There was a significant uptick in North American power and utility deals this year, spurred by new investment vehicles and interest in merchant generation, and analysts at PwC US say they expect that trend to continue next year.
Last year there were $30 billion in deals larger than $50 million. In 2014, just through the third quarter, the value of those same-sized deals has already reached $50 billion.
"Quarter to quarter there's a bit of volatility," said Jeremy Fago, PwC's U.S. power utilities deals leader. "We've seen a noticable pickup in volume, as well as value … and I suspect that's going to be sustained going into 2015."
In the third quarter alone, there were 12 power and utilities transactions with announced deal values greater than $50 million, accounting for $11.1 billion in the third quarter of 2014. That's about a 141% growth in deal value, PwC notes in its research, compared to 12 deals worth $4.6 billion in the third quarter of 2013. Asset transactions accounted for nine deals totaling $9 billion, or 75% of total deal volume and 81% of total deal value in the third quarter of 2014.
Alternative power deals comprised 26% of total deal value compared to 12% during the same period a year ago. Strategic investors accounted for 76% of total deal value during the third quarter of 2014, compared to 72% during the same time period in 2013.
But as to that volatility Fago mentioned — deal volume and value may be up year-over-year, but compared to the monster Q2 the most recent quarter looks modest. In late April Exelon Corp. announced it would acquire Pepco Holdings in a deal PwC values at more than $12 billion. Less than two months later, Wisconsin Energy announced it buy would Integrys Energy Group for about $9 billion. Those two deals alone made up more than half of the second quarter announcements, which totaled almost $35 billion.
Federal regulators and the state of Virginia recently authorized the Exelon-Pepco deal, though the companies must still convince state and District of Columbia regulators, and appears to be facing tighter scrutiny in Maryland. The deal would combine Exelon’s three electric and gas utilities – BGE, ComEd and PECO – and Pepco's three – Atlantic City Electric, Delmarva Power and Pepco. Local opposition to the merger is just beginning to surface in the nation's capital.
The merger of Wisconsin Energy and Integrys faced opposition from shareholders who say the deal did not provide sufficient value and that Integrys should have considered other bids. But there have been signs an agreement is nearing and the deal may move forward, and last week Wisconsin regulators signaled they would not stand in the way. The deal would create WEC Energy Group, serving more than 4.3 million total gas and electric customers across Wisconsin, Illinois, Michigan and Minnesota.
By comparison, the largest deals announced in the third quarter were Dynegy's bids to acquire EquiPower Resources for $3.5 billion and a $2.8 billion acquisition of some Duke Energy generation assets. The largest of the Q1 deals was UIL's $2.8 billion bid for Philadelphia Gas Works.
2015: Gas assets, generation and YieldCos
“Going forward, we may see the vertical integration of gas pipeline assets with power utilities as a result of new rules and regulations that promote the increased use of natural gas. Focus on yield will continue to be a theme driving YieldCo activity and perhaps even transmission related REIT opportunities,” said Fago.
The so-called "YieldCos" are public companies formed to own operating assets and produce a predictable cash flow and dividends for stakeholders. Because of the way they are valued, growth is important and will continue to drive deal activity.
Last month, First Wind CEO Paul Gaynor credited the YieldCo model for making the merger between his company and SunEdison possible. At the time, Utility Dive reported that the deal will create "a whole new kind of renewables business."
“The deal is incredibly complicated but Sun Edison couldn’t have done this without it,” Gaynor said. “The YieldCo is a source of capital that is incredibly important in making it work.”
"We expect to see more [YieldCos] come out in the coming quarters and years," Fago said, noting that the companies are picking up renewable assets and even more traditional gas-fired generation to feed their growth. "That's one notable trend I think will continue well into 2015 and I think it will drive some pretty decent activity as more and more YieldCos come out and the YieldCos that are already out really need to grow that dividend."
Fago also said he expects more independent power producers to emerge in the coming months, possibly through joint ventures. "We've had some very oversupplied markets from a power market perspective," he said, but now expects asset acquisition to pick up in the non-regulated space.
Utilities looking to secure their fuel supply could also purse pipeline or gas field deals, he said.
"We've been in a pretty anemic load growth environment," Fago said. "We're starting to see pockets of that pick up now, and I think that's certainly driving some activity."
Load growth "really fell off a cliff in 2008" with the recession, but is starting to show signs of recovery, said Fago. "Particularly when you couple with that what shale gas has done, and all the exploration and all the drilling and all the gathering that's being done to build out that infrastructure and pull that shale gas out of the ground, it's really driven a lot of economic activity and a lot of load which has had a knock on impact for generators and regulated utilities."