The outlook for M&A activity in the Canadian power sector is positive, according to participants in a panel discussion at the Canadian Power Finance Conference on January 25th. Factors cited by the panel, which was moderated by Lewis Smith of Stikeman Elliott's Toronto office, included:
- ongoing turmoil in the financial markets continues to create demand for stable, long-term investments and has lowered the return expectations for many classes of investor
- lower return targets support higher asset valuations, which is motivating those vendors who have been holding out for higher prices
- large pools of equity capital dedicated to power investments have been raised and pressure will continue to build for these funds to be deployed
- the end of the cash grant program and looming expiration of the renewable electricity production tax credit in the US is causing American investors to look to Canada for new opportunities
- low gas prices, which drive pricing in the US merchant market, and a scarcity of PPAs in the US, make contracted projects in Canada attractive to US developers
- there is increasing interest in the Canadian power sector from European investors facing challenges in their home markets
- Asian buyers continue to seek strategic opportunities in both renewable and non-renewable power generation in Canada
- a dwindling supply of prime greenfield sites is causing developers to turn to acquisitions in order to secure locations for new projects
- smaller developers facing financing constraints will need to sell or bring in equity partners with deeper pockets, particularly for projects with looming commercial operation deadlines under their PPAs
- many smaller developers also do not have the expertise or capacity to bring projects from development into commercial operation and will be motivated to divest or partner with investors who do have these capabilities.
This wide range of factors is expected to drive M&A activity in 2012 for projects at all stages, from early development through to commercial operation. However, the European financial markets crisis could very well be a strong countervailing factor, so Canadian power market players will continue to look nervously across the Atlantic this year.
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