When looking at the sale or purchase of an energy project, both the transaction and the project itself can be incredibly complex. When the deal can be the entire transaction or just one aspect; involve public utilities or impact national security; utilize tax equity credits or unique debt financing structures; and/or trigger federal, state, and local regulatory review, merger and acquisition (M&A) transactions in the energy space are anything but standard.
A group of cross-practice Morgan Lewis lawyers have laid out a few key considerations for both buyers and sellers dealing with energy projects.
For certain renewable energy projects, the federal income tax benefits (including tax credits and accelerated depreciation) generated by the project are often a critical element of an owner’s or other investor’s financial return. A prime example of this is so-called “tax equity” financing, in which the investor’s return is based on its monetization of these tax benefits.
Accordingly, a critical and unique commercial issue in M&A transactions for renewable energy projects concerns risk allocation on issues potentially impacting the underlying project and its owners’/investors’ ability to validly claim the expected tax benefits from the project. The nature of this risk allocation commercial issue is different for each particular transaction based on a variety of factors, including the nature of the transaction itself (e.g., sale as compared to equity financing); the development, construction, or operational status of the project; and the status of any existing tax equity financing for the project.
A good Phase 1 environmental site assessment is critical to any project. It provides critical insights into potential risks and helps build a preemptive defense against certain liabilities under federal and certain state laws.
The US Environmental Protection Agency (EPA) gave notice in late March that it was adopting a new Phase 1 standard, E1527-21, which will become effective May 13, 2022. For developers that are in the middle of a project, it would be wise to consult both the existing and the new standard to ensure compliance.
All developers need federal, state, and local permits to ensure the project can be developed and operated. Often those permits are pulled during different times and under various names. However, it is imperative that the permits be in the right name of the project or it can impact the sale in a future M&A deal.
Equity and financing transactions involving gas and/or electric companies can require prior regulatory approvals and post-closing filings. Timely consideration of these issues can assist in identifying needed approvals, establish a timeline for approvals, and address regulatory challenges to closing and post-closing operations.
The Federal Energy Regulatory Commission (FERC) exercises broad jurisdiction over electric sector mergers, acquisitions, securities transactions, and “dispositions.” FERC’s threshold consideration is whether FERC approval, known as a Section 203 approval, is required before a transaction is finalized.
Generally, if a transaction involves the purchase or sale of a public utility, or the transfer of control of that utility, that is a Section 203 issue that will need prior approval by FERC. The transaction could be exposed to enforcement oversight for a problem that could have been easily addressed out of the gate. FERC authorizations can take six months, so investors and sellers will need to build in that time during a project timeline.
More information on the significant market trends in M&A in the renewable and conventional energy sectors can be found in our full presentation, which was featured as part of the Morgan Lewis M&A Academy.