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. Continue Reading Executive Summary of Executive Order 13920 — Securing the U.S. Bulk-Power System

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.

The COVID-19 pandemic has already created considerable uncertainty and has the potential to significantly disrupt renewable energy project EPC and supply chains worldwide.

Wind Energy

The wind industry is particularly susceptible to the effects of this disruption because project completion delays could preclude developers from qualifying for the full value of the production tax credit. Critical components for wind projects were already in limited supply prior to the pandemic, and developers may have no viable supply alternatives. Additionally, as COVID-19 spreads across the United States and results in mandatory shelter-in-place requirements, worker availability at project sites could also affect project completion timelines. Given these complications, the industry has begun seeing force majeure claims from EPC contractors, wind turbine suppliers and other vendors.

Solar Energy

Supply chain disruptions are also likely to affect the U.S. solar industry. Because of existing tariffs on Chinese solar panels, U.S. developers often purchase panels from Southeast Asia, where manufacturing facilities have yet to encounter COVID-19-related disruptions on the same scale as China. Although most Southeast Asia-manufactured panels are made with raw materials from China, the availability of raw materials is less vulnerable to disruption relative to manufacturing slowdowns in China. Nonetheless, given the uncertainty about the continued spread of COVID-19 and its impact on panel availability, an increasing number of force majeure notices are likely to be issued moving forward. Similar issues are affecting the availability of lithium ion batteries and related equipment necessary for battery energy storage systems.

Force Majeure – Generally

Force majeure clauses may relieve a party of its contractual obligations when an unforeseeable and extraordinary event prevents such party from performing its obligations despite mitigation efforts. Typically, force majeure clauses list “acts of God” and other specific qualifying events. If epidemics or pandemics are specifically included in a force majeure clause, then a party seeking relief from its contractual commitments may be excused from performance provided that the other requirements are met. Even if epidemics or pandemics are not specified, they may qualify as an “act of God,” or other like category, unless specifically excluded. Whether a global pandemic qualifies as an “act of God” may depend on the jurisdiction and case law addressing the scope of such claims. Global pandemics may also give rise to claims of commercial impracticability, impossibility and illegality.

COVID-19 has the potential to give rise to force majeure claims with respect to labor shortages, supply chain disruptions, enhanced site safety and “social distancing” requirements, delays in the issuance of permits and utility approvals, and the potential for government proclamations that require site shutdowns. Project owners and contractors need to carefully consider their options under EPC and related contracts and begin to actively take steps to mitigate potential impacts (e.g., by updating site safety protocols to limit the risk of infection, accelerating purchase and delivery of equipment and canvassing alternate sources of project labor).

Project Owner Considerations

Project owners should assume a high likelihood of COVID-19-related force majeure claims. The appropriate response will depend upon various factors, including the status of completion of the project, the credit and performance quality of the contractor, any applicable surety bonds, the nature and extent of any other third party deliverables and requirements (e.g., owner-supplied equipment, utility construction, back-feed and inspection requirements, permit issuance and close-out) and available schedule float to meet financing and offtaker timing requirements. For early stage projects (particularly if notice to proceed has not been issued), the owner may prudently elect to suspend projects until greater certainty regarding the impact of the COVID-19 situation becomes clear. For projects substantially under way, the risk of suspension must be weighed against the economic carrying costs associated with the projects.

Owners should identify and be prepared to assert their rights under applicable force majeure provisions. A standard owner response to a force majeure claim should include a timely written demand to the contractor to document specific impacts supporting such claim. Owners should evaluate whether other unexcused contractor delays may give rise to a “concurrent delay” defense to such claims. Owners should also request assurances from the contractor regarding its ability to continue to perform, request copies of any applicable surety bonds, and ensure that any required subcontractor flow-down and step-in rights are in place. Owners that are directly sourcing panels, inverters and other key equipment need to evaluate the possibility that they may have additional exposure related to delays in securing delivery of such equipment.

Contractor Considerations

Contractors should review contractual force majeure provisions and take note of the applicable substantive and procedural requirements. Compliance with these requirements will be critical to the success of any force majeure claims. Best practices include making an initial force majeure notice regarding potential impacts before they may be quantified, with updates as better information becomes available. Contractors should also seek assurances from subcontractors and suppliers regarding their ability and intention to continue to meet downstream obligations. Any applicable sureties should be notified to preserve remedies and to actively involve the surety in the decision as to how to best mitigate impacts. Contractors should meticulously and regularly record any time, cost and efficiency impacts in order to preserve the basis for future claims. Contractors should also note the extent to which the contract affords relief for cost impacts as well as schedule delays. A likely contractor strategy will be to seek an “open book” change order in which the contractor is willing to proceed on a time and materials basis, as opposed to the typical fixed price EPC structure with strict schedule requirements.

Other Project Stakeholders and Considerations

Contract provisions aside, managing COVID-19-related impacts will require active and ongoing discussions between owners, contractors, key subcontractors, sureties, offtakers, utilities and other key project participants about how to move forward. Ultimately, all such parties have strong incentives to go forward, but given the unique and unprecedented scale of this pandemic, it is critically important that key risks be identified and equitably allocated among the parties.

COVID-19 impacts may also affect project owners’ ability to achieve required commercial operation dates and other key milestones under offtake contracts. Unless excused, failure to achieve such milestones may entitle an offtaker to delay liquidated damages. Like EPC contracts, offtake agreements typically contain force majeure provisions excusing project completion delays. A comparative analysis of such provisions is important to assess the ability to claim force majeure based upon underlying contractor claims. Developers should note, however, that even if a qualifying force majeure event occurs, such extensions may be limited if the offtake agreement limits the duration of force majeure relief or specifies outside completion dates for which no equitable extension is permitted. Finally, for hedges and other financially settled offtake arrangements, force majeure events typically do not excuse settlement obligations unless expressly stated to the contrary.

Owners also need to consider the liquidity of the credit markets and the extent to which construction and take-out financing will be available. Financing agreements do not contain force majeure provisions and may have outside commitment dates or MAE clauses, which excuse a decision by the financing provider to not provide committed financing.

The COVID-19 pandemic has also disrupted strategies for ensuring that solar and wind projects will satisfy the “beginning of construction” requirements for purposes of the ITC and PTC, including with respect to both the procurement of equipment and the placing in service of projects. An analysis of these issues prepared by Troutman Sanders tax attorneys is available here

Troutman Sanders LLP is actively working with owners, contractors, and others who have been or may be affected by supply chain disruptions. We are available to set up calls and/or videoconferences or otherwise provide guidance on particular issues for clients.