Private capital continues driving deals as KKR picks up Clearway thermal assets

As private equity buyers dominate the market for power company fossil fuel assets, Clearway Energy Inc.'s proposed sale, announced Oct. 25, of its thermal business to KKR & Co. Inc. for $1.9 billion reflects the industry trend toward decarbonization and signals the potential for similar transactions.

Clearway Energy shares gained 4.5% on Oct. 25 after the company said it agreed to unload its Clearway Community Energy business, which provides district energy services including electricity, steam, chilled water and combined heat and power. Some sector analysts welcomed the announcement as a way for Clearway Energy to reduce risk.

"The speed of this development and the significant purchase price relative to the assets' contribution (thermal generated $60 million EBITDA and 9% of total cash available for distribution in 2020) are incremental positives, in our view," Oppenheimer & Co. told clients Oct. 25. "The transaction significantly de-risks [Clearway's] capital flexibility to fund committed renewables investments and meet or potentially accelerate [a] long-term dividend growth target of 5% to 8%."

"This divestiture will provide Clearway with an unprecedented degree of financial flexibility and will eliminate any need to issue new equity to fund our committed investments, while also providing capital to fund future growth objectives and further enhance shareholder value," Clearway Energy President and CEO Christopher Sotos said in a statement.

The agreement also follows JP Morgan Securities Inc. Managing Director Jonathan Dickman-Wilkes' Oct. 20 assessment that transactions involving power sector thermal assets are now almost exclusively driven by private equity. They also result in more conservative valuations, such as Public Service Enterprise Group Inc.'s $1.92 billion announced fossil fuel portfolio sale in August to ArcLight Capital Partners LLC due to terminal value concerns, he added.

ArcLight Capital in March agreed to buy 4,850 MW of NRG Energy Inc.'s thermal generation portfolio for $760 million, while The Carlyle Group Inc. and Hull Street Energy LLC have also snapped up gas-fired plants this year.

The largest deal announcement in 2021 so far was Duke Energy Corp.'s sale of a 20% interest in its Indiana utility, the fossil fuel portfolio of which accounted for 7,084 MW of its total 7,178 MW of power plant generation in 2020, to Singapore's GIC Pte. Ltd. for $2.05 billion. Icahn Enterprises LP's unsolicited $7.48 billion takeover bid for Southwest Gas Holdings Inc., however, could take the number one spot if shareholders vote for activist investor Carl Icahn's yet-to-be-named slate of board nominees and hand him greater control over the company by selling him their shares.

KKR, meanwhile, may be interested in other power companies' fossil fuel assets, since its infrastructure funds have "about $18 billion-plus of uncalled equity commitments," according to Devin Ryan, JMP Securities LLC's director of financial technology research.

"Their fourth infrastructure fund just raised about $14 billion and the third fund has about $4 billion of dry powder left," Ryan said in an email. "Related deployment activity should be healthy in the coming years."