Thomas H. Warren                             Ram C. Sunkara                             February 22, 2011Electric Cooperat...
Our Coop Power Project ExperienceIn the past two years, we have assisted our Electric Cooperative clients in anumber of Po...
Why This Series Is Relevant• Discernable “Shift” in Market and Mindset in the Coop  Industry      Increase in assets on ma...
Introduction to Coop M&A Issues WebinarSeries• Webinar I – Power Asset M&A• Webinar II – Electric Cooperative Mergers &  R...
Overview of Presentation•   Transaction Structures•   “Unlocking Secrets” – Due Diligence is the Key to    Understanding W...
Transaction Structures• Purchase of Assets vs. Equity Interests          Structural considerations          Logistical cha...
Transaction Structures• Critical issues when structuring transactions for  electric generation assets:      Liabilities   ...
Know What You’re Buying• Critical to assemble experienced diligence team• Buyer’s due diligence may uncover liabilities or...
Know What You’re Buying•   Areas of Legal Due Diligence        Commercial        Electric regulatory        Financing Matt...
Know What You’re Buying –Power Asset Issues• Compliance with NERC Reliability Standards• FERC and other Regulatory Approva...
Know What You’re Buying –Electric Coop Issues• Member Approvals     Are approvals required?     Potential closing conditio...
Know What You’re Buying –Electric Coop Issues• Financing Considerations     For RUS borrowers--RUS approval required?     ...
Know What You’re Buying –Electric Coop Issues• Regulatory Matters     FERC approval• System Integration     Load managemen...
Documenting the Deal – First Steps• Letter of Intent      Binding / Non-Binding Provisions      Term Sheet – Can Be a Tool...
Documenting the Deal – The PSA• Key Elements of a Purchase and Sale Agreement     Purchase Price Adjustments     Represent...
Documenting the Deal – The PSA• Key Elements of a Purchase and Sale Agreement     Indemnification        Risk allocation –...
Documenting the Deal – The PSA• In addition to standard R&Ws, power asset deals may  include R&Ws covering such items as: ...
Documenting the Deal – The PSA• Covenants relevant to power asset deals may include:      Access to project site to conduc...
Issues Specific to Acquisitions of Pre-Commercial Renewable Assets•   Bridging the “Valuation Gap”        Structuring paym...
We look forward to seeing you at the NRECA2011 Annual Meeting in Orlando, FL, in March!                                   ...
Questions for the PresentersThomas H. Warren                           Ram C. Sunkara404.853.8548                         ...
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Electric Cooperative Power Asset M&A

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Presentation on commercial and legal issues facing electric cooperatives acquiring power generation assets

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Electric Cooperative Power Asset M&A

  1. 1. Thomas H. Warren Ram C. Sunkara February 22, 2011Electric Cooperative M&A Issues:Power Asset M&A
  2. 2. Our Coop Power Project ExperienceIn the past two years, we have assisted our Electric Cooperative clients in anumber of Power Plant acquisitions and related transactions, including: Acquisition of interest in 2,300 Acquisition of a 300 MW Acquisition of a 340 MW MW coal-fired facilities gas-fired peaking facility gas-fired peaking facility In addition to our M&A transactions, Acquisition of a 500 MW Acquisition of a 1,250 MW gas-fired peaking facility combined-cycle facility 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. ©2010 Sutherland Asbill & Brennan LLP
  3. 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 long- term load growth needs. ©2010 Sutherland Asbill & Brennan LLP
  4. 4. Introduction to Coop M&A Issues WebinarSeries• Webinar I – Power Asset M&A• Webinar II – Electric Cooperative Mergers & Reorganizations Tuesday, May 24, 2011 – 1:00-2:00 P.M. ET• Webinar III – Joint Ownership Arrangements Tuesday, August 23, 2011 – 1:00-2:00 P.M. ET• Webinar IV – Considerations for Cooperatives in Renewable Energy Tuesday, October 25, 2011 – 1:00-2:00 P.M. ET ©2010 Sutherland Asbill & Brennan LLP
  5. 5. Overview of Presentation• Transaction Structures• “Unlocking Secrets” – Due Diligence is the Key to Understanding What You Are Acquiring• Deal Documentation Overview ©2010 Sutherland Asbill & Brennan LLP
  6. 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 ©2010 Sutherland Asbill & Brennan LLP
  7. 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 ©2010 Sutherland Asbill & Brennan LLP
  8. 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 ©2010 Sutherland Asbill & Brennan LLP
  9. 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. ©2010 Sutherland Asbill & Brennan LLP
  10. 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) ©2010 Sutherland Asbill & Brennan LLP
  11. 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 ©2010 Sutherland Asbill & Brennan LLP
  12. 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 ©2010 Sutherland Asbill & Brennan LLP
  13. 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) ©2010 Sutherland Asbill & Brennan LLP
  14. 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” ©2010 Sutherland Asbill & Brennan LLP
  15. 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 ©2010 Sutherland Asbill & Brennan LLP
  16. 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 ©2010 Sutherland Asbill & Brennan LLP
  17. 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 ©2010 Sutherland Asbill & Brennan LLP
  18. 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 ©2010 Sutherland Asbill & Brennan LLP
  19. 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 ©2010 Sutherland Asbill & Brennan LLP
  20. 20. We look forward to seeing you at the NRECA2011 Annual Meeting in Orlando, FL, in March! ©2010 Sutherland Asbill & Brennan LLP
  21. 21. Questions for the PresentersThomas H. Warren Ram C. Sunkara404.853.8548 404.853.8141thomas.warren@sutherland.com ram.sunkara@sutherland.comFocuses his practice on energy Focuses his practice on mergers andtransactional matters including mergers acquisitions, joint ventures, commercialand acquisitions, energy trading and transactions, project development andproject development. Tom is the power plant construction inchair of the firm’s Energy Projects Team the energy industry involving a wideand the firm’s Sustainability Partner. range of participants. ©2010 Sutherland Asbill & Brennan LLP
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