Latest gas utility sales touch off hunt for the next buyers, sellers

Gas utility operators are once again fielding questions about their appetite for dealmaking amid a new wave of asset sales.

Utility leaders are seldom willing to show their cards, but a review of recent earnings conference calls and analysts day events offered clues about the trajectory of the gas utility M&A market.

Recent dealmaking has been driven by multi-utilities seeking an efficient way to fund electric segment capital plans in a challenging environment for raising debt and equity. Deal valuations, measured against the acquisition's rate base, have also moderated from a prior dealmaking cycle in 2021 and 2022.

After CenterPoint Energy Inc. announced the sector's latest deal, equity analysts were keen to know whether the multi-utility intends to continue shedding gas assets. The company agreed to sell its Louisiana and Mississippi distribution companies in February and struck a deal for its Arkansas and Oklahoma gas utilities in 2021.

CenterPoint President and CEO Jason Wells said the company is focusing its asset optimization efforts in areas where its electric and gas jurisdictions overlap. While the company is biased toward dual-fuel jurisdictions, he declined to say whether gas-only territories in Minnesota and Ohio are divestment candidates.

Operators tee up more M&A

Wells' comments reinforced a view that Scotiabank Global Equity Research analysts expressed in September 2023 as the new wave of M&A kicked off: Overlap with an electric service territory generally reduces the appeal of selling a gas utility.

Scotiabank's note appears to have proved prescient in identifying New Mexico Gas Co. Inc. as a noncore divestment candidate for parent company Emera Inc. Emera recently initiated a strategic sale process for the Southwest gas utility, Guggenheim Partners said in a March 4 note to clients, citing reporting from energy finance news site PeakLoad. Emera did not return a request for comment on the report.

Scotiabank also viewed Eversource Energy as a divestment candidate given its challenges selling its offshore wind portfolio.

However, Eversource on Feb. 13 announced a deal to exit the offshore wind business and said it would explore selling its Aquarion Co. water utility business to meet future equity financing needs.

Big gas utilities do not anticipate sales

Asked about divestments, some operators with large gas utility portfolios said the organic growth opportunities within their jurisdictions likely outweighed the potential proceeds from asset sales.

"It's hard for us to see any sort of deal that could compete with the growth and regulatory construct that we have," Atmos Energy Corp. President and CEO Kevin Akers told analysts Feb. 7.

NiSource Inc. President and CEO Lloyd Yates said his company is "always diligently reviewing options to enhance shareholder value." However, he said NiSource stands by two core findings from its 2022 strategic review.

"The scale that NiSource has has tremendous value, and we like the diversification of our six operating companies," Yates told analysts during a Feb. 21 earnings conference call.

Xcel Energy Inc. CFO Brian Van Abel said the multi-utility is comfortable with its current footprint when asked during a Jan. 25 earnings conference call about selling assets to shore up the company's balance sheet. Xcel's gas utilities in Colorado, Michigan, Minnesota, North Dakota and Wisconsin all overlap with parts of its electric territories.

Wall Street sniffs out possible buyers

Asked for her thoughts on recent utility sector consolidation, MDU Resources Group Inc. President and CEO Nicole Kivisto noted that the company expanded its gas utility segment through acquisitions in the 2000s.

As MDU prepares to spin off its construction services business and become a pure-play utility operator, executives will "continue to monitor opportunities to grow outside of our existing territory," Kivisto said during a March 13 analyst day.

At a March 6 investor day, Enbridge Inc. President and CEO Gregory Ebel commented on the company's interest in additional gas utility acquisitions, following its $14 billion deal to buy three Dominion Energy Inc. distribution companies.

Ebel said Enbridge's M&A interests would chiefly lie within areas where it has developed interconnected gas transmission and distribution franchises, which generally boast supportive policy environments. He specifically called out Enbridge's Texas and Gulf Coast midstream hub and the region around southern Ontario and Ohio.

"When you look at the jurisdictions we now have, that's the kind of thing you'll be looking for," he said. "So population growth in a place like Utah; penetration growth in a place like North Carolina; and industrial growth, modernization, both in Ontario and Ohio."

Enbridge would also strongly consider an acquisition's ability to swiftly contribute to earnings, Ebel said. As for purchasing electric utilities, Ebel said he viewed that market as "much more challenging" due to needed investments in rate base.

RNG assets seen fetching value

Following Dominion's gas utility sales, analysts continued to monitor the company's comprehensive business review to see whether the company would divest its stake in renewable natural gas supply projects.

The company decided to retain that business, which will sit within a contracted energy segment that Dominion expects to contribute 10% of operating earnings annually.

"We got in early, and we've developed one of the larger portfolios, and we think that that's going to play well for us," Dominion President and CEO Robert Blue said.

DTE Energy Co. also fielded questions on a report that it was readying its RNG production assets for sale. DTE Chairman and CEO Jerry Norcia said a sale was not imminent during a Feb. 8 conference call. More recently, PeakLoad reported that final bids for the portfolio are due, Guggenheim said in a March 8 note to clients.

"For DTE, strategically this makes sense as the company noted in our prior meetings that increased capex opportunities are starting to emerge," Guggenheim said.