Green Frog and UKPR sales inch forward despite Ofgem embedded payments review

The sale processes of two UK flexible power generation companies, Green Frog and UK Power Reserve (UKPR), are on the cusp of launching despite an adverse Ofgem review into sector payments, two sources briefed on the situations and a sector banker following them said.

InfraRed Partners-majority owned Green Frog has distributed teasers among potential buyers, the sources and banker said.

Rothschild is advising InfraRed, the sources and bankers said. Information memoranda are expected to be issued this month, the first source said.

Management is also likely to sell a portion of interest in the company, the first source added.

UKPR, which is owned by Equistone and Inflexion, is expected to launch its sales process this month once UK’s energy regulator, Ofgem, has published its review into embedded benefit payments, both sources said.

The vendors of each company have been on hold, awaiting Ofgem’s findings before launching their respective sale processes, as previously reported by this news service.

Ofgem published a “minded to” decision to cut embedded benefits in March this year; however, it is expected to make a final decision after the UK general election, the first source said.

The review’s findings have negatively impacted the sale prospects of both flexible power generation companies, which rely on benefits for large portion of their income, the source said.

This cut in benefits will make the companies less attractive to financial investors, the first source and a sector investor said. Private equity, such as First Reserve and Riverstone, had been assessing UKPR but with the revenue stream less certain, they are now unlikely to participate, the investor said.

However, both companies are now be more likely to attract bidders with a strategic interest in merchant power generation, the first source, the investor and two other sector bankers said.

These could include other utilities, including Drax [LON:DRX] and Staeg, the investor said.

But the first source dismissed utility peers as likely bidders. The same pool of bidders with an energy-trading focus that have looked or participated in the ongoing Engie/Mitsui conventional power-generation portfolio sale could be interested, the first source said.

The Mitsui/Engie process has seen interest from Equity Capital Partners, Denham Capital, EPH, Blackstone [NYSE:BX] and Castleton Commodities International (CCI), as previously reported.

Green Frog Power could be worth far more than GBP 250m, this news service previously reported. It posted a GBP 16.8m turnover for the financial year ending March 2016 and GBP 12.5m operating profit.

Its generation assets are mainly diesel and gas, the company having won some 290 MW in the last capacity auction, according to the previous report. InfraRed first invested into Greem Frog in 2011, with further equity investments in 2015 and 2016, according to the website.

Green Frog Power provides short-term operating reserve, which is standby power-generating capacity contributing to balancing supply and demand in the UK power network.

UKPR targets EBITDA of GBP 40m-GBP 50m over the next two to three years, this news service previously reported, citing a source close to the situation.

UKPR’s portfolio stands at 813 MW with around 250 MW online now and 533 MW expected by June 2017. The full 813 MW is due online by October 2018.

Equistone and Inflexion acquired UKPR in 2015 and committed to finance the development of 533 MW reserve capacity.

UKPR acts as a firehouse for electricity services in the UK, CEO Tim Emrich said to this news service last year.

The influx of renewable energy has reduced the dominance of the Big Six and created a requirement to balance the network, he said.

Inflexion, Equistone, InfraRed, First Reserve and Riverstone declined to comment. Green Frog and Rothschild did not respond to a request for comment.

by Patrick Harris in London