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Payment Issues Damages, Options, Leases, Production

Payment Issues Damages, Options, Leases, Production. OSUOKC April 10, 2009 Brad Yarbrough Pilgrim Land Services. Different Kind of Same… New Way of Looking at Payments. QUICK REVIEW. NUMEROUS AGREEMENTS IN USE PROTECTS LESSEE’S FUTURE INVESTMENT RECOGNIZES FINANCING OF PROJECT

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Payment Issues Damages, Options, Leases, Production

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  1. Payment IssuesDamages, Options, Leases, Production OSUOKC April 10, 2009 Brad Yarbrough Pilgrim Land Services

  2. Different Kind of Same…New Way of Looking at Payments

  3. QUICK REVIEW • NUMEROUS AGREEMENTS IN USE • PROTECTS LESSEE’S FUTURE INVESTMENT • RECOGNIZES FINANCING OF PROJECT • LESSEE RESISTANT TO CHANGES IN AGREEMENT • OPTION OFTEN INCLUDED IN LEASE (EXPLORATORY PERIOD) BUT MIGHT BE SEPARATE AGREEMENT • PROVISIONS • TERM OF 20 – 50 YEARS COMMON • AREA OF LAND TO BE LEASED • APPROVED USES OF LAND • ACCESS TO LAND & OPERATIONAL REQUIREMENTS • MORE……

  4. More…QUICK REVIEW • PROVISIONS (CONT) • UPWIND BLOCKAGES • NOISE • CROP PROTECTION • DECOMMISSIONING • TAXES • OTHER • DOCUMENT LENGTH OF 30-40 PAGES • HAS PROVISIONS NOT IN O&G LEASE

  5. More…QUICK REVIEW • LEASES THE SURFACE ONLY (TENANCY FOR NUMBER OF YEARS) • CONTAINS PROVISIONS FOUND IN OTHER LONG TERM LEASE AGREEMENTS A DIFFERENT KIND OF SAME

  6. LANDOWNER CONCERNS • WANTS PROVISIONS TO PROTECT THE LESSOR • PRESERVE & PROTECT RIGHT TO USE & ENJOY • FARMING, RANCHING • HUNTING, RECREATION • OIL & GAS EXPLORATION, PRODUCTION • MAXIMIZE LAND’S POTENTIAL INCOME

  7. TWO BASIC PAYMENTS MADE BY LESSEE I. OPTION PAYMENT II. LEASE PAYMENT

  8. PAYMENTS TO LANDOWNER • NO SINGLE FACTOR DETERMINES COMPENSATION LEVELS • LAND VALUE • TURBINE SIZE • PRICE OF ENERGY • LANDOWNER KNOWLEDGE • MARKET PRICES FOR SIMILAR PROJECT PAYMENTS

  9. I. OPTION PAYMENT • SIGNING BONUS • A SEPARATE AMOUNT PER MET-TOWER • BASED ON NUMBER OF ACRES • MINIMUM PAYMENT (SMALL TRACTS) • FLAT FEE PAID PER YEAR • ESCALATING FEE PAID PER YEAR (OPTION PERIOD OF UP TO 5 YEARS)

  10. II. LEASE PAYMENTS The RENT or ROYALTY Provision 2.FIXED ANNUAL PAYMENT 1. LUMP SUM PAYMENT 3. PERCENTAGE of REVENUE… a ROYALTY 4. COMBINATION of FIXED PAYMENT & ROYALTY

  11. 1. LUMP SUM PAYMENT • PER TURBINE or MW BASIS • IT’S SIMPLE • GIVES LANDOWNER SUBSTANTIAL, AVAILABLE CASH • ELIMINATES FINANCIAL BENEFIT OF REVENUE INCREASES (LANDOWNER HAS NO STAKE IN PROJECT’S SUCCESS) • MAY COMPLICATE FUTURE SALE OF LAND (NEW OWNER HAS NO $ BENEFIT)

  12. 2. FIXED ANNUAL PAYMENT • IT’S SIMPLE • PER TURBINE, MW, UNIT OF LAND • MAY INCLUDE CROP LOSS OR PER/ACRE VALUE OF “USED” LAND • MAY INCLUDE ANNUAL ESCALATOR • PAID EVEN IF TURBINES ARE IDLE • NO LANDOWNER BENEFIT IF PROJECT EXCEEDS FINANCIAL EXPECTATIONS • LESSOR LACKS INCENTIVE TO HELP PROJECT SUCCEED

  13. 3. PERCENTAGE/ROYALTY • BONUS PAID BEFORE CONSTRUCTION • MONTHLY PAYMENT UNTIL CONSTRUCTION • BASED ON NUMBER OF TURBINES & RODS • INSTALLATION FEE (SURFACE DAMAGES) • MAY BE PAID IN CONJUNCTION WITH BONUS PAYMENTS OR IN LIEU • PER MW OF INSTALLED CAPACITY (PRESUMED MORE DAMAGE W/ MORE MW) • SEPARATE PAYMENTS PER ROD AMOUNT FOR ROADS AND UNDERGROUND T-LINES

  14. 3. PERCENTAGE/ROYALTY • REVENUE MUST BE MEASURED AND ACCOUNTING AVAILABLE TO LESSOR • MORE REVENUE IF WIND POWER VALUES INCREASE • MORE RISK TO LANDOWNER OF NOT RECEIVING REVENUE (LESSOR MIGHT WANT SOME INCENTIVE IN AGRMNT FOR DEVELOPER TO KEEP EQUIP OPERATING) • LANDOWNER HAS VESTED INTEREST IN THE SUCCESS OF THE PROJECT

  15. 3. PERCENTAGE/ROYALTY • PAYMENT BASED ON FORMULA • SEMI-FIXED (ex. 4% first ten years then 5%, 6% thereafter) • GRADUATED SCALE (ex. 4% first five years with ½% increases every period thereafter) • A MINIMUM PAYMENT SOMETIMES USED

  16. 4. COMBINATIONFIXED PAYMENT/ROYALTY • FIXED AMOUNT PER TURBINE OR MW • LOWER % OF GENERATED INCOME • FIXED PORTION PAYS WHEN POWER GENERATION IS LOW • ROYALTY PORTION HAS BENEFITS TO LANDOWNER AND TO DEVELOPER (SEE PREVIOUS SLIDE)

  17. EMERGING PAYMENT METHODS • POOLING OF TRACT OWNERS TO SHARE PAYMENTS • WIND ENVY AMONG NEIGHBORING SURFACE OWNERS • EUROPE PIONEERING • SIMILAR TO O&G POOLING

  18. FINAL AUTHORITY: DEVELOPER • EACH DEVELOPER HAS ITS OWN PAYMENT METHOD • AGENTS MUST KNOW DEVELOPERS LEASE TERMS & EXPECTATIONS • LANDOWNERS ARE GOING TO TRY TO NEGOTIATE TERMS TO FAVOR THEM • AGENTS MUST INFORM DEVELOPER OF LANDOWNER CONCERNS/ISSUES

  19. Q & A THANKS! brad@pilgrimland.com www.pilgrimland.com 405-604-8000

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