There has been something unusual happening in the power industry over the last year. There has been a large influx of money from private investors, coupled with large utility mergers. This is no longer the same industry your grandparents used to invest in, or possibly supported by buying you a utility bond certificate for an undoubtedly disappointing birthday gift.
We have seen Warren Buffett’s Iowa-based Berkshire Hathaway Energy (BHE), formerly MidAmerican Energy Holdings, on a utility buying binge over the past few years, acquiring PacifiCorp (West Coast), NV Energy (Nevada) and AltaLink (Canada). The Oracle of Omaha has been very bullish with his utility acquisitions and hasn’t shown any sign of slowing down. He confirmed that recently, announcing his appetite for more utility investments has not waned.
In other parts of the country, Exelon has also been in the game, most recently acquiring PEPCO and Constellation Energy. Wisconsin Energy has recently announced the proposed buyout of Integris Energy Group, which would create a four-state utility in the upper Midwest.
Utility mergers and purchases are not accomplished on a whim. The deals still need to pass through regulatory approval, which can complicate the process, often leaving the acquired utility in a state of flux until final approval is given. Operating a utility in today’s world is complex, there are governmental agencies involved who are approving rate structures along with federal agencies mandating new operation and reporting structures. On top of all of that utilities now have customers that are deciding to produce their own power essentially removing a consistent revenue stream.
In short, regulated utilities are required to spend more capital to “keep the lights on” while they are losing revenue from their existing customers. It only makes sense to diversity portfolios and merge, or acquire another like business that has strengths where you are weak. I believe it was my seventh grade economics class teacher who said as an investor, you shouldn’t put all your eggs in one basket.