NRG Excelon

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Risk Arbitrage
NRG Stats
   Price: $17.61
   Market cap: $4.1bil
   P/E: 5.10
   Price/Book: 0.67
   Price/Tangible Book: 0.87
NRG – Balance Sheet

                                           2008                      2007
Total Current Assets                  8492.00                      3,562.00
Total Assets                          24,808.00                    19,274.00
Total Current Liabilities             6,581.00                     2,277.00
Total Liabilities                     17,452.00                    13,523.00
Total Equity                          7,356.00                     5,751.00

                    2009     2010   2011     2012   2013   After   Total
           Debt        469   265    90        71    2,356 4,936 8,187
NRG – Cash Flows

                                  2008       2007
Net Income                       1,188.00   586.00
Cash from Operating              1,477.00   1,492.00
Cash from Investing Activities   -672.00    -327.00
Cash from Financing Activities   -442.00    -814.00
Net Change in Cash               362.00     355.00
NRG - Overview
   Engaged in ownership, development, and operation
    of power generation facilities since 1989
   Diverse generation facilities
     Geography   (North America, Europe, Australia)
     Fuel type (natural gas, oil, coal, nuclear, refuse-derived)

     Dispatch level (baseload, intermediate, and peaking
About Exelon
  A utilities services holding company and one of the nation's largest
  generators of electricity. Organization is divided into three components:

  1. Generation- In charge of electricity generation
  2. Commonwealth Edison Company- Delivery to northern Illinois (including
  3. PECO Energy Company- Delivery to southeastern Pennsylvania

  Currently serves electricity to 5.4 million customers and provides natural gas
     to 485k customers.

  Upon combination with NRG, Exelon expects to ramp up electricity
     generation to be enough to provide for 45 million homes.
Exelon’s Key Ratios
 •P/E Ratio- 11.21 (Industry 10.65)
 •Price to Book- 2.74 (Industry 2.09)
 •Price to Tangible Book- 3.60

 •LT Debt to Equity Ratio- 114.99 (Industry 82.17)
Exelon’s Upcoming Obligations
•$3.55B due 2009 + $1B potential commitments “triggered by future
•$9.235B due 2010-11
•$6B due 2012-13

“Exelon (NYSE: EXC), for instance, has considerable hurdles in the near-term
horizon, with aging infrastructure, large amounts of regular capital expenditure
and very significant cash obligations related to near term debt obligations. If I
were a shareholder, I would be seriously concerned.”
                                      -Richard Gibbons, The Motley Fool
Exelon’s Current Balance

         Current Assets        $5.3B
         Current Liabilities   $4.08B

         Total Assets          $47.8B
         Total Liabilities     $36.7B
Qualitative Perspective

   “But Kiani said the company has not received commitments for enough
   of its 2011 power sales, exposing its earnings profile to falling natural
   gas prices.”
                        -John Kiani, Deutsche Bank Analyst
The Bottom Line for Exelon

•Large debt obligations in the near future that the company does not have the cash
or cash equivalents to finance. Credit limitations will not allow refinancing like in
past years.

•Ratios indicate company is overpriced and should expect price to fall to
fundamental value in the near future.

•Recent fall in commodity prices indicate bad news for Exelon, as revenue is
dependent upon natural gas prices.

•Despite its difficulties, financing a deal with NRG is not difficult given Exelon’s
tremendous size advantage.

•More importantly, this goes to show us is that Exelon is fundamentally overvalued
The Deal
   0.485 shares EXC per share NRG
   EXC: $45.52
   NRG: $17.61
   Buyout Price: $22.07
   Return: 11%
Why Deal Will Pass
   As of April 18th, indications from Exelon that it has more
    than the 50% of shareholders necessary to win proxy
    battle at upcoming annual meeting (within the next
    This will take place at NRG’s annual meeting which has
    not yet been scheduled but will occur within 13 months
    after NRG’s last meeting held May 14, 2008.
   Exelon has extended its offer until June 26th
   Once vote is complete there are no obstacles to a
    combination (anti-trust, debt or otherwise) and the deal
    is expected to close within months.
   Annualized return of ~20%
The Downside?
   What downside?
   Even if this deal does not go through, placing these
    long/short positions will likely be profitable given
    the tremendous mispricing
   Exelon is substantially overvalued and NRG is
    substantially undervalued
Comparisons of the Two Power

                  NRG      EXC       EXC/NRG Ratio

Revenue           $6.9B    $18.8B    3x

Profit Margin     14.7%    14.4%     1x

5 Year Growth     48.7%    13.4%     0.275x
Rate (Present)
5 Year Growth     11.97%   8.39%     0.7x
Rate (Expected)
Price/Earnings    5.1      11.09     2x
Market Cap        $4.16B   $29.98B   7.20x
“The True Value of NRG”
   Presentation given February 19, 2009 to convince NRG
    shareholders to reject EXC deal
   Deal entitles NRG to only 17% ownership while
    generating 30% cash flow
   EXC will use NRG cash to pay off debt to maintain
    credit rating
   Positioned for recovery
     Decreased energy prices constrain power generation
     Lower coal prices
     Heat rate (mmbtu/mwh) stable with upward pressure in
   This presentation was given with NRG at $26.43
NRG to stockholders
   “Exelon opportunistically seized on market anxiety
    and the free fall of stock values to launch its
    lowball offer, which does not value NRG’s strong
    financial position and immense opportunities.” –
    NRG CEO David Crane in April 2, 2009 letter to
   Despite these pleas from soon to be unemployed
    management - all evidence indicates the deal will
    still pass (But it still goes to show that NRG is
    fundamentally undervalued at the current price)
   NRG- Very Conservative growth rate of 5% (vs.
    12% forecast by analysts) (3% terminal)
   10% Margins (vs 15% historical)
   10% Discount Rate
   Value Per Share: 22.41
   EXC- Very Optimistic growth rate of 9%
   15% Margins
   7.5% Discount Rate
   Value Per Share 39.82
   This is a great trade regardless of any potential
   Regardless, the deal goes will likely go through
    (good chance ~80%) very nice profit, especially on
    an annualized basis
   In the off chance that it doesn’t – sizeable and
    likely even greater profit in medium to long term
   This is a no brainer