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Gas Utilities-Consolidation Trend Likely to Continue:D,PEG,ATO,NI Among Best Positioned to Participate

研究机构:摩根大通(亚太) 研究员:Christopher Turnure,Andrew Pon 发布时间:2015-10-18

Pipeline safety investments and an increased and shifting role for the fuel in powergeneration have made gas infrastructure more and more valuable in the broader utilityasset context over the past several years. Our note examines these assets, their growthpotential and what we view as continued likelihood of sector consolidation. Given thefragmented nature of the industry and the potential benefits of economies of scalethrough M&A, we evaluate several potential combinations. We find that only ahandful of potential targets could move the needle for large buyers, and that takingadvantage of low interest rates and incremental leverage is crucial to offsettingsynergy give-backs. Our scenarios point to many potential deals being accretivenonetheless, and we view D, PEG, ATO and NI as best positioned to participate, andalso highlight UIL and NEE as well-positioned companies currently involved inunrelated pending transactions.

Conditions remain favorable for more consolidation: Since late 2012 we haveseen six major gas utility deals announced as well as the formation of two standaloneLDCs from larger entities. Gas utilities are still in relatively early stages of high ratebase growth and often are in need of external equity at a time when electric namesare facing slowing transmission opportunities and continued anemic load growth.

Additionally, low interest rates are key to what we see as debt-heavy potential deals,and though not cheap, valuations remain at levels we believe allow for numerousaccretive combinations.

Gas utility growth well in excess of electric assets; pipelines especiallyattractive: LDC’s are benefitting from pipeline safety and integrity spending thatdrives rate base growth above 7-8% in many cases, and recovering this via low-lagregulatory constructs in addition. Of equal and growing relevance are the longerdistanceand higher pressure gas transmission assets owned by many of thesecompanies. Higher ROE’s and bilaterally contracted growth potential from coal-togasswitching, and Mexican and LNG exports are among the factors drivinginvestments in such assets by DUK, NEE, D and others.

D, PEG best positioned to acquire; ATO, NI logical potential targets: PEG’sample balance sheet capacity is not new, but a slowing transmission growthspending profile after 2017 and a strong stock currency make now an interestingtime for a deal. ATO and NI both have top-tier rate base growth and are largeenough to move the needle for larger suitors. ATO’s aging management and NI’sneed for external equity both add interesting angles as well. Additionally, wehighlight NEE and UIL as well-positioned to participate in consolidation but notetheir current involvement in unrelated pending transactions.

Several accretive combination scenarios rely on incremental leverage: Of thecountless permutations that are possible in the 70+ company U.S. utility landscape,we chose to focus 9 hypothetical transactions involving the acquirers and targetshighlighted above and the 5 most-plausible deals from this list. The most logicalfrom a strategic and accretive perspective are PEG + NI and D + ATO, in ouropinion, resulting in baseline 2018E accretion of 7.3% and 3.2%, respectively, thesecond full pro forma year modeled.

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