Each year around this time we take the opportunity to review the transactions and other significant industry developments over the past year and offer our views on what they may mean for the coming year.
Mergers and acquisitions activity in the energy industry during 2017 was higher than at any time in the last decade. Deal volume for transactions in the United States was over $213 billion, well above the $141 billion recorded in 2016 and above the previous high-water mark of $201 billion set in 2015. Initial uncertainty about the potential for tax reform was overcome by optimism about the economy generally, which kept stock valuations high and interest rates lower than at least some had thought they might be at this point in the business cycle. Utility stock valuations did decline somewhat toward year end, but it remains to be seen what effect lower valuations may have on the level of transaction activity in 2018.
As usual, more than half the activity involved pipelines, midstream companies and MLPs, with $118 billion of announced transactions, up from about $76 billion the year before. Transactions among regulated electric utilities also increased, to $36.5 billion from $19.8 billion in 2016. The two largest transactions involving regulated electric companies were the acquisition of Oncor Electric Delivery Company by Sempra Energy and Dominion Energy’s acquisition of SCANA Corporation, both of which likely would not have taken place but for the financial distress associated with the company or its parent company. Canadian acquirers remained active with Hydro One Limited agreeing to acquire Avista Corporation in another major transaction. Among LDCs, volume nearly doubled to $8.6 billion from $4.8 billion, although this was still well short of the $18 billion in 2015, when transactions involving AGL Resources and Piedmont Natural Gas Company set a new high-water mark. Most of the 2017 volume in the LDC sector was AltaGas Ltd.’s acquisition of WGL Holdings and the sale of Elizabethtown Gas to South Jersey Industries by Southern Company Gas. As in 2016, the volume of transactions involving electric generation assets was well above average, although at $32.5 billion, 2017 volume was slightly below the $33.5 billion of 2016. Two major transactions announced by IPP companies were Calpine’s going private transaction and the merger of Dynegy and Vistra Energy. Transaction volume for renewable generation assets also jumped in 2017, to $13.1 billion from $6.6 billion in 2016 and $8.5 billion in 2015. Key transactions and trends that we see in each of these subsectors are discussed in more detail in the report.
Although not deal specific, other key developments during the year included the evolving legislative and regulatory reform under the Trump Administration. The Administration’s efforts to significantly change regulations pertaining to the environment and related energy regulatory matters have only begun, but it is clear that they are likely to be significant. The potential implications of regulatory reform are discussed in more detail in the full version of this report.
The other area of major reform is of course federal income tax. The recently enacted tax reform act (the “Tax Reform Act”), informally known as the Tax Cuts and Jobs Act, was signed into law by President Trump on December 22, 2017. The Tax Reform Act made sweeping changes to the Internal Revenue Code of 1986, as amended (the “Code”), most of which took effect on January 1, 2018. We have included discussion of the effects of the Tax Reform Act in the report (see Regulated Utilities, Renewables, Master Limited Partnerships and YieldCos, Project Finance, and Bankruptcy Developments in the Energy Sector). We also have included a separate section discussing the overall impact of the Tax Reform Act on the energy sector.
The report covers the following areas:
- Regulated Utilities
- Independent Power Producers and Generation Assets
- Master Limited Partnerships and YieldCos
- Project Finance
- Bankruptcy Developments in the Energy Sector
- Environmental Regulation
- Small Scale LNG
- Tax Reform Act
To read the full report, click here.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm of approximately 725 lawyers practicing throughout a network of 13 offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the technology, energy, and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.