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Talen Energy in dog-eat-dog business

Since Talen Energy split from PPL Corp. in June, there has been plenty of hand-wringing over where the new power producer will put down permanent roots.

Hoping to keep Talen here, Allentown’s Neighborhood Improvement Zone Development Authority paved the way last week for the energy company — located for now at PPL Plaza on Hamilton Street — to move to The Waterfront, a new mixed-use complex on the Lehigh River.

No matter where it lands, it won’t offer the anchor-like stability provided by its stodgier, more predictable parent, PPL Corp.

Companies like Talen that operate power plants and sell electricity on the open market do business in a competitive realm prone to reversals of fortune that can be driven by weather, fluctuating gas, coal and oil prices, emissions regulations and stagnant U.S. demand. In a consolidating industry, Talen will need to acquire other, smaller power producers to avoid becoming an acquisition target itself, analysts say.

Talen’s falling stock price has only added to the uncertainty. After going public in June at more than $21 a share, Talen stock has fallen to $10.78 at Friday’s close, cutting its market value nearly in half from $2.6 billion to $1.3 billion.

“They could be purchased if the right purchaser came along and they wanted to sell,” said Roy M. Palk, senior energy industry adviser for national law firm LeClairRyan. “But I don’t think they want to sell.”

Unlike PPL and other utilities, which can recover operating costs from their customers by raising rates, Talen has no safety net, said Eric Hittinger, an energy policy expert at Rochester Institute of Technology.

“A regulated utility isn’t worried about whether it will be around in 10 years,” he said. “They know, they can make decisions with that in mind. An independent power producer needs to worry about how they are going to make money in the next few years, and building their business.”

No matter what happens, state Sen. Pat Browne, whose legislation created the Neighborhood Improvement Zone, said he hopes Talen maintains local operations.

“Mergers and acquisitions are possible for any public company, especially one in such a volatile industry,” Browne said. “But Talen doesn’t just have a responsibility to consider its shareholders. It has a responsibility to its employees and customers, as well. Talen would not exist if not for generations of support from this community.”

Talen spokesman George Lewis said the goal is not to sell the company, that it is focused on growth.

“What happens in the market is very unpredictable,” Lewis said. “We think we have a model that will enable us to grow this company so we can do more acquistions on our own over time. We’re confident we can be one of the successful companies in the business and in this sector.”

With 500 well-paid white collar employees, Talen is still a big score for any downtown developer, but one that comes with a healthy dose of risk, or opportunity for growth, depending on how you look at it.

The company is the fourth-largest publicly traded independent power producer in the U.S. behind NRG of Princeton, N.J., and Calpine Energy and Dynegy, both of Houston. All four have seen their stock prices take a hit in recent months, partly a result of a recent decline in the overall market. Talen’s has fallen further, however.

Talen has had a rough first few months, said William Kelly, a finance professor at Lafayette College.

Its stock didn’t fit into the investment strategy of many large mutual funds that held PPL, causing them to dump it. Energy prices have fallen, trimming profits. The company isn’t as well-known as many of its competitors, and finally one of its largest stockholders is positioning itself to sell.

“This is almost like a perfect storm of what can go wrong for a spinoff in the first two months,” he said.

In related news, Talen Renewable Energy will have a new owner.

Difficult sector

Securities analysts say the power sector is a difficult place to make money right now.

Energy prices are low, and U.S. demand is stagnant, said Andrew Bischof, an analyst with Chicago-based Morningstar, a mutual fund and investment analysis company. Forecasts of a mild winter throughout much of the country aren’t helping matters.

To succeed, Talen will need to operate its plants at peak efficiency and aggressively seek out new markets for its power, Palk said. With facilites in the Northeast and in Texas, the company will benefit by having a presence in different markets and different climates.

Talen plans to upgrade two of its existing coal plants to also burn natural gas, but the more it diversifies, the better, Palk said.

“I think they have to grow,” he said. “The utility industry, whether regulated or deregulated, is so capital intensive that you have to maximize your investments.”

That means looking at other ways to boost profits, such as acquiring smaller power producers, then closing redundant offices and laying off workers to lower production costs.

Paul Farr, Talen’s president and CEO, speculated at the Bank of America Merrill Lynch 2015 Power & Gas Leaders Conference that in the end the U.S. will be home to only a handful of companies that generate and sell electricity.

“It will be a few,” Farr said at the forum on Sept. 17. “I don’t know what few as a number is. I don’t know whether that will be three or four.”

Will Talen be one of them? That may depend on its success in absorbing smaller producers and how aggressively federal regulators will act to preserve competition.

So far, Talen has managed to add a few power plants to its arsenal, announcing in August a plan to acquire three plants owned by privately held Mach Gen LLC for $1.2 billion without having to issue stock to raise the cash.

It is also planning to sell a batch of plants to comply with federal regulators’ competitiveness concerns, announcing Thursday that it would start by selling its Ironwood, Holtwood and Wallenpaupack power plants, which together produce 996 megawatts of generating power, for $1.5 billion.

In related news, Oil, gas industry tries to keep talent in pipeline.

Looking to buy

Farr told analysts in September that Talen has the borrowing capacity it needs to continue to grow and is looking to add plants. But financing acquisitions is made more difficult by its depressed stock price.

“We feel very good about our debt levels and the capital needs of the company and ability to execute on committed growth prospects,” he said. Farr has said Talen’s staff is large enough to manage additional power plants without adding more people, enhancing profits.

With utilities and private operators looking to unload generating plants, there should be plenty available, experts say. Ohio-based American Electric Power has said it is exploring the sale of 10 of its power plants. Talen and Dynegy officials have both said they’d be interested buyers.

Industry publication SparkSpread reported that Houston-based Engie Energy North America, formerly GDF Suez, is preparing to put a selection of power plants that generate 9,800 megawatts of energy up for sale.

In terms of size, Talen is for now a distant fourth. Calpine controls 27,000 megawatts of power plants. No. 3, Dynegy, controls 26,000 megawatts. By comparison, when the Mach Gen acquisition closes, and Talen completes its divestiture, the company will control about 16,400 megawatts. NRG is even larger. It controls 52,000 megawatts.

Talen’s competition isn’t sitting still. Dynegy closed two deals in April, paying $6.25 billion to acquire power plants generating a combined 12,500 megawatts of power from Duke Energy of Charlotte, N.C., and Energy Capital Partners, a private equity firm with offices in New Jersey, Texas and California.

While Talen’s corporate bylaws include a variety of anti-takeover provisions that would complicate a hostile bid, if the company can’t match its competition and add to its own roster of power plants, there’s a “high probability” Talen itself would become a target, Bischof said.

That would be bad, said Sy Traub, chairman of the ANIZDA board.

“We’ve been very focused on keeping Talen. We know how important Talen is to Allentown and we know how important it is to the NIZ,” Traub said. “We can’t control whether it merges with another company, but we’ve done everything we can to make it easier for it to stay here.”

Lewis said Talen is eager to prove to investors that it can execute on its plan to grow.

“The market is looking to us to prove it,” he said. “‘You said you could do this, so put up.’ That is where we believe our challenge is. We are confident we can do it.”

Largest power producers

NRG Energy Inc., Princeton, N.J.: 51,765 MW

Calpine Corporation, Houston, Texas: 27,000 MW

Dynegy, Houston, Texas: 26,000 MW

Talen, Allentown: 15,200 MW

Source: Annual reports, Talen Energy.

This article was written by Scott Kraus and Matt Assad from The Morning Call and was legally licensed through the NewsCred publisher network.

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