A Legal Guide to Power Generation Mergers and Acquisitions

A myriad of issues come into play when parties execute power industry mergers and acquisitions. Part 2 of this two-part series looks at the issues involved with acquisition agreements, and some of the more highly negotiated provisions.

Professionals who participate in mergers and acquisitions (M&A) involving operating electric power generation assets must be well-versed in a wide variety of business and legal issues unique to the power generation industry. There are many details involved in the evaluation and negotiation of M&A transactions for operating projects, including key considerations such as potential regulatory approvals, that should be identified at the outset of a potential transaction.

In Part 2 of this two-part series—Part 1 ran in the November 2018 issue of POWER—we will dissect the anatomy of a typical acquisition agreement used in power M&A transactions and some of the provisions that are most often negotiated.

The Parties Involved

Seemingly straightforward, one of the key components to a transaction is determining the proper entities to be parties to the acquisition agreement.

Buyer and Seller. Clearly, the seller (the entity that directly owns the equity interests or assets to be sold) and the buyer (the entity that will directly acquire those equity interests or assets) must be parties to the agreement.

Acquired Companies. In many stock transactions, the acquired companies are also parties to the acquisition agreement (Figure 1). The acquired companies make representations and warranties about their businesses, and undertake to perform covenants during the interim period between signing and closing of the transaction. The buyer will want to ensure that the seller cannot look to the acquired companies for post-closing indemnification or contribution, so that the buyer is not in effect seeking recourse from its own subsidiaries once the deal closes.

1. Stock transactions. CenterPoint Energy’s $6 billion deal to buy Indiana gas utility Vectren was brokered after CenterPoint said it would pay $72 in cash for each share of Vectren stock, and assume all of Vectren’s outstanding net debt, with Vectren becoming a CenterPoint company. Vectren’s assets include the A.B. Brown Generating Station in Evansville, Indiana, which burns both coal and natural gas. Vectren plans to close those units and build a new gas-fired power plant at the site. Courtesy: Wikimedia Commons

Guarantors. One of the most heavily negotiated aspects of a transaction is what parent entities or other credit support, if any, will backstop the obligations of the buyer and the seller. The buyer may be a special purpose entity formed solely for the purposes of the acquisition, and the seller will want some assurances that a creditworthy parent company will be available to pay the purchase price and/or any termination fee payable to the seller. The seller may be a holding company that does not own any other assets besides the project or portfolio being sold in the transaction, and the buyer will want some assurances that a creditworthy parent company will be available to satisfy any post-closing obligations (including indemnification) once the seller has distributed the sale proceeds to its owners and holds no other assets that would be available to satisfy those obligations.

Defined Terms