“Think small” is the message for those contemplating acquisitions in the US utility sector, according to Gerry Yurkevicz, a Boston-based associate partner at management consultancy Oliver Wyman.
In a new report entitled Small is beautiful: M&A opportunities with smaller utilities, Yurkevicz finds that the opportunity for small utility deals is – if you’ll pardon the expression – bigger than you might think. His research reveals more than 150 small electric and gas utilities spread across the US, with more than half of these in the gas utility segment.
Yurkevicz admits that defining small utilities is a term of art, but for the purposes of the study it covers gas utilities with less than 150,000 customers or $500 million of net utility property, plant and equipment (PPE), and electric utilities with less than 250,000 customers or less than $1.5 billion of net PPE.
The significance of all this is that it represents a potential source of deals for infrastructure and private equity funds. Yurkevicz says that much of the focus has been on utility mega-mergers such as Exelon-Constellation Energy ($7.9 billion) and Duke Energy-Progress Energy ($13.7 billion). But these larger deals, he suggests, can be “hard to do and fraught with issues”. He thinks the smaller deal opportunity has been underestimated.
He points out that smaller utilities are often part of larger groups and that these larger groups “are investing a lot of capital as there are a lot of opportunities in core areas. So they are thinking hard about where to deploy their capital. Small assets can be hard to manage and some have been under-invested”. In some cases, the decision may be made to divest them – either selling on a proprietary basis or through auctions.
One recent example of a small US utility deal involving an infrastructure fund was SteelRiver Partners’ agreement to acquire listed natural gas business Equitable Gas Company and merge it with existing portfolio company Peoples Natural Gas in a deal that had a cash element of $720 million.
Trumpeting the deal in a statement, Peoples Natural Gas president and chief executive officer Morgan O’Brien said the combined utility would offer benefits by “creating significant operational efficiencies for the pipeline systems, enhancing safety and reliability, and supporting greater competition for gas marketers and local gas producers”.
This chimes with the views of Yurkevicz who says that “new ownership can often help with customers and regulators. If done right, it’s a positive message”.
He adds: “You are not allowed really high returns [by the regulators] but it’s a decent business to be in where you can make 10 percent on equity. The natural gas utilities in North America will have very competitive prices using shale gas and so there are good growth possibilities and it’s been a very financeable space.”