Monthly Archives: March 2018

The quest for scale: mergers and acquisitions in the wind industry

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Mergers and acquisition are not a recent phenomenon in the wind business. My former manager Luis Miguel still remember vividly the merger in ’97 between Nordtank Energy Group (NEG) and Moerup Industrial Windmill Construction Company (Micon) – and the subsequent merger between NEG Micon and Vestas in 2004.

While in ’97 I was still enjoying the Golden Age of University, I had myself the pleasure of experiencing first-hand the merger between Nordex and Acciona Windpower 2 years ago. The same year Siemens merged with Gamesa, creating a new giant in the business. And that was not all, because GE’s completed the acquisition of Alstom.

What’s next?

Well, if you want my two cents on the topic the trend is going to continue in the next years. Wind turbine prices are free falling, and quite a lot of MW are awarded with an auction system were the cheaper takes all.

Every wind turbine manufacturer is working hard to lower the cost of energy, and for sure economies of scales help in the effort. I would say that Senvion is a good candidate for the next M&A: owned by the private-equity firms Centerbridge and Rapid Partners could be a good target for a Chinese manufacturer, for instance.

The acquisition can also be “vertical” in the value chain – turbine manufacturers are purchasing companies producing blades, blade moulds (Nordex with SSP Technology), or even providing Service (Vestas with the Operation and Maintenance company UpWind Solutions).

I see a consensus in the industry that this consolidation process will continue during the next years, somehow similar to the automotive industry.

5 strange things that you might find in a wind farm

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Working on a variety of projects worldwide I sometimes see unusual requests from customers that want to complement their new wind farm with some nonstandard feature.
I’m collecting here my personal top 5 of “...are you REALLY sure you want it?”. Even if often this type of requirements can lift considerably the price (and make the project less attractive) customers are often irremovable in their request.

#5 – Reserve main transformer. Sometime also poetically called “cold transformer” this is basically a very expensive spare parts to keep parked somewhere in the substation. With a price tag around 1 million it looks like a very expensive price to pay to have a backup in case something goes wrong with the main transformer.

#4 – Residences for the Service technician. In very big wind farm sometimes it’s a good idea to have someone on site 24/7. If the wind farm is in the middle of nowhere it can be also a good idea to provide fully furnished houses.

#3 – Gym. The same Service technician living in the middle of nowhere will presumably need something to do while they are off duty. A properly equipped gym can provide a good use for their spare time.

#2 – Mosque. With a mosque we are becoming very near to the concept of “wind farm town”. It was also a good opportunity to learn something more about the various requirements of this type of religious building.

#1 – Watchtowers. By far the most unusual requirement ever. Basically, a place where an armed guard can watch from a vantage point who is approaching the wind farm, with electricity (you will need to connect it to the substation somehow) and septic tank.

Payment Security: an overview

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In another post I have presented several types of financial securities. In this post I would like to describe more in detail an important subcategory, the Payment Securities.

A Payment Security is usually requested by the seller from the buyer of wind turbines. It is a mechanism to compensate the seller, entirely on partially, if the payments are not completed as per the contractual payment schedule.

Payment securities such as Letters of Credit can have a financial impact – their cost can range from 0.5 to more of 2% of the amount covered, and they usually use lines of credit.

The 2 main types of Payment Securities are:

  • Letter of Credit (full or partial)
  • Parent Company Guarantee (with or without download trigger)

Other 2 possible types of project finance mechanism (without Payment Security) are:

  • Balance Sheet Financing
  • Direct payment from lenders

A Letter of Credit from the point of view of the seller is the strongest alternative. Usually is “unconditional” and “irrevocable”, meaning that it can be used almost as cash: the seller can go to the bank who issued the Letter of Credit and ask for its full amount without explaining what is happening (it is “unconditional”) and at any time (it is “irrevocable”). It is not linked to the contract – that is, the seller does not have to proof that the buyer is defaulting on its obbligations.

A Partial Letter of Credit is simply a Letter of Credit that cover only a percentage of the total contract price (for instance, 30% or 40%).

A Parent Company Guarantee means that the performance of the contractual obligation of the company purchasing the turbines (usually a SPV, a “Special Purpose Vehicle” created only for the project) are guaranteed by a bigger, financially solid parent company owning the SPV.

The Parent Company Guarantee has a Download Trigger if there is a mechanism in place that can force the buyer to replace it with a Letter of Credit. The “download” refers usually to a credit rating downgrade of the parent company or some kind of deterioration of the balance sheet.

The Balance Sheet Financing is not frequent, at least in my experience. It happens when big companies (for instance State utilities) decide to pay for a project “out of their pocket”, without recurring to lenders. As this companies are usually huge, at least in terms of turnover compared to the other players in the business, they can be allowed to buy without providing a Payment Security. Basically they are (or should be) too big to fail.

In the last scenario, Direct Payment from Lenders, the seller doesn’t provide a Payment Security. However, the money flows directly from the lenders (usually a consortium of banks) to the seller, effectively lowering the risk. Obviously the seller will perform a due diligence to check all conditions of the project financing agreement.

Itemized sourcing: everybody else is doing it, so why can't we?

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Itemized sourcing is the new mantra in the business. Basically, it means that you should split the BoP (Civil and Electrical works) in as many lots as possible, in order to achieve substantial savings. This strategy is the opposite of the “single subcontractor” approach, where you give the full package to a unique contractor or at least few of them.

What are the benefits of itemized sourcing? In addition to the possibility of achieving a lower price you also have more control on the purchase of critical items (for instance the main transformer).

Additionally, our friends in Procurement (for instance my role model Ignacio) can create PowerPoint slides showing huge savings to the rest of the organization.

The untold story is that there is no free lunch. What you are achieving is simply a different risk profile for your project: if the truck driver destroy your transformer against a bridge that is a few centimeters too low or if the foundations are build in the wrong place (believe me, both example are from real projects) you will have an hard time to recover your losses - because you purchased the transformer by yourself, or because you have in your pocket many small contracts with low liquidated damages.

Let’s assume that you split a 10 ML USD contract in 5 smaller contracts worth 2 ML USD each.

You will be able for sure to achieve substantial savings. However several other things will happen as well:

  • You should tender every smaller contract separately. Therefore an additional effort is needed from the Tendering Department and from Procurement.
  • Some big subcontractors will decline the job, because the size of the job is too small for them.
  • You will need to discuss the contract (at least) 5x times – 10x if you have more than one option on your table.
  • Unless the applicable law for your contract is something like Sharia (with dispute resolution in Riyadh) you will not be able to claim more than 100% of the value of the contract (2ML) from them. However your exposure toward the customer will be 10ML plus the value of the turbines. If one of them has a problem your risk will be huge.
  • In the real world is often not so easy to understand who is causing a delay. Sometimes there are concurrent delays, sometimes it was not clear who was expected to do a job, other time a finger pointing game start. The more the subcontractor, the more the risk.
  • Lastly, during construction you will need (at least) 5x more effort from the Contract Manager – and for the Site Manager, Project Manager and all people on site.

Don’t get me wrong – I understand that sometime there is no real alternative to make the project fly. However, before you embrace the itemized sourcing of the BoP as the solution for all your problems, you should keep in mind the additional work (try to negotiate 10 contracts in parallel) and risk that you are taking on board.