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In March of 2010, we discussed mergers and acquisitions in the electric utility industry. The then-pending takeover of Allegheny Energy by FirstEnergy (FE), which we highlighted in the article, was completed in February of 2011. Since the article appeared, a few more deals have been announced in this industry, and one has been completed.
The difficulties in obtaining regulatory approval for utility mergers have not changed in the past two years. Utilities usually must compromise and offer concessions in order for a transaction to win the blessing of the regulators. This was illustrated in two deals: the purchase of Constellation Energy by Exelon (EXC), which closed on March 12, 2012, and the merger between Northeast Utilities (NU) and NSTAR (NST), which will probably be completed in early April of 2012 now that regulatory settlements have been reached in Massachusetts and Connecticut.
Exelon wanted Constellation for its nonregulated nuclear assets, its solid and growing energy-marketing operations, and its regulated distribution utility, Baltimore Gas and Electric. Management knew that it would have to offer some tangible benefits for customers in order to win the approval of the Maryland regulators (typically a tough group to satisfy). Among these concessions was the promise of a $100 credit on the bill of each residential customer. That still wasn’t enough for key intervenors in the Maryland proceedings, so Exelon sweetened its offer, and was able to reach an agreement with these intervenors.
The deal between Northeast Utilities and NSTAR was announced in October of 2010. The companies thought that it would be completed within 12 months, but the regulatory process was thornier than they expected. First, Massachusetts changed its criteria for utility mergers so that the hurdle that companies had to overcome was higher. Then, Connecticut decided that it had jurisdiction over the combination, which was a reversal of its initial stance. The utilities finally reached settlements in each state, which were expected to win regulatory approval in early April of 2012, by offering one-time rate credits and other concessions.
A few other utility deals are pending. Duke Energy (DUK) and Progress Energy (PGN) are awaiting regulatory approval in the Carolinas and from the Federal Energy Regulatory Commission, which is concerned that the combined company would have too much power in the wholesale electricity market. This is known in the industry as a “market power” concern. To alleviate this, Duke proposes to construct up to eight transmission projects to increase the amount of wholesale power that could be imported to the Carolinas. A few more months will elapse before it is determined whether this transaction passes the regulatory tests.
In late May of 2011, Fortis, a Canadian company, agreed to acquire Central Vermont Public Service (CV). Less than a month later, Central Vermont received a competing offer from another Canadian company, Gaz Métro. Central Vermont accepted the latter offer in July of 2011. The deal awaits the approval of the regulators in Vermont and New Hampshire. Closing is possible by June. Note that Gaz Métro already owns the other major utility in Vermont, Green Mountain Power, which it bought in 2007.
Fortis didn’t give up after losing its bid for Central Vermont. In February of 2012, it agreed to acquire CH Energy Group (CHG), the parent company of Central Hudson Gas and Electric. Fortis is paying a high price (more than 20 times estimated 2012 earnings), so we doubt that the company will be outbid this time. Fortis is targeting completion of the deal in the first quarter of 2013.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.