Trend—M&A on the Move
After a bit of a lull at the end of 2011, power industry mergers and acquisitions appear to be booming in 2012, at both ends of the size spectrum. At mid-year, the Exelon-Constellation merger is finally done, creating the largest investor-owned power utility in the U.S. with a market capitalization of $34 billion and 34 GW of generating capacity.
The pending Duke Energy-Progress Energy merger, still grinding away in the regulatory mill, could eclipse that deal, creating a company with 57 GW of capacity, a market cap of some $50 billion, and 7 million customers. But the Duke-Progress deal is so big and complex that it has encountered opposition from North Carolina utility regulators and some skepticism from the Federal Energy Regulatory Commission (FERC). If the deal doesn’t close by early July, either company could walk away.
At a smaller level, state regulators in Connecticut and Massachusetts this spring signed off on Hartford’s Northeast Utilities’ $5 billion buy of Boston-based NStar. The deal had been pending since October 2010 and drew fire—and demands for concessions—from local stakeholder groups. Placating those who complained about the deal increased the final price tag by $800 million, according to press accounts. FERC approved the merger in July 2011.
The accounting and consulting firm PriecewaterhouseCoopers (PwC), in its North American Power Deals: Q4 2011 noted, “Continued market uncertainty caused a slowdown in North American power and utilities mergers and acquisitions in the final three months of 2011, driving the number of announced deals down to the lowest level in several quarters.” PwC’s McConomy said the “outlook will remain cloudy until the industry gains more clarity on regulatory and legislative actions and we see more stability in the capital markets.”
Regulatory Outlook Cautiously Good
While legislative actions to clarify the picture haven’t occurred so far and are unlikely this year, the regulatory skies are clearer. In February, FERC rejected a proposal to drop its somewhat unique screen for jurisdictional mergers and adopt the joint Department of Justice-Federal Trade Commission 2010 Horizontal Merger Guidelines. According to an analysis by the Hogan Lovells law firm, FERC found that the “more relaxed” standards in the joint DOE-FTC guidelines are “inappropriate for electricity markets.” (For more on this one, see the article by Scott Hempling in this issue.)
While FERC’s rejection of the proposal does not make the merger process easier, it does make it clear what standards will apply. Nor has FERC been particularly stringent in policing electricity mergers in recent years, dating back to the 2000 merger of American Electric Power and Central and South West Corp.
How the agency deals with the next chapter of the Duke-Progress merger should further clarify just where FERC stands on industry consolidation. The two Carolina utilities in mid-March submitted a new proposal to FERC on how they plan to mitigate monopoly power, which hinges on building seven new transmission lines, at a cost of some $110 million, to open the market to competitive power suppliers. Duke and Progress asked FERC to render a verdict on the new plan by June 8, a month ahead of the drop-dead date.
Renewables Consolidate
Accompanying the high-profile Exelon-Constellation and Duke-Progress mergers have been a spate of combinations in the renewable energy portion of the business, driven at least in part by a tougher business environment. The urge to merge among green companies has not been confined to the U.S., but has also been sweeping other countries, according to a recent PwC analysis. PwC’s Renewables Deals report found a 40% increase in the value of green M&A activity for 2011 over 2010, up from $38.2 billion to $53.5 billion worldwide. “The rise was fueled by a big increase” in deals valued at over $1 billion, said the analysis. Also significant, the year saw deals for newer renewables such as wind and solar eclipse conventional hydro M&A activity for the first time. “The trend is all the more noteworthy given the uncertainty in the market and in government policies on renewables,” said the report.
For 2012, said PwC, the market is seeing “intensifying” dealmaking. “Sustained high deal numbers and record total value reflect a maturing of the sector,” said the report. “The trend is all the more noteworthy given an uncertain market background and concerns over government policies on renewables.” PwC said it is assuming “a continuation of a ‘rolling uncertainty’ scenario affecting the eurozone and wider world sentiment. But, if there are adverse events that turn eurozone ‘rolling uncertainty’ into deeper crisis, deal flow is likely to be dampened.”
—Kennedy Maize is MANAGING POWER’s executive editor.