Cap-ex plans raise the stakes for utility mergers.
Kevin Fitzgerald is the executive partner at Troutman Sanders LLP. Chris Jones is an energy associate in the same firm.
“Hearing utility executives talk about merger synergies is a bit like watching paint dry—except that paint sticks.” This remark by MarketWatch utility analyst Liam Denning1 reflects the conventional wisdom. Wall Street has historically been skeptical about synergy claims in utility mergers, assuming that regulators will insist that any savings flow to ratepayers—or at least dilute the value that can flow to shareholders. Indeed, recent deals illustrate the ongoing debate over whether investors or ratepayers get the better deal when it comes to savings.
However, as economic woes and environmental regulations bear down on the utility sector, merger synergies may be increasingly appealing, not just to the merging parties, but also to usually skeptical Wall Street. Anticipating large capital investments needed to comply with upcoming EPA regulations of coal-fired generation, analysts seem increasingly attracted to the shareholder value driven by the ability, as another analyst said recently, “to spread fixed costs across a larger asset platform.” The benefits of this type of financial synergy appear to outweigh traditional concerns about whether operational and administrative synergies will be diluted in the regulatory approval process.