In a deal announced in early June, JPMorgan’s Infrastructure Investments Fund (IIF) announced that it had entered into a definitive agreement to buy El Paso Electric, an electric utility serving some 430,000 customers in west Texas and New Mexico in an all-cash deal at an estimated enterprise value of over $4 billion.
The deal is not unheard of — think Berkshire Hathaway buying Mid-American, NV Energy and Pacificorp and rolling them into Berkshire Hathaway Energy — and also is far form the first foray into the energy business by Morgan’s Fund.
The IIF is an $11.3 billion private investment vehicle housed inside JPMorgan, with headquarters in New York and London. In a press release announcing the El Paso Electric deal, the IIF says it is “focused on companies that provide essential services, such as energy, water and transportation, either under a regulatory construct or long-term contracts.”
Electric utilities fit perfectly within that definition, and the IIF already holds some 19 companies, 11 of which are energy, utility and electric generation companies.
The fund owns Summit Utilities, with gas utility operations in Maine, Missouri and Colorado as well as AOG, a gas utility formerly known as Arkansas Oklahoma Gas. It provides water utility services through SouthWest Water Company to six states spanning from South Carolina through Alabama, Texas, Oklahoma, California and Oregon. It’s global solar IPP (Independent Power Producer) Sonnedix has over 200 solar energy projects underway in 8 countries worldwide, and New York City-based NovatusEnergy has some 1.6 GW of renewable energy projects — primarily wind and solar — underway around the U.S.
While IIF executives won’t comment on why they chose El Paso Electric, the utility’s President and CEO Mary Kipp released a statement announcing the deal that calls IIF “a leading investor in renewable energy,” and citing IIF’s promise to fulfill El Paso Electric’s stated commitment to invest more in renewable energy resources and local generation.
“This is a tremendous opportunity to scale and prepare the Company [EPE] for a clean energy future that is local and sustainable,” Kipp said. Kipp also said the deal would help the company take aim at carbon-free resources goals being propagated by several states, including EPE’s service territory state of New Mexico. Under the agreement, El Paso Electric would continue to be run independently, with Kipp staying on as President and CEO.
Analysts were generally bullish on the news of the buyout when it broke, but weren’t ready to predict more of the same for the near-term future.
“It was a healthy premium to pay for EPE,” said Jay Rhame, a portfolio manager and research analyst at Reaves Asset Management. “But I think it shows that there is a lot of attractiveness in assets like a utility that can grow earnings five or six percent per year regardless of what happens in an economy.”
Rhame also echoed some of what Kipp said, citing the attractiveness of renewable energy as a draw.
“In a way, renewable energy is becoming pretty cost effective,” he said. “You are seeing plans to shut down coal and bring in wind and solar and batteries and save customers money. That means the regulator wants them to spend more money, the utility wants to spend more money and kind of generally looking forward, you can have a lot of confidence in growth in the industry over the next five years. Twenty years ago, it was building big power plants and asking for big rate increases, but now everyone wants to spend money on improving the utility.”
What might cause private equity funds to pause on hitting the utility “buy” button, Rhame said, is the relatively complicated nature of the deals.
“Seeing a utility being purchased is kind of eye opening because it is such a hard regulatory process to get through,” he added. “I would think that really on the PE side, it would be limited to the companies who already have exposure on the utility side, or those that can do these kinds of deals with partners who are already in the energy or utility space.”
The deal is expected to close in the first half of 2020, and must pass numerous regulatory hurdles including approval by FERC, the NRC and FCC, the U.S. Nuclear Regulatory Commission, public utility commissions in Texas and New Mexico, Hart-Scott-Rodino clearance, El Paso Electric shareholders and the city of El Paso. If it can’t be completed, JPMorgan could face a termination fee of up to $170 million and El Paso Electric could be on the hook for $85 million.
