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Energy mergers, yes. Neglected grid? Probably not

Wednesday, 13 Nov 2013 | 1:49 PM ET
Christopher Pollack | E+ | Getty Images

Historically low interest rates and sliding prices for electricity are leading utilities to consolidate at a breakneck pace, but experts don't see mergers causing the companies to cut back on infrastructure investments.

According to data released this week by consulting firm PriceWaterhouseCoopers, there were 12 power and utilities mergers, worth more than $50 million, in the third quarter. Although the total deal value was down from that of the second quarter, it was a 50 percent increase year over year.

This week, NRG Energy bought a unit of Edison International for $2.6 billion. While less than the $4.7 billion corporate merger of Duke Energy and Progress in 2012, the NRG deal underscored the sector's burst of M&A activity.

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With 3,000-plus utilities comprising the web of U.S. electricity generation—the world's largest grid—companies are trying to eke out growth amid profits challenged by declining retail rates for electricity.

Power companies are under pressure to make assets more environmentally sound, and to protec them against extreme weather and fluctuations that can cause unexpected blackouts. Analysts said they aren't likely to lose that focus.

"Utilities are always looking to maintain safety and infrastructure. … That's not something they're looking to jeopardize," Jeffrey Cassella, a utilities analyst at Moody's Investors Service, said in an interview. "In general, they're doing a fine job investing and fortifying the infrastructure.

"Make no mistake, when utilities do a merger, cost reduction is a key objective," he said. "But in terms of support for infrastructure and maintenance, that is not something they would target to reduce costs."

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Not everyone shares the view that utilities are investing sufficiently or wisely in what is widely considered an aging energy grid.

In a 2011 report, the American Society of Civil Engineers noted that from 2001 to 2010, capital investment in power generation, transmission and distribution grew to an average $63 billion a year. Yet the group, which gave the U.S. a "D" in energy investment, noted a wide gap between actual spending and projected needs, which could swell to $107 billion by 2020.

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Some experts say that the upswing in mergers will help make utilities more nimble and cost-conscious, which should help them pump more juice into the arteries of U.S. power infrastructure. Meanwhile, the federal government is devoting more taxpayer dollars to states and localities to build a smarter grid.

The Edison Electric Institute (EEI), an association of U.S. shareholder-owned power companies, said in its 2012 report that the number of publicly traded utilities has fallen by nearly half since 1995, primarily because of mergers and acquisitions.

Meanwhile, the EEI data showed, the same companies have invested heavily in building new plants and in expanding existing assets: New capacity grew by about 35 percent in 2012 from 2011.

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"Although we'll never be able to fully inoculate ourselves against Mother Nature, electric utilities are continuing to work with regulators, policymakers and consumer advocates on the most effective ways to make their systems more relevant," the EEI said in a recent report.

Accordingly, sluggish demand and a lack of pricing power are leading companies to seek savings where they can—but not in crucial areas that could jeopardize grid security.

"When we talk about finding synergies on the cost side, it's more from operating costs that enable necessary investment," Jeremy Fago, who leads PwC's power and utilities deal practice, said in an interview. "The industry is a whole is focused on finding efficiencies and deploying as much environmentally compliant generation as they can."

—By CNBC's Javier David

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