Electric Cooperative Power Asset M&A

Electric Cooperative M&A Issues:Power Asset M&A

Thomas H. WarrenRam C. Sunkara

February 22, 2011

©2010 Sutherland Asbill & Brennan LLP

Our Coop Power Project Experience

In 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 MW coal-fired facilities

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.


Why This Series Is Relevant

• Discernable “Shift” in Market and Mindset in the Coop Industry

Increase in assets on market due to market changesValuation of power generation assets has dropped in recent years Construction of new plants comes with considerable cost, permitting, construction and change in law riskElectric 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.


Introduction to Coop M&A Issues Webinar Series

• Webinar I – Power Asset M&A• Webinar II – Electric Cooperative Mergers &

ReorganizationsTuesday, May 24, 2011 – 1:00-2:00 P.M. ET

• Webinar III – Joint Ownership ArrangementsTuesday, 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


Overview of Presentation

• Transaction Structures

• “Unlocking Secrets” – Due Diligence is the Key to Understanding What You Are Acquiring

• Deal Documentation Overview


Transaction Structures

• Purchase of Assets vs. Equity InterestsStructural considerationsLogistical challenges and timing issuesContext – auction v. bilateral negotiation

• Acquisition of Partial Interest in Generation AssetsGovernance Issues (majority vs. minority)Information Access & ReportingOperational ConsiderationsRestrictions on Future SalesScheduling & Dispatch

• “Sell-Back” Transactions


Transaction Structures

• Critical issues when structuring transactions for electric generation assets:

LiabilitiesFinancial strength of counterpartyAssignment of key contractsRe-titling or assignment of assetsTransfer of permits and licensesFederal and state/local tax considerationsTiming considerationsDesired risk allocation


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


Know What You’re Buying

• Areas of Legal Due DiligenceCommercialElectric regulatoryFinancing MattersCorporateTax (Federal, State and Local)EnvironmentalReal Property LitigationEmployee Matters and BenefitsIP

• 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.


Know What You’re Buying –Power Asset Issues

• Compliance with NERC Reliability Standards• FERC and other Regulatory Approvals• Diligencing the Key Commercial Arrangements

PPAsO&M & LTSAsFuel Supply/Transportation and Water Supply

• State and Local Tax “Quirks”• Operating Records and History of Plant• Retention of Key Employees (e.g., Plant Manager)


Know What You’re Buying –Electric Coop Issues

• Member ApprovalsAre approvals required?Potential closing condition

• Federal Tax IssuesPatronage-Sourced Income85% Member Income Test

• Commercial IssuesNegotiating new credit support arrangements“Cleaning up” or terminating problematic contracts



• Financing ConsiderationsFor RUS borrowers--RUS approval required?Structuring transaction to meet requirements under indenturePotential closing conditions

• Real Estate IssuesTitle InsurancePowers of condemnation



• Regulatory MattersFERC approval

• System IntegrationLoad management & dispatchTransmission path

• Securities Law IssuesIf cooperative is an SEC filer, an acquisition may trigger requirement under Securities Act of 1933 to file historical audited financial statements (income test)


Documenting the Deal – First Steps

• Letter of IntentBinding / Non-Binding ProvisionsTerm Sheet – Can Be a Tool for Efficiency in PSANegotiations

• Auction Process• Timing Considerations

ExclusivityDue Diligence PeriodTypically Power Asset M&A deals are not “sign & close”


Documenting the Deal – The PSA

• Key Elements of a Purchase and Sale AgreementPurchase Price AdjustmentsRepresentations & Warranties

Risk allocationInformation disclosurePotential walk right if R&Ws not correct at closing

CovenantsAffirmative v. NegativePreservation of value for Buyer pending closingPre- and post-closing

Closing ConditionsCovers Satisfaction of Deferred Items



• Key Elements of a Purchase and Sale AgreementIndemnification

Risk allocation – Gives “Teeth” to R&WsLimitations on Recovery

Caps and Baskets/ThresholdsSurvival PeriodsState Law (e.g., NY “Anti-Sandbagging” and TX “Express Negligence”)

Credit SupportLetter of Credit, Holdback, Escrow

Dispute Resolution



• In addition to standard R&Ws, power asset deals may include R&Ws covering such items as:

Operating recordsMaintenance (or construction, if not yet completed)Committed capacityInventory and spare partsFor renewables, eligibility for incentives and/or entitlement toenvironmental attributes



• Covenants relevant to power asset deals may include:Access to project site to conduct borescope inspection and Phase I environmental assessmentEfforts to pursue regulatory approvals & payment of filing feesOperation of business Casualty and condemnationAssignment of capacity rights Allocation of payments under PPA or other key contractsCertification of NERC Reliability StandardsCompliance with tax and government incentives


Issues Specific to Acquisitions of Pre-Commercial Renewable Assets

• Bridging the “Valuation Gap”Structuring payments based on completed project milestonesIn portfolio acquisition, capping development payments to set ceiling expectation for both parties

• Provisions Regarding Control Over DevelopmentSeller may seek performance assurance and performance standards for BuyerBuyer will want as much autonomy as possible

• Throw the Book Out on “Market” Terms for IndemnificationLimitations vary when structuring with milestone paymentsSpecific indemnities to address liabilities identified in the course of buyer’s due diligence


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


Questions for the Presenters

Thomas H. [email protected]

Focuses his practice on energytransactional matters including mergersand acquisitions, energy trading andproject development. Tom is the chair of the firm’s Energy Projects Team and the firm’s Sustainability Partner.

Ram C. [email protected]

Focuses his practice on mergers andacquisitions, joint ventures, commercialtransactions, project development andpower plant construction in the energy industry involving a wide range of participants.

Documents

Electric Cooperative Power Asset M&A