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US utilities are a ripe opportunity for yield-hungry funds

The JPMorgan-advised IIF's $8.1bn acquisition of South Jersey Industries is the latest in a series of deals by funds looking to shape the decarbonisation path of US utilities.

US utilities need to “demonstrate urgency” in developing new business models and new technologies. At least that was the verdict from EY in December, highlighting trends affecting the industry going into 2022 in order to keep up with the energy transition.

Such urgency was emphatically underscored by South Jersey Industries late last month, which agreed to a take-private by the JPMorgan Investment Management-advised Infrastructure Investments Fund, in a deal with an enterprise value of $8.1 billion and a 46.3 percent premium to SJI’s closing share price.

The transaction continued to highlight the growing trend of large take-privates in the infrastructure market with Mike Renna, president and chief executive at SJI, pointing towards the benefits of the “additional resources” for its capital expenditure plans that its new status as a private company would bring.

However, Renna added that it was IIF’s ability to drive “SJI’s clean energy and decarbonisation initiatives in support of the environmental goals of our state and region” that was key to agreeing to the acquisition. New Jersey is aiming for 35 percent of the energy sold in the state to come from qualifying energy sources by 2025 and 50 percent by 2030.

The sale of SJI is one way US utilities are looking to broaden balance sheets to belatedly join the energy transition. They are being propelled, in part, by November’s passing of the $1.2 trillion Bipartisan Infrastructure Law, which could provide states the much-needed high-voltage transmission infrastructure to modernise the grid and help cope with the increasing renewables load.

Others, as EY noted in December, have sought to bring in further funding through spin-offs, stake sales and, in the case of FirstEnergy in November, selling parts of their transmission and distribution assets. FirstEnergy agreed to offload 19.9 percent of its FirstEnergy Transmission business to Brookfield Super Core Infrastructure for $2.4 billion, a deal which was described by Steven Strah, FirstEnergy’s chief executive, as “an historical premium valuation within the utility sector”.

Not that this seemed particularly cumbersome to Brookfield. According to a statement at the time from Eduardo Salgado, head of Brookfield Super Core Infrastructure Partners, the business is “uniquely positioned to capture significant capital investment opportunities driven by the modernisation of the grid, decarbonisation and general electrification of the economy”.

Brookfield’s investment came alongside a $1 billion acquisition of common stock in the wider FirstEnergy business by Blackstone Infrastructure Partners, which, according to a statement from its head, Sean Klimczak, will “further investment in smart grid resiliency and the transition to a clean energy future”.

It is clear funds are noticing a growing opportunity: utilities require their help in funding their decarbonisation targets and there are plenty of deals available either through partial stake investments, wholesale acquisitions or investments to help maintain grid infrastructure.

These three examples, in addition to smaller utility buys by the Ullico Infrastructure Fund, highlight the other trend pervading the infrastructure market: that these are the kinds of deals that could, arguably, only truly be exploited by open-ended funds. The capital expenditure required, alongside the returns on offer and the patient capital needed to see such investments through, are ripe for the increasing number of much longer-term investors.

As we wait for the fruits of last year’s bipartisan infrastructure efforts to come through, infrastructure funds are wasting no time in bringing billions of dollars to help lay the decarbonisation path.

They could well be the right partner at the right time for US utilities.