The recent sale of Enstar Natural Gas continued a series of acquisitions of gas utilities by private operators owned by financial entities. Thus, this series of costly buybacks is strengthening the valuations and share prices of local gas distribution companies. Therefore, this raises questions about the sustainability of this trend. However, private buyers are willing to pay a premium at this time. As a result, acquisitions give publicly traded gas companies the opportunity to recycle capital into strategic priorities.
Takeover of public gas companies by private buyers
On May 26, Canadian gas distributor TriSummit Utilities announced an $800 million deal with AltaGas. The goal is to buy Alaska gas distributor Enstar and other transmission and storage assets. Similar to recent gas transactions, the acquisition price represents 2.3 times the rate base of the assets in 2021 and 29 times their allowed earnings.
Meanwhile, J.P. Morgan Chase analyst Jeremy Tonet says in a research note that the deal “adds yet another attractive marker to local distributor valuations.”
Andrew Kuske, an analyst at Credit Suisse, believes that it also reinforces several sectoral themes. In particular, “the attraction of private capital to risk-adjusted, highly cash generative, long duration assets.”
Gas utilities on the rise
According to investment bankers, infrastructure funds and pension funds in particular have recently taken a more constructive attitude toward gas utilities. In addition, they have significant capital to pursue long-term infrastructure assets.
For example, TriSummit Utilities is owned by two Canadian pension funds, the Alberta Teachers’ Retirement Fund Board and the Public Sector Pension Investment Board. TriSummit was created in 2020 when the pension funds acquired AltaGas Canada. It is a former subsidiary of AltaGas that went public in an IPO in 2018.
Similarly, Dominion Energy sold its West Virginia gas utility, Hope Gas, to an Ullico fund. The latter is a provider of insurance and investment products.
Thus, valuations of these transactions have been a challenge for publicly traded gas companies bidding for assets that have come to market. Nevertheless, the premiums are a boon for sellers.
Gas utility sales to provide capital
The 2021 CenterPoint transaction provided the necessary capital for the company’s new management team. This is in order to invest more in the electricity sector. Similarly, NiSource is considering the sale of LDC in order to refocus its business portfolio on its electric segment.
For AltaGas, divesting from Alaska facilitates the company’s long-standing goal. It wants to reduce its debt after its 2018 acquisition of WGL Holdings. The latter is a portfolio of gas utilities and energy assets that included Enstar. In addition, the 2018 AltaGas Canada IPO was part of the financing plan for the WGL purchase.
Nathan Joel Heywood, an analyst at ATB Capital Markets, notes:
“While the utility-based asset divestiture was a modest surprise, AltaGas’ core utility business remains focused on the high-growth regions of the eastern United States – Maryland, Virginia, Michigan and Washington DC. Over time, we believe the improved balance sheet will help fund long-term growth opportunities in the remaining utilities business and the Western Canada midstream platform.”