The past year saw an astonishing number of mergers, acquisitions, and business reconfigurations of electricity and energy companies, without any obvious organizing theory. Is it possible to make sense of the activity, or is it just business Brownian motion—aka, random behavior?
Gas companies spun off power generating assets. Power companies sold offshore businesses. Independent generators acquired competing companies. Conventional electric utilities bought natural gas companies. Electric utilities launched new and unfamiliar lines of business. Foreign companies made forays into the U.S. market.
The year in the rear view mirror reveals lots of merger, acquisition, and repositioning activity in the U.S. and internationally. But it was, to quote a famous 20th century author and legendary political figure Winston Churchill, a “pudding without a theme.”
Looking at the booming 3rd quarter (Q3) deals in North American power and utilities, the consulting firm PwC said, “The deal environment continues to remain strong in 2016, with Q3 2016 reflecting the highest quarterly deal value seen in recent years.” That’s on top of two earlier quarters of record deals.
According to the PwC analysis, 22 deals worth $78.1 billion in the power and utilities sector went down in Q3 of 2016. “Deal volume increased by 29 percent, while deal value grew by a sizeable 176 percent from the prior quarter,” said the PwC analysis. “Generation asset deals (fossil, nuclear, wind, and solar) helped the volume growth, though these generation asset deals were lower in total value as compared to corporate deals—which contributed 90 percent to the total deal value for the quarter (includes four corporate mega deals, or deals greater than $1.0 billion).”
PwC said the “mega deals” amounted to six for Q3, “95 percent of total deal value for the quarter. This compares to four mega deals in the prior quarter, which represented 89 percent of total deal value.” Looking at the Q3 deals, PwC’s deals chief Jeremy Fago said, “Pipeline and transmission infrastructure dominated deal value and volume this quarter as deal makers seized on opportunities to support changing generation and natural gas supply dynamics.”
Among the more interesting moves in 2016 were the following, organized roughly by the nature of the deal announced or closed.
Canada’s Enbridge, a giant natural gas distribution company with large generating interests, said it will buy Spectra Energy, a U.S. gas pipeline company, for $47 billion by PwC’s estimation. It will create the largest energy infrastructure company in North America, according to the SNL trade publication.
Atlanta-based Southern Co., a major vertically integrated electric utility, bought half of Southern Natural Gas Co. from Kinder Morgan Energy Partners, a natural gas pipeline company, for $2.7 billion.
Columbia Pipeline Group said it will buy 55.3% of Houston-based Columbia Pipeline Partners for $2.1 billion.
DTE Energy,Detroit’s investor-owned utility, said it will buy 55% of the Stonewall Gas Gathering System and the Appalachian Gathering System for $1.3 billion.
TransCanada has struck deals to sell its U.S. electric power business. LS Powerwill buy a 3,950-MW portfolio of TransCanada’s Northeast U.S. plants for $2.2 billion, while ArcLight Capital, on a buying spree, will gobble up 13 TransCanada hydro plants with 584 MW of capacity for $1.065 billion.
American Electric Power of Columbus, Ohio, a major electric utility company, agreed to sell four coal-fired power plants with 5.2 GW of generating capacity to a joint venture of Blackstone Groupand ArcLight Capital Partners for $2.2 billion. AEP said it will take a $2.3 billion write-off in the deal.
Southern Co.bought the Mankato power plant, a 375-MW natural gas combined cycle generating plant in Minnesota, for $396 million from Calpine Corp.
Duke Energy exited its Latin American electricity business with a series of deals, selling operations in Peru, Chile, Ecuador, Guatemala, El Salvador, and Argentina to investment firm I Squared Capital for $1.2 billion. At about the same time, Duke said it will sell its Brazilian 2,090-MW generating portfolio to China Three Gorges Corp. for $1.2 billion.
On the smaller end of the deal market, Korea’s Kepco utility is buying the 30-MW Alamosa concentrated solar project in Colorado from Carlyle Group for $34 million. Kepco’s president, Ho Hwan-ik, said, “I am glad to secure a beachhead to move into the U.S. power market. We will keep looking for power generation assets for acquisition including wind power, solar and other renewable energy plants.”
NextEra Energy Partnersagreed to buy Bayhawk Wind Holdings from NextEra Energy Resources(both owned by NextEra Inc.) for $565 million.
Riverstone Holdings, a private investment firm focused on energy, bought Talen Energy Corp.,a non-utility electric generator with 16 GW of capacity in eight U.S. states, for $5.2 billion.
A contentious two-year saga concerning the $6.8 billion Exelon Corp.purchase of Pepco Holdings Inc.concluded in March to bring three electric and gas utilities on both sides together to form the largest mid-Atlantic utility company.
One failed deal is worth mentioning: NextEra failed in its attempt to acquire Hawaiian Electric Industriesfor $4.3 billion, after the state’s regulators turned down the deal—a rare occurrence in the world of energy mergers and acquisitions.
Independent generator Calpine Corp.is buying Noble Americas Energy Solutions, the largest U.S. independent supplier of power to commercial and industrial customers, for $900 million, moving the company from wholesale generation into retail distribution.
Florida-based NextEra Energy,parent of electric utility Florida Power and Light,agreed to buy bankrupt Dallas-based Energy Future Holdings, an electricity distribution company, for $18.7 billion, allowing the latter to restructure some $50 billion in debt.
Constellation,an Exelon subsidiary, is buying retail energy supplier ConEdison Solutions for an undisclosed amount, creating the largest competitive retail energy supplier in the U.S.
Edison International,parent of Southern California Edison, in March said it will start a business offering energy consulting and management services for commercial and industrial customers. The new business, Edison Energy, according to The New York Times,“is among the first major forays of a utility into energy management services, and is one of the more ambitious examples of how power companies are adapting to customers’ interest in producing and controlling their own electricity and the growing competition from ventures offering them the ability to do it.”
Duke Energy announced it is getting into the distributed energy business. The company asked its North Carolina regulators to approve $55 million for a 21-MW combined heat and power (CHP) plant at Duke University in Durham, N.C. Duke said it is looking at other opportunities for CHP projects in the 10- to 30-MW range.
Southern Co. bought PowerSecure, a North Carolina distributed energy resources (DER) firm, for $431 million. Electricity Daily commented, “Like other utilities, Southern has been on something of a diversification tear recently, with acquisitions by its subsidiaries of extensive solar and wind energy resources” as well as the PowerSecure purchase.
Chicago-based Exelon Corp. said it wants to develop microgrid technologies, a very new venture for the giant investor-owned utility. The company has asked state lawmakers to approve legislation that would let the investor-owned utility develop six microgrids, including a $300 million, 17-MW facility at Chicago Rockford International Airport.
When in Doubt, Do Anything?
Is there any common thread among these many mergers, acquisitions, and repositionings? That’s a stretch, although PwC takes a stab at it, looking only at the deals it has tracked. According to its analysis, “Sixteen of the 22 deals for the quarter were generation asset deals, spanning fossil, nuclear, wind and solar. While generation asset deals contributed significantly to deal volume, deal value resulting from these deals was only 8 percent of total deal value.”
That doesn’t go very far in explaining the apparently frenzied activity. The best explanations may have to do with business psychology and physics. Over the past 30 years or so, there has been an impetus among energy executives to make deals as an expression of ego. Some have described it as “the urge to merge, purge, or refurb.”
The result may be a kind of business Brownian motion. Encyclopedia Britannica defines Brownian motion (named for Scottish botanist Robert Brown, 1773–1858) as “any of various physical phenomena in which some quantity is constantly undergoing small, random fluctuations.” These are random motions with “no preferred direction.”
The only discernible direction in the energy mergers is the desire to maximize the reward to shareholders, on either side of the transaction. Value to customers, while often touted by the parties, is not necessarily part of the equation.
Scott Hempling, a veteran Washington utility lawyer who has participated in many electric deals (including serving as a witness for the state of Hawaii in NextEra’s failed acquisition of Hawaiian Electric Industries) writes, “In every acquisition I have studied, the target company’s board has one priority: obtain for its shareholders the highest possible price.”
That doesn’t mean commensurate benefits for consumers, Hempling noted. In the Hawaii deal, the Hawaiian Electric shareholders were promised a “premium of $568 million; ratepayers would receive a rate benefit of $60 million.”
Many of the business activities of electricity interests, including mergers and acquisitions, are subject to a plethora of regulatory approvals, from federal government scrutiny at either the Justice Department’s antitrust division or at the Federal Trade Commission (FTC), to the Federal Energy Regulatory Commission (FERC). State regulators often have authority over the deals and have been crucial to proposals that failed to pass regulatory muster.
But the regulatory screens rarely prove to be a real obstacle. Hempling comments that over the 30-year period he has been looking at electric deals, state regulators have rejected only five mergers: Southern California Edison and San Diego Gas and Electric in 1991; Unisource (Tucson Electric) and Kohlberg, Kravis Roberts in 1995; Portland General Electric, Texas Pacific Group, and others in 2005; Northwestern Utilities and Babcock and Brown Infrastructure in Montana in 2005; and this year’s rejection of the Hawaii deal.
The Justice Department and the FTC haven’t rejected an electricity merger or acquisition in modern history. FERC has not turned regulatory thumbs down on any electric mergers, although it signaled clearly in 1997 that it was prepared to nix a deal where Minnesota-based Northern States Power would acquire Wisconsin Electric, to create a company called “Primergy.” (FERC staff privately referred to the merged company as “Spamergy.”) Ultimately, Northern States Power acquired Denver-based Public Service of Colorado and Southwestern Public Service of Amarillo, Texas, to form Xcel Energy. State and federal regulators approved those deals.
Mergers, despite the hype that accompanies them, don’t always produce the values that the parties promise. The rhetoric of the companies involved usually invokes business clichés such as “synergies,” or “cost-savings,” or “diversification.” That often turns out to be a description of what didn’t happen.
No Guarantee of Success
On the 15th anniversary of the failed 2000 AOL–Time Warner merger, Fortune magazine commented, “The landscape of mergers and acquisitions is littered with business flops, some catastrophic, highly visible disasters that were often hugely hyped before their eventual doom.”
The electricity business is no stranger to business flops. Remember Edison Mission Energy, Edison International’s big bet on independent generation? That resulted in a 2012 bankruptcy. AES China Generating Co.? Cratered in 1996. And don’t forget Enron, a product of a merger of two small natural gas pipelines that then gobbled up business after business with what appeared to be an insatiable appetite before it crashed in flames in 2001. Though many mergers are successful, success is never guaranteed.
The Fortune article, by Columbia Business School professor Rita Gunther McGrath, provided a “recipe” for business combination failure:
■ Untested assumptions are taken as facts.
■ Few opportunities exist for inexpensive, low-commitment testing.
■ Leaders are convinced they have the answer and are not willing to change course.
■ Huge up-front investment, rather than a staged or sequenced flow of resources.
■ Massive uncertainty and a sense of time pressure.
In today’s market, at least in the U.S., one of the “untested assumptions” is that natural gas prices will remain low, which may explain the acquisition of gas businesses by power generators. However, as this article was going into production in late 2016, the U.S. Energy Information Administration was predicting continued increases in the price of natural gas, projected to result in a seasonal peak of $31/MWh in February 2017 for gas-fired power—double the $16/MWh a year earlier, in March 2016.
In his 2000 book One Up on Wall Street, legendary fund manager Peter Lynch, who drove Fidelity Magellan into the heights of investment performance, coined the term “diworsification.” He meant that businesses can diversify to such an extent that they lose focus on their original business, diverting the time, attention, energy, and financial resources away from their core competence. It’s a cautionary term in reviewing the hyperbolic claims when managements announce big, allegedly game-changing deals.
But what if the “original business” is flat-lining and the “core competence” is being challenged by new competitors, including third-party providers of DER at various scales? Though on a percentage basis the threat may be small today, given generally flat load growth, any chipping away at revenue streams for the “original business” will be noticed. That dynamic appears to be the backdrop for development of microgrids and other DER business lines.
Especially given the “massive uncertainty” introduced by a new administration in Washington, D.C., as of this month, whether last year’s bets on business strategy pay off is a very open question. ■
—Kennedy Maize is a long-time energy journalist and frequent contributor to POWER.