Deal Structure Primer for Energy Development Projects

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Deal Structure Primer for Energy Development
Projects
GARDINER ROBERTS LLP
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BACKGROUND

• Increasingly, First Nations are actively
  engaged in developing and planning energy
  projects as community economic development
  initiatives.
• First Nations communities often struggle
  to find geographically and culturally feasible
  foundations for economic development.
• Energy Development offers an opportunity
  to create independent revenue streams for First
  Nations.

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BACKGROUND

• Expertise are building among First Nations
  as they partner with industry.
• Increasingly, First Nations are showing a
  greater interest in participating in these
  projects.
• With that interest in greater
  participation comes a different relationship,
  different opportunities and different risks.

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Energy Project Options

• Limited Partnerships
• When two or more corporations decide to combine
  their resources and go into business together in
  pursuit of profit.
• Flow Through Corporations
• Investment vehicle for raising capital on the
  market that is unique to corporations engaged in
  exploration or development of certain Canadian
  Natural Resources.

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Limited Partnerships

• A limited partnership is a creation of statute
  (Limited Partnership Act).
• A combination of the limited liability feature of
  incorporation with the flow through treatment
  of income and losses as with ordinary partnership
  law.
• The limited partnership is an investment vehicle
  for passive investment by limited partners and
  tax treatment advantages.

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Limited Partnership Basic Structure
Unit Certificates get issued to Partners based on
contribution and liability of the partner is
typically limited to the amount invested.
Partners contribute Assets Leasing Rights,
Power Purchase Contracts, Allowable Costs, Cash,
Equipment, etc.
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Who are the Partners?

• OPTION 1
• First Nation (P1) and Industry Partner (P2)
  enter into a Power Partnership LP (LP)
• P1 and P2 create a GP corporation (GP)
• LP Agreement sets out the purpose of the LP
  and the relationship among the P1, P2 and GP
• Shareholder Agreement governs actions of the
  GP

LP Agreement
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Who is the General Partner?

• A Limited Partnership (LP) is not a separate
  legal person and therefore it cannot enter into
  contracts or own property.
• A General Partner (GP) is required in order to
  preserve the limited liability status of the
  individual partners.
• The GP carries out the acts of the LP and thereby
  has sole control over the property and business
  of the LP.

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Who is the General Partner?

• The Partners do not have any independent
  ownership rights in the property of the LP. They
  are entitled to the profits and losses according
  to the terms of the LP Agreement.
• The GP is typically a Corporation and its
  shareholders are typically parties controlled or
  wholly owned by the Partners.
• A GP Shareholder Agreement governs the acts of
  the GP to preserve control by the Partners.

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Status of Partnerships for Income Tax Purposes

• Although and LP is not a separate legal person,
  it is a separate legal person for purposes of
  computing income under the Income Tax Act (ITA).
• Income, Capital Gains (CG), Non-Capital Losses
  (Losses) get computed at the LP level. Once
  calculated at the LP level, the Income, CG and
  Losses get allocated in accordance with the LP
  Agreement. This is what we mean by Flow
  Through.
• Whether an LP is tax-exempt is determined on a
  case-by-case basis. If it can be demonstrated
  that the partnership is situated on a reserve,
  any of its income allocated to the Indian Band
  may be exempt from Income tax.

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Flow of Income and Losses
Beneficial Owners Investors/ First Nations
Membership
Net Profits flow back to beneficial owners
Income calc. at LP level and losses offset
taxable income
Limited Partners Corporations or Trusts
Leases, PPA etc
Cash, Equip.
Income
Losses
Limited Partnership
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Other Options Master LP

• OPTION 2
• FN1, FN2, FN3, etc. set up a Master
  Agreement
• Master LP sets out the rules of engagement
  for projects on a going forward basis
• A separate LP or Flow Through Corp structure
  is set up for each Project.

LP2
F/T1
Create Project LPs or Flow Through Corps (F/T
Corp)
Project 3
LP1
Project 2
Project 1
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Master Agreement provides that each project will
use similar management
Management LP
Transmission LP
Management LP will deliver services, staff and
other resources to each Project LP to provide
continuity and expedite a track record to
facilitate lender due diligence
Wind LP3
Wind LP1
Wind LP2
Transmission LP can be created and starting place
for activities would be to build its asset base
by securing leasing rights. Transmission LP would
be the Tenant. Once leasing rights secured,
other Partners could be farmed-in to develop the
transmission line.

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Key Elements of LP Agreements

• Money In Contributions of partners and Capital
  Structure of the LP
• Units, partnership interests or percentages, in
  kind equity, subordinated debt
• What are the capital needs of the business?
• Cash calls mandatory or voluntary
• Is credit support being provided by certain
  partners
• Money Out Allocation of profits and losses
• Control Governance Structure, management entity,
  admission of new partners. Are all partners
  treated equally?
• Exits Dispute Resolution, Termination of
  Agreement.

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Flow-Through Corporations as a means of raising
capital

• Flow through shares are an investment vehicle
  unique to corporations engaged in the exploration
  or development of certain Canadian natural
  resources. Governed by S.66 to 66.8 of the ITA.
• A Principal Business Corporation (PBC) must
  carry on certain activities related to the
  Canadian natural resource development. Energy
  development falls into this category provided
  that the corporation is generating energy using
  property described in Class 43.1 of Schedule II
  of the Income Tax Act regulations.

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Flow-Through Corps. Cont.

• Appendix A sets out the qualifying activities
  of the PBC.
• Provided this threshold is met, a PBC may
  renounce certain expenses, called Canadian
  Exploration Expenses (CEE). S.66.1(6) of the ITA.
• Appendix B sets out the qualifying expenses.
  Note these qualifying expenses can be reduced by
  the source of the funds such as government
  assistance.
• Care must be taken to ensure that a given expense
  qualifies.
• A Subscriber invests by way of a Subscriber
  Agreement in a given year and receives in return
  a CEE that it can use to reduce its marginal tax
  rate.

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