Fitch: Consolidation in US Power and Gas Will Continue

NEW YORK--()--Link to Fitch Ratings' Report: Merger Mania
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871907

The rapid pace of consolidation in the power and gas sector will continue as companies look to offset weak power demand and declining equity returns by acquiring assets and rate base investment opportunities, Fitch Ratings says. The low interest rate environment is also facilitating the activity. The drive to reduce exposure to unregulated businesses will also keep the pace high.

In most cases, these transactions are structured to maximize earnings accretion, with credit quality and ratings a secondary consideration. Therefore, we expect some to have rating impacts based primarily on the financing plan and the respective ratings of the acquirer and the target company. Rising debt in acquisition financing, higher transaction premiums and regulatory concessions are the primary credit concerns.

The use of leverage in these transactions is on the rise and has generally resulted in weakening pro-forma consolidated credit measures for the acquiring entity. The impact is worsened by the inability to recover or earn a return on the acquisition premium or retain merger-related savings. These factors are only partially mitigated by the scale and geographic diversity the target company adds to the combined entity.

Premiums in recent transactions have ranged from a low of 15% in CLECO Corp.'s acquisition by an investor group to a high of 48% in Emera Inc.'s pending acquisition of TECO Energy, Inc. These premiums are unlikely to deter merger activity in the next several years.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Utilities (pub. 05 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Related Research

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

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Contacts

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Robert Hornick
Senor Director
+1 212-908-0523
33 Whitehall Street
New York, NY
or
Rob Rowan
Senior Director
Fitch Wire
+1 212-908-9159
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Robert Hornick
Senor Director
+1 212-908-0523
33 Whitehall Street
New York, NY
or
Rob Rowan
Senior Director
Fitch Wire
+1 212-908-9159
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com