Less than a year after a group of four private equity funds banded together to acquire Texas Genco Holdings, Inc. from CenterPoint Energy for $3.7 billion, the buyers are proposing to sell Texas Genco to NRG Energy Inc. for $5.8 billion in cash and stock in a deal that confirms the red-hot nature of the market for power generation assets.
Under the deal, NRG — which emerged from chapter 11 just two years ago — will pay $4 billion in cash and will give the sellers $1.8 billion in stock in NRG, which amounts to about a 25% stake in NRG. NRG also will assume an additional $2.5 billion in debt. As a result of the acquisition, NRG will become one of the country’s largest independent generators with more than 24,000 megawatts of capacity from plants in California, the Northeast, the Southeast and Texas.

Through the purchase, NRG gets a large presence in the lucrative Texas power market where, as an independent generator, it will not be tied to any particular utility and will be able to sell its power at wholesale to utilities and other retail suppliers. The deal also gives the private equity fund-owners of Texas Genco a profit of about six times their original investment of nearly $900 million, including the value of the investors’ new 25% stake in NRG.
One controversial aspect of the power generating assets being sold under the deal is that the Texas customers of CenterPoint Energy Inc — the Houston-based utility that originally sold the power plants to the private equity funds — are obligated to pay more than $2 billion to make up the difference between what state regulators concluded that the power generating assets were worth and the higher book value that CenterPoint attributed to the assets. As a result, a fair question is how those supposedly undervalued assets could have appreciated in value so quickly, but the answer is simple — the recent large increase in natural-gas prices. Since Hurricane Katrina hit the Gulf Coast in late August, natural gas prices are up more than 42% to $13.921 a million British thermal unit, which means that the price has nearly doubled for the quarter. Inasmuch as roughly half of the assets being sold consist of nuclear and coal-fired power plants that have low operating costs, NRG will be able to sell that power at the higher prices that gas-powered plants command because Texas allows power to be sold at the price commanded by the most expensive source.
Finally, in another reflection of the super-heated market for power generating assets, the Wall Street Journal is reporting today that Houston-based Reliant Energy Inc. will announce as early as today that it will sell $975 million worth of New York City power plants to a buyout group led by Madison Dearborn Partners and U.S. Power Generating Co. That deal will involve 23% of New York City’s power-generating capacity.