The Deal – Exit revisited: NRG Energy Inc.
By Soma Biswas, January 28, 2005

All too often, a debtor races from bankruptcy only to stumble once it emerges. One year out, however, NRG Energy Inc. seems to have succeeded on both fronts, reorganizing swiftly and then scoring major stock gains and better loan terms as a revamped company.

Its quick exit and post-Chapter 11 success are especially notable given the slow progress at fellow energy giant Mirant Corp., which sought bankruptcy protection just one month after NRG’s filing on May 14, 2003, but submitted a reorganization plan only two weeks ago.

NRG left bankruptcy on Dec. 5, 2003, under a plan that cut its debt in almost half to about $5 billion from $10 billion to $11 billion when it filed. Under David Crane, who became NRG’s chief executive once it emerged, the company has further reduced its debt to $3.6 billion by selling about $1 billion worth of assets.

Late last year, the company refinanced its $950 million senior secured credit facility, part of a $2.7 billion exit financing package from Lehman Brothers Inc. and Credit Suisse First Boston. The refinancing lowered the interest rate on the $800 million term loan portion by 212 basis points, NRG said.

Why the improved terms? An NRG spokeswoman chalks them up to a “combination of the high-yield market being an issuer’s market and a recognition of how far NRG has come since emerging.”

NRG’s financial results have certainly turned around. It reported net income of $54.2 million in the quarter ended Sept. 30, 2004, compared with a $284.8 million loss in the same quarter of 2003. Revenues rose to $606.7 million from $570.7 million a year earlier.

And its new shares, issued at about $24 apiece, have surged to more than $33 in recent trading. As a result, NRG’s equity value, estimated at $2.4 billion in its reorganization plan, now stands at well over $3 billion.

That’s good news for distressed debt specialist MatlinPatterson Global Advisers LLC, which became NRG’s largest shareholder when a reorganization plan swapped NRG’s bank and bond debt for all its new equity, $500 million in new notes and $390 million in cash.

In December, MatlinPatterson cashed out more than half of its 21.5% NRG stake, selling it back to the company for about $405 million.

NRG’s advisers say its quick trip through Chapter 11 stemmed largely from the months of wrangling that preceded its filing. Essentially camped out at NRG’s offices for nearly a year beforehand were Richard Cieri – then a partner at Jones Day but now at Gibson, Dunn & Crutcher LLP – who advised both NRG and its former parent, Xcel Energy Inc., on the restructuring; Kroll Zolfo Cooper’s Leonard LoBiondo and John Boken; and Scott David, a former partner in Jones Day’s restructuring group who had most recently come out of another turnaround at the department store chain Elder-Beerman Stores Corp.

“The reason why it went so smoothly is much of the work was done before,” Cieri says.

Xcel Energy spun out NRG, its unregulated merchant trading unit, in an IPO in 2000. But wholesale power prices soon slumped and power demand slowed, leading to credit rating downgrades in late 2001, which in turn set off $1 billion worth of collateral calls from banks, bondholders and trading counterparties. As NRG struggled, Xcel bought back the 26% stake that it had floated in 2002.

NRG and Xcel hired advisers to lead negotiations with its bank lenders and bondholders, and by November 2002 the parties had a comprehensive restructuring plan with which to work.

Complicating matters was a legal dispute over NRG’s attempt to reject a money-losing contract with Connecticut Light & Power, a move the Federal Energy Regulatory Commission opposed. After several unfavorable court rulings, NRG agreed to settle the issue.
NRG also sped up its filing through a $752 million settlement with parent company Xcel. The $752 million payment to NRG was part of a tax benefit that Xcel agreed to share rather than wrestling with NRG’s lenders and bondholders over allegations that it was responsible for NRG’s failure.

That tax benefit was set to expire at the end of 2003, which provided “very strong motivation to finish the case before the end of 2003,” says Scott Davido, who was NRG’s chairman during the bankruptcy and remains at the company as president of the Northeast region.

NRG’s estate has reaped the rewards. Xcel made three payments to NRG totaling $640 million last year, SEC filings show, much of which landed in a pool for prepetition creditors.