Calpine acquires 1,050-MW combined-cycle plant in Texas; Allete buys AES wind farms; NextEra acquires Silver State solar project from First Solar; plus equity and debt deals involving EdF, Emera,...
Will shifting winds bring consolidation?
will cost to comply with new laws, should they be enacted.
For years, the United States has been preparing to control greenhouse-gas emissions either through existing regulatory authority or new comprehensive legislation. Meanwhile, power and utility companies continue to endure a protracted period of assessing risks versus opportunities in a carbon-constrained world.
In addition to proposed federal legislation, the heavily regulated power and utilities industry must comply with rules and laws that vary widely among the states. Compounding divergent state regulation complexities are federal laws and regulatory trends that tend to be influenced by a demanding customer base.
Certain regulators, depending on the state jurisdiction, also are taking a more active role in sector activities. Examples of this growing trend include the recent decision by Florida regulators to virtually deny two public utility requests to raise rates. State regulators in Maryland and New York also recently took actions that curtailed or made it difficult to divest nuclear generation assets.
Power and utility organizations looking to become M&A participants, when requesting transaction approval, either as potential inbound investors, or as U.S. entities, must recognize how important it is to understand the regulatory climate where the target operates.
Commodity price volatility is yet another cloud over the hope for a turnaround of industry M&A activity. Currently, the forecast for natural gas prices appears to remain in the $4 to $5/MMBtu range, and coal prices likely will continue rising, albeit at a slow pace. Additionally, the country needs new base-load generation in several regions. Current commodity price forecasts for fossil fuels could make it difficult for new coal and nuclear plants to be cost competitive with gas plants.
From an M&A transaction standpoint, it will be more difficult to value an entity that’s heavy on coal, particularly when factoring in the environmental spend on coal-burning plants. For the foreseeable future, it appears that companies with existing nuclear and gas-fired power plants are in a much better valuation position today than those that primarily burn coal.
Wall Street Views
Access to capital and a company’s market value are closely tied to the recovering economy. Like many other industry sectors, certain power and utility companies were downgraded during the recession, which made access to capital to finance transactions or capital improvements scarce, expensive, or both because of changes in investment ratings. And so the condition puts into question whether a buyer would want to merge with a company experiencing credit quality issues.
When analyzing asset valuations, there remains a spread, although it is shrinking, between the bids and asks for merchant-generating companies, as well as generation assets.
A silver lining in a cloudy economy is that the potential for M&A activity may be improving because of the potential availability of debt-distressed assets in the short term.
Certain merchant companies and other financial investors that bought generating plants within the past five years are facing significant debt payments in the near term. Because of demand destruction and low prices for gas, these generating plant owners aren’t hitting the cash-flow targets expected when the investment was made.