Presenting a live 90-minute webinar with interactive Q&A Renewable Energy and Corporate PPAs: Overcoming Regulatory, Financing, Intercreditor, Tax Challenges WEDNESDAY, JULY 20, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Robert Eberhardt, Partner, Chadbourne & Parke , New York Eli M. Katz, Partner, Chadbourne & Parke , New York Robert F . Shapiro, Partner, Chadbourne & Parke , 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 emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Renewable Energy and Corporate PPAs: Overcoming Regulatory, Financing, Intercreditor and Tax Challenges Rob Eberhardt reberhardt@chadbourne.com Eli Katz ekatz@chadbourne.com Bob Shapiro rshapiro@chadbourne.com
Agenda Corporate PPA Overview Corporate PPA Structures and Terms Regulatory Issues Intercreditor Issues Tax Issues
Corporate PPA Overview
Recent Market Trends • 52% of offtake contracts from wind were signed with non-utility offtakers last year • Many of these contracts are for shorter durations than typical PPAs (12-15 years) • Merchant “tail” puts pressure on tax equity and back - leverage financings 8
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Recent Market Trends • Corporates are being driven by: • desire to reduce price volatility • corporate environmental commitments • Confluence of factors is driving this trend: • Long-term extension of tax credits • falling prices for generating renewable power • less optimistic of effect of simply buying RECs 10
State Renewable Portfolio Standards and Goals Source: http://www.ncsl.org/research/energy/renewable-portfolio-standards.aspx 11
Recent Market Trends • Longer term policy support for renewables is becoming more pronounced • Paris Accord • Clean Power Plan • Corporate customers looking for environmental commitments • Dispersed energy needs for corporates makes on-site solar or wind less compelling • Trend towards “virtual” or synthetic PPAs is rapidly becoming the solution 12
Recent Market Trends Key Challenges: • Corporates unfamiliarity with buying power • compare to utilities who “do this for a living” • Financing parties evaluating long-term corporate credit risk • Difficulty obtaining parent guaranties • Covenant restrictions in corporate credit facilities • Inter-creditor issues between financing parties and corporate buyers • More demands on project credit support 13
Selected Projects Year Project Sponsor Offtaker Lead Lender Tax Equity Market 2010 Garden Wind NextEra Google MISO 2012 Minco Wind II NextEra Google SPP 2014 Keechi Wind Enbridge Microsoft N/A MetLife ERCOT 2015 Fowler Ridge IV Pattern Amazon Siemens JPMorgan PJM Wind Financial and MetLife Services 2015 Pilot Hill Wind EDF Microsoft N/A MetLife PJM and GE 2016 CA Flats Solar First Solar Apple TBD TBD CAISO 2016 Cimarron Bend Enel Google N/A TBD SPP Wind 14
Corporate PPA Structures and Terms 15
Physical PPAs Energy Wholesale [“What had Energy Energy Corporate Market Project Offtaker (e.g. Company RECs Market $ PJM, Ancil. Services CAISO) Fixed $ Electric Utility (Retail Service Provider) 16
Synthetic PPAs PPA Payment Wholesale [“What had [“What had Energy RECs Energy Project Project Market Corporate Company Company (e.g. Offtaker Market $ PPA Payment PJM, Ancil. Services CAISO) Electric Utility (Retail Service Provider) 17
PPA Terms • Wholesale Sales - Typical • Virtual PPAs and Physical PPAs delivered through spot markets in organized power market • Difference from Financial Hedge • PPAs in non-organized markets - Wholesaler or Bypass 18
PPA Terms • Delivery Point is a point on the market grid ( PJM, ERCOT, CAISO) • Payment: Virtual — contract for differences — seller gets fixed price; 1. buyer get market price, either at point of interconnection with grid or different settlement point. 2. Physical PPA: fixed price to Seller. • Basis risk. Where is floating price? • Negative market price risk 19
PPA Terms • Milestones. Late COD Delay damages and termination • Option for physical delivery sale • Minimum Performance requirement – availability/production 20
PPA Terms • RECs — who owns (no RPS requirement) • Capacity — who gets — auctions • Two way credit support — Buyer and Seller • Creditworthiness of Buyer — what happens if downgrade • Risk of Curtailment by market operator – impact on minimum performance requirement; payments for energy 21
Regulatory Issues
Regulatory Issues • Market-Based Rate Authority (except ERCOT) • Exempt Wholesale Generator Status • No Retail Sales (retail franchise/ EWG issues) • QF as option for small producers 23
Intercreditor Issues 24
Wind Farm – Sample Financial Structure Construction Phase Sponsor Lenders Project Co. Offtaker Construction loan Operational Phase Holdco Lenders Tax Equity Sponsor Class A Class B Interests Interests Project Co. Offtaker 25
Construction Phase Intercreditor Issues • At financial closing, the project company has no operational history or hard assets • Senior lenders have senior liens on all project assets and project company equity • Liens of offtaker (if any) typically subordinated • Offtaker relies on other forms of credit support (e.g. letters of credit) 26
Operational Phase Intercreditor Issues • Tax equity is equity – structurally subordinated to project company creditors • Tax equity typically prohibits project company-level indebtedness and liens on project assets • Liens of offtaker (if any) typically subject to forbearance agreement with tax equity 27
Operational Phase Intercreditor Issues – Forbearance Terms • Tax equity given notice and opportunity to cure defaults – cure periods negotiated • Offtaker foreclosure prohibited during forbearance period (e.g., until tax equity flip date) • Other offtaker remedies typically remain intact (e.g., termination, draw on letter of credit) 28
Tax Issues 29
Key Tax Issues • Most corporate PPAs leave tax ownership with project owner • Tax credits and depreciation are monetized by project sponsor and reduce energy cost • Offtake arrangements should be “service contracts” for tax purposes and not leases • Tax code has six factor test to make this determination 30
Key Tax Issues • Particular tax issues arise when corporates take equity stake in project • Sales of power to related parties may impact tax credits • Arrangements that are “hedge - like” should be identified as a hedge for tax purposes to avoid: • Tax timing issues • Capital gain/ordinary income mismatch 31
Key Tax Issues • Shorter tenor of corporate PPAs also impact form of tax equity financings at project level: • Tax equity demand for greater share of cash flow • More accelerated “sweep events” • Forbearance on corporate stepping into sponsor’s position • Evaluating revised tax profile if Corporate offtaker forecloses on project 32
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