Issue link: https://digital.shearman.com/i/1300408
16 Owners of large-scale undertakings in the energy, natural resources and industrial sectors often have their own built and operated infrastructure assets that are critical to the operations of, but that (on a stand-alone basis) do not fall within, the "core" business. Examples include: • pipelines for upstream offshore oil and gas operators; • self-generation facilities, as well as storage and waste facilities, for downstream oil and gas operators; and • rail and port businesses for mining companies. Historically, building, owning and operating such assets was the preferred option, given other service providers' reluctance to cover the significant upfront capital cost, and market specific rationales (e.g., iron ore miners viewing the infrastructure connecting mine to market as key to preserving their position on the iron ore cost curve). However, in recent years operators have considered transferring such assets off balance sheet to achieve an upfront cash injection. The ability to obtain such liquidity has become more attainable due to the increasing pool of infrastructure investors and other financial sponsors looking to acquire real assets with long-term contracted or regulated cashflows. RATIONALE FOR THE CARVE-OUT The seller's primary rationale is to remove the "non-core" infrastructure asset from its balance sheet. The asset is typically transferred to a newly formed infrastructure company (InfraCo), InfraCo enters into a long-term contract with the seller, and the seller then sells the equity in InfraCo to a third-party investor/operator. This releases capital for deployment in the seller's "core" business and/or for return to shareholders. An investor/operator may also be able to improve asset performance, either through business synergies, through capacity increasing capital projects, or by converting the infrastructure asset into a greener operating model. Ready-built assets that generate secure long-term revenue streams are attractive to infrastructure investors. Given the infrastructure investor's cost of capital will likely be lower than the seller's, the value attributable to InfraCo by the new investor (based on the discounted cash flow of the long-term revenue stream) is likely to be higher than the value attributable to the asset by the seller (based on the depreciated capital investment). The investor/operator will also benefit from reducing costs, extending the life of the asset and/or opening up access/supply to third parties. Monetizing Embedded "Non-core" Infrastructure Assets Owners of large-scale undertakings in the energy, natural resources and industrial sectors often have their own built and operated infrastructure assets that are critical to the operations of, but that (on a stand-alone basis) do not fall within, the "core" business of those owners. This article looks at a recent trend of carving-out such "non-core" infrastructure assets with a view to transferring to third party owners/operators, including the rationale for doing so and the common issues that arise.