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North America Power & Utility Sector and Generation Assets

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2021 saw the North American economies begin to emerge from the recession induced by the COVID-19 pandemic.  This recovery had a significant impact on the power and utility sector.  The demand for electricity across U.S. rose approximately 2.1% in 2021, recovering all but 0.5% of what was lost in 2020.  In addition to an overall consumption increase, the price for electricity in the U.S. rose approximately 7.8% in 2021, due in large part to price increases for most types of energy commodities in 2021, including the cost of power generation fuels, especially wholesale natural gas prices.  In addition, the U.S. power and utility sector in 2021 experienced unprecedented and unpredictable extreme weather events, particularly in Texas and Oklahoma, which challenged the grid’s reliability and resiliency, and cyberattacks on critical infrastructure increasingly made headlines.  This resulted in record capex spends for some of the U.S.’s largest utilities.

Despite natural gas dominating the generation mix in 2020, it lost ground for the first time in many, many years, resulting in an approximate 3% decrease from 2020’s levels.  This decline was likely due to the significant increase in the cost of natural gas delivered to U.S. power plants in 2021, which averaged $4.98/MMBtu and was more than double the $2.32/MMBtu average in 2020.  Renewables, however, continued their steady ascent in the generation mix, accounting for approximately 20% of generation, an increase of approximately 5.5% over 2020’s levels.  Interestingly, coal and petroleum, which have been on a steady decline over the years, made a comeback in 2021, increasing their portions of the generation mix by approximately 16.2% and 17.1% year over year, respectively.

Despite the recovery, U.S. utility stocks couldn’t keep up with the recovery seen in the overall economy.  The Dow Jones Utilities Index rose approximately 13.8% in 2021, compared to 18.7% for the Dow Jones Industrial Index and the weighted average increase of approximately 19.7% experienced by the NYSE and NASDAQ.

In 2021, the average nominal retail electricity price paid by U.S. residential electric customers rose at the fastest rate since 2008, increasing 4.3% from 2020 to 13.72 cents per kWh.  Although the nominal average price was the highest on record, retail electricity prices, when adjusted for inflation, have been slowly declining over the last two decades and were at the lowest level since before 2006, when the adjusted electricity price averaged 13.99 cents/kWh.

All of the above translated into a surge of deal volume and value in the power and utility M&A sector.  Total deal value in 2021 was approximately $73 billion and produced an increase in value of approximately 75% year-over-year.  Additionally, deal volume was just under 200 deals overall, which were spread fairly evenly over the year.  These levels are still significantly lower than were seen in 2016, a record year for U.S. utility mergers and acquisitions.  For perspective, 2021’s total deal value is less than 50% of 2016 total deal value of $157 billion. Large utility mergers and acquisitions deals (those exceeding $1 billion in total transaction value) drove total deal value and renewables deals accounted for approximate half of 2021 total deal volume.

A few trends underlined 2021 deal activity.  First, environmental, social and governance (“ESG”) initiatives continued to drive strategy and deal activity.  In the last two years, many power and utility companies have announced ESG initiatives and the effect of those initiatives is seen in the uptick in renewables M&A.  In addition, the sector saw an increased interest in special purpose acquisition companies (SPACs) in 2021, with seventy-seven SPACs labelled as in the energy sector.  While these companies have different statuses (including pre-IPO, IPO, announced and closed), 2021 had a total of nine deals through SPACs.

There were several notable transactions in 2021 in the power and utilities sector.  The largest deal of the year, Exelon Corporation’s spinoff of Constellation Energy Corporation in a transaction valued at approximately $15.6 billion, was announced in late February 2021.  The split was driven by Exelon’s desire to refocus on its core transmission and distribution utility businesses and to separate from its non-core power generation and competitive energy business without depleting shareholder value.

Another notable transaction was Brookfield Infrastructure Partners L.P.’s (“BIP”) tender offer and acquisition of all shares of Inter Pipeline Ltd. that were not previously owned by BIP.  The offer was announced in February 2021 and closed in October 2021 with a total transaction size of approximately $13.5 billion.  BIP acquired the remaining 80%+ of Inter Pipeline’s shares after the overwhelming approval of Inter Pipeline’s shareholders.  Such shareholders received cash, exchangeable subordinate voting shares in Brookfield Infrastructure Partners Corporation and limited partnership units in Brookfield Infrastructure Corporation Exchange Limited Partnership.

The final sizable transaction in 2021 was Icahn Enterprises L.P.’s announced tender offer for Southwest Gas Holdings Inc. in October 2021 for a total transaction value of $11.3 billion.  Southwest Gas purchases, distributes, and transports natural gas in Arizona, Nevada and California. As of Dec. 31, 2020, Southwest Gas had 2,123,000 residential, commercial, industrial, and other natural gas customers and also provides trenching and installation, replacement, and maintenance services for energy distribution systems, and industrial construction solutions.  Icahn currently owns approximately 5% of Southwest Gas’s outstanding ownership.  After its initial bid of $75 per share in October 2021, Icahn has since increased its bid for Southwest Gas’s shares to $82.50 a share.  Southwest Gas has said that it is considering the offer.

In 2022, the challenges remain for the power and utility sector, meeting ESG initiatives, ensuring reliability and resiliency of the grid, and maintaining security through increased cybersecurity measures, all while keeping costs down.  To accomplish this task, the industry will likely continue to “decarbonize, digitalize, and decentralize.”  Capital expenditures will likely remain high and utilities will need to find ways to finance such expenditures while awaiting corresponding changes to their rate base.  Renewable energy generation will also continue to take market share in the power generation mix.

Visit 2021 – Traditional Energy Rebounds and Increased Energy Transition, for the complete list of individual, detailed articles associated with this publication.

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