The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, May 19 (Reuters Breakingviews) - Electricity providers are desperate for money to satisfy growing demand and private equity firms have stockpiles of it they’re struggling to invest. This simple logic explains Blackstone Infrastructure’s BX.N plan to buy U.S. utility TXNM Energy TXNM.N for $11.5 billion, including debt. It also speaks to a confluence of risks embedded in the deal.

TXNM, whose regulated utilities supply 800,000 homes and businesses, landed a deep-pocketed backer to help make the transition to clean energy in New Mexico and expand in power-thirsty Texas. Blackstone, meanwhile, is adding a promising target to a division with an unlimited investing time horizon that manages $60 billion.

The investment synergy works as follows. TXNM is on track for $1.3 billion of capital expenditure this year, according to estimates compiled by LSEG, almost twice as much as the company’s expected cash flow from operations. Spending also probably will grow, as it builds power lines and renewables-sourced generation.

It’s just the sort of profile Blackstone Infrastructure seeks: long-term returns with a relatively higher amount of predictability. Local authorities allow TXNM to set prices at levels that guarantee a return on equity, typically around 10%. Additional projects require more capital and thus should lead to more regulated returns.

Based on current conditions, however, the transaction tempts an overload. Blackstone said it is funding the purchase entirely with equity. The infrastructure vehicle will provide a supermajority of the $5.7 billion needed, or nearly 10% of its assets. Moreover, TXNM plans to issue another $800 million of equity, with Blackstone absorbing half of it at a discount to the headline price, before the deal’s expected completion later next year.

Adding to the concentration risk are climate-related concerns. Berkshire Hathaway provides a cautionary tale. Boss Warren Buffett once touted the long-term earnings growth in his conglomerate’s utility business, but in 2023, he conceded that he had made a costly mistake by underestimating the painful regulatory responses to ruinous wildfires.

The increasing prevalence of burning brushlands also means TXNM will be spending more to clear shrubs, fortify equipment and buy insurance. Blackstone, however, may be less vulnerable to related litigation than Berkshire. Texas and New Mexico hold utilities liable only if they can point to negligence, a more favorable standard than in, say, California. Even so, the more unpredictable the dangers become for utilities, the less certain the earnings.

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CONTEXT NEWS

U.S. electricity provider TXNM Energy said on May 19 that it had agreed to be acquired by Blackstone Infrastructure for $11.5 billion, including net debt and preferred stock.

Under terms of the deal, Blackstone Infrastructure will pay $61.25 per share in cash, a 16% premium to where TXNM shares closed on May 16. The buyer said it would fund the entire purchase price with equity and does not expect to add any further debt to TXNM, whose regulated utilities supply power to more than 800,000 homes and businesses in Texas and New Mexico.

Blackstone Infrastructure also is buying 8 million newly issued TXNM common shares at $50 apiece through a private placement before the deal is completed, which is expected to occur in the second half of 2026. In addition, TXNM will issue another $400 million of equity before the transaction closes.

Wells Fargo and Citi are advising TXNM, while RBC and JPMorgan are advising Blackstone Infrastructure.

(Editing by Jeffrey Goldfarb; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))