Like most sectors of the energy industry in 2020, the COVID-19 pandemic had a significant impact on the North American power and utility sector. Quarantines, work from home, social distancing and other measures implemented in response to COVID-19 were a substantial disruption to economic activity, causing a sharp decline in industrial and commercial activities. This decline reduced the demand for electricity across North America by 15% to 20%. However, given its essential nature and the offset provided by increased residential usage, the impact on the power and utility sector was less significant than many others in the industry.
The COVID-19 pandemic didn’t affect all of the players in the power and utilities sector equally. Retail electric and gas suppliers and electricity generators experienced more significant negative effects due to their exposure resulting from the drop in industrial and commercial demand. Conversely, renewables producers, especially those with assets that have guaranteed tariffs, were relatively shielded from the impact of the pandemic. U.S. utility stocks largely remained flat, despite losing almost 25% of their market cap in March due to the start of the pandemic, with the Dow Jones Utility Average Index losing just over 1% year-over-year.
Despite 2020 being so remarkable, most utilities have largely been able to keep consumer rate increases to a minimum, aided significantly by low natural gas prices and declining costs for renewable energy. Aside from COVID, the industry challenges included increased costs from natural disasters (like hurricanes, wildfires and unforeseen severe weather events, which will be discussed more next year) and manmade threats (like cyberattacks and terrorism). COVID was also responsible for negative load growth, bucking the decade long trend of flat growth.
All of the above translated into a power and utility M&A deal volume drop of approximately 20% in 2020 from 2019 levels, which wasn’t a particularly notable year either. Total deal value, which started off slow in 2020, rebounded in the second half of the year to produce an increase of approximately 10% year-over-year. These levels were already significantly down from 2016, a record year for U.S. utility mergers and acquisitions. For perspective, 2020 total deal value reached just $48 billion as compared to a 2016 total deal value of $157 billion. Large utility mergers and acquisitions deals (those exceeding $1 billion in total transaction value), however, saw a resurgence in 2020, accounting for approximate half of 2020 total deal value.
Some interesting trends developed in 2020 power and utility deal activity. First, strategic players returned to the table and drove deal value, accounting for almost 75% of total deal value. Renewables deals accounted for approximately 35% of total deal value, underscoring their importance in overall deal activity. Environmental, social and governance (“ESG”) initiatives were announced by a significant number of power and utility companies in 2020 and were drivers of deal volume, notably in the second half of the year.
There were several notable transactions in 2020 in the power and utilities sector. The largest deal of the year, Brookfield Renewable Partners LP’s acquisition of the remaining 38.5% of TerraForm Power, Inc. for $8.3 billion, was one of the first deals announced in 2020. The combined company will be one of the largest publicly-traded, globally-diversified, multi-technology, pure-play renewable power platforms, with total assets of approximately $50 billion and expected annual funds from operations of approximately $1 billion.
Another notable transaction was Berkshire Hathaway Energy’s acquisition of all of Dominion Energy’s gas transmission and storage operating assets in July 2020 for approximately $8.0 billion. The sale included Dominion Energy’s interest in Dominion Energy Transmission, Questar Pipeline (including Overthrust and White River Hub), Carolina Gas Transmission, Iroquois Gas Transmission System (50 percent interest), legacy gathering and processing operations, farmout acreage, as well as a 25 percent operating interest in Cove Point. In connection with this acquisition, Dominion Energy and Duke Energy announced that they were canceling the Atlantic Coast Pipeline (“ACP”), a project that was subject to significant uncertainty due to legal challenges that had progressed all the way to the U.S. Supreme Court. Interestingly, Dominion had just acquired Southern Company Gas’ 5% stake in ACP just months earlier in 2020.
The final sizable transaction in 2020 was Avangrid’s announced acquisition of PNM Resources in October 2020 for $7.7 billion. The combined company will encompass 10 regulated electricity suppliers across six states, with 4 million customers ranging from Avangrid’s stronghold in New England and New York to PNM Resources’ base in the Southwest. The enlarged company will be the third-biggest U.S. renewables operator, with about 7.4 gigawatts of capacity and a large pipeline of projects.
As we progress into 2021, COVID-related uncertainty will continue to impact the power and utilities deal market. However, we expect that M&A activity will look similar to the second half of 2020, with industry participants looking for strategic opportunities. With the increased push of ESG initiatives, utilities will be focused on balancing and rationalizing their portfolios to align with investor and stakeholder expectations. Additionally, the decreased activity of the past few years has many companies sitting on significant capital which they will need to deploy into attractive growth and yielding investments. Further, we expect renewables to continue to drive investment and deal activity in the sector.
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