NRG Energy grows liquidity to nearly $3 billion; announces next step in possible Holdco formation

By Jennifer Lanning Drey

Portland, Ore., Nov. 2 - NRG Energy, Inc.'s liquidity increased to nearly $3 billion following the implementation of a first-lien collateral structure put in place during the third quarter to replace the company's current second-lien structure, NRG's chief financial officer, Robert Flexon, said during the company's third-quarter earnings conference call held Friday.

According to Flexon, NRG recently reached an agreement with several of its hedging counterparties that migrates their collateral positions from the existing second-lien collateral program to a first-lien collateral position. As a result, the counterparties have returned about $557 million in letters of credit previously provided to them under NRG's $1.3 billion synthetic letter-of-credit facility.

"The successful movement of the first-lien hedging program was a significant win for this company and a materially positive liquidity event. Ideas and efforts like this will continue to be reviewed and identified in order for us to continually improve our capital structure," Flexon said.

In the coming weeks, NRG will approach the remaining counterparties regarding the arrangement, which, if successful, would result in the return of an additional $200 million-plus of letters of credit.

NRG's liquidity at the end of the third quarter stood at $2.3 billion, which is $71 million higher than at Dec. 31, 2006, according to the company's earnings release.

Total cash increased during the quarter by $386 million, mainly due to strong quarterly cash from operations, which totaled $517 million. Capital expenditures of $104 million and common share purchases of $53 million partially offset the cash flow.

"We as a company remain singularly focused on generating cash," David Crane, NRG's chief executive officer, said during the call.

"While this summer's credit crisis has receded to some extent, the fact that it occurred and that it had virtually no lasting impact on NRG reaffirms to me the soundness of our approach to balance sheet management, which while certainly active, remains always prudent," he said.

Term loan prepayment

NRG executives also said Friday that the company intends to use cash on hand to prepay, without penalty, up to $300 million of its existing first-lien term B loan, which will reduce the interest rate applicable to both its $3.1 billion term B loan and $1.3 billion synthetic letter-of-credit facility by 25 basis points.

The decreased interest expense is expected to result in $10 million in pre-tax interest savings during 2008, according to the company.

Holdco next step

NRG also announced on Friday that improvements in the credit market have compelled the company to take the next step in making a determination on whether it will fund NRG Holdings, better known as Holdco.

"We're moving forward with the Holdco strategy with an approach that keeps us in complete control of our capital structure throughout the process. If we're successful in implementing Holdco, it will benefit our bondholders through a credit accretive event, and it will benefit our shareholders by providing additional flexibility for returning capital to shareholders," Flexon said.

As previously reported, the formation of Holdco would constitute a change in control under the senior bond indentures and provide the right for bondholders to put the bonds back to the company at 101% of par.

Accordingly, the company announced its intention to exercise its right to provide bondholders with a conditional change-of-control notice and related tender offer, which the company said is the next step in the process.

"With the credit markets improving since September and our bonds trading at or above par, the question now is, 'How many bondholders would actually accept the 101 offer in the current environment if made?'" Flexon said.

The company will be able to answer that question in 30 days, which is the allotted time for bondholders to notify NRG of whether they would accept the offer if Holdco is implemented.

Based on the outcome of the change-of-control and consent solicitation, NRG will determine whether or not to move forward with the Holdco formation and draw on the Holdco term loan facility prior to the end of the year.

If the Holdco facility is drawn, the net proceeds will be contributed to NRG as an equity infusion and NRG will use the proceeds to repay a portion of its outstanding term loans.

Regardless of whether Holdco is implemented, NRG will retain the right to purchase any bonds tendered during the process.

NRG originally announced its plans to form Holdco, in conjunction with the $4.4 billion refinancing of its senior credit facility but delayed its formation in August due to poor debt market conditions at the time.

NRG reported $719 million of adjusted third-quarter EBITDA, excluding mark-to-market impacts.

Based in Princeton, N.J., NRG owns and operates a portfolio of power-generating facilities, primarily located in the United States.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.