contracts and legal issues – what do you … contracts and legal issues – what do you need to go...
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CONTRACTS AND LEGAL ISSUES
– what do you need to go operational?
NORWEA – FINANCE SEMINAR 2013 DAY 2
Lysebu – Holmenkollen, 31 January 2013
Kjetil Hardeng
2Advokatfirmaet Haavind AS
3Advokatfirmaet Haavind AS
What and why;
• Norwegian wind farms
– Status
• Framework in brief
– Legal
– Commercial and other
• How to make it happen
– The set up; corporate, tax and JV
– Regulatory; concessions
– The various agreements; from land to grid to market
– Funding
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Main take away’s
• Best location
– Wind, site and infrastructure
• Best people
• Think bank/funding from day one
– From first meeting with land owners; same agreement will be
reviewed by UK or other banks
– Too often we see this not been thought through
– Pledge instruments; cash, assets, land and negative pledge
• Care for the cocktail of conflicting interests
– ”can a tree have a standing?” (yes, it can)
– Need to make many stakeholders close to a smile
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N wind – a snap shot
21 wind plants up and running (January 2013)
Total capacity of 700 MW
279 turbines
Last one at Lista in Vest-Agder
181 MW under construction (January 2013)
Split on two separate plants, Vest-Agder (Lista
above) and Hordaland
Will add another 75 turbines
A total of 66 concessions granted (year end 2012)
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Backdrop (el price not included)
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Legal in brief
• It works
– It has worked, 21 farms up and running
– It will work again; that is why we all are here
– Banks and funding sources included
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Government’s goals
• The elcertificate market aims at 13.2 TWh new
renewable power production in Norway by end of 2020
(26.4 TWh in Norway and Sweden combined)
• All new renewable energy sources
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El certs – government tool
• Regime in brief
– Wind qualifies
– Farm needs to energize by end of 2020
• Legal certainty
– Agreement with Sweden
– Legal opinion?
– Protected by two set of laws and a bilateral state agreement
– No year on year parliament budgeting
• Any (un)certainties?
– Sweden attempted minimum price; state aid violation
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The big picture; post credit crunch
• A brand new day of funding?
• Banks
– Basel III (CRD IV)
– Capital req tightens up
– Liquidity Coverage Ratio
– Net Stable Funding Requirement
• Pension funds
– Solvency II
– IORP; more pension
• This will lead to having a more active funding partner at
the table; structure will be key
• Opening up for new players in wind; bonds
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•Wind
measuring;
•Option to
land;
•Prep. for
land register
•Contact grid
operator
•Appeal to
MPE (and
ME)
•NVE grants
concession
•Expropriatio
n
•Application
to NVE for
concession,
incl. impact
study
•Notice;
•Consultation
procedure;
•Impact study
program
•Turbine
agreements
•Grid
agreement
•Construction
agreements •Financing
•Detailed
planning
•Balancing
agreement
WHAT DO YOU NEED?
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Owner 1 Owner 2
SPV
Trustee Bond Holders
Bank
Power Purchaser
Public authorities
NVE
MD
OED
Municipalities
Constructor
Land owners
Grid company
• Investment Agreement
• Share Option Agreement
• Bonds
Security documents:
• Machinery and plant
• Property
• Loan Agreement
• PPA
(Nord Pool)
• Zoning / local development plans
• Property tax
• Authority of Appeal • Concessions
• Turbine supply and construction
• Service agreement / Operation & Maintenance
• Lease
• Buy
• Expropriation
DA
• Joint venture Agreement/
Shareholders’ Agreement
CORPORATE AND STRUCTURING
The limited liability firm is a triumph of comparative law in action. The origin of this relatively new institution is generally attributed to the German
law of 1892, authorizing the Gesellschaft mit beschrnkter Haftung... . While drawing some inspiration from the English practice of the private
limited company, it was nevertheless an original creation. However, the claim that it was without precedent is negated by the fact that the State
of Pennsylvania had enacted a law in 1874 authorizing the limited partnership association, which was extensively used. This form of business
organization, as we shall note later, bears a striking resemblance to the limited liability firm current today in Europe and Latin America. Eder,
Limited Liability Firms Abroad, 13 Univ Pitt L Rev 193 (1952).
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Corporate vehicles – in a nut shell
• Part of Europe
– All recognized legal structures will be found under Norwegian
law, typically;
– Limited liability company (AS)
– Partnership (ANS/DA)
– Limited partnership (KS)
• Main issues when choosing
– Funding
– Tax; transparent vs. non-transparent
– Limitation of liability
– Backing by PCGs may be required
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Corporate vehicles – in a nut shell
• Limited liability company (AS)
– Limited liability
– Separate tax entity
– Invariable legislation; limited possibility for tailoring
• Partnership (ANS/DA)
– Unlimited liability
– Tax transparent
– Flexible legislation; vehicle may be tailor made
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Corporate vehicles – in a nut shell
• Limited Partnership (KS)
– Hybrid between limited liability company and partnership
– Unlimited liability, but can be structured to avoid liability for the
ultimate owners
– Tax transparent
• Foreign set up normally ok
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Joint Venture agreements – overview
• Key goal; successful completion of the project
• Critical that decisions are made
– Project certainty verses minority protection
– Milestones and funding
– Governance and dead lock resolution
– May and should vary from where in the project
• Care for the bank/bonds
– Joint or independent obligations towards the JV
– Post-closing commitments and obligations
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Joint Venture agreement – considerations
• Balance active owners vs. ”sleeping partners”
• Project critical decisions
– Simple majority vs. qualified majority
– Deadlock
• Protection
– Unreasonable benefit at the expense of the company or other
owners
– Dead lock
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Joint Venture agreements – initial funding
• Lock up?
• Funding commitment
– Strong commitment
– Incentives for willingness
– No veto rights
• Tool box to secure funding
– Obligation to fund
– Dilution of the non-funding party
– NOK for NOK or on a discounted basis
– Buy-back
– At nil; pre-agreed valuation
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Joint Venture agreements – post investment
• Stronger protection of the minority is acceptable
• Lock-up / mechanism for new investors / exit possibility
• Dead-lock
– Shoot out mechanism - highest bidder takes over the project
– Forced trade sale
PREREQUISITES FOR BUILDING AND
OPERATING THE PLANT
- Regulatory and land
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Regulatory – Planning and Building/Pollution
• The Planning and Building Act
– Zoning plan
– Assessment of environmental impact
– Installation of turbines etc are exempted from case handling
• The Pollution Act
– Noise and vibrations
– Should be taken into consideration when case handling of the
concession under the Energy Act
– A separate concession according to the Pollution Act may be
required
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Regulatory – The Energy Act
• Trading license
• License for electrical installations (i.e. Wind turbines, grid
etc.)
– Main Governmental authorities involved
– Norwegian Water Resources and Energy Directorate (NVE)
– Ministry of Petroleum and Energy (OED, appeals/complaints
– Ministry of the Environment (indirectly a central player)
• Other legislation involved indirectly
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Necessary rights to land
• Two possibilities
– Agreements with land owners
– Public expropriation of rights
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Agreements with land owners
• Main issues:
– What rights: Right to install and operate turbines, cables,
transformers, other electrical installations for grid connection,
right to establish and/or use roads etc.
– Which parties: All directly affected land owners and other parties
with total or partial rights to the property, that are affected
– What sort of agreement: land purchase agreement, land lease
agreement, agreement giving partial rights to the land owner’s
properties
– Right to assign; bankability wording
– Compensation
• Other issues:
– Waiver of demands concerning noise and other disadvantages
– Duty of cooperation
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Agreements with land owners
• Registration of the agreement in the land register:
– Necessary to give legal protection against defeat of creditors
and extinctive good faith acquisition
– How the agreement is registered depends on the type of
agreement
– Acquisition of land
– Land lease agreement
– Partial rights to the land owner’s property
– Should be registered as encumbrances not as restrictive
covenant
– Highly recommended that the agreement is registered with
first priority
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Expropriation
• Fallback to agreement
– Requires consent from certain part of the landowners
• Granted by NVE or by the Ministry of Energy
– Can be granted simultaneously with concession
• A discretional authority
– Typically given to avoid minority interest blocking majority
– Terms
– Compensation
• Possession of property
Remains good…..
Grid is
good!
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Grid connection
• Mandatory grid connection
– The grid owner obliged to connect new power production
• Investment contribution may be required from developer
– Framework for such contribution regulated by the authorities
• Grid Connection Agreement with local grid company
– Typically in order to allocate ownership interface, responsibilities,
requirements for technical installations, metering of transmission
of power etc.
OTHER CONTRACTS IN PLAY
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The construction phase – land contracts
• There are well established and balanced standard
contracts for all the construction work related to these
type of projects
• Standard construction contracts, published by Standard
Norge, are well known and accepted among both public
and private builders/developers, contractors, consultants
and financial institutions
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The construction phase – land contracts
• There are different kind of standard contracts depending
on what risk the builder/developer wants to keep himself
or outsource to others
• The developer can either choose to have a separate
contract for the engineering of the project with an
engineering firm, and then keep the risk for deficiencies
related to the design of the project, or he can choose to
enter into a contract with a contractor who will be
responsible and hold the risk both for the design and the
construction of all necessary structures
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The construction phase – land contracts
• Examples of contracts you normally will encounter:
• Towards engineering firms:
– NS 8401/8402
– FIDIC Client Consultant Model Services Agreement (2006)
• Towards contractors (if the builder wish to keep the risk for the design himself):
– NS 8405
– FIDIC Red Book (1999) Construction Contract
• Towards contractors (if the builder wish to outsource the risk for the design of the
project):
– NS 8407
– FIDIC Yellow Book (1999) Plant and Design Build Contracts
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The turbine contract – construction phase
• Contracts for supply and maintenance are closely connected and often
entered into simultaneously – must be seen as one
• Complex contracts
• Normally turn key / EPCI –contract (Engineering, Procurement,
Construction and Installation)
• Often suppliers own standard (or customers) – with basis in FIDIC Yellow or
other standard contract (The Norwegian standard AKB 88 is still used)
• Fixed price contract for construction
• Weather data collected by customer and made part of tender documents
and contract:
– Who bears the risk for design of the solution
– Who has the risk for correctness of weather data
• Installation phase - risk for bad weather delaying installation
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Turbine contracts cont.
• Performance guarantees;
– Efficiency / power output
– Noise
• Warranty period
• Maintenance contract:
– Supplier making sure turbine is operating as planned
– Guarantees for availability / maximum downtime during
operation
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Grid related contracts in the operating phase
• The Grid Connection Agreement, ref above
– Framework for costs related to power production regulated by
the authorities
• The Balancing Agreement
– The Norwegian TSO, Statnett, as authority responsible for
settlements in the Regulated Power Marked
– Well known standardized agreement with Statnett SF
(Norwegian TSO)
– Credit evaluation, establishment of security, fees etc.
– Often with buyer in PPA
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Trading – sale of physical power
• Norwegian market for trading of physical power
– Well functioning market
– Generates market which facilitates hedging of the exposure
under the PPA
– Tool for financing by assignment of cash flow
• Nord Pool Spot with standard terms and clearing
• Bi-lateral agreements, settled between the parties
• Financial hedging, ISDA or FEMA
FINANCING
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Financing
• Traditional project financing:
– Equity + loan/bonds – security in assets
• Wind:
– Large investments → security in assets no longer sufficient
– Assets not moveable – cash flow important
– International investors want minimum equity commitment
– Credit risk on project feasibility and power purchaser
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Tools – secure bank/bond position
• Cash
– PPA and Direct Agreement
• Land
• Assets
• How will the post credit crunch regime work?
• And always the fall back of negative pledge; and a
structure that does not leave the bank or the bond too far
away from the cash
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Power Purchase Agreement (PPA)
• Allows for all produced power to be sold, usually at a
fixed price and for a fixed term
• Secures future stable cash flow for financing
• Balancing for producer usually incorporated
• Important that the PPA is tight enough to avoid
renegotiation in case financing banks take over/nominate
third parties under Direct Agreement
• Credit risk with purchaser
– PCG
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Direct Agreement
• Tripartite agreement: producer, purchaser and bank
• Allows the bank to take over on default of the loan
agreement
• Stand-still periods required by banks
– No default without prior notice to banks
– Banks granted a ”take-over light” for interim period
• Right for banks to nominate final take-over of facility
Thank you, and funds to come
45Advokatfirmaet Haavind AS
Aksel Tannum
Associated Partner
T: +47 22 43 30 00
M: +47 90 02 27 65
Kjetil Hardeng
Partner
T: +47 22 43 30 00
M: +47 48 01 22 74