developing and financing wind energy projects: contract...

Developing and Financing Wind Energy

Projects: Contract Provisions, Protecting

Developer and Landowner InterestsTax Equity Partnerships, Cash Investments, Debt Financing, Regulatory Obstacles, Leases, Turbine Purchases

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TUESDAY, JUNE 25, 2019

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

Paul N. Belval, Partner, Day Pitney, Hartford, Conn.

Christine Fernandez Owen, Shareholder, Clean Law, Chicago

Brooke M. Wahlberg, Partner, Nossaman, Austin, Texas

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DEVELOPING AND

FINANCING WIND

ENERGY PROJECTSChristine Fernandez Owen, Shareholder, Clean Law PC

June 25, 2019

Introduction

• Basics of Wind Development

• Significant Milestones & Requirements

• Key Project Documents

• Land Lease and Easement Considerations

• Specific Considerations for Financing

6

WIND

Basics of Wind Energy Development

• Wind Resource Maps

• Wind Data

• Meteorological Towers

7

TRANSMISSION


• Transmission lines with

significant capacity

available nearby

• ISO resources

• Studies

• Interconnection Agreement

8

LAND


• Land Leases

• Easements

• Substation

• Buffer

9

TRANSMISSION

WINDLAND


Sweet spot

10

Significant Milestones /

Key Project Documents

• Land Leases and Easements

• Wind Data

• Interconnection Study/Agreement

• ALTA Survey/ Title Insurance Policy

• Off-take: Power Purchase Agreement

• State and Local Incentives/Approvals

• Construction and Procurement Documents

• Financing Documents

11

Land Control: Developer’s Perspective

• Term of 35-50 years

• Phased terms

• Easements

• Purchase Option

• Administrative/Implementation Considerations

• Termination/No Obligation/Limitation on Remedies

• Assignment/Financing Protections

12

Land Control: Landowner’s Perspective

• Permitted Use

• Insurance

• Location of Facilities

• Restoration Obligations

• Restoration Security

• Taxes

• Compliance with Laws

13

Wind Data – Interconnection – Survey - Title

• Sharing of Wind Data Collected

• Easements for Transmission Owner

• Rights During Development

• Boundary Disputes

• Ownership Representation

• Limitation on Rights of Third Parties

• Existing Unrecorded Leases

• Future Interest Holders

• Cooperation on Owner’s Interests

• Updating Legal Description

14

Off-Take – Power Purchase Agreement

• Payments/Royalties

• Model

• Definition of Gross

Revenues

• Force Majeure

This Photo by Unknown Author is licensed under CC BY-SA

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https://creativecommons.org/licenses/by-sa/3.0/

State & Local Incentives/Approvals

• Permitted Use• Environmental, etc. studies

• Cooperation/Non-Interference

• Consent to Meetings

• Setback Waiver

• Consent to Contest Laws in

Landowner Name

• Farmland Preservation

Agreements This Photo by Unknown Author is licensed under CC BY

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http://www.uniprot.org/taxonomy/109042

https://creativecommons.org/licenses/by/3.0/

Construction-Procurement Agreements

• Commencement of Construction

• Construction Term Length

• EPC Bound to Comply with Lease(s)

• Boundaries

• Fences and Gates

• Exclusion Zones

• Crop Damages

• Maintenance

• Speed

• Lien Waivers

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Specific Considerations for Financing

• Consent to Assign/Mortgage

• Division of Agreement

• Default Notices and Cures

• Step-In Rights

• Estoppel Certificates

• Limitation on Amendments

18

Thanks for joining!

Please feel free to reach out with any

questions!

Christine Fernandez Owen

[email protected]

www.cleanlawpc.com

512-289-1250

19

mailto:[email protected]

http://www.cleanlawpc.com/

© 2019 Day Pitney LLP

Wind Energy ProjectsPower Purchaser, Lender and

Offshore Perspectives

June 25, 2019

| 6/25/2019

Power Purchaser Perspective

WHAT IS IT?• Fixed price PPA could be good hedge against

energy and REC prices• Production or availability guarantee can ensure

purchasers gets minimal level of energy and RECs

• But PPA could also be

significantly above market in

later years

• Matching Delivery Point to

pricing point for purchaser

• Reselling energy and keeping

RECs?

| 6/25/2019

Utility Power Purchaser Perspective

WHAT IS IT?• Purchase may be required by

statute

• PURPA or state procurement

statute

• Overhanging threat of imprudence

finding

• PUC can’t bind its successors in

approving contract

• Niagara Mohawk

• Ultimately, concern with impact on

overall level of retail rates

| 6/25/2019

Federal vs. State Concerns

WHAT IS IT?• Hughes v. Talen• Threat of striking state procurement statute if it

conflicts with Federal Power Act

• Bankruptcy may or may not provide relief• Tension between FERC and bankruptcy court in

rejecting PPAs in utility bankruptcy

• Playing out in PG&E bankruptcy right now

| 6/25/2019

Traditional Project Finance

WHAT IS IT?• Highly structured bankruptcy-remote borrowers

• Ring fencing

• Projects with substantial remaining useful life

• High ratio of debt-to-equity leverage

• 70% to 90% debt

• No guarantees

• No or very limited recourse to sponsor

• Predictable cash flow

| 6/25/2019

Project Finance Structure

Equity Debt Subsidies

Collateral Agent/

Paying AgentProject Company Project Sponsor

Project AssetsOfftake Purchaser(s)

Operator

EPC Contractor

Project Operating Expenses

Reserve Accounts

Key

Contractual

Relationship

Collateral

Cash Flow

| 6/25/2019

Elements of Traditional Project

Finance Model

• Lockbox for payments

• Waterfall payment structure

• Reserve accounts

• Lien on all project assets/all project equity

• Strong covenants (positive and negative)

• Strong lender consent rights

• Significant due diligence• Timing and expense

| 11/17/2016

Lockboxes and Waterfalls

Offtake

Purchaser(s) Paying Agent

Operating Expenses

Scheduled Interest

Scheduled Principal

Scheduled Prepayments

Debt Service Reserve Account

Major Maintenance Reserve Account

Other Reserve Accounts

Affiliate Fees

Project Company / Equity

| 6/25/2019

Consents to Assignment

• One for each major contract

• Counterparty agrees to

“collateral assignment” to

lender/collateral agent

• Creates direct contractual

relationship with counterparty

• Limits changes to contract without lender consent

• Opportunity to correct contract deficiencies

| 6/25/2019

Consents to Assignment

Typical Provisions

• Direct payment of amounts due to Project Company into lockbox held by paying agent

• Notice and step-in cure rights for lender• Acknowledge enforceability of agreement• Transfer by lender/collateral agent to a

successor owner

• Power purchaser attitudes about consents

| 6/25/2019

Balance Sheet Financing

• Large developers (often

associated with utility) have

adequate capital to finance

project development with

their own funds

• Will often move to project

finance model post-COD

• Lower cost of capital for

project already in

operation

• More leverage in

negotiations if already

built

| 6/25/2019

Tax Equity Financing• Benefit for equity investor is primarily

through tax credits and other

incentives

• PTC and ITC

• Accelerated Depreciation

• Pass-through entity (partnership or

LLC)

• Needed to take advantage of tax

benefit

• May include preferred return to

attract investors

• Forbearance Agreement with lenders

• Preserve tax credit during

recapture period

| 6/25/2019

Partnership Flip Structure• Allocations of profit and loss

between classes of investors

change over time

• For ITC, flip after five-year

recapture period

• For PTC, after end of credit

availability

• IRS safe harbor on

percentages before and

after flip (99%/1% to

5%/95%)

• Can also flip based on returns

• Allows developer to retain

residual value

| 6/25/2019

Leveraged Leasing

• Sponsor sells project to a trust, then leases the

project back from the trust

• Sales proceeds finance project

• Equity investor is owner of trust and gets tax

benefits

• Trust issues notes or bonds to finance project

• Lease payments provide cash to repay

• Residual interest reverts to sponsor at expiration

of lease, before end of useful life

| 6/25/2019

Back-Leverage

• Loan financing at Holdco/Sponsor level, not at

project company level

• May include limited recourse or limited sponsor

guarantee

• Secured by pledge of equity in project company

• Distributions into lockbox account

• If project company-level debt as well, sponsor

level lender is structurally subordinated

• If not, negative pledge by project company with

respect to assets

| 6/25/2019

Tax-Exempt Financing

• Financing through a government entity that can

issue tax-exempt debt

• Typically an economic or industrial development

agency

• “Conduit” financing – project issues debt to

government agency, which then issues its bonds

secured by that debt

• Tax-exempt means lower cost of capital

• Restrictions on use of project under IRS rules

• Limitations under enabling legislation

| 6/25/2019

Offshore Wind Projects• Federal leases issued by Bureau of Ocean Energy

Management

• Auction process for lease

• Limited experience United States

• Block Island wind project

• Bi-directional cable to mainland from Block Island

• Large projects with increasingly larger turbines

| 6/25/2019

Offshore vs Onshore Projects

• Limited construction season means longer

construction period

• Also impacts force majeure termination rights

• Limited supply of vessels for construction

• Jones Act concerns

• Generator leads vs. offshore transmission

network

• Federal waters to state waters to onshore

• Transmission congestion onshore

• Conflicting uses of ocean

| 6/25/2019

Offshore vs Onshore Projects (cont.)

• Onshore facilities for

delivery and staging

• Deepwater port facilities

• Conflicting uses of

ocean space

• Fishing concerns

• Other undersea cables

• Competition among the

states for supply chain

| 6/25/2019

Paul N. Belval

[email protected]

860-275-0381

Developing and Financing

Wind Energy Projects:

Contract Provisions,

Protecting Developer and

Landowner Interests

June 25, 2019

Presented by Brooke M. Wahlberg, Partner

Siting and permitting wind

projects and regulatory

challenges

Siting and permitting wind projects

and regulatory challenges

▪ Federal Considerations

▪ State Considerations

▪ Local Considerations

41

Development Perspective

▪Managing permit processes, approvals,

timelines, and costs

▪Avoiding construction delays

▪Optimizing power production

▪Documenting compliance

▪Avoiding surprises

42

Financing/Investor/Purchaser

Perspective

▪Minimal enforcement risk or risk of

penalties

▪Low likelihood of delay or interruption of

construction/operation

43

Federal Considerations

▪ Federal wildlife laws - ESA, BGEPA, MBTA

▪ NEPA – federal nexus and timeline

implications

▪ Clean Water Act – 404 permits

▪ FAA – no hazard determinations

▪ DoD – clearinghouse process

▪ NHPA – federal nexus and timeline

implications

44

Federal Wildlife Laws

▪ Endangered Species Act

▪ Bald and Golden Eagle Protection Act

▪ Migratory Bird Treaty Act

▪ Land-Based Wind Energy Guidelines

▪ Eagle Conservation Plan Guidance

45

Endangered Species Act▪ Section 10 permit process to obtain authorization for incidental

take

– Typically a 2+ year process

– Includes NEPA analysis

– Includes section 7 analysis

– Includes public comment

– Costs: minimization, mitigation, monitoring, adaptive

management financial assurances

▪ Section 7 consultation process

– Triggered by discretionary federal actions

– Mitigation not required, but often included

– Regulations mandate 135-day process (often takes longer)

46

Endangered Species Act cont. ▪ Having species that are not listed, but will be potentially listed or

that are partially through the listing process potentially occur

within a project area can create significant uncertainty (e.g.

monarch, tri-colored bat)

▪ Impact on project timelines where construction impacts create

risk of take to listed species

▪ Impact on power production where operational impacts create a

risk of take to listed species

▪ ESA includes a citizen-suit provision where third-parties can sue

the USFWS to compel ESA compliance and seek injunctive relief

47

Bald and Golden Eagle

Protection Act▪ Bald and golden eagle populations are currently widespread and

doing well (particularly bald eagles)

▪ Eagle nests may be built near the project area during or after

project development

▪ Significant enforcement actions and penalties have been

assessed to wind energy facilities based on golden eagle deaths

(claims brought under MBTA, but eagle deaths were primary

driver)

▪ Eagle permit process typically 2+ years (in some cases 5+)

▪ Eagle permit costs include mitigation and monitoring

48

Migratory Bird Treaty Act▪ Criminal, strict liability for migratory bird deaths

▪ Case law has varied as to whether “incidental take” (i.e. deaths

from turbine blades, window strikes, machinery entanglements) is

prohibited by MBTA.

▪ Significant settlements (multi-million dollar penalties/fines) have

been a result MBTA enforcement actions

▪ No permit program; risk of enforcement based entirely on

enforcement discretion.

▪ Wind Energy Guidelines provide tiered approach to risk

assessment that was intended to help favorably poise a project

for enforcement discretion

▪ Most recently the Trump administration issued Solicitor “M-

Opinion” siding with circuit courts that incidental take is not

prohibited by MBTA

▪ Anticipated rulemaking codifying M-Opinion

49

Bird and Bat Conservation

Strategies – the “BBCS”▪ Opportunity to catalogue siting and due

diligence efforts and adherence to the Wind

Energy Guidelines

▪ Includes:

– Desktop and site specific surveys

– Risk assessments to ESA/BGEPA/MBTA

protected species

– Agency coordination

– Post-construction monitoring commitments

– Adaptive management50

Clean Water Act – 404 and

Nationwide permits▪ Individual permits trigger NEPA analysis,

public comment period, ESA section 7

analysis and NHPA obligations

▪ Streamlined Nationwide Permit program

(NWP) can trigger review under ESA and

NHPA

51

Other Federal Considerations

▪FAA – no hazard determinations

▪DoD – clearinghouse process

▪Federal Explosive Permit

52

State Considerations

▪Vary considerably from state to state

▪Siting or conditional use permits

–Significant differences across states

–Conditions to these permits can include

mitigation or other obligations

–Process can include public participation

▪Public Utilities Commission processes

▪Stormwater permits

▪Air permits (construction)

53

State Considerations cont.

▪Meteorological Towers

▪Spill/Pollution control (AST registration,

SPCCs, Phase I ESA)

▪State water and species laws

▪State road crossings, access, and utility

installation

▪Septic systems, water wells, public

water systems

54

Local Considerations

▪County Zoning or Use Permits

▪County road use, access, utility

installation

▪Groundwater or local water districts

▪Tax abatement zones or reinvestment

zones

55

Recommendations for

Developers▪Get your arms around the applicable

processes early and understand the

timelines associated with each process

▪Carefully document and organize your

due diligence efforts

▪Keep an eye out for changes in the laws

and regulatory climate

56

Recommendations for

financing/purchasing parties▪Get your arms around the applicable

processes early and understand the

timelines associated with each process

▪Carefully document and organize your

due diligence efforts

▪Keep an eye out for changes in the laws

and regulatory climate

57

Thank you!

58

Brooke M. Wahlberg

Nossaman LLP

816 Congress Avenue

Suite 970

Austin, TX 78701

Phone: 512.813.7941

Email:

[email protected]