Domestic energy production was a subject of much attention in the recently passed federal legislation. That legislation eliminated significant future tax incentives for new construction of large-scale wind and solar projects. Other energy generation sources are expected to be used more intensively and for a longer period of time than previously assumed in order to meet significant anticipated growth in domestic energy demand.
The consensus expectation is that the federal legislation will increase domestic production, transportation, and consumption of natural gas and result in domestic consumption of natural gas occurring at a higher level for a longer period of time than previously estimated. A logical conclusion, then, is that the valuations for long haul natural gas pipelines, including their terminal value, will need to be revisited. The value of a long-haul pipeline is principally based on the value of the long-term contract(s) the owner is able to put in place for transportation of natural gas. The terminal, or residual, value of that infrastructure asset is generally calculated taking into account the end date for the useful life of the asset (usually concurrent with expiration of the long-term transportation contracts) and the discounted value of liquidation of the asset (sale for scrap or sale to a third party for repurposing).
Similarly, with the future elimination of tax incentives for large scale solar and wind developments, it is likely that existing solar and wind projects will remain in use for a longer period of time. That useful life extension, if accurate, should result in an increase in value of those deployed assets in the eyes of potential acquirers.
It will be interesting to see if those anticipated changes in perceived value impact M&A activity for those energy infrastructure assets and other assets that may be affected by the country’s growing demand for energy and the prospect of lower investment in large-scale wind and solar projects.
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