capital confidence barometer - may 2016 - power ......increasingly irrelevant in today’s rapidly...

CapitalConfidenceBarometer

Power & Utilities

New competition and customer demands drive dealmaking

May 2016 | ey.com/ccb | 14th edition

b | Capital Confidence Barometer

Key global findings

Sectors with the highest appetite to acquire

Oil and gas 59%Consumer products and retail 59%Power and utilities 58%Diversified industrial products 55%

Life sciences 51%

Top investment destinations

1. United States

2. United Kingdom

3. India

4. China

5. Germany

intend to enter alliances to accelerate top- and bottom-line growth40+60+M40%

expect distressed asset sales to become more prominent in dealmaking37+63+M37%

expect to actively pursue acquisitions in the next 12 months 50+50+M50%

increase in appetite for US$1b to US$5b deals 100+M5X

considering cross-border investments74+26+M74%

1Capital Confidence Barometer | 1 Capital Confidence Barometer |

Companies look to protect themselves against disruption by acquiring innovation and forging alliances with unconventional partners

Pip McCrostie Global Vice Chair Transaction Advisory Services

Our latest Global Capital Confidence Barometer continues to find a strong acquisition appetite together with a growing inclination to forge new alliances. Prolonged economic challenges are driving investment decisions, leading companies to ally and cooperate to generate growth as well as compete and acquire to gain market share.

The macroeconomic environment remains challenging. Economic growth remains subdued. Low inflation endures. Price sensitivity becomes ever more intense. Within this complex environment, disruption continues to fundamentally challenge current business models.

Increased innovation and sector convergence are accelerating the emergence of new competitors across many industries. Changing customer preferences and shifting consumer behaviors are transforming the business landscape. In a digital “sharing economy,” where peers pool their access to goods and services, past performance is neither an indicator nor a guarantee of future success.

Executives now find themselves planning for multiple possible futures. Buying and selling can be a transformative means to reshape and refocus the business. M&A remains a strong option to accelerate strategic plans and offer the prospect of game-changing competitive advantage.

At the same time, alliances are becoming more attractive as companies seek new sources of revenue and earnings while looking to manage costs and risk. Increasingly, companies are taking this option to bolster their research-and-development processes. As sectors converge, the evolutionary paths of industries are unclear. Companies are shrewdly spreading risks as they pursue growth.

In this bold new world, those companies that best achieve commercial advantage through combining strategic M&A and cooperative responses to new challenges will be best positioned to win. Buying and bonding are now key features of the corporate growth agenda.

Capital Confidence Barometer

Key sector findings

are seeking growth through operational improvements 51+49+M51%

are confident the global economy is improving; slowdown in key emerging markets has moderated optimism43+57+M43%

are planning to actively pursue acquisitions; strong intentions and momentum will drive M&A over the next 12 months 53+47+M53%

expect that distressed assets and competition from financial investors will dominate dealmaking over the next 12 months64+36+M64%

3 Capital Confidence Barometer |

M&A is a key strategic tool as utilities strive to stay competitive amid a transforming sector

Matt Rennie EY Global Transactions Power & Utilities Leader

Transformation in the power and utilities (P&U) industry is multifaceted and driven by several disruptive forces across the value chain, with the traditional utility business model becoming increasingly irrelevant in today’s rapidly changing sector landscape. EY’s 14th Power & Utilities Capital Confidence Barometer reveals that utilities across the globe are cognizant of this transformation and are reviewing their operations, customer relationships and investment strategies to remain competitive and drive growth.

Technological advancements such as distributed generation, low-cost renewable power and advanced energy efficiency applications are changing the framework for customer reliance on the traditional grid. A new generation of utility “prosumers,” exposed to advanced customer service experiences in the technology and telecommunication sectors, demand greater levels of service and choice from their traditional electricity and gas providers, which are struggling to keep up with these expectations.

Utilities have been slow to respond to these changes, and market reforms in many countries have opened opportunities for new entrants to offer innovative energy products and services and blur sector boundaries. The P&U executives we surveyed identified changing customer expectations as the biggest disruption driver for their businesses, followed by competition from companies in other sectors and increasing globalization.

The quest to diversify and optimize asset portfolios is driving more utilities to look beyond their domestic market. Seventy percent of survey respondents say they are looking to acquire assets outside their home territory. The developed markets of the US and the UK, as well as the emerging markets of China and India, remain top investment destinations.

Global economic and political conditions remain a major concern for P&U executives. Only 43% of those surveyed said the economy is improving, a significant dip from 81% six months ago. Increased global and regional instability, and increased commodity and currency price volatility, are cited as key risks. Despite these concerns, we expect to see robust deal activity in 2016, driven by ongoing disruption and market reforms, and supported by the momentum generated in 2015.

Macroeconomic environmentSlowing growth in key markets moderates confidence in the global economy

4 | Capital Confidence Barometer

43%view the global economy

as improving

Macroeconomic environment

5Capital Confidence Barometer |

Global economy seen as stableWhile almost half (46%) of P&U executives see the global economy as stable, confidence in global growth prospects has fallen since our last survey. Only 43% of respondents expect the economy to improve, compared with 81% six months ago.

This sentiment reflects current global economic conditions, particularly in key emerging markets. China’s economic growth in 2015 was its lowest in 25 years, at 6.9%, while Brazil’s economy has contracted by 3.8%. The World Bank cites global GDP growth for 2015 at 2.4%, down from 2.6% in 2014, although it does expect the global economy to recover, predicting growth rates of 2.9% for 2016 and 3.1% for 2017.1

Moderate confidence in key market indicatorsP&U executives are less positive towards key market indicators than they were six months ago, expressing moderate levels of confidence in corporate earnings, short-term market stability, credit availability and equity valuations.

This more subdued sentiment can be attributed to the cumulative pressures of depressed energy demand, persistent low wholesale power prices, volatile commodity prices, and an evolving utility business and regulatory landscape across many regions.

What is your perspective on the state of the global economy today?Q:

Please indicate your level of confidence in the following at the global level.Q:

Political instability, commodity and currency volatility pose the greatest risksRising geopolitical conflicts and instability, including the ongoing conflict in Syria and refugee crisis, recent terrorist attacks and conflicts in the South China Sea are impacting the P&U sector. Our respondents name increased political instability and volatility in commodity and currency markets as the top two risks for utilities.

Commodity prices fell to record lows in 2015 and early 2016. In January, Brent Crude oil prices hit 2003 levels of around US$26/barrel; the Henry Hub natural gas spot prices have fallen to around US$1.8-US$2.0/mmbtu this year compared to US$13/mmbtu in 2008; while the price of coal in Australia’s Newcastle Port has fallen 70% below its 2009 peak.2

What do you believe to be the greatest economicrisk to your business over the next 6–12 months?Q:

1%Apr 15

27%

Oct 15

14% 5%

Improving DecliningStable*

1% 1%Apr 16

36% 14%

Stronglyimproving

Modestlyimproving

Stronglydeclining

Modestlydeclining

Stable*

3%Apr 15

14%

61%

1%Oct 15

7% 9%

47%

Apr 16

46%

11%43%

48%

81%

36%

72%

22%

Improving Stable Declining

Equityvaluations

Short-termmarket stability

Creditavailability

Corporateearnings

42% 44%

32%

43%

54%

42%

57%

40%

4%

14%11%

17%

Increased global andregional political instability

Increased volatility incommodities and currencies

Economic and political situationin the European Union

Slowing growth in keyemerging markets

Timing and pace of interestrate rises in the US

Risk of globalhealth pandemics

18%

10%

7%

9%

27%

29%

* Respondents who selected stable expect real GDP growth in 2016 to be the same as 2015.

1 ”Global Economic Prospects 2016,” World Bank, www.worldbank.org/en/publication/global-economic-prospects, accessed 4 April 2016; “China’s economic growth in 2015 is slowest in 25 Years,” The Wall Street Journal, www.wsj.com/articles/china-economic-growth-slows-to-6-9-on-year-in-2015-1453169398, 19 January 2016; “Brazilian waxing and waning,” The Economist, www.economist.com/blogs/graphicdetail/2016/03/economic-backgrounder, 31 March 2016.

2 ”US Energy Information Administration (EIA); “Australia thermal coal price at 8-year low,” Financial Times, www.ft.com/intl/cms/s/0/339d3796-6cf9-11e5-aca9-d87542bf8673.html#axzz44veFNQ2M, 7 October 2015.

Utilities focus on improving efficiencies and adopting new technology

Corporate strategy


51%will focus on improving

operations to drive growth


Corporate strategy

Utilities seek growth through improving operations, managing risk and embracing technologyDisruptive trends have become a reality in today’s P&U business landscape. New technologies, diverse market entrants, different products and services and changing customer expectations require utilities to develop new capabilities, including better use of digital technology and analytics. Staying relevant in this transforming environment requires utilities to embrace this new technology and the opportunity to improve business structures, risks and processes. Recently, we have seen some of the biggest utilities in the UK facing customer churn and revenue losses, due partly to issues in their billing processes.

Improving operations (51%) and risk management (49%) will be central to utilities’ growth strategies over the next 12 months, according to our respondents. Reducing costs is still a priority, with 44% saying cost reduction dominates their boardroom agenda. Centrica, E.ON and RWE are among several large utilities that have significantly restructured their businesses in recent months.

Improving operations: infrastructure,organization and processes

Making better use of digital,technology and analytics

Improving riskmanagement

46%

49%

51%

Reducing costs/improving margins


Impact of digital technologyon your business model

38%

38%

44%

Improving operations: infrastructure,organization and processes

Making better use of digital,technology and analytics

Improving riskmanagement

46%

49%

51%

Reducing costs/improving margins


Impact of digital technologyon your business model

38%

38%

44%

How does your company plan to drive growth over the next 12 months?Q:

Focus on retaining or hiring talentThe digital evolution and adoption of new technology have not led to significant job cuts in the utilities sector. In fact, many utilities are actively seeking new talent with different skill sets – most of our P&U respondents (86%) expect to retain or hire talent in the next 12 months.

As other utilities restructure and reduce costs, however, some jobs will be lost. Fourteen percent of P&U respondents expect to reduce workforce numbers in the next 12 months.

With regard to employment, which of the following does your organization expect to do in the next 12 months?Q:

Which of the following has been elevated on your boardroom agenda during the past six months?Q:

14%

30%Reduce workforce numbers

Keep current workforce size

Create jobs/hire talent

56%

New business models and wider technology adoption to drive growth


M&A outlookPositive outlook sees deal momentum remain strong

53%plan to actively pursue

acquisitions


What is your level of confidence in the following at the global level?Q:

5% 40% 44%

11% 47% 42%

11%

59% 34%

61%

7%

90% 10%

61%

78%19% 52%

56%

29%

DecreaseRemain at current levelsIncrease

NoYes


The gap is small (<10%) No gap

Somewhat higher (10%—25% gap)Significantly higher (≥25%)

Apr 16

Oct 15

Oct 14 Apr 15 Oct 15


2,695

3,702

16%

63%

2,963

Qualityof acquisitionopportunities

Numberof acquisitionopportunities

Likelihoodof closing

acquisitions

71%

50%

41%

67%

73%

58%

41%

34%

47%

Total number of deals our survey respondents have in their pipeline

% of positive attitudeDeal metrics

Gap between buyer and sellerexpectations too wide

Competition fromother buyers

Issues uncovered duringdue dilligence

Investor orboard scrutiny

Concerns about regulatoryor antitrust laws

21%

17%

16%

25%

21%

Expectations ease after a strong year The strong M&A momentum of 2015, when total P&U deal value reached a six-year high of US$200b,3 carried over to Q1 2016, which recorded a Q1 high of US$44b worth of deals. These results confirm the sentiments expressed by P&U respondents in the October 2015 edition of the survey, in which 76% of the respondents felt that the M&A market was improving.

Although expectations around M&A over the next 12 months have eased, about half (49%) of P&U executives expect the market to continue to improve, while 48% expect it to stay the same. Only 3% anticipate a decline.

What is your expectation for the M&A market in the next 12 months?Q:

Stay the same

Improve

Decline

48%

23%

58%

1%

3%

3%

39%

76%

49%

Oct 15 Apr 16Apr 15

More than half of utilities plan acquisitionsAlthough slipping marginally from October 2015, more than half (53%) of respondents expect their company to actively pursue acquisitions in the next 12 months.

Utilities are using M&A as a strategic tool to adapt to changing sector dynamics through divestment of non-core businesses and the acquisition of new capabilities. In the US, electric utilities are buying gas operations to boost regulated earnings, while European utilities are expanding energy services platforms, such as Engie’s acquisition of OpTerra Services and E.ON’s US$18.3m investment in Greensmith, a provider of energy storage software and integration services.4

Sentiments around deal fundamentals remain positive, although we see less confidence than six months ago. The majority (58%) of P&U executives are positive about the number of acquisition opportunities and expressed a moderate level of confidence about both the quality of opportunities and the likelihood of closing these deals.

Do you expect your company to actively pursue acquisitions in the next 12 months? Q:

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2%

2015

4%

6%

8%

10%

0

1t

2t

3t

4t

5tM&A/GDP

Expectations to pursue an acquisition

Value (US$t)

Value US$t M&A value as % of GDP

Apr 14 Oct 14 Apr 15 Oct 15 Apr 16

35% 40%

45%

58%

53%

3 EY analysis — EY Power transactions and trends, Q4 2015. 4 “Engie acquires Opterra Energy Services in North America,” ENGIE, www.gdfsuezna.com/news/engie-acquires-opterra-energy-services/, 25 February 2016; “E.ON invests in

American start-up Greensmith,” E.ON, www.eon.com/en/media/news/press-releases/2015/12/9/eon-invests-in-american-start-up-greensmith.html, 9 December 2015.

M&A outlook


Healthy pipelines support strong M&A activity

Small and mid-cap deals to dominate, but megadeals remain prominentSmall and mid-cap deals will continue to represent the bulk of M&A activity as utilities focus on adding bolt-on capabilities to their portfolios. Fifty-nine percent of respondents said that their largest planned deal size over the next year is less than US$250m. This trend was reflected in EY’s Q1 2016 edition of Power transactions and trends, in which the average deal size of European utilities fell by 24% to US$283m.

We expect to see more deals in renewable energy as utilities seek to align their portfolio to an increasingly clean-energy focused regulatory environment. In Q1, 74% of total European deal activity (US$5.4b) was in the renewables segment.

Megadeals have not disappeared however — the sector has seen more than 40 deals over US$1b across the last three quarters.5 We expect a steady stream of billion-dollar-plus deals over the coming months. In particular, utilities in the US and China are looking for acquisition opportunities to consolidate their position in the market.

Q: What is your largest planned deal size in the next 12 months?

Greater than US$5b

US$0—US$250m

US$251m—US$1b

US$1.1b—US$5b

59%

33%

8%

0%

Utilities pursue multiple dealsThe search for new avenues to top-line growth is behind many utilities’ decisions to develop healthy pipelines of multiple deals. Many of these involve regulated assets which are increasingly attractive because of their ability to offer stable cash flows and opportunities to expand customer bases. As P&U companies invest in new capabilities such as energy storage, connected homes and supporting IT applications, deals involving disruptive technologies are becoming more mainstream.

How do you expect this to change over the next 12 months?

Q:

DecreaseNo changeIncrease

20%15%

65%

≥5 3 2 14

12% 29%

17% 22%

20%

How many deals do you currently have in your pipeline?

Q:

M&A outlook

5 EY analysis — EY Power transaction and trends, Q4 2015

BEPS guidance is already impacting M&A strategiesThe release of the Organisation for Economic Co-operation and Development’s (OECD) final Base Erosion and Profit Shifting (BEPS) guidance in October 2015 has already impacted P&U dealmaking, with 13% of respondents saying they have canceled a planned transaction in response to the guidance. An additional 39% are considering the implications of the guidance on their M&A plans.

As more utilities expand operations into multiple countries, consideration of the implications of BEPS legislation will become critical when planning corporate and acquisition strategies.

Has the new guidance on tax issued by the OECD regarding BEPS altered your planned acquisition strategy?Q:

We have not considered theimplications of this guidance

We are considering the implicationsbut have not changed our planned

acquisition strategy

We have altered the structureof planned acquisitions

We have canceleda planned acquisition

15%

13%

39%

33%


How do you expect this to change over the next 12 months?

M&A outlook

Valuation gaps remain at manageable levels

Utilities are prepared to walk away from deals that do not meet expectationsUtilities are taking a judicious approach to M&A by not pursuing deals without a strong strategic rationale. Ninety percent of respondents said that they have canceled a deal in the last 12 months (up from 78% six months ago).

Executives are canceling deals that don’t fully meet their price expectations if they uncover issues during due diligence or if the competition is too great. The issue of competition is increasing as more P&U companies seek to restructure their business portfolio, financial investors increase their presence and new players enter the market.

Asset prices to remain largely stableThe majority (52%) of P&U executives expect asset prices to stay stable over the next 12 months, while 29% expect prices to fall.

We anticipate regulated network and renewable generation assets to continue to command high valuations based on their stable and predictable cash flows. As governments begin to withdraw clean energy subsidies, we expect a slowdown in the rate of new renewable capacity development, which will increase interest in existing assets and push up valuations.

Valuations of thermal generation assets are likely to further decrease amid ongoing low commodity prices and energy demand.

Utilities are using deals and alliances to create new value and meet customer expectationsP&U executives feel relatively comfortable with the current valuation gap within deals. Forty-four percent of respondents say the gap is less than 10%, 11% say there is no gap and just 5% believe it is more than 25%. However, uncertainty around the impact of key disruptive trends on asset valuations could result in differences in asset pricing expectations. More than half (59%) of respondents expect the valuation gap to increase over the next 12 months.

How do you think that buyers’ expectations currently compare to sellers’ (valuation gap)? Q:

5% 40% 44%

11% 47% 42%

11%

59% 34%

61%

7%

90% 10%

61%

78%19% 52%

56%

29%


NoYes




Apr 16

Oct 15



2,695

3,702

16%

63%

2,963




acquisitions

71%

50%

41%

67%

73%

58%

41%

34%

47%








21%

17%

16%

25%

21%

What do you expect the price/valuation of assets to do over the next 12 months?Q:

If you answered yes, what was the primary reason?Q:

5% 40% 44%

11% 47% 42%

11%

59% 34%

61%

7%

90% 10%

61%

78%19% 52%

56%

29%


NoYes




Apr 16

Oct 15



2,695

3,702

16%

63%

2,963




acquisitions

71%

50%

41%

67%

73%

58%

41%

34%

47%








21%

17%

16%

25%

21%

Have you either failed to complete or canceled a planned acquisition in the past 12 months?Q:

How do you expect the valuation gap between buyers and sellers to change in the next 12 months?Q:

5% 40% 44%

11% 47% 42%

11%

59% 34%

61%

7%

90% 10%

61%

78%19% 52%

56%

29%


NoYes




Apr 16

Oct 15



2,695

3,702

16%

63%

2,963




acquisitions

71%

50%

41%

67%

73%

58%

41%

34%

47%








21%

17%

16%

25%

21%

5% 40% 44%

11% 47% 42%

11%

59% 34%

61%

7%

90% 10%

61%

78%19% 52%

56%

29%


NoYes




Apr 16

Oct 15



2,695

3,702

16%

63%

2,963




acquisitions

71%

50%

41%

67%

73%

58%

41%

34%

47%








21%

17%

16%

25%

21%

5% 40% 44%

11% 47% 42%

11%

59% 34%

61%

7%

90% 10%

61%

78%19% 52%

56%

29%


NoYes




Apr 16

Oct 15



2,695

3,702

16%

63%

2,963




acquisitions

71%

50%

41%

67%

73%

58%

41%

34%

47%








21%

17%

16%

25%

21%

12 | Capital Confidence Barometer12 | Capital Confidence Barometer

Utilities are using deals and alliances to create new value and meet customer expectations

Are you planning to enter alliances with other companies or competitors to help create value from underutilized assets?

Q: If you answered yes, what was the primary reason?Q:

Yes No

61% 39%

To monetize tangible assets(including production facilities,

land and buildings, etc.)

To monetize both intangibleand tangible assets

To monetize intangible assets(including data, brands,

intellectual property, etc.)

24%

65%

11%

0 10 20 30 40 50

Changing customer behavior and rising expectations will be the most disruptive factors in the utilities sector over the next 12 months, according to nearly a third (29%) of our respondents.

The new generation of utility customer demands advanced technologies, flexible interactions and on-demand services offered by the likes of Amazon, Uber and telecommunications giants — they expect the same level of choice and convenience in the management of their energy and water services. With information and communication technology (ICT) players, system integrators, telecommunications companies (telcos) and “home automation” firms entering the market and competing with utilities for the same customer base, it is not surprising that our P&U respondents identified sector convergence and increasing globalization as other key disruptors.

Faced with these challenges, utilities are exploring new avenues, including partnerships, alliances and M&A to increase their customer base and gain access to new technology and new markets. More than a third (39%) of respondents have indicated that they plan to enter into alliances with other companies and we are seeing a clear rise in utility-tech company partnerships. Engie has partnered with Quby (a Dutch developer of smart home solutions) to offer a new smart thermostat to customers in Belgium; and E.ON is partnering with SOLARWATT to roll out electricity storage solutions in Germany.6

6 “Quby announces collaboration with Engie Electrabel of Belgium,” Quby, quby.com/en/quby-announces-collaboration-with-electrabel-of-belgium, 7 April 2016; “E.ON to partner with SOLARWATT to develop electricity storage systems,” E.ON, www.eon.com/en/media/news/press-releases/2016/2/25/eon-to-partner-with-solarwatt-to-develop-electricity-storage-systems.html, 25 February 2016; “Osaka Gas enlists Docomo for home power sales,” Nikkei, asia.nikkei.com/Business/Deals/Osaka-Gas-enlists-Docomo-for-home-power-sales, 8 December 2015; “Wireless Solutions,” PGE, www.pge.com/en/mybusiness/services/maint/wireless/index.page, accessed 18 April 2016.

Increasing globalization

Product innovation

15%

Advances in technology and digitization

12%

Industry regulation

10%

Changing customer behavior and expectations

29%

Sector convergence/ increasing competition from companies in other sectors

17% 17%

From where do you see the most disruption to your core business in the next 12 months?Q:

Sect

or d

isru

ptio

n


Cross-sector acquisitions rising as utilities realign portfolios

Which of the following do you expect to become more prominent in dealmaking in the next 12 months?

Q:

More distressed asset sales

Unsolicited/hostile acquisition approaches

Greater competition from PE acquirers

Outbound acquisitions from China

33%

31%

27%

9%

Access to new materials ortechnologies/digitalization

Changes in customer behavior

New product innovation

Reacting to competition

39%

22%

22%

17%

The combination of multiple disruptive forces – low wholesale prices, penetration of renewable energy and distributed generation, regulatory pressures and new business models – have adversely affected the economics of several conventional utility assets, bringing several distressed assets onto the market. One-third of P&U executives expect to see more distressed asset sales in the next 12 months.

Faced with less revenue from traditional sources, many utilities are using deals to adapt to changing conditions and find alternative avenues to growth. For some, this means exploring opportunities outside the power and utilities sector. More than a third (39%) of the P&U executives we surveyed said they would consider buying outside their sector to gain access to new technology or to meet changing customer expectations regarding products and services.

We already see examples in many markets of how this sector convergence is driving deals. In the US, The Southern Company plans to acquire PowerSecure for US$431m to provide customers with distributed generation and energy efficiency solutions.7 Meanwhile, the UK’s Centrica acquired its smart thermostat platform provider AlertMe in early 2015 and is now ramping up its connected homes offering across all the geographies in which it operates. The company’s US subsidiary Direct Energy acquired the energy management and data analytics provider Panoramic Power in November 2015.8 These acquisitions are in line with the company’s stated strategy of focusing more on customer-facing business for growth.

We expect to see more cross-sector acquisitions by P&U companies, particularly in the technology-oriented energy management and analytics domains, as utilities seek to align their operations and offerings to new expectations.

Sect

or c

onve

rgen

ceWhat is the main reason for pursuing an acquisition outside your sector?Q:

More distressed asset sales

Unsolicited/hostile acquisition approaches

Greater competition from PE acquirers

Outbound acquisitions from China

33%

31%

27%

9%

Access to new materials ortechnologies/digitalization

Changes in customer behavior

New product innovation

Reacting to competition

39%

22%

22%

17%

7 ”Press release details Southern Company to acquire PowerSecure International, Inc,” Southern Company, investor.southerncompany.com/information-for-investors/latest-news/latest-news-releases/press-release-details/2016/Southern-Company-to-Acquire-PowerSecure-International-Inc/default.aspx, 24 February 2016.

8 ”Case study: Making the connected home a reality,” Centrica Plc, www.centrica.com/news/case-study-making-connected-home-reality, accessed on 20 April 2016; “Direct Energy to acquire energy management solutions provider Panoramic Power,” Centrica Plc, www.centrica.com/news/direct-energy-acquire-energy-management-solutions-provider-panoramic-power, accessed 20 April 2016.


Reforms in the distribution segment, changes in tariff policy and an increased focus on renewables and energy efficiency have made the P&U sector in India one of the world’s most attractive destinations for investments and M&A activity. The sector is expected to be boosted further by the successful implementation of the Ujjawal Discom Yojna (UDAY) scheme, which aims to restructure the cumulative outstanding debt of about US$63b on distribution companies (discoms).

In April 2016, Fortum Corp. agreed to invest US$220m to US$450m in the Indian solar segment. Similarly, Welspun is well-advanced in discussions around selling 700MW of renewable assets to IDFC Alternatives Ltd. in a deal expected to fetch US$1.5b. While we expect continued investor interest in renewables, competitively low tariff bids could impact funding and returns for projects under development.

Investment has continued to flow into other segments as well. In January 2016, EDF signed a preliminary agreement with NPCIL to build six nuclear power plants in the western part of the country. Similarly, Adani Power has indicated it will set up US$2.2b coal-fired plants with a capacity of 1.6GW.

These recent announcements bode well for longer-term investment trends. According to India’s Minister of Power, the country aims to attract investment of US$1t by 2030 to ramp up its power infrastructure and realize 100% electrification. 11

India

Disruption is reshaping Australia’s P&U sector as commodity prices fall and stakeholders increasingly embrace renewables and energy storage. Many utilities are responding by repositioning themselves. Australia’s largest electricity producer, AGL Energy, launched a US$3b renewable energy fund in February 2016 while simultaneously investing in Sunverge, a Californian solar and battery storage developer. Similarly, Ergon Energy, an electricity retailer, has partnered with SunPower and Sunverge for trials of solar PV plus energy storage systems for its customers in Queensland.

Several of Australia’s state governments are opening up their T&D sectors to private buyers in a bid to raise cash for investment in infrastructure. Inspired by the successful divestment of Transgrid, the New South Wales Government now plans to sell a 50.4% stake of Ausgrid. The Western Australian Government is also considering privatizations.

Investors are also vying for market share in the renewables sector. Thailand’s Wind Energy Holding Company acquired 50% of CWP Renewable’s Australian business, including an 800MW development pipeline. As support for renewables and energy storage grows, we expect more private investment in this segment, although shorter power purchase agreements (PPAs) offered to renewable developers could start to impact their returns.9

Australia

M&A outlook

Top M&A markets and investment destinations

Mainland China’s P&U sector remains a key investment and M&A destination. The sector witnessed some megadeals in the last few months, with the most notable being China Yangtze Power’s US$12.5b acquisition of Jiangsu Sanxia Jinshajiang Chuanyun Hydroelectric Power from China Three Gorges Corporation, Sichuan Energy Investment Group and Yunnan Energy Investment Group. China’s 13th Five-Year Plan calls for greater investment in renewables innovation and technology, particularly battery storage and clean coal, which is set to attract investors in coming quarters.

However, the slowdown in economic growth rate has started to impact the P&U sector. China’s electricity demand grew only 0.5% year-on-year in 2015, the slowest since 1998. As utilities reach the end of the domestic consolidation cycle (primarily in generation), which peaked in 2015, they will increasingly look for M&A opportunities in renewables both at home and overseas. State Grid has outlined plans to build a US$50t global energy network enabling transmission of electricity across continents.10

China

Market data and insights from clients have helped us identify six key markets that we expect to host significant M&A activity within the P&U sector over the next 12 months.


Reforms are transforming Japan’s generation and retail segments. The retail electricity market opened to competition on 1 April, and already we see the monopoly of Japanese power utilities giving way to increased competition from nontraditional players. It is reported that more than 260 companies from different sectors, including gas and oil, telecommunications and railways, have entered the electricity retail market.

Robust policy support for renewables has seen solar energy surge in Japan. According to a report by the Institute for Energy Economics and Financial Analysis, Japan has 30GW of cumulative solar capacity installed as of December 2015, which puts the country on track to exceed 50GW by 2020. With rising energy prices — primarily due to fossil fuel imports and the nuclear shutdown — renewables are set to become key to growth in the region.12

Japan

9 “AGL Energy going greener with launch of $3b renewable energy,” Business Daily, 10 February 2016, via Factiva Copyright © 2016 Fairfax Media.10 “China Builds an Empire of Electricity With Australia as Target,” Bloomberg, accessed 01 April 2016.11 “India is likely to spend $1 trillion on power by 2030, says Power Minister Piyush Goyal,” Business Insider, 09 February 2016, via Factiva, © Times Internet Limited.12 “Data Bite: In Solar Advances, Japan Is Living Up to Its Nickname as the Land of the Rising Sun,” Institute for Energy Economics and Financial Analysis website (via http://ieefa.org/

solar-advances-japan-living-nickname-land-rising-sun/, accessed 15 April 2016).13 BNEF, EY analysis.14 EY’s Q1 2016 Power transaction and trends.

During Q1 2016, a total of US$26b worth of deals occurred in the US P&U sector, with most M&A activity driven by consolidation in power and gas segments. The US hosted five out of the quarter’s eleven billion-dollar-plus transactions. Valuations of T&D assets remain high, as evidenced by several large deals, including the Fortis and Dominion acquisitions in the regulated electric and gas T&D segment.

Though the US Clean Power Plan has been put on hold, last year’s interest rate hike, coupled with depressed commodity prices, have put pressure on the valuations of generation utilities. Renewables will remain an attractive bet for utilities as they replace capacity lost as coal-fired plants retire.14

M&A outlook

It is renewable energy, particularly solar and offshore wind, that is leading growth in the UK P&U sector. Activity in solar has been boosted by developers rushing to build new capacity to take advantage of subsidies that are now being rolled back. According to a report by Bloomberg New Energy Finance, 2GW to 2.5GW of solar capacity will be installed in the UK in 2016 as existing projects still eligible for subsidies come online.

As in the rest of Europe, low commodity prices and suppressed energy demand are leading to subdued deal activity in other UK energy segments. However, utilities are increasingly taking advantage of financial investors keen to invest in assets with long-term stable cash flows. In Q1 2016, utilities including SSE, DONG Energy and Centrica sold wind assets worth US$2.1b to financial investors in a bid to raise cash. Due to strong policy support, greenfield investment in offshore wind is expected to remain high.13

United Kingdom

United States

The P&U executives we surveyed tell us that that the US and UK remain the most attractive investment markets for utilities seeking stable acquisition opportunities, particularly in the regulated gas and electricity transmission and distribution (T&D) and renewable energy segments. The growth rate has slowed in China, but the country’s renewables market still holds interest. Reforms in India’s energy sector are also attracting investors.


Key developed and emerging markets set to attract major share of acquisition capital

1. United Kingdom 2. United States 3. China 4. India 5. Germany

Which are the top destinations in which your company is most likely to pursue an acquisition in the next 12 months?Q:Companies increasingly looking outside

their home markets in search for growthAs P&U investors review their portfolios, many are exploring cross-border acquisition opportunities. Almost three-quarters (70%) of survey respondents said they would consider such a deal in the next 12 months.

Major developed markets, such as the US and the UK, that have relatively stable economic prospects, are attracting the most attention from investors looking for regulated and renewable assets. In Q1 2016, Canadian investors bought more than US$13b of regulated assets in the US.

India should also attract strong interest after a series of investor-friendly reforms and strong economic growth. China remains an attractive investment destination, led by ongoing consolidation and renewable power deals, although slowing economic growth is encouraging domestic investors to seek cross-border deals. In February, SDIC Power Holdings acquired the UK offshore wind business of Repsol S.A. for US$263m. Meanwhile, the State Grid of China is among contenders keen to acquire a 50.4% stake in Australian transmission utility Ausgrid.15

DomesticCross-border74%

26%

Cross-border

Domestic

70%

30%

Survey respondents were asked to rank their top three destinations of choice for investments. Those that chose their headquarters country as first choice were considered as being primarily focused on domestic acquisitions.

M&A outlook

15 “Repsol sells its offshore wind power business in the United Kingdom for 238 million euros,” Repsol, www.repsol.com/es_en/corporacion/prensa/notas-de-prensa/ultimas-notas/25-02-2016-repsol-vende-su-negocio-eolico-marino-en-el-reino-unido-por-238-millones-de-euros.aspx, accessed on 10 May 2016; “China’s State Grid eyes 50.4 per cent stake in Ausgrid, part of investment wave,” Australian Financial Review, www.afr.com/business/energy/electricity/chinas-state-grid-eyes-504-per-cent-stake-in-ausgrid-part-of-investment-wave-20160401-gnvzwf, accessed on 10 May 2016.

17Capital Confidence Barometer |17 | Capital Confidence Barometer

Cont

actsFor a conversation about your capital strategy, please contact:

GlobalPip McCrostie EY Global Vice Chair Transaction Advisory Services [email protected] +44 20 7980 0500

Steve Krouskos EY Deputy Global Vice Chair Transaction Advisory Services [email protected] +44 20 7980 0346

Matt Rennie EY Global TAS Power & Utilities Leader [email protected] +61 7 3011 3239

AmericasJoseph Fontana US TAS Power & Utilities Leader New York, US [email protected] +1 212 773 3382

Mitch Fane US Southwest TAS Power & Utilities Leader Texas, US [email protected] +1 713 750 4897

Miles Huq US Northeast TAS Power & Utilities Leader Maryland, US [email protected] +1 410 783 3735

Rob Leonard US Southeast TAS Power & Utilities Leader Charlotte, US [email protected] +1 704 335 4236

Dmitriy Litvak US Central TAS Power & Utilities Leader Illinois, US [email protected] +1 312 879 5913

Gerard McInnis Canada TAS Power & Utilities Leader Alberta, Canada [email protected] +1 403 206 5058

Olivier Hache MeCAR TAS Power & Utilities Leader México, D.F. [email protected] +52 55 5283 1310

Lucio Teixeira S. America TAS Power & Utilities Leader Sao Paulo, Brazil [email protected] +55 112 573 3008

Asia-Pacific Nick Cardno Oceania TAS Power & Utilities Leader Sydney, Australia [email protected] +61 2 9248 4817

Gilles Pascual ASEAN TAS Power & Utilities Leader Singapore [email protected] +65 6309 6208

Bum Choong Kim Korea TAS Power & Utilities Leader Seoul, Korea [email protected] +82 2 3787 4107

Alex Zhu China TAS Power & Utilities Leader Beijing, China [email protected] +86 10 5815 3891

Europe, Middle East, India and Africa (EMEIA)Arnaud De Giovanni EMEIA TAS Power & Utilities Leader Paris, France [email protected] +33 1 55 61 04 18

EuropeRemigiusz Chlewicki Central & Southern Europe TAS Power & Utilities Leader Warsaw, Poland [email protected] +48 22 557 74 57

René Coenradie BeNe TAS Power & Utilities Leader Rotterdam, Netherlands [email protected] +31 88 407 8777

Edgars Ragels CIS TAS Power & Utilities Leader Moscow, Russia [email protected] +7 495 755 9724

Michael Bruhn Nordics TAS Power & Utilities Leader Copenhagen, Denmark [email protected] +45 25 29 31 35

Stéphane Kraft FraMaLux TAS Power & Utilities Leader Paris, France [email protected] +33 1 55 61 09 28

Umberto Nobile Mediterranean TAS Power & Utilities Leader Milan, Italy [email protected] +39 0280 669744

Martin Selter GSA TAS Power & Utilities Leader Berlin, Germany [email protected] +49 30 25471 21284

Ian Whitlock UKI TAS Power & Utilities Leader London, UK [email protected] +44 20 7951 0892

Middle EastDavid Lloyd Middle East TAS Power & Utilities Leader Riyadh, Saudi Arabia [email protected] +966 1121 59852

IndiaKuljit Singh India TAS Power & Utilities Leader New Delhi, India [email protected] +9 111 66 233 110

AfricaBruce Harvey Africa TAS Power & Utilities Leader Johannesburg, South Africa [email protected] +27 11 772 5352

JapanPeter Wesp Japan TAS Power & Utilities Leader Tokyo, Japan +81345826400 [email protected]

Power & Utilities insights from EY

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About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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About EY’s Global Power & Utilities Sector In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY’s Global Power & Utilities Sector brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Sector team works to anticipate market trends, identify their implications and develop points of view on relevant sector issues. Ultimately, this team enables us to help you meet your goals and compete more effectively.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

ey.com/powerandutilities/ccb

About this surveyThe Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas —EY’s framework for strategically managing capital.

It is a regular survey of senior executives from large companies around the world, conducted by the Economist Intelligence Unit (EIU). Our panel comprises selected global EY clients and contacts and regular EIU contributors.

• In February and March, we surveyed a panel of more than 1,700 executives in 45 countries; nearly 50% were CEOs, CFOs and other C-level executives. In this survey, we had 114 respondents from P&U companies; more than 55% were CEOs, CFOs and other C-level executives.

• The P&U companies’ annual global revenues ranged from less than US$500m (20%); US$500m–US$999.9m (28%); US$1b–US$2.9b (25%);

US$3b-US$4.9b (8%); and greater than US$5b (19%).

• Global company ownership was publicly listed (59%), privately owned (32%), government/state-owned (7%) and family-owned (2%).

capital confidence barometer - may 2016 - power ......increasingly irrelevant in today’s rapidly...

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