NRG Energy CEO details expected benefits of potential Calpine acquisition

By Jennifer Lanning Drey

Portland, Ore., May 28 - NRG Energy, Inc.'s chief executive officer told investors Wednesday that the company's proposed acquisition of Calpine Corp. would benefit shareholders on both sides by allowing Calpine to use NRG's roadmap detailing the path between recent emergence from bankruptcy and value creation under the guidance of NRG's management.

"We evaluate the transaction not just as a way of harvesting low-hanging fruit but as a way to take the combined company to a level of evolution that has not yet been seen in the competitive power generation industry," David Crane, NRG's chief executive officer, said during a presentation at the Deutsche Bank Energy & Utilities Conference in Miami.

During his prepared remarks, Crane discussed the benefits of a potential acquisition of Calpine, which he said include the combined company's increased scale, its ability for asset optimization and disposition, and its ability to maintain a continued focus on Texas.

At the start of the presentation, the CEO asked shareholders to trust in NRG's belief that the proposed acquisition of Calpine represents proper judgment.

"The proposed Calpine transaction is compelling from a strategic point of view and persuasive from a financial point of view, but it's not so compelling or otherwise persuasive that it would cause us to depart from our most cherished bedrock principal of fiscal discipline with prudent balance sheet management," Crane said.

As previously reported, on May 14 NRG proposed to acquire Calpine in an all-stock deal, which would see NRG paying 0.534 of a share of its stock in exchange for one share of Calpine.

Increased scale, bias corrections

While Crane said NRG doesn't believe it is limited by its current scale, he added that the larger scale that would result from the proposed acquisition of Calpine would be likely to provide privileges with regard to procurement, liquidity, indexation and political influence.

"The combined company would be in a better place than NRG alone, and it would be in an altogether better place - almost a different time zone - from where Calpine is right now," Crane said.

NRG also believes a combination with Calpine would be complimentary for NRG because it would correct its biases toward Texas and toward coal. On Calpine's side, Crane said NRG would fix Calpine's lack of solid fuel baseline generation.

Additionally, the combined company's regional scale would be large enough to provide the opportunity to rationalize the combined asset base, he said.

"These two companies in their present incarnation perfectly compliment each other," Crane said.

The CEO said Texas would remain a significant region for NRG with or without the Calpine acquisition.

NRG also sees an "enormous potential for synergies" as a result of the transaction, and the company has estimated it would be able to achieve more than $100 million in cost savings through the combination.

During the presentation, Crane said the estimate "may be one of the greatest understatements to come from NRG management."

Coal reduction an upside

Crane also mentioned carbon reduction as an upside to the proposed Calpine transaction but added that it is not a specific driver. NRG has a plan to decrease its carbon intensity to carbon moderate or carbon neutral status by 2025; however, the acquisition of Calpine would bring its combined average to carbon moderate almost immediately, he said.

Crane believes NRG's carbon status may weigh on the stock price and make NRG less attractive as a takeover target of its own.

"I think what it weighs on is the prospect of NRG alone or NRG with Calpine as an acquisition candidate in its own right. There are people who would not pursue NRG because of its carbon-heavy aspect," Crane said.

NRG also believes a combination with Calpine would result in tax benefits including the ability to use Calpine's net operating loss carryforwards (NOLs). NRG otherwise will transition to a full taxpayer over 2009 and 2010.

"When we stack all of the positives of the value drivers of this transaction ... what we come to is the fact that from a free cash flow accretion point of view we expect that this would be a very positive transaction in the first year," Crane said.

NRG is a Princeton, N.J.-based power company.

Calpine is a San Jose, Calif., power company.

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