NRG Rejects $6.1 Billion Exelon Bid, Cites Rating Cut

By Jim Polson and Christopher Martin

Nov. 10 (Bloomberg) -- NRG Energy Inc., the second-largest power producer in Texas, rejected an unsolicited $6.1 billion takeover offer from Exelon Corp., citing a recent downgrade of the largest U.S. utility owner's credit rating.

In a six-page letter, NRG Chief Executive Officer David Crane and Chairman Howard Cosgrove cited Exelon's lack of secured financing as one reason for the rejection. The Oct. 19 offer also ``significantly undervalues NRG,'' Princeton, New Jersey-based NRG said in a statement yesterday.

The acquisition would have made Exelon the largest U.S. power producer, ahead of Atlanta-based Southern Co. and Columbus, Ohio-based American Electric Power Co. Standard & Poor's on Oct. 21 cut Exelon's credit rating by one notch to BBB, the second- lowest investment grade, citing its ``willingness to pursue an aggressive growth at the detriment of creditworthiness'' in buying junk-rated NRG. A further cut may follow, S&P said.

``Their credit rating gives us pause,'' Crane, 49, said in an interview. ``It's not that common for people to go forward at this point with no debt financing in place.''

NRG would consider higher offers that also include arrangements for refinancing the company's more than $7 billion in debt, he said.

``Exelon is disappointed that NRG's management and board are not willing to discuss our attractive offer for NRG,'' Judy Rader, an Exelon spokeswoman, said in an e-mailed response to the rejection. ``Our board will review the NRG response and we will determine our next steps.''

Falling Value

Chicago-based Exelon's takeover offer came after NRG lost half it market value in two months and was at a 35 percent premium to the utility's closing share price on Oct. 17.

``It's not the nature of the consideration, it's the amount,'' Crane said.

Exelon offered NRG owners 0.485 share of Exelon for each of their 233 million shares outstanding. That valued the company at $26.10 a share as of the Nov. 7 close, a 9.4 percent premium.

``Under your proposal, NRG shareholders would own only 17 percent of the combined company while contributing over 30 percent of a combined NRG-Exelon free cash flow in 2008,'' Crane and Cosgrove said in the letter, made public yesterday by NRG. The lack of secured financing poses ``real risk of non- consummation to NRG's shareholders.''

Exelon has said it would bring a superior credit rating to the table and would reduce NRG's debt leverage.

NRG, which emerged from bankruptcy protection in December 2003, has a rating of Ba3, three levels below investment quality, from Moody's Investors Service.

Buying NRG would expand Exelon's sales outside its Illinois and Pennsylvania operating bases, including a nuclear plant stake southwest of Houston.

Nuclear Reactors

The acquisition would have expanded Exelon's fleet of 17 cheaply fueled nuclear generators, the nation's largest. NRG operates and is 44 percent owner of the South Texas Project. It's seeking a federal license to add two more reactors there.

NRG, Exelon and other power producers have proposed 24 new reactors to help add needed generation capacity without increasing greenhouse-gas emissions.

The Exelon bid followed acceptance by Constellation Energy Group Inc., the largest U.S. power marketer, of a $4.7 billion cash offer from Warren Buffett's MidAmerican Holdings Co. Constellation's shares had dropped by half in a week amid investor concern that it would be short of cash to back energy contracts.

MidAmerican parent, Berkshire Hathaway Inc., based in Omaha, Nebraska, acquired 3.24 million NRG shares in the second quarter, according to a public filing.

NRG rejected a $7.86 billion takeover offer from Atlanta- based Mirant Corp. in 2006. NRG was spurned itself in May on an $11 billion, unsolicited offer for power producer Calpine Corp.

(NRG will conduct a conference call with analysts and investors at 9 a.m. New York time, accessible on the company's Web site at http://www.nrgenergy.com.)

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Christopher Martin in New York at cmartin11@bloomberg.net.