Powergen’s acquisition of Midlands Electricity in the UK will reinforce its growing position in the UK, and indicates that E.On’s plans for growth show no sign of slowing. Siân Green reports.

UK utility Powergen has announced that it has signed an agreement to acquire Midlands Electricity, a UK electricity distribution company, from its US owners. The announcement came just a few weeks after another UK utility, Scottish and Southern Energy (SSE), withdrew from an agreement to buy Midlands.

Powergen will buy Midlands from Aquila Inc. and FirstEnergy Corp. for g1.637bn (£1.146bn, $1.8bn). The price includes a payment of g51m to Aquila and FirstEnergy, together with a cash payment to the bondholders of Avon Energy Partners Holdings (AEPH), Midland’s parent company. Powergen will assume g692m of existing debt.

Midlands is the fourth largest electric utility in the UK, serving 2.4m network customers through a 63 000 km distribution network. Midlands also owns interests in 884 MW of generating capacity in the UK, Turkey and Pakistan.

The acquisition will strengthen Powergen’s position in the UK market, and will reinforce a very different image of the company compared to seven years ago when it first tried to purchase Midlands. Back then, Midlands was an integrated distribution and supply business and Powergen an electricity generator, and the UK government was opposed to the creation of vertically-integrated utilities in what was a vastly different power industry landscape.

Powergen has seen a great deal of change since then, as has Midlands. Since 1999, the company has undergone a separation, two changes of ownership and several name changes. It is now largely a regulated networks business, owning and operating distribution wires in central England. Its supply business was sold to National Power (now npower) in 1999.

Kansas, USA-based Aquila owns 79.9 per cent of Aquila Sterling Limited, a parent company of AEPH and Midlands, while FirstEnergy owns 20.1 per cent. The two companies acquired Midlands through the 2001 merger of GPU and FirstEnergy. The merged company, which took the name FirstEnergy, wanted to focus on the US market and sold a 79.9 per cent economic interest in Midlands to Aquila for $264m in November 2001.

On 5 August 2002, Aquila changed the name of Midlands from GPU Power to Aquila Networks. Just three days later it announced that it was seeking a buyer for its share in the company.

Like many US energy companies, Aquila and FirstEnergy have suffered the tough economic and market conditions in the US. Both are attempting to focus on core business units. On announcing the deal with Powergen, Keith Stamm, COO at Aquila said: “The completion of the transaction to sell Midlands to Powergen will be another milestone in Aquila’s restructuring efforts, allowing management to focus more of its attention on Aquila’s core business.”

In May 2003, SSE reached an agreement with FirstEnergy and Aquila to buy Midlands for £1112m. The deal fell though, however, when SSE failed to agree terms with some of the bondholders of AEPH. “We believe that the enterprise value we offered for Midlands Electricity was fair,” said Ian Marchant, CEO of SSE. “We are not prepared to jeopardize shareholder value by paying more.”

SSE’s disciplined approach is good news for Powergen. Of particular importance is the fact that Powergen already owns and operates the distribution wires of neighbouring East Midlands Electricity (EME), which serves 2.4m customers. The acquisition will therefore double the number of connected customers which Powergen serves, taking the company from number five to number two in the UK market in terms of customers served by the distribution network.

Paul Golby, Powergen CEO, said: “[The] announcement allows us to fulfil a long-held ambition to acquire Midlands. It is the last big piece in the jigsaw which Powergen has constructed to transform itself from a pure electricity generator into an integrated power company and major player in the UK energy market. The transaction is strategically and economically very attractive.”

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In the regulated wires business, cost efficiency and standards of service are key, and owning two neighbouring networks will enable Powergen to leverage operational synergies and cut costs. A Powergen spokesman said that the company would benefit from economies of scale through increased buying power, and that service levels would be improved. In particular, a larger engineering workforce will enable Powergen to handle major incidents more efficiently; in the past, EME has had to bring in engineers from other regional networks to supplement its own workforce.

It is possible that this acquisition signals a desire by Powergen to focus on asset management opportunities such as network operation, especially while the UK generation market remains in the doldrums. Powergen denies this is the case, however. “We are interested in anything that makes commercial sense,” said the spokesman.

Powergen will also acquire a number of other assets as part of the deal, including a metering business; an electrical contracting business; and generation assets comprising a 19.2 per cent stake in Teesside Power Ltd. in the UK, a 40 per cent stake in Uch Power Ltd. in Pakistan and a 31 per cent stake in Trakya Elektrik Uretin ve Ticaret A.S in Turkey.

The deal is expected to be completed in early 2004 and will be financed by Powergen’s parent company, E.On, from existing sources. According to market analysts Datamonitor, the deal is proof that E.On is pressing ahead with its ambitious European expansion programme, to which it has already allocated g10bn. The UK is one of E.On’s main target markets, and the company is currently in the best possible position to take advantage of the withdrawal of US companies.