The opportunity for Indigenous Nations to acquire equity in projects has become a common feature in major project agreements across British Columbia. Equity deals offer benefits to both Indigenous Nations and industry: they can help ensure Nations benefit financially from a project in their territory, and it provides industry with opportunities to access capital that is often offered at a reduced rate and also ensures that Nations have some ‘skin in the game’ in their projects.
The following are some best practices to consider when developing equity agreements with Indigenous Nations.
1. Consider value as well as percentage:
As a general rule, most equity deals are discussed and developed in percentage terms, For example, TC Energy offered a 10% equity share for Indigenous Nations along the pipeline route in the Coastal Gas Link Project (https://www.coastalgaslink.com/whats-new/news-stories/2022/2022-03-10-indigenous-groups-sign-historic-equity-option-agreements-with-tc-energy-on-coastal-gaslink/); Indigenous Nations negotiated a 40% equity stake in the Wembly Gas Co-Generation facility in Alberta https://www.newswire.ca/news-releases/five-indigenous-nations-in-northwestern-alberta-make-20-5-million-investment-in-greenhouse-gas-emission-reducing-cogeneration-unit-for-alberta-gas-plant-835227547.html, and BC Hydro stipulated in its last call for clean power that Indigenous Nations must make up a minimum of 25% equity in any project that it approves https://www.bchydro.com/work-with-us/selling-clean-energy/2024-call-for-power/background-and-development.html.
However, while the percentage is important, it is also necessary to think it terms of the value of the equity. Twenty-five percent of a $60 million project - $15 million – is much different than 25% of $2 billion project - $500 million – for example. Raising $500 million is no easy task, so at some point, a high percentage equity requirement or target can become a barrier because of significant financing complexities, and this ultimately adds costs to the project.
2. More is not always better:
Intuitively, it may make sense that more equity in a project or in an asset is better than less equity. But the higher the stake, the greater the responsibility, which translates into risk. At some point, with a higher percentage of equity, the Nation becomes part operator, not simply a passive investor.
3. It’s all about risk:
In addition to considering percentage and value of equity, Indigenous Nations may want to consider utilizing the following strategies in order to decrease risk with equity investments:
• Invest in the cash flow, not the hard asset: equity agreements that guarantee a minimum rate of return on capital, with an uplift tied to the financial performance of the operation, are preferable to direct investments in infrastructure. If investment is tied directly to infrastructure or an overall operation of a company, then Indigenous Nations may be subject to future cash calls or dilution of investment.
• Ensure the agreement provides a guaranteed return on investment: this will allow Nations to finance 100% of their equity share if necessary.
• Shape the investment as an option exercisable upon the project going into operation: this will remove the need for the Indigenous Nation to carry any of the construction risk; removes the need for the Nation to be responsible for any cash calls or potential dilution during construction; provides Nations with the time to review all the costs and revenue streams that will flow from the project prior to making a final decision to invest; and provides adequate time to organize financing.
• Secure capacity funding: costs to Nations to ‘close’ financing can be significant and reduces the share of any revenue stream. Indigenous Nations will want to consider accessing capacity funding to support legal and financing costs – including costs that may be incurred to structure the financial vehicle to hold the equity investment.
4. Equity opportunities are commercial, not based on strength of claim:
Successful equity initiatives have been set up as a purely commercial offering, and not subject to strength of claim negotiations (one Nation = one share = one vote).
Assigning equity value based on strength of claim is complex and creates issues when establishing the financial vehicle that holds the investment, and this is particularly true for linear projects with a large number of Indigenous Nations involved. Strength of claim can be reflected and dealt with in separate Project Agreements or Impact Benefit Agreements with individual Nations.