Legal Issues facing wind leases and wind development

1. Legal Issues facing wind leases and wind development PRESENTED AT: The University of Texas School of Law 2009 WIND ENERGY INSTITUTE

2. Panelists: Greg Friend, McElroy, Sullivan & Miller, L.L.P. Roderick E. Wetsel, Wetsel & Carmichael, LLP Robert P. Wright, Baker Botts, L.L.P. Moderator: Lisa Chavarria, Stahl, Bernal & Davies, L.L.P.

3. 2008 was another record breaking year for wind installations. But the late extension of the PTC and economic crisis will likely result in fewer new project installations in 2009. Ripple effects of economic crisis extend to wind leases and Texas wind development.

4. Ripple Effects • How has the financial crisis changed the way we look at wind leases? • How has it changed the prevalence of wind lease offers and planned projects? • Other shifts? • Are these shifts permanent, temporary, hard to project?

5. Landowner Concerns • Option, construction and operation periods • Developer has right to terminate lease • Insurance for ongoing covenants • Valuable capital improvements • Decommissioning • Bond requirements • Ongoing review/approval rights as to amount, surety • Is bond protection impaired if lease rejected by Developer's bankruptcy trustee?

6. Developer Concerns • Harder to obtain equity investors • Needs little from Landowner other than lease • Landowner may reject leases and executory contracts in bankruptcy under Sec. 365(a) • If lease is rejected, Developer may retain possession under Sec. 365(h)(1) • Will an “easement” be treated as a lease for purposes of Sec. 365? • If not, is the easement an executory contract?

7. Developer Concerns (Cont’d) • Important for Developer to perfect lease rights through timely recordation of memorandum • Could be voidable as preference if not recorded within 30 days of receipt of lease (Sec. 547) • Bankruptcy Code gives trustee rights of bona fide purchaser without notice (Sec. 544)

8. Project Lender Concerns - Developer • More stringent equity requirements and due diligence • More attention to lender protections in lease • Lien against Developer’s assets can be foreclosed • If bankruptcy trustee for Developer's estate rejects lease, Lender can rely on "comeback lease" provisions of the lease

9. Project Lender Concerns – Landowner • Prior liens against fee require subordination or additional protections from developer • If Landowner's bankruptcy trustee rejects lease, Lender may preserve leasehold rights if given right to do so under the lease (Sec. 365(h)(1)(D))

10. Two Approaches to Project Leasing 1. Keep entire project area under lease for life of project. 2. Entire project initially placed under lease; after construction lease area reduced to area with improvements only.

11. Entire Project Area Leased Lease Line Roads

12. Improvement Area Only Lease Line

13. Improvement Area Only Lease Lines

14. Pooling Formula • Percentage of Gross Revenues produced by the entire Project multiplied by the ratio of acres contributed by the landowner (as compared to the total project area). • Paid to everyone included in the project area regardless of whether turbines are installed on the property.

15. Do Wind and Oil Mix? • In Texas the mineral estate is the dominant estate. • The Accommodation Doctrine mitigates the dominant position of the mineral estate requiring the mineral owner to exercise “due regard” for the surface owners use. See Getty Oil Co. v. Jones, 470 S.W.2d 613 (Tex.1971)

16. Transmission Easements The PUC has authorized a $4.9B transmission buildout to provide transmission to wind energy Projects. Landowners located in transmission corridors are likely to see a spike in transmission easement activity.

17. Transmission Easements • What to consider: • What’s included? • Defined and Purpose • Parameters of the easement • Width and height • Uses Reserved • Term • Termination • Trigger • Removal • Condemnation Rights?

18. The Learning Curve The first wind project went on-line in Texas in about 1994. As of November 2008 Texas has, according to ERCOT, 7,912 MW of installed wind Capacity. What have we learned now that wind projects are up and running?

19. Lessons Learned • Importance of lease clauses that retain right to build phased projects. • Landowners like to sever wind rights. • Public opinion is important at all stages of project development.

20. Partial Assignment • The issue: different portions of leased premises will be used for different phases • The alternative: split lease • cleaner approach; each has separate rights and obligations • for co-usage, grant easements • In partial assignment, both lessees are parties to same agreement • must determine extent of rights and obligations of each

21. Partial Assignment • Partial assignment requires careful consideration and agreement with landowner • division of rent obligations • minimum payment requirements • road/transmission lines • substation rights • renewal rights • termination rights • point of contact

22. Partial Assignment (cont’d) • Landlord agreements • not to look to one co-tenant for the other's defaults (and/or right to cure defaults of the other) • no consent necessary to acquisition of interest of one by the other • comeback lease rights if lease terminates through rejection in bankruptcy or by default

23. Partial Assignment (cont’d) • Consider need of one phase owner to use other phase owner's land • partial assignment: reservation of co-usage rights over Phase II land and grant of co-usage rights over Phase I land • separate leases: each lessee grants easements to other

24. Severing Wind Rights • Landowners should sever with caution – there is no judicial or statutory guidance on this issue in Texas. • Reservation of a portion of the royalty with no executive rights (similar to a non-participating royalty interest) is the best approach. • Surface payments should stay with surface owner.

25. Public Opinion is Important

26. Conclusion • Questions?