Treasure trail

Squeezed utilities should look to their non-core land and assets to release value. Shane Toal spells out some options.

How do you make more from less? A second look at existing assets can help reveal hidden value. Utilities are adept at squeezing efficiencies from their core businesses, but may not be aware of the latent value wrapped up in their surplus property and kit.
Unlocking value in this way poses challenges for utilities. In many cases, time pressures or resource constraints affect their ability to exploit non-core ­assets to the full. Moreover, they have a duty to achieve best value from their assets and may be unable to take on risk from property deals. But these obstacles can be overcome by engaging with stakeholders early.
Regulated businesses have a number of options for immediate cash boosts. These include: renting space on the peripheries of operational sites, such as for advertising hoardings; renting space for car parking, or surplus office space; and co-locating telecoms equipment (4G is upon us) on rooftops and other structures.
Many businesses have taken advantage of these options. One utility, for example, rented space for advertising hoardings and telecoms equipment on a number of its sites, generating income for use by the regulated business. These are simple steps that can generate cash from land or sites that have no immediate business use.
Beyond that, there are options for utilities to develop hidden value. In the longer term, businesses may generate significant income and capital by transferring surplus land to a non-regulated surplus asset vehicle (SAV). The SAV can take on and manage risks and achieve best value through the development process by creating demand for the land or developing sympathetic businesses that can then be sold. The benefits are shared between the regulated business and the SAV. The SAV may also choose to partner with trusted companies to plan and develop these opportunities.
A recent example that Dundas & Wilson advised on involved the transfer of surplus land from the regulated company to its SAV, resulting in a large premium paid to the regulated business along with the transfer of environmental risk. Demand for this land was created for sympathetic uses and both the regulated business and SAV will share in future profits.
Another option is to enhance the value of adjoining development land (not owned by the regulated business) by removing blight factors. For example, the joint sale of a former gas holder site and the adjacent development land, with the enhanced value shared.
Utilities can also consider selling or sharing redundant water and gas pipes for other uses such as fibre optics. The reuse of water and gas pipes for other media is increasingly popular, especially in built-up areas where businesses are under pressure to reduce disruption. We are currently exploring with one regulated business the possibility of co-locating fibre optic cables within part of the business’s existing pipeline network or transferring part of this network (which may be surplus to requirements) to the fibre optic company for such purposes. Either way, income for the regulated business will be generated.
The sale and leaseback of surplus office and other space is also worth considering. There is a healthy appetite among investors for such deals, which generate an immediate cash return for a company while enabling it to remain in occupation on reasonable terms for years to come.
This is just a flavour of the initiatives that regulated businesses can consider.

Shane Toal is a partner in the real estate team at law firm Dundas & Wilson

This article first appeared in Utility Week’s print edition of 16 March 2012.
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