Critical Issues in Joint Development and Joint Ownership Projects: Roles, Rights and Obligations

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Critical Issues in Joint Development and Joint
Ownership ProjectsRoles, Rights and Obligations

• William S. Andrews
• Nixon Peabody LLPSuite 900401 9th Street,
  N.W.Washington, DC  20004-2128
• wandrews_at_nixonpeabody.com
• 202-585-8392

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Critical Issues in Joint Development and Joint
Ownership ProjectsRoles, Rights and Obligations

• The Players Who Sponsors Projects?
• Project Phases
• Development Phase Project Development Agreement
• Financings Fundamental Principles and
  Coordination
• Acquisition of an Ownership Interest
• Construction Operations Phases
  Participation Agreement
• Withdrawal and Payment

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The Players Who Sponsors Projects?

• Utilities
• Base load needs
• Plant is integral to its system over the long
  term
• Exert considerable control
• Looking for participants to take advantage of
  economies of scale

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The Players Who Sponsors Projects? contd

• Independent Developers
• Looking for investors or joint tenants
• Serving customers under PPAs / selling into the
  market on a merchant basis
• Looking to build or expand its generation or
  related core business (long-term outlook)
• Looking to profit from the sale of its interest
  (short-term outlook) will seek broad rights to
  sell its interest
• Will want to exert control to protect its
  investment

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The Players Who Sponsors Projects? contd

• Public Power Entities / Electric Cooperatives
• Base load needs
• Long term objectives
• Generally will be looking to participate with
  other joint tenants to take advantage of
  economies of scale
• Generally will look to exert proportional
  control, but with elements of blocking control
  for significant decisions

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Ownership Scenarios
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Project Phases
FinancialClosing
Retirement
Construction
Operations
Development
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Development Phase
Development
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Development Models Single Sponsor Driven

Cost and Risk Sharing
Retirement
Financial Closing
Development
Construction
Operations
Acquisition of Ownership Interest
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Development Models Single Sponsor Driven

• Last Look No skin in the game
• No Project Development Agreement to formalize
  roles, rights and responsibilities
• Communication is often less routine
• Development period activities
• Due diligence
• Negotiating Asset Purchase Agreement (APA) and
  Participation Agreement (PA)

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Development Models Single Sponsor Driven contd

• APA signed just prior acquisition of the
  interest (PA, an exhibit)
• Interest will be acquired at the Financial
  Closing
• PA signed at Financial Closing upon acquisition
  of the interest
• Coordinating Financial Closing is more challenging

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Development Models Multiple Owner Driven

• Cost and Risk Sharing
• Execution of Project Development Agreement and
  Asset Purchase Agreement

Financial Closing
Retirement
Development
Construction
Operations

• Withdrawal Rights
• Full
• Limited
• None/Assignment

• Acquisition of Ownership Interest
• Execution of Participation Agreement
• Financial Closing

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Development Models Multiple Owner Driven

• Participants share development costs and risks
  proportionately
• Greater need for investment protection during
  development phase
• Greater voice in development decisions for
  minority decisions

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Development Models Multiple Owner Drivencontd

• Need for Project Development Agreement to specify
  Participants roles, rights and obligations
• Project Development Agreement and Asset Purchase
  Agreement executed during Development Phase
• Participation Agreement executed either at
• Financial Closing
• Instead of Project Development Agreement

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Development Models Multiple Owner Drivencontd

• Ownership Interest will be acquired either at
• Financial Closing
• Upon earlier execution of the Participation
  Agreement

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Development Issues

• Establish the Facts
• Access to project information (permits, real
  estate, local taxes, fuel availability, cost and
  transportation)
• Development budget
• Initial construction budget
• Pro forma operating budget

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Establish Roles, Rights and Obligations

• Sponsor
• Duty to pursue development
• Permitting
• Additional Owners
• EPC Contract/Multiple Prime
• OM Contract
• Real Estate
• Fuel Contracts/Plan
• Interconnection Agreement
• Agency (fiduciary standard)
• Duty to regularly inform other Participants

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Establish Roles, Rights and Obligations contd

• Participants
• Transmission
• Pay percentage costs
• Maintain confidentiality (applicability of open
  records statutes)
• Support development
• e.g. Permitting, political (state and local)
• Audit Rights
• Private Use Restriction Preservation of
  Tax-Exemption
• Fees (Development, Administrative, Success)

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Control of Development

• Formation of Development Committee
• Facilitates exchange of information feedback
• Monthly meetings
• Financing Coordination
• Day-to-Day decision-making
• Joint
• Entrusted to principal Sponsor

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Control of Development contd

• Minority Rights
• Certain decisions require Supermajority/Double
  Majority
• EPC Contract
• OM Agreement
• Decisions that have Material Adverse Impacts
• Purchases of Real Property
• Other significant Binding Commitments (e.g.
  Fuel, Transportation)

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Withdrawal

• Sponsor Withdrawal
• No guarantee of success all parties lose
  investment
• Disposal of Assets Distribution of proceeds
• Transfer of rights to other Participants

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Withdrawal contd

• Participant Withdrawal
• At any time prior to financial closing lose
  investment
• Unsatisfied with results of development
• Unable to arrange affordable transmission
• Better options
• Problem created for remaining parties (financing
  exception)
• Limiting Right of Withdrawal after agreed point
• Liquidated Damages
• Not permitted / Assignment Only Option

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Financing Fundamental Principles Coordination

• Essence of joint ownership is sharing financial
  risk
• Construction
• Long term operations
• The more diverse the ownership mix, the more
  credit information and coordination will be
  necessary.

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Financing Fundamental Principles
Coordination contd
IPPs Merchant Selling under PPAs Project Finance Rated Subinvestment grade Leasing Structure
Tax Exempts Municipals Joint Action Agencies Issuing Tax-Exempt Bonds for 100 of Project Costs
IOUs Rate-based Through non-regulated entities Corporate Debt Equity Commercial Bank Loan Project Finance
Electric Cooperatives Co-Bank/RUS CFC/RUS
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Financing Fundamental Principles
Coordination contd

• Generally, each Owner is responsible for its
  Owner financing and does not need the consent of
  the other Owners
• Goal To close on a single mutually agreed date.
• Always uncertainty until the last Owner is
  assured access to capital

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Financing Fundamental Principles
Coordination contd

• Coordination Approaches
• None
• Flexible
• Extensive
• Coordination Techniques
• Coordinate updating of project information so
  Owners seeking ratings present a common picture
• Early communication of financing plans and
  education of steps necessary to effect each plan

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Financing Fundamental Principles
Coordination contd

• Consider PILOT arrangements, Enterprise Zone and
  other tax issues early
• Launch financing efforts when agreed project
  elements have clear definition

• Permits
• Construction costs
• Real estate
• Ownership percentages
• Credit standing of Owners
• Financing plans

• Fuel and Fuel Transportation Strategy
• Operating strategy
• Participation Agreement finalized
• Asset Purchase Agreement finalized
• Weekly coordination meetings

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Financing Fundamental Principles
Coordination contd

• Develop strategy for dealing with lender
  comments on transaction documents
• Anticipate consent requirements
• Determine common approach to collateral
• Avoid intercreditor agreements if possible

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Financing Fundamental Principles
Coordination contd

• Encourage bank / private equity financings to be
  arranged first. Capital Markets transactions
  require disclosure and cannot easily accommodate
  changes
• Transactions where Owners well understand the
  financing of requirements of their Co-Owners tend
  to have the least disruptions prior to closing

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Construction and Operations Phases The
Participation Agreement
Operations
Construction
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1. Governance Decision-making

• Decision-making vested in Management Committee
  with representation proportional to ownership
• Day-to-day decisions
• Extraordinary Decisions
• Project Budgets Construction Operations
• Project Agreements, e.g. OM, Fuel
• Affiliate Contracts
• Restoration, Condemnation, and Retirement
• Permit Changes
• Decisions with Disproportionate Effect
• Capital Improvements

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Control Thresholds

• Majority
• Supermajority (66.7, 75, 80)
• Double Majority ( )
• Unanimous

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2. Operating Structure for Asset Management /
Operations

• Owner-Operator managed and operated
• All Owners manage and operate
• Formation of Project Company
• Asset Management Contract / OM Contract

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3. Fundamental Dispatch Principles

• Each Participant entitled to its Percentage of
  Energy, Capacity and Ancillary Services
• No Participant may deliberately take a greater
  share
• Minimum Scheduling Requirements
• Setting the level
• Remedy for failure to schedule

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3. Fundamental Dispatch Principles contd

• Scheduling
• Imbalance Charges Inadvertent use of more or
  less energy on an integrated hourly basis
  assessed pro rata to the scheduling owners
• Scheduling Outages
• Fuel Allocation/Reconciliation
• Heat rate adjustments for less than full load
• Impact on load-following
• Authority to Change Dispatch Principles

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4. Joint and Several Liability/Several Liability

• Several Liability
• Flow down to Project Agreements

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5. Assignment Transfer of Interests

• Which are permitted and which require consent?
• All assets to be transferred
• Effect on Project Agreements (e.g. OM)
• Retention of expertise
• Who is your partner? Transfer by a principal
  sponsor
• Tension between free transferability and loss of
  expertise
• Maintenance of numerous percentage for minimum
  period

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6. Expansion

• Rights jointly owned
• Rights retained by Sponsor
• Sponsor grants right of first refusal/option
• Common facilities Definition Valuation
• Priority/Adverse Impact

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7. The Collateral Package

• Joint Owners are tenants-in-common, each owning
  anindividual undivided interest in Project
  Assets
• Project-based Collateral is limited to a joint
  tenants undivided ownership interest
• No encumbrance of another joint tenants
  undivided interest or any Project asset
• No right to partition of Project Assets
• Lender can cure, but must assume position of its
  borrower

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8. Impact of a Co-Tenant Financing

• Tax-exempt financing
• Use of tax-exempt financing means no private
  business use
• Contracts with operators must be Qualified
  Management Agreements the duration of the
  contract and incentive fees for performance may
  be restricted
• Under certain circumstances applicable to
  cooperatives, there may be restriction on sales
  of energy, capacity or ancillary services to
  avoid certain income restrictions
• Project Finance financing
• EPC contracting approach

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9. Payment Default DilemmaThe essence of
joint ownership isshared financial risk

• Make obligations recourse to creditworthy
  entities.
• Require pro rata sharing of development costs to
  make sure all entities are fully and increasingly
  invested.
• Prevent withdrawal to be certain that entities do
  not have right to rescind commitment

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9. Payment Default Dilemma contd

• Impose minimum credit requirements
• Require at closing (remedy)
• Require during operations (remedy)
• Increase security upon downgrade or fall below a
  minimum credit rating (consider sliding scale)
• Invoicing and payment in advance
• Disputed Payments to be made as a condition of
  maintaining a dispute

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9. Payment Default Dilemma contd

• Require working capital and maintenance reserves
  (all phases)
• Tie pre-funding to payment default cure periods
• Reasonable period to vacate automatic stay
• Default Remedies Make non-payment painful
• Dilution (proportional vs. acclimated (eg., of
  FMV))
• Extinguish interest at preferential price

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9. Payment Default Dilemma contd

• Interim Remedy
• Loss of right to energy, capacity and ancillary
  services
• Step-up or limited step-up (voluntary or
  involuntary)
• Restrict Project Lender collateral to Ownership
  Interest, thereby forcing Lender to fund or risk
  dilution or loss of collateral

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9. Payment Default Dilemma contd

• Pre-funding of construction costs until COD
• Tie pre-funding to default cure periods
• Consider tying pre-funding to reasonable period
  to vacate automatic stay
• Build reserves for scheduled maintenance with
  goal of fully pre-funding scheduled maintenance
• Build reserves for capital improvements, other
  events

Pre-funding could be cash or other security
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William S. Andrews Nixon Peabody LLP Suite
900401 9th Street, N.W.Washington, DC 
20004-2128 wandrews_at_nixonpeabody.com 202-585-8392