Last year I forecasted “another wave” of essential-service company mergers, driven by low capital costs and a need to gain scale. Both are still catalysts for utility deals, but a major obstacle to M&A has since emerged: Obama administration regulators increasingly mindful of approaching November elections and anxious for low-risk opportunities to stir up anti-corporation/pro-environment sentiment within the Democratic Party base.
The first casualty was AT&T’s (T) proposed buyout of Deutsche Telekom’s (OTCQX:DTEGY), which the former canceled due to concerted opposition from the US Dept of Justice and the Federal Communications Commission.
It may not be the last rejected. Until the past few months, the Federal Energy Regulatory Commission routinely ruled expeditiously on utility mergers. Now it’s taking even longer than notoriously contentious states like New York.
Even the Federal Trade Commission is getting into the act by challenging deals outright, or delaying them by requesting more information.
The upshot is a new hurdle to utility mergers that’s likely to curtail activity until after the election, with the exception of deals small enough to get under the radar.
One potential target, with a fleet of low-cost natural gas power plants that’s benefitting from falling gas prices, is Calpine Corp (CPN).
One good candidate is Provident Energy Ltd (PVX), which has a fast-growing natural gas liquids asset base in Canada.
New Environmental Protection Agency rules for coal-fired power plants’ mercury, acid rain gases and particulate matter have apparently pleased the Democratic Party base.
Meanwhile, the estimated $9.6 billion cost is less than initially proposed and companies have some flexibility on timing.
In contrast, there’s no middle ground for pending Nuclear Regulatory Commission decisions on relicensing Entergy Corp’s (ETR) Indian Point (New York) and Pilgrim (Massachusetts) nuclear plants.
My guess is the AP1000 gets approved in early 2012, while rulings on re-licensing and Keystone XL wait until after the election. That’s reflected in optimistic pricing of SCANA and Southern.