of coal in the U.S. The company purchased approximately 27 million tons of coal in 2011, of which 98% was Powder River Basin coal and lignite.
NRG’s Texas coal plants are: Limestone (1,690 MW net) and W A Parish (2,490 MW). The Northeast coal plants are: 65 MW apiece minority shares in the Conemaugh and Keystone plants; Dunkirk (530 MW); Huntley (380 MW); and Indian River (380 MW). The South Central plant is Big Cajun II (1,495 MW).
GenOn plans sweeping series of coal shutdowns
GenOn expects to deactivate various coal-fired power plants and units over the next few years. GenOn offered this deactivation timeline in its May 10 Form 10-Q filing:
- Niles unit 2 (108 MW), June 2012, plant located in Ohio;
- Elrama units 1-3 (289 MW), mothball June 2012 and retire in March 2014, Pa.;
- Portland (401 MW), January 2015, Pa.;
- Avon Lake (732 MW), April 2015, Ohio;
- New Castle (330 MW), April 2015, Pa.;
- Titus (243 MW), April 2015, Pa.;
- and Shawville (597 MW), place in long-term protective layup in April 2015, Pa.
GenOn said it will operate Niles unit 1 (109 MW) and Elrama unit 4 (171 MW) under reliability must run (RMR) arrangements until Oct. 1, then expects to deactivate them in the same manner as the other units at those facilities. While it continues to work with PJM to ensure that any reliability concerns regarding these deactivations are addressed, GenOn said in the Form 10-Q that it thinks that the units identified for deactivation will be deactivated at the times referenced. These eight generating facilities contributed 13% to GenOn’s realized gross margin during 2011.
“We expect industry retirements of coal-fired generating facilities to contribute to a tightening of supply and demand fundamentals and higher prices for the remaining generating facilities will more than offset reduced earnings from our unit deactivations,” said the Form 10-Q. “Consequently, we expect the resulting higher market prices to provide adequate returns on investment in environmental controls necessary to meet promulgated and anticipated requirements. Accordingly, we expect to invest approximately $611 million to $750 million over the next ten years for selective catalytic reduction emissions controls and other major environmental controls to meet certain air and water quality requirements, which we expect to fund from existing sources of liquidity.”
In addition to the deactivations of the these facilities, GenOn plans to retire its 482-MW Potomac River facility in Alexandria, Va., in October. During 2011, GenOn entered into an agreement with the city of Alexandria that provides for the retirement of the Potomac River plant on Oct. 1, subject to the receipt of needed consents.