By Ted Caddell
American Electric Power has agreed to shed more than 5,000 MW of merchant generation in Ohio and Indiana to private investment firms The Blackstone Group and ArcLight Capital Partners for about $2.17 billion, the company announced Wednesday.
The Wall Street Journal first reported the deal Tuesday, citing anonymous sources.
The plants are the 2,640-MW coal-fired General James M. Gavin Power Plant in Cheshire, Ohio; the 850-MW natural gas-fired Waterford Energy Center in southeastern Ohio; the 480-MW gas-fired Darby Electric Generating Station, 20 miles south of Columbus; and the 1,096-MW gas-fired Lawrenceburg Generating Station in Dearborn County, Ind., on the Ohio border.
The company has said about 2,700 MW of merchant generation in Ohio not included in the reported deal are also being considered for sale. The remainder of AEP’s total of 31,000 MW of generation is owned by regulated utilities in 11 states.
Merchant generators have seen profit margins evaporate as the fracking boom has flooded the market with cheap natural gas, reducing wholesale market clearing prices.
“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. This transaction advances that strategy and reduces some of the business risks associated with operating competitive generating assets,” AEP CEO Nick Akins said in a statement.
AEP hopes to close the sale, which is subject to approvals by FERC, state regulators and a federal antitrust review, in the first quarter of 2017.
The company said it would net approximately $1.2 billion in cash after taxes, debt repayment and transaction fees, as well as an expected after-tax gain of about $140 million.
The company confirmed in January 2015 that it had hired investment bank Goldman Sachs to shop almost 8,000 MW of merchant generation in Ohio and Indiana, which then-AEP Ohio President Pablo Vegas called “on the economic bubble” and struggling to remain profitable. (See AEP Considering Sale of 8,000 MW in Ohio, Indiana.)
AEP and FirstEnergy have sparked opposition from PJM and others with their bids to convince Ohio regulators to effectively move their merchant plants back into their regulated rate base. (See FirstEnergy Posts $1.1B Loss, Eyes Exit from Merchant Generation.)
AEP’s sale mirrors that of other utilities, including Duke Energy, which sold its retail business and its interest in 11 merchant plants in Ohio, Pennsylvania and Illinois to Dynegy for $2.8 billion in 2015.
PPL spun off its merchant generation — along with that of Riverstone Holdings — to create publicly traded Talen Energy in 2015. Riverstone announced in June it had agreed to purchase the company and take it private.
Exelon also has looked to shift its exposure away from market prices to regulated assets while also threatening to close struggling merchant nuclear plants.
So what’s private equity’s rationale for buying merchant plants that utilities no longer want?
“The private-equity firms’ multiyear investment horizon gives them an opportunity to bet on a rebound in the wholesale power market,” the Journal said.
Private equity giant Blackstone‘s recent investments have included transmission development (GridLiance), oil and gas (Permian basin shale properties) and LNG (Cheniere Energy Partners).
ArcLight, a smaller fund, focuses on “energy infrastructure assets with substantial growth potential, significant current income and meaningful downside protection.”
It says it has spent $16.8 billion in 99 transactions since its founding in 2001, with “62 exits across diverse market cycles.”
Blackstone and ArcLight have owned more than 38,000 MW of generation globally, AEP said, including operations in PJM, NYISO and ERCOT.