PwC: Power sector deals rose 60% in the first quarter

Dive Brief:

PwC in a new report says the value of power and utility deals rose 60% in the first quarter compared with fourth quarter 2017. Deal value hit $29 billion in the first quarter, a roughly 125% increase over the $13 billion in deal value in first-quarter 2017.
Two mega deals account for 77% of the total deal volume: Dominion Energy's proposed acquisition of South Carolina's SCANA, which is valued at $14.5 billion and Global Infrastructure Partners acquisition of Zephyr Renewables LLC, estimated at $7.9 billion.
Despite this forecast, the largest planned acquisition, which accounts for 50% of the total deal value, faces challenges. Dominion CEO Thomas Farrell has warned that he would walk away from the acquisition if SCANA were not allowed to recover costs associated with the failed V.C. Summer nuclear project.

Dive Insight:

Whether or not the Dominion-SCANA deal closes didn't affect PwC’s tally because the report tracks announced deals. “In this industry, the regulatory process is always a key focus,” Jeremy Fago, U.S. power and utilities deal leader at PwC, told Utility Dive. It is still “a decent start for the year from an announced deal perspective.”

Even so, the controversy surrounding the deal could scuttle it before the year is out. State-owned utility Santee Cooper earlier this month filed a motion with the South Carolina Public Service Commission seeking to intervene in Dominion’s planned buyout of SCANA and its South Carolina Electric & Gas subsidiary.

Santee Cooper and SCE&G were partners in the failed V.C. Summer nuclear project until they agreed to abandon the project last year. South Carolina’s Attorney General has also weighed in on issues related to the failed nuclear project, calling SCE&G’s proposed rate hikes, meant to recover costs associated with Summer, unconstitutional.

In all, there were five deals of $1 billion of more announced in the first quarter, one more than in the previous quarter, accounting for 90% of the total deal value for the quarter. Other large deals announced in the first quarter were Capital Dynamics’ announced merger with 8point3 Energy Partners valued at $1.7 billion, the $1 billion merger of SJW Group and Connecticut Water Service, and Cleco Energy's $1 billion planned acquisition of NRG South Central Generating.

Renewable energy deals accounted for 36% of the deal volume in the quarter, which PwC called a comparatively high proportion of the market.

Drivers of deal activity in the quarter include fading concerns about tax reform, a continuing trend toward utility consolidation, and a unique window for solar and wind energy assets as they face the phase out of federal incentives, namely, the production tax credit and the investment tax credit.

One of the differences between the last two years was amount in the the mega deals: In 2016, a total of $156.7 billion, Fago said. In 2017, there were only $82.3 billion worth of deals.

One of the reasons for the drop in deal value last year was that the acquirers were occupied in executing and integrating their acquisitions, Fago said. Some of those 2016 players will likely be returning to the market this year, he said.

“We are bullish as we look forward to 2018,” Fago said.

In terms of valuations, natural gas transmission and distribution companies continue to set the high end of the range for power and utilities as investors continue to look for growth opportunities within the gas utility sector, PwC said. Merchant electric companies, on the other hand, are setting the low end of the range because of their exposure to commodity price volatility and regulatory uncertainty.

Overall, valuations are rising, said Fago. That is, in part, a function of the shift under way in the market. There is more of an emphasis on infrastructure assets such as transmission lines and natural gas pipelines, and people are willing to pay a premium for them.

“Because that premium is so focused on the ability to grow the business, it is important you have a plan in place to integrate,” Fago said. “It is not just how you value an acquisition, but how you extract value” when the deal is done, he said.