Part of a heat recovery steam generator at Calpine Corp.'s power generation plant in Deer Park, Texas, is seen in this file photo.F. CARTER SMITH
Canada Pension Plan Investment Board is helping to buy one of the biggest independent electricity generators in the U.S. amid a surge in power and energy deals this year.
The pension fund said Friday that it would invest $750-million (U.S.) as part of a $5.6-billion cash deal to privatize Houston-based Calpine Corp. CPPIB is helping to lead the investment part of the deal alongside a consortium of funds, which are being advised by private equity firm Energy Capital Partners. Through the deal, CPPIB intends to boost its exposure to the evolving power and renewable energy market south of the border.
Calpine is a power giant with 80 plants either running or currently being built that together can generate enough electricity from geothermal and natural gas resources for about 20 million homes. The bulk of the company's operations are in its local market of Texas, but Calpine's geothermal assets in Northern California are among the state's biggest renewable energy sources, according to the company.
Energy and power mergers and acquisitions have been on the rise this year, with deal activity up 28 per cent compared with this time in 2016, according to figures compiled by Thomson Reuters. So far, $293.1-billion worth of these deals have been announced in 2017.
Other Canadian firms have also shown enthusiasm for making acquisitions in the U.S. power space. This summer, Hydro One Ltd. struck a $4.4-billion (Canadian) deal for Washington-based natural gas and electrical transmission company Avista Corp. And at the beginning of the year, AltaGas Ltd. bought WGL Holdings Inc., comprised of a gas utility and a gas gathering and processing business, for about $4.5-billion (U.S.)
Other pension funds and investment giants such as Brookfield have also sought to increase their exposure to renewable energy through a series of deals this year.
This surge in activity comes as U.S. President Donald Trump has sought to protect the coal industry, which has been shrinking as a result of a confluence of factors including environmental concerns and the glut of available and affordable natural gas. From a cost-competitiveness perspective, coal has been losing ground to natural gas-fired generators as an electricity source, according to the U.S. Energy Information Administration. That said, U.S. coal exports have increased in recent months.
For CPPIB, the investment was in part driven by a desire to broaden its natural resources portfolio to include more power and renewable assets, according to Avik Dey, head of natural resources at the pension fund. Most of CPPIB's existing natural resource stakes are in more traditional oil and gas energy investments.
"Calpine owns and operates one of the most efficient fleets of natural gas power plants in the U.S. serving critical markets in California, Texas and the Eastern U.S." Mr. Dey said in a statement. "Coupled with the reliable generation of renewable geothermal energy, Calpine's modern approach to energy production is ideally positioned for ongoing success."
Calpine's CEO Thad Hill said in July that the company had been exploring a sale of the business for several months. "Despite what we believe to be a strong track record of execution, strong cash flows and a great asset base, our share price remained far below what we viewed as fair value," Mr. Hill said on a conference call at the time.
After reaching a high of more than $24 in 2014, the company's share price had been languishing at a price point of less than $15 this year, although even that price had been boosted by the rumours of a sale, the Houston-based company said in a statement. Investors have been offered $15.25 per share under the terms of the deal.
The transaction is still subject to a 45-day "go-shop" period as well as shareholder and regulator approvals and other closing conditions, but the investors predict that the transaction will close in the first quarter of 2018.