[FT] M&A by US energy utilities at four-year high

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Mergers and acquisitions by US energy utilities rose to their highest level for four years in the first half of this year, emphasising how consolidation is being driven by low prices for natural gas, demand for heavy investment and more willingness by regulators to accept deals.

PricewaterhouseCoopers, the professional services firm, says $52bn of deals for electricity and gas companies were announced in the first six months of this year – the strongest such period for M&A since 2007.

The largest deals announced to date this year have been Duke Energy’s $26bn acquisition of Progress EnergyExelon’s $11.5bn deal for Constellation Energy, and AES’s $4.7bn takeover of DPL. All the valuations include debt.

John McConomy, PwC’s US utilities and power transactions leader, said recent deals were often driven by energy companies’ attempts to broaden and to diversify their businesses.

The shale gas boom, which has caused a rise in US natural gas production as the industry has opened up reserves in shales and other rocks previously unviable economically, has driven down prices for both gas and electricity.

Companies that have relied on power generation for a high proportion of their earnings have sought to cut their exposure to electricity price risk by acquiring a larger customer base – which generally delivers more stable returns – or regulated businesses that earn profits agreed by state authorities.

Mr McConomy said: “For some companies Wall Street has been saying to them: ‘You are too heavily weighted in the non-regulated business, and you need some more regulated earnings.’”

The objective of securing more regulated business drove the first substantial acquisition of a UK utility by a US energy company for about a decade: PPL’s $6.4bn purchase of Central Networks, the British electricity distribution company, from Eon of Germany.

Another factor behind recent deals has been the need for companies to grow so they have the financial strength needed to fund heavy investment programmes to replace ageing assets and to meet fresh environmental regulations.

Mr McConomy said it was not yet clear what effect the recent market turmoil would have on the sector. “Most utilities in the sector feel pretty positive about the future,” he said. “If we see more rock and rolling [in the markets] we’re going to have to see how that affects things.”

M&A in the sector slumped after the financial crisis that began in 2007, recovered in 2010 and then gathered strength in 2011.

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