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PPL, Riverstone create Talen Energy

Stocks in this article: PPL DUK AES

HOUSTON ( The Deal) --  PPL (PPL) and Riverstone Holdings said Monday they agreed to combine their independent power generation businesses into a new stand-alone, publicly traded power producer, allowing PPL to focus on its regulated utility business.

The new company, called Talen Energy, will own and operate 15,320 megawatts of generating capacity in Maryland, New Jersey, Texas, Massachusetts, Pennsylvania and Montana and generate sales of $7.2 billion, making it the third-largest investor-owned independent power producer in the country.

In what's known as a Reverse Morris Trust, PPL will spin off PPL Energy Supply LLC, the parent of PPL Generation LLC and PPL EnergyPlus LLC, to PPL shareholders and then combine it with Riverstone's generation business and take it public on the New York Stock Exchange.

PPL didn't say how many shares PPL stockholders will get for their shares, but they will end up with 65% of the new company while Riverstone will have 35%. Talen will have five board seats at the new company and Riverstone will get three. PPL won't own any shares in Talen and the exchange is intended to be tax free to PPL and its shareholders.

PPL chairman, CEO and president William Spence said in a statement that Talen will be a significant player in the U.S. competitive generation market, bringing together the best of two businesses with a very strong presence in the Pennsylvania-New Jersey-Maryland, or PJM, region and nearly 2,000 megawatts of generating capacity in the fast growing Electric Reliability Council of Texas (ERCOT) market. "Talen Energy will have significant scale, a very competitive cost structure and the financial agility to pursue growth opportunities," he said.

PPL CFO Paul Farr will be CEO and president of Talen. To help with the transition before closing, Farr is becoming president of PPL Energy Supply and PPL controller Vincent Sorgi will become CFO.

Riverstone partner Michael Hoffman said in a statement that the blending of the two complementary businesses will create one of the largest independent power producers in the U.S. with diversified generating capacity in the most attractive U.S. markets with strong free cash flow and a conservatively capitalized balance sheet. "With an outstanding management team led by Paul Farr, we believe Talen Energy will be one of the most successful IPPs [independent power producers] in North America," he said.

Tudor, Pickering, Holt & Co. Securities wrote in a note that PPL's spin of its "underwater" merchant supply business is positive, as it comes at a near peak of the power market.

Kit Konolige, a longtime utility analyst who works at BGC Partners LLC, said it's good for PPL shareholders and Riverstone, giving it "liquidity opportunities."

Talen expects to have $1.07 billion in Ebitda next year, including $155 million in cost cuts. PPL kept its guidance for earnings per share this year at $2.05 to $2.25 and expects earnings next year to be $2.05 to $2.25 with 4% compound annual growth rate. It also hopes to maintain its current dividend rate of $1.49 per share per year until the transaction closes and expects to raise it as a purely regulated company.

The deal doesn't require PPL shareholder approval but must clear the Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, Hart-Scott-Rodino review and the Pennsylvania Public Utility Commission. The deal is expected to close in the first or second quarter of next year.

On a conference call, Farr said Talen would be looking for acquisitions to expand, particularly where it already has plants (including west of PJM, the midwest and the ERCOT) but not to expect "drop downs" from Riverstone into Talen if Riverstone were to buy one of the power plant packages that are on the market, including Ohio power plants being sold by Duke Energy (DUK) and AES (AES).

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