By Carl Fleming, Edward Zaelke and Seth Doughty

Law360 (April 14, 2020, 3:40 PM EDT) --

Carl Fleming

Edward Zaelke

Seth Doughty

As the tax credit safe harbor cliff fast approaches, many wind projects are competing to come online by the end of 2020. 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.

This is the second part of our two-part legal and commercial practitioner's guide for in-construction wind projects to highlight key potential pain points in this review process. Part one included a summary of key points related to the equity capital contribution agreement. This part will provide a summary of the financing agreement and other material project documents which are critical to ensure project completion in 2020.

Financing Agreements

A project attempting to come online by Dec. 31 may need to enter into a financing agreement, receive further loan disbursements or have a portion of the loan converting to a term loan at commercial operation. Each scenario will require 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 postdate the commitment expiration date under the equity capital contribution agreement, or 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.

Financial Covenants

With recent drops in the stock market and other major economic changes, financial covenants in parent guaranties, or other security provided to the lender, 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.

Conditions Precedent

The financing agreement also contains conditions precedent that must be achieved prior to each drawing of funds or for term conversion. This list often looks very similar to the conditions precedent under the ECCA, but special attention should be paid to differences, including in the definitions.

Below are some of the most common additional conditions precedent (in addition to those in the ECCA) that borrowers should be concerned about in light of COVID-19:

• 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.

• A certification that 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 conditions precedent have been met, 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:

• 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. Below are some of the most common representations and warranties that borrowers should be concerned about in light of COVID-19:

• 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 adjustments to the project schedule must be reviewed to confirm that completion before the maturity date is not at risk.

• No event of default under the ECCA, the financing agreement or other financing documents.

Next steps:

• 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.

Covenants

The financing agreement also contains key covenants. Some of the most critical covenants to consider include the following:

• Information. Many notices provided to or from the borrower must be provided to the lenders, including notices of events of force majeure, events of default, events that might lead to defaults, events that might lead to material adverse effects, and any material written notices from material counterparties.

• No amendments or changes. There are likely limitation on amendments and change orders that may be made to material contracts. 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.

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.

Turbine Supply Agreements

The turbine supply agreement, or 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.

The analysis of a TSA's force majeure provisions is crucial. 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, which are often fulfilled by the EPC contractor. To the extent that an EPC contractor claims a force majeure that causes schedule delay, this may have a delaying effect upon the turbine supplier. Even if a project was initially spared a force majeure claim, 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.

• 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 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.

• Review the EPC schedules, including any requirements of the project company to prepare for various construction milestones, in conjunction with TSA schedules.

Offtake and Energy Hedge Agreements

The sponsor faces twofold 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. The following risks may commonly be encountered.

Offtaker Risk

In this uncertain climate, it is important to review the creditworthiness and the risk of nonperformance of the project's offtaker (including any corporate buyer) or energy hedge provider. 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 may be provisions 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. 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. Potential milestone schedule relief should also be considered.

Timing Issues

For energy hedge agreements, one of the largest risks is misalignment of financial and physical delivery. At entry, 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. 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. If 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.

---

Carl J. Fleming and Edward Zaelke are partners, and Seth B. Doughty is an associate at McDermott Will & Emery LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

For a reprint of this article, please contact reprints@law360.com.