(NRG Energy story updated for analyst commentary)



) -- As



and leveraged buyout firm

Blackstone Group

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all but guarantee that a deal to take the power producer private will fail to garner enough shareholder support,

NRG Energy

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has to regroup from its plans to acquire close to $1.4 billion of Dynegy power-producing assets.

The Dynegy-Blackstone proposal pitted the leveraged buyout specialists against activist investor

Carl Icahn

and hedge fund Seneca Capital, both shareholders of Dynegy, who argued that the Blackstone offer of $5 was a lowball offer based on the break-up value of Dynegy assets.

As the Dynegy LBO soap opera played out, NRG Energy was faced with questions as to its plan B, and NRG CEO David Crane has made several comments in the past few weeks concerning NRG Energy's strategy should the Dynegy-Blackstone deal fall through.

NRG Energy media relations official Lori Neuman said on Tuesday that the company would have no new comment to make until the Dynegy shareholder vote is completed. However, NRG CEO Crane ran through a gamut of options on the company's recent earnings conference call.

In his comments to the press, NRG Energy CEO Crane has previously focused on making a new bid for Dynegy assets at a lower price, since pricing in the market and the forward gas curve has deteriorated since the August announcement of the bid. NRG Energy has also stressed the importance of a new deal not being tied up with a company in bankruptcy court, where claims of "fraudulent conveyance" can lead to prolonged legal wrangling.

Yet on the earnings conference call, the NRG Energy CEO also presented a few other ideas for use of capital if its Dynegy acquisition isn't completed.

On the alternative use of the liquidity, the NRG Energy CEO described the Dynegy assets as "particularly attractive," but added that the Dynegy assets were not the only combined cycle power plant in the United States on the market. "I actually think that the absolute best time to be buying combined cycle power plants most probably will be in the first part of 2012," the NRG Energy CEO said on the earnings call.

Crane also said that a share buyback plan is a possibility. The Dynegy transaction was expected to serve as an earnings booster -- though NRG Energy hadn't put any hard numbers on potential earnings accretion. Share buyback activity is a more conservative way than acquisition of boosting earnings per share in the short-term.

In the last quarter, NRG Energy completed $130 million of share repurchases, completing the 2010 share repurchase program of $180 million.

An energy market analyst said even though NRG Energy's stock price is low, it has restrictions on how much share repurchase activity it is permitted to authorize, a stipulation after its re-emerged from bankruptcy to protect bond holders.

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In the original deal announcement, NRG Energy estimated that the new asset portfolio would contribute between $175 million and $225 million in annualized adjusted EBITDA. In its 2011 guidance, NRG Energy presented an adjusted EBITDA range of $1.9 billion to $2.1 billion, including pending acquisitions.

The NRG Energy CEO also noted that since the company borrowed money in August in order to finance the Dynegy transaction, paying down existing debt would be an option for the company.

Brandon Blossman, an analyst at Tudor, Pickering, Holt & Co. who covers NRG Energy, wrote in an email to the


that debt repurchase looks like the most logical course of action right now.

NRG Energy completed a $1.1 billion senior note offering shortly after the Dynegy transaction was proposed.

Even though paying down debt might be the most logical option, the company's earnings profile is declining, and the acquisition of the Dynegy assets was a ballast to 2011 guidance. Also, the Dynegy assets would be part of the higher margin generation business for which the Street affords a higher multiple, as opposed to lower multiple retail business. NRG Energy will have to bring its EBITDA guidance down by the roughly $200 million it said to expect from Dynegy assets, and that will shift the earnings mix back toward the lower multiple assets.

An acquisition would still be the quickest way to boost the Street view, but the second energy analyst said that the Dynegy deal seemed as if it were engineered particularly to meet the needs of NRG Energy, by moving the debt that it's not allowed to hold per its bond covenants into the Blackstone transaction.

As for NRG Energy CEO Crane's comments about 2012 being the perfect time to make acquisitions, the energy analyst said that a deal is needed now, though the argument could be made that 2011 won't be a stellar year for earnings, and acquisition pricing will still remain favorable to buyer in 2012. Therefore, a buyer could still buy on the low in 2012 and have a quicker road to a bigger earnings bump from a deal. "The time for payback would be shorter, but the merchant companies are over-levered and the outlook for gas prices is not bullish and they have to do something," the energy analyst said.

One thing that the NRG Energy CEO made clear on the earnings conference call is that if the company pursues other acquisition targets, its acquisition strategy isn't going to change, and won't include Midwestern coal assets the type of which it avoided in the Dynegy deal.

"We made it very clear from the beginning that we were not interested in owning the Midwest coal assets. We've been consistent about this ever since the response to the Exelon situation. In my seven years in this company, we have never been attracted to the Midwest as a place where we really want to be very active," the NRG Energy CEO said on the conference call.

NRG Energy shares were down 1% on Tuesday, in line with the decline in the utilities sector.

-- Written by Eric Rosenbaum from New York.


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