Stagnant electric demand sparks mega mergers
Stagnant demand for electricity in the USA is forcing utilities to look elsewhere for revenue and earnings, prompting a surge in mergers and acquisitions.
Recent announcements by Duke Energy and Southern Company illustrate the trend, which is likely to continue for some time, according to analysts, including the accounting firm EY, previously known as Ernst & Young.
New numbers from EY show the value of deals involving electric, gas and water utilities in North America and South America totaled $57 billion in the third quarter of 2015, a five-year high for the period. The comparable number for the second quarter was $6.2 billion.
The bulk of that M&A activity, or about $47 billion, involves electric and natural gas utilities in the USA.
"In the U.S., it's pretty difficult for people to make money," Matt Rennie, EY's global leader for power and utilities transactions, said of electric utilities and their executives. "So we're seeing decisions being taken by larger companies to diversify their holdings to move upstream or downstream to try to recover some of the revenues or profits that they're losing."
That was the case for Duke Energy and Southern Co., two of the largest utility companies in the USA, and profitable ones, as well. Both companies announced agreements for gas utilities in their service areas, turning to a fuel whose popularity is growing in the country.
For Charlotte-based Duke Energy, the partner is Piedmont Natural Gas, which it would buy for $4.9 billion. Atlanta-based Southern Co. would purchase AGL Resources for $8 billion. Both deals are subject to regulatory approval.
The two acquisitions account for nearly 25% of the third quarter's merger activity among utilities in EY's tabulation.
"Large integrated utilities are looking at acquiring quality regulated assets, which offer predictable and stable cash flows to reduce the impact of earnings volatility," EY says in a report scheduled to be released soon.
Moreover, markets reward such transactions. Over the past quarter, share prices for companies in play rose by as much as 50% after announcements of the deals, according to the Ernst & Young analysis. Among those benefiting were investors at AGL Resources as well as TECO Energy, the latter a Tampa-based electricity and gas provider that would be bought for $10.4 billion by the Canadian energy provider Emera.
"This is a quarter that's all about consolidation," Rennie said in a telephone interview from Sydney, where he was attending a conference. "The two places most ripe for consolidation are the U.S. and Europe, though for completely different reasons."
In Europe, Rennie said, the proliferation of government policies that promote renewable energy at the expense of coal and nuclear power for electricity drive interest in transactions.
"It's very difficult to make money producing power the old-fashioned way there," he said of Europe.
Other analysts report similar developments in power markets.
"We saw a significant increase in value and volume as the cost of capital remained low and as strategic investors announced deals supporting current growth objectives and future capital deployment opportunities," accounting firm PricewaterhouseCoopers said in a new report on utility acquisitions.
EY's Rennie said he expects the consolidation among U.S. electric utilities to "settle over the next few years," just as their leaders face even greater challenges from renewable energy, electricity storage and other advances in technology that threaten to disrupt the ways electricity is produced, transmitted and used.
"Utilities seem to be very comfortable doing tomorrow what they did today," he said. "It's a heavy-infrastructure industry. These technological advancements are very hard for utilities to embrace."
The advances will become particularly challenging once batteries and other means of storing electricity become widely economical for consumers and can be combined with solar panels to make homes and businesses much less dependent on utilities, or even independent of them.
Some utilities are already gearing up for those transformations, Rennie said, citing New York City's Con Edison for its proposal to develop a "virtual" power plant. Con Ed's plan, prompted by New York state policies seeking new options for providing safe, clean power, would provide homeowners with solar panels and batteries and enable the utility to coordinate the dispatch of electricity from those locations.
"You've got this heap of disruption just sitting out there, and it's hard to figure out what may happen," he said. "But the smart play is to start to think about what you should do and what you should buy."
Bill Loveless — @bill_loveless on Twitter — is a veteran energy journalist and television commentator in Washington. He is a former host of the TV program Platts Energy Week.