In one of the biggest deals in the independent power business to come down the pike in recent years, NRG Energy (NYSE: NRG) has worked out a deal to take over Edison Mission Energy, the Edison International (NYSE: EIX) subsidiary that has been in Chapter 11 bankruptcy protection since December 2012.
NRG said Oct 18 that it has entered into a plan sponsor agreement with Edison Mission Energy (EME), certain of EME’s subsidiaries, the unsecured creditors committee, certain of EME’s unsecured noteholders, and the parties to the Powerton and Joliet sale leaseback transaction to acquire substantially all of the assets of EME, including its equity interests in certain of its subsidiaries. This deal is for an aggregate purchase price of $2.635bn (or $1.572bn net of $1.063bn retained cash within EME).
The aggregate purchase price, which is subject to certain post-closing adjustments, will consist of about 12.7 million shares of NRG common stock (valued at $350m based upon the volume-weighted average trading price of the 20 trading days prior to Oct. 18, 2013) with the balance to be paid in cash on hand.
In connection with the transaction, NRG will also assume non-recourse debt of about $1.545bn, of which $273m is associated with assets designated as Non-Core Assets pursuant to the asset purchase agreement.
The acquisition and transactions contemplated in the purchase agreement will be consummated as part of an EME Chapter 11 plan of reorganization to be sponsored by NRG. Each of EME’s major stakeholders has agreed to support and pursue a Chapter 11 plan sponsored by NRG.
Nearly 8,000 MW of capacity, much of it coal- and gas-fired, to go to NRG
The assets to be acquired include EME’s generation portfolio, which consists of nearly 8,000 MW (net) of generation capacity located throughout the U.S.:
- 1,700 MW of wind capacity
- 1,600 MW of gas-fired capacity
- 4,300 MW of coal-fired capacity
- 400 MW of oil- and waste coal-fired capacity
Also to be acquired is Edison Mission Marketing and Trading, a proprietary trading and asset management platform.
Joliet and Powerton are coal-fired plants in Illinois that EME leases from financial entities. It has lately been trying to work out a settlement of lease issues related to those plants so that it could keep those assets within its estate.
NRG says this deal a good fit for the company
“Edison Mission Energy is a great fit with NRG, as virtually 100% of their assets, their particular expertises and the balance of their technologies deployed complement NRG’s own assets, personnel and businesses,” said David Crane, President and CEO of NRG. “We look forward to working with EME’s employees, its management and its owners to close this transaction expeditiously and ensure that the ensuing integration achieves the best possible outcome for all concerned.”
“We are pleased to have reached this agreement with NRG, which maximizes the value of our company for all of our stakeholders and paves the road for our emergence from Chapter 11,” said EME President Pedro Pizarro. “NRG is a leader in our industry, and its proposed acquisition of Edison Mission Energy is a powerful affirmation of the reputation and performance the men and women of EME have achieved over the past 25 years. We believe NRG and EME are a great fit operationally. We will continue to operate our fleet of coal, gas and wind energy facilities as we move through this transition and remain focused on ensuring safe and reliable operations.”
With the transaction, NRG and its affiliates will become the third largest U.S.-based renewable energy generator within the U.S. with over 2,900 MW (net) of wind and solar capacity in operation or under construction. This transaction will substantially increase both the scale and geographic diversity of NRG’s renewable generation portfolio by almost quadrupling NRG’s existing wind generation capacity with the addition of 1,700 net MW of wind capacity, including 1,150 net MW of wind outside of NRG’s existing renewable footprint in Texas and the Southwest.
The EME portfolio contains 2,600 net MW of fully-contracted generation, of which 1,600 MW are under long-term contracts with credit-worthy counterparties (with a weighted average remaining contract life of 14 years). This contracted portfolio is composed of 1,100 net MW of wind capacity and the 500-MW gas-fired Walnut Creek facility, which achieved final commercial operations during the summer of 2013.
NRG said it continues to balance the geographic distribution and dispatch-level diversity of its conventional generation fleet by adding 1,200 MW of contracted gas assets in California and 4,300 MW of coal-fired capacity in PJM West (Illinois).
NRG expects to leverage key competencies built from its successful GenOn takeover integration to achieve cost synergies and operational improvements that will significantly enhance the financial performance of the portfolio. With EME’s coal fleet, NRG will further capture commercial opportunities in PJM through its operational improvement initiative.
NRG to fund needed air controls for two Illinois coal plants
In connection with the transaction, NRG has agreed to certain financial conditions with the Powerton and Joliet (PoJo) lessor stakeholders subject to which an NRG subsidiary will assume the PoJo leveraged leases and NRG will guarantee the remaining payments under each lease. In connection with this agreement, NRG has committed to fund up to $350m in capital expenditures for plant modifications at Powerton and Joliet to ensure federal Mercury and Air Toxics Standards (MATS) compliance. All monetary defaults under each lease will be cured at closing.
EME intends to file a motion to seek approval of the plan sponsor agreement with the U.S. Bankruptcy Court for the Northern District of Illinois on Oct. 18. The hearing to approve the plan sponsor agreement is expected to occur on or before Oct. 25. EME will then file a motion to seek approval of a Chapter 11 plan of reorganization and a related disclosure statement. EME intends to seek approval of the plan during the first quarter of 2014.
If all matters before the bankruptcy court are resolved in accordance with the current schedule, NRG expects to be in a position to answer questions about the proposed transaction on its third quarter investor call scheduled for Nov. 12.
Edison Mission Energy can still take other takeover offers
NRG expects to close the transaction in the first quarter of 2014. In addition to the approval of the bankruptcy court, the transaction is subject to customary closing conditions, including the effectiveness of the registration statement and approval for the listing of the NRG common stock on the NYSE, and receipt of regulatory approval by the Federal Energy Regulatory Commission, the U.S. Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Act and the Public Utility Commission of Texas. EME will also submit notice of the acquisition to the California Public Utilities Commission.
EME is allowed to continue to solicit alternative transaction proposals from third parties through Dec. 6. If EME’s board of directors determines, consistent with its fiduciary duties, that another proposal or proposals is better for EME and its stakeholders than the terms of this transaction, NRG will have advance notice of EME’s intention to terminate the purchase agreement.
Under specified circumstances, including if EME enters into or seeks approval of certain alternative transactions, and following approval from the bankruptcy court, NRG will be entitled to receive a cash fee of $65m and expense reimbursement to the extent the plan sponsor agreement and asset purchase agreement are terminated.