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Presenting a live 90-minute webinar with interactive Q&A

Structuring Proxy Revenue Swaps

in Wind Energy Projects Leveraging a New Financial Product to Mitigate Energy Price Risk and Wind Resource Uncertainty

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, MAY 23, 2017

Robert Eberhardt, Partner, Chadbourne & Parke, New York

John J. Leonti, Partner, Troutman Sanders, New York and San Francisco

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Proxy Revenue Swaps in

Renewable Energy

Projects

Rob Eberhardt, Chadbourne & Parke LLP

John Leonti, Troutman Sanders LLP

Strafford CLE Webinar

May 23, 2017

Agenda

Proxy Revenue Swap Basics

Sample Calculation

Commercial Issues

Legal Issues

Proxy Revenue

Swap Basics

7

What is a Proxy Revenue Swap?

• New risk management tool for the wind energy industry • Swap of fixed annual payment for floating revenues of a wind

project (driven by the hourly wind resource and power prices)

• Hedge providers are participants in weather risk market looking for weather-derived exposure not correlated with other financial markets

• Merchant power price risks and wind resource risks both

transferred in an integrated derivative contract

• Tenors of up to 10 years long enough to support project financing,

including tax equity

8

Proxy Revenue Swaps Signed in 2016

Project Market Sponsor Lender Tax Equity

Hedge Provider

Back-to-Back Price Hedge Provider

Calculation Agent

Bloom (KS)

SPP Capital Power Corp.

N/A Goldman Sachs

Allianz Risk Transfer / Nephila Capital

Microsoft Corporation

REsurety

Old Settler (TX)

ERCOT Apex Clean Energy

Deutsche Bank

JPMorgan (lead)

Allianz Risk Transfer / Nephila Capital

Confidential REsurety

Not Public (OK)

SPP Not Public

N/A N/A Allianz Risk Transfer / Nephila Capital

Confidential REsurety

9

Comparison of Offtake Contracts:

Price

Power Purchase Agreement

Fixed Volume Price Swap (“Bank Hedge”)

Corporate / “Virtual” PPA

Proxy Revenue Swap

Project’s Counterparty

Utility Commodities Merchant (Financial/Strategic)

Corporation Weather Risk Investor

Physical vs Financial

Physical Physical Financial Financial

Product Energy and RECs Energy plus potentially RECs

Energy and RECs Energy plus potentially RECs

Unit Price Fixed Fixed Fixed Effectively Varies by Volume

Settlement Point Project Node Trading Hub Project Node or Trading Hub

Trading Hub

Price Basis Risk No Yes (but includes Tracking Account)

Depends on Settlement Point / Shared Risk

Yes

Market Sales? No Yes Yes Yes

10

Comparison of Offtake Contracts:

Volume

Power Purchase Agreement

Fixed Volume Price Swap (“Bank Hedge”)

Corporate / “Virtual” PPA

Proxy Revenue Swap

Project’s Counterparty

Utility Commodities Merchant (Financial/Strategic)

Corporation Weather Risk Investor

Physical vs Financial

Physical Physical Financial Financial

Revenue Based on Wind Production?

Yes Yes Yes No

Revenue Based on Availability?

Yes Yes Yes Yes

Revenue Based on Efficiency?

Yes Yes Yes Yes

Fixed Delivery Obligations

None Hourly Delivery Obligations (P99)

None None

Minimum Delivery Obligations

Annual Minimum Production

None Annual Minimum Availability

None

11

Sample Calculation

12

Assumptions and Data

Assumptions Fixed in Contract at Closing Data Collected for Each Settlement Interval

Fixed Payment (in $) Detailed (10 minute) Turbine-Specific Wind Data from Project SCADA

Number of Wind Turbines in Project (e.g. 100) Wind Data from Permanent Met Towner

Power Curve Other Meteorological Data

Project Operational Efficiency (e.g. 90%) Market Prices at Hub Published by ISO

Contracted Fraction Production Data (both Turbine-Specific and at Project Meter)

13

Power Curve

Wind Speed (m/s)

Output (kw)

0 0

4 100

6 300

8 900

10 1800

14 2500

16 2500

20 2500

24 2500

14

Wind Data

DATE TIME WTG 1 WTG 2 WTG 3 … WTG 49 WTG 50

01.01.2018 0:00 15.5 16.5 16.1 … 16.6 15.2

01.01.2018 0:10 15.5 16.5 16.2 … 16.7 15.2

01.01.2018 0:20 15.7 16.6 16.2 … 16.7 15.1

01.01.2018 0:30 15.6 16.6 16.1 … 16.7 15

01.01.2018 0:40 15.7 16.7 16 … 16.7 15.1

… … … … … … … …

01.01.2018 23:40 10.1 12.4 14.4 … 10.2 11.6

01.01.2018 23:50 10.2 12.2 14.2 … 10.3 11.7

01.02.2018 0:00 10.2 12.2 14.3 … 10.3 11.7

… … … … … … … …

04.30.2018 23:20 16.4 17.9 16.2 … 18.3 17.1

04.30.2018 23:30 16.5 17.8 16.4 … 18.3 17

04.30.2018 23:40 16.6 17.9 16.4 … 18.4 16.9

04.30.2018 23:50 16.6 18 16.4 … 18.4 16.9

15

Proxy Revenue Calculation

• Power Curve-Derived Generation: Energy (in MWh) for a wind turbine during a Calculation Interval (e.g. 10 minute period) estimated based on:

Power Curve and Measured Wind Speed at Turbine

• Proxy Generation: Sum for all wind turbines during each Calculation Interval of:

Power Curve-Derived Generation x Expected Operational Efficiency

• Proxy Revenue: Sum for each Calculation Interval during the Settlement Period (e.g. 3 months) of:

Proxy Generation x Day-Ahead Hub Energy Price

16

Two-Way Settlement

Wind

Project

Hedge

Provider Settlement Amount

If Proxy Revenue > Fixed Payment High winds, high prices, or a combination during settlement period

Wind

Project

Hedge

Provider Settlement Amount

If Proxy Revenue < Fixed Payment Low winds, low prices, or a combination during settlement period

17

Project Receives Merchant Revenues

Wind

Project

Hedge

Provider Settlement Amount

Market

Merchant

Revenue

18

The Calculation Agent

• Responsible for Preparing Settlement Reports

• Performs Specified Power Curve Adjustments

• Assesses Data Quality and Excludes Invalid Data

• Proposes Calculation Methods for Unspecified Circumstances

• Identifies Operational Losses (e.g., Availability, Performance,

Operational Losses)

19

Commercial Issues

20

Fees

• Upfront Structuring Fee to Hedge Provider

• Annual Fee to Hedge Provider

• Service Fees for Calculation and Reporting Services

21

Hedge Provider Credit Support

• Critical for Project Financing

• Public Credit Ratings (S&P, Moody’s, Fitch, A.M. Best)

• Possibility of Downgrade Protection

22

Project Credit Support

• Cash or Letter of Credit of Fixed Amounts

• Issuing Bank Downgrade Protection

• Parent Guarantees

• Possibility of Liens on Project Assets

• Negative Covenants

23

Adjustments and Partial Termination

• As-Built Conditions Inconsistent With Assumptions

• Casualty / Condemnation

• Wake Impacts of Neighboring Projects

24

Legal Issues

25

Documentation

• ISDA Documentation

• Confirmation

• Master Agreement

• Schedule

• Credit Support Annex

• Departures from ISDA Master Agreement Standard Terms, e.g.

• Cure Periods

• Cross-Acceleration (not Cross-Default)

• No Credit Event Upon Merger

• Calculation Services Agreement with Calculation Agent

26

Project Company Covenants

• Customary Limits for Special-Purpose Project Companies, e.g.

• Indebtedness and Liens

• Other Commodity Hedges

• Asset Sales

• Investments

• Insurance / Casualty Events

• Operation and Maintenance of Anemometers on Permanent Met

Towers and Each Nacelle

• Replace Unreliable Anemometers

27

Additional Termination Events

• Failure to Achieve Commercial Operations by Guaranteed Date

• Breach of Negative Covenants (No Cure)

• Abandonment

28

Bankruptcy Issues

• Parties Agree that Safe Harbor Provisions Apply

• Termination / Liquidation Permitted

• Setoffs / Netting Permitted

• Certain Pre-Petition Transfers Not Subject to Avoidance

29

Dodd-Frank Requirements

• Commercial End-User Exception to Mandatory Clearing /

Exchange-Trading Requirements

• Real-Time Reporting Rules (CFTC Rules Part 43)

• Swap Data Reporting (SDR) Rules (CFTC Rules Part 45)

• Who is the Reporting Party? (Often the Project Company.)

• Possibility of Reporting Service Agreement

30

Thank You

Rob Eberhardt

Chadbourne & Parke LLP

reerhardt@chadbourne.com

John Leonti

Troutman Sanders LLP

john.leonti@troutmansanders.com

31