Deregulation ignites flurry of asset transactions

Linda Drisko Hickok, ENSR International

Deregulation of the electricity industry has spawned unprecedented asset transfer activity among electric generating companies. Many companies are focusing on generation, while a large number of former generating companies are shifting their focus to concentrate on power distribution and communication initiatives. The result is a significant turnover of power plants to new owners as generating companies assemble portfolios geared for success in a competitive marketplace.

Older power plants bring value based on fuel type (diversity is important), location (infrastructure is all in place), and readiness (new plants can take two to four years to develop). But, they also bring environmental issues and liabilities that must be considered carefully before an acquisition goes forward. These issues can be regulatory, operational, or residual, and it is the responsibility of the buyer to learn about and understand the relevant issues prior to purchase, during the due diligence phase. Once a purchase agreement has been executed, the buyer must develop a plan to complete the transaction and integrate the new plants into its fleet.

There are three distinct phases in the transaction process: due diligence, transition, and integration.

Due diligence: Think fast!

The due diligence phase is characterized by a detailed review of seller-generated information about the facilities and site visits to visually inspect conditions at the sites, followed by internal analyses of the issues and the liabilities to assess their impacts on a bid price. The bid team must screen issues for relevance and importance. This step is essential; the material issues must be sorted out so that the limited bidding time can be used most effectively.

Costs associated with site contamination and remediation, air pollution controls, consent orders, permit changes, presence of hazardous materials, or other liabilities, along with value from emission allowances, emission reduction credits (ERCs), advantageous environmental permits, etc. must be quantified and incorporated into the overall financial analysis for the bid. In addition, the bid team and its advisors must work hard to identify ways to address issues and enhance value. Analysis of liabilities and issues should include identification of possible solutions to identified environmental problems and ways to enhance the value of the asset overall: Is re-powering an option? Can the buyer add new capacity at site? Are brownfields cleanup incentives available? Can the buyer install emission controls and generate saleable allowances/ERCs?

Transition and integration: Resolving issues as a team

Once a winning bidder has been selected by the seller, the two companies enter into a new relationship, one where they work together toward the common goal of completing the transaction. As the buyer explores the details of environmental issues identified during the due diligence phase, both the buyer and seller focus on working through issues and financial closing requirements on schedule. A checklist should be developed as early as possible to focus the team’s efforts and make sure the target is well defined.

Transition phase issues can include almost anything; during this phase a much broader perspective is taken by the buyer and the seller is obligated to involve the buyer in any significant actions or decisions affecting the assets. The major areas of focus are typically:

  • Permit transfers Regulatory process, structure of company, financial assurance requirements;
  • Ongoing/unresolved matters remediation agreements, consent orders, pending permits, hydroelectric plant relicensing proceedings;
  • Requirements for financial closing;
  • Development issues;
  • Personnel issues; and
  • Planning for the integration phase.

The integration phase begins the day after financial closing. Successful integration incorporates the new facilities and personnel into the buyer’s organization and culture and implements strategic plans to extract maximum value from the acquired assets. The most successful integration is achieved when there has been adequate preparation in the weeks and months leading up to financial closing. The hard work of the transition phase will begin to pay off if contractual arrangements between the buyer and seller have addressed all relevant issues, “people” issues have been carefully handled, and solutions to technical issues have been developed and implemented.

Hickok is a senior program manager with ENSR International, Westford, Mass. She can be reached at 312-432-0506, or at lhickok@ensr.com.

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