On May 28, 2020, Treasury and the IRS issued Proposed Regulations under Section 45Q of the Code, which provides for a production tax credit for persons who physically or contractually ensure the capture and disposal of qualified carbon oxide. The Proposed Regulations address the requirements for capture and disposal, the use of qualified carbon oxide as a tertiary injectant in a qualified enhanced oil or natural gas recovery project, and the utilization of qualified carbon oxide in a manner that qualifies for the credit. The IRS previously requested comments on issues arising under Section 45Q in Notice 2019-32. On March 9, 2020, the IRS published Revenue Procedure 2020-12, which provides a safe harbor for allocating Section 45Q credits in a partnership flip structure and Notice 2020-12, which provides guidance on when construction of a carbon capture facility or carbon capture equipment has begun. Continue Reading Treasury and IRS Issue Long-Awaited Proposed Regulations for Section 45Q Production Tax Credits for Qualified Carbon Sequestration

On May 27, 2020, the IRS issued Notice 2020-41, which provides much-anticipated relief for delays caused by the COVID-19 pandemic with respect to the “beginning of construction” requirements for renewable energy projects eligible for the production tax credit (“PTC”) or investment tax credit (“ITC”). Continue Reading IRS Extends Continuity Safe Harbor and Provides Safe Harbor Delivery Deadline for Renewable Energy Projects

On Thursday, May 21, attorneys from our Capital Projects & Infrastructure and Energy practices hosted a webinar on the topic of build transfer agreements. During the hour-long discussion John Leonti, Justin Boose, Todd Coles and Vaughn Morrison discussed topics, including:

  • Origins of build-transfer for traditional generation assets
  • Application to different renewable technologies
  • Varying structures regarding site control and permitting
  • Managing EPC and construction risk
  • Variations in contracting structures
  • Regulated versus unregulated utility buyers

To access a replay of the program, click here.

Speakers:
Matthew H. Adler, Partner, Pepper Hamilton
Coburn R. Beck, Partner, Troutman Sanders
John T. Bradley, Partner, Troutman Sanders
Joanna J. Cline, Partner, Pepper Hamilton
Sean Ehni, Associate, Troutman Sanders

Troutman Sanders and Pepper Hamilton are producing a series of podcasts to discuss litigation topics that have been brought to the forefront by the COVID-19 pandemic and how businesses might be able to prepare and respond.

In this episode, Troutman associate Sean Ehni leads a discussion on Material Adverse Effect (MAE) clauses. Sean is joined by Pepper partners Matt Adler and Joanna Cline, and Troutman partners John Bradley and Coby Beck. Topics discussed include how they are drafted and negotiated, and whether COVID-19 could qualify as an MAE and be used as an escape hatch to contractual performance. They also discuss how MAE clauses are drafted and negotiated, how MAEs have been interpreted by courts, the litigation related to them, and dig into some other ways COVID-19 has affected the negotiation and execution of M&A transactions.

LISTEN HERE

On May 1, 2020, President Trump issued Executive Order No. 13920 (“Executive Order”) prohibiting Federal agencies and U.S. persons from engaging in certain “transactions” defined thereunder—specifically, acquiring, importing, transferring, or installing certain items defined in the Executive Order as “bulk-power system electric equipment”—with “foreign adversaries.” Such equipment classifications and types are specified in the order and include “items used in bulk-power substations, control rooms, or power generating stations.” The prohibitions apply to transactions involving such equipment if such items are (i) designed, developed, manufactured, or supplied by a foreign adversary, or by persons under the control, direction, or jurisdiction of such adversaries and where (ii) such equipment pose an unacceptable risk to national security and America’s safety.

The Executive Order also authorizes the Secretary of the U.S. Department of Energy (“DOE”), in consultation with other Executive Branch agencies, to (i) establish a “pre-qualified” list of vendors to ensure that future equipment transactions are not in violation of the order; (ii) develop recommendations to identify, isolate, monitor, or replace existing bulk-power system electric equipment presenting a security risk from foreign adversaries; and (iii) oversee a Task Force to update the Federal government’s acquisition regulations and to develop policy recommendations and issue reports.

Authority and Declaration of National Emergency

In the Executive Order, the President declared a national emergency with respect to the U.S. bulk-power system, citing the authority granted to him pursuant to the U.S. Constitution, the International Emergency Economic Powers Act (“IEEPA”), National Emergencies Act (“NEA”), and Section 301 of United States Code Title 3. The IEEPA authorizes the President to investigate, regulate, or prohibit certain foreign transactions “to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared.” A Congressional resolution terminating the national emergency is required to revoke the authorities granted to the President by the IEEPA.

In prefatory findings, the Executive Order describes increasing concerns regarding involvement in the bulk-power system by “foreign adversaries,” which are defined as any foreign government or non-government person “engaged in a long-term pattern or serious instance of conduct significantly adverse” to the national security of the United States or its allies. In particular, the Executive Order determines that the “unrestricted foreign supply of bulk-power system electric equipment constitutes an unusual and extraordinary threat” to national security and the U.S. economy.

Prohibited Transactions and Implementation of Executive Order

In relevant part, the Executive Order prohibits federal agencies and U.S. persons from acquiring, importing, transferring, or installing bulk-power system electric equipment that poses an “undue” or “unacceptable” risk to the U.S. and over which a “foreign adversary” or a national thereof has an interest.

  • Importantly, the Executive Order defines bulk-power system electric equipment to include “items used in bulk-power system substations, control rooms, or power generating stations, including, reactors, capacitors, substation transformers, current coupling capacitors, large generators, backup generators, substation voltage regulators, shunt capacitor equipment, automatic circuit reclosers, instrument transformers, coupling capacity voltage transformers, protective relaying, metering equipment, high voltage circuit breakers, generation turbines, industrial control systems, distributed control systems, and safety instrumented systems.”
  • Bulk-power system electric equipment does not include local distribution facilities or items “that have broader application of use beyond the bulk-power system . . . .”
  • The transaction prohibitions apply “except to the extent provided by statute, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted prior to the date of this order.” (emphasis added)

The Executive Order also authorizes and empowers the Secretary of Energy, in consultation with the heads of a number of other executive departments and agencies, to:

  • Take actions regarding the “timing and manner of the cessation” of pending and future prohibited transactions;
  • Take necessary steps to implement the Executive Order, such as determining what particular countries or persons are considered “foreign adversaries” for purposes of the prohibited actions;
  • Establish criteria for recognizing particular equipment and vendors as “pre-qualified” for future transactions;
  • “[I]dentify, isolate, monitor, or replace” any now-prohibited equipment already in use as soon as practicable, taking into consideration risks to the overall “bulk-power system” (as defined in the Executive Order); and
  • Publish rules and regulations within 150 days implementing the authorities delegated to the Secretary of Energy by the Executive Order.

Finally, the Secretary of Energy is tasked with overseeing a “Task Force on Federal Energy Infrastructure Procurement Policies Related to National Security,” to be chaired by the Secretary. The Task Force is required to, among other things, conduct studies and issue periodic reports to the President and Congress, engage with “distribution system industry groups,” and develop a recommended set of energy infrastructure procurement policies for submission to the Federal Acquisition Regulatory Council (“FAR Council”). The FAR Council is in turn required to consider proposing amendments to federal agency procurement regulations for notice and public comment within 180 days of receiving any such recommendations.

The Executive Order defines terms that are key to identifying its scope and breadth. These terms are not capitalized, but can be found in Section 4 of the Executive Order. The full text of the Executive Order can be found here.

On April 16, the Federal Energy Regulatory Commission (FERC) issued two orders in proceedings related to PJM Interconnection, L.L.C.’s (PJM) Minimum Offer Price Rule (MOPR). First, FERC denied requests for rehearing and granted limited clarification with respect to its June 29, 2018 order (2018 Paper Hearing Order) where it (i) found PJM’s then-existing tariff to be unjust and unreasonable because it failed to address the suppressive effect of resources receiving out-of-market payments on the capacity market, and (ii) implemented a paper hearing to establish a revised MOPR to apply to both new and existing resources receiving out-of-market payments, regardless of resource type (see July 11, 2018 edition of the WER).

Continue Reading FERC Grants Limited Rehearing and Provides Limited Clarification on PJM’s Minimum Offer Price Rule

Authors:
Hugh M. McDonald, Partner, Troutman Sanders
Deborah Kovsky-Apap, Partner, Pepper Hamilton
Andrew L. Buck, Associate, Troutman Sanders

Chapter 11 bankruptcy filings are up 12% year-over-year from 2019, largely due to the COVID-19 crisis. Many companies are filing expressly in order to sell their assets, while others are dual-tracking standalone reorganizations with sale processes. Bankruptcy sales offer significant opportunities and advantages to strategic and financial buyers who are open to acquiring distressed assets. This high-level overview answers key questions about the bankruptcy sale process. For further information, please feel free to contact the authors.

Continue Reading Bankruptcy Asset Sales: A Primer

As we help our clients navigate the impacts of the novel coronavirus (COVID-19), Troutman Sanders has authored two Frequently Asked Question summaries particularly relevant to energy and infrastructure projects: one on Renewable Energy and Infrastructure and another on Force Majeure.

As COVID-19 continues to spread, Pepper Hamilton LLP and Troutman Sanders LLP have developed a dedicated Resource Center to guide clients through this unprecedented global health challenge. We regularly update the Resource Center with COVID-19 news and developments, recommendations from leading health organizations, and tools that businesses can use free of charge. Visit the full Resource Center here.

Authors:
Ben Deninger, Associate, Troutman Sanders
James Diwik, Partner, Troutman Sanders
Matthew Dials, Associate, Troutman Sanders
Robert A. Gallagher, Partner, Pepper Hamilton
Michelle Beth Rosenberg, Associate, Pepper Hamilton
Jamey B. Collidge, Associate, Pepper Hamilton

As of April 8, the governors of 42 states and the Mayor of the District of Columbia have taken executive action to combat the spread of the coronavirus (COVID-19) which affects the construction industry by (i) ordering non-essential businesses to cease physical operations – except minimum basic operations such as securing facilities or processing payroll; (ii) ordering all individuals within their jurisdictions to shelter-in-place, which may include the duty to self-quarantine, unless performing exempt functions; or (iii) both. This analysis highlights the impact of state executive orders on the construction industry and demonstrates the importance of reconciling state and local government regulations.

The federal government has yet to close businesses, instead opting to issue relevant guidance materials. For example, the United States Department of Homeland Security’s guidelines identify 16 sectors as “Critical Infrastructure” during the pandemic, which have been adopted by various states in their executive orders. The following construction industry workers commonly are included in the list of “critical trades” exempt from most states’ executive orders:

  • Building, construction, and other trades, including, but not limited to, plumbers, electricians, exterminators, operating engineers, cleaning and janitorial staff for commercial and governmental properties, security staff, HVAC, painting, moving and relocation services, and other service providers who provide services that are necessary to maintaining the safety, sanitation, and essential operation of residences, essential activities, and essential businesses and operations.[i]

Federal guidelines also include large portions of the construction industry, specifically employees supporting the following construction-related activities:

  • Construction of renewable energy infrastructure or energy sector fuels supporting the mining, processing, manufacturing, construction, logistics, transportation, permitting, operation/maintenance, security, waste disposal/storage and monitoring;
  • New and existing pipeline or on/offshore drilling projects and construction of natural gas, propane, natural gas liquids, and other liquid fuel processing plants;
  • Construction of critical or strategic infrastructure, traffic signal maintenance, emergency location services for buried utilities, maintenance of digital systems infrastructure supporting public works operations, and other emergent issues;
  • Plumbers, electricians, exterminators, builders, contractors, HVAC technicians, landscapers, and other service providers who provide services that are necessary to maintaining the safety, sanitation, and essential operation of residences, businesses, and buildings such as hospitals, senior living facilities, any temporary construction required to support the COVID-19 response;
  • Engineers, technicians and associated personnel responsible for infrastructure construction and restoration, including contractors for construction and engineering of fiber optic cables, buried conduit, small cells, other wireless facilities, and other communications sector-related infrastructure;
  • Ensuring continuity of building functions, including but not limited to security and environmental controls (e.g., HVAC), the manufacturing and distribution of the products required for these functions, and the permits and inspections for construction supporting essential infrastructure;
  • Essential maintenance, manufacturing, design, operation, inspection, security, and construction for essential products, services, and supply chain and COVID-19 relief efforts; and
  • Housing construction related activities to ensure additional units can be made available to combat the nation’s existing housing supply shortage.

Despite the Federal exemptions above, some jurisdictions have broadly restricted construction. In Pennsylvania, both residential and non-residential construction businesses may NOT continue physical operations EXCEPT for emergency repairs, health care facilities, and other limited exemptions.[ii] Similarly, New York has restricted all construction except (i) Emergency Construction (e.g. a project necessary to protect health and safety of the occupants, or to continue a project if it would be unsafe to allow it to remain undone until it is safe to shut the site); or (ii) Essential Construction (e.g. roads, bridges, transit facilities, utilities, hospitals or health care facilities, affordable housing, and homeless shelters.) The map below illustrates the different levels of state restrictions nationwide:  Except in Pennsylvania and New York, nearly all private and public construction projects nationwide can remain in operation and workers can leave their homes to work. However, many local jurisdictions have also issued Orders restricting business or ordering individuals to shelter-in-place which could affect construction projects. Because most statewide Executive Orders do not specifically preempt potentially conflicting local orders, it is generally recommended to comply with whichever Order is most restrictive. The following are several examples of how local jurisdictions have regulated business to combat COVID-19:

  • Boston, MA – Construction Prohibited
    On March 16, 2020, the City of Boston announced a temporary two-week pause on non-essential construction with certain limited exemptions such as most utility work, work on the transportation network, public health and health care facility work, and small residential construction work. Recognizing the significant economic impact, the Governor of Massachusetts directed that any local policies in conflict with the State’s March 24 Order shall be withdrawn. The Mayor of Boston doubled down and announced he was affirmatively extending the City’s construction shutdown until further notice.
  • San Francisco Bay Area – Specific Construction Exempt
    Although California’s Executive Order directed all residents to stay home; on March 22, the State Public Health Officer exempted construction workers by classifying them as “Essential Critical Infrastructure Workers.” However, many local jurisdictions, including Northern California Bay Area Counties, significantly narrowed the type of construction activities allowed during their stay home orders. Alameda County, for example, amended its order on March 31 by limiting allowable construction activity to essential infrastructure, creating or expanding health care operations related to COVID-19, affordable housing that includes income-restricted units, public works specifically designated as an essential governmental function by the lead governmental agency, construction necessary to cure immediate issues of safety, sanitation, or habitability, in addition to activities necessary to shut-down non-exempt construction projects.
  • Harris County, TX (Houston) – Most Construction Exempt
    The Texas Executive Order is not as clear as others and, rather than prohibiting business or ordering residents to stay at home, it directs citizens to minimize social interaction/contact.[iii] Harris County Judge Lina Hidalgo issued an Order directing all non-essential businesses to cease physical operations and directing all individuals to stay home. Fortunately, the Order classifies most types of construction – including but not limited to commercial, residential, manufacturing and public works construction – as “Essential Business” meaning they are exempt from its effect.[iv]

Employers should also consider that in most states, social distancing measures – to the extent possible – are still required and out-of-state laborers may be required to self-quarantine for up to 14 days before commencing physical operations.

  • General Social Distancing Requirements:
    Most states still require Essential Businesses to mandate their employees to practice social distancing to the extent possible; meaning (i) maintaining a distance of six feet between people; (ii) washing of hands with soap and water for at least 20 seconds as frequently as possible; (iii) covering coughs or sneezes into the sleeve or elbow; (iv) regularly cleaning high-touch surfaces; and (v) not shaking hands.[v]

    • New York-Specific Social Distancing Requirements:
      Pre-shift meetings and orientations must include information on protecting against infection, and employers must (i) provide personal protective equipment and required training to employees; (ii) require 100% compliance with protective eyewear and work glove policies; (iii) limit crew size to the extent possible; (iv) maintain a robust sanitizing schedule for all frequently touched surfaces throughout all work shifts; and (v) designate a contact person for employees to address COVID-19 questions and concerns.[vi]
  • Self-Quarantine for Out-of-State Labor:
    In Alaska, Florida, Hawaii, Maine, Rhode Island and Vermont, all individuals traveling from states with substantial community spread are required to self-isolate for 14 days with exceptions for those persons performing essential activities.[vii]

The Executive Orders in effect in most states currently expire at some point in April; however, some states have longer expiration dates:

  • Six states (Delaware, Hawaii, Massachusetts, New Hampshire, Ohio and Washington) run through May;
  • Virginia’s Order runs through June 10, 2020; and
  • 11 states run through the duration of the State of Emergency in their respective states (California, Florida, Kentucky, Maryland, Minnesota, New Jersey, New Mexico, Oregon, South Carolina and West Virginia).

Here is an illustration of the general duration (different Orders expire on different dates) of the Executive Orders nationwide:

A more detailed summary of the specifics of each executive order can be found here.

 


 

[i] See, e.g., Indiana Executive Order No. 20-08 § 14(j).

[ii] See Pennsylvania Emergency Proclamation and Industry Operation Guidance issued by Governor Wolf, available at: https://www.scribd.com/document/452553026/UPDATED-4-00pm-April-1-2020-Industry-Operation-Guidance (last visited on 4/3/20 at 9:30 AM).

[iii] See Executive Order GA-14, available at: https://gov.texas.gov/uploads/files/press/EO-GA-14_Statewide_Essential_Service_and_Activity_COVID-19_IMAGE_03-31-2020.pdf (last visited on 4/7/20 at 3:00 PM).

[iv] See Stay Home, Work Safe Order of County Judge Lina Hidalgo, available at: https://www.readyharris.org/stay-home (last visited on 4/7/20 at 3:00 PM).

[v] See Wisconsin Emergency Order #12 § 16, available at: https://evers.wi.gov/Pages/Newsroom/Executive-Orders.aspx (last visited on 4/3/20 at 9:30 AM).

[vi] See REBNY & BCTC Industry Standards for Construction Safety, available at: https://www.rebny.com/content/dam/rebny/Documents/PDF/News/REBNY_BCTC_Industry%20Standards.pdf (last visited on 4/3/20 at 1:00 PM).

[vii] See Florida Executive Orders No. 2020-80 & 2020-86, available at: https://www.flgov.com/2020-executive-orders/ (last visited on 4/3/20 at 9:30 AM).

The COVID-19 pandemic has disrupted strategies for ensuring that solar and wind projects will satisfy the “beginning of construction” requirements for purposes of the ITC and PTC, with respect to both the procurement of equipment and the placing in service of projects.

Delays in Safe Harbor Equipment Procurement

To qualify for the 30% ITC, solar projects had to begin construction in 2019. The ITC is phased down to 26% for projects on which construction begins in 2020.

Many developers seeking to begin construction for ITC purposes procured project equipment with the goal of incurring at least 5% of the projects’ costs before 2020 and, thereby, satisfying the Five Percent Safe Harbor under Notice 2018-59. Certain of these developers have utilized the so-called “3.5 month rule” to satisfy the economic performance requirement for incurring costs for income tax purposes. Under the 3.5 month rule, a taxpayer may treat services or property as provided to the taxpayer (and, therefore, economic performance as having occurred) as the taxpayer makes payment to the supplier, if the taxpayer reasonably expects the property to be provided within 3.5 months after its payment.

The severity of the COVID-19 pandemic and consequential supply chain disruption generally was unexpected as of December 31, 2019, the last date that payments qualifying for the 3.5 month rule in 2019 could be made. Accordingly, developers likely are to take the position that they “reasonably expected” the property to be provided to them within 3.5 months if the delivery delays were caused solely by the COVID-19 pandemic. A careful review of the applicable facts and circumstances is necessary to support such claims. Furthermore, developers also may wish to take steps to ensure that economic performance occurs within 3.5 months of the applicable payments, such as accelerating the title transfer provisions of supply agreements (assuming a title transfer is the purchaser’s default method of economic performance).

Delays in Placing Projects in Service

The ITC and the PTC both require that a taxpayer make continuous progress toward completion once construction has begun (the “Continuity Requirement”). Whether the Continuity Requirement is satisfied depends on the relevant facts and circumstances. However, there is a safe harbor (the “Continuity Safe Harbor”) pursuant to which the Continuity Requirement is deemed to be satisfied if a taxpayer places a facility in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began.

To qualify for the full PTC, wind projects had to begin construction before 2017. Accordingly, for wind projects that began construction in 2016, the deadline to satisfy the four-year Continuity Safe Harbor is December 31, 2020. If COVID-19 were to result in delays that cause a project to be placed in service after December 31, 2020, the Continuity Safe Harbor would not be satisfied, and whether the Continuity Requirement would be satisfied would be based upon all of the facts and circumstances.

Even for projects with good documentation that the Continuity Requirement is satisfied, buyers and tax equity investors may require specific indemnities, credit support, tax insurance, or other risk mitigation mechanisms.

The COVID-19 pandemic also raises general issues with respect to disruptions in the renewable energy supply chain and the application of force majeure provisions in engineering, procurement, and construction agreements and offtake contracts, which we have addressed in a related post.