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Foreign buyers, maturing renewables augur strong M&A outlook for US generation

Q2: U.S. Solar and Wind Power by the Numbers

Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


Foreign buyers, maturing renewables augur strong M&A outlook for US generation

Bankers and lawyers in the power finance sector predict the busy U.S. seller's market for generation assets will extend into 2019, with Canadian pension funds and European corporations poised to make further purchases. Industry observers also expect technologies like battery storage to proliferate and repowering projects to ramp up in the new year.

"I think the [Canadian] pension funds are dominating at the moment," Madeleine Tan, partner in the energy and infrastructure group at law firm Eversheds Sutherland and co-head of the firm's transportation and social infrastructure team, told S&P Global Market Intelligence in an interview. "They have huge buying power and sometimes their return requirements are not as short-term as some private equity funds might be. They don't need an exit strategy within five or six years, for example, like some private equity funds. They have a little bit of a longer outlook on the market."

Tan identifies European companies as active acquirers at a time when Asian investors are less of a presence in the U.S. market compared to the mid-2010s.

"Clearly Europeans have been playing a big role in the consolidation that has already taken place. But I think there's still more opportunities for consolidation out there," said Roger Wood, managing director of power and infrastructure at Moelis & Co.

As for Canadian pension funds, Wood sees them as active buyers, but not exclusively on this side of the Atlantic or the Pacific. "They're looking, clearly, at the U.S., but also looking at putting money to work in Europe and Australia," he said.

Renewable market matures, gas remains attractive

While many players in the energy space expect gas-fired deals to chug along, acquisitions, financings and repowerings of renewable assets are likely to increase as those sectors mature.

"The [commercial and industrial] market is just rumbling on," said Kaam Sahely, partner and co-head of the energy transactions and projects practice group at law firm Vinson & Elkins LLP. Sahely noted that financings and sales of C&I portfolios, often smaller than transactions involving utility-scale assets, tend to fly under the radar.

"There will obviously be gas-fired projects that get developed and financed," Sahely said, pointing out that renewable deals are omnipresent and wind repowerings are likely to tick up next year.

"You're seeing some of the older generation wind projects now reaching merchant tail," Tan said, adding that many owners are aiming to replace older turbines with more efficient equipment, a trend already underway in California.

"It's really dependent upon where you're building," said Andrew Redinger, managing director and group head in the North America utility, power and renewable energy group, at KeyBanc Capital Markets Inc., when asked about the attractiveness of building gas-fired assets versus renewables.

"The sun doesn't shine as much as it does in California in [PJM Interconnection] and it has cheap natural gas so it's harder to make those renewable projects pencil off from a return perspective. That said, several states in PJM have mandates to have so much solar required prior to some year in the future," Redinger added.

"I wouldn't expect to see a lot more activity than what's already been announced for new gas-fired capacity," Wood said. "It's very likely that if there is new capacity it's going to be utility-scale wind and solar, and as prices continue to come down on those I think they can make a strong case, particularly if we get better integration with battery storage, which could be a better long-term answer for the grid."

Financing landscape

Wood characterized the M&A climate as "generally robust" heading into 2019, a sentiment echoed by Redinger.

"There are many players of all flavors and types looking to make acquisitions over the next few months, so it'll be a mixed bag on the financing front," said Redinger, adding that it remains to be seen whether buyers will be more likely to raise acquisition financing from banks, will finance deals at the corporate level, or approach acquisitions in a different way.

And while cheap debt continues to be available for project and acquisition financing, current dynamics may begin to shift in 2019.

"It's a great time to be a borrower today," Wood said. "Valuations are closer to a peak than they are to a trough and I would say the same for borrowing costs and terms."

But it is also entirely possible that it will soon be preferable to be a lender, according to Wood, who added, "I wouldn't be surprised to see the pendulum starting to swing back next year toward higher borrowing costs and more rigorous covenant packages."