Sale of Wind Farm Projects – Legal Structures and Payment Models

John Dallas, Solicitor
McDowell Purcell

Sale of Wind Farm Projects – Legal Structures and Payment Models

Current Trends

The last two years has seen a marked decline in the rate of construction of wind farm projects in Ireland. At the same time, there has been a noticeable increase in the number of development projects changing hands. This is linked to the scarcity of finance available to developers, especially smaller independent developers, to construct projects. At least partly as a result of this, a market trend has emerged whereby larger industry players and semi-state developers with balance sheets capable of financing projects or which have greater borrowing power, have been actively purchasing wind farm projects in Ireland.

This article briefly considers the appropriate legal structures involved in the sale and acquisition of wind farm projects in Ireland and looks at some common models for payment of consideration in both development and operational projects.

Legal structures in the purchase of Wind Farm Projects

Whenever the business of a company is being purchased, the question arises as to whether the business should be purchased by way of asset purchase or whether the company itself should be purchased by way of share purchase. Whilst the relative advantages and disadvantages of each approach could be discussed at length, there are a number of points which can be made specifically in relation to the purchase of wind farm projects.

Firstly, by and large, (and for various legal, commercial and other reasons) wind farm projects are developed in special purpose vehicles (“SPVs”) i.e., companies set up for the sole purpose of developing, owning and operating the project. This means that all of the assets, liabilities, contracts, licenses and consents that are required for the purposes of developing the project are legally owned by the SPV. Therefore, structuring the purchase of a wind farm project as a share purchase is usually a neat approach to acquiring the project since these assets, licenses, consents and contracts are all housed within the target SPV.

By contrast, purchasing a wind farm project by way of asset purchase requires that all assets are transferred (usually by way of asset purchase agreement) and that all contracts, licenses, permissions, consents and other agreements (including land leases) relating to the project are legally transferred to the purchaser by way of assignment or novation.

The contractual framework required to transfer a project by way of asset purchase is much more complex than a transfer by way of share purchase. This is especially true in the case of an operational project where the co-operation of third parties (for example, the turbine supplier, the electricity off-taker and various other construction contractors) is required for the purposes of assigning and/or novating the existing project contracts.

For this reason (among others) wind farm projects tend, almost always, to be purchased by way of share purchase rather than by way of asset purchase. A possible exception to this would be where part only of a larger wind farm project is being sold to a third party in which case an asset purchase structure would be appropriate.

Payment Models

Whilst the commercial details of all business acquisitions are different, there are a number of common themes relating to the payment of consideration in purchasing wind farm projects.

Development Projects

Whilst from a vendor’s point of view it is always preferable to receive full consideration for the project on the day it is purchased, this must be balanced with the purchaser’s risk in taking on a project that must still be constructed (and therefore requires significant additional investment by the purchaser) before any revenues can be generated by the business. For this reason, purchasers of development projects may seek to negotiate a payment structure that includes partly deferred payments. Deferred payments may be linked to certain significant project milestones, for example the completion of certain pre-construction activities or to milestones that are much later in the project lifecycle such as financial close or commercial operation.

Vendors will be (rightly) concerned with minimising (i) the period that may elapse before they receive the deferred payment(s) and (ii) the risk that the deferred consideration may not be paid as a result of either one or more payment milestones not being achieved or that the purchaser is not (at the time) in a financial position to make payment.

In some cases, it may be appropriate for vendors to seek a parent company guarantee in respect of deferred payments, for example where the project is being purchased by a subsidiary of a larger group and where that subsidiary does not, in itself, have the financial wherewithal to meet the deferred consideration payments.

Payment milestones should be reasonable, transparent, achievable and, where possible, subject to an ultimate backstop date. A vendor should not agree a deferred payment date which is years in the future or in relation to which there is a risk the milestone may not be achieved. Vendors should be conscious that once the project is purchased the vendor will, most likely, have no control over how and when the milestones are achieved and therefore introducing a backstop date protects the vendor if the milestone ultimately fails to be met within an agreed timescale.

From a contractual perspective it is also possible to provide that if the deferred consideration payments are not met by a purchaser, the transaction will be unwound and the company will be transferred back to the vendor. However, whilst it is possible to provide for this contractually, it is likely to be difficult in practice to unwind the transaction after it has taken place especially if the company has been owned and controlled by the purchaser for any significant period of time.

The purchase of a wind farm project may also include conditional (as opposed to deferred) consideration. An example of this may be where planning permission for a project has been granted for a particular turbine hub height but a subsequent planning application has been made by the vendor to the relevant planning authority to increase the approved hub height. The project is potentially more valuable in the event that the revised planning permission is granted (on the basis that the larger turbines will generate greater output) and accordingly the purchaser may agree to an uplift in consideration on the condition that the revised planning permission is granted. In this example it is important that the vendor has comfort that the planning process in relation to the revised permission is run correctly as, again, after the project is transferred the vendor will have ceded control over this process. The vendor may seek to retain some input in relation to the planning process (by providing for this in the share purchase agreement) in order to ensure the vendor has the best opportunity to be paid the conditional consideration.

Operational Projects

In the case of operational projects the payment structure is likely to be much more straightforward. This is because the revenue streams of the business are already in existence (i.e., the project is exporting power), are transparent and (especially in the case of mature operational projects) the future revenues and costs of the project will be measurable to a reasonable level of certainty. The result is that vendors will usually insist on full up front payment on the sale of operational projects. The possible exception to this is in the case of operational projects which have the appropriate consents to be extended. This may result in a ‘hybrid’ consideration structure which includes elements commonly seen in the purchase of development projects as well as more straightforward up front payments for the operational elements of the project.

Outlook

With few indications that the lending landscape in Ireland will significantly improve in the short term, it is likely that development projects will continue to be purchased and developed by larger developers. It is important that vendors of development projects understand the risks associated with deferred payment models and that they have adequate contractual protections against these risks.

John Dallas is a solicitor specialising in renewable energy and commercial law at McDowell Purcell. John has experience in the area of renewable energy having worked with a number of windfarm developers in relation to the construction, purchase and sale of windfarms in Ireland.

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