- The wave of electric-gas consolidation in the utility sector is not without risk, Moody's Investor Services warns in a new report focused on higher levels of debt in three recent transactions involving Southern Co., Duke Energy and Dominion Resources.
- Amid stagnant demand and the search for new revenue streams, electric utilities have been investing in natural gas companies. But the diversified revenue is being offset by higher leverage, Moody's said, as well as large differences in geographic operating regions.
- The most "dramatic" financial decline will result from Southern's $12 billion acquisition of AGL Resources, Moody's said, where the deal will considerably alter its cashflow-to-debt ratio.
For months now, we've been reporting on consolidation and diversification in the utility sector – electric companies, facing sagging demand and stagnant revenues, have been turning to gas company acquisitions as a way to boost cashflows. But that strategy comes with a risk, according to a new report from Moody's, and while the deals may boost revenues, electric companies are taking on increasing amounts of debt to pull them off.
"Electric utility holding companies are acquiring natural gas assets in order to diversify revenue and provide growth amidst stagnant electric demand," said Ryan Wobbrock, an assistant vice president and analyst at the firm. "While diversification is a credit positive, the benefits aren't sufficient to offset the effect of higher leverage and financial risk associated with these transactions."
Moody's new report, "Electric and Gas Utility Deals Bring Benefits, But Higher Leverage Mitigates Impact," focuses on Southern's acquisition of AGL Resources, Duke's bid to acquire Piedmont Natural Gas, and Dominion Resources' acquisition of Questar Corp.
"While the deals will provide enhanced size, scale and scope of operations, they will not bring significant cost savings through combined resources," Moody's said. "The acquired natural gas assets have different operations and geographic locations, making cost-sharing with the electric utilities difficult."