CenterPoint Energy Inc.'s plan to sell its Arkansas and Oklahoma natural gas utilities into a sleepy M&A market has raised questions about who will emerge to acquire the assets.
CenterPoint executives expected to announce a buyer by the second quarter of 2021, expressing confidence in their ability to offload assets with more than 520,000 customers, 17,000 miles of gas main and $700 million in combined rate base. The sale is a critical part of financing CenterPoint's turnaround strategy, which revolves around investing heavily in the company's electric power business.
For the wider gas utility sector, it is a test of M&A appetite. A dry spell for gas utility dealmaking has helped to erode the sector's once lofty stock valuations. Meanwhile, growing scrutiny of gas consumption's role in climate change has raised concerns about the value of local distribution companies, or LDCs, though some analysts have said the fears are overdone.
"Success on the sales would be a nice catalyst for gas LDCs overall to demonstrate the value proposition that has been mired this year by ESG concerns," market analysis firm Wolfe Research LLC said in a Dec. 7 note.
Potential in-state suitors
CenterPoint aimed to sell the utilities at roughly 1.5 times their combined rate base. Wolfe Research projected the deal would net about $650 million in proceeds, after paying down debt and taxes on the gain. Guggenheim Partners analyst Shahriar Pourreza said the sale could satisfy $590 million to $710 million of CenterPoint's equity needs.
"While LDC multiples have come down significantly in 2020, [CenterPoint] assets could still be positioned well as they could be strategically advantageous for state incumbent players and are not plagued by local gas ban ordinances," Pourreza wrote in a Nov. 5 research note.
The largest incumbent in Oklahoma is One Gas Inc., which holds an 88% market share within the state and distributes gas to about 877,000 customers, according to the company. Its Oklahoma Natural Gas Co. subsidiary accounts for 42% of One Gas' $3.91 billion in estimated 2020 average rate base, or $1.65 billion. The company has its roots in M&A — former parent company ONEOK Inc. entered Kansas and Texas through acquisitions in 1997 and 2003, respectively — though it has not been very active in dealmaking in recent years. A spokesperson said the company does not comment on market speculation.
Another potential strategic buyer is multiutility Black Hills Corp., which acquired an Arkansas gas territory in 2016 as part of a $1.89 billion acquisition. During November's Edison Electric Institute, or EEI, 2020 Financial Conference, Black Hills signaled it would consider gas utility assets that hit the market, according to Mizuho Securities. Mizuho noted that the company was unlikely to pay a multiple above 1.8 to 2 times the value of the acquisition's rate base.
While explaining the rationale for selling the Arkansas and Oklahoma assets during a Dec. 7 investor day, CenterPoint Executive Vice President and CFO Jason Wells suggested that the territories hold value as a pair. In making the decision, the company considered assets within its portfolio that have ongoing operational synergies, he said.
Regional utilities may be in play
Along with in-state utility acquirers, CenterPoint sees pension and infrastructure funds as potential buyers, Pourreza said in a Dec. 7 research note. In a June report on CenterPoint's strategic review, he said buyers could also be gas utilities that aim for regional diversification.
At the EEI conference, northern Midwest and Rockies LDC operator MDU Resources Group Inc. said it would be interested in gas assets in strategic locations, while ALLETE Inc. said it was willing to grow its small gas distribution business in Wisconsin, according to Mizuho. Overall, however, Mizuho noted a "glaring" lack of material interest in gas utility acquisitions among electric utilities.
CenterPoint's Nov. 5 announcement that it would sell the gas utilities also prompted analysts to question regional gas utility companies about their interest during third-quarter earnings calls.
One of these companies was Atmos Energy Corp., an eight-state, pure-play gas utility with a $12.3 billion market capitalization that distributes gas in several nearby states. On Nov. 12, Atmos President and CEO Kevin Akers said his company is focused on driving internal growth by deploying $11 billion to $12 billion over 2021-2025, chiefly for safety and reliability investments. He said he had a hard time seeing the company achieving equivalent return on investment through an acquisition.
Spire Inc., another pure-play gas utility that operates in the region, recently shifted from a period of acquisition-driven expansion to a stage in which it will focus on organic growth, infrastructure investment and innovation. While executives said recent M&A had been successful, they too indicated they wanted to focus on a five-year capex plan, growing their existing customer base and investing in new technology.
"Other opportunities may emerge, but we're very confident in the plan that we have for the next five years," Spire Executive Vice President and COO Steve Lindsey said during a Nov. 18 conference call.