Dive Brief:

• Utility deals' overall value reached $12.3 billion in the U.S. during the second quarter of 2019, a 55% increase over Q1 2019 and the strongest earnings in a year, even as the volume of deals continue to decline, according to a new PricewaterhouseCoopers (PwC) report.
• Just 13 deals were completed in the second quarter, down 19% from the first quarter of this year and down 35% from Q2 2018. It was also the fourth consecutive quarter with no "mega deals" exceeding $5 billion, the firm said. 
• The numbers show a slowing consolidation trend, which has shrunk the number of investor-owned utilities by about a third in recent years, said PwC analysts. But significant deal-making potential remains and renewables will be "one of the key area of interest for deal makers" as states boost their green energy targets, according to the report.

Dive Insight:

Despite the slowdown in volume, PwC analysts say they "expect to see a continuation of themes" in utility deals for the rest of the year, driven by yield, access to infrastructure, rebalancing portfolios and balance sheet rationalization.

Nonetheless, deal volume in the second quarter represented the lowest volume quarter since the third quarter of 2017. Some of the shifts are cyclical, "as is the deals cycle in general," PwC Power & Utilities Deals Leader Jeremy Fago told Utility Dive.

"That said, we still see the environment as robust for deal-making with fundamentals intact, cost of capital still very low and a quickly shifting landscape in this capital intensive industry," Fago said.

Renewables "played a more limited role," representing 26% of deal value in the most-recent quarter, according to PwC. But the firm said it expects clean energy will "represent a focus area for deal activity" continuing forward.

Beyond the drop in IOUs, "we've also seen significant consolidation on the merchant generator side. As well, we continue to see consolidation in the renewable generation and development space," said Fago.

Recent deals have also been driven more by financial players, rather than strategy, according to PwC. Last month, for instance, El Paso Electric reached a deal to be acquired by J.P. Morgan's Infrastructure Investments Fund. The $4.3 billion deal was the largest of the quarter.

PwC's report found financial deals accounted 61% of total deal value in the second quarter, which it called "a notable data point" as strategic deals typically drive value in the utility sector.

"Financials have always been at the table but we've seen many of the larger strategic players focus on integration of recent previously announced mega-deals," Fago explained. Those companies are also looking at the "organic deployment of capital," into some of those merged or acquired platforms, he said.

"When you couple that with what is a relatively smaller community of strategic players that can do serial M&A at scale and the available capital on the financial player side, we saw a shift this quarter to financial players driving deal value," he said.