Acquisitions in the U.S. power industry surged more than 20-fold by value in the first eight months of the year. Advisers say expect more deals as buyers such as Blackstone Group LP bet electricity prices will rise with economic recovery.
Blackstone’s agreement this month to buy Dynegy Inc. of Houston for $4.7 billion, including assumed debt, brought the value of power deals announced in 2010 to $27.5 billion, almost 22 times the total at this time last year, according to Bloomberg data.
“The announced deals are only just the small tip of the iceberg,” said Aaron Engen, a managing director at BMO Capital Markets in Calgary. “We’re seeing lots of activity right now.”
Power assets got cheaper as electricity prices plunged last year and demand in 2010 remained below pre-recession levels. Dynegy’s market value tumbled 94 percent in the three years before the sale to New York-based Blackstone, the world’s largest buyout firm, was announced. Buyers are betting they’ll profit as the economy recovers. They are offering to pass on merger cost savings to consumers to win regulatory approvals.
Betting on Rebound
“An acquirer is looking at depressed asset values right now, thinking that if electricity demand increases by even a relatively minor amount overall that the value of the assets could increase,” said David Bloom, a partner at law firm Mayer Brown LLP in Washington. He has advised clients on regulatory issues associated with more than $1 billion of power and natural-gas transactions in the past two years.
For utilities, expanding through mergers can spread the cost of complying with environmental regulations over more customers, said Bloom, who added he’s getting a growing number of inquiries about the regulatory implications of potential acquisitions.
Citigroup Inc. is among the banks and professional firms gearing up to capitalize on more deals.
“We’re definitely busier than we were in 2009 and have hired six people to increase our power investment banking team, with flexibility to add further,” said Joseph Sauvage, co-chief of investment banking for the North American power industry at Citigroup in New York.
With little customer growth to drive earnings gains, utilities must reduce costs to increase profit margins. Exelon Corp., the biggest U.S. utility owner, cut jobs, froze executive pay and closed money-losing plants to boost profit after trying unsuccessfully to buy NRG last year. Mergers can provide more opportunities to trim costs by eliminating overlapping jobs.
“We believe that this is an industry where you need consolidation,” John Rowe, chief executive officer at Chicago- based Exelon, told investors on a July 22 conference call.
Exelon announced today that it agreed to buy Deere & Co.’s wind-power business for as much as $900 million. The company is gaining generation assets in the transaction at less than half the cost of developing new wind farms, Exelon President Chris Crane said in a CNBC interview.
U.S. utilities have struggled in the past decade to get mergers approved by states. Exelon dropped its $17.8 billion takeover of New Jersey’s Public Service Enterprise Group Inc. in 2006 after an offer of $600 million in customer refunds and other concessions failed to satisfy the state.
That same year, Juno Beach, Florida-based NextEra Energy Inc.’s $12.4 billion acquisition of Constellation Energy Group Inc. of Baltimore was scuttled after it failed to reach agreements with regulators.
Merger savings that can be passed on to consumers may help persuade states in today’s economy, said Tony Earley, CEO at DTE Energy Co., the Detroit-based owner of Michigan’s largest utility.
Stan Wise, a member of the Georgia Public Service Commission, agreed. “If a Georgia company can show me they’ve got significant cost savings and the ratepayers can benefit from it, I would be favorably inclined to such an acquisition,” he said.
Acquisitions would accelerate if pending mergers avoid regulatory roadblocks, said John McConomy, head of U.S. power and utility transactions at PricewaterhouseCoopers LLP in Philadelphia.
FirstEnergy and Greensburg, Pennsylvania-based Allegheny said in February that their $8.5 billion merger, including debt, would yield $530 million in pretax savings in the first two years. Ellen Raines, a spokeswoman for Akron, Ohio-based FirstEnergy, said the transaction is on course to be approved.
Also awaiting approval is PPL Corp.’s $6.7 billion purchase of E.ON AG’s U.S. utilities. Power producers Mirant Corp. of Atlanta and RRI Energy Inc. of Houston this month won Federal Energy Regulatory Commission approval for their $3.1 billion merger, announced in April.
Constellation and Princeton, New Jersey-based NRG are among companies trying to make bargain purchases of so-called merchant plants, which sell power to utilities and municipalities at market prices instead of fixed rates.
Constellation bid $1.1 billion this month to acquire U.S. Power Generating Co.’s five Boston-area power plants out of a bankruptcy proceeding. Also this month, NRG agreed to buy Dynegy plants in two states from Blackstone and to purchase a Texas power station from Kelson LP, part of Columbia, Maryland-based power producer Kelson Holdings.
NRG is adding capacity at 40 percent to 50 percent of the cost of building new plants, according to investment bank Tudor Pickering Holt & Co. in Houston.
“Our cash flow and balance-sheet strength allow us to take advantage of this market,” NRG Chief Financial Officer Chris Schade said in an e-mail.
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