Drafting the O&M Contract, Warranty Management and Insurance Claims Matthew R. Archer 713-653-1709 marcher@mwe.com March, 26, 2014 www.mwe.com Boston Brussels Chicago Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Paris Rome Seoul Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2014 McDermott Will & Emery. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome.
O&M Contract Structures Distributed Generation vs. Utility Scale Different economies of scale Different abilities to absorb costs Different expectations Cost Reimbursable Contracts Reimbursed for labor, consumables, parts, overhead and out-of-pocket expenses Very low profit fee and Contractor largely only at risk for the fee Annual and longer term budgeting Contractor often owns an equity interest in the project No or very limited availability guaranty/bonus www.mwe.com 2
O&M Contract Structures Fixed Price Routine Maintenance O&M Lump sum fixed price Scope of work limited to routine and regularly scheduled services Corrective maintenance performed as an additional service for an additional fee Labor for corrective maintenance may be included in the lump sum fixed price if the corrective maintenance can be performed by personnel dedicated to the site without impacting routine maintenance obligations Owner often responsible for part supply or Contractor provides parts on a cost plus basis Availability guaranty often includes exclusions for unscheduled maintenance or periods of time waiting for replacement parts www.mwe.com 3
O&M Contract Structures Full Wrap O&M Agreement Long term 5 to 25 years Fixed price Includes all routine scheduled maintenance and all corrective maintenance Credit issues and concerns Production Based Availability or Output Guarantees Acts as a long term extended warranty but is expensive Traditionally offered by large OEMs www.mwe.com 4
Stakeholders to be Considered When Drafting an O&M Contract Offtaker Sponsor Grid Operator Investors O&M Suppliers Lenders Insurance www.mwe.com 5
Availability and Output Guarantees Availability Guarantees Production based availability guarantee Incentivizes O&M Contractor to perform maintenance at night or on low sun days May include mechanisms to address derated equipment and incentivize O&M Contractor to improve performance Guaranteed availability is often around 98% in full wrap contract LDs are usually calculated based on lost production at the PPA price Bonus may include a deadband or different levels of revenue sharing as availability increases from the guaranteed level Exclusions www.mwe.com 6
Availability and Output Guarantees Time Based Availability Considers all downtime for a solar facility during daylight hours the same Simple and easy to calculate Could include derating mechanisms to address performance issues Should be easier for an O&M contractor to provide a higher guaranteed availability level May be more common in smaller projects and may include more exclusions LDs and Bonuses often calculated in a similar fashion to production based availability but often with a higher guaranteed availability www.mwe.com 7
Availability and Output Guarantees Output Guarantees Becoming more common with large scale utility projects during first few years of operation Intended to address issues related to early degradation of solar panels Model determines expected energy output and is adjusted for actual site conditions and expected degradation built into the calculation Guaranteed percentage of expected energy output is subject to negotiation but around 96% Exclusions LDs compensate for missing production and bonus for excess production but usually with a deadband Replaces availability guarantee in the years offered www.mwe.com 8
Breach of Contract and Liability Limits Breach vs. Event of Default Events of Default Bankruptcy (Automatic Stay Issues) Material Breach 30 day cure period with potential for extension Poor Performance/Availability Failure to Pay Miscellaneous Defaults Remedies Often limited to cover damages but could be a liquidated amount Waiver of Consequential Damages Limits of Liability www.mwe.com 9
Warranty, Insurance and Indemnity Warranty Full Wrap Contract warranty of limited value except in final years of the agreement Warranties are typically only provided for 1 or 2 years after the service or corrective maintenance is performed Insurance All Risk Property, CGL, Auto, Pollution, Workers Comp/ER Liability and Umbrella Policies Full Wrap Contract Credit Support Extended Warranty Insurance www.mwe.com 10
Warranty, Insurance and Indemnity Indemnities Knock for Knock Express Negligence Rule Proportionate Liability Property damage and the All Risk Property Insurance IP Issues Third Party Claims and Limits of Liability Availability of Insurance www.mwe.com 11