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American Electric (AEP) to Sell 4 Power Plants for $2.2B
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Electric utility major, American Electric Power Co., Inc. (AEP - Free Report) will sell four of its natural gas and coal-fuelled power plants to a newly formed joint venture (JV) between private equity firms The Blackstone Group L.P. (BX - Free Report) and ArcLight Capital Partners LLC (ArcLight). The deal has a total value of $2.17 billion and is scheduled to close in the first quarter of 2017.
The four power plants – Lawrenceburg Generating Station, Waterford Energy Center, Darby Generating Station and Gen. James M. Gavin Plant – located in the states of Ohio and Indiana, have a total capacity of 5,200 megawatts (MW).
We note that the sale is in sync with the company’s Jan 2015 decision to look for alternative strategies, even sell-offs if required, for the optimal use of its power plants.
As far as the financial gains from the deal are concerned, management expects it to add $1.2 billion after-tax cash to American Electric’s balance sheet, excluding repayment of debt associated with these assets and transaction fees. The company also expects an after-tax gain of approximately $140 million from the sale, subject to inventory true-ups, income tax and other adjustments.
The sale is subject to regulatory approvals from the Federal Energy Regulatory Commission, the Indiana Utility Regulatory Commission and federal clearance pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Currently management is exploring strategies of investing the proceeds from the transaction in its business and plans to discuss the details on American Electric’s annual day, scheduled for Nov 1, 2016. These strategies may include reinvestment in regulated businesses, including transmission, renewable projects, additional debt retirement and share buybacks.
Our View
Independent U.S. power companies have been taking a beating as cheap natural gas price, rising demand for renewable energy and energy conservation initiatives continue to plague the wholesale electricity market. Forward wholesale electricity prices for 2017 in the largest U.S. grid dropped 24% in the past three years, according to data compiled by Bloomberg.
We believe that the deregulation of the electricity market is another cause of concern for companies operating in this space and this, along with the aforementioned factors could have been the reason American Electric was compelled to sell its assets.
Also, this divestiture is in line with American Electricity’s strategy of transitioning itself from a wholesale electricity provider to a fully regulated, premium energy company.
In this context, it should be noted that as energy companies rush to shed their power plants, private equity firms are moving in to purchase them. For instance, private equity firm Starwood Energy Group Global recently agreed to buy NextEra Energy Inc.’s (NEE - Free Report) stake in two Pennsylvania-based power plants for $760 million this July. Similarly, Carlyle Group had acquired Entergy Corp.’s (ETR - Free Report) Rhode Island State Energy Center for $490 million last year.
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American Electric (AEP) to Sell 4 Power Plants for $2.2B
Electric utility major, American Electric Power Co., Inc. (AEP - Free Report) will sell four of its natural gas and coal-fuelled power plants to a newly formed joint venture (JV) between private equity firms The Blackstone Group L.P. (BX - Free Report) and ArcLight Capital Partners LLC (ArcLight). The deal has a total value of $2.17 billion and is scheduled to close in the first quarter of 2017.
The four power plants – Lawrenceburg Generating Station, Waterford Energy Center, Darby Generating Station and Gen. James M. Gavin Plant – located in the states of Ohio and Indiana, have a total capacity of 5,200 megawatts (MW).
We note that the sale is in sync with the company’s Jan 2015 decision to look for alternative strategies, even sell-offs if required, for the optimal use of its power plants.
AMER ELEC PWR Price
AMER ELEC PWR Price | AMER ELEC PWR Quote
Details of the Deal
As far as the financial gains from the deal are concerned, management expects it to add $1.2 billion after-tax cash to American Electric’s balance sheet, excluding repayment of debt associated with these assets and transaction fees. The company also expects an after-tax gain of approximately $140 million from the sale, subject to inventory true-ups, income tax and other adjustments.
The sale is subject to regulatory approvals from the Federal Energy Regulatory Commission, the Indiana Utility Regulatory Commission and federal clearance pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Currently management is exploring strategies of investing the proceeds from the transaction in its business and plans to discuss the details on American Electric’s annual day, scheduled for Nov 1, 2016. These strategies may include reinvestment in regulated businesses, including transmission, renewable projects, additional debt retirement and share buybacks.
Our View
Independent U.S. power companies have been taking a beating as cheap natural gas price, rising demand for renewable energy and energy conservation initiatives continue to plague the wholesale electricity market. Forward wholesale electricity prices for 2017 in the largest U.S. grid dropped 24% in the past three years, according to data compiled by Bloomberg.
We believe that the deregulation of the electricity market is another cause of concern for companies operating in this space and this, along with the aforementioned factors could have been the reason American Electric was compelled to sell its assets.
Also, this divestiture is in line with American Electricity’s strategy of transitioning itself from a wholesale electricity provider to a fully regulated, premium energy company.
In this context, it should be noted that as energy companies rush to shed their power plants, private equity firms are moving in to purchase them. For instance, private equity firm Starwood Energy Group Global recently agreed to buy NextEra Energy Inc.’s (NEE - Free Report) stake in two Pennsylvania-based power plants for $760 million this July. Similarly, Carlyle Group had acquired Entergy Corp.’s (ETR - Free Report) Rhode Island State Energy Center for $490 million last year.
Stocks to Consider
American Electric, Blackstone, Entergy Corp and NextEra Energy currently sport a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>