Nrg Energy, Inc. · NYSE:NRG
Nrg Energy — Merger or Acquisition (November 2008)
38 slides from Nrg Energy's merger presentation, Nov 10, 2008
Slide 1: Charting Our Course: NRG: Focus on Value
Charting Our Course Phoenix, Arizona November 10, 2008 NRG: Focus on Value David Crane Chief Executive Officer
Slide 2: Safe Harbor Statement
Safe Harbor Statement This presentation does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. This Investor Presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933
Slide 3: Agenda
Agenda The Exelon Offer Undervaluation Unattractive net synergies Unanswered questions Uncertain transactability NRG - The Path to Real Value NRG - Always Looking to Create Value, Not Empires Conclusion
Slide 4: Exelon Offer at Market
Exelon Offer at Market Exelon's opportunistically timed approach seeks to exploit value aberration arising out of the current financial crisis which has nothing to do with the two companies' relative performance or prospects. Average = 0.501x High = 0.614x Low = 0.320x At-Market on 10/17(1) = 0.355x
Slide 5: NRG Always Has Been Managed for Cash
NRG Always Has Been Managed for Cash Implied Ownership at Exelon Proposal: 17% Source: Estimates reflect Wall Street estimates for Exelon and NRG management guidance for NRG. Where is the payoff? 30% 70% 26% 74% 0.833x 0.670x Implied Exchange Ratio Percent Recurring FCF Contribution Year 2008E 2009E
Slide 6: Exelon Offer Based on Fundamentals
Reports its best performance ever in 3rd quarter Raises 2008 guidance Launches 2009 share buyback program Amasses record cash on hand and record liquidity Exelon Offer Based on Fundamentals Source: FactSet. Reflects consensus 1-year forward total free cash flow yields. Reports lower year-on-year 3rd
Slide 7: Cash Accretion for Exelon = Cash Dilution for NRG
Cash Accretion for Exelon = Cash Dilution for NRG At the proposed exchange ratio, the transaction subjects NRG shareholders to significant dilution Dilution to NRG Source: Exelon investor presentation filed on 10/29/08, slide 5. Free cash flow per share dilution to NRG reflects Exelon's pro forma es
Slide 8: Synergy Problem
Synergy Problem Limited positive synergies Minus Uncommonly large negative synergies Equals EQUITY VALUE DESTRUCTION "Synergy Problem" In this environment, the negative financing synergies will lead to value destruction Whole (Exelon PF) > Exelon + NRG Positive Synergies > Negative synergies $180mm
Slide 9: Exelon's Offer Leaves Several Critical Questions Unanswered
Exelon's Offer Leaves Several Critical Questions Unanswered Regarding the Combined Company's Prospects
Slide 10: Question 1: Is it a Viable Offer?
Question 1: Is it a Viable Offer? All figures indicated are on a pre-tax basis. Excludes potential asset sales/cash that could reduce debt. 100bps change in underwriting or consent fees would increase costs by $73MM Not the best time to approach the debt markets Financing Method Potential Cost Other
Slide 11: Question 1: Is it a Viable Offer? Credit Rating Issue
Question 1: Is it a Viable Offer? Exelon's quest for credit rating upgrades will come at a significant cost for shareholders and will go unrewarded by rating agencies Exelon's commercial operations, finance, and risk functions may not be prepared to trade 48,000 MW off of a weak investment grade or
Slide 12: NRG Credit Rating Upgrade - Four Year Track Record
Equity Debt CREDIT/STATS EBITDA/Interest FFO/Total Debt Total Debt/EV FINANCIAL PROFILE EBITDA Guidance Liquidity Enterprise Value BUSINESS PROFILE Geographical Diversity Total MW 5 Year Average % Baseload Hedged Strategic Hedging Collateral Position Cumulative Corporate Debt Reduction Q4 2003 1.59
Slide 13: Rating Downgrade Triggered Equity Value Destruction at Constellation
Rating Downgrade Triggered Equity Value Destruction at Constellation CEG emergency BOD meeting CEG w/ S&P (new conditions imposed to avoid downgrade) S&P places CEG on CreditWatch CEG w/ Moody's (no further action likely) CEG w/ Moody's (Moody's threatening two notch downgrade) CEG w/ Moody's (no co
Slide 14: Liquidity
Liquidity Total Non-Lien Liquidity Available $3,049 Liquidity @ 9/30/2008 (1) For GAAP purposes, NRG carries cash collateral outstanding as Current Assets in millions NRG Unrestricted Cash $1,483(1) Restricted Cash 32 Cash Available $1,515 Synthetic LC's Capacity $1,300 Current use (766) Availabilit
Slide 15: Question 2: Where Would All of the Cash Go?
Question 2: Under Exelon's Offer, Where Would All of the Cash Go? In the early years, funds available for share repurchases and growth CAPEX may be limited or nonexistent... Exelon Cash Flow NRG Cash Flow To maintain Exelon dividend (83% of which would go to Exelon shareholders) To pay down the expe
Slide 16: No Near-Term Incremental Free Cash Flow from the Combination
No Near-Term Incremental Free Cash Flow Generated from the Combination .. . . resulting in negative incremental free cash flow 2009PF 2010E Cumulative 2- Year Impact Per Exelon's own estimates, no near-term incremental free cash flow once the costs are taken into account (1) (1) 2009PF reflects Exel
Slide 17: Question 3: What About Exelon 2020?
Million tons CO2/year Exelon + NRG 2008 Exelon 2008 ? Question 3: What About "Exelon 2020"? NRG sees benefit in decarbonizing fleet, but it is of no value to talk about it if you can't show how you will achieve it 2008 2020 The Carbon Gap How Does NRG Fit? Assist customers, reduce GHG 3.5mm metric t
Slide 18: Exelon's and NRG's Growth Prospects are Very Different
Exelon's and NRG's Growth Prospects are Very Different .... and We are Far More Bullish on Ours
Slide 19: NRG Growth Drivers / Exelon Growth Drivers
NRG Growth Drivers / Exelon Growth Drivers Extracting Maximum Value from Existing Business Leverage off Inherent Advantages of Existing Assets New High Growth Revenue Opportunities PECO roll off in 2011 NRG growth drivers are intrinsically driven NRG Exelon ComEd roll off in 2013 Enactment and imple
Slide 20: What is Exelon's Growth Strategy?
What is Exelon's Growth Strategy? Difficult tough economic conditions usually do not result in a benign regulatory environment for utilities (1) I/B/E/S estimates per Exelon presentation of October 29, 2008. (2) Illustrative rate increase based on PPL auction per Exelon presentation of March 6, 2008
Slide 21: NRG view on claw back: Not if, but how much?
NRG view on claw back: Not if, but how much? At first glance, Exelon carbon upside looks attractive to shareholders ... 17,000 MW of merchant nuclear generation could yield ~$8bn value to Exelon shareholders1 ($12/share) Upside widely touted and advertised by Exelon itself .... but can it be realize
Slide 22: Exelon Regulatory Driven Growth: Bad Timing
2008 2009 2010 2011 2012 2013 2008 0 17 50 100 125 150 Exelon Regulatory Driven Growth: Bad Timing Prolonged economic recession Democratic majority looks to use tax rebate to protect consumers from carbon costs during election cycle Hard-hit Illinois & Pennsylvania have another crack at Exelon Exelo
Slide 23: Question 4: Can Exelon Realize NRG's Growth Potential?
Question 4: Can Exelon Realize NRG's Growth Potential (Just Because They are Big?) Exelon ownership likely to inhibit NRG growth Culture Exelon has a traditional utility structure, which means, multi-tiered bureaucracy, committee-driven, engineer-dominated Track Record Exelon has no track record of
Slide 24: Nuclear development: high reward, high risk
Nuclear development is a high reward initiative but it also comes with an unacceptably high risk if you don't seek to avoid the mistakes of the 1970s-80s, including: Taking unnecessary first-of-a-kind technology risk Taking unmitigated EPC risk and escalation potential Ignoring manufacturing pipelin
Slide 25: STP (NRG) & Victoria (Exelon) Comparison
STP (NRG) & Victoria (Exelon) Comparison Risk STP 3&4 Victoria Comments EPC Contract u u STP has negotiated and signed a fixed price EPC contract that is substantially similar or better than traditional high quality fossil EPC contracts Previous Construction History u u ABWR has been built four time
Slide 26: STP & Victoria Development Comparison (cont'd)
STP & Victoria Development Comparison (cont'd) Risk STP 3&4 Victoria Comments Existing Transportation & Construction Infrastructure u u STP 3&4 site was designed for four operating units with plenty of laydown space There is an existing barge slip that makes transportation of ultra-large modules and
Slide 27: NRG: The Path to Real Value
30° a NRG The Path to Real Value so
Slide 28: 2008 on target for record operating and financial performance
2008 on target for record operating and financial performance Operational and Commercial Summary Safety results approaching top decile performance 3rd quarter 2008 OSHA Recordable Rate improved 46% versus 3rd quarter 2007 YTD OSHA Recordable Rate of 0.86 versus 1.63 in 2007 Coal plant operations app
Slide 29: Managing Commodity Price Risk
Managing Commodity Price Risk Baseload Hedge Position1 Open Energy YTD New Hedges 2007 Hedged Energy Hedged Fuel 26% 44% 68% 78% 95% 2009 2010 2011 2012 2013 21% 9% Hedging program utilizes commodity price volatility to lock in gross margin while lien program provides efficient collateral vehicle 22
Slide 30: Heat Rates: Texas Always Recovers First
Heat Rates: Texas Always Recovers First Recession impact on demand muted given elasticity of residential/commercial load Limited access to capital will delay/cancel new build pipeline. (27 GW of proposed capacity at-risk) Reserve margins tightens as recession ends and the supply of new capacity is l
Slide 31: Natural Gas Fundamentals - Seeds are Sown
Oct 30, 2008 Potential reduction of 4 Bcf/d 12-M forward strip at $7.68/MMBtu as of Nov 3, 2008 Significant decrease in natural gas prices (~40%) signals production cuts. Reduction in rig count could mean up to 4 Bcf/d of supply reduction. Access to capital has been severely constrained. Several E&P
Slide 32: Capital Allocation
Capital Allocation Business Reinvestment Debt Management Shareholder Return Growth Capital Q3 2008 $36M Maintenance CAPEX $53M Environmental CAPEX YTD 2008 $128M Maintenance CAPEX $115M Environmental CAPEX 2009 Plan $255M Maintenance CAPEX $256M Environmental CAPEX Q3 2008 $14M Debt Repayments $45M
Slide 33: NRG: Well Positioned for the Future
NRG: Well Positioned for the Future Short-Term (1-2 years) Medium-Term (3-5 years) Significantly hedged 2009-2010 at robust margins Leveraged into the upturn Natural gas price recovery Heat Rate recovery, particularly in Texas Capacity prices trending to replacement cost Positioned to withstand down
Slide 34: NRG: Always Looking to Create Value, Not Empires
NRG: Always Looking to Create Value, Not Empires
Slide 35: NRG is the Best Positioned Competitive Power Generation Company
NRG is the Best Positioned Competitive Power Generation Company NRG Fleet1 Gas 10,490 MW 46% Coal 7,525 MW 33% Oil 3,690 MW 16% Nuclear 1,175 MW 5% Exelon's generation assets, among others, are undeniably a good fit 1 Includes 115 MW as part of NRG's Thermal assets. For combined scale, approximately
Slide 36: Power Industry Consolidation in the Post Exelon/PSEG World
NRG/Texas Genco Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2004 2005 2006 Exelon/PSEG Timeline Trend 1: Power Industry Consolidation in the Post Exelon/PSEG World worse same better never Acquirer Target IOU Deregulated Genco Regulated T & D - - Non-regulated Sub-investment grade Growth - - Regulated Investment grade Y
Slide 37: Summary
Summary
Slide 38: Summary
Exelon's offer is severely mispriced, highly conditional, and poorly structured NRG will continue on its current path of pursuing value creation through: Continued execution excellence Prudent balance sheet management Return of capital to shareholders Intrinsic growth (FORNRG, econrg, NINA) Extrinsi