trending Market Intelligence /marketintelligence/en/news-insights/trending/ukcdaondptv-uuhrykckka2 content esgSubNav
In This List

Competitive power's private pivot continues

Podcast

Next in Tech | Episode 49: Carbon reduction in cloud

Blog

Using ESG Analysis to Support a Sustainable Future

Research

US utility commissioners: Who they are and how they impact regulation

Podcast

Street Talk Episode 87


Competitive power's private pivot continues

Deal activity in the competitive power sector appears to have entered a holding pattern in early 2018, as the remaining public merchant generators focus on executing restructuring strategies amid a broader shift toward private ownership. While publicly held independent power producers focus on synergies, selling noncore assets and tightening pricing advantages, value in the power sector continues to be seen as best extracted via private capital, according to executives and advisers speaking at the S&P Global Market Intelligence Power and Gas M&A Symposium in New York on Jan. 31.

Shifting ownership

Independent power producers have been experiencing an erosion of market capitalization compared to regulated utilities in recent years, with the remaining public merchant generators consisting primarily of NRG Energy Inc., Vistra Energy Corp. and AES Corp. From the standpoint of investors, private ownership remains attractive, as in the case of Energy Capital Partners' campaign to privatize Calpine Corp. The same pressures apply to the handful of publicly traded IPPs, especially if they have difficulty retaining long-term capital.

"From an overall public market investor view, the sector is pretty much irrelevant," Moelis & Co. managing director Roger Wood said. "It's a combination of volatility and investors not feeling comfortable with underlying risk, and frankly the ability to deal with business fundamentals in a private context is a much superior option."

Elliott Management Corp. and Bluescape Energy Partners LLC have emerged as key activists in the public market, with campaigns unfolding at NRG and FirstEnergy Corp. Joining Elliott is ValueAct Capital Management LP as the latest activist fund to take aim at the power space, taking a position in AES on Jan. 18. Whether this trend continues may depend on factors including the remaining availability of low-hanging fruit in the sector tied to asset sales and cost cuts in the limited universe of pure-play unregulated targets.

"Certain companies were ripe for it," Dynegy Inc. CEO and President Bob Flexon said. "The reason you're seeing Elliott at FirstEnergy is people weren't happy with the rate of progress, and with NRG they had a different viewpoint," referencing NRG's move to spin off noncore holdings.

"It's more company specific, and not necessarily industry specific, and they look for what appears to be a different viewpoint," Flexon added.

Private markets

Opposite activist hedge funds is private equity, which in recent years has allocated vast sums of capital to expanding merchant holdings amid a downturn in wholesale market prices. Corresponding with the rise of power private equity is the disruption to competitive markets from a series of state-level efforts to subsidize nuclear assets, in New York, New Jersey, Illinois and elsewhere, as well as discussions at the grid level to address resilience attributes of certain baseload assets.

LS Power Group has been among the most active private equity funds in the sector's history, accumulating roughly 16,000 MW of operational nameplate capacity, according to S&P Global Market Intelligence data. With restructuring in the power sector, specifically among Dynegy, Calpine and NRG, which have been outspoken opponents of state subsidies, the question of whether private equity may look to strengthen its regulatory response to such efforts seems appropriate given the size of its investment.

"We have not been as public a company as some of the publicly traded IPPs, because they need to be out there leading the effort," LS Power CEO Paul Segal said. "But we have become more actively involved with the more assets we've accumulated, because we feel like there is not enough focus on making sure these issues are addressed."

Like publicly-traded power companies striving to perfect the "integrated model," Segal said LS Power is open to expanding its retail platform, but only at value. As for investments in generating assets, the prolonged downturn in most market prices may not ultimately deliver expected returns to sponsors, creating opportunities for private equity to continue snapping up efficient young assets, rather than greenfield deals.

"There's a flood of power plants that all have a unique attribute that they are closer to gas at an extraordinarily low price, but they're chasing a price signal that may not be there by the time the plants become operational," Segal said. "We much prefer buying assets that others have built."