Private Equity Snapping Up Unloved Plants in Tough Power Market

Updated on
  • American Electric Power sale shows ‘significant interest’
  • Calpine and Dynegy may be private equity takeout targets

Private equity firms better positioned to weather the prolonged slump in U.S. electricity markets are snapping up generators from risk-averse power companies.

In the latest example, Blackstone Group LP and ArcLight Capital Partners LLC said Wednesday they had formed a joint venture to buy four power plants in the Midwest from American Electric Power Co. for $2.2 billion. The deal comes after transactions earlier this year including Riverstone Holdings LLC taking Talen Energy Corp. private for $1.8 billion and Energy Capital Partners LLC grabbing a 15 percent stake in Dynegy Inc.

Power generators across the U.S. that compete in wholesale markets have seen their profits squeezed by cheap natural gas, a surge in renewable energy supplies and energy conservation. The slump is expected to continue as prices failed to strengthen after a hot summer with high demand. Wolfe Research LLC downgraded U.S. independent power producers earlier this week.

“Utilities are exiting the merchant business due to shrinking margins resulting from weak demand and low commodity prices,” said Stacy Nemeroff, an analyst for Bloomberg Intelligence. “Private equity players can withstand the volatility of these assets.”

Forward wholesale electricity prices for 2017 in the largest U.S. grid have fallen about 24 percent in the past three years, according to data compiled by Bloomberg. That may herald more deals as generator owners seek shelter from the slump.

Calpine Corp. and Dynegy, two of the biggest publicly traded U.S. independent power producers, could be takeout targets of private equity firms and infrastructure funds, Praful Mehta, an analyst for Citigroup Global Markets Inc., said in a note to clients Wednesday.

American Electric’s sale process “suggests significant interest in generation assets by private equity shops,” Mehta said.

Blackstone spokeswoman Paula Chirhart and Matthew Nelson, a spokesman for ArcLight, declined to comment. Calpine and Dynegy didn’t immediately respond to a request for comment.

Recent power-plant purchases by private equity firms include Starwood Energy Group Global LLC’s plan to buy NextEra Energy Inc.’s stake in two Pennsylvania power plants for $760 million. Investors led by The Carlyle Group LP bought Entergy Corp.’s Rhode Island State Energy Center for $490 million last year.