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Power Asset Joint Ownership Arrangements
Dorothy B. FranzoniRam C. Sunkara
September 13, 2011
©2011 Sutherland Asbill & Brennan LLP2
Instructions for Webinar Access
To access the audio portion of the Webinar, either:Dial in to (866) 802-4355. Provide conference ID 1527387 and your name to the operator.
- OR -Turn up the volume on your computer’s speakers.
To ask questions during the Webinar:Type your questions into the Ask a Question box at the bottom of your screen. Dorothy and Ram will answer questions at the end of the hour.
©2011 Sutherland Asbill & Brennan LLP3
Sutherland’s Electric Cooperative Practice
• Nationally preeminent electric cooperative practice group has been representing electric cooperatives for more than 35 years
• Sampling of our recent experience counseling electric cooperatives on co-ownership arrangements:
Represented G&T in negotiating co-ownership arrangements for a new nuclear generating facility on an existing plant site
Represented G&T in the acquisition of an undivided ownership interest in a large coal-fired facility
Represented G&T in exploring the sale of a minority ownership interest in a gas-fired, combined-cycle facility
• The Coop Industry’s Daily Resource for Important News and Legal Issues: www.cooplawblog.com
©2011 Sutherland Asbill & Brennan LLP4
Coop M&A Issues Webinar Series
• Webinar I – Power Asset M&A• Webinar II – Electric Cooperative Mergers &
Combinations• Webinar III – Power Asset Joint Ownership
Arrangements
Tuesday, September 13, 2011 – 1:00-2:00 p.m. EDT
• Webinar IV – Considerations for Cooperatives in Renewable Energy
Tuesday, October 25, 2011 – 1:00-2:00 p.m. EDT
©2011 Sutherland Asbill & Brennan LLP5
Why This Webinar is Relevant
• Market “drivers” support joint ownership
Permitting risks and costs are high
Upward pressure on construction costs, especially for environmental controls
Uncertainty regarding changes in environmental laws
Limited number of attractive plant sites
Reduced load growth projections drive need to add capacity in smaller increments
• Result: Opportunities for short- and long-term benefits through joint ownership arrangements.
©2011 Sutherland Asbill & Brennan LLP6
Potential Benefits of Joint Ownership
• Improve efficiency of use of generation resources (joint dispatch)
• Diversify capacity (type, geography)
• Eliminate excess generation while maximizing efficiencies
• Permits smaller coops and utilities to share economies of scale of large generation
• Share development, construction and operation costs
• Maximize “political cover”
• Potential for mitigating environmental challenges
• Full utilization of current plant sites
• Pooling liquidity to take advantage of undervalued assets
• Utilizing common facilities to lower operating costs
• Other potential economies of scale (management resources, leveraging owner relationships, etc.)
Overall objective: Cost Savings and Risk Mitigation
©2011 Sutherland Asbill & Brennan LLP7
Overview of Presentation
• Types of Co-Ownership Structures• Understanding the Different Players and Motivations• Project Phases
Development Phase
Construction Phase
Operational Phase
• Selected Key Co-Ownership Issues
©2011 Sutherland Asbill & Brennan LLP8
Types of Co-Ownership Structures
• Undivided ownership interests as tenants in common• Formation of a special purpose entity to hold title for
members/shareholders• Ownership-like interest in plant through Power Purchase Agreement
(PPA)Ownership Scenarios
33%
33%
33%
26%
25%
5%
20%
14%
10%50%
50%
50%
50%
©2011 Sutherland Asbill & Brennan LLP9
Primary Structuring Considerations
• Ownership Objectives• Co-Owner Creditworthiness• Financing Issues• Regulatory Considerations
©2011 Sutherland Asbill & Brennan LLP10
The Players and the Potential for Misaligned Interests
• Utilities
Generation to meet long-term baseload needs
Objective is to maximize output over useful life of facility
Maintain operational control
• Financial Investors
Short term interest (maximize profit and get out quickly)
Liquidity and exit rights are paramount
Maintain control over capital expenditures and market activity
©2011 Sutherland Asbill & Brennan LLP11
Project Phases: The Roadmap
Development Construction Operations
DecommissioningPermitting “Financial Closing”
©2011 Sutherland Asbill & Brennan LLP12
The Development Phase
Development
©2011 Sutherland Asbill & Brennan LLP13
The Development Phase
• Joint Development Issues
Exit Rights – When and How
Voting Rights
Early agreement on co-ownership terms during construction and operating phases
©2011 Sutherland Asbill & Brennan LLP14
Once Construction Commences…• No easy turning back• Co-Ownership Definitive Agreement(s) typically address roles going forward
Sharing of Costs and Risks Occurs Early• Co-Ownership Definitive Agreements executed
Joint Development
Development Construction Operations
Decommissioning“Financial Closing”
Exit Rights
• Full
• Limited
• None/Assignment
©2011 Sutherland Asbill & Brennan LLP15
Development Phase: Key Issues
• Test Harmony on Critical Issues Early to Assess Viability of Project
Formulating development and initial construction budgets
Access to vital project information (site control, permits, state and local taxes, water supply/process water discharge, fuel availability and pricing, etc.)
Projecting operating costs in future
• Who is Wearing What Hat and At What Time?
Crucial for co-ownership agreement to address development stage roles and responsibilities
©2011 Sutherland Asbill & Brennan LLP16
The Development Agent’s Duties
• Co-Ownership Agreement will establish duties to pursue development
Site control
Permitting (and addressing any permit challenges)
Duty to market for additional equity investment?
EPC Contract (turn-key or multiple procurement)
O&M Contract
Ancillary Services and Fuel Supply Arrangements
Regulatory Filings
• Standard of performance to other participants
©2011 Sutherland Asbill & Brennan LLP17
Co-Owner Rights and Responsibilities
• Responsibility for pro rata share of costs and expenses
• Information Access and Audit Rights• Right to Remove Development Agent under Certain
Conditions• Cooperation in Financing of Co-Owners
Lender Consents
RUS Requirements (if RUS borrower)
©2011 Sutherland Asbill & Brennan LLP18
Development Phase: Governance
• Day-to-Day Decision Making
Development Committee (process for information flow and joint decision making)
Facilitates exchange of necessary information
Coordinates financing among various participants
• Minority Owner Protection Rights
Certain “key” decisions may require supermajority or similar standard voting threshold (e.g., final EPC/O&M Agreements, acquisitions of combustion turbines, material design changes, etc.)
©2011 Sutherland Asbill & Brennan LLP19
Development Phase: Exit Rights
• Exiting during due diligence phase
Right to withdraw – typically no penalty
• Exiting at some point during the Development Continuum…
Participants lose 100% of investment to date
“Exit” is typically very limited– often limited to sale of interest (either to co-owner(s) or third party).
©2011 Sutherland Asbill & Brennan LLP20
The Construction and Operations Phase
Construction Operations
©2011 Sutherland Asbill & Brennan LLP21
Construction and Operations
• Parties need to address many of the same issues raised during Development, but context is different
• And the Participants need to also consider…
Expansion/Additional Units
Common Facilities – Rights and Obligations
Co-Owner Bankruptcy Risk
Scheduling/Dispatch
Co-Owner Defaults/Remedies
©2011 Sutherland Asbill & Brennan LLP22
Selected Issues: Governance
• Decision-Making Authority
Management Committee
E+O Committee
• Distinguish between “day to day” decisions and “extraordinary” decisions – requiring Super Majority Vote
Project Agreements (O&M, Fuel Supply, Other Binding Commitments over agreed-upon material $ threshold)
Facility Budgets (for construction and operations)
Casualty/Condemnation – Restoration/Retirement
Affiliate Contracts
Significant Capital Improvements
©2011 Sutherland Asbill & Brennan LLP23
Selected Issues: Expansion
• Do all Co-Owners have Right to Participate in additional units, and, if so, how will ownership be allocated?
• Provisions to address impact of additional units on existing generating units
Priority/Adverse Impact
• Right of First Refusal/Option
©2011 Sutherland Asbill & Brennan LLP24
Selected Issues: Common Facilities
• Rights should be addressed when first unit is built
Retain ownership interest in common facilities even if owner(s) opt not to participate in expansion of generating facility
• Scope of common facilities must be carefully defined to avoid future disputes
• Impact on cost sharing of O&M and capital improvements to shared facilities if owner(s) do not participate in expansion of additional units
• Address priority rights in event of capacity limitations
©2011 Sutherland Asbill & Brennan LLP25
Selected Issues: Regulatory
• Scheduling/Dispatch
Does ISO/RTO permit separate scheduling of units?
Establish minimum scheduling requirements? (and penalty for failure to schedule?)
• NERC Reliability Standards
Operating Agent typically files with Regional Operator as “GOP” and “GO”
Co-Ownership Agreement should delegate NERC compliance duties to Operating Agent
Co-Owners – even passive ones – may still be held liable as GOs
©2011 Sutherland Asbill & Brennan LLP26
Selected Issues: Other Issues
• Exit Rights
Increased emphasis on “qualified assignee”
Tension between free assignability vs. inexperienced investor
• Bankruptcy Treatment of Ownership Interests• Co-Owner Defaults
Credit requirements (during construction and operations phases)
Requiring working capital and maintenance reserves
Remedies must “hurt”
Dilution of ownership interest
Forced sale to co-owners at below FMV pricing
©2011 Sutherland Asbill & Brennan LLP27
Questions for the Presenters?
Dorothy B. [email protected]
Focuses her practice on energytransactional matters includingmergers and acquisitions, powersupply, finance and projectdevelopment. Dorothy is the chair of the firm’s Renewable and Alternative Energy Team.
Ram C. [email protected]
Focuses his practice on mergers andacquisitions, joint ventures, commercialtransactions, project development andpower plant construction in the energy industry involving a wide range of participants.
©2011 Sutherland Asbill & Brennan LLP28
Thank You!
• Next Webinar: Considerations for Cooperatives in Renewable Energy
Tuesday, October 25, 2011 – 1:00-2:00 p.m. EDT
• G+T Legal Seminar – San Diego, CA, November 3-4
Thomas H. Warren – Power Asset Acquisitions
Dorothy B. Franzoni – Freedom of Information Act
• www.cooplawblog.com