Key due diligence points to consider for an energy portfolio transaction, stressing the importance of understanding typical red flags, asset lifecycle and effective document management.
As the market refocuses, following the reduction of available subsidies for renewable energy projects, there have been significance groupings and subsequent sales and re-financings of energy portfolios. As a key cost line, streamlining the due diligence process on these transactions is essential and stakeholders can take steps to ensure due diligence is effectively and efficiently conducted. This article sets out some points to consider, based on our experience of successful transactions we have advised on.
1. Know the common legal ‘red flags' and how they might be mitigated
Certain clauses in construction and O&M documents will always be of interest in the context of a sale / finance due diligence review. We have provided some key examples below.
Sales: Restrictions on any change in control of the project owner will cause concerns for a buyer. In this case, it is important to consider at what level of the corporate structure the clause ‘bites’. For example, the sale of a higher tier holding company may not be a concern if the clause restricts a change in control of the lower tier contracting party. Sellers can highlight such a mitigation, if relevant, to assist a buyer’s understanding of the risk.
Re-financing: A funder will want to ensure that (a) project owners can assign by way of security their interests in the construction and O&M documents and that (b) the funder can benefit from direct agreements from key contractors, such as any EPC or O&M provider. As such, it is important that any restrictions on such activities are dealt with proactively, e.g. by the buyer seeking all relevant consents and approvals from contractors at an early stage and the funder being clear on its requirements for any direct agreements at the outset.
Both: ‘Live’ portfolios will often involve a variety of on-going disputes, technical issues and variations. Your legal team should be pragmatic and assess (often with input from technical teams) how significant – if at all – these issues are and if they can be accepted, particularly if risk is mitigated by the portfolio, with more resilience than a single asset.
2. Understand the project lifecycle
Where a portfolio is operational, legal due diligence becomes far simpler. For example, pre-take over extension of time provisions and defects / performance and availability testing regimes in construction contracts may no longer be relevant. Construction / commissioning phase performance security will also probably have expired (in line with the contractor’s obligations) at this stage. From a practical perspective, further comfort can be taken from the fact that on a more mature portfolio the contract counterparties will likely have established channels of communication and will have a good understanding of how the contracts are administered, meaning payment and performance disputes are less likely to arise. If a portfolio includes projects at an earlier stage in development, a greater number of risks will be relevant.
Discussion at the outset as to a proportionate scope of any legal review is key. For example, it may be for a buyer to agree with its legal advisors that they should approach documents for projects near take over on the basis that take over has already been achieved, depending on the timescales and structure for the wider sale / finance transaction.
In any event, collaboration between the various professional team, including legal, technical and insurance advisors for example, can greatly assist in streamlining the due diligence process, particularly where there is clear evidence of strong operational performance across the portfolio
3. Employ effective document management
A well-organised data room is essential to the success of any portfolio transaction and substantially reduces cost. Key features of a good data room include:
- A clear document naming convention
- A logical folder structure
- Provision of all documents (including any amendments, side letters etc) in a single tranche
- Provision of word searchable versions of documents (particularly where advisors can utilise these to prepare comparisons between documents on similar terms)
Effective document management is also important during the Q&A process. Depending on the scale of the portfolio, the parties should agree at the outset which format is most suitable for this process in the context of the relevant project, e.g. by way of word/excel document or by utilising a web-based tool. We have seen clients benefit from substantial cost savings on comparable portfolio transactions when switching to our recommended web-based tool for document and/or transaction management.
Portfolio transactions require parties to proactively manage their due diligence processes to ensure greater cost savings, efficiencies and profitability. We regularly advise a variety of stakeholders on energy portfolio sales and re-financing across a wide range of technologies and are therefore well-placed to help you shape and scope your transaction.