WILMINGTON, Del. (CN) — Debt holders of GenOn Energy have sued NRG Energy, claiming it bought the power generating company to exploit its assets through an onerous services contract that pays it hundreds of millions of dollars a year.
After buying GenOn Energy in 2012, NRG caused the power generating company to enter into a services agreement that paid NRG $193 million a year, "an amount that is multiples of the arm's-length cost or fair market value of the services," the noteholders say in the Dec. 13 complaint in Chancery Court.
The services agreement is a so-called, "'free cash flow generating machine' for NRG, without regard to the actual cost of the services or GenOn's financial well-being,” the noteholders say.
In fact, “NRG boasted that a shared services agreement between it and GenOn would enable NRG to 'capture' the value of the merger synergies and highlighted that 'no bondholder approvals [would be] required from either NRG or GenOn bondholders,” according to the complaint.
NRG structured the merger so that GenOn would be operationally integrated but financially separated, the bondholders say, to "exploit GenOn's assets for the benefit of NRG's shareholders, while at the same time isolating itself from GenOn's liabilities."
An NRG news release announcing the merger made explicit the company's plan by trumpeting a projected "'$200 million in annual EBITDA enhancements' for NRG,” the complaint states.
The noteholders say this was a strategic highlight of the deal, and it is no coincidence that the $193 million in annual payments from GenOn make up most of the $200 million in annual EBITDA enhancements that was touted in the merger announcement.
Though undercapitalized and losing millions annually, GenOn entered into the services agreement with NRG because NRG stood on both sides of the deal, having "appointed its own employees to serve as the directors and officers of GenOn Energy and its subsidiaries," the bondholders say.
And though GenOn may renegotiate the terms of the services agreement yearly, it has failed to amend the contract at all, even though NRG has caused GenOn to mothball or sell off several of its power generating plants to raise cash, the noteholders say.
They say that because of the reduction in services needed by GenOn, "NRG caused GenOn to overpay it annually during each renewal term by at least $130 million and perhaps by more than $150 million."
The bondholders say that the GenOn asset sales forced by NRG in the past four years account for cumulative proceeds of $824 million, “which is roughly equivalent to the aggregate amount of payments GenOn has made to NRG under the services agreement."
GenOn has been able to maintain liquidity only through these forced asset sales directed by NRG, the noteholders say.
"In essence, NRG has caused GenOn to burn its own furniture to heat NRG's house with four years of overpayments under the Services Agreement," according to the complaint.
As a result, GenOn is unable to service its debt and has become “balance sheet insolvent,” say the noteholders.
They say the payments made to NRG under the services agreement are fraudulent transfers, or at the least, constitute insider preferences. They seek recovery of the allegedly fraudulent transfers, damages and costs of suit.
They are represented by Gregory Williams with Richards Layton in Wilmington, and by David Hennes with Ropes & Gray in New York City.