NRG Poised to Relinquish Debt-Laden GenOn to Creditors

Under a proposed restructuring agreement, NRG Energy will hand over 100% equity of GenOn Energy, a wholesale generation company it acquired in a $1.7 billion deal in 2012, to the company's bondholders once GenOn emerges from voluntary Chapter 11 restructuring.

NRG, GenOn, and an ad hoc group of GenOn noteholders reached a mutual cooperation agreement on May 22, and the parties are expected to strike a restructuring support agreement by May 26 that will fully release NRG and GenOn and GenOn Americas Generation from indemnification claims while dismissing all litigation against NRG.

While the agreement must be approved by the bondholders, when that will occur is still being negotiated. GenOn's next bond payment is due on June 15.

A Comprehensive Agreement

The proposed agreement, described in an 8-K filing with the Securities and Exchange Commission, and made public on May 23, is to be implemented through voluntary cases filed by GenOn under Chapter 11 of the U.S. Bankruptcy Code.

It will allow NRG to provide a settlement consideration of $243 million in cash, and continued and amended shared services in return for the cancellation of its equity interests in GenOn.

It may also resolve a bitter dispute between GenOn's noteholders and the company's parent, NRG, about shared services costs. A lawsuit filed in December 2016 by debt holders of GenOn Energy against NRG Energy, for example, claimed a services agreement between the two companies when they merged in 2012 required GenOn to pay $193 million a year. That amount far exceeded market value of the services, serving "as a 'free cash flow generating machine' for NRG, without regard to the actual cost of the Services or GenOn's financial well-being," the complaint said.

An amended complaint filed by the noteholders in April 2017, meanwhile, asserts breaches of fiduciary duty by some current and former GenOn executives in relation to a management services agreement, and it accuses NRG for aiding and abetting such breaches of fiduciary duties. NRG and GenOn have separately filed separate motions to dismiss the complaint, but such motions are superseded by the amended complaint.

The agreement reached earlier this week will allow NRG to provide GenOn with shared services at no charge for two months after GenOn emerges from Chapter 11. Also, NRG will provide GenOn with the option of up to two one-month extensions for transition services at a rate of $84 million per year. NRG also plans to retain historic pension obligations through Chapter 11 emergence and take a "worthless stock deduction for federal tax purposes."

High Debt Burden

GenOn owns and operates 32 wholesale power generation facilities across eight states, with a total of 15.4 GW capacity. Most of its capacity (61%) is fueled by natural gas, though it relies on coal for 27% of its power mix. The remainder is oil-fired. About 62% of its capacity is centered in the PJM Interconnection region, though it has assets in other competitive markets in California, New England, the Midcontinent Independent System Operator, and New York.

When NRG acquired GenOn in 2012, the merger created the "largest competitive generator" in the U.S.

However, GenOn has since racked up a high debt burden relative to cash flow. Over the past five years, the company has been financially crippled by falling wholesale power prices and capacity prices, which were spurred primarily by the glut of cheap gas depressing power prices. It has sought to stay profitable by selling assets and rebalancing its portfolio, which entailed retiring uneconomic coal plants and converting them to gas where economical.

Industry observers have anticipated for nearly a year that the company would default or restructure its debt. In an earnings call with investors on May 2, NRG CEO Mauricio Gutierrez said that NRG was evaluating all options available before upcoming bond maturities on June 15.

"We, along with GenOn, remain in active dialog with GenOn's creditors while we continue to evaluate and pursue a broader range of possible outcomes," he said.

Gutierrez in February noted that the company's troubles stem from a period of "unprecedented disruption" that is currently affecting the competitive power sector. "Changes in fuel mix, consumer preference, technological innovation and increased distributed generation have put pressure on the traditional [independent power producer (IPP)] model, particularly as commodity markets continue to weaken.

"While sufficient at the outset of competitive markets, I believe the IPP model is now obsolete and unable to create value over the long term."

On May 2, Gutierrez addressed newer concerns affecting the integrity of competitive markets:

"Out-of-market subsidies and contracts distort pricing that was needed to attract new capital investment, but often raising prices for the end users. We and a number of other parties have filed legal challenges to the nuclear subsidies in both New York and Illinois because we believe they're not legal and because regulators should focus on crafting competitive solutions for public policy objectives," he said.

-Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)

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