Persistently low natural gas prices and a search for stable cash flows helped drive a large year-over-year increase in power and utilities mergers and acquisitions in 2Q 2013, according to accounting giant PricewaterhouseCoopers.
The value of North American power and utilities M&A deals worth $50 million or more rose sharply year-over-year, reaching $12.5 billion, up from $668 million in the same period last year, according to PwC. The lion’s share of the increase was attributable to MidAmerican Energy Holdings’ $10-plus bln acquisition of NV Energy. But there were seven $50 MM-plus deals in this year’s 2Q, compared with just two during the same three months of 2012, PwC said.
Low natural gas prices have continued to stress the finances of merchant power generation assets by pushing down the market clearing price for power in unregulated markets. And as depressed price levels persist, there is more incentive to shed those assets. “Those that were either not divesting previously or holding certain assets and are facing pressure are starting to reevaluate that, and are starting to consider or take action to divest,” PwC US power and utilities deals leader Jeremy Fago told Breaking Energy.
Fago said that yield was the other big driver of M&A activity. “We hear a lot about people looking for stability of cash flows and yield,” he said.
There is a large pool of potential funding that is looking for deals in the power generation market, but “there are not a lot of assets in the power space that are either fully regulated, with predictable cash flows, or contracted assets with longer-term off take agreements that are available in the market”, Fago said. “With so much money looking for a home, there is a lot of appetite out of there for stability of cash flows versus taking on volatility or merchant risk in the unregulated market.”
PwC cites two other significant factors driving M&A activity. One is rising costs, as asset holders make necessary investments to upgrade generation, transmission, and other assets, and to comply with new environmental guidelines. The other is slower-than-expected load growth.
“It is obviously hugely dependent on the region and the dynamics in those regions, but for the most part, there’s been fairly flat load growth over the last several years, certainly on the heels of the recession and global economic issues that we saw hit in 2008-09,” Fago said. “Load certainly hasn’t recovered as quickly as folks thought it would.”
Added to that is the impact of demand-side efforts to enhance energy efficiency, such as distributed generation and demand response initiatives. “There are some conscious decisions on the demand side that are mitigating load growth.” Fago said.
Interest Rate Impact
As activity in power and utility M&A has risen, financial investors appear to have pulled back from the power and utilities market. That class of investors may have sought stable cash flows and decent yields while interest rates were low, but Federal Reserve Bank Chairman Ben Bernanke’s comments in late June hinting at a potential interest rate hike may have prompted them to look to other markets.
“With interest rates potentially rising, we’re concerned about what the yield is going to be going forward,” Fago said. “That’s maybe slowed some of those transactions down.”
“When we saw Treasuries come up a little bit, there was some sentiment that the yield had come down too much,” Fago said. “Perhaps folks are thinking more and more about what happens to their investments when interest rates come up.”
