Legal Issues in Project Finance

and Acquisition Finance

Philip K. Barton

6th Annual Small Hydro Canada – Western Summit

April 17, 2014
 Presenter:

Philip K. Barton –Lawyer, Entrepreneur and Engineer

Act for developers, lenders and contractors for IPP projects (mostly BC)
Acted on $500+ million of hydro and wind projects in BC & Canada
22 MW ($65 million) Jamie Creek run-of-river started in my basement in 2007
Now owned by Boralex (TSX: BLX): COD expected in Q2 2014

Boughton Law – 50 lawyers in Vancouver

Focus on finance, mergers & acquisitions and litigation

Philip K. Barton
2 604-647-4143
pbarton@boughtonlaw.com
 What is
Project Finance?
Advantages:
Developer
(many projects) • Non-recourse to the Developer
and other development assets;
• Keeps debt off the balance
sheet of the Developer;
common • Facilitates highly-leveraged
shares structures

Lender’s
ProjectCo Security…
(15 MW RoR
hydro project)

Project is “Ring-Fenced”
Philip K. Barton
604-647-4143
3 pbarton@boughtonlaw.com
 What is What is
Project Finance? Corporate Finance?

Developer Developer
(many projects) (many projects)

common common
shares shares

Lender’s
ProjectCo ProjectCo
Security…
(15 MW RoR (15 MW RoR
hydro project) hydro project)

Non-Recourse to Developer Recourse to Developer

4
 Sources & Uses:
Project Finance for Construction (example)
SOURCES USES

$10,000,000 Equity $5,000,000 Development

Expenditures

$40,000,000 Senior Debt $42,000,000 Construction

Expenditures

$3,000,000 Interest During Construction

Lender Fees,
Independent Engineer Fees
Legal Fees

$50,000,000 $50,000,000

Philip K. Barton
604-647-4143
5 pbarton@boughtonlaw.com
 What is Acquisition Finance?

Vendor Purchaser

PurchaseCo
(special purpose
vehicle)
Lender’s
Security…
Target Target
(15 MW (15 MW
operating operating
facility) facility)

6 (Amalgamation Post-Closing)
 Sources & Uses:
Acquisition Finance for Operating Hydro Facility (eg.)

SOURCES USES

$10,000,000 Equity $19,000,000 Proceeds to Vendor

$40,000,000 Senior Debt $30,000,000 Payout of Existing

Lender

$1,000,000 Lender Fees,

Independent Engineer Fees
Legal Fees

$50,000,000 $50,000,000
Purchase Price = $49,000,000 (example)
Philip K. Barton
604-647-4143
7 pbarton@boughtonlaw.com
 Project Finance:
devil-in-the-details

• Material Contracts must be perfect (“iron-clad”)

• Lender’s Security only on the Project;
• Lender’s due diligence will uncover problems;
• Therefore, reduce problems to reduce legal issues:
• Project Finance; or
• Acquisition Finance

Philip K. Barton
604-647-4143
8 pbarton@boughtonlaw.com
Project Finance – structure:
Developer

$$ as Equity
Investment

ProjectCo
(15 MW RoR
hydro project)

Security: General Security, Assignments,

Consents to Assign, Mortgages, Share Pledge
Project Finance – structure:
Developer BC Hydro
(AAA
counter-
party)
EPA & Interconnection
(SGIA)

ProjectCo
(15 MW RoR
hydro project)

Security: General Security, Assignments,

Consents to Assign, Mortgages, Share Pledge
Project Finance – structure:
Developer BC Hydro
(AAA
counter-
party)
EPA & Interconnection
common
(SGIA)
shares

ProjectCo Crown /
(15 MW RoR (i) Water Licence MFLNRO
hydro project) (ii) Land Licence
(iii) Tenure Lease

Security: General Security, Assignments,

Consents to Assign, Mortgages, Share Pledge
Project Finance – structure:
Developer BC Hydro
(AAA
counter-
party)
EPA & Interconnection
common
(SGIA)
shares

ProjectCo Crown /
(15 MW RoR (i) Water Licence MFLNRO
hydro project) (ii) Land Licence
(iii) Tenure Lease

Construction Contracts
Performance Bonds
Labour & Material Bonds
Contractors
Security: General Security, Assignments,
Consents to Assign, Mortgages, Share Pledge
 Project Finance – structure:
Developer BC Hydro
(AAA
counter-
party)
EPA & Interconnection
common
(SGIA)
shares

ProjectCo Crown /
(15 MW RoR (i) Water Licence MFLNRO
hydro project) (ii) Land Licence
(iii) Tenure Lease

Construction Contracts
Management Performance Bonds
Manager/ Agreement Labour & Material Bonds
Contractors
Operator Security: General Security, Assignments,
Consents to Assign, Mortgages, Share Pledge
 Project Finance – structure:
Developer BC Hydro
(AAA
counter-
party)
EPA & Interconnection
common
(SGIA)
shares

ProjectCo Crown /
First
(15 MW RoR MFLNRO
Nations Impact & Benefit (i) Water Licence
Agreement hydro project) (ii) Land Licence
(iii) Tenure Lease

Construction Contracts
Management Performance Bonds
Manager/ Agreement Labour & Material Bonds
Contractors
Operator Security: General Security, Assignments,
Consents to Assign, Mortgages, Share Pledge
 Project Finance – structure:
Developer BC Hydro
(AAA
Lender
counter-
party)
Credit Agreement & EPA & Interconnection
Security (SGIA)

ProjectCo Crown /
First
(15 MW RoR MFLNRO
Nations Impact & Benefit (i) Water Licence
Agreement hydro project) (ii) Land Licence
(iii) Tenure Lease

Construction Contracts
Management Performance Bonds
Manager/ Agreement Labour & Material Bonds
Contractors
Operator Security: General Security, Assignments,
Consents to Assign, Mortgages, Share Pledge
 Timeline:
Project or Acquisition Financing

Term Sheet
Finalize all Contracts & Permits
Due Diligence (Contracts & Permits)
Independent Engineer
Independent Insurance Consultant
Negotiate Credit Agreement

Finalize all Lender’s Security & Consents

Closing & Funding

Construction; attain COD

Conversion of Credit Facility

Philip K. Barton
604-647-4143
16 pbarton@boughtonlaw.com
 Term Sheets

• Non-binding but morally binding (typically);

• Benefit of establishing a “meeting-of-the-minds”
before too far into the process;
• Binding terms (typically):
• Non-Disclosure;
• Borrower is responsible for costs of IE, legal, etc.
• Exclusivity with sufficient time to attain closing;

Philip K. Barton
604-647-4143
17 pbarton@boughtonlaw.com
 Due Diligence

• Foundation of Project are Contracts & Permits

• IE review of Contracts & Permits…
• Legal review of Contracts & Permits…
• Due Diligence feeds back into the Representations
& Warranties of the Credit Agreement…

Philip K. Barton
604-647-4143
18 pbarton@boughtonlaw.com
 Credit Agreement:
Conditions Precedent - typical

• Conditions for Closing:

• All security registered and all assignment consents;
• Financial Model showing Minimum Debt Service;
• Evidence of Required Equity in ProjectCo by Developer;
• Report from Independent Engineer including generation;
• Report from Independent Insurance Consultant;
• Conditions for Conversion (Project/Construction):
• BC Hydro confirms COD (Commercial Op. Date);
• Certificate from Independent Engineer
• Financial Model showing Minimum Debt Service;
• Restricted Accounts are fully funded:
• Major Maintenance Reserve; Debt Service Reserve
Philip K. Barton
604-647-4143
19 pbarton@boughtonlaw.com
 Credit Agreement:
Representations & Warranties - typical

Examples:
• All security is perfected & enforceable;
• No undisclosed liabilities; no litigation;
• Contracts are unamended, in full force & effect;
• Permits are unamended, in full force & effect;
• Financial statements are true & correct.

Philip K. Barton
604-647-4143
20 pbarton@boughtonlaw.com
 Credit Agreement:
Funding Mechanics for Project Finance

• Restricted bank accounts are created;

• Funding Account – partially or fully funded at Closing;
• Proceeds Account – Borrower’s control unless default
• Major Maintenance Reserve
• Debt Service Reserve
• Funds advance into Funding Account;
• Drawdowns, from time to time, from Funding
Account to contractors – all certified by IE;

Philip K. Barton
604-647-4143
21 pbarton@boughtonlaw.com
 Credit Agreement:
Cash Waterfall

Facility Revenues deposited in Proceeds Account.

Priority for Payments out of Proceeds Account:

1) Payment of Facility Expenses;
2) Payment of interest and lender’s fees;
3) Payment of principal (and any prepayment fees);
4) Funding the MMRA and DSRA;
5) Maintain “Required Working Capital”
6) Satisfy all Taxes;
7) Distributions to Sponsor/Developer;

Philip K. Barton
604-647-4143
22 pbarton@boughtonlaw.com
 Credit Agreement:
Covenants - typical

• Positive Covenants:
• Provide financial statements;
• Provide Annual Management Plan with deviations from
Financial Model;
• Maintain insurance;
• Comply with Prudent Utility Practice;
• Negative Covenants:
• No Distributions to Sponsor/Developer unless comply
with Cash Waterfall / Minimum Debt Service / etc;
• No amendments to Contracts or Permits;
• No change in ownership of any assets or shares;
• No change in Operator / Manager.
Philip K. Barton
604-647-4143
23 pbarton@boughtonlaw.com
 Credit Agreement:
Events of Default

Examples:
• Failure to pay interest or principal;
• Material misrepresentation or breach of warranty;
• Breach of material covenant;
• Default under Contract or Permit;
• Insolvency/Litigation;
• etc.

Philip K. Barton
604-647-4143
24 pbarton@boughtonlaw.com
 Summary

• Project & Acquisition Finance can be Non-Recourse

to the Developer / Sponsor:
• Developer can isolate single construction project from
multiple development projects;
• Due Diligence is critical:
• IE and lawyers will focus on Contracts & Permits;
• Indep Insurance Consultant will focus on construction &
operating insurance
• 100+ page Credit Agreement and Restricted Accounts for
cash management will leave nothing to chance…

Philip K. Barton
604-647-4143
25 pbarton@boughtonlaw.com