Deals Guru Jeremy Fago with His Take on Q4

After each financial quarter winds up, a note turns up in our inboxes reminding us that Jeremy Fago and his U.S. power and utilities deals team at PwC has put out another analysis of what just happened in mergers and acquisitions in our industry. And as usual we reply saying, yes, please, give us some more Jeremy. 

Because these quarterly interviews provide Public Utilities Fortnightly readers with extraordinarily-insightful reviews of not just the industry's ongoing consolidation but also its strategic transformation. 

How is the road to renewables reflected in the deals? How is the regulatory environment baked in? What about the risks from all directions from wildfires to the wild west of cyber bandits to the twists and turns of extreme weather events? Industry players are adjusting to these climatic changes. Read on and Jeremy will tell you what just happened and more important what's about to happen next.
 

PUF's Steve Mitnick: Remind us all again of your PwC team's role with respect to deals?

Jeremy Fago: I lead our power and utilities deals practice in the U.S. My focus is obviously primarily deals related, but that is broad as you think about all of the transactional aspects underpinning this industry and the changes we are going through. 

I am lucky to be surrounded by an extremely talented group of people at PwC, with colleagues focused on a broad array of specialty areas. As the overall deals leader, my main responsibility is to make sure that our clients are connected with the right teams to support their needs before, during, and after the deals process. 

That is typically bespoke in nature given the persity of the market players in this industry, but can include some or all aspects, for example; due diligence, regulatory and business strategy, integration and separation, tax, accounting, valuation, modeling, people and change, as well as overall transaction management support and beyond.

We assist with all of the things that come with, not just pricing a deal, but then executing on that deal whether that be a merger, acquisition, asset transaction, business separation or sale, making sure that the extrapolation of value and the execution of the strategy for those deals is intact.

As you can probably imagine, we spend a lot of our time these days focused on the holistic transaction given the stakeholders involved and the unique nature of the industry. As an example, on the regulatory front, taking into account your jurisdiction, ensuring that your communications line is open, and that you're communicating and articulating your unique transaction strategy with all the stakeholders. Unlike a lot of other industries, in this industry you have multiple parties including shareholders, customers, and therefore the regulators that need to understand your strategy and the benefits thereof.

We spend quite a bit of time working with companies in looking at, not just what the number is, but also what the impact to the business and interested parties is. It's not just about discounting the cash flows or putting a multiple on a business.

It's a fairly broad purview of things that we do here at PwC and because of the amount of activity we participate in and the capabilities we bring, particularly as it relates to a lot of the deal activity that goes on in our space and across all of the different types of asset classes, it has been an exciting time for sure, and we're looking forward to more because there's work to be done broadly in the space. Some of that work is inevitably going to be done to a significant degree in an inorganic fashion through deals.

PUF: We've discussed each quarter with you, and now we want to discuss the fourth quarter. Were some of the big deals this quarter a little different, such as the DTE deal? Talk about quarter four.

Jeremy Fago: As we compiled the data and were looking at this, it was an interesting mix of different types of deals. It goes to the fact that there's so much opportunity and need in the industry to build out the infrastructure to support everything that we're going through as an industry.

We saw significant renewable activity over the last several quarters, but this quarter was just a little bit different where you had a mix of renewables, asset deals versus some corporate deals, and some infrastructure plays.

It hasn't been atypical over the last several years, but this quarter reflects what we've been talking about for some time, which is the myriad aspects of where investment opportunities reside, and how those investment opportunities are a function of the fact that we're going through this change dramatically over the last several years, with different types of generation resources, and fundamental shifts in policies and customer demands.

It's renewable, it's natural gas, it's how we are fueling that natural gas generation with the logistical shifts in gas reserves as a result of shale and it's the transmission of electricity with the shifting location of generation. All of the supply chain is impacted as a result of the change in generation type and when you couple that with, for example, shale gas, the challenges, needs and opportunities related to the infrastructure to support the change is significant.

This quarter in particular is but a sample of the variety of opportunities that we're seeing in the industry broadly.

PUF: One of the things you do is look at strategic versus financial deals. You're a real expert, but what's the difference and why is it important between a strategic deal and a financial deal and what does this quarter tell us about that?

Jeremy Fago: When we look at strategics, we're typically talking about the industry corporates in most cases. It is utility players looking at other utilities or looking at certain assets or portfolios for example. 

On the financial side you're mostly talking about some of the private equity players, hedge funds, infrastructure investment firms, for example. In many cases, financial players may be looking at opportunities to optimize around cash flows versus a focus on earnings like many of the publicly traded utilities are held to as a result of how they are valued in the marketplace by investors.

It's something we saw play out to some extent over recent years as some of the publicly traded independent power producers, that aren't by their nature the same as regulated utilities, had some exposure to quarterly or annual earnings volatility from a commodity perspective. Trading on a price earnings basis didn't necessarily suit them particularly well when compared to a regulated utility, where many investors found safety in predictable cash flows and pidends/yield particularly in a decade long low interest rate environment on the heels of the great recession.

To be clear, it's not that opportunities and growth potential don't exist for both regulated and non-regulated businesses, but more about how those businesses are valued by their respective investor bases. Financial players tend to be much more focused on cash flow return over an investment horizon, whereas regulated utilities are really evaluated by their investor base on an earnings basis quarter-to-quarter, in most cases.

PUF: It's not random. There are trends. Someone who follows it closely, like you and your team, can see how the next year or two might go? What do you think are the mega trends?

Jeremy Fago: There is going to continue to be a massive focus on customer experience and connecting with the customer, which we've seen a lot of focus on over the last several years.

There are infrastructure needs and we've talked about some of that, but I do think, both regulated utilities and independent power producers, by coupling with retail where possible, are very focused on the customer experience. If you have a happy customer, you typically are going to have a happy regulator, which is going to ultimately flow through to happy investors to the extent that you're providing a valued service.

However, the way that service is valued has changed with customers wanting and, in some cases, demanding a different service than what has historically been offered.

There's a big focus from the industry to change that interaction with the end user. It will not be without challenges along the way, but it will continue to be fun to be a part of this industry as it undergoes the transformation. We're keeping watch on opportunities related to the technology, data, and analytics side. For example, we are seeing, in a lot of cases, IT departments evolving and changing in how they work even within the business, and the mindset of serving as a change agent for the business.

Technology overlay and that data and analytics piece is going to become increasingly important as you think about the changing desires and wants of the customer. In particular, as it relates to user interface and the ability to control their usage, the source of their usage, their data, and how they experience things. This is going to continue to be a trend we keep a close eye on as we think there are growing possibilities for strategic deals around the enablement and impact to customers. 

More broadly, it is interesting as you look at where we've gone from a deal value and volume perspective. If you looked at this on a graph, you're ramping up from 2013 for each and every year up to '16 and since then we've been ramping down.

Last year was no exception. We were at roughly forty-three billion dollars in total deal value as we define it, versus seventy-two billion dollars the year before, versus eighty-two billion the year before.

We have seen a stair-stepping of sorts as we start to come down from what was a monumental level in 2016 of a hundred and fifty-seven billion dollars in total deal value with a significant amount of mega-deals announced.

We talked a little bit about the reason for that. The reason isn't that the fundamental deal environment is bad. In many cases it's more a function of the folks that announced those big deals sticking to the strategic rational of those announced deals, to realize the value of those investments, and shifting to an organic focus in deploying capital into those platforms to address the investment needs we have in this country and in this industry. As well, we've also undergone an extended period of consolidation in the industry, so the number of serial mega-deal players has shrunk as far as strategic players go.

In general, we think it will be an interesting deals year, but it's not without uncertainty as we enter a key political cycle with the presidential election and any policy shifts that may or may not result along with the overall market conditions debate around the possibility of a recession. That said, we feel optimistic that we'll continue to see deal activity as the industry moves forward with the significant opportunities and change already underway.

Other Power and Utilities Deals conversations with Jeremy Fago:

• 2019 Q3
• 2019 Q1
• 2018