Nrg Energy, Inc. · NYSE:NRG
Nrg Energy — Proxy Contest (April 2009)
49 slides from Nrg Energy's proxy contest presentation, Apr 22, 2009
Slide 1: Exelon Offer: Low Value, High Risk
Exelon Offer: Low Value, High Risk RiskMetrics Group Meeting April 22, 2009
Slide 2: Safe Harbor Statement / Important Information
Safe Harbor Statement Important Information This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of proxy of any stockholder of NRG Energy, Inc. ("NRG"). NRG filed a preliminary proxy statement on Schedule 14A with the Securi
Slide 3: Agenda
Agenda I. Overview NRG in Power Industry NRG History EXC Offer Represents a Discount, Not a Premium Reasons to Reject EXC Offer II. Valuation NRG - Analysis of Exelon Offer Inadequate Price Inadequate Relative Value III. Strategic Rationale Unexplained Combination Risk One-Sided Transaction Risk IV.
Slide 4: NRG: The center of the power industry value chain
NRG: The center of the power industry value chain. Platts' 2007 Recipient of Energy Company and Industry Leader of the Year: "NRG is a true global pioneer, and the judges were impressed by NRG's breadth of endeavor; its management excellence, coupled with incisive strategy and an unparalleled sense
Slide 5: NRG Board of Directors: Independent, Qualified, & Committed to NRG Stockholders
I. Overview- NRG Board of Directors: Independent, Qualified, & Committed to NRG Stockholders Composition of NRG Board of Directors A five-year track record of stockholder value creation and returns, before broad market dislocation swamped the energy sector Independence: Most members selected by the
Slide 6: NRG vs EXC Relative Stock Price Performance
I. Overview- NRG vs EXC Relative Stock Price Performance Relative Price Performance(1) Over the same five year period, on a relative value basis, NRG has outperformed EXC 1) Data includes trading period from 12/2/2003 through 4/17/2009; 2) 5 year average reflects period 12/2/2003 through 10/17/2008
Slide 7: Exchange Ratio Represents a Discount, Not a Premium
1-Day Premium 4-Week Premium I. Overview- Exchange Ratio Represents a Discount, Not a Premium Exelon's approach to NRG occurred at close to a 2-year low trading ratio; the proposed exchange ratio is at a discount to the average historical trading ratio and is well below the premiums offered in prece
Slide 8: Exelon's Offer is Bad on Every Count
Exelon's proposed exchange offer does not adequately compensate NRG stockholders for value contributed or risk assumed I. Overview - Valuation, Strategic Rationale and Process - Exelon's Offer is Bad on Every Count Exelon offer is at a low EBITDA multiple and below average premium particularly given
Slide 9: Inadequate Price
II. Valuation- Inadequate Price Under the terms of offer, EXC will get NRG Texas assets at a discount and then the rest of the NRG portfolio for FREE - -- Exelon's Presentation at the Credit Suisse Conference dated February 2, 2009
Slide 10: Exelon Offer Severely Undervalues NRG's Fundamental Value
Exelon's offer at historical valuation low point II. Valuation- Exelon Offer Severely Undervalues NRG's Fundamental Value 12/31/2006 6/30/2007 12/31/2007 6/30/2008 12/31/2008 Exelon Offer NRG 7.35 9.43 9.15 9.06 6.12 5.86 Exelon Offer North 45.9 46.9 45 Historical EV / EBITDA Multiples(1),(2) Histor
Slide 11: Value not reflected in Exelon's offer
Reflects change in value of exchange offer since 10/17/08 NRG Other Growth Projects and International Assets (4) (1) Offer pricing date of 10/17/2008. Current pricing date of 4/17/09. NRG diluted share count 275M. $3000+/kw sourced from Exelon presentation dated February 2, 2009 (2) Replacement cost
Slide 12: Commercial Hedging is Key to Consistent Financial Performance
Note: all numbers exclude collateral movements and include discontinued operations II. Valuation- Commercial Hedging is Key to Consistent Financial Performance 2005 2006 2007 2008 2009E Adjusted EBITDA 731 1502 2279 2291 2200 FCF 347 679 1377 1614 1212 Liquidity 758 2227 2715 3364 Demonstrated susta
Slide 13: Key Commodity is Natural Gas
NG 12-month fwd strip price $/mmbtu Gas Rig Count Source: Bloomberg II. Valuation- Key Commodity is Natural Gas Recovery in gas prices & slowdown in new build drive increased value and higher profitability for existing capacity Since natural gas sets price of electricity most often in Texas, when na
Slide 14: Inadequate Relative Value
II. Valuation- Inadequate Relative Value "We think Exelon is getting a good deal at this exchange ratio. Heck, by Exelon's own admission, the deal should create $1-3B of long-term value for EXC stockholders." - -- Wachovia Equity Research, October 21, 2008
Slide 15: NRG Has Charted a Clear Path to Future Growth
NRG Classic ForNRG West Texas Genco acquisition Texas hedge reset Repowering 2008 514 714 726 1810 2269 activity 514 200 12 1084 459 30 2291 negative activity While NRG controls its own destiny, we view Exelon's strategy for growth as heavily dependent on regulatory and legislative fiat II. Valuatio
Slide 16: NRG Would Bring Significant FCF to Combined Company
Even with the so-called share price "premium" offered by Exelon, NRG stockholders would be contributing an average 30% of recurring free cash flows to the combined company for only 17% ownership Source: Sell-side research FCF defined as Cash from Operations less maintenance CapEx but excluding envir
Slide 17: Cash Accretion for EXC = Cash Dilution for NRG
$3.04 2010E FCF Per Share EXC Standalone EXC Combination Pro Forma Accretion NRG Standalone EXC Combination Pro Forma Dilution - - 49% + 33% Note: As of 11/10/08(1), (2) Note: As of 11/10/08(1), (2) II. Valuation- Cash Accretion for EXC = Cash Dilution for NRG The Exelon proposal may be good for Exe
Slide 18: NRG's Assets are Located in More Attractive Power Markets
II. Valuation- NRG's Assets are Located in More Attractive Power Markets than Exelon's Businesses NRG shareholders are best leveraged to benefit from Texas power market recovery as compared to other markets Supply stack in NRG and EXC Regions Gas sets the marginal price of power most often in Texas
Slide 19: Combination Risk
III. Strategic Rationale- Combination Risk "While each company currently generates free cash flow, maintenance of the ratings will require the combination to meet a financial guidance range that offsets the higher business profile risk. Exelon's stand-alone financial profile reflects aggressive fina
Slide 20: Exelon: Caught in a Rating Agency Vicious Cycle
III. Strategic Rationale - Exelon: Caught in a Rating Agency Vicious Cycle Exelon seeks to maintain an investment grade rating primarily for the benefit of its utility business, not for the benefit of its much larger competitive power generation business Issue Equity (to maintain standalone credit r
Slide 21: Commercial Hedging and Collateral Uncertainty
III. Strategic Rationale- Commercial Hedging and Collateral Uncertainty Ratable 5-Year Hedge Strategy: Applying any hedging strategy to the combined company's portfolio requires a well thought out and robust collateral support structure Ratable 3-Year Hedge Strategy: Exelon has not provided their pl
Slide 22: Combination Risks - Liquidity Facilities
III. Strategic Rationale- Combination Risks- Liquidity Facilities (1) EXC reflects cash balance as of 12/31/08 from 10K and revolver/LC liquidity figures reflect Exelon Generation and Corporate disclosed at EXC' s Exelon's liquidity primarily relies on Bank-provided lines and counterparty credit lim
Slide 23: Synergies, as Estimated by EXC, Would be Offset by Transaction Costs
Pre-Tax Run Rate Synergies Year 2 + Annual Cash Impact to Combined Company in millions Note: Estimated synergies are midpoint of Exelon's range of $180 - $300mm per year; with one half of synergies realized in Year One, all synergies realized by Year Two Transaction Costs, refinancing interest rate
Slide 24: Unfunded Pension and OPEB Has Created a Significant Issue for Exelon
YE 2007 Q1 2008 Q2 2008 Q3 2008 YE 2008 Q1 2009 NRG 247 245 252 225 262 EXC OPEB 2494 2470 2477 2472 6366 III. Strategic Rationale- Unfunded Pension and OPEB Has Created a Significant Issue for Exelon, but Not for NRG - - S&P 500 Given further market deterioration, EXC Pension liabilities likely hav
Slide 25: NRG Generates Positive Cash Flows
(1) From Exelon's SEC filings and Investor Day Conference Presentation dated 3/10/09 (2) Includes one-time costs; See slide 22 (3) See slide 22 (4) NRG cash dividend represents preferred dividends paid; Adjustment reflects NRG adjusted share count assuming 275 diluted shares converting at the curren
Slide 26: The S&P Risk Factor and the Probability for Equity Issuance
III. Strategic Rationale-The S&P Risk Factor and the Probability for Equity Issuance: What it Means for NRG Stockholders NRG Ownership Exchange Ratio Exelon's Offer on 10/17 16.9% 0.485x Effective Offer(2) Adjusted for Scenario of: Effective Offer(2) Adjusted for Scenario of: Effective Offer(2) Adju
Slide 27: Debtholders and Rating Agencies Would be the Priority
III. Strategic Rationale- Under Exelon's Plan, Debtholders and Rating Agencies Would be the Priority Exelon's plan denies NRG stockholders the benefit of NRG cash and dilutes EXC's own equityholders in what likely will be a very challenging effort to placate rating agencies given their perception of
Slide 28: View on Washington Landscape for Energy Policies: EXC vs. NRG
III. Strategic Rationale- View on Washington Landscape for Implementation of Energy Policies: EXC vs. NRG Waxman-Markey generally tracks USCAP Blueprint To achieve passage, legislation will need to accommodate coal state legislators Impact on NRG will depend on success with RepoweringNRG Climate Cha
Slide 29: Carbon Debate of Auction vs. Allocation
III. Strategic Rationale- Carbon Debate of Auction vs. Allocation - - An Emerging Center Obama ......... 100% auction Waxman ........ 100% auction Markey .......... 100% auction Boucher ......... 100% allocation EEI ............... Unable to agree Exelon .......... 100% to load NRDC ........... 100%
Slide 30: Case in Point for Nuclear Development: The NRG Way Versus the Exelon Way
III. Strategic Rationale- Case in Point for Nuclear Development: The NRG Way Versus the Exelon Way Risk NRG STP 3&4 EXC 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 contrac
Slide 31: Exelon Lacks the Right Approach to Nuclear Development
III. Strategic Rationale - Exelon Lacks the Right Approach to Nuclear Development A smaller balance sheet has not hindered NRG from developing larger projects, with less risk, and in a more cost-effective manner than Exelon For the same economic result... Exelon's strategy puts 5 times more of the f
Slide 32: Transaction Risk
III. Strategic Rationale- Transaction Risk "Since regulatory approvals will take through at least 2009, this would cause an undefined, potentially crippling situation if NRG as a standalone were forced to refinance the debt before Exelon could complete the merger." - -- Simmons & Company, March 27,
Slide 33: Risk Summary: Exelon Adds Risk Across the Board
III. Strategic Rationale- Risk Summary: Exelon Adds Risk Across the Board 2009 - 2010 2010 - 2011 Distraction Retention and recruiting Economic waste Opportunity cost of missed partnerships and acquisitions Financing Rating Agencies Regulatory Approvals Integration Management Experience Ratings Down
Slide 34: Exelon's Highly Conditional Offer Gives It a Call Option on NRG Shares
III. Strategic Rationale- Exelon's Highly Conditional Offer Gives It a Call Option on NRG Shares... for Free Exelon proposal, if it succeeds at all, could take 12 months or more to consummate During that time, without any consequences including financial obligations (i.e. breakup fees, change of con
Slide 35: NRG M&A Value Creation vs. EXC M&A Value Dilution
III. Strategic Rationale- NRG M&A Value Creation vs. EXC M&A Value Dilution Transaction1 Time to Close from Announcement Financial Impact Illinois Power Failed after ~2 months Related one-time costs not disclosed Sithe Energies/ Sithe New England Series of transactional steps over the course of 5 ye
Slide 36: Reliant Retail - A Natural Strategic Fit for NRG
III. Strategic Rationale- Reliant Retail - A Natural Strategic Fit for NRG Complements NRG's merchant generation position with a leading retail franchise business with an enduring brand name and outstanding customer operations Optimizes business model through matching of strengths of each business p
Slide 37: Reliant Retail: Financial Benefits to NRG
Multiples III. Strategic Rationale- Reliant Retail: Financial Benefits to NRG Purchase price $288 Average working capital 100 Total $388 EBITDA run rate $150 - $200 Free cash flow run rate(1) $ 60 - $110 EV / EBITDA multiple 1.9x - 2.6x Free cash flow yield 15% - 28% Immediately accretive to ongoing
Slide 38: Proxy
IV. Process- Proxy "If I want to own EXC, I can go out and buy it. I don't need to swap my NRG stock at a low price to get it." - -- Solus Alternative Asset Management
Slide 39: NRG Board's Review and Response
IV. Process-NRG Board's Review and Response Board evaluated both on initial offer launch and tender coupled with periodic updates to account for changes in macro economic drivers and underlying commodity prices and continues to arrive at same answer: Price is Inadequate Discounted cash flow valuatio
Slide 40: NRG Corporate Governance - Ensuring Continuity of Oversight
We believe that the four Class III directors up for re-election this year are more qualified than EXC's proposed slate in terms of industry experience, knowledge of NRG, and in the depth and breadth of their power industry skill sets and expertise IV. Process - NRG Corporate Governance - Ensuring Co
Slide 41: NRG vs EXC Developments since Offer Launch
Continued willingness to engage EXC Communicated willingness to transact with EXC at an appropriate value Engaged with stockholders to understand their value expectations Provided clear guidance to EXC regarding our concerns about their offer IV. Process- NRG vs EXC Developments since Offer Launch C
Slide 42: NRG Stock Price Performance vs. Peers and Indices
IV. Process- NRG Stock Price Performance vs. Peers and Indices Relative Price Performance1 Exelon has not made a compelling case that a Board change is warranted, particularly with NRG's execution and 5-year track record of performance 1) Data includes trading period from 12/2/2003 through 4/17/2009
Slide 43: Key Takeaways
IV. Process- Key Takeaways Exelon's offer is underwhelming from a price, strategic rationale and transaction risks perspective NRG believes in industry consolidation and is a willing buyer or seller at adequate value Exelon's offer is at a discount, not a premium, to NRG's fundamental value, and is
Slide 44: Appendix
NRG ) Appendix
Slide 45: NRG's Unique Collateral Structure
NRG's Unique Collateral Structure A "bigger balance sheet" and "higher credit rating" do not necessarily translate into reduced risk or value accretion for NRG stockholders NRG Lien Program (1) Available baseload under the Lien Program represents 80% of total baseload capacity for first rolling 60 m
Slide 46: Review of EXC Proxy Events/Process
Review of EXC Proxy Events/Process September 30, 2008: Following an initial value indication by EXC for a transaction with NRG, NRG and EXC Management meet. EXC indicates its 4 day earlier indication of price is no longer valid given the "deterioration" in EXC's stock price. Both companies agree to
Slide 47: Board of Directors Biographies
Board of Directors Biographies Howard E. Cosgrove Chairman of the Board Mr. Cosgrove has been a director and Chairman of the Board of NRG Energy since December 2003. He was Chairman and Chief Executive Officer of Conectiv and its predecessor Delmarva Power and Light from December 1992 to August 2002
Slide 48: Board of Directors Biographies (continued)
Paul W. Hobby Chair, Commercial Operations Oversight Committee Mr. Hobby was appointed as a director of NRG, effective March 8, 2006. Mr. Hobby is founding Chairman of Genesis Park, L.P., a Houston-based private equity business specializing in technology and communications investments. In that capac
Slide 49: NRG )
Dh NRG )