ENTERPRISE FUTURE
A New Challenge in IPP Business in the U.S. IPP Business

Osaka Gas Demonstrates Its Global Business Potential

Expansion of the Overseas Energy Business

In its Long-Term Management Vision 2030, released in 2017, Osaka Gas set a goal to nearly triple its consolidated ordinary profit by fiscal year 2030 from that of 2017. Key in achieving this goal is the significant expansion of the overseas energy business, especially the acquisition of power generation facilities where a total capacity of at least 3.5 million kilowatts is targeted by fiscal 2030. The most important target for this expansion is the IPP (independent power producer) sector in North America.

Over the past four years, Osaka Gas has rapidly increased its presence in the North American IPP sector. Osaka Gas started acquiring ownership interests in U.S. power plants—first with St. Charles Energy Center in Maryland in April 2015, followed by Woodbridge Energy Center (i.e., Shore Power Plant) in New Jersey and the under-construction Fairview Energy Center in Pennsylvania in March 2017. In 2018, three additional investments were made in power plants in Michigan and Connecticut.

Osaka Gas' investments in U.S. power generation dates back to 2004. During this period, IPP projects were supported by PPAs (power purchase agreements), long-term power purchase contracts with local electric utilities and power companies that resulted in predictable revenue streams. As power markets in the U.S. matured, new gas-fired project development shifted to a merchant IPP business model. Merchant IPP projects now sell directly in the power markets and our exposed to price fluctuation risk. The evolution of the IPP sector to accept and manage market risk has prompted Osaka Gas to adopt in order to facilitate the desired growth.

To do so, in 2014 Osaka Gas welcomed John Drake into Osaka Gas USA Corporation (OGUSA), an expert with significant experience across the IPP sector.

“When I joined OGUSA,” John recalls, “Osaka Gas was challenged in making new acquisitions and was not considered an active participant in the IPP business. The first step was to improve the image of OGUSA in the marketplace and signal that we're ready to invest. At the same time, we needed to persuade the executives of Osaka Gas in Japan that we can successfully grow OGUSA's merchant IPP business in the U.S. On that basis, we developed plans to grow and began investing."

In 2015, Osaka Gas acquired a 25% stake in the St. Charles Energy Center, which was under construction in Maryland. The acquisition of the stake in St. Charles was a transformational transaction for Osaka Gas, marking the beginning of a new era.

Two Transactions Combined into a Win-Win Deal

Competitive Power Ventures, Inc. (CPV) is one of the premier IPP companies in the U.S. CPV had developed, was constructing and ultimately would operate the St. Charles Energy Center. The investment in the St. Charles Energy Center for John was an opportunity to build relationship with CPV. As a next step, John proceeded to acquiring a stake in the Woodbridge Energy Center (or Shore Power Plant) owned by CPV in New Jersey.

“Back in 2016, CPV was interested in selling a 20% ownership interest in the Shore Power Plant and we decided to pursue it. While certain prudent reservations were raised internally about this transaction, I believed this deal would be essential in forming the relationship we hoped to establish with CPV. So, I had discussions with CPV to propose a mutually beneficial solution: to combine the acquisition of the stake in the Shore Power Plant with a 50% investment in the Fairview Energy Center, which CPV was about to launch a process to raise equity.”

At that time, CPV had recently been acquired by new owners and senior management was preoccupied with the transition. Osaka Gas’s prompt offer for the Fairview Energy Center attracted attention. For Osaka Gas, combining the Shore and Fairview transactions was a strategic investment that paved the way to acquire a 50% stake in the Fairview Energy Center.

In other words, by combining the two transactions, John was able to create a win-win situation for both parties. More importantly, in addition to the 50% interest in the Fairview Energy Center, John negotiated with CPV an option for OGUSA to take-over the asset management (power plant management and operation) of the facility in the future. The option to take-over asset management was essential for OGUSA to develop the capabilities and build a team to succeed in the highly competitive IPP sector in the U.S.

Perseverance Brought the Agreement to a Conclusion

“Although the deal was beneficial to both companies, it was not easy getting the agreement signed,” John confesses.

“At first, CPV was doubtful of our ability to execute and obtain the required approvals. That was understandable since it took us nearly seven months to execute the St. Charles transaction. The combined deal to acquire interests in both the Shore and Fairview facilities involved more complicated negotiations and structuring , with very limited time and a hard deadline.”

In addition, Osaka Gas’s request to take over asset management was another major obstacle in reaching an agreement. This request went against CPV's business model which is to develop, construct and manage their IPP assets. It also raised a concern that granting asset management to Osaka Gas would create a new competitor.

“To persuade CPV that Osaka Gas was able to execute this deal successfully, I presented a detailed schedule with milestones to measure progress and instill confidence. I also expressed clearly that we had no intention of competing with them. Osaka Gas was looking to establish the foundations for future investment in the overseas electric power business which made it essential to build the necessary capabilities to manage a power generation facility like the Fairview Energy Center. I also pointed out that this arrangement, would serve as the foundation to establish a strategic relationship between Osaka Gas and CPV." Negotiating with someone with significant experience that was willing to risk his personal reputation in this industry was also an important consideration that helped to convince them. John managed to persuade CPV while methodically addressing every challenge.

In March 2017, the two companies closed the two transactions and successfully completed the combined deal. Looking back on those days, John repeatedly emphasized that this success owed a great deal to the support he received from OGUSA’s then-President, Hisaichi Yoneyama, and the staff of Osaka Gas headquarters in Japan.

“The most memorable moment in the negotiation process was having a meeting with CPV at OGUSA’s Houston Office on July 20, 2016. Mr. Yoneyama conveyed to CPV our commitment and determination to execute this deal with admirable authority. He then left everything up to me and made every effort to persuade the executive management at Osaka Gas. That's how we managed to successfully execute this deal."

Growing as an IPP Player in North America

Since the closing of the transaction, the Fairview project has been moving forward very well. The Fairview Energy Center, currently under construction, is expected to be completed ahead of the original schedule target in March 2020. It is also expected to be completed at a lower cost, under budget. In addition, the investment in Shore continues to perform well, producing better results than originally anticipated.

The Shore facility resolved the operational issues that typically follow construction and now operates reliably.

The successful execution of this combined transaction and the ensuing relationship with CPV are very special both for Osaka Gas and me on a personal level," John says in retrospect. “For Osaka Gas, this transaction was significant because it formed the foundation for the company’s future IPP business in North America. On a personal level, it brought me closer to Osaka Gas feeling the same sense of loyalty as a homegrown member. The trust Mr. Yoneyama placed in me to take on such important responsibility was the most I have ever encountered. This experience created strong bond between me and Osaka Gas."

During 2018, Osaka Gas continued their investements by acquiring interests in three power plant projects: Towantic Energy Center and Kleen Energy in Connecticut, and Michigan Power in Michigan. It is remarkable that Osaka Gas managed to close three deals in just one year. According to John, it was made possible by the strong teams from both OGUSA and Osaka Gas headquarters in Japan, formed after the Shore and Fairview projects to promote the IPP business. “We're now in a good position to continue our steady growth,” John says confidently.

Osaka Gas has been steadily securing a foothold in North America to become a major player in the IPP sector and achieve the earnings goal it has set for 2030.

Profile
John Drake
【In charge of IPP business development and asset management】
Osaka Gas USA Corporation(New York Office)
Merchant IPP Team
Vice President
John Drake

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