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Interesting Times

Utilities stay the course in a volatile market.

Fortnightly Magazine - October 2011
“Until things become clearer, I expect utilities to take a time out rather than initiate mergers of equals.” – Frank Napolitano, RBC Capital Markets

increase in efforts in the courts and in Congress to try to overturn EPA’s decisions.

Eisenstat, Dickstein Shapiro: None of these regulations are a surprise. Certainly the EPA is trying to change things, but I believe the agency is acting in good faith to draft the best regulations it can. The nature of any new regulation is that the agency comes out with what it believes is the best place to start. I’m sure they could have taken a more extreme position.

Bilicic, Lazard: A lot of coal plants might be around a little longer than some people think they will. They’re important for system integrity and in some regions it will be difficult to replace that capacity, given current market signals and rate pressures. As a result, some of the coal plants that are available for purchase may ultimately be worth more than people have possibly considered.

“This is one of the few times I’ve seen where the stock prices of acquiring companies outperform their peer group.” – David Nastro, Morgan Stanley


Fortnightly: Several major corporate mergers are moving forward, and also many power plants and other assets are changing hands. Are we seeing a wave of M&A, or is this activity driven by short-term factors? (See Figure 4, “M&A Snapshot.”)

Napolitano, RBC: Right now companies are focused on their organic strategies, which might involve acquisitions of businesses or assets, but probably not merging companies or re-casting their business profile. A lot of things are happening in our sector right now, with a lot of uncertainty, so people are just taking stock and focusing on making sure their companies are running right. We’ve had financial turmoil, hurricanes, blackouts … until things become clearer, I expect utilities to take a time out rather than initiate mergers of equals. Then they’ll focus on M&A as a tool to accelerate their organic growth, or to fit parts together based on what they think the rules of the road are going to be.

“Investors have been clamoring for utility debt. There isn’t enough supply.” – Andy Redinger, KeyBanc Capital Markets

Bilicic, Lazard: Our thoughts are about the same as they’ve been for the last 20 years. This industry is going to consolidate slowly and steadily. On average, there will be three or four public company mergers a year, and now maybe one more because today there are financial investors looking at acquiring utilities. In that regard, financial investors with the capability and interest in investing in the industry are looking across the map at opportunities to invest in existing publicly traded companies and their subsidiaries, as well as transmission assets, contracted generation facilities, renewables-based infrastructure, and others.

To be clear, we don’t see any transactional floodgate opening up. Nevertheless, there remains extraordinary pent-up interest in consolidation, but that interest always will be constrained by regulatory concerns, the peculiarities of the industry and by the long history of consolidation discussions in this industry. Those and other factors cause logical transactions to move forward at a reduced pace compared to what otherwise makes sense.

On the asset front, you will see an ongoing movement of assets from one owner to another, and from time to time that will mean a non-regulated asset will move into regulated rate base because it’s the right resource-planning decision. There is a very