Negotiate a Contract

Once you have selected a winner out of RFP participants, it is time to negotiate the PPA and any related documents.

During this process, contract provisions are likely to change. You may find that the terms of the deal evolve such that the provisions your internal stakeholders approved, and perhaps even the fundamental economic analysis, become materially different. Therefore, it is critically important that you continue to work with all internal stakeholders—especially legal and accounting teams—to ensure that the final agreement aligns with your company’s requirements.

This page focuses on these two most important issues, as well as one that you might not have considered:

• deal valuation and risk assessment;

• accounting treatment; and

• structuring a deal that will yield an operating renewables project.

Deal valuation and risk assessment

In most corporations, the financial controller will expect the deal team to perform a detailed deal evaluation and risk assessment and share the results of their analysis for critical scrutiny.

We have described in stage 7 the various approaches the deal team can follow to perform that task. It is good practice to have involved accounting/finance early on in the upcoming transaction, logged in a disciplined fashion their questions and concerns, and answered them in written form as early as the analysis makes it possible.

Typical questions that the finance and accounting teams will ask are below. Keep these questions in mind during negotiation of the PPA, in case the answers evolve.

• What is the strategic rationale behind this deal?

• What is the NPV of the transaction?

• What assumptions have you made on future electricity prices?

• What are your sources for this forecast? Have you triangulated with other sources?

• What is the worst case scenario? How did you establish it?

• How much money will we save with this contract during the first year of operations?

Controlling will also be concerned with the duration of the contract and how it matches the expected lifetime of the business activity that it is designed to supply. However, in most cases they will provide the deal team with a maximum deal duration that will not be open to negotiations.

With respect to risk assessment, refer back to the company’s risk appetite, determined in stage 5. Are the terms and conditions outlined in the contract in line with your company’s risk tolerances?

Accounting treatment

As described in previous stages, accounting concerns are often among the most critical in these transactions. It is therefore crucial that you ensure that changes to documents during the negotiation process are acceptable to your company.

Accounting and treasury are likely to be concerned with the accounting treatment of the proposed transaction. Some corporations will have strict guidelines limiting the use of derivatives; others will not, but in either case CFOs are highly unlikely to approve a large-scale off-site renewable deal until the accounting treatment is clarified and validated by external auditors.

As these deals are still relatively uncommon, reaching a conclusion on accounting treatment is likely to take a significant amount of time (months, not days).

BRC Canada is developing an accounting primer that describes in detail the accounting issues that will need to be addressed. It is good practice to involve accounting and treasury early on in the upcoming transaction, and, as for finance, log in a disciplined fashion their questions and concerns. However, accounting will not expect the deal team to provide accounting expertise. We believe, however, that the issues are almost always the same, and deal teams may find it helpful to provide to their accounting department access to our accounting primer. We are also in a position to bring together finance executives from various corporations in conference calls for them to exchange experience on these accounting issues.

The main accounting issues are:

• Will the transaction trigger derivative accounting?

• Will the transaction trigger capital lease accounting?

• Will the project be considered to be a variable interest entity (VIE)?

• Are there any reporting requirements for this transaction under Dodd-Frank?

Structuring a “bankable” PPA

It is possible that if you are too successful in negotiating a deal then your counterparty (the project developer) will be unable to obtain the necessary financing to deliver the project. Therefore, it is important for buyers to understand what is required to create a bankable PPA. When corporate buyers negotiate PPAs with developers, they are, in effect, dealing not only directly with a developer but also indirectly with the financiers that will back the project—both lenders and equity investors. We are aware of several instances in which companies signed PPAs but found themselves without operating projects because the developer was unable to find viable financing due to the PPA not satisfying the expectations of lenders and investors.