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Putting a price on power

Mergers and acquisitions in the power sector can be complicated because of the complex, technical and high-value nature of the assets.

Where the owner of a utility puts all or part of its assets up for sale, how do you determine, as part of the due diligence process, whether a potential vendor is offering the right price? Or that the business model on which the offer is based is robust?

Financial expertise

Answering these questions requires financial expertise and technical capabilities. “In the case of a utility coming up for sale, you could be looking at thousands of substations, tens of thousands of kilometres of cables, transformers, and even down to vans and people,” says Duncan Broom, who heads up advisory services in Mott MacDonald’s power transmission and distribution business.

A utility business will have capital and operational expenditure models that underpin its business plan, but there will be technical assumptions within these, and this is where Mott MacDonald can help, he says. “You know there are a certain number of transformers on the network of a particular age profile from which you can forecast what the age-related Capex replacement should be. If you don’t do this, there can be adverse knock-on effects. For example, equipment may start failing and the Opex will increase. You can also look at how efficiently a utility is being run and identify areas where money could be saved – essentially upsides for investors that allow them to make their bid more competitive”.

Another key common focus area, says Duncan, is technical and non-technical losses – assessing whether the target acquisition has a handle on these, how they are trending, and whether there are any opportunities to drive the trends harder going forwards.

Due diligence

Essentially, the due diligence process is all about drilling down into the financial business models and pressure testing the technical assumptions in them. It is broadly: the owner wants to divest some capital and will reach out to potential buyers through a global investment bank. The potential buyer will then assemble a team of advisors with, for example, legal, insurance, and financial expertise.

Duncan says Mott MacDonald has both the breadth of expertise to provide technical support as well as financial, tariff, regulatory and environmental advice. “We can also review the commercial and contractual documents to make sure they are consistent and protect the lenders from risk.”

He says the scope of work can vary from an initial quick-see assessment to assist a potential buyer in determing whether they should proceed, through to detailed due diligence to facilitate a successful transaction.

Identifying the unknowns

“It is much more than assessing the condition of assets. That is the easy part of the process,” says Duncan. “Drilling into the technical side of the financial models almost invariably identifies new unknowns, defining a whole new set of risks to work through and mitigate.

“What we do in our advisory work has no clear boundary. Delivering advisory reports is very different to delivering design services. The mindset is very different. You also need to communicate in a very different way than in a construction environment. And you absolutely need to recognise what concerns a potential lender, be able to speak the language of banks and meet the challenging time-scales driven by transaction deadlines.”

It’s a process

Offshore wind transmission assets have been a busy area in recent years for the Mott MacDonald advisory team.

Power generators wanting to connect to the grid need first to reach an agreement with the grid operator. Then they must understand what infrastructure is required, what type of contract to use, how much the connection will cost, how long the project will take, and where the risks are. Ultimately the risk profile is largely dependent on the regulatory regime.

In the UK, offshore windfarm developers are legally required to transfer transmission assets to an offshore transmission owner, which receives revenue for keeping the connection to the farm operating.

Energy regulator Ofgem put this arrangement in place to attract investment into offshore transmission. It also enables developers to recover the capital invested in the windfarm, freeing up money to reinvest in other projects. The current high level of activity in the UK’s offshore wind sector suggests the approach is working.

The bottom line

Whether you are the generator or the transmission owner, the interfaces are nevertheless both technical and commercial.

As Duncan sees it, attracting investment into the offshore transmission industry is about understanding the risk profile and the technical drivers: “If you can change the risk profile, you can change the pattern of investment. That’s the bottom-line.”

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