McCarthy Tétrault
McCarthy Tétrault LLP
Box 48, Suite 4700
Toronto Dominion Bank Tower
Toronto ON M5K 1E6
Canada
Telephone: 416 362-1812
Memorandum
June 26, 2009
FIT CONTRACT (JUNE 8
DRAFT)
To:Ontario Power Authority
From:McCarthy Tétrault on behalf of NextEra Energy Canada, ULC
Re:FIT Contract Questions and Comments to OPA
The following are our questions and comments to the OPA in respect of the June 8 draft FIT
Contract provided to you at the request, and on behalf, of NextEra Energy Canada, ULC.
(“NextEra”).
MAJOR ISSUES
The following are the critical issues which NextEra requires the OPA to address. Failure to address
these issues will have a serious impact on the ability of NextEra to proceed with wind power projects
in Ontario under the FIT Program.
(1)
Cross Collateralization of Financings: Section 11.1(b): Section 11.1(b) will preclude
portfolio financing of energy projects, ie because a FIT Project cannot collateralize indebtedness not
incurred with respect to that FIT Project. Given the state of the debt and capital markets today, we
believe that this will make financing FIT projects more difficult. The OPA should minimize any
restrictions in the FIT Contract which impede obtaining the most efficient sources of capital. We do
not believe that there is any material prejudice to the OPA in removing this restriction because any
lender in possession that has lent against the security of one FIT Project, or a multitude or projects
including one or more FIT Projects, will seek to ensure continuing performance under the FIT
Contract in order to maximize collateral value and ensure repayment of its loans in due course. The
OPA should have confidence in a portfolio lender acting in a commercially rational manner.
(2)
Upstream Change of Control: Section 15.6(a): A change of Control should only apply
with respect to the Supplier and any single purpose upstream entity such as a special purpose holding
company, but should not apply to a change of Control of an entity which has substantial other assets
in addition to an interest (whether direct or indirect) in the Contract Facility. Our concern relates
specifically to a sale of shares, merger or reorganization of a top holding company in the U.S. which
holds interests in thousands of megawatts of generation projects across North America (a “Material
Upstream Transaction”), triggering a consent requirement from the OPA. This is an excessive level
of interference in internal management decisions of the Supplier’s ultimate parent, ie. relating to
matters of such a scale that we believe it is inappropriate for the OPA to have an approval right, even
where such consent is conditioned by “reasonableness”. Accordingly, we suggest that Section
15.6(c) be reworded to read as follows: “For the purposes of Sections 15.6(a) [and Section
15.7(a)(ii)] a change of Control shall exclude a change in ownership of any shares or units of
ownership that are listed on a recognized stock exchange and, subject to the foregoing, shall only
-2apply to a change of Control resulting from a change of ownership in any shares or units of
ownership in any entity that directly or indirectly owns the Facility and whose special or sole
purpose is ownership, direct or indirect, of the Facility or the Facility and other generation facilities
under a FIT Contract.”
(3)
Two Year Hold Period-Change of Control and Assignments: Section 15.7: The 2 year
hold restriction in Section 15.7 should be eliminated. In the capital constrained markets which exist
today, there should be few impediments to capital being matched to good projects with FIT
Contracts. In other words, we think Section 15.7 will impede the development of good projects that
are capital starved. Such a provision is not consistent with the realities of the wind industry. Many
wind farm developers engage in early project development up to an including procurement of a PPA
only to find that further development requires substantial equity funds from an equity investor that
will obtain all, or most of the equity in the project in question. Furthermore, given the opportunities
for capital depreciation afforded under the Income Tax Act, it is common for new investors with tax
appetite to purchase all, or most of, the equity in or assets of such projects. The 25% “safe harbour”,
ie. right to sell-down up to 75% of the project equity set out in Section 15.7(a)(ii), does not address
this point because early developers will typically retain only modest equity interests or
royalty/carried interest entitlements.. Consent, not to be unreasonably withheld, as is provided in
Sections 15.5(a) and 15.6(a) for assignments and change of control, respectively, should be sufficient
protection for the OPA.
We also advise that a 2 year hold on change of Control is also unacceptable, as presently worded, in
that it may entirely preclude an Material Upstream Transaction, as described in previous comment
above, giving the OPA a level of say on such a transaction, ie. a fully discretionary waiver,
completely inappropriate in the circumstances.
(4)
Negative HOEP: Section 1.5 of Exhibit B: The exclusion of compensation for negative
HOEP, as provided in Section 1.4 of Exhibit B, is of great concern if paid curtailment under Section
1.5 of Exhibit B does not apply to any hour in which HOEP is negative. This is an extremely
contingent event that has been happening more frequently in recent months. It is difficult to assess
from a risk point of view and, therefore, model. Suppliers must give up the benefit of HOEP to the
extent it exceeds the Contract Price under the contract for differences. They should be entitled to
full compensation whenever HOEP is less than zero in the contract for differences.
OTHER ISSUES
(1)
Waiver, Amendment: Section 1.8: We would request that the first sentence of this section
be reworded to read: “Except as expressly provided in this Agreement, no waiver of any provision
of this Agreement shall be binding unless executed in writing by the Party to be bound thereby and
no amendment of any provision of this Agreement shall be binding unless executed in writing by
both Parties to this Agreement.” We believe a waiver can be a matter of a unilateral document from
the Party affected but an amendment should require a document signed by both Parties.
(2)
Contract Facility Amendment Consent: Secton 2.1(b): In Section 2.1(b) please add the
words “,delayed or conditioned” after the words “unreasonably withheld” in the sixth line. We are
concerned that unnecessary delay on the part of the OPA will, in turn, entail costs and delays in the
construction schedule for the project and the addition of these words provides some comfort in this
regard.
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-3(3)
OPA Termination Right: Section 2.4(a): The OPA can terminate a FIT Contract in “its
sole and absolute discretion”. Our concern is that the OPA should exercise this discretion
“reasonably” instead. We believe that reasonableness can be specifically referenced to availability
of transmission/interconnection facilities at a reasonable cost, and on a reasonable timetable, having
regard to the economic criteria that will be used by the OPA in such decision, ie. according to the
stakeholder session relating to NTP (see slide 7 of the March 31 session), this is the only real reason
the OPA would terminate a FIT Contract under this section .
(4)
Reciprocal Termination Right by Supplier: Section 2.4(a): We ask that Section 2.4(a) be
made reciprocal whereby Supplier can terminate the FIT Contract at will prior to NTP and forfeit its
Completion and Performance Security as the only consequence thereto.
(5)
Financing Plan: Section 2.4(b)(ii): We contemplate developing projects using balance
sheet financing and that there may be a refinancing post COD with a commercial lender. What is
contemplated by a Financing Plan in such circumstances? Is a simple letter confirming same, ie.
agreement in principle to provide equity and/or debt, from an upstream shareholder sufficient?
(6)
Requirements for Commercial Operation: Section 2.6(a)(iv)(A): This is purely a drafting
point: could you please add words to the end of this clause “and the up to 10% allowance in Contract
Capacity provided for in Section 2.6(a)(iv)(C) below” or words to similar effect. We believe we
have a potential interpretation conflict otherwise and our requested change clarifies the intention of
the parties. There is also an incorrect section reference in the third line of the lead in language to this
section: reference should be to “Section 2.6(c)” and not “Section 2.6(b)”.
(7)
Insurance: Section 2.8: Is it sufficient if the OPA is given access to review, but not have a
copy of Supplier’s insurance policy, if Supplier provides a certificate of insurance to the OPA?
(8)
Resource Data: Section 2.11(b): We assume that for purposes of this Section, resource
data (ie. met tower data/wind studies) for a wind project only applies pre-COD. Post COD you will
have the production data of the wind farm. If our assumption is correct, could this be specified in
Section 2.11(b)?
(9)
Future Contract Related Products: Section 3.3(c): We would like to make it clear that this
Section only applies where revenue received from sales of Future Contract Related Products, less
Approved Incremental Costs, is a positive amount. Supplier should not be obligated to sell such
products at a loss as it will not be compensated for such loss under the contract for differences in
Section 1.4 of Exhibit B.
(10) Settlement for IESO Market Participants: Section 4.2(b) and (c): The timelines are very
tight. If we are reading this correctly, the OPA provides a statement up to 20 Business Days in the
calendar month following a Settlement Period and payment has to be made no later than the last
Business Day of the same calendar month in which the statement is provided. Given that a typical
calendar month only has between 21 and 23 Business Days, this does not leave much time.
Accordingly, could the statement deadline be 15 Business Days instead of 20?
(11) HOEP Over 75% of Contract Price: Section 5.2: We understand that this Section
addresses a concern with “flight risk” in the event that HOEP appears to be moving in a direction
where it will exceed the Contract Price on a sustained basis, ie. that Supplier would consider moving
assets to another location or jurisdiction in order to become a merchant plant etc. We think this is a
very remote possibility, particularly given the large non-recoverable costs incurred in most projects
(foundations, civil works, roads etc.) and we don’t believe such a move could occur without
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-4incurring enormous costs. Would it not be sufficient to simply have a covenant prohibiting same?
Breach of such a covenant and possible legal consequences should be a sufficient remedy to protect
the OPA.
(12) Composition of Completion and Performance Security: Section 5.3: There is a cost to
posting cash or an LC as security. Bank credit lines are also constrained in today’s market.
Accordingly, is it possible to post a guarantee from a creditworthy affiliate of Supplier capped in the
amount of the required security or other security in a form acceptable to the OPA acting reasonably?
Would the OPA also be prepared to accept a surety bond as security in the required amount?
(13) Composition of Completion and Performance Security: Section 5.3(b): This is purely a
drafting point: could you please add words to the end of this subsection: “but without limiting
Sections 5.1(c) or 5.2(c) above” or words to similar effect. We believe we have a potential
interpretation conflict otherwise and our requested change clarifies the intention of the parties.
(14) Replenishment of Completion and Performance Security: Sections 5.4(a)(i), 9.2(b)(ii),
9.2(d)(i) and 9.5: There should be a limit to the obligation to replenish Completion and
Performance Security in Section 5.4(a)(i) particularly as such security is only outstanding during the
period preceding COD. As there is no LD mechanism for late COD, we believe that the only
recourse against this security by the OPA should be pursuant to Section 9.2(d)(i), ie. one time
recourse only on a termination. Accordingly the text in Section 9.2(b)(ii) after the words “draw on
all or part of the Completion and Performance Security” should be deleted. Not deleting this text in
Section 9.2(b)(ii) raises the spectre of the OPA making repeated claims against replenished
Completion and Performance Security whereas Section 9.2(d)(i) suggests that such recourse would
be a one time remedy only for a pre-COD termination.
On a related note, the last sentence of Section 9.5 refers to an option of the OPA pursuant to Section
9.2(d)(i) to retain Completion and Performance Security as its sole remedy for an “at fault”
termination of the FIT Contract pre-COD and yet Section 9.2(d) refers in the fifth line to ninth lines
to exercising “other” rights and remedies at law. We believe that there is an inconsistency here. If
so, can the language be removed, ie. text from the fifth line “and exercise all other remedies etc” to
the end of the subsection?
(15) Interest on Completion and Performance Security: Section 5.5: In Section 5.5, why is
the OPA permitted to keep interest earned on Completion and Performance Security? This appears
to be unreasonable as Supplier bears a cost in connection with such security and should be entitled to
set off interest against this cost.
(16) Late COD: Section 8.1(b): While we believe that a shortening of the Term of the FIT
Contract for a COD that is later than the Milestone Date for COD is a fair and reasonable
consequence of unexcused tardiness, we would suggest that Supplier be given the option to pay LDs
instead if it so chooses. In some circumstances Supplier’s tardiness will be due to its construction
contractor’s tardiness and Supplier may be able to pass on to the OPA LDs payable to Supplier under
the construction contract. This gives the Supplier a chance to preserve its project economics and
compensate the OPA for unexcused tardiness as well. We believe that both LDs, and reduction of
Term, act equally well as powerful incentives to achieve timely COD and Supplier should be give a
chance to choose one or the other.
(17) Cure Periods: Section 9.1: The cure periods set out in Sections 9.1 (a), (b), (c) and (d) are
very short by relative industry standards. The cure period in Section 9.1(a) should be 10 Business
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-5Days. The basic cure period in Sections 9.1(b), (c) and (d) should be 30 days with an extension of
up to an additional 180 days if a default is not reasonably susceptible of cure within 30 days, so long
as Supplier is diligently pursuing a cure. We believe this is consistent with market practice.
(18) Typo in Section 9.3(h): We believe the intended reference in this Section is “Section
15.5(f)” and not Section 15.5(e).
(19) Termination by Supplier: Section 9.4(a): Could you please add the following to this
subsection or words to similar effect: “and the OPA shall return any Completion and Performance
Security, or other security it holds, to Supplier”.
(20) Force Majeure Post COD-Extension of Term: Section 10.1(f): If a force majeure event
during the operating term interrupts generation or delivery of power, the operating term of the
contract should be extended to allow Supplier the opportunity to recover any lost economics. The
last sentence of Section 10.1(f) should be modified accordingly.
(21) Force Majeure Post COD-Materiality: Section 10.1(h): In Section 10.1(h), Force Majeure
during the operating term should be material before either party is entitled to terminate in accordance
with this section. In other words, there may be immaterial events of force majeure which should not
give either party a right to terminate the FIT Contract. Accordingly, we would ask that the word
“material” be added before the word “obligations” in the second line of Section 10.1(h).
(22) Secured Lender Liability: Section 1l.1(a): We would like to add express language that a
“Secured Lender includes a nominee, agent, receiver or receiver and manager appointed by or on
behalf of the Secured Lender or by the court on the application of or with the consent of the Secured
Lender”. This language is largely consistent with text already found in Sections 11.2(c), (d) and
11.2(e) to similar effect. While the text in Sections 11.2(c), (d) and 11.2(e) could be modified
instead to accord with our proposed language, we believe lenders would prefer to see this language
upfront rather than “buried” in subsequent sub-sections. In insolvency proceedings to date involving
power projects, our experience is that the rights under a power purchase agreement are exercised by
a receiver or receiver and manager and that in such circumstances, the Secured Lender incurs no
liability though the offtaker has full recourse against the project assets as it does from inception of
the contract. In furtherance of the foregoing, we would also like to see text in Article 11 to the effect
that the recourse of the OPA will be limited to the assets and undertaking comprising the Contract
Facility. In other words, the OPA should in no way have recourse to the balance sheet of the
Secured Lender just as it presently has no recourse to the balance sheet of shareholders of the
Supplier. Again, as indicated elsewhere in this memo, given the current markets, we are concerned
to have language that lenders are used to seeing in their consent agreements with project
counterparties.
(23) Copy of Secured Lender’s Security Agreement: Section 11.1(d): Is it sufficient for this
section if the OPA is given a copy of the security agreement, debenture or mortgage containing the
charge or security interest which the Secured Lender holds or is the OPA asking for the complete
credit agreement as well? If the latter, can it be redacted to delete sensitive commercial information?
(24) Lenders’ Rights: Section 11.2(e): There is concern with language in Section 11.2(e) which
does not allow lenders to realize their security without assuming the FIT Contract. This should not
be mandatory. U.S. based lenders are not fond of “attornment” clauses whereby their discretion to
reject or claim the benefit of a contract in insolvency proceedings is curtailed. Given the difficulty
of procuring financing in today’s capital constrained markets, we believe the sentence beginning on
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-6line 7 of this Section should be amended to read as follows: “If the Secured Lender itself or by a
nominee or agent, or a receiver or a receiver and manager appointed by or on the application of the
Secured Lender, is the owner or is in control or possession of the Contract Facility, and such entity
provides notice in writing to the OPA that it elects to assume the obligation of this Agreement, then
the entity that is the owner or is in control or possession of the Contract Facility shall be bound by all
of the Supplier’s obligations, and enjoy all the Supplier’s rights, under this Agreement”. We believe
this is consistent with market practice and the expectations of lenders.
(25) Transfer by a Lender: Section 11.2(f): Similar to the previous comment, we believe the
lenders should be free to transfer the Contract Facility to a purchaser without the FIT Contract.
Given the definition of “Supplier’s Interest” you have bundled the Contract Facility and FIT
Contract together which has the effect of constraining the options available to the lenders. We
believe this is inconsistent with market practice. Again, we are anxious to avoid limiting lender’s
options in any way. In addition, where there is an intention to transfer the FIT Contract to such
purchaser, we are concerned that any requirement of obtaining the consent of the OPA to such
transfer will give the project lenders concern as they will not want to have any restrictions on their
ability to realize on their collateral. and liquidate their exposure. Accordingly, we request that no
consent of the OPA be required to a transfer of the FIT Contract in the context of a realization by the
lenders of their security interest.
(26) Transfer by a Lender to a Non-Arm’s Length Transferee: Section 11.2(f)(ii): We would
like to ask you why a Secured Lender cannot transfer a project to a Non-Arm’s Length Party? What
concern does the OPA have here? If such a transfer were made for a value less than fair market
value, this is an equity/developer issue and impacts in no way on the OPA. For example, Manulife
has an affiliate that is a developer/owner of power projects, Regional Power. Why would a transfer
by Manulife to Regional be precluded? GE Financial is another example where such an issue may
arise. Again, our concern is that in these severely capital constrained times, we do not want to create
any impediments to procuring debt unless there are interests of the OPA that require protection. We
do not see that arising here.
(27) New Contract: Section 11.2(g)(i): Could the reference to “30” days be changed to “45”
days to better accommodate concerns of project lenders.
(28) New Contract: Section 11.2(g)(i): We would ask that clause (C) be removed. While we
believe that lenders will be prepared to make the payments and effect the cures contemplated by
clauses (A) and (B), they will not be prepared to pay additional amounts under clause (C).
(29) Clarification re Consequential Damages: Section 13.1: In Section 13.1, it should be made
clearer that the exclusion of lost profits only applies in respect of consequential or special damages
and not for any ordinary common law claim under Section 9.5. We believe this to be the case in any
event but this text is, in our experience, often misinterpreted. Accordingly, we suggest that the
following sentence be added: “For greater certainty, loss of profits shall not be excluded where they
are not special, indirect, incidental, punitive, exemplary or consequential.”
(30) Indemnification: Section 13.3: Supplier indemnification of the OPA in clause (ii) of this
section (relating to breaches of contract etc.) and should be reciprocal.
(31) Notice: Section 14.6(c) (incorrectly identified as Section 14.6(a): We believe that such a
notice should be given electronically as well as “by hand or courier delivery”. Our reason is that
some of the cure periods are short and electronic delivery is the most immediate and efficient form
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-7of notice to ensure prompt rectification of problems during a cure period. Delivery by hand or
courier can, of course, complement electronic delivery, given the gravity of such a notice. We
believe both parties benefit by such a change.
(32) Arbitration: Sections 15.1 and 15.2: Arbitration under Section 15.2 should be mandatory
and not subject to agreement of the parties because we believe that recourse to the courts is time
consuming, expensive, public and inappropriate, in particular, with respect to technical disputes.
Accordingly, the last sentence of Section 15.1 should be modified to read as follows: “If, following
the Senior Conference, the dispute is not resolved, the dispute shall be settled by arbitration pursuant
to Section 16.2 rather than recourse to the courts”. We would also suggest that a panel of three
arbitrators hear any dispute (one panel member selected by each party, and the two panel members
so selected, choosing the third member of the panel).
(33) Assignment by OPA With Consent: Section 15.5(a): Our concern here is with the right of
the OPA to assign the FIT Contract to an entity that does not have creditworthiness comparable to
the OPA even though it has a comparable credit rating at the time in question. The credit rating of
the OPA is based on its statutory right to pass on the costs of procurement contracts, such as the FIT
Contract, to ratepayers in the Province of Ontario. Accordingly, we would like have a qualification
that “reasonableness” (i.e. in the context of providing a consent to an assignment by the OPA “not to
be unreasonably withheld”) will be determined, amongst other things, by reference to the
creditworthiness of the assignee, including, without limitation, an assessment of the assignee’s
credit rating, amount of shareholder equity as indicated in its most recent financial statements,
volatility of its principal lines of business and economic prospects.
(34) Assignment by OPA Without Consent: Section 15.5(f): We request that the OPA be
liable for all breaches of such assignee whether before or after an OPA Event of Default.
Accordingly, we request that clause (iii) be reworded as follows: “the OPA shall remain liable for all
obligations and liabilities of the assignee including any payment defaults, provided that any notice
required to be given under Section 9.3 and 9.4(a), as applicable, is given on the same day to the
assignee and to the OPA. Time periods in Section 9.3 shall not begin to run until both the assignee
and the OPA have been so notified”. We would also ask, as a point of clarification, that the words
“(without limiting the Supplier’s rights under this Agreement)” after the words “without the prior
written consent of the OPA” in line eight. We wish it to be clear that there is no new right of
amendment or termination by assignee created by an assignment under Section 15.5(f).
(35) Two Year Hold Period-Assignments to Affiliates: Section 15.7: In any event, an
assignment to an affiliate by Supplier in Section 15.5(c) should not be subject to the 2 year hold
period in Section 15.7.
(36) Adequacy of the Pre-Construction Liability Limit: Exhibit A and Definitions: We are
concerned that the Pre-Construction Liability Limit set out in Exhibit A is too low. The Supplier
may incur considerable costs in connection with the negotiation and settlement of contracts relating
to equipment supply, construction and financing as a prelude to applying for NTP and should be able
to recover these costs if the OPA terminates the FIT Contract pre-NTP. Accordingly, we suggest
that the Pre-Construction Liability Limit be increased by $200,000. We also suggest that reference
to “negotiation of contracts relating to equipment procurement, construction and financing” and to
“Renewable Energy Approval, if required” be added to the last sentence of the definition of “PreConstruction Development Costs” as illustrations of such costs.
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-8(37) Environmental Attributes: Definitions: In the definition of “Environmental Attributes”
clause (f) please add the words “any tax or other benefit including” to the beginning of the clause to
make it clear that Class 43.1 treatment, for example, is also excluded. We believe this is a “for
greater certainty point” that forecloses any uncertainty on the issue. In other words, if you are going
to go to the trouble of specifically excluding CRCE from the definition, why wouldn’t you make the
exclusion generic to all similar benefits of accelerated depreciation. Not doing so may inadvertently
raise an inference that a distinction is intended.
(38) Including Meaning “Including Without Limitation”: Definitions: The RES III Contract
has a definition that “”including” means “including, without limitation””. We believe this definition
should be included in the FIT Contract. There is case law indicating that the word “including”
creates a definitive or exhaustive list and our concern is that without amending the meaning of the
word “including” we may have inadvertent consequences in the interpretation of the FIT Contract.
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