A Smart Deal

Issue 8 and Volume 118.

Barry Cassell   By Barry Cassell, Chief Analyst, GenerationHub

The deal between PPL Corp. and Riverstone Holdings LLC to create new independent power producer Talen Energy Corp. is a prime example of two recent trends in the power business: Lower exposure to the variable independent power producer (IPP) market, and, for IPPs, asset diversification and economies of scale.

For PPL Corp., this is a chance to put its independent power plants into a new, larger entity (Talen), while PPL will retain its regulated utilities like Kentucky Utilities and Louisville Gas & Electric.

Talen Energy will own and operate a diverse mix of 15,320 MW of generating capacity in key U.S. competitive energy markets. Based on current generating capacity statistics, Talen Energy would be the third-largest investor-owned IPP in the nation.

Under the terms of the agreement, at closing, PPL Corp. will spin off PPL Energy Supply LLC, the parent company of PPL Generation LLC, and PPL EnergyPlus LLC, to shareowners of PPL and then immediately combine that business with Riverstone’s generation business to form Talen Energy.

Upon closing, PPL Corp.’s shareowners will own 65 percent of Talen Energy and Riverstone will own 35 percent. PPL Corp. itself will have no continuing ownership interest in Talen Energy.

“Talen Energy will be a very significant player in the U.S. competitive generation market, bringing together the best of two robust businesses with a very strong presence in the PJM region, as well as nearly 2,000 megawatts of generating capacity in the fast growing ERCOT market in Texas,” said William Spence, PPL Chairman, President and Chief Executive Officer. “Talen Energy will have significant scale, a very competitive cost structure and the financial agility to pursue growth opportunities.”

Following the spinoff, PPL Corp. will focus on the high-performing regulated utilities it owns and operates in the United Kingdom, Kentucky and Pennsylvania, serving more than 10 million customers. These regulated businesses, which had 2013 revenues of $7.2 billion, provided more than 85 percent of PPL Corp.’s 2013 earnings from ongoing operations.

“As stand-alone companies, PPL Corporation 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,” said Spence. “As PPL has grown its rate-regulated business portfolio significantly over the past several years, PPL’s Energy Supply business has not – in our view – achieved appropriate equity valuation.”

While the transaction represents a significant change for all company stakeholders, Spence said PPL decided on this direction following an in-depth analysis of its business mix.

“Given the challenges, uncertainties and opportunities in the wholesale power markets, maintaining the status quo was not a viable option. This transaction provides greater clarity for shareowners, our PPL Energy Supply employees, customers and the communities we serve,” said Spence.

Talen Energy will combine 5,325 MW of capacity owned and operated by Riverstone at 15 sites in Maryland, New Jersey, Texas and Massachusetts with 9,995 MW of capacity owned and operated by PPL Generation at 12 sites in Pennsylvania and Montana.

The new company’s planned 15,320-MW portfolio will have fuel diversity, with 40 percent natural gas, 40 percent coal and 15 percent nuclear. Talen Energy will be headquartered at a yet-to-be-determined location in Pennsylvania. The transaction, which does not require PPL shareowner approval, is expected to close in nine to 12 months.

This transaction does not include the 8,100 MW of regulated generating capacity owned by PPL’s Kentucky utilities. Those assets will continue to be owned and operated by Louisville Gas and Electric and Kentucky Utilities.

There are other examples of companies with regulated utilities that have exited or are looking to exit from or at least reduce their independent power holdings.

Virginia-based Dominion Resources is one of them, having sold a while back power plants including the Kincaid coal-fired facility in Illinois as it turns its focus on its regulated Virginia Electric and Power subsidiary.

Also, Missouri-based Ameren Corp. last December completed the divestiture of its largely coal-fired merchant generation business in Illinois to an affiliate of Dynegy Inc. That deal allowed Dynegy, already one of the largest IPPs in the United States, to get larger, while Ameren retained its regulated Union Electric utility operation in Missouri.

NRG Energy, another big IPP, earlier this year completed the acquisition of substantially all the assets of a bankrupt IPP, Edison Mission Energy. NRG Energy itself is the result of a series of prior mergers or takeovers in the IPP space, including a 2012 buy of GenOn Energy. Edison Mission Energy, before entering bankruptcy, had been controlled by Edison International, the parent of regulated utility Southern California Edison.

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