Specialized Consultancy Serving the Power Industry

Introduction:

Our client sought to diversify its portfolio by acquiring a company with complementary advanced technology. The target company had a sizeable contract with a major gas turbine producer, and a very strong forecasted growth in the gas turbine aftermarket service industry. To ensure a successful acquisition and mitigate potential risks, SS&A embarked on a meticulous due diligence process.

Objective:

The primary goal of the due diligence was to comprehensively assess the taret company’s operations, financial health, market position, technology, legal standing, and potential risks. This scrutiny aimed to validate the strategic fit of the acquisition, identify any hidden liabilities or challenges, and determine the feasibility of the investment.

Methodology:

1. Financial Analysis: A team of financial analyst scrutinized financial records, including balance sheets, income statements, and cash flow statements, to evaluate profitability, revenue trends, cost structures, and potential liabilities. SS&A’s role in this step was to assess the revenue trends and cost structures for reasonability, especially as related to the gas turbine portion of the business.
2. Operational Assessment: Engineers and industry experts conducted a thorough review of the manufacturing processes, quality control measures, production capacities, and supply chain management. SS&A’s role was assessing technology patents and research and development pipelines and processes.
3. Market Analysis: SS&A’s challenge was to assess the competitive landscape, market trends, regulatory challenges, and future growth prospects as a supplier in the gas turbine industry. This analysis ultimately aimed to determine the target company’s market share, customer base, and potential for growth in the industry.
4. Legal and Compliance Review: Legal experts delved into contracts, licenses, litigation history, environmental compliance, and regulatory adherence to identify any legal risks or compliance issues that could affect the acquisition. SS&A supported with a thorough review of supply contracts with a major gas turbine OEM.

Findings:

1. Financial Strength: The target company demonstrated consistent revenue growth over the past five years, with healthy profit margins. However, there were concerns about growth forecasts, which seemed too aggressive for the relatively stable gas turbine industry.
2. Operational Efficiency: The manufacturing processes were well-organized, leveraging advanced technology, and demonstrated a commitment to quality control. However, there were minor concerns regarding supply chain dependencies on certain critical components. The target company was also far too optimistic with the research and development timelines and underestimated its new technologies time to market within the conservative gas turbine industry.
3. Market Position: The target company’s technology did have advantages over the leading market supplier, but purchase of this component was typically driven by low price rather than superior technology. One exception could be for gas turbines using hydrogen as a fuel, in which case the advanced technology of the supplier would be much more critical to help maintain combustion flame stability. Our assessment proved that the target company had vastly overestimated the size of this market within the next ten years. Overall the target company’s forecasts were overestimated, especially for sales to gas turbine OEMs and gas turbine after market service providers.
4. Legal and Compliance: The company had a clean legal record with no ongoing litigations or major compliance issues. However, the major supply contracts with the gas turbine OEM were not firm and did not provide any guaranteed revenue stream.

Conclusion: The due diligence process revealed that, while our client had an opportunity to buy a company with advanced technology and some significant advantages in the gas turbine industry, the target company’s forecasts did not align with the realities of the gas turbine market. there were certain risks and challenges that needed careful consideration and mitigation strategies. SS&A’s assessments provided crucial insights for our client to negotiate terms, structure the deal, and develop a post-acquisition integration plan.

Outcome:

Armed with a comprehensive understanding of the target company’s position as a supplier to gas turbine OEMs,  our client proceeded with the acquisition. They implemented risk mitigation strategies and integrated the target company successfully into their portfolio, leveraging its technological advancements to further establish their presence in the gas turbine industry.

Objective:

The primary objective was to secure a favourable LTSA extension that addressed the owner’s evolving needs. This include adding more flexibility to the restrictions on operating hours and starts and extending the maintenance interval. As the top operational expenditure for the plan behind fuel, gas turbine maintenance costs were also extremely important. The rotor lifetime also had to be addressed within the timeframe of the contract extension.

Challenges:

1. Changing Operational Requirements:

• The owner’s energy portfolio had evolved, leading to changes in the operational requirements and duty cycles of the gas turbines. The new LTSA needed to accommodate these changes.

2. Cost Optimization:

• Balancing the need for comprehensive support with cost optimization was a key challenge. The company aimed to negotiate a competitive pricing structure that aligned with its budget constraints in a period where a large influx of new gas turbine hot gas path parts were required.

3. Technology Upgrades:

• The original LTSA had very conservative gas turbine maintenance intervals compared to today’s market standards. The owner wanted to extend the gas turbine maintenance interval without taking on additional risk.

4. Rotor Lifetime:

• The gas turbine rotor was due to reach its lifetime limits within the next LTSA period. The owner needed a cost effective plan that would minimize outage time.

5. Flexibility in Contract Terms:

• Ensuring flexibility in the contract terms to accommodate future changes in the company’s operational strategy and potential gas turbine upgrades was a critical consideration.

Process:

1. Needs Assessment:

• Conducted a comprehensive analysis of the current and future gas turbine operational requirements, identifying specific areas where the LTSA needed modification or enhancement.

2. Engagement with Manufacturer:

• Initiated discussions with the gas turbine manufacturer to understand their perspective on technology upgrades, pricing models, and the feasibility of accommodating changing operational needs. Helped owner challenge to understand what were real gas turbine technical limitations versus commercial issues.

3. Cost-Benefit Analysis:

• Conducted a thorough cost-benefit analysis to justify the requested changes and enhancements. Evaluated options to repair the existing gas turbine rotor, purchase a new rotor, and purchase a used third party rotor.

4. Technical Workshops:

• Organized technical workshops with representatives from the owner and the gas turbine manufacturer to discuss the feasibility and implications of incorporating new technologies and features into the LTSA.

5. Negotiation and Agreement:

• Engaged in a series of negotiations to finalize the terms of the LTSA extension. This included discussions on pricing, warranties, liabilities, taxes, insurance, division of responsibility, performance guarantees, and the implementation of gas turbine technology upgrades.

Results:

1. Extended Turbine Life:

• Successfully negotiated an LTSA extension that allowed another 20 years of operation, allowing the owner to maximize the return on its capital investment.

2. Cost-Effective Maintenance:

• Achieved a cost-effective LTSA that balanced comprehensive support with budget constraints, optimizing maintenance costs over the extended agreement period while minimizing owner risk.

3. Access to Latest Technology:

• Secured access to the latest gas turbine technological advancements, including performance optimization, enhancing the overall availability and efficiency of the gas turbines.

4. Flexible Contract Terms:

• Incorporated flexibility into the LTSA terms, allowing the owner to continue to operate profitably under a number of different operating regimes, allowing more flexibility for future market changes.

Conclusion:

The successful negotiation and extension of the gas turbine LTSA demonstrated the importance of proactive engagement, a thorough needs assessment, and challenging the gas turbine manufacturer to adjust terms and conditions that are no longer in line with market standards. By addressing the evolving operational landscape and securing favorable terms, the company ensured the continued reliability and efficiency of its gas turbine fleet for years to come.

Introduction:

Our client sought to diversify its portfolio by acquiring a company with complementary advanced technology. The target company had a sizeable contract with a major gas turbine producer, and a very strong forecasted growth in the gas turbine aftermarket service industry. To ensure a successful acquisition and mitigate potential risks, SS&A embarked on a meticulous due diligence process.

Objective:

The primary goal of the due diligence was to comprehensively assess the taret company’s operations, financial health, market position, technology, legal standing, and potential risks. This scrutiny aimed to validate the strategic fit of the acquisition, identify any hidden liabilities or challenges, and determine the feasibility of the investment.

Methodology:

1. Financial Analysis: A team of financial analyst scrutinized financial records, including balance sheets, income statements, and cash flow statements, to evaluate profitability, revenue trends, cost structures, and potential liabilities. SS&A’s role in this step was to assess the revenue trends and cost structures for reasonability, especially as related to the gas turbine portion of the business.
2. Operational Assessment: Engineers and industry experts conducted a thorough review of the manufacturing processes, quality control measures, production capacities, and supply chain management. SS&A’s role was assessing technology patents and research and development pipelines and processes.
3. Market Analysis: SS&A’s challenge was to assess the competitive landscape, market trends, regulatory challenges, and future growth prospects as a supplier in the gas turbine industry. This analysis ultimately aimed to determine the target company’s market share, customer base, and potential for growth in the industry.
4. Legal and Compliance Review: Legal experts delved into contracts, licenses, litigation history, environmental compliance, and regulatory adherence to identify any legal risks or compliance issues that could affect the acquisition. SS&A supported with a thorough review of supply contracts with a major gas turbine OEM.

Findings:

1. Financial Strength: The target company demonstrated consistent revenue growth over the past five years, with healthy profit margins. However, there were concerns about growth forecasts, which seemed too aggressive for the relatively stable gas turbine industry.
2. Operational Efficiency: The manufacturing processes were well-organized, leveraging advanced technology, and demonstrated a commitment to quality control. However, there were minor concerns regarding supply chain dependencies on certain critical components. The target company was also far too optimistic with the research and development timelines and underestimated its new technologies time to market within the conservative gas turbine industry.
3. Market Position: The target company’s technology did have advantages over the leading market supplier, but purchase of this component was typically driven by low price rather than superior technology. One exception could be for gas turbines using hydrogen as a fuel, in which case the advanced technology of the supplier would be much more critical to help maintain combustion flame stability. Our assessment proved that the target company had vastly overestimated the size of this market within the next ten years. Overall the target company’s forecasts were overestimated, especially for sales to gas turbine OEMs and gas turbine after market service providers.
4. Legal and Compliance: The company had a clean legal record with no ongoing litigations or major compliance issues. However, the major supply contracts with the gas turbine OEM were not firm and did not provide any guaranteed revenue stream.

Conclusion: The due diligence process revealed that, while our client had an opportunity to buy a company with advanced technology and some significant advantages in the gas turbine industry, the target company’s forecasts did not align with the realities of the gas turbine market. there were certain risks and challenges that needed careful consideration and mitigation strategies. SS&A’s assessments provided crucial insights for our client to negotiate terms, structure the deal, and develop a post-acquisition integration plan.

Outcome:

Armed with a comprehensive understanding of the target company’s position as a supplier to gas turbine OEMs,  our client proceeded with the acquisition. They implemented risk mitigation strategies and integrated the target company successfully into their portfolio, leveraging its technological advancements to further establish their presence in the gas turbine industry.

Client Background:

Our client, a major UK energy company, relied on a fleet of legacy gas turbines for power generation. One of their units, a legacy model that had been in operation for over two decades, experienced a critical combustor failure. The manufacturer had long ceased production of this particular turbine model, sourcing a new combustor would leave the unit non-operational for 48 weeks, leaving the client in a predicament for the upcoming winter period where production was critical.

Consultant Engagement:

The client engaged the services of SS&A Power Consultancy, a group of seasoned industrial consultants with expertise in turbine technology and a strong network within the energy sector. The consultant’s primary objective was to identify and facilitate procurement and assessment of the obsolete parts necessary to bring the malfunctioning turbine back online.

Challenges:

1. Obsolete Parts Location: The first challenge involved locating the specific parts required, SS&A was aware that three other power plants operated units of this kind and one was undergoing an upgrade and combustor parts would be available for sale. Through its service network, SS&A was able to facilitate a commercial transaction between the client and the power plant with identical parts available for sale.
2. Quality Assurance: Given the age of the combustor parts being procured, ensuring the quality and reliability of the sourced parts was paramount. The consultant mobilized a team to site and carried out visual and NDT assessments so as to ensure that the parts were fit to operate for another major operational cycle.
3. Budget Constraints: The client had budget constraints, necessitating a delicate balance between cost-effectiveness and the urgency of getting the turbine operational.

Approach:

1. Technical Expertise: SS&A leveraged their deep understanding of this particular gas turbine technology to dissuade the client from its original intent, with was to reverse engineer the parts.
2. Global Network: Utilizing their extensive industry network, SS&A was able to identify a power plant with similar units with parts available to trade.
3. Quality Control Measures: SS&A mobilized a team to the power plant and conducted a visual assessment, reviewed past inspection reports and carried out NDT assessments to ascertain fitness for purpose.

Results:

After weeks of tireless effort, the SS&A aided the client in successfully sourcing the required combustor parts. The comprehensive quality control measures implemented ensured the reliability of the components. The turbine was successfully restored to operational status prior to the critical winter period, preventing significant downtime and potential financial losses for the client.

Conclusion:

This case study highlights the critical role of consultants in navigating complex challenges within the industrial sector. The successful sourcing of obsolete gas turbine parts underscores the importance of technical expertise, a robust industry network, and effective facilitation skills in resolving unique and urgent problems faced by clients in the energy sector.