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Americas

Power transactions and trends | Q4 2017

Can the American energy sector sustain record-high investment in 2018?

Federal policy uncertainty has not deterred investors from US renewable energy assets, which helped boost the Americas’ 2017 power and utilities (P&U) investment to an eight-year high. In 2018, all eyes will be on US interest and inflation rates, which have the potential to shift investors’ view of the region.

EY - Americas Infographic

Americas deal value and volume, by segment
(announced asset and corporate-level deals, Q4 2015-Q4 2017)

EY - Americas deal value and volume, by segment

Americas deal value and volume, by segment
(announced asset and corporate-level deals, 2013–2017)

EY - Americas deal value and volume, by segment

Source: EY analysis based on Mergermarket data.

Much of the record-breaking deal value in 2017 was M&A in US renewable energy assets, which benefit from strong state policy support. But conventional generation also made a big contribution, due mostly to sector consolidation and the sale of highly leveraged assets.

Q4 2017 transactional highlights

Key figures:

  • US$102.2b 2017 deal value
  • US$29.4b contributed by network sales
  • US$28.4b contributed by integrated assets
  • US$24b contributed by deals in generation
  • US$14.2b contributed by renewables
  • 71% increase in value of renewables M&A, 28% increase in the number of deals

Read our full Americas report here

Investment highlights in 2017:

  • Renewables remained top of the investment agenda, with 12 clean energy deals in Q4 – the highest volume of any region that quarter.
  • Corporate investors dominated investment, doing deals worth double that of financial buyers and focusing on transmission and distribution (T&D) and integrated assets.
  • Coal to gas switching continued, driven by low natural gas prices.
  • Latin America attracted foreign buyers, mostly from China, the UK, the US and Canada. Most deal value occurred in Brazil, Mexico and Peru.

Americas regional capital flows, 2017

EY - Americas regional capital flows, 2017

Source: EY analysis based on Mergermarket data.

Top five Americas deals, Q4 2017

All deals are announced deals, and the values indicated are disclosed enterprise values comprising equity and debt components.

EY - Top five Americas deals, Q4 2017

Source: EY analysis based on Mergermarket data.

Valuations snapshot

Average EV/EBITDA trading multiples for select utilities

(on FY2 consensus earnings-per-share estimates, 2013–Q4 2017)

EY - Average EV/EBITDA trading multiples for select utilities

Note: The valuations analysis only contains pure-play publicly listed companies in each relevant market segment.Sources: Bloomberg, EY analysis

Sources: Bloomberg, EY analysis

Average P/E trading multiples for select utilities

(on FY2 consensus earnings-per-share estimates, 2013-Q4 2017)

EY - Average P/E trading multiples for select utilities

Note: The valuations analysis only contains pure-play publicly listed companies in each relevant market segment.Sources: Bloomberg, EY analysis

Sources: Bloomberg, EY analysis

The Americas P&U sector is trading at a two-year forward EV/EBITDA (enterprise value by earnings before interest, tax, depreciation and amortization) ratio of 8.5x, a 3.3% premium to the 2016 average of 8.4x and a 0.6% premium to the long-term average of 8.5x. The P/E (price to earnings) ratio saw significant movement, trading at 21.8x, a 16.1% premium to the long-term average of 18.7x and a 13.1% premium to 2016.

Q4 valuations:

T&D

  • Two-year forward EV/EBITDA ratio: 8.9x – 1.2% discount to Q3, 8% discount to long-term average, 12% discount to current average
  • Two-year forward P/E ratio: 17.0x – 2% discount to Q3, 7% premium to long-term average

What it means: Analysts expect an increase in earnings overall, while the recent acquisition of Gas Natural at an EBITDA multiple of 7.3% demonstrates potential to acquire undervalued businesses.

Integrated

  • Two-year forward EV/EBITDA ratio: 7.9x – the same as Q3, 1% discount to long-term average
  • Two-year forward P/E ratio: 12.8x – 1.2% discount to Q3, 3% discount to long-term average

What it means: Investors expect a slight earnings increase for these utilities.

Renewable energy

  • Two-year forward EV/EBITDA ratio: 9.0x – 0.1% premium to Q3, 21% premium to long-term average
  • Two-year forward P/E ratio: 20.0x – 3% discount to Q3, 3% premium to long-term average

What it means: Investors are bullish around the earnings potential of these assets and are prepared to pay huge premiums for them.

Independent power producers

  • Two-year forward EV/EBITDA ratio: 8.2x – 0.7% discount to Q3, 4% discount to long-term average
  • Two-year forward P/E ratio: 45.0x – 13.9% premium to Q3, 71% premium to long-term average

What it means: Moves by IPPs to cut debt and rationalize portfolios, as well as purported federal government support for thermal power, are encouraging bullish sentiment of investors for merchant assets.

Will US state support for clean energy reshape the region’s investment priorities?

In 2018, investment in Americas P&U sector is likely to flow into renewables and new technologies, such as battery storage. We may see some uplift to generation assets, as a recovering economy attracts financial investors seeking opportunities to decrease leverage and capitalize on a potential market recovery. Key trends to shape investment include the following.

  • More investment in energy storage: Increased renewable energy projects and strong support from several US states, including New York, Massachusetts and Washington, for energy storage are likely to boost the technology’s appeal to investors.
  • New projects in offshore wind: Twenty-eight offshore wind projects totaling 23,735 MW of potential installed capacity have been announced in the US.
  • US and Brazil to remain investment hotspots: The US is expected to continue to be the top P&U investment destination for the region, and the world. We’ll also see more activity in Brazil as the Government plans new generation and transmission assets.

EY Americas Transaction Advisory Services (TAS) P&U contacts

Matt Rennie
Global TAS P&U Leader
Brisbane, Australia
+61 7 3011 3239

Stephanie Chesnick
US TAS P&U Leader
Houston, Texas, US
+1 713 750 8192

Mitch Fane
US Southwest TAS P&U Leader
Houston, Texas, US
+1 713 750 4897

Miles Huq
US Northeast TAS P&U Leader
Baltimore, Maryland, US
+1 410 783 3735

Robert Leonard
US Southeast TAS P&U Leader
Charlotte, North Carolina, US
+1 704 335 4236

Robert A Jozwiak
US Central TAS P&U Leader
Chicago, Illinois, US
+1 312 879 3461

Gerard McInnis
Canada TAS P&U Leader
Calgary, Alberta, Canada
+1 403 206 5058

Lucio Teixeira
Latin America South TAS P&U Leader
Sao Paulo, Brazil
+55 11 2573 3008

Rafael Aguirre Sosa
Latin America North TAS P&U Leader
México, D.F., Mexico
+52 55 5283 8650