AI Boom Helps Score $12 Billion Deal for Little-Known LS Power

Pipelines at the Southern California Gas Co. (SoCalGas) Honor Rancho underground natural gas storage facility in Santa Clarita, California, U.S., on Friday, April 22, 2022. U.S. natural gas prices have almost doubled this year to the highest since the shale revolution more than a decade ago, driving up energy costs and helping fuel the fastest inflation in 40 years. Photographer: Bing Guan/Bloomberg Photo by Bing Guan /Bloomberg

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(Bloomberg) — LS Power bet on buying and building natural gas power plants at a time when some analysts considered them almost relics, doomed to be sidelined by solar and wind.

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Now, utilities see gas-fired plants as essential to meeting a surge of electricity demand from new data centers. And LS’s gamble on gas has produced a $12 billion payday.  

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The New York development and investment company, little known outside its industry, announced a deal Monday for NRG Energy Inc. to buy 18 of its gas-burning plants, capable of generating enough power for about 10.4 million homes. The agreement also saw privately held LS take an 11% stake in NRG, one of the country’s biggest independent power companies. 

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“We are at the beginning of the secular growth phase in this industry unlike we have really seen during my career, and we want exposure to that for sure,” said Paul Segal, chief executive officer of LS, in an interview.

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The company has developed a reputation for timing big shifts in the industry, including the shale boom and the growth of renewables. NRG’s top executive on Monday praised LS’s execution and said the deal would benefit both companies. Investors sent NRG’s stock up 26% Monday, its best one-day performance since 2017.

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“Both sides realized this is one of those transactions where one plus one equals five,” Larry Coben, NRG’s chief executive officer, said in an interview.

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Segal’s father, Mike, co-founded LS in 1990 as an engineer from Ukraine and still serves as chairman of its management committee. Co-founder Michael Liebelson left after several years and joined NRG for a brief stint, developing low-carbon technology. 

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At first, LS focused on building co-generation plants that relied on steam hook-ups at refineries, universities and other big energy consumers, Segal said. That changed in the 2000s as power markets deregulated. The company began snapping up plants sold off by utilities or other electricity producers and in 2005 launched its first private equity fund to fuel the shopping spree. It also, in 2014, opened a New Jersey plant to take advantage of the boom in shale gas production – another well-timed bet. 

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“If you just run to where everybody else is running, you are probably not going to add a lot of value,” Segal said. The company started expanding into renewables as well. 

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US electricity demand, meanwhile, stayed flat, changing little over two decades. Wind and solar power grew quickly, becoming cheaper by the year, and former President Joe Biden called for a carbon-free grid by 2035. Some analysts argued that gas’s reign as the power industry’s top fuel had already peaked. 

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Now, however, the introduction of artificial intelligence has companies such as Alphabet Inc., Meta Platforms Inc. and Microsoft Corp. racing to find enough electricity for their planned data centers. Gas-fired plants take years to build, making LS’s portfolio of existing generators an attractive asset. 

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“People are looking for data center confirmation,” and this big NRG deal feeds that excitement, said Jefferies analyst Julien Dumoulin-Smith.

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Segal says the entire industry has entered a new era of growth. “In my mind, we have moved out of the cyclical dynamic that we had in a mostly overbuilt market over the last 20 years,” he said.

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