Air Pollution Control Equipment Services, Coal, Emissions, Nuclear, Renewables

Merger pace picking up again in power industry

A gradual economic expansion, quicker regulatory approvals and the need for a larger balance sheet are driving a new wave of mergers and acquisitions in the electric power sector.

Today’s investor owned utilities need to finance big investments in both generation and transmission, Booz & Co. Partner Earl Simpkins said in a recent interview with GenerationHub. Simpkins deals with M&A issues. He is a partner in energy, chemicals and utilities in the Booz Dallas office.

The past couple of years have seen completed mergers that include Duke Energy (NYSE:DUK) and Progress Energy; Exelon (NYSE:EXC) and Constellation Energy; Northeast Utilities (NYSE:NU) and NSTAR; and NRG Energy (NYSE:NRG) and GenOn to name a few.

Since the 1990s, mergers have been driven by factors ranging from regional consolidation to an influx of capital by foreign utilities interested in the U.S. power market, Simpkins said.

Today bigger is often better when it comes to financing big infrastructure projects, Simpkins said.

Also deals are winning regulatory approval quicker. In the late 1990s it probably took 15 to 16 months to get a typical acquisition approved. The average is more like 12 months now, Simpkins said.

“They [regulators] want to make sure they don’t get in the way of value creation opportunities.”

Bigger infrastructure investment needed, Simpkins says

The uncertainty surrounding the environmental regulation of coal generation has companies planning to make capital investments, and companies with bigger balance sheets are better able to do this, Simpkins said.

“Having a stronger balance sheet to fund future capital investments,” is increasingly important, Simpkins said.

Many companies are also looking to better balance their generating fleet. This enables companies to better manage risk through a more-balanced portfolio.

Issues from Clean Air Act exposure to natural gas prices to whether a company is long or short on baseload power all influence M&A, Simpkins said.

Financial trends also affect corporate ability to finance acquisitions, the official said.

During the recession years, valuations were low but money was tight. “With the economy expanding a bit people, perhaps, have more access to capital,” Simpkins said.

With the economy picking up there could be “more legs under these potential transactions to support the business case,” Simpkins said.

The Fukushima disaster may have altered or delayed some deals involving companies with a significant nuclear footprint, Simpkins said.

“People are going to consider the diversification strategies,” so as not to be too dependent on one type of electric generation, whether coal, gas or nuclear, Simpkins said.

This article was published, with permission, from our sister publication Generation Hub.

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