FEATURE: Natural gas utilities drawing buyout interest from private buyers willing to pay

The recent sale of Enstar Natural Gas has extended a streak of gas utility acquisitions by private utility operators owned by financial entities.

The string of pricey buyouts has bolstered valuations and stock prices for local gas distribution companies raising questions about whether the trend is sustainable. But with private buyers willing to pay a premium for now, the acquisitions are giving publicly traded gas utilities the opportunity to recycle capital into strategic priorities.

Canadian gas distributor TriSummit Utilities on May 26 announced an $800 million deal with AltaGas to purchase Alaska gas distributor Enstar and other transmission and storage assets. Reflecting recent gas utility deals, the acquisition price represented 2.3 times the assets' 2021 rate base and 29 times their allowed earnings.

The transaction "adds yet another attractive marker to LDC valuations," J.P. Morgan Chase analyst Jeremy Tonet said in a May 26 research note. It also reinforces several sector themes, particularly "the attraction of private capital to highly cash-generative, long-duration risk-adjusted assets," Credit Suisse analyst Andrew Kuske said in a May 26 note.

Sentiment turns positive

Infrastructure and pension funds in particular have recently taken a more constructive view of gas utilities and have plenty of capital to chase long-dated infrastructure assets, according to investment bankers.

TriSummit Utilities is owned by two Canadian pension funds, the Alberta Teachers' Retirement Fund Board and Public Sector Pension Investment Board. TriSummit Utilities was formed in 2020 when the pension funds acquired AltaGas Canada, a former AltaGas subsidiary that went public in a 2018 initial public offering.

In February, Dominion Energy sold its West Virginia gas utility, Hope Gas, to an infrastructure fund controlled by Ullico, an insurance and investment products provider.

Shortly after, South Jersey Industries agreed to be taken private by Infrastructure Investments Fund, or IIF, a private investment vehicle advised by a JPMorgan Chase & Co. entity. IIF also owns Summit Utilities, which purchased Arkansas and Oklahoma gas utilities from CenterPoint Energy in 2021.

The valuations in those deals have presented a challenge for publicly traded gas utilities bidding for assets that have hit the market. Still, the premiums are a boon for sellers.

Capital to execute strategies

The 2021 CenterPoint deal provided the capital for the company's new leadership team to invest more heavily in the electric business. Similarly, NiSource is considering LDC sales to potentially shift its business mix toward its electric segment.

For AltaGas, the Alaska divestment facilitates the company's long-running goal of driving down debt following its 2018 acquisition of WGL Holdings, a portfolio of gas utilities and energy assets that included Enstar. The 2018 AltaGas Canada IPO was part of the plan to finance the WGL purchase.

The Enstar deal now positions AltaGas to meet its goal of reducing its debt ratio to below five times net debt to normalized EBITDA, according to analysts. After taxes, AltaGas expected the transaction to provide about $985 million of capital for debt reduction.

AltaGas has long telegraphed that it would seek to monetize its stake in the Mountain Valley Pipeline to reduce debt, but project delays have hampered its ability to monetize the asset. As recently as March, AltaGas President and CEO Randy Crawford tempered expectations that the company would sell an LDC in light of MVP's headwinds.

Analysts broadly supported the sale, as well as AltaGas's sharpened focus on its remaining US LDCs: Washington Gas Light and Semco Energy Gas.

"While the divesture of a utilities-based asset was a modest surprise, the core utilities business for [AltaGas] remains focused on the high-growth Eastern US regions of Maryland, Virginia, Michigan and DC," ATB Capital Markets analyst Nathan Joel Heywood said in a May 26 note. "In time we expect the improved balance sheet will help fund long-term growth opportunities in the remaining utilities business and Western Canadian midstream platform."