Daily GPI / M&A

Debt Could Offset Benefits of Recent Power-Buys-Gas Mergers, Moody’s Says

March 22, 2016
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For the recent string of large U.S. electric utility holding companies buying up natural gas infrastructure assets, the planned acquisitions bring added debt that could offset the benefits from diversifying revenue, according to a report published Tuesday by Moody’s Investors Service.

Regarding the Duke Energy Corp.-Piedmont Natural Gas Company Inc. (see Daily GPI, Oct. 26, 2015), Southern Company-AGL Resources Inc. (see Daily GPI, Aug. 24, 2015) and Dominion Resources Inc.-Questar Corp. (see Daily GPI, Feb. 1) mergers announced over the past eight months, Moody’s said “synergies are not a primary driver, or benefit” of the deals.

The firm said it sees “little synergistic benefit in this wave of electric and gas transactions.” While the utilities might benefit from “consolidating some corporate functions...these business combinations have mostly different operations and geographic locations, which will make cost-sharing difficult.”

Buying up these natural gas assets does, however, “offer opportunities for earnings growth, especially in a world of weak growth in electricity demand,” Moody’s said. “Investments in gas companies give utilities a way to grow their rate bases and earnings at a time when organic growth is hard to come by.”

The Southern and Dominion deals also offer a greater amount of geographic and regulatory diversity, the firm said, while the Duke deal offers the least amount of diversification “since it already has significant operations” in Piedmont’s service area.

But the debt required to finance these acquisitions brings added financial risk that could offset the benefits, Moody’s said.

The ratings agency calculated that the $12 billion Southern-AGL merger, requiring $8 billion in debt to finance the deal, will bring Southern’s ratio of cash flow from operations (CFO) to debt down to 15% from 22.2% prior to the announcement of the merger. Duke’s pre-merger CFO-to-debt ratio of 16.8% would decline to 15% after the merger, with the smaller size of the Piedmont acquisition having less of an impact on Duke’s financial metrics, Moody’s said.

“Dominion is least exposed to a decline in financial metrics, given the lower premium it will pay for Questar...and the more balanced mix of debt and equity that is expected to finance it. However, the added holding company debt,” an acquisition strategy centered around its master limited partnership, and “inclusion of Questar’s quasi-regulated [exploration and production] operations will add modest financial risk to Dominion’s credit profile, as well,” Moody’s said.

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