Blackstone, ArcLight to Buy AEP Plants for $2.2 Billion

  • AEP had been looking to sell plants in U.S. Midwest for months
  • Power generators’ profits have been squeezed by cheap gas

American Electric Power Co., one of the largest electricity generators in the U.S., agreed to sell a set of power plants in the Midwest to Blackstone Group LP and ArcLight Capital Partners LLC for $2.17 billion.

The private-equity firms have formed a joint venture to buy four power plants generating about 5,200 megawatts in Ohio and Indiana, a company statement shows. The sale is slated to close in the first quarter of 2017. American Electric expects to net about $1.2 billion in cash after taxes, repayment of debt and transaction fees.

American Electric has been looking to get rid of power plants in the Midwest for months as it works to refocus its business on regulated assets that offer steadier returns. Power generators across the U.S. that compete in wholesale electricity markets have seen their profits squeezed by cheap natural gas, a surge in renewable energy supplies and weak demand.

“This price highlights that there is robust interest in generation assets from PE shops,” Citigroup Inc. analyst Praful Mehta wrote in research published Wednesday. American Electric probably will buy back stock and invest in power lines with the proceeds, he wrote.

Blackstone spokeswoman Paula Chirhart and ArcLight spokesman Matt Nelson declined to comment. American Electric rose 0.3 percent to close Wednesday at $64.02 in New York. Shares are up 9.9 percent this year.

The Ohio plants include the gas-fired Waterford Energy Center and Darby Generating Station and the coal-fired James M. Gavin Plant. The sale also includes the gas-fired Lawrenceburg Generating Station in Indiana.

AEP Chief Executive Officer Nick Akins had said earlier this month that the company received “robust interest” in its plants up for sale and that he hoped a deal would be reached “soon.” As of a Sept. 7 company presentation, AEP’s unregulated generation unit owned plants capable of producing about 7,900 megawatts. AEP runs regulated utilities in 11 states, according its website.

Buyout Targets

“AEP’s long-term strategy has been to become a fully regulated, premium energy company focused on investment in infrastructure and the energy innovations that our customers want and need,” Akins said in Wednesday’s statement. “This transaction advances that strategy and reduces some of the business risks associated with operating competitive generating assets.”

Independent power generators Calpine Corp. and Dynegy Inc. may benefit because the deal values competitive plants at higher prices than their stock has been trading, Citigroup’s Mehta said. Either company may be bought by private equity firms, he said.

Arclight and Blackstone “are significantly involved already in owning generation assets,” Bloomberg Intelligence utility analyst Kit Konolige said by phone Wednesday. “The volatility of the power business is more suited to a private equity firm than a publicly-traded utility where the investors really prefer stability, visibility of earnings and dividends. A private equity firm is able to handle the feast-or-famine cycles.”

AEP said it will provide details about its plans to invest the proceeds at a Nov. 1 analyst day. Strategic evaluation of 2,677 megawatts of competitive generation in Ohio continues, according to the statement. A 48-megawatt hydroelectric plant in Racine, Ohio, also may be sold, the company said.

The sale is subject to approval by the Federal Energy Regulatory Commission, the Indiana Utility Regulatory Commission and antitrust clearance, American Electric said. Goldman Sachs Group Inc. and Citigroup Inc. advised American Electric.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE