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Deal activity in Americas down 62.2% on year in H1

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New York — Power and utility deal activity in the Americas dived 62.2% in the first half of 2020 compared with the year-ago period, but the rate of dealmaking could pick up through the remainder of the year, according to consultant and tax adviser EY.

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Deal activity in the Americas "sputtered" in H1 with a total of $8.3 billion in investment through 62 deals, according to EY's "Power and Utilities Transactions and Trends" report released Aug. 6.

The Americas' deal value in H1 2019 was about $22 billion, the report said.

"Overall, renewables have continued to maintain investor trust," Miles Huq, EY power and utilities strategy and transactions partner, said in the report's introduction.

"Both financial and corporate investors are being driven by a public mandate for cleaner energy, and institutional investors focus" on environmental, social and governance matters (ESG), Huq said.

The Americas lagged behind other regions, accounting for only 14% of global power deal activity, the report said.

The deal volume in the Americas rose in the first quarter of 2020 by 30% compared with Q1 2019, but then sharply declined in the second quarter 2020 to 15 deals, which was a 68% decline from Q2 2019, according to the report.

The $8.3 billion deal value in the region in H1 was primarily driven by renewable energy-related transactions valued at $3.5 billion and integrated deals valued at $2.0 billion. Some 28 deals, 45% of the total, were acquisitions in the renewable energy segment, according to the analysis.

The $3.5 billion in renewable deals accounted for 42% of the total deal value.

One of the largest deals of the segment and region was Eversource Energy's February acquisition of Columbia Gas' Massachusetts natural gas assets for $1.1 billion from NiSource, after a series of 2018 gas explosions put Columbia Gas in a "distressed position," the report said.

Brookfield Renewable Energy Partners acquired the remaining 37% stake in Terraform Power to create a "pure-play renewable energy platform" with $50 billion of assets, and in Canada, Hydro-Québec acquired a 19.9% stake in Innergex for $490 million, according to the report.

Corporations contributed to 61% or $5.1 billion of the total deal value in H1 2020 in the Americas. Warburg Pincus, a US-based private equity firm, provided a line of equity to fund up to $300 million in Scale Microgrid Solutions, a distributed energy provider involved in microgrids, EY said.

Looking ahead

The broad transition toward cleaner and renewable energy sources by traditional power industry players as well as some oil and gas companies could stimulate an uptick in deal activity later this year.

"Appetite for renewable energy investing will continue to flourish and prove its resilience even in unprecedented financial markets," Huq said in an Aug. 7 email.

"More deal activity is expected throughout 2020 as investors make their long-term value creation bets. Both financial and corporate investors, including oil and gas companies, are seeking M&A opportunities for cleaner energy," Huq said.

NRG Energy paid $3.6 billion in cash in late July to buy energy retailer Direct Energy and oil major BP recently said it plans to reduce its oil and gas production by 40% in the next 10 years while accelerating its transition into an integrated energy company.

"It is probable that we will experience ... asset-level divestments from power and utility companies in a greater number as companies look to sell off non-core/unregulated businesses to increase their focus on regulated operations in the near term," Huq said.

Public Service Enterprise Group said July 31 it is looking into selling over 6,750 MW of fossil fuel-fired generation later this year, while retaining its nuclear plants as part of a plan to mostly exit the merchant power generation business and transition toward being a regulated utility.

"With interest rates expected to remain low, many well capitalized companies will have access to significant capital in both the debt and equity markets to make fundamental bets given the pace of change expected in the power and utility sector," Huq said.