Power transactions and trends - EY - US...Power transactions and trends Q3 2015 We’ve seen little...

Power transactions and trends Q3 2015

Contents

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

Matt RennieGlobal TAS Power & Utilities Leader+61 7 3011 [email protected] @MattRennie_EY

Simone ZawadskiGlobal TAS Power & Utilities Resident+61 7 3011 [email protected] @s_zawadski

Shikhar GuptaGlobal Power & Utilities Analyst+91 124 470 [email protected] @ShikharGupta_EY

http://www.ey.com/ptt

http://www.ey.com/ptt

Matt RennieGlobal TAS Power & Utilities Leader+61 7 3011 [email protected]

3Power transactions and trends Q3 2015 |

After a sluggish first half of the year, where deal activity dipped to a historic low of US$50.9b, the quarter saw utilities actively pursuing growth agendas despite weak global economic conditions in some regions and falling commodity prices.

M&A activity in the US dominated the quarter, with megadeals contributing US$46.9b, or 62% of total deal value. This is in sharp contrast to the first half of 2015, where deals reached just US$9.6b, as regulatory hurdles and macroeconomic uncertainty put the brakes on transactions. While consolidation has been an ongoing feature of the US P&U sector over the last two years, this surge in activity shows how utilities are under increased pressure from rising environmental costs and reducing load growth. Some of the largest deals — Southern Company’s US$12b acquisition of AGL Resources, Emera’s US$10.4b acquisition of TECO Energy and NextEra Energy’s US$2b acquisition of NET Midstream assets — all point to a common growth agenda focused on diversification of portfolios toward stable, regulated assets.

Of these regulated assets, gas transmission and distribution (T&D) assets are increasingly appealing to utilities seeking to replace lost capacity from retired coal-fired plants and unlock growth. While markets are rewarding these regulated deals, it is interesting to note the dip in performance of yieldcos and merchant generator stock during the quarter. The sustainability of the yieldco model appears to have been questioned amid a recent decline in market capitalization and potential interest rate rises.

In Asia-Pacific, the main transaction drivers continue to be consolidation in China and growing foreign investors’ interest in the Indian renewable energy sector. Quarterly deal value reached US$11.9b, up from US$9.3b in Q2. While the prospect of rising US interest rates, falling commodity prices and slowing economies might deter some dealmaking, reforms, privatizations and renewable generation opportunities will continue to drive investor interest. Companies that have high leverage on balance sheets will explore options with strategic and financial investors.

Despite a slight uptick in deal value and volume, M&A activity in Europe still hovers at a six-year low. The majority of Q3 deal value was contributed by the renewable energy segment as strategic investors seek to comply with environmental mandates and financial investors look for stable returns not otherwise available in a negative demand-growth scenario.

The Africa and Middle East region maintains its appeal for foreign investors as many countries in the region diversify their energy mix to meet growing demand. Renewable energy offers particular opportunities; most countries in Sub-Saharan Africa (SSA) have set ambitious renewable energy targets, and more Middle East countries, such as United Arab Emirates, Israel and Oman, are contemplating reforms to shift their generation mix toward clean energy.

While regulated T&D assets will continue to command premium valuations, we expect the rapid uptake of new technologies, such as integrated solar-plus battery systems, to increasingly disrupt the sector. In countries such as Australia, where penetration of rooftop solar photovoltaic (PV) is high and battery storage is becoming more cost- competitive, traditional utility business models are being challenged, which may impact regulated capex and asset valuations in the future.

Going forward, we anticipate P&U transactional strategies to be increasingly influenced by the convergence of sectors aimed at capitalizing on synergies and unlocking further revenue potential. Already in Japan, for example, a number of integrated utilities have teamed up with telecommunication players to enhance their service offering and customer base ahead of retail competition in 2016.

The global power and utilities (P&U) sector

witnessed a sharp upturn in merger and acquisition

(M&A) activity in Q3 2015, reaching a five-year high

with a massive US$75.5b of deals.

Overview

Massive surge in deal activity as utilities pursue growth and synergies with other sectors


Chart 1Global P&U deal value and volume (Q3 2013–Q3 2015)

31.7 35.5 28.2

58.138.6

52.2

29.721.2

75.5

Total deal value (US$b) Deal volume

Q3 Q42013

Q1 Q2 Q3 Q4 Q12014

Q2 Q32015

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30

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Source: EY analysis based on Mergermarket data

Chart 2Global P&U deal value by region (US$b, Q3 2013–Q3 2015)

Americas Europe Asia-Pacific

Q3 Q42013

Q1 Q2 Q3 Q4 Q12014

Q2 Q32015

01020304050607080


16billion-dollar-plus

transactions pushing average deal value to US$878m, compared to US$290m in Q2

US$75.5b total global deal value,

a five-year high

US$46.9b total US deal value,

a six-year high

US$29.8b total T&D deal value,

a five-year high led by megamergers

in the US


Deal activity remains depressed; transactions focused on renewables

EuropePower transactions and trends Q3 2015

We’ve seen little change since last quarter, with a continued absence of large corporate divestments reflecting a tough energy demand environment. E.ON is a notable deviation from this trend as it continues to pursue portfolio optimization through the sale of its Italy-based hydroelectric business for US$1b.

The ongoing appeal of renewables reflects the region’s widespread mandates for the adoption of clean energy. Deals in this segment accounted for 72% of Europe’s total deal value, with Germany, Italy, Spain and the UK emerging as the most active markets. Despite several conventional generation assets up for sale, non-renewable generation saw a meager US$25m deal value during

Q3, reflecting weak fundamentals for generation businesses in the region.

Financial investors remain dominant among the buyer community, acquiring renewable and T&D assets worth US$3.6b. We are seeing an interesting shift in strategy by these investors. While historically they have preferred to manage risk by investing in operational renewable assets, we are now seeing private equity (PE) firms such as Germany-based Global Infrastructure Partners partnering with utilities to acquire assets under construction. We expect this trend to gain momentum as subsidies disappear and the need for capital pushes utilities to join hands with financial buyers.

US$6.6b in total deal value for Q3

US$3.6b of deal value by financial investors

72%of total deal value contributed by the renewable energy segment

7%expected growth of EU’s electricity T&D capex between 2014 and 2035

Deals in the renewable energy sector were the

main focus of an otherwise sluggish quarter for

Europe where, despite a 17% uptick in deal value

since Q2, the region’s deal activity continues to hover

around six-year lows at US$6.6b.


Q3 trends:• Expansion into high-growth markets — Turkey’s relatively high energy prices are attracting investors, including Norway-

based energy group Statkraft, which announced plans to invest in the country’s hydropower segment and trading activities. We expect more interest in Turkey — its electricity market is projected to be Europe’s fastest growing, with an estimated compound annual growth rate (CAGR) of 6% until 2020.

• Diversity of renewables policies — Across Europe, we see an increasingly diverse landscape of clean energy policies and priorities. While France and the Netherlands are shoring up their solar and onshore wind capacities, the UK Government announced in July 2015 that it would begin phasing out subsidies for solar and onshore wind from April 2016. Germany has recently announced it will start shifting to coal power reserves in winter 2016. We expect these developments to translate into deal activity with several distressed assets coming to market.

• Divestment of wind energy assets — A number of utilities are selling stakes in expensive wind energy assets to institutional fund investors in a bid to raise cash. In September 2015, UK-based SSE Plc listed about US$758m worth of onshore assets for sale, expecting solid demand from pension and infrastructure funds. Similarly, DONG Energy has divested 50% of the 330 MW German Gode Wind 1 offshore wind construction project to Global Infrastructure Partners for US$879m.

• Energy reform and unbundling — Privatization and unbundling mandates continue to drive several investment opportunities in Eastern Europe. In September 2015, the Ukraine State Property Fund announced it would sell stake sales in power generators and utilities. Similarly, the pan-European equity fund Marguerite is playing an active role in the natural gas liberalization process in Latvia through its acquisition of shares in the Latvian natural gas utility, Latvijas Gaze, owned by Germany’s E.ON Ruhrgas International. For more details visit: ey.com/energyreform.

Transaction snapshot Financial investors’ quest for T&D and renewable assets drives transactionsWe saw deal value improve by 17% in Q3, driven mostly by US$4.7b of deal activity in the renewable energy segment. Strategic utilities are keen to acquire clean energy assets to help meet environmental mandates, especially amid an environment of reduced solar and wind subsidies, flatter valuations and expected reductions in grid capacity over the coming years. For financial investors, renewable energy assets with long-term power purchase agreements (PPAs)

offer stable returns that are otherwise not achievable in a negative demand-supply scenario.

As in Q2, financial investors led M&A activity, with private equity players and infrastructure and pension funds, primarily from the UK and the US, pumping around US$3.5b into the European P&U market. In a departure from recent trends, the presence of Chinese buyers was not as strong as in previous quarters, mostly because of weaker economic growth at home.

However, the State Grid Corporation of China, which is on a mission to acquire US$50b of overseas assets, is a potential buyer for Switzerland-based ABB’s grid operations.

Chart 4Europe deal value by segment (by subsector, US$b, Q3 2013–Q3 2015)

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Q3 Q42013

Q1 Q2 Q3 Q4 Q12014

Q2 Q32015

Generation T&D Renewables Others


Chart 3Europe deal value and volume (Asset and corporate level deals, Q3 2013–Q3 2015)

16.912.2

17.412.4

8.2 10.3 11.45.6 6.6


Q3 Q42013

Q1 Q2 Q3 Q4 Q12014

Q2 Q32015

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www.ey.com/energyreform



Top five deals, Q3 2015

Source: EY and Mergermarket analysis

Upstream gas assets are a focus for UK utilities, encouraged by relatively low wholesale gas prices. The quarter saw SSE Plc acquire a 20% stake in Total’s Shetland gas fields for US$880m.

With proposed law changes making utilities liable for the costs of nuclear decommissioning in Germany, Q3 saw some major planned spin-offs unravel. E.ON, for example, cancelled plans to spin off its German nuclear power assets, in a move estimated to cost the utility US$10b in asset write-downs in 2015. E.ON still plans to spin off other conventional power assets.

Valuations snapshot Regulated assets maintain above-average valuationsAs detailed in our recent report, Benchmarking European power and utility asset impairments: testing times ahead, European utilities impaired around US$8.2b (€7.2b) worth of fossil-fuel-based generation assets in 2014, representing the greatest share of impairments in the region. Little has changed for coal and gas-based generation plants since then. While margins have thinned due to falling oil prices and low domestic demand, the majority of these plants are running below capacity as renewables continue to connect

Announcement date

Target Target country

Bidder Bidder country

Deal value (US$m)

Rationale Segment

06 August 2015 Terni Hydroelectric Complex (E.ON Italia)

Italy ERG Power Generation SpA

Italy 1,033 The transaction marks E.ON’s move to exit the coal, gas and solar generation market in Italy. Note: following a strategic review E.ON has decided to retain and expand its Italian electricity and gas sales business, along with its distributed energy business.

Renewables: hydro

30 September 2015

Finerge Gestao de Projectos Energeticos

Portugal First State Investments

UK 1,008 Aligns with Enel Green Power’s active portfolio management strategy and will also help to shore up its balance sheet

Renewables: wind

29 July 2015 UK- and France- based gas fields of Total SA

UK, France

SSE E&P UK Ltd

UK 880 Expands SSE’s portfolio of gas production assets and is in line with utility’s effort to acquire assets while prices are depressed

Integrated: gas

10 September 2015

Gode Wind I (50% stake)

Germany Global Infrastructure Partners (GIP)

US 872 Investment strategy to strengthen renewable portfolio

Renewables: wind

21 July 2015 Gestamp Asetym Solar, S.L. (80% stake)

Spain KKR Global Infrastructure Investors II, LP

US 800 Supports target of 2.5 GW installed capacity by 2020

Renewables: solar

www.ey.com/assetimpairment

www.ey.com/assetimpairment


to the grid. We expect valuations for generation and IPPs to dip further as more fossil-fuel-based assets are brought to market or mothballed, notably by Enel, A2A and EDF.

While renewables valuations remain above average across Europe, looming subsidy cuts in the UK are expected to see small- and medium-scale solar IPPs in that country take a hit. In October 2015, Climate Energy and Mark Group, both small-scale solar companies, filed for bankruptcy, citing the cuts as a contributing factor. SunEdison has also indicated that it plans to de-emphasize its presence in the UK solar sector. Wind assets are also feeling the impact. Wind power developer Infinis Energy lost 8% in share value after estimating a considerable slump in EBITDA (earnings before interest, tax, depreciation and amortization) for FY16. The bright spot may be in renewable power assets backed by regulated utilities, which are likely to attract above-average valuations from pension and infrastructure funds looking for long-term, stable revenue streams.

We saw M&A activity in the T&D segment increase slightly over the quarter, attracting deals worth more than US$800m. According to the International Energy Agency (IEA), the EU’s electricity T&D capex is predicted to grow more than 7% between 2014 and 2035. We expect regulated T&D valuations to remain high as investors continue to be attracted by the segment’s stable revenue potential. In one example, Copenhagen Infrastructure II K/S fund unveiled plans in July 2015 to invest US$2.2b in T&D and renewable assets.

Regulated T&DChart 5Average price/earnings (P/E) trading multiples for select T&D utilities (on FY2 consensus earnings per share (EPS) estimates, 2007-Q3 2015)

Jan 07

Jan 08

4.0x

8.0x

12.0x

16.0x

20.0x

0xJan 09

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jan 15

Average: 10.9xMax: 15.6xMin: 7.8x

Sources: S&P Capital IQ, EY analysis

Generation and IPPsChart 6Average enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) trading multiples for select IPPs (on FY2 consensus EBITDA estimates, 2010-Q3 2015)

Nov10

May11

Nov 11

May 12

Nov 12

May13

Nov13

May 14

Nov14


2.0x

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May15

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Integrated and diversifiedChart 7Average EV/EBITDA trading multiples for select diversified utilities (on FY2 consensus EBITDA estimates, 2010-Q3 2015)

Mar10

Sep10

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Portfolio optimization and energy reforms opportunities drive deal valueWe expect four key factors to drive the European P&U transaction agenda going forward:1. Energy reform and unbundling — Electricity and gas privatization and unbundling programs in Eastern European

countries, such as Latvia and Ukraine, are likely to see increasing interest from investors. In Turkey, sales of renewable energy and generation assets are already attracting interest from local entities as well as investors from China, Russia, India and the Gulf States. The announcement of new regulatory budgets for 2016–20 should further boost Turkey’s M&A activity. For more details visit: ey.com/energyreform.

2. Portfolio optimization — Utilities will continue to optimize asset portfolios toward new technologies, energy services and renewables, while moving conventional generation assets off their balance sheets. In one example, Vattenfall has invited bids for 8,100 MW of its lignite generation and mining assets (worth US$3.9b) in Germany and intends to add around 300–400 MW of offshore and onshore wind in northern Europe per year.

3. Smart partnerships — We expect to see more utilities form partnerships and alliances with smart home companies. Already, Opower, a software-as-a-service company, is working with several utilities, including E.ON, National Grid and First Utility, to enable them to analyze data from smart meters.

4. Emerging economies — Expansion by European companies into high-growth emerging economies, such as Africa and the Middle East, South America and Asia, will continue to drive activity. Enel Green Power, for example, has outlined plans to move away from Europe and expand into developing renewable energy markets where governments are still offering high feed-in tariffs. The company recently sold its renewable energy assets in Portugal and acquired BLP Energy, a clean energy developer in India, in a bid to strengthen its foothold in this growing market.


SpainDeal value Deal

volumeCapital outlook

US$1,126m 3 Spain continues to focus on austerity measures, with plans to tax residential solar systems that specifically apply battery storage, while also preventing such systems receiving payment for selling excess power back into the grid.

Despite this regulatory uncertainty and limited public spending capacity, the renewables sector in Spain is expected to continue to attract healthy levels of investment.

After KKR’s buyout of Gestamp Asetym Solar, several other investment funds and private equity players are looking to acquire Spanish renewable energy players at low valuations.


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

Matt RennieGlobal TAS Power & Utilities LeaderBrisbane, Australia+61 7 3011 [email protected]

Arnaud De GiovanniEMEIA TAS Power & Utilities LeaderParis, France+33 155 61 04 [email protected]

Remigiusz ChlewickiCentral & Southern Europe TASPower & Utilities LeaderWarsaw, Poland+48 22 557 74 [email protected]

René CoenradieBeNe TAS Power & Utilities LeaderRotterdam, Netherlands+31 88 407 [email protected]

Edgars RagelsCIS TAS Power & Utilities LeaderMoscow, Russia+7 495 755 [email protected] Umberto NobileMediterranean TAS Power & Utilities LeaderMilan, Italy+39 [email protected]

Martin SelterGSA TAS Power & Utilities LeaderBerlin, Germany+49 30 25471 [email protected]

Stéphane KraftFraMaLux TAS Power & Utilities LeaderParis, France+33 155 61 09 [email protected]

Bjorn GustafssonNordics TAS Power & Utilities LeaderStockholm, Sweden+46 8 [email protected]

Ian WhitlockUKI TAS Power & Utilities LeaderLondon, UK+44 20 7951 [email protected]

TurkeyDeal value Deal


US$58m 4 The privatization of power generation assets is under way, with the Government aiming to privatize 29 hydroelectric and gas-turbine-powered power plants by 2020.

We see significant opportunities in energy efficiency programs, through the use of smart grids, customer and billing solutions, digitization and distributed generation programs.

UKDeal value Deal


US$1.1b 10 The Government’s announcement to end subsidies for onshore wind power and large-scale solar projects pushed the country out of the top 10 destinations on EY’s Renewable energy country attractiveness index (RECAI), for the first time in 12 years.

The removal of Climate Change Levy exemptions, as outlined in the Government’s Summer Budget, could see onshore wind operators lose at least 6% of revenue.

Quarter-on-quarter increase in solar PV installations during the first two quarters of 2015 was reduced to 11%, compared to 20% in 2014.

These developments may adversely impact the confidence of investors in the renewable energy sector.

GermanyDeal value Deal


US$901m 10 An uncertain policy environment and sustained strong growth in renewables will continue to pose a threat to German utilities. Companies have been hit hard by write-downs across their gas power plant fleets as a result of lower wholesale electricity prices.

The Government’s recent changes to the nuclear liability law will further dent large utilities’ plans to restructure business operations.

Some relief to utilities was offered in the July 2015 announcement by the Government that it would establish a capacity reserve mechanism, allowing utilities to mothball facilities but keep them on standby in case of emergency.

BulgariaCapital outlook

Led by the World Bank, the Government plans to deregulate the electricity market by early 2016.

Post-liberalization, electricity prices will be determined by market fluctuations, with the regulator only setting the access fee and other regulatory components of the tariff.

www.ey.com/recai

www.ey.com/recai


China leads activity to a five-year high

Asia-PacificPower transactions and trends Q3 2015

Despite reports of an economic slowdown, China once again led activity, contributing 84% to the total regional deal value. Consolidation remained the primary driver of transactions within the Chinese domestic power and utilities (P&U) market, with large companies eyeing mid- and small-cap companies that provide larger customer bases, higher revenues and greater shareholder value. Cheung Kong Infrastructure (CKI) Holdings’ US$4.9b merger announcement with Power Assets Holdings was the region’s largest deal of the quarter.

Regulated transmission and distribution (T&D) assets and renewables continue to attract investors looking for stable, long-term cash flows, supporting premium

valuations in the short to medium term. In particular, the upcoming privatization of transmission and distribution assets in Australia, including New South Wales networks TransGrid, Ausgrid and Endeavour Energy, should boost deal activity in the next few months. Disruptive threats are, however, starting to challenge network businesses.

Interest in the Asia-Pacific P&U sector is expected to increase as our clients indicate a bullish approach to this growing market. Results of EY’s 13th Power and Utilities Capital Confidence Barometer show 88% of Asia-Pacific survey respondents expect the global mergers and acquisitions (M&A) market to improve, driven by a focus on bolt-on and innovative investments.

US$11.9b total deal value for Q3, a five-year high

US$7.1b deal value in the integrated and water segment, a 49% rise from Q2

84%of total deal value contributed by China

US$5.0b was the largest deal of the quarter, double the top deal in Q2

In Q3, Asia-Pacific deal value climbed further to

reach US$11.9b, up from US$9.3b in Q2

http://www.ey.com/powerandutilities/ccb




Q3 trends:• Rising renewable energy investments — During the quarter, India’s renewable energy segment hosted deals involving

multiple overseas players, with foreign investment expected to reach close to US$6.2b over the next two years. In addition to the notable acquisition by Enel Green Power of a majority stake in BLP Energy, Canada-based Brookfield Asset Management is evaluating potential investment opportunities in the country.

• New infrastructure build — According to the International Energy Agency (IEA), securing Asia-Pacific’s growing energy needs will require an investment of US$2.5t in energy-supply infrastructure by 2040. China recently announced plans to spend around US$315b on improvements to its power grid infrastructure over the 2015–20 period.

• Japanese retail competition — As the opening of electricity retail competition in Japan draws closer, close to 750 firms (as of October 2015) — including oil wholesalers, telecommunication companies (telcos), power producers and suppliers — have signed up as power producers and suppliers, in competition with 19 existing regional monopolies. Large integrated utilities, including TEPCO, are busy exploring tie-ups and joint ventures with telcos and gas companies to cut costs and secure market share, while others are looking to accelerate diversification of their earnings.

• Energy reform and unbundling — Across the region, several governments are pushing reform agendas driven by the need to raise capital to fund infrastructure build and create an investor-friendly environment. The Australian Energy Market Commission (AEMC) is considering a gas market overhaul to provide greater flexibility to participants, lower barriers to entry and promote competition, while the Indian Government is planning to sell partial stakes in several state-owned companies as part of its privatization strategy. For more details visit: ey.com/energyreform.

Transaction snapshot Activity dominated by China, with notable deals in Australia and IndiaOnce again, China was the star of Asia-Pacific transactional activity in Q3, with deals hitting a five-year high of US$10.1b, compared to US$8b in Q2. As seen in recent months, the majority of these deals occurred in the integrated, water and wastewater, and generation segments. As power consumption continues to fall in China, we expect consolidation to gain further momentum as utilities look to acquire mid- and small-cap companies to bolster their customer base and add positive cash flows. Reforms in the country, as well as plans to set up trading platforms aimed at removing controls on electricity pricing, will provide impetus for private sector investment.

The Australian and Indian power sectors also gained traction during the quarter. The largest deal of Q3 in these countries was Australia-based Duet Group’s announcement that it would acquire Energy Developments Ltd for US$1.4b to access long-term, contracted energy infrastructure cash flows. In India, the renewable energy market is attracting investors from across the globe. Singapore’s sovereign wealth fund GIC is looking to acquire the trading activities and assets of India-based renewable energy player Greenko for about US$254.4m. Similarly, several Middle Eastern players, such as Doha-based Nebras Power QSC and Dubai’s private equity firm Abraaj Group, are evaluating renewable energy projects in the country. We expect increased deal activity in the Asia-Pacific region in coming months.

Chart 9Asia-Pacific deal value by segment (US$b, Q3 2013–Q3 2015)

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Q1 Q2 Q3 Q4 Q12014

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Chart 8Asia-Pacific deal value and volume (asset and corporate level deals, Q3 2013–Q3 2015)

5.912.0

4.47.9 4.9

15.210.9 9.3 11.9


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Announcement date

Target Target location

Bidder Bidder location

Deal value (US$m)

Rationale Segment

08 September 2015

Power Assets Holdings Limited (PAH)

China (Hong Kong)

Cheung Kong Infrastructure Holdings Limited (CKI)

China (Hong Kong)

4,990 Enables CKI to capitalize on the huge cash balance of PAH and invest across the infrastructure sector

Integrated

20 July 2015 Energy Developments Limited (EDL)

Australia Duet Group Australia 1,382 EDL’s remote energy business is complementary to the Duet Group

Generation

01 July 2015 Chongqing Water/ Chongqing Sanfeng Environmental Industry Group

China Chongqing Derun Environment (CDE)

China 1,229 Enables CDE to enter into waste treatment and waste-to-energy project investments

Water

16 July 2015 Baichuan Gas China Winowner Group

China 667 Aligns with buyer’s strategy to transform its main business to gas management

T&D: gas

30 August 2015 Huaihu Coal & Electricity Co./Huaihu Electric Power/Huainan Mining Industry Group Power Generation

China Anhui Wanjiang Logistics Group

China 630 Increases profitability, improves asset structure and enhances sustainable development capacity

Generation



Valuations snapshot Regulated assets and renewables command high premiumsThe regulated T&D sector remains attractive to investors looking for stable, long-term cash flows amid volatility in commodity prices, and this, coupled with increased investment in some parts of the region, will support premium valuations in the short to medium term. Despite moderating demand growth in China, the National Energy Administration (NEA) reports that the country is aiming to increase the total length of its high-voltage transmission lines to 1.01 million kms (627,585 miles) by the end of 2020, more than double its length in 2014. Similarly, gas T&D transactions are commanding high premiums, as seen in China-based Winowner Group’s agreement to acquire Baichuan Gas Co Ltd for US$667m — a price/earnings (P/E) multiple of 15.3x. Despite these figures, we do expect that disruptive threats, such as the high level of distributed generation uptake in Australia and falling costs of battery storage systems, will start to challenge network businesses.

Stagnant demand growth in China (power consumption expanded 1.3% in the first half of 2015, much lower than the 5.3% posted last year), flat electricity sales in Japan (power consumption dropped to 74.6 TWh in August 2015, the lowest for that month since 2003) and low electricity offtake from a highly leveraged distribution sector in India are impacting valuations for generators and independent power producers (IPPs). Unless tariff reforms are addressed in India, the strain on balance sheets and cash

flows will continue to be felt on IPPs and impact their ability to add new capacity, while weighing on valuations. However, improved fuel supply security in key economies and sector reforms, such as tariff hikes in India, will drive improvements in asset valuations for this segment.

Renewable assets will continue to witness high investor interest, driven by energy mandates and policy support. For example, India’s renewable energy targets attracted several foreign players this quarter, including Hilliard Energy, JA Solar, Cemtrex, SkyPower and Enel. Considering the volatility in international energy prices and Asia-Pacific’s growing dependence on energy imports, renewable energy will become increasingly prominent within the overall generation mix and an important platform of energy security agendas.

Integrated and diversified utilities in Japan are currently in the midst of energy reforms and facing the prospect of diminished market share once retail competition commences in April 2016. These utilities are also feeling the impact of a shrinking economy and soft industrial electricity demand — Japanese manufacturers purchased 3.3% less electricity in May 2015, the 13th consecutive month of decline and the biggest since January 2013. Japan’s flat-to-negative growth in gross domestic product (GDP) over the past decade and growing support of energy efficiency have seen total nationwide electricity sales fall by 2.9% in the first half of 2015. In these tough conditions, those utilities which succeed in striking partnerships with other players to expand their customer base will stand the best chance of success.


Regulated T&DChart 10Average price/earnings (P/E) trading multiples for select T&D utilities(on FY2 consensus earnings per share (EPS) estimates, 2010 to Q3 2015)

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Jan 11

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Generation and IPPsChart 11Average enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) trading multiples for select IPPs (on FY2 consensus EBITDA estimates, from 2009 to Q3 2015)

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May10

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May14


4.0x

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Integrated and diversifiedChart 12Average EV/EBITDA trading multiples for select diversified utilities (excluding Japan) (on FY2 consensus EBITDA estimates, from 2007 to Q3 2015)

Jan07


2.0x

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Despite challenges, Australia, China and India are preferred investment destinations Over the coming months, the prospect of rising US interest rates, falling commodity prices and slowing economies could challenge the flow of investment in the Asia-Pacific region. However, overleveraged companies looking to consolidate may appeal to investors, potentially driving deal activity.

Going forward, we anticipate Australia, China and India will remain the region’s key M&A destinations, as privatizations and reforms fuel investor confidence and utilities explore ways to drive shareholder value. In Australia, competition for the New South Wales electricity networks assets will continue to heat up with several consortiums in the running for the State’s transmission assets, including Power NSW Finance Company, set up by State Grid of China (SGCC) and partner Macquarie Infrastructure and Real Assets. SGCC is also a potential bidder for ABB’s power grids business, which in September 2015, announced US$1b in cost cuts, possible layoffs and the divestment of its grid business.

Despite some challenges, we expect foreign investors to continue investing in the Asia-Pacific P&U sector. For example, SkyPower Global has announced that it will invest US$4.3b in the Bangladeshi solar power segment, and the Malaysian Government has indicated that it may lift limits on foreign ownership in its electricity generation sector to attract investors. With interesting developments such as these, we expect 2015 deal activity in the region to finish on a high note.

AustraliaDeal value Deal volume Capital outlook

US$1.4b 3 The eagerly anticipated electricity network privatization of TransGrid will keep investors interested.

The deal is expected to attract stiff competition, with investors including Macquarie and China State Grid, CIC and Global Infrastructure Partners, a Hastings-led consortium, IFM, Australian Super and CKI all lining up to bid on the asset.

The Government is expected to call for final bids in November 2015, with completion scheduled for early 2016.

Power transactions and trends Q3 2015 | 15

EY Asia-Pacific Transaction Advisory Services (TAS) P&U contacts

ChinaDeal value Deal volume Capital outlook

US$10.1b 20 China’s cut in its GDP growth target to 6.5% (from 7%) in its latest five-year plan may lead to lower power consumption.

A planned $315b investment in grid infrastructure through 2020 will keep the sector upbeat.

IndiaDeal value Deal volume Capital outlook

US$155m 2 Falling valuations and equity markets may delay planned stake sales in state-owned companies, although the Government’s push for reforms will keep investment flowing into the power sector.

Solar energy will remain the investment hot spot, as the country works toward a target of 100 GW by 2020.

Matt RennieGlobal TAS Power & Utilities LeaderBrisbane, Australia+61 7 3011 [email protected]

Nick CardnoOceania TAS Power & Utilities LeaderSydney, Australia+61 2 9248 [email protected]

Lynn ThoASEAN TAS Power & Utilities LeaderSingapore+65 6309 [email protected]

Alex ZhuGreater China TAS Power & Utilities LeaderBeijing, China+86 10 5815 [email protected]

Kuljit SinghIndia TAS Power & Utilities LeaderNew Delhi, India+91 11 [email protected]

Kenneth G. SmithJapan TAS Power & Utilities LeaderTokyo, Japan+81 34 [email protected]

Bum Choong KimKorea TAS Power & Utilities LeaderSeoul, Korea+82 23787 [email protected]


Megadeals push regional deal value to a six-year high

AmericasPower transactions and trends Q3 2015

These massive deals are led primarily by the soaring appetite of large integrated utilities for regulated assets, which are attracting record-high premiums. While a trend toward consolidation has long been a feature in the US P&U sector, this sudden spike in activity is a reflection of increasing pressure on utilities from rising environmental costs and reducing load growth. Large integrated utilities are deploying capital to acquire quality regulated assets (primarily gas transmission and distribution (T&D)), which offer predictable and stable cash flows to support dividends and reduce the impact of earnings volatility from merchant businesses.

By creating larger and diversified companies, these acquisitions also provide economies of scale.

Mergers and acquisition (M&A) activity in the renewables segment also surged across the quarter, registering deals worth US$12.7b — a five-year high. SunEdison and its yieldco, TerraForm Power, contributed 62% of the total regional renewable deal value. We expect to see further investment in the renewables segment as discussions continue in each US state regarding actions to comply with the Clean Power Plan.

This quarter saw the return of the megadeal, with eight billion-dollar-

plus transactions pushing the US power and utilities (P&U) sector to record its strongest deal activity of

the past six years.

US$12.7b in renewables from 23 deals, 4 times Q2 deal value

25% decline in current Henry Hub prices from the last three-year average

US$57b total Americas deal value for Q3

US$28.2b in T&D a five-year high


Q3 trends:• Markets reward deal strategies focused on stable, long-term growth — Shares of TECO Energy were up nearly 50%

following the announcement of its acquisition by Emera. Similar spikes have been observed in AGL Resources and Pepco shares, suggesting markets will reward companies pursuing deals focused on stable, long-term growth, particularly in regulated T&D and renewables.

• Strong interest from cross-border investors — Both the US and Latin America are increasingly becoming attractive for cross-border and foreign investors. Canada-based Emera’s move to acquire TECO Energy for US$10.4b was the highlight of the quarter, reflecting strong interest in US regulated assets. Despite economic concerns, Brazil continues to attract capital — SunEdison announced a US$5b deal to acquire Renova Energia’s hydro and wind energy assets, while China Three Gorges announced that it plans to buy Brazilian power assets worth US$538m.

• Uncertainty regarding longevity of yieldcos — The sustainability of yieldcos’ growth targets and financing models has been questioned in recent months following a drop in equity valuations attributed to falling oil prices, global uncertainty and potential interest rate rises. Between January and August 2015, five yieldcos — NRG Yield, TerraForm Power, NextEra Energy Partners, Abengoa Yield and Pattern Energy Group — lost a combined US$1.1b in market capitalization. Sempra Energy has recently announced it is delaying plans to form a master-limited partnership amid a sell-off in the investment vehicles.

• Mexican reforms — Investors are taking long-term positions in Mexico where reforms are gathering steam. In August 2015, US-based AES Corp. and Mexico’s Grupo Bal announced intentions to invest up to US$2.5b over the next five years, primarily in new generation capacity. For more details visit: ey.com/energyreform.

Transaction snapshot US megadeals drive activity focused on building regulated portfolios Q3 saw a massive turnaround in the region’s P&U M&A activity, with deal value reaching US$57b, compared to just US$6.2b in Q2. Much of the increase was driven by the return of the megadeal, most notably the US$12.5b acquisition of Energy Future Holdings by a consortium, and five billion-dollar-plus US gas T&D transactions worth a cumulative US$27b.

After a steep decline in the first half of 2015, the US dominated the region’s quarterly transactional activity, hosting deals worth US$47b, a figure that reflects

increased investor confidence and market conditions ripe for M&A. Southern Company’s US$12b acquisition of AGL Resources (see Deal spotlight) and NextEra Energy’s US$2b acquisition of NET Midstream’s gas pipelines highlight a trend by electric utilities to diversify into natural gas infrastructure. As companies look to supplement portfolios and broaden investment opportunities, we anticipate megamergers will continue to support high-value deals in the region.

With forward power price curves expected to remain low across most US markets, a number of mid-size utilities are planning to acquire assets rather than construct new capacity. For example, Talen Energy acquired 2.5 GW of gas-fired generation capacity plants (worth US$1.2b) to

Chart 14Americas deal value by segment (by subsector, US$b, Q3 2013–Q3 2015)

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Chart 13Americas deal value and volume (asset and corporate-level deals, Q3 2013–Q3 2015)

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Announcement date

Target Target country

Bidder Bidder country

Deal value (US$m)

Rationale for deal Segment

10 August 2015 Energy Future Holdings (EFH)

US Consortium led by Hunt Consolidated

US 12,500 Allows EFH to exit bankruptcy. Post-acquisition, EFH will be restructured into a real estate investment trust (REIT) and an operating company

Integrated

24 August 2015 AGL Resources US Southern Company

US 11,936 Creates second-largest utility company in the US by customer base

T&D: gas

04 September 2015

TECO Energy US Emera Canada 10,362 Expands footprint in the US regulated P&U segment

T&D: electricity and gas

16 July 2015 Renova Energia (backlog projects)

Brazil SunEdison US 5,000 Grows business in emerging Latin American economies

Renewables: wind and hydro

06 July 2015 Invenergy Wind (930 MW of wind power plants)

US TerraForm Power

US 2,450 Strengthens TerraForm Power’s renewable power platforms in North America

Renewables: wind



enter the NYISO and ISO-NE markets, while AltaGas Power bought US$642m of contracted gas assets. As further coal plants are retired, utilities are likely to make up the lost capacity through investments in gas and renewables. In particular, expect to see M&A activity in Michigan, where several of DTE Energy’s and Consumer Energy’s coal-fired plants are slated to retire in 2016 and beyond.

Valuations snapshot Premiums continue to surge on regulated assets while investors question viability of yieldcos The hunt for stable returns is continuing to push up premiums offered on regulated T&D assets, as seen by Emera’s acquisition of TECO Energy. The deal reflected a premium of 48% to TECO’s closing stock price on 15 July 2015, the day before TECO announced it was exploring strategic options, including a possible sale. Southern Company is also paying a high premium for AGL Resources (see Deal spotlight) — a P/E ratio of 21x, which is well above the average trading multiple of 12.7x for the group. Given the capex/rate base growth opportunities, we expect premium valuations for regulated T&D utilities to continue.

Q3 witnessed a surge in renewable M&A activity, fueled primarily by yieldcos as well as several utility parent holding companies looking to expand their contracted portfolios. While solar deals surpassed wind, we are seeing variation across renewables valuations. For example, EV/EBITDA multiples for wind projects have typically been in the 9x–11x range; however, solar transactions have fetched above 12x. Yieldco stocks witnessed a significant sell-off as investors

Deal spotlight: Southern Company buys AGL ResourcesSouthern Company’s US$11.9b acquisition of AGL Resources, an energy services holding company with operations in natural gas distribution, retail operations, wholesale services and midstream operations, enables the company to take advantage of gas midstream opportunities. The deal also creates the second-largest US utility combining:

• 11 regulated electric and natural gas distribution companies with nine million customers

• 200,000 miles of electric transmission and distribution lines and more than 80,000 miles of gas pipelines

• 46,000 MW of electricity-generating capacity

Southern Company will pay US$66 cash per share for each outstanding AGL Resources share, and around US$3.59b net debt. This is a price-earnings (P/E) ratio of 21x, way above the average trading multiple of the group.

Rob Leonard, EY US Southeast TAS Power & Utilities Leader, said the transaction is evidence of integrated US utilities’ desire for earnings diversification and growth. “The deal allows Southern Company to build its natural gas infrastructure and reduce its exposure to power generation.”

Stephanie Chesnick, EY US TAS Power & Utilities Leader, said it also highlights the trend of utilities in the Americas to concentrate on core, rate regulated assets. “That hyper focus translated into more mega deal announcements in the third quarter and should continue in the months ahead.”


began to question the viability of growth targets and financing models. As depicted in Chart 15, leading yieldcos in the US have underperformed the broader markets over the last six months.

For commodity-exposed power generators and independent power producers (IPPs), valuations continue to be impacted by the fall in power and natural gas prices over the past 12 months. Henry Hub prices are currently hovering around US$2.6/MMBtu, approximately 25% below the last three-year average. However, we still see investors prepared to reward assets located in selected markets, such as ISO New England, where tightening conditions (rising natural gas demand versus insufficient pipeline and liquefied natural gas (LNG) storage capacity) are predicted to result in substantially improved capacity revenues over the next three years.

Chart 15S&P 500 utilities vs yieldcos(October 2014–October 2015)

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S&P 500 Utilities Pattern Energy Group IncTerraForm Power, Inc Abengoa Yield plc NRG Yield, Inc

Sources:

Regulated T&DChart 16Average price/earnings (P/E) trading multiples for select US regulated utilities (on FY2 consensus EPS estimates, 2007-Q3 2015)

Jan07

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Generation and IPPsChart 17Average enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) trading multiples for select IPPs (on FY2 consensus EBITDA estimates, 2007-Q3 2015)

Jan07

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Integrated and diversifiedChart 18Average EV/EBITDA trading multiples for select diversified utilities (on FY2 consensus EBITDA estimates, 2007-Q3 2015)

Jan07


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Corporate mergers and ongoing investment in renewables will maintain momentumWe anticipate five main factors to drive future M&A activity in the Americas P&U sector:1. Consolidation — The push by electric utilities to consolidate their customer and operating bases is likely to result in

further corporate mergers during the remainder of the year, with a focus on regulated gas assets. While resistance from regulators and municipalities to such large deals is likely to continue (over the past 10 years, deals valued above US$3b have taken an average 316 days to close, almost double the typical closing time), we don’t expect such delays to deter investors from these megadeals.

2. Clean Power Plan (CPP) — While the plan has met resistance (with 24 states filing lawsuits against implementation of the bill), if implemented, the CPP will provide significant impetus to renewable energy investments in the US and is expected to be a strong driver of earnings growth for utilities in the future. Integrating clean energy sources to the grid will require a massive amount of new transmission — 46% of US$47.9b of US transmission projects planned through 2025 is intended to support renewable energy resources.

3. Divestments of merchant assets — With no price recovery in sight, diversified utilities, particularly in the Midwest, are looking to divest merchant assets. Following divestments by Duke Energy and PPL Corp., as well as the recent announcement by Talen Energy that it is selling three power plants for US$1.5b, all eyes are on which companies will go next; AES Corporation and American Electric Power (AEP) may be front-runners.

4. Yieldcos to acquire contracted assets — We expect yieldcos to engage in further M&A to acquire long-term contracted renewable and natural gas infrastructure assets. However, as yieldco equity valuations contract, we may see a rise in the cost of capital for these entities and more downward pressure on valuations. SunEdison has recently shifted its yieldco strategy, announcing that it will continue to focus on the US, India, China and Latin American markets but will not drop any projects into its yieldcos until market conditions improve. NRG Energy, on the other hand, plans to separate its renewable energy business and spin off its wind assets to NRG Yield.

5. Financial investors remain key players — Financial investors will continue to rotate assets and exit when valuations are right. Across Q3, a number of financial investors, such as ArcLight Capital Partners, Blackstone Group and Energy Capital Partners, sold stakes in generation, gas T&D and renewable assets to strategic buyers. We expect financial investors to deploy this capital to acquire assets that enable them to diversify their investment portfolios.

Power transactions and trends Q3 2015 | 21

USDeal value Deal volume Capital outlook

US$46.9b 27 Electric and gas utility mergers are set to rise as utilities look to grow rate base and contracted assets. For example, Duke Energy has announced it will acquire natural gas distributor Piedmont Natural Gas for US$4.9b to expand operations.

A massive 32 GW pipeline of utility-scale solar is under development in the US, with developers aiming to finish their projects by the end of 2016, when the federal energy investment tax credit (ITC) expires. This will maintain deal momentum with plenty of assets up for acquisition.Brazil

Deal value Deal volume Capital outlook

US$5.9b 4 Strong foreign investor interest is expected in the Government’s December 2015 auction to sell operating rights for 29 existing hydropower plants. China’s Three Gorges Corporation is reportedly planning to bid for these assets.

State Grid Corporation of China is also planning to expand its generation capacity locally and will look at these newly available hydropower plants.

Brazilian electricity utility CEMIG is considering acquisitions of power generation and transmission assets.Mexico

Deal value Deal volume Capital outlook

US$1.5b 2 Mexico recently published the regulations (in effect from January 2016) pertaining to participation in the wholesale market. Also, early September saw the launch of a new financing vehicle, the FIBRAE, aimed at tapping markets to fund energy infrastructure.

In August 2015, SENER announced plans to invest US$330m between 2016 and 2019 in the development of smart grids in the country. As a result, the CFE plans to launch a first tender for smart grid projects before the end of this year.

ColombiaCapital outlook

In September 2015, the long-delayed privatization of state-owned utility Isagen made a significant step forward when Colombia’s Council of State announced it would lift the suspension on the Government’s sale of its 57.6% stake in the company.

The Colombian Government is also looking to undertake wholesale market reforms aimed at improving the investment environment and operational efficiency.

An annual electricity demand growth of 3.6% during the next five years is likely to attract foreign investors in the market, particularly in setting up new generation capacity.

EY Americas Transaction Advisory Services (TAS) P&U contactsMatt RennieGlobal TAS Power & Utilities LeaderBrisbane, Australia+61 7 3011 [email protected]

Stephanie ChesnickUS TAS Power & Utilities LeaderHouston, Texas, US+1 713 750 [email protected]

Mitch FaneUS Southwest TAS Power & Utilities LeaderHouston, Texas, US+1 713 750 [email protected]

Miles HuqUS Northeast TAS Power & Utilities LeaderBaltimore, Maryland, US+1 410 783 [email protected]

Rob LeonardUS Southeast TAS Power & Utilities LeaderCharlotte, North Carolina, US+1 704 335 [email protected]

Dmitriy LitvakUS Central TAS Power & Utilities LeaderChicago, Illinois, US+1 312 879 [email protected]

Gerard McInnisCanada TAS Power & Utilities LeaderCalgary, Alberta, Canada+1 403 206 [email protected]

Lucio TeixeiraSouth America TAS Power & Utilities LeaderSão Paulo, Brazil+55 11 2573 [email protected]

Olivier HacheMeCAR TAS Power & Utilities LeaderMéxico, D.F., Mexico+52 55 5283 [email protected]


Renewables rise, though falling oil prices may impact investment

Africa and the Middle East

Power transactions and trends Q3 2015

In line with global trends, the majority of countries in Sub-Saharan Africa (SSA) have established ambitious renewable energy targets: South Africa has committed to achieving 9% of its electricity generation from renewables by 2030, Nigeria 10% by 2020 and Tanzania 14% by the end of 2015. Meeting these targets will require these countries to make significant investments in transmission and distribution (T&D) networks, as well as other ancillary services, providing plentiful opportunities for investors.

While much of the quarter’s investment was in solar, nuclear and electricity T&D and new generation

capacity build-out received strong foreign investor interest. In one notable example, in August 2015, consortiums of US and Chinese energy firms committed US$14b to the second phase of Nigeria’s National Integrated Power Project (NIPP). We expect to see a further push from foreign investors as oil prices fall, increasing pressure on fiscal budgets and reducing the ability of government to fund power projects.

In the Middle East, a rapidly growing population and increased industrialization are expected to fuel up to 7% annual growth in electricity demand, driving new investments into the generation segment.

During Q3, the focus of the power and utilities (P&U) sector of Africa

and the Middle East was primarily on renewable

energy, with interest increasing from both

policymakers and investors.

22%contribution by renewables to total Africa generation mix by 2030

US$233b planned investment by Southern African Development Community through 2027 to improve electricity generation in Southern Africa

US$316binvestment required in the Middle East power sector by 2020

1.5 GWsolar energy expected to come online in the Middle East by the end of 2015


Unlike previous years, focus in the region has shifted to renewables. In September 2015, Spain-based TSK Group signed a US$385m contract with the Kuwait Government to build a 50 MW solar power plant. Elsewhere, we are seeing intense competition from international bidders, including EDF Energies Nouvelles, Enel Green Power, SunEdison, Acciona, First Solar and Abengoa for new renewable projects in the region.

Africa investment trends: continued support from global development funds could lead to more sector reformsAfrica’s Sub-Saharan region has long suffered from a scarcity of capital that has impacted investment in the P&U sector. Now, falling oil prices and a global economic slowdown are seeing the SSA region’s 2015 growth decelerate to 3.7% compared to 4.6% a year ago, putting even more pressure on government finances. In early 2015, the Angola Government was forced to shelve its planned electricity network expansion due to public funding cuts in the wake of falling crude oil prices.

This chronic funding shortfall has seen the region become increasingly reliant on support from global international development banks, and we expect these development loans to remain the most prominent source of funding for new power assets across the continent. In September 2015, 10 development banks, including European Investment Bank, KfW Development Bank and the Japanese International Cooperation Agency, announced they would collaborate to mobilize US$1b of investment in a hydropower dam and interconnection system to provide electricity to Gambia, Guinea, Guinea-Bissau and Senegal in West Africa. Similarly, the African Development Bank has proposed spending US$55b a year on electrification projects across Africa, with the establishment of Africa50, a platform to work on project development that aims to leverage US$10b of private investment into the energy industry over the next 10 years.

As these bank loans usually come with strict covenants for sector reform, we expect to see more energy reform projects in coming months, particularly across the SSA region. The reform process is already under way in Nigeria, Kenya and Ghana, while in September 2015, Liberia began its own reform journey when Parliament approved a new bill to liberalize the electricity sector. This could result in increased competition, which may improve the accessibility, quality and affordability of electricity; privatize the Liberia Electricity Corporation; and help attract much-needed private investment in the sector.

Middle East investment trends: energy diversification is a priority, while oil slump may impact sector investmentFor the oil-rich countries of the Middle East that have primarily depended on natural gas to meet their own power demands, diversifying the energy mix is a high priority. Unsurprisingly, solar energy is expected to play a key role in this diversification bid, with the Middle East Solar Industry Association expecting 1.5 GW of solar capacity to come online by the end of 2015.

However, the current slump in oil prices, which has already had an impact on the finances of Middle East countries, may negatively affect new investment in the P&U sector, particularly in renewable energy. The region’s banking system faces a liquidity crunch. The spiraling cost of debt may force utilities to look at refinancing options while also adversely impacting large-scale investment with high debt to equity ratio. Over the past 12 months, syndicated loans for Middle East banks have nearly doubled to US$7.8b, compared with US$4.1b in the previous year. Utilities in Saudi Arabia and Oman are reportedly looking to refinance a combined US$2.1b of debt at lower costs.

It has also been suggested that cheaper oil prices may divert the Middle East from its clean energy agenda. While it’s a sensible opinion given that investment in renewable energy is front-loaded, it’s worth remembering that the subsequent operating cost of these assets is low compared to fossil-fuel-based power plants. We expect the political mandate and sustainability commitments to continue to support the region’s investment in renewable energy.

Chart 19US$316b investment required in power sector by 2020

$188b$89.5b

$38.5b

Generation

Distribution

Transmission

Source: Arab Petroleum Investment Corporation


Q3 trends:• Energy mix diversification — Clean energy is increasingly a priority for both African and Middle Eastern countries.

As reflected in EY’s 45th Renewable Energy Country Attractiveness Index, South Africa, Saudi Arabia, Egypt, Kenya and Morocco have taken the lead in diversifying their energy mix through the installation of renewable energy capacity. In Q3, we also saw US$1.4b of renewable power projects brought to financial close in Oman, the United Arab Emirates (UAE) and Israel. In July 2015, Oman-based Petroleum Development Oman (PDO) and GlassPoint Solar announced plans to build a 1,021 MW capacity solar thermal plant in South Oman, expected to be operational in 2017.

• Infrastructure build supported by foreign investment and global development banks — Africa’s huge need for new infrastructure is continuing to attract foreign investors keen to diversity into new growth markets. Investments are currently centered on renewable assets. In one example, Canadian solar developer SkyPower announced in September 2015 that it would double its investment in Kenya’s solar infrastructure to US$4.4b. Similarly, Norway’s Scatec Solar is eyeing US$600m investments in Egypt’s solar energy program. Meanwhile, US independent foreign aid agency the Millennium Challenge Corporation (MCC) has launched a “second generation” of agreements with African nations, with plans to invest US$2b to support the ongoing US-backed Power Africa program.

• Utilities refinancing debts — Falling oil and commodity prices have adversely impacted the region’s banking system, resulting in an increased cost of debt that is driving utilities to look at refinancing options. In a rare move for Gulf countries, in October 2015, the Abu Dhabi Water and Electricity Authority (ADWEA) outlined plans to refinance bank debt for its 785 MW power plant through quasi- sovereign bonds worth US$350m.

• Nuclear energy gains traction — Low electrification rates in the SSA region are prompting governments to explore all possible sources of energy generation. For example, in September 2015, the Kenyan Government signed a Memorandum of Understanding (MoU) with China General Nuclear Power Corp. to set up a 1,000 MW nuclear power plant by 2025, with plans to boost its capacity to 4,000 MW by 2033. The South African Government has also signed an agreement with Russian nuclear power developer Rosatom to develop nuclear power technology in the country.

http://www.ey.com/Publication/vwLUAssets/RECAI-45-September-15-LR/$FILE/RECAI_45_Sept_15_LR.pdf


Investor Target country Project description Segment

ACWA Power and Mitsui (Saudi Arabia/Japan)

Oman Providing US$640m in financing for 445 MW gas-fired plant

Generation: gas

Tana & Athi Rivers Development Authority (Kenya)

Kenya Building a 320 MW solar power plant with an investment of US$469m, in collaboration with Hitachi India and Ultra Clean Energy Solutions

Renewables: solar

SoI Group and Bharat Heavy Electricals Limited (BHEL) (UK/India)

Ghana Agreed to build US$400m power station with capacity of 400 MW

T&D

OPIC, Proparco and International Finance Corporation (IFC)

South Africa US$400m loan for 100 MW Redstone concentrated solar power (CSP) project

Renewables: solar

Scatec Solar (Norway) Mali Scatec Solar and IFC InfraVentures have agreed to develop a US$55m, 33 MW greenfield solar photovoltaic (PV) project

Renewables: solar

Yingli Green Energy (China) Ghana Formed joint venture with Namene Energy International to develop 100 MW utility scale and 50 MW commercial solar projects

Renewables: solar

IFC Zambia Signed memorandum of understanding with state-owned Industrial Development Corp. to construct two solar PV projects with combined capacity of 100 MW

Renewables: solar

KenGen (Kenya) Kenya KenGen to set up 400 MW wind farm, to be funded by a consortium of development financers

Renewables: wind

TSK Group (Spain) Kuwait TSK Group signed a US$385m contract with the Government of Kuwait to build a 50 MW solar power plant

Renewables: solar

European Union Nigeria Plans to invest US$165m to boost the electricity sector, particularly solar energy

Generation

Key investment announcements, Q3 2015

Investment outlook: electrification agenda may fast-track off-grid and nuclear solutionsGrowing electricity demand, particularly in Africa, may see parts of this region take a fast track along the energy transition journey, making an early leap into off-grid energy solutions. The success of these initiatives will depend on stakeholders adopting off-grid solutions to meet the varied needs of both household and commercial energy customers.

A number of these markets have also embarked upon nuclear programs in a bid to keep the lights on. While the UAE already has two nuclear reactors expected to come online by 2017, Jordan, Egypt and South Africa have now also committed plans to introduce nuclear into their energy mix.

However, it is renewable energy that we expect to remain the focus for investment in this region, with notable projects, often involving power purchase agreements (PPAs) and support from global development agencies, set to take place in multiple countries, including Kenya, Egypt and the UAE.

Investment partnerships will continue to drive capacity building Scarce capital in Africa’s P&U sector has seen the use of public-private partnerships (PPPs) accelerate. Some of the region’s Q3 deal highlights involved PPPs:

• Chinese and US firms will invest US$14b in hydropower generation and transmission assets in Nigeria through the Niger Delta Power Holding Company.

• State Grid Corporation of China, in a consortium with CET Power and Westron, has reportedly committed US$8b in the first tranche and US$4b later (in equity/loan participation) in the Transmission Company of Nigeria.

• African Infrastructure Investment Managers (AIIM) and a subsidiary of French developer Mecamidi will invest US$500m in developing 200 MW of hydropower in Nigeria through to 2020.

• In September, Egypt received US$243m from the Japanese Government to enhance its electricity distribution network.

In the Middle East, the adoption of energy-efficient technologies, such as smart metering, is driving foreign partnerships. Utilities in the Middle East and North Africa region are expected to spend close to US$9.8b on smart grid infrastructure by 2024. This may offer opportunities for international companies with strong technical expertise in demand-side energy management to enter these markets.


KenyaKenya climbed to 31st place in EY’s RECAI 45 index, due largely to a US$2.2b deal with SkyPower to develop 1 GW of PV in the country. In another major deal, OPIC committed US$233m of debt funding to support the 100 MW Kipeto wind farm.

EgyptThe country is continuing its strong push toward renewables, with the Government floating new tenders for wind (250 MW) and PV (200 MW) in August, as well as a 50 MW CSP tender. The Government has also signed a US$200m deal with Italy’s Building Energy SpA to construct two 50 MW PV plants. Given the momentum generated around renewables since the auction of 4.3 GW of capacity in January 2015, we expect more activity in this space.

UAEThe solar segment is expected to drive most investment activity going forward, with tendering the preferred source for solar asset development in the country. Recently, the Dubai Electricity and Water Authority (DEWA) invited expressions of interest for the 800 MW third stage of the Rashid Al Maktoum solar PV independent power producer (IPP) project. The Abu Dhabi Water and Electricity Authority (ADWEA) has also announced plans to launch a new tender for 350 MW of solar PV capacity by the end of 2015. Nuclear investments will be on the rise, as the country plans to source 25% of total electricity demand from nuclear by 2020.

ZambiaThe Government is considering rolling out a program similar to Uganda’s successful GET FiT program, which sees power generators supported to build and operate plants while giving end users a discounted energy bill. Funding from the European Union Infrastructure Trust Fund via KfW would make up the difference in a model that we expect to encourage private investment and fast-track construction of new assets.

EY Africa and Middle East Transaction Advisory Services (TAS) P&U contactsMatt RennieGlobal TAS Power & Utilities LeaderBrisbane, Australia+61 7 3011 [email protected]

Bruce HarveyAfrica TAS Power & Utilities LeaderJohannesburg, South Africa+11 772 [email protected]

David LloydMiddle East TAS Power & Utilities LeaderRiyadh, Saudi Arabia+966 11 215 [email protected]

Liraz Ben-AmiIsrael TAS Power & Utilities LeaderTel Aviv, Israel+972 3623 [email protected]

Source: EY analysisFor more details visit: www.ey.com/energyreform

http://www.ey.com/GL/en/Industries/Power---Utilities/Renewable-Energy-Country-Attractiveness-Index

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About EY’s Global Power & Utilities SectorIn 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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Data source and industry scopeThe EY analysis and perspectives within Power transactions and trends are based on global financial releases and Mergermarket data, as well as global engagements conducted by EY member firms over the period 2012 to 2015. They provide an up-to-date assessment of outcomes and trends in the global utilities industry. For more information on the methodology employed in the preparation of this report, please contact Simone Zawadski, Associate Director, Global Transactions Power & Utilities.

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