COVID-19 and Wind Projects: A Legal and Commercial Checklist for Tax Equity, Debt Financing and Project Documentation

Présentation


The Coronavirus (COVID-19) pandemic has severely disrupted the wind market’s supply chain and labor resources, resulting in significant project delay risk. This legal and commercial checklist is a comprehensive practitioner’s guide to help sponsors and borrowers review their tax equity, financing, offtake and material project documents to ensure compliance with obligations, prevent unnecessary default triggers, and manage relationships with banks, tax equity and other stakeholders.

In Depth


As the tax credit safe harbor cliff fast approaches, many wind projects are competing to come online by the end of 2020. As discussed in our earlier renewable project finance market alert on Coronavirus (COVID-19), the supply of key wind turbine components was already tight, and many wind projects were at risk of delayed completion. In the wake of increased COVID-19 disruptions, these risks have magnified, and hundreds of millions of dollars in tax equity commitments and loans are at stake for sponsors and developers. Because of the pervasive and significant impact of COVID-19, it is essential that sponsors and borrowers preparing wind projects for completion in 2020 perform a holistic review of their full suite of tax equity, financing, offtake and material project documents to ensure compliance with obligations, prevent any unnecessary default triggers, and manage relationships with banks, tax equity and others.

We provide this legal and commercial checklist and practitioner’s guide for in-construction wind projects to highlight key potential pain points in the various tax equity, financing, offtake and material project documents. Although each individual project is different, the following checklist can help sponsors and borrowers better understand the variety of risks that their project may face as it moves towards completion in 2020. Careful preparation and execution to mitigate COVID-19’s effects will be required, as will extensive discussions with tax equity and lenders, in many cases. To that end, we also provide a brief update on the current state of the tax equity and debt markets to provide context for such discussions.

Tax Equity and Debt Markets Update

COVID-19’s rapid spread has brought severe disruption and uncertainty to the wind industry’s supply chain and could also affect the availability of labor, resulting in significant delay risk. This uncertainty has resulted in a highly dynamic environment for the tax equity and debt financing markets. We continue to monitor these markets as well as the governmental response to the economic impacts of COVID-19. As of the date of this writing, we are closely monitoring the following issues:

  • In the debt market, we are watching for liquidity issues. Currently, existing deals that are already in the pipeline are moving to close. However, deals that are in their early stages are being repriced to reflect new cost of money. Ultimately, deals are moving forward but at a somewhat slower pace and, in certain cases, with repricing.
  • In the tax equity market, we are watching for risk appetite in light of safe harbor and start of construction guidelines. We do not see any slowdown at the moment. Instead, tax equity is moving forward with a large number of 2019 deals that have spilled over into 2020. However, tax equity will likely require clarification of the four-year safe harbor for 2016 start of construction and the extension of four years to five years due to COVID-19 related delays.
  • We continue to watch how the tax equity and credit markets adjust the availability of funds and the terms upon which they are offered as the pandemic affects new markets daily.

Equity Capital Contribution Agreements

Under an equity capital contribution agreement (ECCA), a tax equity investor agrees to provide funding to the project once it has been constructed and has met an agreed set of conditions. Given current uncertainty surrounding the future availability of capital, and the eagerness of tax equity to fund its existing commitments in light of the pandemic, sponsors should review their ECCAs to ensure that no items might prevent or excuse funding from occurring as planned. Generally, tax equity partners are well-established entities with a long history in the market, and they likely will not attempt to escape their obligations. However, these partners likely will not “close over » required closing items just because of the uncertain nature of the COVID-19 pandemic. A review of the ECCA should begin with the following points:

Commitment Expiration Date: Generally, the ECCA contains a commitment expiration date that provides a final date by which tax equity is obligated to provide its funding. For projects scheduled to come online in late 2020, delayed turbine mechanics may have been negotiated into the contract, whereby funds would be placed in escrow to allow for delayed turbines to be installed into 2021. However, in either circumstance, it is rare to find any sort of force majeure mechanism to allow for an automatic extension of the commitment expiration date. This would be especially important this year because it is the final year of safe harbor for projects that commenced construction in 2016, and if the commitment expires December 31, 2020, it is unlikely to be extended for any reason.

Next Steps:

  • Review the commitment expiration date and funding mechanism together with any force majeure or delay notices received under an engineering, procurement and construction (EPC) agreement or turbine supply agreement.
  • To the extent a delay is likely to make turbine delivery or construction completion impossible by the commitment expiration date, begin dialogue with tax equity.
  • To the extent a delay is likely to push funding into 2021, consult with tax counsel immediately to discuss any potential options to ameliorate the loss of tax credits.

Condition Precedents: An ECCA contains a long list of condition precedents that must be achieved prior to the tax equity investor providing its funding. This list likely includes both material items and ministerial items. Some of these items are in the complete control of the sponsor, and others are outside of the sponsor’s control. While many of these condition precedents are unlikely to be affected by the COVID-19 pandemic, below are a number of the most common condition precedents that sponsors should be concerned about in light of COVID-19:

  • Representations and Warranties. Representations and warranties remain true and correct as of the funding date (discussed below).
  • Tax Counsel Opinion. An updated tax counsel opinion is provided to tax equity. This may be of particular concern if tax equity has a broader discretion in whether it will accept the form of the tax opinion, or if it must be accepted if it is in the form provided at the initial execution of the ECCA.
  • No Change in Tax Law. No change in tax law has occurred unless such change is properly reflected in modeling. While no change in tax law has occurred at this time, the form of governmental response and other stimulus packages are subject to change. It is important to review whether tax equity has broader discretion in this regard or if any changes included in modeling must be acceptable to tax equity.
  • Title Policy. A title policy has been provided. While title companies generally have not yet been prevented from providing these policies, recorders’ offices are experiencing delays due to various closures or other COVID-19 related delays. These concerns may be ameliorated with sufficient planning and early recordation.
  • Permits. All required permits have been obtained. Similarly, COVID-19 related closures may cause delays for even minor permits.
  • Delivery of Landowner Estoppels. In ordinary times, collecting estoppel certificates from all landowners can be a time-consuming task. “Stay at home » orders, concerns for the elderly and widespread illness can make it almost impossible. Furthermore, many estoppels must be executed within 30 days of funding, but much more time may now be necessary.
  • UCC and Litigation Searches. Certain ministerial documents are provided, including UCC and litigation searches. With sufficient advance preparation, these should be attainable, but special care should be taken compared to sponsors’ previous tax equity funding experiences.
  • Engineer and Consultant Reports. Bring-down of independent engineer and other consultant reports. The content of many of these reports should not be at risk due to COVID-19. But timely delivery of environmental and independent engineer reports may be at risk because they are often based upon site visits, which may not be possible due to travel restrictions or state mandated lockdowns. “Virtual » final inspections, including the use of drones, should be considered and agreed well in advance of the funding date.
  • Material Adverse Effect. No material adverse effect has occurred. It is important to note both the definition of material adverse effect as well as the scope of this condition precedent. Often this provision may apply only to the sponsor and not tax equity. As such the sponsor likely has much greater control in pushing tax equity to fund than if the material adverse effect applied to tax equity.
  • Substantial Completion. The project has been substantially completed, subject to completion of punch list items. This condition precedent is potentially the condition precedent over which the sponsor has the least control and the one that may be most affected by the COVID-19 pandemic. Certain risks associated with some of the major project contracts that could delay substantial completion are outlined below.

Next Steps:

  • Closely review the condition precedents of the ECCA to determine which may be of particular concern to your project. For any particularly risky condition, review tax equity’s discretion in acceptance of any required deliverables.
  • Begin planning now how to address any particular condition precedents that provide special risk to your project. These may involve sensitive discussions with tax equity.
  • Realize that many condition precedents may take more time than they have in the past, so begin to carefully plan so that they can be completed either early or on time.
  • Have discussions with tax equity investors regarding landowner estoppels and other required estoppel certificates. Consider asking for a longer window (such as 90 days) in which to obtain estoppel certificates.
  • For any condition precedents that cannot be achieved as expected, begin conversations with tax equity now in order to find solutions that are achievable.

Representations and Warranties: Generally, the ECCA contains several representations and warranties that are made both at execution and at funding. Other representations and warranties are made for the first time at funding. While many of these representations and warranties are unlikely to be affected by the COVID-19 pandemic, below are some of the most common representations and warranties that sponsors should be concerned about in light of COVID-19:

  • No Material Adverse Effect. No material adverse effect has occurred (the same analysis in regards to the condition precedent likely applies).
  • No Event of Default. No event of default or event that with the passage of time could be considered an event of default under a material project contract has occurred and is continuing.
  • No Force Majeure. No force majeure event under a material project contract has occurred or is continuing.
  • No Cross-Default. There has been no event of default under the ECCA or other financing documents.
  • Disclosure Schedules. At the execution of the ECCA, exceptions to the representations and warranties were likely provided in a disclosure schedule. At the funding date, these disclosure schedules are most often updated, but the ECCA likely provides certain guidelines whereby these schedules can and cannot be updated. Tax equity likely has some discretion regarding these updates and whether they allow disclosure of facts or events that would make the representations and warranties true.

Next Steps:

  • Review the various representations and warranties to determine which may be at risk.
  • Understand whether the sponsor will be allowed to make certain critical updates to the disclosure schedules at funding.
  • Review the obligations of the sponsor under the ECCA, especially in regards to notice provisions and events of force majeure under the material project contracts. Closely follow these obligations to ensure that there is no breach under the ECCA or any project document that breaches a representation and warranty.

Financing Agreements

Although lenders likely will review all new financing opportunities with increased scrutiny in this uncertain climate, a project attempting to come online by December 31, 2020, has likely already entered into its financing agreement. While this certainly reduces some project risk, further loan disbursements may well be required in addition to various covenants requiring compliance. Furthermore, construction loans that have a portion of the loan converting to a term loan at commercial operation will have a number of condition precedents that need to be satisfied. Any review of the financing agreement should include a review of the following key points to ensure any loan amounts are not jeopardized:

Maturity Date: Generally, the financing agreement contains a maturity date by which the loan must be repaid. This date will ideally post-date the commitment expiration date under the ECCA such that it will not (by itself) be a concern. However, to the extent a tax equity deadline is delayed, corresponding arrangements must be made with lenders under the financing agreement.

Next Steps:

  • Review the financing agreement maturity date and understand its implications in the project’s schedule.

Financial Covenants: In conjunction with the financing agreement, some form of security, such as a parent guaranty, was likely provided to the lender. The financing agreement or the security arrangement likely includes financial covenants. With recent drops in the stock market and other major economic changes, these covenants must be reviewed to ensure that the project remains in compliance.

Next Steps:

  • Review financing agreement financial covenants and consider whether the borrower is in compliance and likely to remain in compliance considering the uncertainty around the effects of COVID-19.

Condition Precedents: The financing agreement also contains a long list of condition precedents that must be achieved prior to each drawing of funds and, in the case of a construction-to-term loan, are required for term conversion. This list often looks very similar to the condition precedents under the ECCA, but special attention should be paid to any differences, including any different definitions between the two agreements. While many of these condition precedents are unlikely to be affected by the COVID-19 pandemic, below are some of the most common condition precedents that borrowers should be concerned about in light of COVID-19:

  • Representations and Warranties. Representations and warranties remain true and correct as of the date of borrowing (discussed below).
  • No Change in Tax Law. No change in tax law has occurred that will adversely affect the ability to receive tax equity funding.
  • No Material Adverse Effect. No material adverse effect has occurred. It is important to note both the definition of material adverse effect as well as the scope of this condition precedent.
  • Funding Obligations. A certification by the borrower that the sponsor can meet its funding obligations under the ECCA and that it has no knowledge that tax equity will not be able to meet its funding obligations under the ECCA.
  • Milestone Completion. The project has completed all milestones that are required to be completed according to the construction schedule. While ideally this condition precedent will be met by most projects at this time, there is danger of greater slippage as the effects of COVID-19 become more widespread. Even if all other condition precedents and risks regarding a failure of lenders to provide an additional disbursement have been resolved, it may be difficult to get lenders to provide a loan disbursement to the extent delays have occurred and no cure plan can be provided.

Next Steps:

  • Closely review the condition precedents under the financing agreement for future loan disbursements to determine which may be of particular concern to your project. For any condition which is likely to be unmet, begin conversations with lenders to see whether any solution is possible.
  • To the extent COVID-19 causes any schedule slippage, look for ways to ameliorate this to satisfy lenders that the final completion will occur as scheduled.

Representations and Warranties: Generally, representations and warranties in the financing agreement are made at execution and again at each loan disbursement. While many of these representations and warranties are unlikely to be affected by the COVID-19 pandemic, below are some of the most common representations and warranties that borrowers should be concerned about in light of COVID-19:

  • No Material Adverse Effect. No material adverse effect has occurred (the same analysis in regards to the condition precedent likely applies).
  • No Event of Default. No event of default or event that with the passage of time could be considered an event of default under a material project contract has occurred and is continuing.
  • No Change in Project Schedule Impacting Final Completion Date. Any delays could cause the project schedule to adjust. That adjustment must be reviewed to confirm that completion before the maturity date is not at risk.
  • No Force Majeure. No force majeure event under a material project contract has occurred and is continuing.
  • No Cross-Default. There has been no event of default under the ECCA, the financing agreement or other financing documents.

Next Steps:

  • Review the various representations and warranties to determine which may be at risk.
  • Review the obligations of the borrower under the various financing documents, especially in regards to notice provisions and events of force majeure under the material project contracts. Closely follow these obligations to ensure that there is no breach under the financing agreement that breaks a representation and warranty.

Covenants: The financing agreement also contains key covenants that must be complied with to allow the borrower to cleanly make a representation and to prevent a default from occurring. In the wake of COVID-19, some of the most critical covenants to consider include the following:

  • Information. Most critically, many notices provided to or from the borrower must be provided to the lenders, including notices such as force majeures, events of default, events that might be an event of default with the passage of time, events that might lead to material adverse effects, and any material written notices from a material project counterparty
  • No Amendments or Changes. There is likely a covenant limiting amendments and change orders that may be made to material project contract. The thresholds vary, but to the extent a contractor is entitled to change order relief because of a force majeure, the borrower may need to seek the consent of lenders.
  • Cross-Defaults. The financing agreement likely also contains provisions regarding cross-defaults under an offtake agreement or other material project contract. Considering the variety of contracts that intersect for a particular project to achieve commercial operation, this provision should be reviewed carefully to ensure the borrower remains in compliance. To the extent compliance is no longer possible, the borrower should begin communication with the lenders as soon as possible.

Next Steps:

  • Review financing agreement covenants to ensure that all required notices are provided to lenders.
  • Begin conversations with lenders as soon as feasible regarding any required change orders or likely cross-defaults.
  • Be aware of any technical defaults that may now exist due to the widespread ramifications of COVID-19-related governmental responses.

Turbine Supply Agreements

The turbine supply agreement (TSA) contains certain important provisions that must be reviewed in order to ensure that the project will be able to come online on schedule. The first key provision to review in regards to the TSA is that regarding force majeure or excused delay. The TSA almost certainly has a force majeure or excusable delay provision that provides for change order and schedule relief to the turbine supplier. Many projects have already received force majeure notices related to issues in the turbine supplier’s global supply chain under the TSAs (while others continue to receive them). Click here for more information on force majeure clauses and strategies for response.

As COVID-19 disruptions spread in the United States, new risks arise in regards to TSAs. Under the TSA, the project company has certain obligations regarding site preparation for receipt and installation of the turbines. These obligations are often fulfilled by way of the construction work of the EPC contractor and their subcontractors. To the extent that an EPC contractor claims a force majeure that causes schedule delay, this may have a corresponding delaying effect upon the turbine supplier. Even if a sponsor’s project was initially spared a force majeure claim due to the particular circumstances of its turbines, there is still a danger that the turbine supplier will be entitled to schedule relief or demurrage due to delays by the EPC contractor or otherwise.

Next Steps:

  • Review force majeure or excused delay provisions under the TSA to understand the rights of the project company and the turbine supplier in regards to any potential force majeure claims. This is often a very language-specific and fact-specific exercise. In short, a sponsor should evaluate the notice for:
  • Timeliness
  • Reasonableness of the description of the particulars of the event
  • Adequate estimations of the impact and duration of the delays
  • Whether the vendor has taken reasonable efforts to mitigate the delay
  • The actual impact of COVID-19 on the project directly.
  • Review TSA schedules, including any requirements of the project company to prepare for receipt of turbines, in conjunction with the EPC contract schedule.

Engineering, Procurement and Construction Agreements

Similar to the TSA, the project’s EPC contract is key to ensuring that the project is completed on time. COVID-19 may cause some delay to the EPC contractor (and its subcontractors) due to the unavailability of materials, equipment or personnel. It is critical to review the EPC contract’s force majeure or excused delay provisions to understand what qualifies as a force majeure or an excused delay. These agreements, through the force majeure provisions or otherwise, also likely provide some schedule relief to the EPC contractor to the extent the turbine supplier or other prime contractors are the cause of project delays that affect the EPC contractor’s ability to remain on schedule.

Next Steps:

  • Review force majeure or excused delay provisions under the EPC contract to understand the rights of the project company and the EPC contractor in regards to any potential force majeure claims. This also is a very language-specific and fact-specific exercise. As individual force majeure notices are submitted by EPC contractors (these have not yet risen to the level of the notices by turbine suppliers, but may tick up with more restrictions on travel and state-mandated “stay at home » orders), a standard review should first be conducted to see if the language specifically addresses pandemics, whether there are any carveouts, and whether the project itself is actually affected. Next, the timeliness and substance of the notice should be reviewed. Upon that review, it should be determined whether the affected party can establish that the outbreak is contemplated as a force majeure event as an “epidemic » or an “act of God » or, if relevant, that the restrictions placed upon companies and citizens by a government in order to help contain the outbreak, are contemplated by the force majeure definition as “governmental action. » This factor has been dynamic in cases where the affected party may not have been directly affected by the outbreak but is affected by the subsequent governmental action to contain the outbreak. Exclusions to the definition of force majeure, such as “general economic conditions, » should also be considered.
  • Review the EPC schedules, including any requirements of the project company to prepare for various construction milestones, in conjunction with TSA schedules.

Turbine Servicing Agreements

As turbine servicing agreements are generally signed by an affiliate of the turbine supplier and are only effective after turbine completion, they may provide less risk than other material project contracts. Generally, these service agreements do not include a specific start date; rather, services often commence upon a date keyed to a turbine completion milestone. The major COVID-10 concern raised by service agreements relates to force majeure or excused delay provisions. Often, service agreements include termination rights in the case of extended force majeure events. The same force majeure analysis discussed above for TSAs and EPC contracts should also be done in regard to service agreements, with special focus on the unavailability of labor or replacement parts. For projects coming online in the very near term, this analysis is likely critical, but for projects coming online later in 2020, it is less crucial than the proper analysis of TSAs or EPC contracts.

Next Steps:

  • Ensure service start date is tied to a milestone rather than a specific date.
  • Review force majeure provisions to understand the rights of the project company and the turbine servicer in regard to any force majeure claim that exists now or may exist related to COVID-19.
  • Review service agreements for any rights the turbine servicer has to change order relief.

Offtake and Energy Hedge Agreements

While sponsors may face delay risk from tax equity, lenders, EPC contractors and turbine suppliers, the project’s power purchase agreement and any energy price hedge agreement (offtake agreement), if applicable, is in a different situation. The sponsor faces two-fold risks in regard to the offtake agreement: the ability to delay product delivery (if necessary) and the counterparty’s ability to delay or stop receipt of product delivery. Additionally, although all material project contracts have some variety, there is especially great variety among offtake agreements. Consider conducting a careful review of your project’s particular offtake agreement to find any specific project risk associated with COVID-19. The following risks may commonly be encountered:

Offtaker Risk: In this uncertain climate, it is important to review the creditworthiness of the project’s offtaker (including any corporate buyer) or energy hedge provider. Ideally this will be a credit-worthy counterparty or a counterparty that has provided sufficient project security, but it is important to review the offtaker’s identity and the risk of non-performance. Further, with recent declines in the stock market, any net worth test may no longer be met such that new collateral is required.

Seller Credit Provisions: Just as the offtaker’s credit may now be at risk, the seller’s credit position should also be reviewed to ensure that it meets any requirements. There occasionally may be collateral provisions in offtake agreements, such as those requiring adequate assurances. It is conceivable that since the onset of COVID-19, an offtaker might request that additional collateral assurance be posted. The seller should prepare for any potential change in collateral required as a result of COVID-19. This might include an increase in cash posted, a larger guaranty provided, or an increase in the size of a letter of credit. To the extent this increase is likely to be requested (or required), the seller should prepare now to ensure it is not in a default when the offtaker makes a request. Similarly, if COVID-19 has delayed the project and a letter of credit will expire, the seller should prepare now to request an extension.

Schedule: Many offtakers require periodic reports, compliance with milestone schedules, and other specific notices from the seller to the offtaker under the offtake agreement. A careful review of the offtake agreement should occur to ensure that there are no breaches on the seller’s part due to a failure to provide a required notice or report. This may be especially crucial now to the extent a report requires third-party input from a party that may be experiencing COVID-19-related closures or delays. Potential milestone schedule relief should also be considered.

Material Adverse Effect: Although these clauses may be rare in offtake agreements, it is important to review for any material adverse effect clauses that might provide the offtaker the right to delay, reduce or terminate deliveries under the offtake agreement.

Timing Issues: For energy hedge agreements, one of the largest risks is misalignment of financial and physical delivery. When the energy hedge agreement was entered into, it was likely assumed that the timing of each component would be correlated. However, if the financial component has a firm start date, but the physical component is likely to be delayed, this may have a major impact on project economics. While the effect might conceivably be positive, it is important to model what this impact is and whether there is any way to hedge or remove any risk associated with this misalignment of timing.

Force Majeure: Generally, an offtake agreement’s force majeure provision is likely to be used by the seller, rather than the offtaker. To the extent that there is major EPC contract or TSA risk associated with a project, the sponsor should review the offtake agreement’s force majeure provisions to ensure it will be in compliance with these provisions to the extent it provides any force majeure notice. This risk may be immediate, despite a distant commercial operation date, to the extent there is a milestone schedule which provides the offtaker with termination rights.

Next Steps:

  • Complete a careful analysis of the project’s offtake agreement to ensure there is sufficient certainty of performance.
  • Prepare to increase any collateral provided as necessary and prepare to request any additional collateral allowed.
  • Review any milestone schedule and related provisions to ensure no breach of the contract occurs.
  • Review the offtake agreement’s force majeure provision to determine whether the project will be able to resort to a force majeure claim if necessary.
  • Review any timing provisions associated with a force majeure claim and consider providing a notice of force majeure. In the alternative, rather than strain a relationship with the offtaker with such a notice, consider discussing an amendment to the commercial operation date with the offtaker and the rationale for doing so.
  • To the extent a financial delivery product has a firm start date, review all models and options if the physical delivery product is likely to be delayed.

Conclusion

COVID-19 has severely disrupted the wind market’s supply chain and labor resources, resulting in significant project delay risk. This puts a project’s funds at risk. Due to the pervasive and significant impact of COVID-19, it is essential that sponsors and borrowers preparing wind projects for completion in 2020 perform a holistic review of their full suite of tax equity, financing, offtake and material project documents to ensure compliance with obligations, prevent any unnecessary default triggers, and manage relationships with banks, tax equity and others.

Our global team of more than 50 dedicated renewable energy project finance lawyers is closely monitoring market developments for our clients engaged in the acquisition, development, construction and financing of renewables projects. We remain prepared to counsel projects on the state of the market and the latest market terms. For any immediate questions, or to set up a 20-minute complimentary virtual meeting, we invite you to reach out to the author of this On the Subject.