More Related Content
Similar to Electric Cooperative Power Asset M&A (20)
Electric Cooperative Power Asset M&A
- 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 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. 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. Introduction to Coop M&A Issues Webinar
Series
• 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. We look forward to seeing you at the NRECA
2011 Annual Meeting in Orlando, FL, in March!
©2010 Sutherland Asbill & Brennan LLP
- 21. Questions for the Presenters
Thomas H. Warren Ram C. Sunkara
404.853.8548 404.853.8141
thomas.warren@sutherland.com ram.sunkara@sutherland.com
Focuses his practice on energy Focuses his practice on mergers and
transactional matters including mergers acquisitions, joint ventures, commercial
and acquisitions, energy trading and transactions, project development and
project development. Tom is the power plant construction in
chair of the firm’s Energy Projects Team the energy industry involving a wide
and the firm’s Sustainability Partner. range of participants.
©2010 Sutherland Asbill & Brennan LLP