The latest earnings reporting season — punctuated by dealmaking — provided plenty of material to those watching for mergers and acquisitions in the natural gas utility industry.

Analysts have been looking for hints of M&A ever since CenterPoint Energy Inc. sold its Arkansas and Oklahoma gas utilities at a lofty valuation in April 2021. Dominion Energy Inc.'s deal to sell its West Virginia local distribution company, or LDC, and an investment fund's $8.1 billion buyout of South Jersey Industries Inc., or SJI, spurred a barrage of inquiries during quarterly conference calls.

The SJI deal valuation could spark interest in the acquisition of pure-play gas distributors and entice multi-utilities with large electric power investment plans to sell LDCs, Guggenheim Securities LLC said in a Feb. 24 research note.

In another development attracting analyst interest in M&A, new NiSource Inc. President and CEO Lloyd Yates announced the company would conduct a strategic review, including an assessment of its asset portfolio. Yates said NiSource would consider recent valuations in LDC sales and acknowledged that multi-utilities levered toward electric operations have been commanding higher public market valuations.

Some multi-utilities leave door open to transact

Following its LDC sales, CenterPoint has said it will remain open to divesting more gas utilities from its six-state footprint. In September 2021, CenterPoint President and CEO David Lesar said the businesses provided liquidity to execute the company's 10-year capital plan, which includes $40 billion of investment opportunity.

During a Feb. 22 conference call, Lesar identified one of those opportunities: A partnership with Houston to make the city's energy system more resilient through grid hardening and modernization, electric vehicle infrastructure development, and other investments. Lesar said he would not divulge details of the company's funding plan yet, but he noted that CenterPoint has LDCs of various sizes, which it could sell to finance projects under Houston's Resilient Now initiative.

"It's just a great option to have as we look at our ability to spend more capital here in what is essentially one of the crown jewels of CenterPoint, which is [CenterPoint Energy Houston Electric LLC]," Lesar said.

Southern Co. Chairman, President and CEO Thomas Fanning said the company is always seeking to "put assets in the hands of the best owner." Since expanding into gas distribution through its AGL Resources acquisition, Southern Co. has sold off a Florida LDC and LDCs in New Jersey and Maryland, while retaining its Illinois, Georgia, Tennessee and Virginia assets.

Fanning said the Southern Co. Gas business has far exceeded expectations, contributing roughly 10% of annual EPS growth. "So in order to think about [capital allocation and] ... selling something like our asset in Illinois, relative to reinvesting in the core, we always have to consider what is best for our long-term growth rate, what is best on a risk-adjusted basis," he said.

With no equity needs in Southern's forecast, an LDC sale would be "purely a value play as opposed to a need," Fanning said during a Feb. 17 call.

Black Hills Corp. CFO Richard Kinzley on Feb. 10 said the company is always reviewing its asset portfolio, and while management had nothing to report at the moment, "there certainly could be options to replace our equity needs." The company distributes gas to about 1.1 million customers in Arkansas, Colorado, Iowa, Kansas, Nebraska and Wyoming.

Asked where the company see the largest difference in valuations, Black Hills President and CEO Linden Evans replied, "I think the obvious one that comes to mind is what we're seeing in the market with respect to LDCs and the private equity — the premiums willing to be paid there."

Peers put damper on speculation

Among the companies that appeared to temper expectations for LDC sales was Dominion. Chairman, President and CEO Robert Blue said the Hope Gas Inc. transaction was about scale, noting that the utility was a quarter of the size of its next largest LDC. The sale created an opportunity for capital allocation by divesting a "relatively a small stand-alone operation" outside of Dominion's five "premier states," he said.

"As it pertains to our LDC businesses, they are growing there in what we describe as premium states, very pro-business states ... with customers who want natural gas for cooking and heating their homes," Blue said during a Feb. 11 call.

Fortis Inc. President and CEO David Hutchens said divesting small utilities to boost liquidity is not a priority as the company tees up large-scale projects. "Someone would have to see some weird outsized value," he said Feb 11. "Because to create value in one of our subsidiaries or one of our pieces of our portfolio above and beyond what we can, I think that's ... a high hurdle."

Asked Feb. 10 about breaking up MDU Resources Group Inc.'s portfolio, which spans gas and electric utilities, gas transportation and storage and construction materials and services, MDU Resources President and CEO David Goodin said executives feel like they have the right business mix. On March 1, diversified peer Southwest Gas Holdings Inc. announced that it would split its regulated natural gas business from its energy infrastructure construction and services unit.

Pure-play LDCs put customer growth, territory development ahead of M&A

One Gas Inc. can best drive shareholder value by executing its five-year plan to invest $3.5 billion in system maintenance and growth across its three-state footprint, President and CEO Sid McAnnally said. Metropolitan areas in the company's Texas and Oklahoma territories, such as Austin and Tulsa, have driven customer expansion, while its Kansas LDC has generated more tepid growth.

"We plan to keep our heads down and execute with a continued focus on the core values that we've had since the company was founded, and really taking advantage of these opportunities that we think are unique to our service territory," McAnnally said during a Feb. 24 conference call.

Atmos Energy Corp. executives are keeping their ears and eyes open to the M&A market, President and CEO Kevin Akers said on a Feb. 9 conference call. The company has the "best properties out there," backed by communities that support natural gas and laws that prohibit building gas bans in the majority of its territories, he added.

"[W]e don't need an acquisition to meet our 6% to 8% earnings per share growth" target, Akers said. "So at this point, we remain focused on executing our system modernization strategy as we continue our journey to be the safest provider of natural gas services."

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