Publicly Traded Utilities Increase M&A Activity
While utilities are generally considered to be essential services for which demand should increase as the population grows, making publicly traded utilities a reasonably safe option in an investment portfolio, recent reports have revealed that this is not the case with the demand for electricity. It seems that alternative power sources such as rooftop solar panels, and technology such as low-power processors and manufacturing businesses, has caused electricity demand to all but level off. The annual increase in electricity usage during the 1990s was around 2.4 percent, whereas during the current decade the annual increase in usage has been approximately 0.5 percent. Moreover, a recent study by the Deloitte Center for Energy Solutions revealed nine out of ten businesses and up to 70 percent of consumers polled have set reachable goals to decrease their electricity costs.
This trend has resulted in a spate of merger and acquisition proposals among publicly traded utility providers, adding up to a value of US$44 billion since the beginning of 2011, as compared to the 2010 total of US$30 billion for M&A deals. The proposed deal put forward in January for Duke Energy (NYSE: DUK) to acquire Progress Energy (NYSE: PGN) would result in creating the country’s largest utility, owning power plants to serve 7.1 million customers in six states and generating US$22.7 billion in revenue. Credit analyst of utilities and infrastructure ratings at Standard & Poor’s, Todd A. Shipman, noted that the surge of deals in the electric utility industry marks increased progress toward the consolidation of the sector. It has been reported that since deregulation in the 1990s, publicly traded utility companies have decreased from 100 to around 50 and there is a strong possibility that these could be halved to as few as 25 in the next five years or so.
Another issue which may make mergers and acquisitions within the utilities sector an attractive option is the pending regulation on limiting greenhouse gas emissions, along with renewed efforts at enforcing existing regulations regarding air pollution, where compliancy measures are likely to be costly. In light of the current economy and dismal job market, it appears that regulators are more willing to approve merger and acquisition deals without the usual tedious delays, especially when promises are made that no job cuts will be made.