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AltaGas/WGL deal seen as harbinger of utility M&A but may face regulatory fight

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AltaGas/WGL deal seen as harbinger of utility M&A but may face regulatory fight

The deal by Calgary-based AltaGas Ltd. for mid-Atlantic utility holding company WGL Holdings Inc. signals more utility M&A in the works, equity analysts said, but regulatory experts see headwinds ahead.

"We view the takeout price and the all cash nature of the deal as positive data points as it relates to the utility M&A trend, particularly on the gas side," Wells Fargo Securities LLC analyst Sarah Akers said. "We still think the sector is ripe for consolidation and that there will be enough acquirers willing to pay up for strategic deals."

The deal for the gas utility that serves Washington, D.C., and parts of Maryland and Virginia was an all-cash offer valued at US$6.4 billion, according to AltaGas and WGL announcements issued after the Jan. 25 market close. Shares in WGL were up 3% in early afternoon trading Jan. 26, while shares in AltaGas had lost nearly 6%, both on heavier-than-normal volume.

In addition to the more than 1 million customers it serves in the D.C. area, WGL Holdings has stakes in Marcellus and Utica Shale pipelines with agreements to sell LNG through Dominion Resources Inc.'s Cove Point LNG LP terminal.

"This is highly transformational for our company … while keeping our company DNA," AltaGas CEO David Harris said on a Jan. 25 conference call to discuss the deal, adding that the WGL Holdings fits AltaGas' desire to acquire "high quality, long-lived [natural gas] assets."

"Canadian utilities acquiring US domiciled utilities is becoming a strong trend," analysts at CreditSights said Jan. 26. "AltaGas is now the fourth Canadian utility to reach south of the border and acquire a US domiciled utility over the past two years." The three previous deals were Fortis Inc.'s acquisition of ITC Holdings Corp., Emera Inc.'s purchase of TECO Energy Inc. and Algonquin Power & Utilities Corp. buying Empire District Electric Co.

The WGL purchase will require regulatory approval from two states and the District of Columbia. Some Wall Street analysts expect the deal to win easy approval, while regulatory analysts are not as certain.

"While we expect a few bumps in the road, we believe the transaction will ultimately gain approval and highlight a number of initial commitments including maintaining the D.C. headquarters (and relocating [AltaGas'] U.S. power business to WGL's service territory) and maintaining headcounts in WGL's various business units," Akers noted.

"While D.C. proved to be a thorny process in the [Exelon Corp./Pepco Holdings LLC] deal, the specifics of the [AltaGas/WGL] combination are considerably different (WGL constitutes roughly half of the pro-forma entity and there do not appear to be any conflicts of interest with the legacy business)," Akers said.

Analysts at Regulatory Research Associates, or RRA, give both Maryland and D.C. below-average grades for investors in energy deals and noted the difficulty the last utility deal had before the D.C. Public Service Commission.

"The only other transaction to come before the PSC in the last decade was Exelon Corp.'s acquisition of Pepco Holdings LLC, parent of Potomac Electric Power Co., completed in March 2016, after an almost two-year review. The process was contentious and politically charged," RRA analyst Lillian Federico said Jan. 26.

"The PSC was the last of the requisite regulatory bodies to rule on the merger and that enabled the commission to extract incremental concessions from the companies in order to secure approval," RRA said. "Given that Washington Gas Light is the largest LDC in the jurisdiction, it is likely that the AltaGas/WGL deal will be subject to similar scrutiny."

Katie Bays of Height Securities LLC warned of the regulatory process in two of the three local jurisdictions. "Overall, we expect the deal could face stiff opposition in DC and Maryland, but the Virginia state review and federal approvals should not be challenging. We expect the deal is likely to go through, though probably with some concessions in DC and MD."

Regulatory Research Associates is an offering of S&P Global Market Intelligence.