Responding to Industry Pressures With Mergers and Acquisitions

Our nation’s gas and electric utility providers face difficult challenges as they create plans for the future. Demand for traditional services has leveled out or declined slightly as government, commercial, and residential customers institute energy savings initiatives. Rising environmental compliance costs combined with the aforementioned market pressures put the squeeze on profit margins. Not to mention, competition has escalated with the advent of commercially viable alternatives to traditional energy sources.

With the enactment of FERC Order No. 1000, senior management is required to engage other providers in the region to coordinate investments in power generation and distribution. An aging infrastructure requires billions of dollars in investment at a time when the debt and equity markets are becoming less friendly toward regulated public utilities.

For most power and utility companies, “business as usual” is not a viable option. They must respond with a laser-sharp strategy that builds on their core competencies, equips them to address market pressures effectively, and positions them for long term stability.

Mergers and acquisitions (M&A) have long been strategic options to achieve economies of scale, reduce operating costs, and bolster the balance sheet in a way that attracts capital for infrastructure investment. Given shifting sands in this industry, several large institutions have used M&A to achieve other high-level objectives, including but not limited to:

• Strengthening their resource and infrastructure bases to enhance their geographical reach
• Shifting their services toward environmentally compliant power generation while taking full advantage of embedded know-how in the provisioning of large-scale renewable energy programs
• Balancing their regulated and non-regulated portfolios through pursuit of new, diversified revenue streams
• Leveraging information technology expertise in smart grid applications, customer relationship management, advanced data analytics, and cyber risk management. [Note: The latter has become especially important due to recent, highly publicized breaches among major retailers.]
• Extending service offerings behind the meter – e.g., home-based energy generation (e.g., solar panels, battery storage systems, fuel cells), home automation systems (e.g., smart thermostats, lighting control), home security systems, telecommunications, entertainment services, et al.

Joint ventures may achieve the foregoing objectives outside the bounds of a merger. For example, when Minnesota’s Arrowhead Electric Cooperative (AEC) secured stimulus funds to build a fiber-to-the-home broadband network to underserved citizens, they partnered with neighboring Consolidated Telecommunications Company (CTC) to provide the expertise in engineering, implementation, sales, and marketing. Upon deployment, AEC will attend to billing while CTC provides back-end support.

At the end of the day, M&A and joint ventures provide opportunities to leverage core competencies, increase capacity to respond market conditions, mitigate risk, and heighten shareholder value. To the extent that regulators acknowledge the upside potential for consumers in these organizational moves, all parties could realize a substantial benefit.

This post was originally published on October 30, 2014. It was updated on May 18, 2017 to provide you the most current information.