In recent years the Portuguese M&A market has witnessed significant dynamism, with large-scale acquisitions being completed in the gas infrastructure (grids) and renewables generation sectors, including the following:
- in October 2016, Marubeni and Toho Gas acquired from Galp Gás a 22.5 per cent stake in its natural gas distribution business for €138 million;
- in June 2017, a subsidiary of China Three Gorges Group (ACE Portugal Sàrl) acquired 49 per cent of EDPR PT – Parques Eólicos, a 422 MW (megawatt) wind farm, for €248 million;
- in March 2017, Artá completed the acquisition of Gascan from Portuguese private equity fund Explorer for €70 million. In February 2019, Gascan was then sold by Artá to UBS Asset Management for €100 million;
- in October 2017, REN completed the acquisition of EDP Gás from EDP for €532 million;
- in May 2018, China Three Gorges launched a takeover offer for EDP and EDP Renováveis subject, in particular, to the withdrawal of the voting cap in EDP's articles of association by EDP's shareholders' general meeting. Since the withdrawal was not approved, in May 2019 the Portuguese Securities Market Commission (CMVM) put an end to the takeover offer based on non-compliance with the conditions established by China Three Gorges;
- in 2018, Aquila Capital acquired the entire share capital of EDP Small Hydro, SA, a company engaged in the operation of 21 mini hydro power plants, for €164 million;
- in March 2019, Total Eren acquired from Novaenergia Fund Novenergia Holding Company, which owns, in particular, Generg, one of the biggest renewable energy players in Portugal that is also active in six other European countries;
- in June 2019, Fundação Gulbenkian announced the sale of Partex Oil and Gas to Thai company PTTEP for €622 million; and
- in 2018 and 2019, Aquila Capital and BlackRock Investment (UK) acquired several greenfield ready-to-build solar projects in mainland Portugal.
Investor interest in the Portuguese renewables market, which may be evidenced through the transactions listed above, is aligned with the government's policy of fostering the development of, and an increase in, power generation capacity through renewable sources.
Pursuant to the Portuguese National Plan for Energy and Climate up to 2030 (PNEC 2030), the draft version of which was submitted to the European Commission in December 2018,2 the government is aiming to achieve the following targets for renewables generation in the energy consumption mix:
- 31 per cent by 2020;
- 33 to 34 per cent by 2022;
- 37 to 38 per cent by 2025;
- 40 to 41 per cent by 2027; and
- 47 per cent by 2030.
Simultaneously, according to the PNEC 2030, Portugal is aiming to achieve by 2030 a 52 per cent reduction in CO2 emissions when compared to the 20053 reference values.
To meet the above targets, a relevant increase in the number of new renewable generation facilities and repowering will most certainly be required, and will likely attract investment from foreign players and further fuel the positive energy M&A trend. EDP's publicised divestment plan and the projected sale of grid and hydro businesses shall also be followed closely.
ii YEAR IN REVIEW
i Solar auction
In Portugal, 2019 was marked profoundly by the first auction launched by the government for the awarding of power injection capacity into RESP, the public service electrical grid for photovoltaic (PV) solar energy launched by Order of the Portuguese Secretary of State of Energy No. 5532 B/2019, of 6 June. The online auction took place at the end of July and the beginning of August, and the results set a world record low in terms of the tariffs that will apply to the power plants to be developed to further the capacity awarded through the auction for a period of 15 years. The auction was preceded and followed by some significant legislative changes in the energy sector, which are addressed below.
The government opted to auction a total of 1.150MW of grid capacity, which was split into 24 lots, each of which had different capacity blocks.
Ultimately, the 24 lots were awarded to a total of 13 different bidders and companies. Iberdrola Renewables Portugal SA, a subsidiary of the Spanish utility Iberdrola, won seven of the 24 lots, while Akuo Renováveis Portugal, Lda, a unit of the French power producer Akuo Energy SAS, won over 370MW.
Akuo's bid for the grid capacity under lot number three scored a record-breaking tariff of €14.76/megawatt hour for a 150MW development, which made global headlines for being the world's lowest-priced solar PV power purchase agreement. The auction winners gained the right to have allocated to them the grid dispatch capacity in a given batch of delivery points of the RESP, with a remuneration arrangement valid for 15 years.
ii Legislative changes
In terms of legislative changes, 2019 saw the enactment of two major changes to the legal framework applicable to the Portuguese energy market that are significant and relevant within the context of M&A transactions.
Decree-Law 76/2019, of 3 June
On 3 June 2019, Decree-Law 76/2019 was enacted, amending Decree-Law 172/2006, which sets forth the legal framework applicable to electricity production, transmission, distribution and supply activities and the organisation of the electricity markets. The main goal of Decree-Law 76/2019 is to develop the general principles regarding the organisation and operation of the national electrical system. By doing so, it altered the legal framework regarding the production, storage, transportation, distribution and commercialisation of electric energy.
Among the main changes introduced by Decree-Law 76/2019, the modification of the rules applicable to the awarding and assignment of power plant generation licences is a key item worth mentioning. Pursuant to the new Decree-Law:
- the attribution of a grid reserve capacity title for the injection of power into the RESP is now a prior and mandatory requirement for the commencement of the process for obtaining a power generation licence; and
- a holder of a generation licence is now strictly prohibited from assigning its title to a third party before the operation licence is issued to the power plant (i.e., generation licences cannot be transferred to third parties until the commercial operation date of the power generation facility arrives).
The policy drive behind these amendments is, on the one hand, to maximise efficiency by assuring that all requests are guaranteed an injection point in the RESP and, on the other, to incentivise sponsors to fully commit to projects and their swift development.
It should further be noted that these rules were enshrined and deepened in the tender specifications for the solar auction, where a change of control of the entities that have been awarded with injection capacity titles is strictly forbidden until the relevant projects obtain their operation licences: a breach of this undertaking may lead to the revocation of injection capacity titles.
Under Decree-Law 76/2019, sponsors have the ability to enter into direct agreements with grid operators to finance and build new network infrastructure to anticipate planned changes to the networks or to reinforce existing ones. By doing so, as an alternative to obtaining grid injection capacity under an auction procedure and being limited to the available lots, technology and price caps auctioned by the government, sponsors may seek to develop larger generation assets.
The hybridisation of power plants (i.e., power plants that use more than one primary source of energy, allowing greater production based on the same infrastructure) is now also clearly foreseen under Decree-Law 76/2019, with a simplified procedure applicable to the repowering of installations, which may opt to increase their installed capacity through different technologies (e.g., hydro and wind; solar and wind).
Small power production units have also been specifically catered for under Decree-Law 76/2019. The production of electricity from renewable energy sources now benefits from a simplified procedure carried out via an electronic platform: if production is based on a single source of energy, with an installed capacity of up to 1MW, there is now an option of prior registry and the faster acquisition of an operation certificate.
The changes implemented by Decree-Law 76/2019 are applicable to all processes pending before the Directorate General of Geology and Energy (DGEG) without invalidating acts that were already practised in accordance with the previous legal framework. Due to the Decree-Law's new imperative status, some processes were suspended until applicants had acquired a reserve on their energy's reception capacity in the RESP.
Decree-Law 104/2019, of 9 August and Ministerial Order 282/2019, of 30 August
Decree-Law 104/2019, of 9 August and Ministerial Order 282/2019, of 30 August introduce important changes to Decree-Law 74/2013, of 4 June, which created a mechanism to regulate competition in the Portuguese electricity wholesale market within the framework of the MIBEL (the integrated Iberian electricity market).
Decree-Law 74/2013, of 4 June, regulates the global use of the electricity tariff system, which is charged to end users, and includes a component related to general economic interest costs (CIEG) that are reflected directly upon power generators. CIEG are generally referred to as the regulatory mechanisms to ensure the balance of competition within the Portuguese wholesale market (tariff), and are generally perceived to be in place to establish a level playing field between Portuguese and Spanish generators in the MIBEL pool market due to the Spanish generation tax applicable to Spanish generators that does not have an equivalent in Portugal.
As a result of changes brought about by Decree-Law 104/2019 and Ministerial Order 282/2019, the scope of application of the tariff now encompasses all power generators, except, in general, hydro generators below 10 megavolt ampere, and the plants that received grid capacity under the solar auction and that have an installed capacity below 5MW. The extent of the impact of this measure is yet to be seen, but it is likely to have downward economic effects on solar and wind assets, which were exempted from CIEG prior to the enactment of the new statutes.
iii LEGAL AND REGULATORY FRAMEWORK
i Primary and secondary legislation
In Portugal, the general legal framework governing M&A transactions consists mainly of the following legislation:
- the Civil Code, enacted by Decree-Law 47344, of 25 November, as amended, which contains the general rules governing sales, purchases and contracts;
- the Commercial Companies Code, enacted by Decree-Law 262/86, of 2 September, as amended, which establishes the general framework governing Portuguese commercial companies and the legal regime governing share capital increases and decreases, mergers and demergers, as well as acquisitions and transfers of shares;
- the Securities Code, enacted by Decree-Law 486/99, of 13 November, as amended, which is applicable to listed companies but also contains the general regime relating to matters such as the transfer of shares in limited liability companies; and
- the Competition Act, enacted by Law 19/2012, of 8 May, as amended, which establishes the Portuguese competition legal regime.
On a specific basis, the legal framework applicable to M&A transactions in the energy sector comprises the following legislation:
- Law 19/2012, of 8 May, which governs the merger control regime from an antitrust perspective in relation to which the Portuguese Competition Authority (AdC) has exclusive jurisdiction to enforce the merger control rules;
- Decree-Law 29/2006, of 15 February, and Decree-Law 172/2006, of 23 August, as amended, which govern the electricity system and transpose the unbundling rules applicable to the electricity sector as set out in the Electricity Directive4 into Portuguese law;
- Decree-Law 31/2006, of 15 February, as amended, which governs the oil and gas systems and transposes the unbundling rules applicable to the electricity sector and set out in the Gas Directive 2009/73/EC5 into Portuguese law;
- Decree-Law 215-A/2012, of 8 October, sets out the restrictions applicable to the ownership of the national transmission network operator in the electricity sector; and
- Decree-Law 138/2014, of 15 September, which establishes the legal framework for the safeguarding of strategic assets deemed essential for national defence and security or for the supply of fundamental services in the energy, transport and telecommunications areas.
Additionally, the energy sector is further governed by specific laws and regulations, some of which are issued by the respective regulatory entities.
ii Merger clearance by the energy regulator
In general, in the energy sector, the regulatory entity that holds the authority to provide merger clearance is the AdC. Additionally, other regulatory entities such as the Regulatory Entity for Energy Services and the government may also play a role in the merger control review of energy assets if transactions involve entities subject to unbundling requisites or assets deemed to be strategic under the applicable legislation.
In addition, in the electricity sector, the transfer of licences to third parties in the context of a corporate reorganisation by merger, demerger or transfer of the management or operation of a renewables asset by a company is subject to prior authorisation from the DGEG.
Moreover, in the oil and gas field, the assignment of a concession's rights to a third party by the concession holder, as well as a change of control of concession holder, require a prior authorisation from the Ministry of Economy, which must be requested through the DGEG.
iv Cross-border transactions and foreign investment
i Recent cross-border energy M&A transactions
The energy sector has been one of the most active sectors in terms of Portuguese M&A. According to MergerMarket, the value of energy deals in Portugal in the first three quarters of 2019 more than quadrupled compared with the same period in 2018, from €161 million to €739 million.6 As previously mentioned, foreign investment in the country in the energy sector has remained robust, with the pipeline of ongoing and forecasted transactions increasing.
In early 2019, Total Eren SA, a French renewable independent power producer, acquired NovEnergia Holding Company, the fourth-largest producer of renewable energy in Portugal, in a deal worth over €1 billion. NovEnergia operates 47 renewable energy projects located in six countries and is held by Fundo Novenergia, located in Luxembourg, which in turn is held by Portuguese bank funds and Portuguese foundations.
In November 2019, a Portuguese philanthropic body, Calouste Gulbenkian Foundation, concluded the sale of 100 per cent of Partex Holding BV's share capital, its energy holding, to a subsidiary of PTT Exploration and Production Public Company Limited, a Thai state-owned enterprise, for approximately €555 million. Partex currently invests in seven oil and gas projects in several countries.
In addition, the solar energy auction launched by the government in July 2019 attracted several international bidders, and an announcement made by the government regarding a second auction to be launched in January 2020 is also expected attract considerable interest in terms of foreign investment.
From an outbound perspective, during the second semester of 2019 REN Group, Portugal's transmission and system operator, which manages both electricity and natural gas networks, entered into an agreement with Compañia General de Electricidad SA and Naturgy Inversiones Internacionales, SA for the acquisition of 100 per cent of the share capital of Empresa de Transmisión Eléctrica Transmesel, SA, an electricity transmission company in Chile, for approximately €48.9 million.
The Portuguese energy sector has been particularly active in the past few years, mainly in the energy transition field. Regarding the Portuguese renewable energy assets market, while in the past the focus has been on wind farms and hydroelectric power plants, recently international investment funds and corporate investors have shown considerable interest in investing in greenfield solar energy.
ii Rules regarding or restrictions on foreign investment
In relation to restrictions on foreign investment, in general, foreign companies are free to invest in the energy sector. However, certain limitations are applicable. Decree-Law 138/2014, of 15 September, establishes the legal framework for the safeguarding of strategic assets deemed essential for national defence and security or for the supply of fundamental services in the energy, transport and telecommunications areas. Pursuant to this regime, the government may object to a transaction resulting directly or indirectly in the acquisition of sole or joint control by an investor (person or company) from a country outside the European Union and the European Economic Area over strategic assets if it poses a real and severe threat to national defence and security or to the provision of basic services considered to be of a fundamental nature for Portugal, such as energy supply. For legal certainty purposes, this regime allows for an acquiring entity to request that the government issues a declaration of non-opposition to a transaction, which shall be deemed granted if a decision is not issued within 30 days.
Additionally, from the perspective of ownership of electricity companies or assets, according to Decree-Law 215-A/2012, of 8 October, a national or foreign entity cannot, directly or indirectly, hold more than 25 per cent of the share capital of the national transmission network operator or of the companies that control the operator. Moreover, if the concession holder of the transmission network is controlled by one or more persons from third countries, it can only be certified as an operator if said certification does not pose a risk to the security of the national energy supply.
In addition, Decree-Law 172/2006, of 23 August, as amended, establishes restrictions applicable to holders of electricity production licences by imposing a 40 per cent limit on the electricity generation capacity share held by licence holders within the scope of the Iberian market.
iii Export or import restrictions in the energy sector
Portugal does not impose any export or import restrictions in the energy sector.
iv Governing law and jurisdiction in energy transactions
Regarding the choice of governing law and jurisdiction, parties to a transaction are generally free to choose the governing laws of their transaction. However, limitations apply to transactions involving concession agreements and certain project agreements entered into with public entities, which are usually required to be governed by Portuguese law. Limitations further apply to disputes regarding collective labour rights, which are subject to mandatory domestic arbitration or insolvency proceedings, and which are also subject to the jurisdiction of domestic courts.
v DUE DILIGENCE
The areas generally covered by due diligence within the context of the acquisition of energy assets in Portugal are:
- regulatory (e.g., licensing, remuneration schemes, public contracts and public incentives);
- real estate;
- material contracts (e.g., intragroup agreements when business units sold are entities being demerged from larger conglomerates; and engineering, procurement and construction, and operation and maintenance (O&M) contracts);
- labour; and
Given the public interest nature of energy target assets and the fact that they are often operated under concession contracts entered into with public entities (which is, for instance, the case for electricity and gas grids), which are granted through public concessions entered into by the state and hydro generation assets (where the private use of a hydric domain is either granted by a licence or concession contract), a review of the regulatory aspects that may impact a transaction and prospective limitations, and the need for consent to a change of control of operators are some of the first aspects to be checked. Likewise, a review of labour aspects and liabilities in relation to employees allocated to public concessions is also key.
VI PURCHASE AGREEMENTS AND DOCUMENTATION
Almost all M&A transactions in the Portuguese energy sector are structured as share purchase deals. Asset deals are very rare, if not non-existent.
Key reasons for this approach are tax and regulatory-related. On the one hand, a sale of business units may entail relevant tax costs, which are not triggered in the event of an asset deal. On the other, asset deals significantly reduce the regulatory burdens or constraints to the extent that operation licences or public concessions are not required to be assigned to a third party and, in most cases, a mere direct or indirect change of control of the operator either does not trigger the need for regulatory consent or significantly smoothes the consent process, since business continuity is generally not expected to be affected.
As flagged above, several M&A transactions have targeted business units that have been demerged from larger conglomerate entities (e.g., EDP and REN). In this sense, M&A deals usually entail transition service agreements and O&M agreements to bridge the transfer of business from the seller to the purchaser for a period generally of up to 12 months.
Finally, further to the 2019 solar auction, there is currently a pipeline of 1.150MW solar PV greenfield that will be subject to hard change of control limitations during the next two to three years. It will certainly be interesting to see if the structuring of transactions entailing a sale of minority stakes in these developments, with detailed call or put auctions and development arrangements, will see the light of day.
VII KEY REGULATORY ISSUES
In addition to the regulatory aspects addressed above that may impact energy M&A, and mostly due to the public interest nature of some targets, we have witnessed an increase in the amount of attention buyers pay to anti-bribery and anti-money laundering issues, given the close relationship with public entities that the operation of energy assets entails.
In this respect, when taking part in energy M&A transactions, two laws should be taken into consideration to abide by the legal framework for anti-money laundering and anti-corruption: Law 89/2017, of 21 August and Law 83/2017, of 18 August:
- Law 89/2017, in accordance with Directive (EU) 2015/849, requires all corporate entities to obtain and hold adequate, accurate and current information on their beneficial ownership; and
- Law 83/2017, also in accordance with Directive (EU) 2015/849, establishes anti-money laundering and anti-terrorism measures. In line with Article 4(2)(a), lawyers who take part in M&A transactions are subject to weighty duties regarding the communication and identification of, as well as abstention from, money laundering activities.
To act in accordance with these measures when dealing with energy M&A transactions, lawyers should take part in know your customer procedures, and be alert to any and all money laundering activities.
In Portugal, until recently the negotiation of civil liability insurance or guarantee clauses to safeguard against breaches of representations and warranties made by sellers in M&A transactions was not common practice, mainly due to a lack of offer in the Portuguese insurance market.
In terms of the use of representations and warranties (R&W) insurance policies by clients in the energy sector, Portugal is currently a maturing market in this regard. However, R&W insurance has increasingly been used as a partial alternative to the traditional post-closing indemnification, escrow and survival of the representations and warranties structure of M&A deals due to enhancements and new solutions being particularly suitable to underwriting risks associated with M&A transactions involving energy and renewable assets. The increase in interest in this category of insurance product is due partly to the fact that the types of transactions that can be covered by R&W insurance have expanded beyond simple industrial or manufacturing targets to a wider spectrum of targets, such as those in the energy field.
In particular, in recent years there has been an increased use of insurance across infrastructure deals in Portugal. Deals in the energy area, including oil and gas and power transactions, have recently begun to utilise R&W insurance, as R&W insurance has expanded into new sectors such as renewable energy and oil and gas, and has been developed to respond to the unique risks in relevant transactions in the energy sector, insuring both traditional representations and specific warranty title matters to provide buyers with post-closing protection. Part of the main risks faced by buyers in energy transactions is linked to title and environmental matters. Parties usually address title and environmental issues through a price adjustment mechanism rather than R&W. Alternatively, environmental representations are sometimes covered by standalone environmental insurance policies.
Recently, there has been an emerging trend in the use of R&W insurance in M&A of privately held companies in the energy sector, especially in large dimension operations or operations involving foreign entities. For instance, in 2019, warranty and indemnity (W&I) insurance policies were utilised in greenfield solar energy in the context of transactions involving medium developers with a lack of significant balance sheets and assets, and foreign international asset management funds as buyers.
The use of W&I insurance policies in an energy project can lead to an increase in the extent of due diligence required, as insurance companies may take a more conservative approach where policy enhancements are requested considering the type of required knowledge and risks involved in energy deals. Due to the complexity of the energy sector and such required knowledge, a decision to undertake an R&W insurance policy during the initial phases of a transaction is important to define the scope of due diligence to be undertaken by parties, thus potentially widening the scope of the covered R&W.
Generally, W&I policies in the energy sector tend to exclude, among other things:
- risks known by the buyer, such as those identified in a due diligence report;
- forward-looking R&W (i.e., financial forecast);
- areas that have not been subject to due diligence;
- fraud by the insured;
- secondary tax liability; and
- liabilities arising from the construction of energy assets (i.e., power plants).
M&A activity in the Portuguese energy sector is expected to continue to perform well during the course of 2020.
Driven by public policy and the divestment plans of big utilities (EDP in particular), the market is expected to remain buoyant:
- EDP has announced in a filing with the CMVM that its strategic update for 2019 to 2022 will include more investment in renewables and a plan to dispose of conventional generation assets;
- new auctions for the award of injection capacity in the RESP are expected to take place during the course of 2020, which will increase the pipeline of greenfield solar projects; and
- the government has made public its intention to trigger the process for the decommissioning of the coal power plants of Sines (EDP) and Pego (Tejo Energia), which would release 1.9 gigawatts of grid capacity.
1 João Louro e Costa is a senior associate at Uría Menéndez – Proença De Carvalho. The author would like to acknowledge the assistance of his colleagues Jill de Soet Palmeiro and Guilherme Drummond Ludovice (trainee lawyers) in the preparation of this chapter.
3 The year of peak CO2 emissions in Portugal.
4 Electricity Directive 2009/72/EC.
5 Gas Directive 2009/73/EC.