Orion, Reliant officials confirm merger

Deal would create major independent producer of energy

September 28, 2001|By Dan Thanh Dang | Dan Thanh Dang,SUN STAFF

Executives of Baltimore-based Orion Power Holdings Inc. and Reliant Resources Inc. confirmed yesterday that they will merge in a deal that will create the nation's second-largest independent power producer with more than 20,000 megawatts of electricity capacity in operation or under construction.

The deal, reported yesterday by The Sun, also means that Baltimore will likely lose a headquarters of a company listed on the New York Stock Exchange. In addition, the future of Orion's downtown personnel is in question.

In their formal announcement yesterday, the companies confirmed that the Houston electricity company will pay $26.80 a share for Orion, a 40 percent premium over its Monday close, putting the value of the deal at $2.9 billion. Reliant also will assume $1.8 billion in debt.

Shares of Orion soared 31 percent, or $5.86, yesterday to close at $25.06. Reliant Resources, also traded on the NYSE, dropped 93 cents to close at $15.75.

The deal gives Reliant Resources entry into New York's power market, where Orion owns plants in New York City and upstate. Since Orion's inception in March 1998, the company has invested more than $4 billion in 81 power plants that produce nearly 6,000 megawatts of electricity, or enough energy for 6 million homes.

Reliant Resources, a publicly traded merchant energy company that is majority-owned by Reliant Energy Inc., owns 14,100 megawatts of electricity in operation and under construction across the country. Reliant Resources is expected to split from its parent company in the first quarter of next year.

A good fit

"This company fits our strategy to a T," said Stephen W. Naeve, Reliant Resources executive vice president and chief financial officer. "We have a very highly skilled, top-tier gas and power trading organization. Orion doesn't really have that skill set. We've certainly been aware of the company since its inception and have admired the management team.

"They've done very well for their company," Naeve said. "But we can improve on that and create additional value. Orion was economically attractive to us."

Said Orion Chief Executive Officer Jack Fusco, "I love this company. It was the right decision, but not an easy decision for me. But I am pleased that a company as excellent as Reliant Resources was interested in merging with us."

The deal, which is expected to close early next year, will immediately add 30 cents to Reliant Resources' earnings per share in 2002.

Financing the transaction

Reliant Resources will use a combination of cash on hand, $400 million of an existing credit facility and a new bridge loan of $1.6 billion to $1.8 billion, which has not been committed, to finance the transaction, company officials said during an analyst conference yesterday. Standard & Poor's placed Reliant Resources on credit watch with negative implications yesterday, pointing out that the deal will raise its debt to more than 50 percent of capital.

It was unclear yesterday how Orion's 70 Baltimore employees would be affected. They could be relocated to Reliant Resources' headquarters in Houston or to its eastern regional office in Johnstown, Pa., near Pittsburgh. Company officials said it was too soon to make a determination.

Most of Orion's 950 employees operate the company's power plants and will most likely be unaffected.

"There's a strong likelihood that we'd consolidate some of the administrative activities into our existing offices, but haven't developed a definitive plan yet," Naeve said.

Orion's executive management team, which includes Fusco, is under no obligation to stay or leave after the merger. Fusco declined to say yesterday whether he would stay with the new company.

Orion was started in 1998 as a joint venture between the New York investment firm Goldman Sachs Group Inc. and an affiliate of Constellation Energy Group Inc., parent of Baltimore Gas and Electric Co. Together, the two firms retain about 55 percent of Orion's stock.

The company succeeded almost immediately, analysts say, and doubled in size last year. After going public in November at $20 a share, Orion posted record earnings in the second quarter of this year, more than triple the $5.5 million it reported a year earlier.

Fusco said yesterday that almost from the time of Orion's inception, "I had received an enormous amount of reverse inquiry for the company from a variety of different sources. It has always been my desire when we set up the company to create shareholder value.

"When it became evident that we would need a stronger balance sheet to grow the business as aggressively as we wanted, that's when this merger started to make more sense strategically," Fusco added.

Orion contacted several of its suitors, including Reliant Resources, about six weeks ago, Naeve said.

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