Renewable Energy Project Financing: Legal Strategies for Structuring the Deal

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Renewable Energy Project Financing: Legal Strategies for Structuring the Deal Navigating Financial Incentives, Sources of Capital, Debt and Equity Structures TUESDAY, MAY 30, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Jessica I. Basil, Of Counsel, Gibson Dunn & Crutcher, New York Darin Lowder, Partner, Ballard Spahr, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Renewable Energy Project Financing: Legal Strategies for Structuring the Deal Prepared by: Jessica Basil May 30, 2017 Beijing Brussels Century City Dallas Denver Dubai Frankfurt Hong Kong Houston London Los Angeles Munich New York Orange County Palo Alto Paris San Francisco São Paulo Singapore Washington D.C.

6 <Presentation Title/Client Name> Finance-ability of the Renewable Energy Project - Key Components 6

7 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS Physical Project Can the Project be built and operated? Legal/Regulatory Issues Are all permits in place? Is the project in compliance with all laws and regulatory requirements? Contracts Are contracts in place that assure that the Project can be built and operated and adequately allocate risks? Financial Feasibility If built and operated as planned under the contracts, is the Project financially feasible? 7

8 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) THE PROJECT Technology proven technology supportable by IE report deliverability creditworthy warranty sometimes backstopped by L/C or other security 8

9 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) THE PROJECT Land Rights typically easements or leases term must match/exceed financing term recurring issues access rights crossing agreements liens on the fee interest/subordination consents to collateral assignment can be burdensome 9

10 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) THE PROJECT Fuel/Resource Supply Contractual or naturally occurring? Wind, solar, biomass, etc. Interconnection firm to the point of delivery shared common facilities physical facilities can be shared subject to common facilities use agreement typically held as tenancies-in-common 10

11 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) LEGAL/REGULATORY Permits / Environmental Law Federal, state and local final, nonappealable permits needed environmental issues hazardous substances wildlife conditions that could affect operations noise, sight, avian mitigation measures renewal risk 11

12 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) LEGAL/REGULATORY Regulatory federal issues state issues Litigation prohibiting the financing against the project 12

13 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) CONTRACTS Ground Leases/Easements Equipment Supply /EPC / BOP Fuel and Resource Supply Agreements Interconnection Agreement O&M Agreements Offtake Agreements 13

14 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) CONTRACTS Equipment Supply / EPC/BOP Contracts Facility completion schedule delay liquidated damages price/change orders performance tests and warranties performance liquidated damages no EPC structure equipment supplier BOP contractor coordination among agreements 14

15 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) CONTRACTS Fuel/Resource Supply Agreements Not needed for wind or solar Fuel supply commitment Amount, firmness quality Term Remedies/LDs Performance security Interconnection Agreements Federally regulated Schedule Costs 15

16 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) CONTRACTS O&M Agreements reputable operator term costs needs to be supported by IE report performance guarantees spare parts costs/availability for particular technology preventive maintenance /maintenance schedules 16

17 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) CONTRACTS Offtake/hedging contracts products covered RECs retained or sold? energy only? Capacity? term (drives financing term) pricing fixed or pre-determined creditworthy counterparty default triggers project performance-based covenants and milestones should trigger LDs, not termination as-available delivery; availability/output guaranties must be structured properly may need to address intercreditor issues (debt, tax equity) 17

18 <Presentation Title/Client Name> CRITICAL COMPONENTS OF RENEWABLE ENERGY FINANCINGS (cont d) FINANCIAL FEASIBILITY Is there sufficient $ to build and complete the Project? Can it be built in compliance with its permits and contracts? Are the performance guarantees and warranties sufficient? Are the operating budgets reasonable? Will the Project last for the life of the financing? Have any Project specific risks been identified and addressed? Is the fuel supply adequate? Is the project or group of projects of a sufficient size to make a financing worthwhile? Is there sufficient collateral? Will the Project generate sufficient revenues to cover debt service, pay operating costs and provide a return on equity? 18

19 Renewable Energy Project Financing: Legal Strategies for Structuring the Deal May 30, 2017 Darin Lowder Partner Energy and Project Finance Copyright 2017 Ballard Spahr LLP. All rights reserved.

20 Project Financing Overview 20

21 The Basics: What is Project Financing? Technique for financing capital-intensive projects that are either difficult to support on a Developer s corporate balance sheet or are more attractive when financed separately Sponsor (the Developer) creates subsidiary Special Purpose Entity ( SPE ) to hold the project s assets Sponsor (Developer) Project Company (SPE) 21

22 The Basics: What is Project Financing? Equity in SPE comes from Sponsor and outside parties Debt is provided to SPE based on the economic viability of the project and the strength of project contracts Risks borne by project parties Contract counterparties provide credit substance Recourse is limited to the Project Company s assets and cash flow, not to Sponsor 22

23 Off-Balance Sheet Accounting On-Balance Sheet The Basics: What is Project Financing? Key Attributes Structural tool to finance - Single or multiple assets Credit Full Recourse Non-Recourse - Capital intensive assets Reliance on asset s cash flows for debt repayment Typical Project Finance Risk-shedding Goals Structure project to maximize credit Project Finance Lease- Type Structure Credit is non-recourse 23

24 Corporate vs. Project Finance Control Credit Impact Corporate Financing Least Full Recourse Project Financing Most (negative covenants) Non-Recourse Financial Flexibility Most (financial covenants only) Least (comprehensive covenants) Leverage Lower Higher Security Unsecured (investment grade) Secured Dividend Test Debt Service Reserve Amortization None None Bullet maturity Required Required Amortizing/Mini Perm. 24

25 Parties to the Transaction - Introduction 25

26 Sponsor / Developer: Legal Plan Project Sponsor/Developer Reputation Track record Financial strength and skill set Depth of the development team Legal Plan Special purpose entity (SPE) for the project All the contracts are with the SPE with proper assignment rights Purpose of upstream HoldCo in collateral structure 26

27 Financial Incentives 27

28 Renewable Energy Federal Tax Provisions Federal tax provisions - Accelerated Depreciation 5 years - Investment Tax Credit (ITC) 30% of value placed in service in taxable year Declines from 30% through 2019 to 26% in 2020, 22% in 2021, 10% thereafter - Production Tax Credit (PTC) primarily for wind - Election to claim ITC instead of PTC - Energy Efficient Commercial Property Deduction - Other credits or financing possibly available: Low-income Housing Tax Credits / New Market Tax Credits may be twinned with ITC / PTC in some circumstances 28

29 Subsidies Renewable Energy Certificates / Credits Term (State-specific limitations) the longer the better Credit Quality utilities v. private parties Competitive / fluid market for pricing and trading Long-term hedges available for larger contracts Change in law risk New Jersey / Massachusetts / Maryland Rich markets front-loaded benefits 29

30 Loan Guarantees US DOE Loan Guarantee Program (Title XVII for Innovative Technologies) - The two principal goals of Title XVII are: encourage commercial use in the United States of new or significantly improved energyrelated technologies and to achieve substantial environmental benefits. - Loans available only for pre-commercial technology ready for commercialization - Borrowers must pay a credit subsidy cost to offset possible risks to governmental guarantor - Additional Details Available at: 30

31 Loan Guarantees USDA Business and Industry Loans - Guarantees repayment of private loans made meeting specific criteria - Lender is the applicant - Focused on economic development in rural areas very broad criteria - Will guarantee loans ranging from less than $5 million to $25 million - Guaranteed amount ranges from 60% to 80% 31

32 USDA Loan Guarantees USDA Rural Energy for America Program ("REAP") - Renewable Energy Systems and Energy Efficiency Improvements Assistance available to agricultural producers and rural small businesses (broad definition) for renewable energy systems and energy efficiency improvements. - Energy Audit and Renewable Energy Development Assistance Grants - available to a unit of State, Tribal, or local government; instrumentality of a State, Tribal, or local government; institution of higher education; rural electric cooperative; a public power entity; or a council. - Guarantees repayment of private loans made meeting specific criteria - Guarantees range from 60% to 85% of loan balance, depending on loan size 32

33 USDA Loan Guarantee Comparison Loan Guarantee Percentage Based on Loan Size and Application of Underwriting Criteria Minimum equity of 25% typically required Projects / businesses must be located in areas with populations of less than 50,000 Standard creditworthiness underwriting considerations Loan Amount USDA REAP Guarantee Less than $600k Up to 85% N/A USDA B&I Guarantee Up to $5 million Up to 80% Up to 80% Between $5-$10 million Up to 70% Up to 70% Between $10-$25 million Up to 60% Up to 60% 33

34 Key Revenue Sources Power Purchase Agreement (PPA) Credit quality Term Defaults Commodity risk transfer Change in law risk Schedule milestone obligations 34

35 Key Revenue Sources Renewable Energy Certificates / Credits Term (State-specific limitations) the longer the better Credit Quality utilities v. private parties Competitive / fluid market for pricing and trading Long-term hedges available for larger contracts Change in law risk New Jersey / Massachusetts / Maryland Rich markets front-loaded benefits 35

36 Novel Revenue Sources Monetizing Nutrient Reductions to Finance Agricultural Biogas Facility with Multiple Revenue Streams Gettysburg Energy & Nutrient Recovery Facility in Adams County, PA 36

37 Trading and Offsets Provide the Tools Pennsylvania program provides tradable credits for complying or exceeding water quality standards Reducing Nutrient Output from Chicken Egg Laying Facility by using fertilizer byproduct as input in biogas facility generated credits Multiple revenue streams: Electricity net metering of electrical load of chicken egg laying facility Mineral Ingredient for Organic Fertilizers and Organic Animal Feeds Nutrient Trading Credits Tax Benefits (federal tax credits, accelerated depreciation) 37

38 Incentives Availability to Non-Taxpayers Incentive Available to Non-taxpayer? When Available? State Rebate Yes At Project Completion State Tax Credit No At Project Completion Federal 30% Investment Tax Credit Federal Accelerated Depreciation Value of Electricity (low or high) No No Yes At Project Completion Over First 5 Years Life of Project State Solar REC Yes Life of project 38

39 Sources of Capital 39

40 Typical Equity Sources Project sponsor equity Limited partner equity Tax equity banks, corporates State and Local Investment Tax Credits Equipment vendor equity Subordinated debt 40

41 Key Players Tax Equity Investor - Provides portion of equity financing - Receives tax benefits and cash flows from operations (rent payments in a lease structure) - May be entitled to a residual interest in the assets 41

42 Key Players Debt Provider/Lender - Provides construction financing and term financing (and may also provide for working capital and/or letter of credit facilities to support the Project) - Receives fixed return based on fees, interest and principal - Typically receives a first lien on all real and personal property of the Project Company (or upstream holdco if backleveraged), including rights to Cash Grant or tax equity proceeds to repay bridge loans, obligations of members and prospective members to make capital contributions, and a lien on the membership interests of the Project Company 42

43 Typical Debt Sources Commercial Banks Institutional Debt Providers - Insurance Companies - Pension Funds - Very long-term debt (18-20 years through note purchases) - Construction Debt (short-term debt with term takeout) Corporate Parent subordinated convertible debt/equity Credit support government-backed loan guarantees Equipment vendor equity 43

44 <Presentation Title/Client Name> Debt and Equity Structures 44

45 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES Debt Structure Project Company SPV or holding company of multiple SPVs (LLC or LP) Usually bankruptcy remote Limited or no recourse to sponsors Exception: PTC monetization structure Security for Lenders All assets of project company (including contract rights) Pledge of ownership interests in project company Disbursement Waterfall All revenues collected in collateral account and disbursed in specified order of priority: expenses, debt, equity 45

46 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) $ Project Revenues Revenue Account Construction / Operating Account Project Construction/Operating Expenses Debt Payment Account Fees, Interest & Scheduled Principal Debt Service Reserve Account O&M/Major Maintenance Reserve Account Subordinated Debt Account Distribution Account Maintain Required Debt Service Reserve Level Maintain Required Major Maintenance Reserve and/or O&M Reserve Level Payment of Subordinated Debt (if any) Remaining amount distributed to equity holders (assuming no defaults and financial tests are met) 46

47 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) Debt Structure Commercial loans construction financing term financing working capital letter of credit facility 144A offerings 4(a)(2) offerings 47

48 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) Tax Equity Structure: Partnership Flip Tax Benefits: 1% pre-flip 95% post-flip Sponsor Development Capital Tax Equity financing Tax Equity Investors Tax Benefits: 99% pre-flip 5% post-flip Tax Equity Partnership Project Company Payments Electricity Utility/Offtaker Project 48

49 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) Tax Equity Structure: Partnership Flip (cont d) May be leveraged or single-investor Can use with ITC, PTC or cash grant Tax investor sizes investment to an after-tax return Investment may be combination of upfront or deferred payment If choosing ITC, tax investor must be in partnership before asset placed-inservice Investment may be deferred over time Tax investor receives tax benefits and cash (99%) Sponsor typically receives initial cash until return of (not on) capital Tax basis reduced by 50% of ITC or cash grant, if used 49

50 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) Tax Equity Structure: Partnership Flip (cont d) Once tax investor return achieved, 95% of benefits "flip" back to sponsor Cash grant tax equity deals often include multiple flips and larger cash sharing by Sponsor in order to extend average life and produce full term yield Sponsor generally has post-flip purchase option Fair market value Safe harbor for wind--rev Proc No project level debt; back-leverage preferred 50

51 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) Tax Equity Structure: Sale/Leaseback Sponsor Sale and leaseback Development Rent Utility/Offtaker Payments Electricity Project Collateral Tax benefits Tax Equity Lessor 51

52 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) Tax Equity Structure: ITC/Cash Grant Sale-Leaseback Structure (no PTCs) Tax investor (lessor)/sponsor (lessee) Tax benefits utilized more efficiently, but larger residual/purchase option price Can be effected up to 3 months after placed-in-service Sponsor retains upside during lease term ITC/cash grant based upon FMV (instead of sponsor cost) Traditional true lease rules apply maximum lease term not to exceed 80% of useful life maximum PV of rentals not to exceed 90% of FMV minimum residual of 20% residual and early buy-outs at actual or projected FMV 52

53 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) Tax Reform Could include: reducing corporate tax rate to between 15 and 25% from 35% immediate expensing for capital investments (similar to 10% depreciation in the first year) limiting the deductibility of interest Impact of reform: accelerates depreciation but less valuable due to reduced tax rate reduces corporate tax appetite, likely reduces supply of tax equity financing 53

54 <Presentation Title/Client Name> DEBT AND TAX EQUITY STRUCTURES (cont d) Tax Reform (con d) Market reactions Tax reform risk generally borne by Sponsors, change from prior practice No consensus on ways to shift risks to Sponsors size tax equity investment assuming tax reform is effective in 2018 with the tax equity investor obligated to supplement its investment if the tax rate remains 35% size tax equity investment using 35% for all years with an indemnity for Sponsor if tax rate is lowered in years with tax losses Bonus depreciation is being used to accelerate losses into 2017 (where the tax rate is 35%) 54

55 Worldwide Capabilities with Local Execution Gibson Dunn s Global Footprint: Around the Globe Around the Clock <Presentation Title/Client Name> Gibson Dunn is a recognized leader in representing companies ranging from start-up ventures to multinational corporations in all major industries. With more than 1,300 attorneys in 20 offices, Gibson Dunn is committed to providing top-tier legal services. Our team can leverage our network of global offices, located in leading business centers worldwide, to provide a true global practice with superior local execution capability. 55

56 <Presentation Title/Client Name> Corporate Transactions Gibson Dunn s corporate attorneys have experience with virtually every type of corporate or commercial transaction. Regardless of a client's size, we take the collective experience we have gained from handling the most complex transactions for the world's pre-eminent companies and make that knowledge available to every client. Our corporate transactions team encompasses several practice groups that work together seamlessly to provide the experience needed on any transaction. These groups include: Capital Markets Mergers & Acquisitions Private Equity Emerging Companies Securities Regulation and Corporate Governance Global Finance Strategic Sourcing and Commercial Transactions Technology Transactions Our transactional groups, in turn, work closely with Gibson Dunn attorneys in other practice areas on an as-needed basis to meet client needs. We have internationally recognized lawyers in many areas of the law, including tax, executive compensation, labor, antitrust, litigation, environmental law, intellectual property, real estate and bankruptcy. 56

57 <Presentation Title/Client Name> Thank You Jessica I. Basil Gibson Dunn & Crutcher New York Office 200 Park Avenue New York, NY

58 Our Offices <Presentation Title/Client Name> Beijing Unit 1301, Tower 1 China Central Place No. 81 Jianguo Road Chaoyang District Beijing , P.R.C Brussels Avenue Louise Brussels Belgium +32 (0) Century City 2029 Century Park East Los Angeles, CA Dallas 2100 McKinney Avenue Suite 1100 Dallas, TX Denver 1801 California Street Suite 4200 Denver, CO Dubai Building 5, Level 4 Dubai International Finance Centre P.O. Box Dubai, United Arab Emirates +971 (0) Frankfurt TaunusTurm Taunustor Frankfurt Germany Hong Kong 32/F Gloucester Tower, The Landmark 15 Queen s Road Central Hong Kong Houston 1221 McKinney Street Houston, Texas London Telephone House 2-4 Temple Avenue London EC4Y 0HB England +44 (0) Los Angeles 333 South Grand Avenue Los Angeles, CA Munich Hofgarten Palais Marstallstrasse Munich Germany New York 200 Park Avenue New York, NY Orange County 3161 Michelson Drive Irvine, CA Palo Alto 1881 Page Mill Road Palo Alto, CA Paris 166, rue du faubourg Saint Honoré Paris France +33 (0) San Francisco 555 Mission Street San Francisco, CA São Paulo Rua Funchal, 418, 35 andar Sao Paulo Brazil +55 (11) Singapore One Raffles Quay Level #37-01, North Tower Singapore Washington, D.C Connecticut Avenue, N.W. Washington, D.C

59 Debt Mechanisms 59

60 Establishing Debt Capacity Assessing Debt Service Coverage Ratio (DSCR) capacity and setting a minimum requirement Minimum required equity Inclusion of non-contracted cash flow Valuing environmental credits (Renewable Energy Certificates (RECs), carbon offsets, etc.) Fully amortizing, Partial amortization, Bullet 60

61 Key Financing Documents Term Sheet Credit Agreement Depositary Agreement Intercreditor Agreement/Forbearance Agreement Security Agreement & Mortgage Ownership Pledge 61

62 Project Financing Debt Mechanisms DSCR criteria may vary widely, depending on technology risk and strength of sponsor Construction loan Conversion/term loan Bridge loan Interest rate hedges and swaps Letters of Credit - Power Purchase Agreement (PPA) - Interconnection - Debt Service Reserve Working capital lines 62

63 Typical Debt Mechanisms Account Control Agreements Sponsor guarantees: specific and narrow Maintenance reserve Debt service reserve Standby equity 63

64 Project Revenues Power Purchase Agreements (PPA) Is a PPA a must have for a project financing? What makes a PPA financeable? Intensely negotiated items and the risk these items create for lenders (e.g., curtailment) Required output Missed milestones result in termination or liquidated damages? Financial security / deposits required? 64

65 Major Structure and Risk Considerations Contracts and financing documents Bankruptcy remote entities and ring fencing Security and collateral - First lien on all tangible and intangible assets of the borrower Assets comprising the project facility Leasehold and other real property interests in project site Material project agreements Accounts Permits and approvals - Strict cash flow and payments waterfall Permits, licenses and regulatory approvals Opinions 65

66 Parties to the Transaction Sponsors Funding Company Tax Investors Guarantees or Support Passive Equity Investors Equity Investment Shareholders Agreement Collateral Agent HoldCo Senior Lenders Term Note Banks Public Institutional Investors Bank Revolver/LC Facility Subordinated Lenders Legal Counsel Independent Engineer Market Consultants Insurance Consultant Parent Guarantor Warranties Performance Guarantees Sponsor Investors Project Site Project Company Fixed Price EPC Contract EPC Contractor Input Supplier (e.g., biomass fuel supply) Interconnection Agreement Subsidiary Infrastructure Transmission Services Legal Counsel Design Engineer Investment Banker Revenue Modeler Accountants Parent Guarantor* Power Marketer* Parent Guarantor Power Purchaser(s) Offtake Agreements/ Concessions/Project Agreements Equipment and Material Suppliers Subcontractors *Project company power marketer and its parent guarantor may be affiliated. O&M Provider O&M Agreement Rating Agency(ies) 66

67 Best Practices 67

68 Best Practices Project Fundamentally Ready for Financing (Data Room readiness as Proxy for Financing Readiness) - Real Property Documents (site control, surveys, lease, deeds, licenses, zoning, title insurance, landlord estoppels, mortgage SNDA all in name of Borrower or Project Company) - Environmental Documents (Phase I, NEPA, Cultural Resources, Biological Resources, Geotechnical report, Stormwater pollution prevention plan, Dust Control, Flood) - Permitting (Conditional Use Permit, Zoning or Land Use Permit, Take Permits for Endangered/Protected Species, Building Permits, Grading Permits, Electrical Permits, Encroachment Permits, Air Quality Permits, NPDES Stormwater Construction Permit, Wetlands, FAA Determination, COO) 68

69 Best Practices (con t.) Project Fundamentally Ready for Financing (Data Room readiness as Proxy for Financing Readiness) - Offtake Agreements (PPA s and related Security Deposits, etc.) - Transmission/Interconnection Agreements and Studies - Engineering, Procurement and Construction Agreements - FERC Filings - Organizational Documents (Formation, Name Changes, Ownership Transfers, Asset Transfer documents) - Third-Party Consultant Reports (Independent Engineer, Insurance, Geotechnical Engineers, Environmental Consultants) 69

70 Thank you! Darin Lowder Partner Energy and Project Finance