Despite taking proactive steps to meet conditions placed on previous mergers and a relatively smooth path to approval by the Federal Energy Regulatory Commission (FERC), controversy is beginning to arise as state commissions begin their reviews of the proposed acquisition of Washington Gas Light parent WGL Holdings by Canadian energy company AltaGas Ltd.
The transaction, announced in January, is one of a long line of recent transactions in which a Canadian energy concern seeks to acquire U.S. utility assets, including a past transaction under which Alta acquired SEMCO Energy, which has regulated utility operations in Alaska and Michigan. The deal has been described as a "merger of equals" and a "compelling match" by AltaGas executives. But based on testimony filed in August, stakeholders in Maryland and Virginia are not convinced.
Under the proposal, AltaGas would acquire WGL for US$88.25 in an all-cash transaction valued at $6.4 billion. The offer price represents a 28% premium over WGL's stock price prior to rumors of a possible deal beginning to surface late last year.
The transaction is subject to review by the FERC and state regulators in the District of Columbia, Maryland and Virginia, as well as the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and review by the Committee on Foreign Affairs in the U.S.
Federal approvals were received in July with little fanfare. However, as has been the case with recent transactions, such as the 2016 acquisition of Pepco Holdings by Exelon Corp., state regulators are expected to be the sticking.
Aware of the difficulties faced by prior deals that came before the Maryland and District of Columbia regulators, AltaGas and WGL purportedly offered a series of robust commitments designed to alleviate opposition from stakeholders.
So far it seems to be to little avail, as stakeholders in Virginia suggested that the state was short changed when the merger benefits were handed out. While the Virginia commission staff report was relatively tame by comparison, it remains to be seen how the remainder of the proceeding shapes up once other state reviews progress.
The stakeholders in Maryland have taken a much more virulent stance, with the commission staff suggesting that the merger be rejected and the Office of People's Counsel suggesting that a portion of the acquisition premium be shared with ratepayers. In its testimony, the staff asserts that the term "merger of equals" as applied to this transaction is a "misnomer and is not reflected in organization or governance," of the combined entity and "the transaction is not based on expected synergies," as "it is clear that the modest savings that are represented are ill supported and speculative at best."
Acknowledging that the commission could approve the transaction over its objections, the Maryland staff recommended various enhanced commitments, including higher ratepayer credits than offered by the companies, tighter ring-fencing measures and dividend restrictions.
While not going so far as to recommend rejection of the transaction, the people's counsel proposes a condition stating that "After the Commission determines, based on the record in this case, how much of the acquisition premium should be allocated to ratepayers, AltaGas shall provide that amount in a manner consistent with the public interest." The people's counsel calculates the acquisition premium at 39%, or $1.27 billion. Like the staff, the people's counsel recommends increasing the ratepayer credits and tighter corporate governance commitments. The people's counsel also seeks a "most-favored-nations clause" that would require the companies to up the ante for Maryland ratepayers should more favorable commitments/conditions occur in another jurisdiction reviewing this transaction.
Testimony is not due to be filed in the District of Columbia until late-September, and in the aforementioned Exelon/Pepco merger that jurisdiction proved the most difficult. Chances are that will be the case this time around as well.
The themes running through this merger have become the norm in terms of what merger candidates face from state regulators. As these deals have become more complex, scrutiny by regulators has intensified, and the related proceedings have become somewhat more contentious and protracted. State regulators have become more aware than they historically were of the magnitude of acquisition premiums being paid and more savvy about garnering concessions for their constituencies prior to granting approval.
This is not the first time the notion that ratepayers are in some way entitled to a portion of the acquisition premium has arisen in a merger proceeding; the Kansas commission state made a similar suggestion on that commission's review of the proposed merger of Great Plains Energy and Westar.
While this notion is incongruous with established policy/practice whereby goodwill is excluded from rate base, with the acquired assets valued at original cost, minus accumulated depreciation, it may be a harbinger of things to come.
Already a client? Read our RRA Topical Special Report, AltaGas Acquisition of WGL Holdings, for a detailed overview of this proposed transaction.