(AP) — AES Corp. will buy the regional power company DPL Inc. for about $3.5 billion in cash, continuing the steady consolidation of the utility industry.
Utilities have been trying to get bigger to help them spread the costs of making their power plants cleaner in response to tightening environmental regulations on emissions.
Also, low power prices and weak demand have cut into utility revenue and profits. Companies such as AES that sell wholesale power at market prices have been especially vulnerable. They're attempting to increase the number of customers in regulated markets, where power prices are less volatile.
AES, which operates in 29 countries, said Wednesday it will pay $30 a share for DPL, an 8.7 percent premium to its closing stock price of $27.59 Tuesday. DPL owns Dayton Power and Light, a regulated electric utility that serves more than 500,000 retail customers in West Central Ohio.
"We are concentrating our growth efforts in a few key markets, including the U.S. utility sector," AES President and CEO Paul Hanrahan said.
Combinations like AES and DPL can lead to lower power prices for customers by lowering borrowing costs and allowing the combined utilities to more efficiently run plants and buy fuel and equipment, analysts say.
They generally result in job losses, however. And consumer advocates worry that bigger companies have more sway with regulators to keep prices high. In unregulated markets these mergers can reduce competition and lead to higher rates, advocates say.
Analysts say the deal allows AES to make better use of cash on its balance sheet that has been earning a scant return.
DPL, which generates almost all of its power with coal, has already invested in equipment to control emissions from its plants in anticipation of coming pollution regulations. With the equipment paid for, DPL should have strong cash flow in the coming months. That cash flow may allow AES to begin paying a dividend, like most other utilities.
But there is some concern that DPL's cash flow may dwindle. Under its rate deal with Ohio regulators, DPL can charge customers rates that are now 20 percent to 30 percent above the market price for power. That deal expires at the end of 2012, and analysts expect DPL earnings to drop sharply in the following year.
"The elephant in the room is this Ohio negotiation," says David Grumhaus, a utility analyst at the Chicago hedge fund Copia Capital. "There's no way they can know how this is going to play out."
The utility industry is in a state of flux. Environmental Protection Agency regulations governing emissions of toxic pollutants, particulate matter and the use of cooling water are all scheduled to be tightened in the coming years. These rules will force utilities to add expensive new equipment to some power plants.
Also, the Supreme Court has ordered the EPA to regulate emissions of carbon dioxide and other greenhouse gases. Congressional efforts to assume control of greenhouse gas regulation or block the EPA from regulating it have so far fallen short.
Some states have set renewable power mandates that are forcing utilities to change their power sources and build new transmission lines. President Obama is pushing a plan that would have the country generate 80 percent of its power from clean sources by 2035.
At the same time, power prices are being kept low by the abundance of cheap natural gas being produced in the U.S. In many markets, the cost of power produced with natural gas sets the market price for all electric power.
Utilities have been combining to more easily raise money to pay for these changes and spread the cost over a larger group of customers.
Duke Energy Corp. is buying rival North Carolina utility Progress Energy Inc. for $13.7 billion. If regulators approve the deal, the combined utility will be the largest in the country by market value, number of customers and generating capacity.
In November, PPL Corp. bought Louisville Gas and Electric and Kentucky Utilities from Germany's E.On. Also last year, First Energy Corp. agreed to acquire Allegheny Energy Inc. and Northeast Utilities agreed to buy NStar.
Combined, AES and DPL generated $18.5 billion in revenue in 2010. The companies serve 12 million customers.
Dayton Power and Light will keep its name and stay headquartered in Dayton, Ohio, for at least two years after the acquisition. AES is based in Arlington, Va.
Both boards have approved the deal, expected to close within nine months. DPL shareholders must still approve the buyout. The Federal Energy Regulatory Commission and the Public Utilities Commission of Ohio must also approve it.
AES shares rose 3.4 percent, to $12.90 in afternoon trading. Shares of DPL soared more than 9 percent to $30.12.