Navigating Trends and Pitfalls in Power and Utilities M&A Transactions

For businesses in the highly regulated areas of electric, gas, and water, and businesses in the wholesale electric generation space, there are many key considerations to keep in mind when pursuing an M&A transaction.

Electric, gas, and water utilities face intense regulatory scrutiny and significant regulatory risk when pursuing merger and utility sale transactions. Regulatory risk allocation, including the allocation of economic responsibility for commitments made to regulators, drives a number of key commercial negotiation points. For example, buyers are frequently required to assume regulatory approval risk by agreeing to “hell or high water” regulatory covenants and being responsible for large regulatory termination fees.

Transactions involving sales of wholesale generation (including renewables) and energy storage now involve different risk profiles and key negotiation items as financial buyers and sellers have become more prevalent in this space.

The power and utilities space is beginning to see the impacts of the coronavirus (COVID-19) pandemic in areas such as increased customer bad debt, supply chain and permitting delays (including an uptick in “force majeure” notices), heightened review of “material adverse effect” clauses, and pauses in some M&A transaction processes.

As regulated and competitive businesses pursue M&A transactions, they should keep in mind critical factors for success – the significant regulatory considerations for regulated transactions, key diligence and frequently negotiated commercial issues, and the “market” for different transactions.

If you are a power or utilities company exploring a purchase or sale, keep in mind:

• Utility and power transactions present the typical “suite” of M&A issues, but the unique regulatory issues and risks put an enhanced focus on certain contractual provisions
• Key commercial contract terms need to be carefully integrated with the regulatory requirements and process
• In evaluating transactions, sellers and their boards may need to weigh heavily the nature of the buyer due to the intense scrutiny put on potential buyers by regulatory authorities
• In competitive generation transactions, there is greater focus on project-level issues
• COVID-19 is starting to impact the power and utilities sector in the short-term such as slowing down new transactions, while long-term impacts are expected but still largely speculative

Note: this presentation was part of the M&A Academy webinar series.