In today’s uncertain economic and public policy environment, senior executives are leery of Wall Street’s ready appetite for mergers and acquisitions (M&A), according to a panel of three executives discussing growing rate base Tuesday at the Bank of America Merrill Lynch Power and Gas Leaders Conference in New York City.
While there might be some strategic advantages to seeking M&A long term if companies are like Minneapolis-based Xcel Energy Inc., Jackson, MI-based CMS Energy Corp. or Phoenix-based Pinnacle West Capital Corp., senior executives from those utility holding companies told financial analysts that it didn’t make sense to them at this time.
“It would be nice to be bigger,” said Ben Fowke, CEO of Xcel. “But considering the price you pay to be bigger, you have to be very cautious. When we look at our own situation, we have great organic growth, and the tradeoffs of trying to get bigger through M&A often just don’t make sense when you do the math.
“We ‘never say never’ and are very interested in acquisitions, such as the [natural gas-fired] power plant we bought from Calpine [Corp.] in Colorado, but that is just growing rate base.”
Tom Webb, CFO of CMS Energy Corp., thinks “bigger is not necessarily better in all ways,” and it often depends on what you have been able to do within the size of the company you have. “Your track record in returning value is what is important,” Webb said. “If you can deliver the earnings growth within a certain type rate structure year after year, and you do it through different [regulatory] commissioners over time, that tells you something about the company that I think people have confidence in.”
Webb acknowledged that smaller capitalized companies will often seek the “protection” of a larger entity. “During tough times, people will run for safe havens.”
M&A is viewed much differently in the West, according to Jim Hatfield, CFO of Pinnacle West. “We’d like to get bigger to weather a lot more storms, but I would point out with our growth and rate agenda our ability to push that aside to try to get a merger transaction through the [Arizona Corporation] commission wouldn’t be worth the risk,” said Hatfield, adding the two proposed utility mergers in the state in the last 12 years were turned down (UniSource and Southwest Gas Corp.). “I’m not sure the environment would be very receptive to a merger at this point.”
Webb said CMS had wanted to pursue a clean coal plant but had to put it on hold in the face of the recessionary economy, environmental uncertainties and low natural gas prices. “We decided not to do it, although we had the air permits and everything we needed in place,” he said.
“We also have some decisions to make on some very small coal plants that we will probably replace with new gas-fired capacity that is out there, but we don’t have to make that decision for a year or so. That’s something on the waiting list and it amounts to a half a billion dollars-plus [in new rate base]. There are lots of things that could take us from $6.5-10 billion in rate base.”
A question dealt with how the three companies were dealing with the stiffer federal emissions restrictions in terms of being able to retrofit power plants, and all three executives said they were prepared to meet the stiffer restrictions, although in Texas Xcel is prepared to join others in filing a lawsuit if it is unsuccessful in getting the Environmental Protection Agency to allow more time for compliance.
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