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Investors planning for the due diligence process
Written By: Jen Neville
May 7, 2018
We exclusively interviewed Gillian Howard Larsen, Global director of Due Diligence Services from AWS Truepower, to get her insights on due diligence for renewable energy projects. Larsen works at AWS Truepower, a global renewable energy firm that provides quality, innovative energy engineering, and advisory services to project developers and operators, investors, utilities, government agencies, and manufacturers.
Larsen has been a renewable energy professional in both the United States and Europe for over 24 years. In the last 17 years, Larsen has had a lead role in the development, acquisition, and financing of utility-scale wind projects. Before joining AWS Truepower, now a UL company, she led project development, financing, and M&A teams and negotiated with project owners, lenders, utilities, and regulatory agencies to close project development, acquisition, financing and sales of multiple wind energy projects. As Global Director of Due Diligence, Larsen leads the team and all aspects of project due diligence and performs contract reviews, review of commercial structure, risk assessment and allocation, financial model and OPEX cost reviews, site visits, and construction monitoring. She holds bachelor’s and master’s degrees from Cambridge University.
Q: Can you share with us on what kind of deal flows are you seeing in today's renewable project M&A markets?
Gillian Howard Larson: We're definitely seeing an increase in mergers and acquisitions in both wind and solar. Over the last 18 months, we've worked on a number of global portfolio acquisitions as well as a number of individual project acquisitions. We represented Brookfield group sales for the TerraForm portfolio both in North America and globally for their wind assets. And more recently, we represented Global Infrastructure Partners for both wind and solar assets for the NRG portfolio. But we've done quite a large number of transactions that we can't talk about, in between that, we're certainly seeing more activity in the markets.
Q: Can you briefly discuss some of what your firm typically undertakes when examining a projects energy resource, technology, balance of plant design, warranty O&M, environmental and permitting issues, site and possible lifetime extension prospects?
GHL: Let's go through one by one and hit key points for each.
-On resource assessment, we'll be looking at what kind of measurement and monitoring campaign have they had. How long have they been collecting resource data on site? Are the collection points representative of the whole site?
-On operating projects, we'll be looking at what historic operating data on the resource side or on the production side do they have.
-On technology, we'll be looking at the history and the track record of the technology supplier. Then major component suppliers, we'll look at availability and power curve. Then we'll look at all the key issues that they've had on a particular turbine and how they've resolved them.
-On balance of plant, we'll be looking at the geotechnical aspects of the project site. We'll be looking at the foundation design and we'll be performing independent product calculations to ensure that the foundations have actually been designed for the turbine loads given the soil conditions.
-On the electrical, we'll look at the design of the collection systems, the project substations, any gen-tie to the utility substation, and we'll look at making sure that everything actually ties up with the requirements of the interconnection agreement and the system operator.
-On operations and maintenance, we'll look at what is the term of the agreement? What's the price? Who's actually performing it? What is the scope? Are there inclusions? Are there exclusions? And very much the same on the warranties. We'll look at how long a warranty is in place for. And also what are the exclusions? That's almost as important as what is actually included. What are the areas where if an owner has to enforce the warranty, the manufacturer or the service provider will say, "Well no, wait a minute? This is not included." Looking at that is extremely important.
-On the permitting side, we'll look at what are the key issues and risks for a particular location? If it's wind, is it within the whooping crane corridor? Or are there legal issues in that particular location? Are there bat issues that might lead to curtailment?
-In terms of lifetime extension, it is a competitive market. So the longer that an investor can actually evaluate a project or portfolio life over, then the more likely they are to be successful. It's important to look at the appropriate time period to do the valuation over is extremely important. And we'll be looking at that from a production perspective, from an operating cost perspective, from a foundation perspective, and from a turbine and loads perspective.
Q: Are there any geographic regions where you're seeing increased or decreased activity?
GHL: We're definitely seeing a lot of interest in North America right now. We're seeing former European utility companies coming into the markets, who've not really been as active in North America before, really looking at establishing platforms and portfolios in the market. We're seeing quite a bit of activity in Latin America and Spain. We're also seeing activity in India. In North America, Latin America and Spain, it's driven by increased opportunities in the markets, where we're seeing strong markets with fairly strong growth. In India, last year was really a year where there was very little activity in the market, very little growth. And we're seeing the reverse effect where people are actually wanting to sell portfolios with other people coming in and looking to buy.
Q: What do you think actually spurred that growth in the once slower regions?
GHL: For North America, I think that there are three years left, certainly for wind, on the production tax credits. With tax reform finally taking place at the end of last year, we've got three years of clarity in the market, so a lot of developers are trying to get projects off the ground between now and 2020. And there is certainly a lot of well-capitalized large companies that are looking to help develop and ultimately own those portfolios.
Q: When working with investors, your firm stresses that different projects require different approaches to evaluating investments in various projects. Could you give us some examples of how the risks in different projects require specialized examination?
GHL: Usually, what our clients are looking for in a valuation is they're looking at what price can they offer a seller. They're coming to us to look at what are the key value drivers from a technical perspective that will affect that price? And all valuation is done based on the project cash flow model or a portfolio cash flow model that has revenues on the one side and then expenses on the other side. On the revenue side, the most critical input of that is what energy will each project generate over its life? We'll be looking at the energy from a greenfield development perspective or an operating perspective. And really verifying and validating that what the sponsor has forecast can actually be realized, and if not then, we'll be looking at adjusting that. And then on the cost side, we're looking at for the greenfield projects, what is the CAPEX for those projects? How much is it going to cost to put them in the ground? What are turbines going to cost? What is further equipment going to cost? And then how much is it going to cost to operate them? And again, are the sponsors' estimates for those reasons or are they overly aggressive or overly conservative? And then finally we look at red flags, other items that would affect both the energy or the CAPEX and OPEX negatively. On greenfield projects, other items that would affect the schedule, and either make projects take much longer to develop, or simply stop the development completely. Other items in pivoting that may take much longer to obtain or they may just simply never get them. On the technology side, we'll look at what is the technology being deployed? What's its track record? Are there any issues or unresolved issues that may cost more on the operations and maintenance side. And then we'll also look at who the key project participants and what's their track record? Have the major participants in projects and portfolios got a track record in the industry? How well would they actually be able to perform and deliver on the projects that an investor's looking for?
Q: Are there risk factors and deals that will occur in 2018 that were less important in the past? Are there any trends in that project risk that tend to be common to many projects?
GHL: I think that in North America we're seeing a couple of things that people are really looking at in a lot more detail than previously. The first one is the commercial and industrial PPAs and hedge agreements in the market, as well as basis risk. What congestion and containment will there be? What is the risk in negative pricing between the project and the point at which power offtake is paid for? That's something that really has to be paid attention to. And then the second thing we're looking at on greenfield projects is, have developers actually got PTC vocation for projects that they will be bringing online in 2018, 2019, 2020.
Q: What advice would you offer an investor about planning for the due diligence process as they are contemplating an investment? What kind of time and resources would they need to commit to this essential step?
GHL: I think really the first safe advice would be plan ahead. Many of these M&As are a competitive process, and certainly what we're seeing at the moment is it's very much a seller's market and there are a lot of buyers who are looking for portfolios and for assets. Anyone that's looking, needs to be competitive. And everyone's looking at a fairly limited pool of advisors. Whether it's in technical or due diligence, whether it's legal, whether it's accounting. Really getting those parties tied up ahead of time, I think it's beneficial because what a lot of sellers do is that they set a fairly short timeline for due diligence. It might be 30 days. It might be 45 days. It's fairly important to be able to hit the ground running with an advisory team once the clock starts ticking. I think the second thing I'd say is, really making sure that what's in the data room for due diligence is as complete as possible. A data room that's half empty really means that process will be delayed and will not be as good pricing indications. And then every transaction has multiple advisors. Be it legal, technical, accounting. Making sure that the communication interface between different advisors is set up well is important. If one advisor finds one item that affects the work another advisor is doing, there won't be any issues between teams.
Q: What interesting trends do you see ahead for, the solar developers, wind, grid operators, regulators, and policy decision-makers, and owners with significant energy portfolios?
GHL: I think it points to four different things. The first is costs. Costs are going down. The cost at which power offtake is being contracted for is still going down. It's as low as we've ever seen it. It's not going up yet. In response to that, both turbine and solar costs are going down as well. We haven't seen the bottom of that market and I don't think we will for some time. Secondly, I'd say transmission. In certain locations, whether it's the US, whether it's other global markets, locations that have great resource may not always have the transmission needed. So there could be improvements that are required going forward. Thirdly, we're seeing a lot of consolidation in the market. As we've become a global company we're seeing our clients operating in multiple global markets. Different companies have made acquisitions in, North America, Europe, Latin America. You may see the same company in India. The world is getting a lot smaller and that's something that we're really seeing everywhere. And then finally, these are long-term assets. Anyone that's investing is investing in an infrastructure asset that's going to have a life of potentially in excess of 30 years. Really understanding the performance of those and figuring out how to actually optimize that and how to reduce costs is going to give people a huge benefit over time. And it's something that I think is definitely going to be very important to look at going forward as to where additional value could be.
Investors planning for the due diligence process
Gillian Howard Larsen
Global director of Due Diligence Services