PPL Corp., the utility owner formerly known as Pennsylvania Power & Light, will spin off part of its U.S. generation business into a venture with private-equity firm Riverstone Holdings Ltd.
The new company, to be called Talen Energy Corp., will operate 15,320 megawatts of capacity in the U.S., with PPL shareholders owning 65 percent and Riverstone the remainder, the companies said in a statement late yesterday. Talen will be listed in New York and will rank as the third-largest independent U.S. power producer owned by investors, the companies said.
The tax-free spinoff allows Allentown, Pennsylvania-based PPL to shed 12 stations in its home state and Montana without cutting this year’s forecast earnings of $2.15 to $2.30 per share. PPL, which will have no control of or equity in Talen, said it plans to re-focus on its “high performing” utility assets in Kentucky, Pennsylvania and the U.K., which last year accounted for more than 85 percent of earnings from ongoing operations.
The deal’s timing comes at the “near peak” of the power market, analysts at Tudor Pickering Holt & Co. wrote today in a note to investors. They called the news positive.
Utilities have been shedding plants after a drop in natural gas costs caused electricity prices in some markets to decline. Duke Energy Corp., the largest U.S. utility owner, said in February it plans to sell its interest in 13 Midwestern power units. American Electric Power Co. may decide later this year or early 2015 whether it will follow Duke in selling plants.
Merging the Maryland, New Jersey, Pennsylvania, Texas and Massachusetts power plants owned by Riverstone with the 9,995 megawatts of capacity that PPL is carving out will create a business that derives 40 percent of its electricity from coal, 40 percent from gas and 15 percent from nuclear. The majority of the plants will sell power into the mid-Atlantic market overseen by PJM Interconnection LLC.
The transaction is expected to be complete in the first or second quarter of 2015, PPL said. The stock gained 3 percent to $35.25 at 8:08 a.m. in New York.
Talen expects to generate $912 million in adjusted earnings before interest taxes, depreciation and amortization next year, according to company slides released today.
Paul A. Farr, PPL’s executive vice president and chief financial officer, will be Talen Energy’s president and chief executive officer and a director of the new corporation.
“As stand-alone companies, PPL Corp. and Talen Energy each will have compelling growth prospects, and we expect the financial markets will ascribe valuations that more appropriately recognize the inherent strengths of each company,” PPL Chairman and CEO William H. Spence said in the statement.
PPL has been considering a range of options for its power supply unit, whose profitability was expected to decline this year, Spence said during an investor call last month. The unit was projected to earn 11 cents a share on an adjusted basis in 2014, compared with 39 cents a share in 2013.
“Talen Energy will have significant scale, a very competitive cost structure and the financial agility to pursue growth opportunities,” Spence said.
Riverstone, based in New York, has committed to $26.1 billion in investments, including $2 billion in power and coal production, since it was founded in 2000, according to its website.
Citigroup Inc. and Morgan Stanley served as financial advisers and Simpson Thacher & Bartlett LLP served as legal adviser to PPL. Riverstone’s financial adviser was JPMorgan Chase & Co. and its legal adviser was Vinson & Elkins LLP.