- Despite enthusiasm for the electrification of heating and industrial processes, gas local distribution companies (LDCs) are not about to go extinct, a panel of investment bankers said Wednesday at S&P Global’s Power and Gas M&A Symposium. But they also said there could be a shift in how the sector is owned and capitalized.
- Gas utilities as a group lost 17.3% of their share value in 2020, according to S&P, and the panel acknowledged the fuel is not viewed favorably right now. However, “the death of the LDC has been way overstated,” said Jeffrey Holzschuh, chairman of Morgan Stanley’s global power and utility group.
- Part of the lower gas valuation is related to an increasing focus on environmental, social and corporate governance (ESG) issues, including decarbonization, the panel said. Banks are increasingly considering ESG issues before financing energy company deals, making carbon reduction strategies one key to accessing capital at affordable rates.
Electric companies ought to be evaluating any positions they hold in gas LDCs “because they trade a little differently now,” said George Bilicic, vice chairman of investment banking and global head of power, energy, and infrastructure, at Lazard.
That could lead to an increase in corporate transactions, he said, particularly as Lazard expects concerns around the gas LDC business to continue.
The electric utility sector has done a “great job of working with Wall Street banks on ESG matters,” Joseph Sauvage, vice chairman and global head of the power group at Citi, said during the virtual conversation, which focused on shareholder activism.
Sauvage pointed to an ESG reporting template developed by the American Gas Association and the Edison Electric Institute, with input from member companies and banks. The panel discussed broader ESG pressures on electric and gas utilities from stakeholders such as banks, in response to pressure from shareholders and regulators.
Sauvage said he would break the stakeholder side of ESG concerns into two components.
“The first is simply credit implications, in terms of changing business models, the acceleration of coal retirements, and questions about the longevity of the gas LDC business in certain spots,” said Sauvage “The banks’ regulators are focused on the credit quality of their portfolios.”
The second part, and more interesting for the sector as a whole, said Sauvage, is “how the stakeholders of those big Wall Street banks are approaching ESG,” including carbon intensity and commitment to the Paris climate accord.
Every bank with a large finance and capital-raising business has adopted, or is in the process of adopting, policies on oil and gas exploration, coal and carbon, said Sauvage. Many electric utilities have committed to 2050 carbon neutrality, and banks face similar pressure.
“Banks are going to be under tremendous pressure to hit net-zero carbon neutrality in 2050,” said Sauvage. “For U.S. companies, the question will be how their own targets … correspond to the pressure that the banks are seeing from their regulators, also shareholders and stakeholders.”
The influence of stakeholders and shareholders in the utility business is a net positive for the sector, said George Bilicic, vice chairman of investment banking and global head of power, energy, and infrastructure, at Lazard.
Utilities are probably “underappreciated in terms of their skill” in responding to stakeholder concerns, said Bilicic. “It’s an emerging area, but its an area of strength for the utility industry given the ratepayer interfacing nature of the sector and the need to work in communities.”
The impact of banks and other groups on utility policy is a relatively new phenomena, Holzschuh observed. When conversations on carbon began 20 years ago, utilities were most impacted by environmental…