How US regulators shaped $15bn Evergy merger

The decision by American Electric Power to cancel its 2GW Wind Catcher project has been a big talking point in US onshore wind. The scheme met its demise after being rejected by Texas regulators, who said it didn’t offer enough value for ratepayers.

The deal has shown how state regulators can affect and influence the shape of the wind sector in the US. This is set to become an increasingly prominent issue as growth in onshore wind relies more on cost and less on states’ need to hit renewable energy targets, while regulators are set to judge projects more on economics than in previous years.

In the last couple of years, we have seen state regulators assume key roles in other major transactions – and not just schemes like Wind Catcher, but on M&A deals too.

One of the most recent and relevant examples is the merger between US utilities Westar Energy and Great Plains Energy. In this case, the intervention of Kansas and Missouri regulators was key to shaping a new player in the US market, with an equity value of around $15bn and over 1.6 million customers.

We spoke to Brandon Sack, clean energy development manager at Westar Energy and now at Evergy, to find out more about the deal.

Westar has 700,000 customers in Kansas and owns 7GW of generation capacity, of which 1.8GW is wind farms, in both owned projects and power purchase agreements. Great Plains has a total of 900,000 customers in Missouri and Kansas, with 6GW of total capacity, of which 1.3 GW is wind farms. Sack said that a tie-up was the best way for both firms to grow.

“The merger just made a lot of sense. We have been neighbours for 100 years. We co-own several power plants. We are in the same region, with the same type of customers. A merger was the most cost-effective solution to grow and allow our customers to realise cost savings through synergies,” he said.

But the process that has brought these companies together was far from smooth.

In 2016, Great Plains first proposed a $12.2bn acquisition of Westar. However, in 2017, Kansas regulators rejected the proposed takeover deal because it could have exposed ratepayers to “undue financial risk”.

In particular, regulators argued that the acquisition included “an excessive purchase price” that would have required Great Plains to take on up to $8bn of debt. Instead, they proposed that, because the firms operated similar services and in similar areas, a ‘merger of equals’ would have made the most sense.

As a result, Westar and Great Plains last year revised their agreement to meet the regulators’ recommendations, and proposed to merge and create a new company – Evergy – with an equity value of $15bn. In February, the Federal Energy Regulatory Commission approved the deal, with consent from Kansas regulators arriving in May.

Evergy is now operating as a holding company for both Westar and Great Plains. It will hold a joint portfolio of about 13GW of generation, of which 3.1GW is wind farms.

Sack said the new utility had plans to become a significant player in the renewable energy market, with a focus on wind: “We plan to add 444MW of wind in 2019 and 300MW more in 2020, for a total of 744 MW of wind by the end of 2020,” he said. “Kansas wind has proved to be a great source of reliable, affordable clean energy and the state has room for more.”

The utility is also working with regulators on ways to make renewables, including wind and solar, an even larger part of its mix: “We are in the early stages with our regulatory bodies in both Kansas and Missouri to add Renewable Tariffs for Great Plains customers that would to allow them to sign up directly for renewables, including wind. Two of these have already been approved in Kansas for our Westar customers,” he explained. If approved, Evergy would have the opportunity to grow the proportion of wind in its portfolio based on customer demand, which could provide an interesting model for other utilities.

With widespread support for wind and solar, such a model could open development opportunities for firms across the US. It is easy to bemoan the impact of regulators when they give decisions that developers and investors don’t like – but agreeing to a model like this could give us reason to praise them too.