Energy Law Expected to Modestly Impact M&A: Higher oil prices and existing strategies will be more decisive forces in shaping industry players

Energy industry experts say the new energy bill passed by Congress and signed by President Bush in August will tweak some sectors and institute moderate structural changes in others, but they dont expect any major impacts on industry dealmaking. “We won’t see any dramatic changes in the pace of industry consolidation, but around the edges it will make some deals easier,” says Mark Kubow, a Senior Managing Director at Navigant Consulting. The bill, not an easy read at 1,037 pages, includes $14.5 billion in tax breaks, mainly for producers of oil, natural gas, coal, and nuclear power, and provides tax breaks and other incentives to encourage new nuclear plants, cleaner-burning coal facilities, and production of more oil and natural gas. It also offers incentives to produce energy from wind and other renewable sources and to make homes and office buildings more efficient. Energy bill abolishes PUHCA For the electric utility industry, the bill provides the long-awaited repeal of the 1935 Public Utility Holding Company Act (PUHCA) that ostensibly prohibited electric utilities from merging if their territories were not contiguous. Two other PUHCA clauses prevented utilities from investing in projects outside of their region and prevented non-utility companies from buying more than a minority stake in power companies. Kubow notes that even while it existed, PUHCA didn’t stop utility mergers from happening, especially since deregulation began in the 1990s. Even with the Depression Era law’s demise, he adds, he doesn’t think businesses outside of the electricity industry will start buying up power assets. “They have better areas to focus on,” he says. One reason the repeal of PUHCA isn’t going to kick-start a wave of utility buyouts from outside of the industry, according to Ed Tirello, a Managing Director at Berenson & Co., is that industrial companies won’t want to deal with the state regulation of the utility business. “The state regulatory commissions control the show,” he notes. “A utility owner can’t do whatever it wants, so that is still a strong impediment to new entrants.” Tirello points to the experiences of foreign buyers of U.S. power assets such as Scottish Power PLC and National Grid PLC as a turnoff for other potential foreign entrants. “In Europe, these companies have to meet with regulators once a year, sometimes once every five years. There’s much more contact here,” he says. The energy bill also transferred some merger review responsibilities to the Federal Energy Regulation Commission (FERC), a move that some sources believe may make it easier to get deals cleared. Yet, Kevin Smith, Senior Vice President at Invenergy, says he doesn’t see anything in the bill that would change the trend of utilities emphasizing expansion through construction rather than by buying assets. In other industry segments, the bill offers coal producers and nuclear generators billions of dollars in tax credits to assist them in increasing capacity. Kubow says the bill puts an exclamation point on trends that have supported the construction of new generation facilities in these two industry sectors. There has been a movement to emphasize the development of clean coal plants that the bill, “on the margin, may help a little,” he says. On the nuclear front, the bill supports plans for a new generation of nuclear reactors that are due to come online in 2015 by continuing tax advantages for companies that invest in these plants. Plusses for nuclear power investors Tirello notes that one of the big advantages for firms that want to invest in new nuclear plants is that under new Nuclear Regulatory Commission (NRC) rules, all the litigation is done before the plants are built. “Investors and operators will now know how much a project is going to cost,” he says. In the renewable energy segment, the response to the energy bill’s two-year extension of tax credits for wind energy projects provoked a lukewarm response from Invenergy’s Smith. “The bill really needed to put in a more permanent set of tax incentives,” he says. “One difficulty in trying to plan based on such a short time frame is that it’s hard to factor in market swings when making planning decisions,” he adds, commenting that equipment makers “don’t want to expand production if they can only forecast a short time out.” Thus, there’s a likelihood of equipment shortages and increased costs for wind turbine makers. Among the major oil companies, consolidation is a fact of life, says energy analyst Fadel Gheit of Oppenheimer & Co. He says that if planners believe that current high oil prices are sustainable – i.e., if they believe that fossil fuel prices have graduated to a new plateau – it would accelerate ongoing sector consolidation. In Gheit’s view, the energy bill doesn’t have enough teeth in it to make a major impact on dealmaking among oil producers. (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com