Circumstances are converging to encourage
consolidation in the electricity sector. Electricity businesses are
gaining attention from investors as attractive M&A targets.
Particularly on the transmission and distribution side, these
highly regulated businesses tend to deliver predictable returns
that are attractive in low-interest-rate markets.
Concurrently, many electricity businesses are owned by
governments that face growing pressure to find efficiencies and new
sources of money to fund infrastructure spending, increasing the
likelihood that the business will become available for acquisition.
The combined influence of these factors is starting to be felt.
Electricity transmission and distribution businesses are gaining
in popularity as targets for acquisition. Fortis Inc., an
integrated electricity utility company that had its beginnings as a
Newfoundland transmission and distribution business, acquired CH
Energy Group in 2013 and UNS Energy in 2014, which operate
regulated electricity and gas distribution businesses in the United
States. In 2014, Berkshire Hathaway purchased AltaLink from SNC
Lavalin in a transaction that placed a higher value than expected
on the Alberta transmission assets, demonstrating the attractive
prices that the private sector is prepared to pay for these assets.
And recent transactions are also demonstrating the potential that
these businesses have to grow: in September 2015, Nova Scotia-based
energy company Emera Inc. announced its intention to acquire TECO
Energy, a U.S. power generation business.
Appetite to Consolidate
Governments looking to dispose electricity-sector assets are
also generating M&A activity. Many government-owned electricity
distributors lack the capital and other resources necessary to
adapt to change and increase efficiency—and in some regions,
the government is creating incentives to accelerate the
consolidation process. In the spring of 2015, the Province of New
South Wales in Australia obtained a mandate to lease a 49% stake in
its transmission and distribution network to fund new investment in
infrastructure. The government is rumoured to have received
interest from a number of pension and other offshore investors.
The Canadian electricity landscape is also seeing movement
toward consolidation. In 2014, the Ontario provincial government
struck the Premier's Advisory Council on Government Assets,
chaired by Ed Clark, which recommended a number of changes to
generate funds for infrastructure development and spur
consolidation in the electricity distribution sector (read our
interview with Ed Clark below). Following those recommendations, on
November 5, 2015, the Province of Ontario in Canada sold a 15%
interest in its transmission and distribution business by way of an
initial public offering of the shares of Hydro One Limited to fund
M&A in the Regulated
Electricity Sector: What are the Challenges?
As is the case in many other highly regulated sectors, M&A
in this sector poses unique tax, regulatory and other challenges
(see Trend 3, "New Investors, New Scope: Infrastructure Investing
is Broadening"). For example, Ontario's
payment-in-lieu tax provisions for municipally owned utilities have
generally discouraged consolidation. To address this concern, the
government has temporarily reduced various tax components to
further foster consolidation.
Where the assets are owned by municipalities or other
governments, the political approval process may introduce
uncertainty and timing challenges. Also, because electricity
transmission and distribution businesses are largely
rate-regulated, parties must pay careful attention to the impact of
the transaction on ratepayers. The rate-setting process is critical
to value, and the ability of an acquiror to retain the benefit of
synergies, harmonize rates and grow the rate base can have a
significant effect on the economics of the deal.
In many cases the acquisition itself may also require approval
by the rate regulator. As well (as was the case for Berkshire
Hathaway's acquisition of AltaLink), foreign investment and
anti-trust approvals may be necessary. The regulatory approval
processes in Canada, the United States and elsewhere can be
prolonged, requiring careful negotiation of terms to facilitate the
approval process and fairly allocate between the parties the risk
of a failed approval or unacceptable terms being imposed by a
The growing number of investors amenable to taking on the
regulatory challenges of businesses in the electricity sector
speaks to the appealing characteristics of these assets, such as
stable long-term returns. In the year ahead, we expect to see
factors unique to regulated regimes continue to converge with
investor interest to fuel M&A activity in this space.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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