Due diligence is usually performed for acquisitions of various sizes. Energy projects stand out due to their immense size and often complex arrangement.

There are several components of due diligence that needs to be carried out before acquiring an energy project, such as:

• Corporate
• Legal (e.g.- key PPA or EPC contracts)
• Real Estate, Land Use, Entitlements and Permits
• Environmental
• Technical audit (for Project and Developer)
• Financial

Each of these aspects present an opportunity for gaps (e.g.- funding gaps) to be identified and analysed in order to ensure risk is mitigated and negotiations, for example of purchase agreements, are fair and representative of the projected lifetime value.

Importance Of Due Diligence

Due diligence refers to the methods used to verify, audit, and investigate a business deal or transaction before it is completed. Financial due diligence is especially important as it will uncover any financial liabilities that buyers should be aware of. This form of investigation attempts to verify that financing and financial position(s) of the parties involved are strong enough to support the delivery of the project. Considering the example of a wind power project, facility payments, purchase agreements, municipal-finance and tax equity-finance arrangements may be reviewed.

What Does A Typical Financial Due Diligence Review Include?

A financial due diligence review looks at the historical financial performance of the business/project being acquired, as well as the predictions for future financial performance.

The existing business plan for operations is thoroughly assessed to verify if the forecasted performance is correct. This includes looking at previous trends within a specific time period and determining if they will accurately reflect future trends.

Financial due diligence covers a wide variety of items, including:

• Accounting practices
• Income statements
• Tax filings
• Net revenue receipts
• Balance sheet analysis
• Insurance policies
• Existing contracts and agreements
• Inventory and reserves
• Operational facilities, practices and policies
• Budgets and projections

The scope of financial due diligence can vary from project to project. Buyers should aim to complete the most thorough assessment to get a clear picture of the project’s financial standing.

For energy projects, further and more specific analysis may be conducted into the more technical factors such as:

• Energy yield assessments and production estimates
• Assumed power curve and exceedance levels
• Operation and Maintenance agreements
• EPC contracts
• Project plans, milestones and phase costs
• Business plan reviews

Who Performs Financial Due Diligence?

Financing and technical due diligence reviews can be carried out by someone instructed by the buyer. The acquirer could hire or consult with an expert such a tax advisor or auditor, management consultant or independent consultants specialising in risk management, quality assurance or technical advisory – essentially a highly experienced professional able to offer the financial due diligence services required.

When Should Financial Due Diligence be conducted?

Financial due diligence should ideally be conducted as soon as negotiations between the buyer and seller have started – essentially prior to the acquisition process. The process usually begins once the main terms of the deal have been drafted.

During this investigation, the target project is usually taken off the market. This is also when communications between the buyer and sellers are put on hold. It is important for the acquiring party to set sufficient time aside for due diligence to be carried out, as it could raise critical details that could impact the project’s valuation and completion.

Financial Due Diligence Mistakes To Avoid

Some common mistakes to avoid include:

Purchasing At The Wrong Time

Knowing when to proceed is buy is important, as it is fundamental to an effective financial decision. Buyers should have a good understanding of how the project’s value will evolve over time, considering cyclical demand and fluctuations in resource costs.

Focusing On Irrelevant Information

As mentioned earlier, financial due diligence reviews typically cover a wide variety of items. However, some of these items, for example historical performance data, may not provide a true indication of what is likely to affect the project’s success going forwards. Reporting on and emphasising irrelevant risks could inform and influence the proposed project plan negatively, and outline a set of ineffective management actions. Ensuring the scope of investigations is correct (e.g.- meets the timelines, budget and stakeholder requirements) is crucial.

To understand the essential areas to focus on, investors should seek out business specialists that offer financial and commercial due diligence consulting services.

Lack Of Contact Between Individuals Performing Due Diligence

Due diligence can be a complex process that sometimes requires multiple items to be completed simultaneously. This requires a clear line of communication between the different personnel involved in the investigation.

If the buyer has hired accountants and lawyers separately, they may miss certain items due to the assumption that the other has taken care of them. Conversely, some items may be repeated or duplicated due to poor communication.

Purchasing an energy project can be a massive investment and will require effective coordination between a number of parties. The documents or data points that need to be accessed, processed and assessed will vary and depend upon which stage the project is at and the nature of the market. For example, projects operating at a smaller scale (e.g.- 5MWp) – versus a 500MWp project with an extended, large regional scale pipeline – would require a different due diligence undertaking.

Effective coordination between buyer and seller is required in order to qualify the project and reduce the overall time demand of the transaction. Thus, leveraging relevant field expertise or a specialised on demand consulting firm would be very beneficial.

Author Bio:-

Pangea Strategic Intelligence is an energy consulting firm based in London. We provide global on-demand consulting solutions for companies needing strategy support.