1. Critical Issues in Joint Development and Joint Ownership Projects: Roles, Rights and Obligations William S. Andrews Nixon Peabody LLP Suite 900 401 9th Street, N.W. Washington, DC 20004-2128 wandrews@nixonpeabody.com 202-585-8392

2. Critical Issues in Joint Development and Joint Ownership Projects: Roles, Rights and Obligations The Players – Who Sponsors Projects? Project Phases Development Phase – Project Development Agreement Financings: Fundamental Principles and Coordination Acquisition of an Ownership Interest Construction & Operations Phases – Participation Agreement Withdrawal and Payment

3. The Players Who Sponsors Projects? Utilities –Base load needs –Plant is integral to its system over the long term –Exert considerable control –Looking for participants to take advantage of economies of scale

4. The Players Who Sponsors Projects? contd Independent Developers –Looking for investors or joint tenants –Serving customers under PPAs / selling into the market on a merchant basis –Looking to build or expand its generation or related core business (long-term outlook) –Looking to profit from the sale of its interest (short-term outlook); will seek broad rights to sell its interest –Will want to exert control to protect its investment

5. The Players Who Sponsors Projects? contd Public Power Entities / Electric Cooperatives –Base load needs –Long term objectives –Generally will be looking to participate with other joint tenants to take advantage of economies of scale –Generally will look to exert proportional control, but with elements of blocking control for significant decisions

6. Ownership Scenarios 50% 33% 65% 5% 10% 20% 25% 26% 14% 10% 5%

7. Development Financial Closing Retirement Construction Operations Project Phases When does relationship commence? Cost and sharing/risk sharing Acquisition of ownership interest Withdrawal Rights

8. Development Phase Development

9. Development Models Single Sponsor Driven 65% 5% 10% 20% Retirement Development Construction Operations Financial Closing Cost and Risk Sharing Acquisition of Ownership Interest

10. Development Models Single Sponsor Driven Last Look No skin in the game No Project Development Agreement to formalize roles, rights and responsibilities Communication is often less routine Development period activities –Due diligence –Negotiating Asset Purchase Agreement (APA) and Participation Agreement (PA) Development Construction Operations Financial Closing Cost and Risk Sharing Acquisition of Ownership Interest Retirement

11. Development Models Single Sponsor Driven contd APA signed just prior acquisition of the interest (PA, an exhibit) Interest will be acquired at the Financial Closing PA signed at Financial Closing upon acquisition of the interest Coordinating Financial Closing is more challenging Development Construction Operations Financial Closing Cost and Risk Sharing Acquisition of Ownership Interest Retirement

12. Development Models Multiple Owner Driven 20% 25% 26% 14% 10% 5% Development Construction Operations Financial ClosingRetirement Cost and Risk Sharing Execution of Project Development Agreement and Asset Purchase Agreement Acquisition of Ownership Interest Execution of Participation Agreement Financial Closing Withdrawal Rights Full Limited None/Assignment

13. Development Models – Multiple Owner Driven Participants share development costs and risks proportionately Greater need for investment protection during development phase Greater voice in development decisions for minority decisions Retirement Development Construction Operations Financial Closing Cost and Risk Sharing Execution of Project Development Agreement and Asset Purchase Agreement Acquisition of Ownership Interest Execution of Participation Agreement Financial Closing Withdrawal Rights

14. Development Models – Multiple Owner Driven contd Need for Project Development Agreement to specify Participants roles, rights and obligations Project Development Agreement and Asset Purchase Agreement executed during Development Phase Participation Agreement executed either at: –Financial Closing –Instead of Project Development Agreement Retirement Development Construction Operations Financial Closing Cost and Risk Sharing Execution of Project Development Agreement and Asset Purchase Agreement Acquisition of Ownership Interest Execution of Participation Agreement Financial Closing Withdrawal Rights

15. Development Models – Multiple Owner Driven contd Ownership Interest will be acquired either at: –Financial Closing –Upon earlier execution of the Participation Agreement Retirement Development Construction Operations Financial Closing Cost and Risk Sharing Execution of Project Development Agreement and Asset Purchase Agreement Acquisition of Ownership Interest Execution of Participation Agreement Financial Closing Withdrawal Rights

16. Development Issues Establish the Facts –Access to project information (permits, real estate, local taxes, fuel availability, cost and transportation) –Development budget –Initial construction budget –Pro forma operating budget

17. Establish Roles, Rights and Obligations Sponsor –Duty to pursue development w Permitting w Additional Owners w EPC Contract/Multiple Prime w O&M Contract w Real Estate w Fuel Contracts/Plan w Interconnection Agreement –Agency (fiduciary standard) –Duty to regularly inform other Participants

18. Establish Roles, Rights and Obligations contd Participants –Transmission –Pay percentage costs –Maintain confidentiality (applicability of open records statutes) –Support development w e.g. Permitting, political (state and local) –Audit Rights –Private Use Restriction – Preservation of Tax-Exemption –Fees (Development, Administrative, Success)

19. Control of Development Formation of Development Committee –Facilitates exchange of information; feedback –Monthly meetings –Financing Coordination Day-to-Day decision-making –Joint –Entrusted to principal Sponsor

20. Control of Development contd Minority Rights –Certain decisions require Supermajority/Double Majority w EPC Contract w O&M Agreement w Decisions that have Material Adverse Impacts w Purchases of Real Property w Other significant Binding Commitments (e.g. Fuel, Transportation)

21. Withdrawal Sponsor Withdrawal –No guarantee of success – all parties lose investment –Disposal of Assets: Distribution of proceeds –Transfer of rights to other Participants

22. Withdrawal contd Participant Withdrawal –At any time prior to financial closing – lose investment w Unsatisfied with results of development w Unable to arrange affordable transmission w Better options –Problem created for remaining parties (financing exception) –Limiting Right of Withdrawal after agreed point w Liquidated Damages w Not permitted / Assignment Only Option

23. Financing: Fundamental Principles – Coordination Essence of joint ownership is sharing financial risk –Construction –Long term operations The more diverse the ownership mix, the more credit information and coordination will be necessary.

24. Financing: Fundamental Principles – Coordination contd IPPs –Merchant –Selling under PPAs Project Finance –Rated –Subinvestment grade –Leasing Structure Tax Exempts –Municipals –Joint Action Agencies Issuing Tax-Exempt Bonds for 100% of Project Costs IOUs –Rate-based –Through non-regulated entities Corporate Debt & Equity Commercial Bank Loan Project Finance Electric CooperativesCo-Bank/RUS CFC/RUS

25. Financing: Fundamental Principles – Coordination contd Generally, each Owner is responsible for its Owner financing and does not need the consent of the other Owners Goal: To close on a single mutually agreed date. –Always uncertainty until the last Owner is assured access to capital

26. Financing: Fundamental Principles – Coordination contd Coordination Approaches –None –Flexible –Extensive Coordination Techniques –Coordinate updating of project information so Owners seeking ratings present a common picture –Early communication of financing plans and education of steps necessary to effect each plan

27. –Consider PILOT arrangements, Enterprise Zone and other tax issues early –Launch financing efforts when agreed project elements have clear definition Financing: Fundamental Principles – Coordination contd w Permits w Construction costs w Real estate w Ownership percentages –Credit standing of Owners –Financing plans w Fuel and Fuel Transportation Strategy w Operating strategy w Participation Agreement finalized w Asset Purchase Agreement finalized w Weekly coordination meetings

28. Financing: Fundamental Principles – Coordination contd –Develop strategy for dealing with lender comments on transaction documents –Anticipate consent requirements –Determine common approach to collateral w Avoid intercreditor agreements if possible

29. Financing: Fundamental Principles – Coordination contd Encourage bank / private equity financings to be arranged first. Capital Markets transactions require disclosure and cannot easily accommodate changes Transactions where Owners well understand the financing of requirements of their Co-Owners tend to have the least disruptions prior to closing

30. Construction and Operations Phases The Participation Agreement Construction Operations

31. 1. Governance & Decision-making Decision-making vested in Management Committee with representation proportional to ownership Day-to-day decisions Extraordinary Decisions –Project Budgets: Construction & Operations –Project Agreements, e.g. O&M, Fuel –Affiliate Contracts –Restoration, Condemnation, and Retirement –Permit Changes –Decisions with Disproportionate Effect –Capital Improvements

32. Control Thresholds Majority Supermajority (66.7%, 75%, 80%) Double Majority (# & %) Unanimous 33% 50% 80% 5% 10% 20% 25% 26% 14% 10% 5%

33. 2. Operating Structure for Asset Management / Operations Owner-Operator managed and operated All Owners manage and operate Formation of Project Company Asset Management Contract / O&M Contract

34. 3. Fundamental Dispatch Principles Each Participant entitled to its Percentage of Energy, Capacity and Ancillary Services No Participant may deliberately take a greater share Minimum Scheduling Requirements –Setting the level –Remedy for failure to schedule

35. 3. Fundamental Dispatch Principles contd Scheduling –Imbalance Charges: Inadvertent use of more or less energy on an integrated hourly basis assessed pro rata to the scheduling owners –Scheduling Outages Fuel Allocation/Reconciliation –Heat rate adjustments for less than full load w Impact on load-following Authority to Change Dispatch Principles

36. 4. Joint and Several Liability/Several Liability Several Liability Flow down to Project Agreements

37. 5. Assignment – Transfer of Interests Which are permitted and which require consent? –All assets to be transferred –Effect on Project Agreements (e.g. O&M) –Retention of expertise w Who is your partner? Transfer by a principal sponsor –Tension between free transferability and loss of expertise –Maintenance of numerous percentage for minimum period

38. 6. Expansion Rights jointly owned Rights retained by Sponsor Sponsor grants right of first refusal/option –Common facilities: Definition & Valuation –Priority/Adverse Impact

39. 7. The Collateral Package Joint Owners are tenants-in-common, each owning an individual undivided interest in Project Assets Project-based Collateral is limited to a joint tenants undivided ownership interest No encumbrance of another joint tenants undivided interest or any Project asset No right to partition of Project Assets Lender can cure, but must assume position of its borrower

40. 8. Impact of a Co-Tenant Financing Tax-exempt financing –Use of tax-exempt financing means no private business use –Contracts with operators must be Qualified Management Agreements: the duration of the contract and incentive fees for performance may be restricted –Under certain circumstances applicable to cooperatives, there may be restriction on sales of energy, capacity or ancillary services to avoid certain income restrictions Project Finance financing –EPC contracting approach

41. 9. Payment Default Dilemma The essence of joint ownership is shared financial risk Make obligations recourse to creditworthy entities. Require pro rata sharing of development costs to make sure all entities are fully and increasingly invested. Prevent withdrawal to be certain that entities do not have right to rescind commitment

42. 9. Payment Default Dilemma contd Impose minimum credit requirements Require at closing (remedy) Require during operations (remedy) Increase security upon downgrade or fall below a minimum credit rating (consider sliding scale) Invoicing and payment in advance Disputed Payments to be made as a condition of maintaining a dispute

43. 9. Payment Default Dilemma contd Require working capital and maintenance reserves (all phases) Tie pre-funding to payment default cure periods Reasonable period to vacate automatic stay Default Remedies – Make non-payment painful Dilution (proportional vs. acclimated (eg., % of FMV)) Extinguish interest at preferential price

44. 9. Payment Default Dilemma contd Interim Remedy Loss of right to energy, capacity and ancillary services Step-up or limited step-up (voluntary or involuntary) Restrict Project Lender collateral to Ownership Interest, thereby forcing Lender to fund or risk dilution or loss of collateral

45. 9. Payment Default Dilemma contd Pre-funding of construction costs until COD Tie pre-funding* to default cure periods Consider tying pre-funding to reasonable period to vacate automatic stay Build reserves for scheduled maintenance with goal of fully pre-funding scheduled maintenance Build reserves for capital improvements, other events *Pre-funding could be cash or other security

46. William S. Andrews Nixon Peabody LLP Suite 900 401 9th Street, N.W. Washington, DC 20004-2128 wandrews@nixonpeabody.com 202-585-8392