Utility deals experience a power surge
CONSOLIDATION of the US power sector has accelerated at lightning speed
In the first eight months of 2010 alone, acquisitions added up to more than $27bn, almost 22 times more than in the same period of 2009, according to data compiled by Bloomberg. PricewaterhouseCoopers, an accountancy firm, says 21 transactions in excess of $50m were announced in the second-quarter 2010, compared with 13 each in the first quarter 2010 and the last quarter of 2009.
These measures reflect the industry's response to "what may have been the worst market and financial conditions in the history of our industry," PPL chief executive James Miller said in his company's annual report. As the country's economic problems lingered, electricity output dropped by 3.7% last year compared with 2008. At the same time, costs for such expenses as regulatory compliance, infrastructure improvement, energy efficiency and security continue to climb. Consequently, utilities have been consolidating to capitalise on depressed power-generation asset prices, achieve economies of scale and diversify their portfolio to reduce risk.
Last month, FirstEnergy moved a big step closer to concluding its $8.5bn acquisition of Allegheny Energy, when both companies' shareholders approved the merger. The transaction will create the US' largest power utility, with 6 million customers, and will yield an estimated $0.53bn in pre-tax savings in the first two years.
In April, Pennsylvania-based PPL announced plans to purchase the US utility holdings of German power firm E.On, including Louisville Gas & Electric and Kentucky Utilities, for $6.7bn in cash. The acquisition will expand the company's portfolio of regulated utilities with their reliable revenue streams.
Also in April, Mirant and RRI Energy revealed their intent to merge in a $3.1bn transaction, creating GenOn Energy, one of the country's largest independent power producers with nearly 25 gigawatts (GW) of generating capacity and market capitalisation of $3.1bn. The companies have complementary power generation assets: RRI Energy owns and leases facilities in Southern California, the Midwest and Southeast, while Mirant has assets in Northern California and the Northeast; both have power plants in the mid-Atlantic. By reducing overheads, the combined company will realise annual savings of $150m.
Although Blackstone Group's decision to acquire Dynegy for $4.7bn, including debt, does not fit the intra-industry consolidation pattern, the investment and advisory firm plans to sell Dynegy's four combined-cycle, gas-fired power plants in California and Maine to NRG for $1.36bn. NRG is also purchasing a gas-fuelled facility in Texas from Kelson Holdings for $0.525bn, and acquiring clean energy firm Green Mountain Energy for $350m. The acquisitions support NRG's strategy, stated in its 2009 annual report, "to grow into the nation's foremost provider of clean energy, both as a primary and secondary energy source".
Other megamergers are also in the works. Constellation Energy has proposed a $1.1bn purchase of five plants totalling nearly 3 GW of capacity – the third-largest power-generating portfolio in New England – from Boston Generating, which filed for bankruptcy in August. The company had expressed an interest in lowering unit costs and creating other synergies by making big asset acquisitions in areas where it supplies large volumes of electricity; Constellation's existing plants in the Northeast represent roughly 85% of its 9 GW of generating capacity.
UIL Holdings, parent of United Illuminating, aims to buy Southern Connecticut Gas, Connecticut Natural Gas and Massachusetts-based Berkshire Gas from Spain's Iberdrola for almost $1.3bn. As well as more than doubling the company's customer base and expanding its geographic diversity, the deal will enhance UIL Holdings' earnings and cash flow.
Other, smaller deals have also been announced and sources say even more are on the horizon as the drivers for consolidation within the power sector become even stronger.