Two Gas Utilities Seen Joining Questar as Takeover Targets

  • Exelon, NextEra may join Dominion in buying gas companies
  • U.S. climate rules seen driving demand for natural gas

The scramble among power companies to snap up natural-gas businesses for their stable returns is far from over, with Dominion Resources Inc. saying Monday that it’ll buy Questar Corp. for $4.4 billion. The only question now: Who’s next?

Atmos Energy Corp. and NiSource Inc. may be next to sell, BMO Capital Markets analyst Michael Worms said by phone Monday. Exelon Corp., the biggest U.S. nuclear generator, or NextEra Energy Inc., the biggest U.S. wind-power developer, may be next to announce a takeover, said Worms, who correctly forecast in September that Dominion and Duke Energy Corp. would buy gas utilities and that Questar would be sold.

Driving the deals are a conviction that natural gas demand will rise as it remains abundant and cheap, replacing coal as the cleaner-burning fossil fuel of choice in power plants. There’s also speculation that flat demand for electricity won’t improve. Dominion expects the almost $900 million premium it’s paying for Questar to be covered by expansions, as states such as Utah and Wyoming convert from coal to gas for power generation, Dominion Chief Executive Officer Thomas Farrell told investors on a Monday call.

“There’s more coming after this one,” said Worms. “Gas utilities, many of them, are in the process of replacing aging pipes. That’s incremental capex. Buyers are diversifying their electric business by diversifying into another regulated business.”

Privilege Premium

And they are paying for the privilege. Southern Co. agreed to a 38 percent premium to the previous closing price for AGL Resources Inc. in August, driving up the value of gas utilities. The S&P 500 Gas Utilities Index surged 28 percent, the most in at least 26 years, the day Southern announced the takeover, and it had outperformed the index of electric utility stocks since 2009.

Spokesmen for Exelon, NextEra and NiSource declined to comment. Atmos’ investor relations office didn’t immediately respond to a telephone request for comment.

NiSource fell 0.2 percent on Tuesday to close at $21.26 in New York. Atmos rose 1.9 percent to $69.90.

Meantime, the market signaled expectations that Questar may fetch a higher bid. The stock closed at $24.98, within 2 cents for a second day of the $25 a share Dominion offered. Traders typically discount from the takeover price when they expect a deal to close as agreed, according to Bloomberg Intelligence analyst Kit Konolige.

The surge in value didn’t prevent Duke, the largest U.S. utility owner, from paying about $4.9 billion in cash, a 40 percent premium to the prior close, for Piedmont Natural Gas Co. in October. Dominion’s price for Questar, about a 23 percent premium to the previous close, shows buyers and sellers can still reach agreement in the sector, Worms said.

Growth Outlooks

“Gas companies have more growth opportunities,” Jay Rhame, who manages the Reaves Utilities ETF in Jersey City, New Jersey, said by phone Monday. “A lot of the gas systems were built out 50 or 60 years ago. They need replacement work and a lot of state commissions have been positive on safety-like spending.”

That’s translated into profit-growth forecasts of 6 percent to 8 percent a year among gas utilities while electric utilities are predicting annual growth of 4 percent to 6 percent, Rhame said. “Small differences, but enough to make the big acquisition work.”

Atmos and NiSource, each with a market value of about $7 billion, are the most likely targets for a buyer wanting a deal large enough to improve its bottom line, Rhame said.

The round of power-on-gas utility takeovers began in May 2013 when Teco Energy Inc., owner of the electric utility in Tampa, Florida, agreed to buy New Mexico Gas Co. for $950 million in cash. Since then, at least five deals with an enterprise value of about $28 billion have been announced, according to data compiled by Bloomberg.

Questar’s pipeline network, which Dominion intends to sell to its publicly traded unit Dominion Midstream LP over two years, was a bigger attraction than its utility, Farrell said.

Although there will be more takeovers, they may not be numerous, Rhame said.

“Valuations are high, and investors punished the stocks of Duke and Southern,” he said. The prime targets, Atmos and NiSource, each operate in more than a half-dozen states. “It’s a lot of work to get seven or eight separate state approvals.”

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