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Americas' power sector deals jump 45% in Q4 2020, focus on clean energy: EY

Highlights

$17.3 billion in 2020 renewable energy deals

Consolidation, ESG push expected in 2021

New York — Americas' power and utilities merger and acquisition activity picked up considerably in the fourth quarter of 2020, with deal value increasing 45% from Q4 2019, while the outlook for clean energy in 2021 remains positive, EY said in a report.

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"Negative investor sentiment towards conventional generation is weighing on the gas [local distribution company] LDC and midstream segment and is creating the valuation disparity between regulated and non-regulated assets," Miles Huq, EY partner focused on strategy and transactions, said in the introduction to the tax advisory and consulting firm's latest power and utilities transactions and trends report released Feb. 11.

Several multibillion-dollar transactions totaling $18.5 billion drove Americas' deal value in Q4 2020, while total deal volume increased by 34% in the quarter with 71, compared to Q3 2020 deal volume of 53, the report said.

Deal value in the Americas during 2020 was driven by deals involving integrated assets ($15 billion) and renewable energy ($17.3 billion). And with a total of $2.4 billion in deals, "investors made fundamental bets on fossil fuels — some chose to get out while others doubled down to increase value," according to EY.

Huq said that Impact Investing represents "an interesting opportunity" for utilities, as these funds tend to generate positive, measurable social and environmental impacts along with financial returns.

Renewable energy assets fit that description and demonstrated resilience through the economic downturn during 2020 with "soaring valuations," he said.

Interestingly, coal-heavy companies have greater opportunities to replace fossil fuels and obtain significant greenhouse gas emissions reductions on both an aggregate and percentage basis, Huq said, adding that coal-heavy companies with strategies that offer greater rates of change may attract Impact Investment funds.

Power sector trends

Corporate investors remained the top investor sector in the Americas region with around $31 billion in Q4 2020 deal value, driven by companies like Avangrid, NRG Energy and Sunrun, which acquired assets with long-term reliable returns in integrated and renewable segments, the report said.

The trend of utilities focusing on regulated power markets also continued. In the largest deal of the quarter, Avangrid acquired PNM resources in a deal expected to increase the earnings contribution of Avangrid's regulated business by 80%, EY said.

Diversified utilities could "prioritize investment in rate base given the regulated utilities' strong core operating fundamentals while divesting from non-core and unregulated businesses," Huq said.

Major electricity industry players have already announced planned or potential strategic actions in this direction, including CenterPoint, DTE, Exelon and PSEG, he noted.

In October, DTE said it plans to spin off DTE Midstream, the company's non-utility natural gas pipeline, storage and gathering business to become pureplay regulated electricity business. Dominion sold off its gas transmission and storage assets to an affiliate of Berkshire Hathaway for $9.7 billion and PSEG said it plans to transform into a regulated business utility after finding a buyer for its fossil assets, the report said.

Huq also predicted that with the victory of President Joe Biden and a Democrat-controlled majority in the US House and Senate, there will be renewed policy focus on clean technology, electrification and stringent GHG emissions targets.

The US re-joining the Paris Agreement signals both domestic and foreign investors of "attractive growth opportunities in renewables and electrification in the region," he said.

The expected push from Washington toward stricter GHG regulation, increasing focus on ESG and consolidation are expected deal catalysts in 2021.

Consolidation in the power and utilities sector is a continued theme and is "expected to drive megadeals" especially due to uncertainties around the power grid of the future and the energy transition, EY said.

"Facing flat load growth and a rapidly changing environment we would expect the M&A trend to continue particularly in small- to mid-cap utilities which have been underperforming and hence present opportunities for acquisition at value," according to the report.