FERC OKs sale of Dominion merchant power plants to Energy Capital Partners

Federal regulators approved yesterday the sale of three fossil fuel-fired power plants from energy company Dominion Resources Inc. to Energy Capital Partners LLC for $650 million.  The order by the Federal Energy Regulatory Commission moves the deal closer to fruition.  Is the transaction part of a trend in the U.S. energy industry?

Dominion is a major player in the U.S. energy business, serving customers in 15 states with its holdings in both the electricity and natural gas sectors.  Dominion owns a portfolio of about 27,000 megawatts of electric generation and 6,400 miles of electric transmission lines, as well as vertically-integrated electric utilities like Dominion Virginia Power.  Dominion also owns a large natural gas storage system as well as about 11,000 miles of natural gas transmission, gathering and storage pipelines.

Buyer Energy Capital Partners is a private equity firm focused on investing in North America's energy infrastructure.  The firm has recently acquired other electric generation plants, including the 830-megawatt combined-cycle natural gas-fired Red Oak power plant in Sayreville, New Jersey, and the 847-megawatt Broad River simple cycle, natural gas-fired power plant in South Carolina.

Over the past several decades, Dominion added merchant power plants designed not to serve the load of its affiliated utilities.  These plants produced electricity from coal, oil and other fossil fuels, and sold the power into regional wholesale markets such as those managed by ISO New England and mid-Atlantic grid operator PJM.  But with tighter environmental regulations, and more competitive electricity markets thanks to low-cost natural gas, many New England coal and oil-fired power plants have a hard time succeding in the current markets.  As an apparent result, in 2012 said it would sell or close its merchant coal-fired plants to realign its portfolio and improve return on invested capital and shareholder value, and sold the coal- and oil-fired Salem Harbor Power Station in Massachusetts.

In March 2013, Dominion announced a deal to sell its interests in three power plants to Energy Capital Partners.  1,528-megawatt Brayton Point Power Station, in Somerset, Massachusetts, is the largest remaining coal-fired power plant in New England.  It has three coal-fired units and one unit capable of being firing oil or natural gas, as well as the coal-fired 1,158-megawatt Kincaid Power Station in Illinois..  Dominion also offered its stake in 1,424 megawatts of capacity at the Elwood Power Station outside Chicago, which is powered by nine 158-MW natural gas-fired combustion turbines.

The deal price announced was $650 million.  At least one analyst has noted that after removing tax benefits, the deal implied an underlying price paid per kilowatt of capacity of just over $100, a price 30 times lower than the the cost of building a new coal-fired plant according to the U.S. Department of Energy.

The Federal Trade Commission approved the deal from an antitrust perspective under the Hart-Scott-Rodino Act in March 2013,  so the Federal Energy Regulatory Commission approval today was among the final approvals needed.

Fossil fuel and electricity markets are experiencing changes, from tighter air emissions to the prospect of federal carbon regulation.  Assuming the Dominion deal actually happens, does it signal a trend of utility divestiture of merchant fossil fuel-fired power plants?  Will other utilities exit the merchant electricity generation business?  Will we see increased transactional activity, as utilities sell their fossil fuel-fired plants?  For how much longer will the buyers run these plants?  In the case of the Salem station Dominion sold last year, buyer Footprint Power LLC is demolishing the old plant and redeveloping the site as a natural gas-fired power plant.  Will Energy Capital Partners choose to keep Brayton Point operating in a market where margins are often tight?  Or is this just the rationalization of Dominion's asset base, with no similar ripples throughout the sector?