OREANDA-NEWS. The rapid pace of consolidation in the power and gas sector will continue as companies look to offset weak power demand and declining equity returns by acquiring assets and rate base investment opportunities, Fitch Ratings says. The low interest rate environment is also facilitating the activity. The drive to reduce exposure to unregulated businesses will also keep the pace high.

In most cases, these transactions are structured to maximize earnings accretion, with credit quality and ratings a secondary consideration. Therefore, we expect some to have rating impacts based primarily on the financing plan and the respective ratings of the acquirer and the target company. Rising debt in acquisition financing, higher transaction premiums and regulatory concessions are the primary credit concerns.

The use of leverage in these transactions is on the rise and has generally resulted in weakening pro-forma consolidated credit measures for the acquiring entity. The impact is worsened by the inability to recover or earn a return on the acquisition premium or retain merger-related savings. These factors are only partially mitigated by the scale and geographic diversity the target company adds to the combined entity.

Premiums in recent transactions have ranged from a low of 15% in CLECO Corp.'s acquisition by an investor group to a high of 48% in Emera Inc.'s pending acquisition of TECO Energy, Inc. These premiums are unlikely to deter merger activity in the next several years.