Thomas H. Warren Ram C. Sunkara February 22, 2011

Transcription

1 Thomas H. Warren Ram C. Sunkara February 22, 2011 Electric Cooperative M&A Issues: Power Asset M&A

2 Our Coop Power Project Experience In the past two years, we have assisted our Electric Cooperative clients in a number of Power Plant acquisitions and related transactions, including: Acquisition of interest in 2,300 MW coal-fired facilities Acquisition of a 300 MW gas-fired peaking facility Acquisition of a 340 MW gas-fired peaking facility Acquisition of a 500 MW gas-fired peaking facility Acquisition of a 1,250 MW combined-cycle facility In addition to our M&A transactions, we have counseled electric cooperatives in numerous financing transactions, wholesale power contracts, renewable power PPAs, leveraged lease arrangements and actions relating to mortgage bond indentures.

3 Why This Series Is Relevant Discernable Shift in Market and Mindset in the Coop Industry Increase in assets on market due to market changes Valuation of power generation assets has dropped in recent years Construction of new plants comes with considerable cost, permitting, construction and change in law risk Electric cooperatives continue to maintain above-average credit ratings and access to cheap capital for acquisition The Result: The market is ripe with acquisition opportunities for cooperatives who seek to meet longterm load growth needs.

4 Introduction to Coop M&A Issues Webinar Series Webinar I Power Asset M&A Webinar II Electric Cooperative Mergers & Reorganizations Tuesday, May 24, :00-2:00 P.M. ET Webinar III Joint Ownership Arrangements Tuesday, August 23, :00-2:00 P.M. ET Webinar IV Considerations for Cooperatives in Renewable Energy Tuesday, October 25, :00-2:00 P.M. ET

5 Overview of Presentation Transaction Structures Unlocking Secrets Due Diligence is the Key to Understanding What You Are Acquiring Deal Documentation Overview

6 Transaction Structures Purchase of Assets vs. Equity Interests Structural considerations Logistical challenges and timing issues Context auction v. bilateral negotiation Acquisition of Partial Interest in Generation Assets Governance Issues (majority vs. minority) Information Access & Reporting Operational Considerations Restrictions on Future Sales Scheduling & Dispatch Sell-Back Transactions

7 Transaction Structures Critical issues when structuring transactions for electric generation assets: Liabilities Financial strength of counterparty Assignment of key contracts Re-titling or assignment of assets Transfer of permits and licenses Federal and state/local tax considerations Timing considerations Desired risk allocation

8 Know What You re Buying Critical to assemble experienced diligence team Buyer s due diligence may uncover liabilities or impediments to deal that require restructuring Prioritize most critical items Interplay between due diligence and PSA to protect buyer

9 Know What You re Buying Areas of Legal Due Diligence Commercial Electric regulatory Financing Matters Corporate Tax (Federal, State and Local) Environmental Real Property Litigation Employee Matters and Benefits IP Non-legal due diligence is also critical e.g., operational, commercial, accounting, insurance, risk management Context and experience are critical when conducting your due diligence.

10 Know What You re Buying Power Asset Issues Compliance with NERC Reliability Standards FERC and other Regulatory Approvals Diligencing the Key Commercial Arrangements PPAs O&M & LTSAs Fuel Supply/Transportation and Water Supply State and Local Tax Quirks Operating Records and History of Plant Retention of Key Employees (e.g., Plant Manager)

11 Know What You re Buying Electric Coop Issues Member Approvals Are approvals required? Potential closing condition Federal Tax Issues Patronage-Sourced Income 85% Member Income Test Commercial Issues Negotiating new credit support arrangements Cleaning up or terminating problematic contracts

12 Know What You re Buying Electric Coop Issues Financing Considerations For RUS borrowers--rus approval required? Structuring transaction to meet requirements under indenture Potential closing conditions Real Estate Issues Title Insurance Powers of condemnation

13 Know What You re Buying Electric Coop Issues Regulatory Matters FERC approval System Integration Load management & dispatch Transmission path Securities Law Issues If cooperative is an SEC filer, an acquisition may trigger requirement under Securities Act of 1933 to file historical audited financial statements (income test)

14 Documenting the Deal First Steps Letter of Intent Binding / Non-Binding Provisions Term Sheet Can Be a Tool for Efficiency in PSA Negotiations Auction Process Timing Considerations Exclusivity Due Diligence Period Typically Power Asset M&A deals are not sign & close

15 Documenting the Deal The PSA Key Elements of a Purchase and Sale Agreement Purchase Price Adjustments Representations & Warranties Risk allocation Information disclosure Potential walk right if R&Ws not correct at closing Covenants Affirmative v. Negative Preservation of value for Buyer pending closing Pre- and post-closing Closing Conditions Covers Satisfaction of Deferred Items

16 Documenting the Deal The PSA Key Elements of a Purchase and Sale Agreement Indemnification Risk allocation Gives Teeth to R&Ws Limitations on Recovery Caps and Baskets/Thresholds Survival Periods State Law (e.g., NY Anti-Sandbagging and TX Express Negligence ) Credit Support Letter of Credit, Holdback, Escrow Dispute Resolution

17 Documenting the Deal The PSA In addition to standard R&Ws, power asset deals may include R&Ws covering such items as: Operating records Maintenance (or construction, if not yet completed) Committed capacity Inventory and spare parts For renewables, eligibility for incentives and/or entitlement to environmental attributes

18 Documenting the Deal The PSA Covenants relevant to power asset deals may include: Access to project site to conduct borescope inspection and Phase I environmental assessment Efforts to pursue regulatory approvals & payment of filing fees Operation of business Casualty and condemnation Assignment of capacity rights Allocation of payments under PPA or other key contracts Certification of NERC Reliability Standards Compliance with tax and government incentives

19 Issues Specific to Acquisitions of Pre- Commercial Renewable Assets Bridging the Valuation Gap Structuring payments based on completed project milestones In portfolio acquisition, capping development payments to set ceiling expectation for both parties Provisions Regarding Control Over Development Seller may seek performance assurance and performance standards for Buyer Buyer will want as much autonomy as possible Throw the Book Out on Market Terms for Indemnification Limitations vary when structuring with milestone payments Specific indemnities to address liabilities identified in the course of buyer s due diligence

20 We look forward to seeing you at the NRECA 2011 Annual Meeting in Orlando, FL, in March!

21 Questions for the Presenters Thomas H. Warren Ram C. Sunkara Focuses his practice on energy transactional matters including mergers and acquisitions, energy trading and project development. Tom is the chair of the firm s Energy Projects Team and the firm s Sustainability Partner. Focuses his practice on mergers and acquisitions, joint ventures, commercial transactions, project development and power plant construction in the energy industry involving a wide range of participants.