A Bernstein Research analysis Oct. 21 suggested that Edison Mission Energy’s (EME) wind and natural gas generating units were the primary attraction for NRG Energy (NYSE:NRG).
NRG announced Oct. 18 that it reached a deal to take over EME power generating fleet. EME is a former Edison International (NYSE:EIX) subsidiary that has been in Chapter 11 reorganization since late 2012.
The NRG takeover still requires a slew of approvals, including the blessing of the U.S. Bankruptcy Court North District of Illinois Eastern Division. “We would be surprised if any future payments required by the bankruptcy court would be material in the long term to EIX,” according to Bernstein.
“Our valuation analysis of NRG’s purchase leads us to believe that EME’s contracted gas and wind generation assets are the primary driver of NRG’s interest in EME,” according to the Bernstein review authored by Senior Analyst Hugh Wynne.
EME’s merchant generation assets total 5,340 MW, and comprise primarily the 4,600 MW of coal fired capacity in northern Illinois owned by EME subsidiary Midwest Generation. EME’s contracted generation assets total 2,668 MW, broken down almost equally into 1,316 MW of contracted gas-fired power plants and 1,303 MW of contracted wind assets, Bernstein said.
NRG has noted that much of this fully-contracted generation is under long-term contracts with credit-worthy counterparties – making it a natural fit for recent NRG Yield spin-off.
“If we exclude from our evaluation of NRG’s purchase the loss-making coal fired generation fleet of EME subsidiary Midwest Generation, NRG Energy has acquired some 3,300 MW of gas fired and wind generation assets for $1,050/kW installed, as against an estimated replacement cost for these assets of ~$1,500/kW,” according to Bernstein.
“Similarly, the implied enterprise value of $3.5 billion paid by NRG is equivalent to just over 80% of the book value of EME’s assets, excluding Midwest Generation,” according to Bernstein.
“We would expect EBITDA excluding Midwest Generation to improve materially over the next 12 months, further improving the implied valuation of NRG’s acquisition,” Bernstein Research said. “EME’s 479 MW gas-fired power plant at Walnut Creek, California, which accounts for almost 15% of EME’s generation assets outside of Midwest Generation, only entered service in June 2013. We believe it safe to assume that the terms of the Walnut Creek power purchase agreement are sufficient to allow EME to recover its investment in the plant with a reasonable return,” Bernstein said in the analysis.
Bernstein is an affiliate of Sanford C. Bernstein & Co.