With an increasing number of U.S. investor-owned utilities launching business reviews, engaging in asset sales and selling minority interests in regulated operating companies, views differ on whether short-term gains from such deals unlock long-term value.
Days before management teams and Wall Street analysts gathered at the Edison Electric Institute Financial Conference in Hollywood, Fla., NiSource Inc. disclosed plans Nov. 7 to pursue a minority stake sale of electric and gas subsidiary Northern Indiana Public Service Co., or NIPSCO, based on the results of a business review. Company executives expect the sale of up to a 19.9% ownership interest in NIPSCO to minimize future external capital market needs and eliminate all equity needs through at least 2025 while strengthening the company's balance sheet.
Richmond, Va.-headquartered Dominion Energy Inc. also launched a business review with the goal of boosting stock performance and shareholder value.
"We share in [fixed income] investor frustration at the lack of equity issuance commitments but to the extent it is filled with continued asset sales, we are indifferent to the source of that equity," CreditSights analyst Andrew DeVries wrote in a Nov. 17 report recapping the EEI Financial Conference.
DeVries noted that FirstEnergy Corp. management indicated to investors they could pursue an additional stake sale in FirstEnergy Transmission LLC or one of its distribution utilities. FirstEnergy in May closed the sale of a 19.9% interest in FirstEnergy Transmission to Brookfield Super-Core Infrastructure Partners LP for $2.38 billion at a 40x price-to-earnings multiple, or 3x rate base.
While Fitch Ratings said it prefers utilities issue equity over selling slices of their business to address their balance sheet, analysts noted recent valuations have been advantageous for utility sales and management teams are "committing to these being credit-accretive."
Complexity vs. risk
Southern Co. Chairman, President and CEO Thomas Fanning said the company's decisions to sell businesses, such as Florida panhandle electric utility Gulf Power Co., were driven by value and "not driven by a need for equity, per se."
"We'll always look at every idea," Fanning told S&P Global Commodity Insights on the sidelines of the conference. "The other thing that I would keep in mind is that complexity breeds risk, and risk destroys value. ... I don't like complexity on the balance sheet. I don't like yieldcos. I don't like MLPs. I don't like sales of minority interest. That creates complexity."
Guggenheim Securities LLC analyst Shahriar Pourreza wrote in a note to investors that Duke Energy Corp.'s management team signaled it could sell additional minority stakes in the company's Midwestern utilities "in place of issuing block equity."
Early in 2021, Duke announced the sale of a nearly 20% interest in utility subsidiary Duke Energy Indiana LLC in a move that allowed the company to avoid raising $1 billion in common equity. The proceeds from the two-phase transaction are expected to help fund Duke's $63 billion to $66 billion five-year capital plan and satisfy all capital raising needs through 2025.
The company told Commodity Insights that similar deals "could be an option" in the future, but there are no specific plans for such a transaction at this time.
"This summer, we launched a process to look at our commercial [renewables] business and perform a strategic review. We decided after doing that market study, we're going to sell that business," Duke Executive Vice President and CFO Brian Savoy said in an interview at the Edison Electric Institute Financial Conference. "It wasn't to raise equity at the time. It was really strategic positioning as we looked at capital across our company, but cash is fungible, and we're going to exit that business in 2023."
Savoy added that $1 billion in proceeds from the minority stake sale of Duke Energy Indiana to Singapore sovereign wealth fund GIC Pvt. Ltd. will flow in toward the end of 2022 or early 2023.
'Not applicable to us'
Executives for Chicago-headquartered Exelon Corp. noted the company did a lot of work to address its noncore operations by separating its power generation business into Constellation Energy Corp.
In addition, the company has already satisfied more than half of its $1 billion in equity needs through 2025 and has about $425 million remaining.
The sale of a minority stake in an operating company "is not applicable to us for a couple reasons," Exelon Executive Vice President and CFO Jeanne Jones said in an interview. "One, we don't have materially sizable equity needs. Two, we don't have any noncore businesses that would make sense to sell off. And I would say, three, that is sort of like a short-term solution that creates long-term problems."
Similarly, American Electric Power Co. Inc., or AEP, has no plans to sell a slice of its prized AEP Transmission Holding Co. business.
"Here is the spin on AEP, as it relates to transmission in particular: We're the leader," AEP President and CFO Julie Sloat said in a Nov. 17 interview. "What is also nice about that transmission play is it tends to be a little lower risk. We have great visibility in terms of recovery, not to mention there is a huge need for it that just got even greater as a result of the energy transition."
The company is separately selling its Kentucky Power Co. subsidiary and also its competitive contracted renewables portfolio. AEP has also initiated a strategic review of its retail electricity and natural gas business.
"What we have made a concerted effort to do is continue to stress-test and look at every piece of our business to make sure that [the business] really fits," Sloat said. "So, the whole picture hangs together, but we don't feel the need to sell a minority interest when we've got these other things going on."
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