Power Asset Joint Ownership Arrangements - … ©2011 Sutherland Asbill & Brennan LLP Coop M&A Issues Webinar Series • Webinar I – Power Asset M&A • Webinar II – Electric Cooperative

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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.


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

http://www.cooplawblog.com/


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


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.


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


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


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%


Primary Structuring Considerations

• Ownership Objectives• Co-Owner Creditworthiness• Financing Issues• Regulatory Considerations


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


Project Phases: The Roadmap

Development Construction Operations

DecommissioningPermitting “Financial Closing”


The Development Phase

Development


The Development Phase

• Joint Development Issues

Exit Rights – When and How

Voting Rights

Early agreement on co-ownership terms during construction and operating phases


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


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


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


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)


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.)


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).


The Construction and Operations Phase

Construction Operations


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


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


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


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


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


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


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.

mailto:[email protected]

mailto:[email protected]


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

http://www.cooplawblog.com/

Documents

Power Asset Joint Ownership Arrangements - … ©2011 Sutherland Asbill & Brennan LLP Coop M&A Issues Webinar Series • Webinar I – Power Asset M&A • Webinar II – Electric Cooperative