Full due diligence is an essential part of M&A transactions in the power sector. Typical due diligence areas will include:
- financial and operational agreements;
- power sector regulations; and
- real estate, environmental, corporate, litigation, tax, labour, social security, insurance, intellectual property and anti-corruption compliance.
It is overall critical, especially for buyers, to assemble experienced due diligence teams, including:
- legal and regulatory advisers;
- specific technical, engineering and environmental advisers;
- financial advisers; and
- any other advisers that might be necessary in particular cases, such as insurance and employee benefits advisers.
Purchase agreements and documentation
In addition to specific findings during due diligence, representations and warranties may include full compliance with the law and typical no third-party claims or litigation, or a limitation to those specified in an exhibit. Usual conditions precedent to closing include the waiver or approval of financing parties such as lenders and bondholders, and the prior approval of the competition authorities in Brazil and other applicable jurisdictions. In some cases, the approval of ANEEL and power purchase agreement counterparties will be required.
In the transmission and distribution sector, as well as for some large hydropower plants, regulated tariffs constitute the main source of revenue under the financial models, and, therefore, the prospect of variances may make it relevant to include price adjustment mechanisms in the transaction documents. It is the same in the case of power generation sources subject to the concept of 'physical guarantee', which is a number calculated by the MME that directly affects the energy amount available for sale.
Depending on the stage of a project, buyers will negotiate to attribute to the seller any risks related to construction or to the additional capital expenditure needed to complete the works. Construction risk is an important factor not only because of the impairment to revenues that it may cause in the event of delays or failures, but also because of the possibility that ANEEL will enforce in some cases a performance bond of 5 to 10 per cent of the value of the investments.