E.ON Near Deal to Sell $7.5 Billion U.S. Unit to PPL

E.ON AG is nearing an agreement to sell its U.S. unit to PPL Corp. in a deal that values the unit at about $7.5 billion including debt, according to a person with knowledge of the matter.

E.ON, based in Dusseldorf, is seeking to sell more than 10 billion euros of assets by the end of the year after being saddled with debt from acquiring power plants and customers from Spain to Siberia. PPL, based in Allentown, Pennsylvania, owns its state’s second-biggest utility.

E.ON’s U.S. unit, which includes two utilities, delivers power to about 900,000 customers and gas to 318,000 customers. It can generate more than 8,000 megawatts of power. PPL owns or controls about 12,000 megawatts of generation, of which 34 percent is coal-fired and 18 percent is nuclear. PPL has 1.4 million Pennsylvania customers and 2.6 million U.K. customers.

Last month, Public Service Enterprise Group Inc. Chief Executive Officer Ralph Izzo said that uncertain environmental regulation may limit acquisitions. Public Service owns New Jersey’s largest utility. Legislation approved by the U.S. House last year would curb greenhouse gases and charge certain industries for permits to emit them.

“We’re going to try to keep an open mind about this, but really preferred PPL as a standalone company, at least until there’s more clarity on carbon regulation,” Phil Adams, a credit analyst with Gimme Credit in Chicago, wrote today in a report to clients.

Shares Fall

PPL dropped $2.13, or 7.7 percent, to $25.60 at 4 p.m. in New York Stock Exchange composite trading. The utility owner has fallen 21 percent this year. Earlier today, the shares declined to $25.54, the biggest drop since August 2009.

“I am not able to confirm market rumors,” George Biechler, a PPL spokesman, said in an e-mail.

E.ON already has raised almost 6 billion euros selling high-voltage power lines, about 20 percent of its electricity generation capacity in Germany and a holding company for stakes in local energy suppliers, according to a March 10 presentation. E.ON’s net debt was 44.67 billion euros as of Dec. 31.

E.ON acquired the U.S. assets when it bought U.K. electricity producer PowerGen Plc in 2002. PowerGen agreed to buy LG&E Energy Corp. for $5.4 billion in 2000. The German company also has 1,720 megawatts of wind turbines in the U.S. managed by its renewable-energy unit, according to its 2009 annual report. LG&E was originally formed in 1838 as Louisville Gas & Water to provide gas-fired street lighting.

Industry Consolidation

“Consolidation in this industry makes sense,” Paul Patterson, an analyst at Glenrock Associates LLC in New York, said yesterday. “There are a large number of smaller utilities when combined together that could drive operational efficiencies.”

In February, FirstEnergy Corp. agreed to buy Allegheny Energy for about $4.7 billion to increase generation capacity in PJM Interconnection LLC, the largest electricity market in the U.S., which stretches from Washington to Chicago.

“With the bigger balance sheet and more asset base, you can take on bigger projects that smaller and medium utilities cannot do,” said Steve Mitnick, a partner at Oliver Wyman in New York who advises power and utility companies. “That’s a real advantage.”

E.ON hired Goldman Sachs Group Inc. to find a buyer for the unit, a person briefed on the matter said last month.

With wider geographic spread, companies may find it easier to weather state utility commission actions, Mitnick said.

Florida regulators in January rejected or reduced rate increases for Progress Energy Inc. and FPL Group Inc.’s Florida Power & Light Co. Both companies reduced capital-spending plans following the decisions.

“Where a utility is in several states and is not dependent on just one regulatory commission, that means that its financial stability is less dependent on one commission,” Mitnick said. “In these tough times, some of these commissions have been difficult and challenging.”

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Jordan Burke in New York at jburke29@bloomberg.net.

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