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Utility deals resume after 18 months of austerity.

Fortnightly Magazine - October 2010

finish line, they might provide a roadmap for others to follow. For instance, merging companies might find greater success by being more conservative and less specific about the dollar value of synergies they expect transactions to deliver. “The environment for consolidation is better now than it’s been for a few years,” McConomy says. “Companies are looking at who to team up with, and how to bring the best value to shareholders. But regulated utilities have to be careful to understand the mindset of PUCs.”

Thus as a general matter, corporate-level M&A seems unlikely to accelerate very dramatically in the United States, mostly because deals remain complex and difficult to sell to state regulators.

“There are so many different pieces that must line up to make deals worthwhile, I don’t see the floodgates opening,” Lamb says. “I wouldn’t expect to see more than a few deals in the $2 billion-plus range in the next 12 months.”

Building the Buzz

Even if M&A announcements aren’t coming fast and furious, the increased pace of deals this year compared to the previous two years signals a decidedly improving outlook for the U.S. power and gas industry. Companies have gained enough confidence about the future that they’re considering strategic moves—mostly aimed at strengthening core businesses and achieving greater scale and market diversity. These are all good things, and Wall Street seems ready to reward companies for making such moves.

Accordingly, companies that are planning to increase their capital spending programs can expect a warm reception—at least on Wall Street. Whether regulators and customers embrace the higher prices that result from higher cap-ex likely will depend on how effectively utilities make the case for such investments—and how they fit into the evolving regulatory and economic picture. In the meantime, power and gas companies are dealing with uncertainties in the market by raising capital and making strategic moves that seem rational in the context of today’s changing outlook. Infrastructure investments likely will grow apace as that outlook solidifies.

“The longer the industry faces uncertainties, the harder it will be to plan for the future,” says Mike Haggerty, a senior credit officer with Moody’s. “Companies can plan strategically for six months or a year, but planning beyond that will depend on the answers to long-run questions.”