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After M&A spate, major utility deals to come at measured pace, consultant says

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After M&A spate, major utility deals to come at measured pace, consultant says

Utilities looking for growth may still turn to acquisitions to get there, but after so many deals in recent years, finding a good match may require more analysis and a willingness to take on larger acquisition targets.

Companies looking to spread their fixed costs over larger numbers of customers have to balance those desires against the complexities of taking on new regulatory environments and incorporating large new enterprises into existing business models, Russell Feingold, vice president of the consulting group Black and Veatch, said May 20 at the American Gas Association Financial Forum in Phoenix.

"There's a little more analysis to pick and choose who we might think is a good acquisition target at this point because the low-hanging fruit has already been taken," Feingold said. "There still is interest in economies of scale, but I think it's a more measured interest and I think there's more evaluation in who really makes sense and where can we get the synergies more easily than not."

Electric utilities have seen fairly stagnant load growth, given their high penetration among U.S. markets, coupled with energy efficiency, conservation initiatives and distributed generation resources, Feingold noted.

Investments in smart grid and other grid modernization technologies have driven some power sector growth, but gas utilities' potential for expansion and infrastructure investment remain attractive to power companies looking to boost their growth opportunities, Feingold said. CenterPoint Energy Inc.'s planned purchase of Vectren Corp. and AltaGas Ltd.'s plans to buy WGL Holdings Inc. reflect some of this interest in growth through increased exposure to regulated gas utilities. On May 21, Southern Co. announced that it agreed to sell Florida assets including Gulf Power Co. and Florida City Gas to NextEra Energy Inc. for approximately $6.48 billion.

Noting that a number of smaller utilities have been acquired already, Feingold said prospective buyers may have to take on larger purchases if they want to expand. "We're now looking at, perhaps, some of the ones that acquired the small guys may now be the ones that are now being looked at by the bigger guys as possible acquisition targets," Feingold said.

Market capitalizations for major electric-focused utility companies — such as Duke Energy Corp., Southern, Dominion Energy Inc., National Grid PLC and Consumers Energy Co. — continue to dwarf many of the gas-focused companies, leaving room for potential acquisitions, Feingold said.

However, he expects that companies that have been active in the M&A space may be less likely to take on additional acquisitions near-term. "When they take on some of these acquisitions, there's a lot of synergistic evaluation that has to occur, and organizational change, organizational effectiveness kind of activities that you've got to kind of absorb the transaction, as opposed to going out and saying, 'Let's go do another one,'" Feingold said.

Duke, Southern and Dominion all made major purchases in recent years, acquiring Piedmont Natural Gas Co. Inc., AGL Resources and Dominion Energy Questar Corp., respectively. Dominion has gone back for more, though, recently announcing plans to buy SCANA Corp.