NRG's Calpine Bid Shows Sector Adapting [wsj]
By REBECCA SMITH
May 23, 2008; Page B4
NRG Energy Inc.'s proposed $10.7 billion acquisition of Calpine Corp. shows how the rebounding independent power sector is positioning itself to face the next set of problems rolling in: a spike in the cost of fuel and construction materials, greenhouse-gas restrictions and energy-market upheaval.
On Wednesday, it became public that NRG on May 14 made an unsolicited stock-for-stock offer for Calpine, offering 0.534 share of its stock for each share of Calpine. A combined company would have a market capitalization of about $22 billion. Calpine's board hasn't responded to the offer.
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A merger of NRG and Calpine would create the biggest independent power producer in the U.S., with 45,000 megawatts of capacity, and could spur combinations among the remaining "independents" that sell electricity to utilities at market prices. Analysts say the proposal opens the door to other combinations, perhaps involving Dynegy Inc., Reliant Energy Inc., Mirant Corp. and others.
"I think you'll see more companies coming together" in the future, said NRG Chief Executive David Crane in Princeton, N.J.
One common problem for independent power generators is that their companies were built for a different era, when they thought electricity deregulation would sweep the nation and their firms would generate most of the power needed in the U.S. But deregulation was derailed by the California electricity crisis of 2000-2001 and the fall of Enron Corp., which spawned a credit crunch for the industry and caused many states to back away from deregulation. A smaller, chastened independent power sector emerged from that crisis and, shed of excess debt, has been performing better.
Another problem is the prospect that Congress will pass restrictions on greenhouse gases. That likely would drive up operating costs for some plants and would boost profits for others.
In this new world, companies that are dependent on a single fuel -- as Calpine is dependent on natural gas for its entire fossil-fuel fleet -- could be disadvantaged. A combined Calpine and NRG would have the full complement of power plants, including gas-fired, coal-fired, nuclear and geothermal. It would have some plants that run around the clock and others that run only at moderate or high-demand levels. It would also have plants in all of the major U.S. regions, giving it fuel and geographic diversity.
One thing making Calpine attractive is that many generating plants are worth more today than even a year or two ago. That's because the price for new power plants is going up sharply because of a spike in the cost of commodities needed to build them, such as steel. Mr. Crane said, at his proposed price, Calpine's capacity is valued at about $600 per kilowatt of generating capacity, but he believes the replacement cost would be close to $1,000 a kilowatt of capacity. "It's enormously expensive" to build new plants, he said.
Another plus to the merger is the fact that larger companies can take on more debt, another reason for smaller companies to consider ways to bulk up. NRG, for example, is hoping to build two nuclear reactors at its existing South Texas Project site. Mr. Crane's estimate is that it can be done for $8 billion, but some other estimates are far higher. He added that he would like to build several big power plants but might be constrained by his company's modest size. A combination would roughly double the size of the company.
Another looming uncertainty is what will happen if Congress imposes carbon limitations on the power industry. In some cases, independent generators will be able to pass those added costs through to utility customers. But that isn't guaranteed. Companies with more sorts of plants will be able to spread the risk.
A merger of Calpine and NRG would put Mr. Crane in charge of the two companies. NRG was the first major independent power producer to go into bankruptcy, and it emerged in late 2003. Calpine filed two years later and emerged in February of this year. Calpine now has its headquarters split between Houston and San Jose, Calif., and most of its top executive positions are filled by interim executives, creating uncertainty. |
