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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

Payment IssuesDamages, Options, Leases, Production

OSUOKC

April 10, 2009

Brad Yarbrough

Pilgrim Land Services


Different kind of same new way of looking at payments

Different Kind of Same…New Way of Looking at Payments


Quick review

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……


More quick review

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


More quick review1

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


Landowner concerns

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


Two basic payments made by lessee

TWO BASIC PAYMENTS MADE BY LESSEE

I.

OPTION

PAYMENT

II.

LEASE

PAYMENT


Payments to landowner

PAYMENTS TO LANDOWNER

  • NO SINGLE FACTOR DETERMINES COMPENSATION LEVELS

    • LAND VALUE

    • TURBINE SIZE

    • PRICE OF ENERGY

    • LANDOWNER KNOWLEDGE

    • MARKET PRICES FOR SIMILAR PROJECT PAYMENTS


I option payment

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)


Ii lease payments

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


1 lump sum payment

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)


2 fixed annual payment

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


3 percentage royalty

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


3 percentage royalty1

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


3 percentage royalty2

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


4 combination fixed payment royalty

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)


Emerging payment methods

EMERGING PAYMENT METHODS

  • POOLING OF TRACT OWNERS TO SHARE PAYMENTS

    • WIND ENVY AMONG NEIGHBORING SURFACE OWNERS

    • EUROPE PIONEERING

    • SIMILAR TO O&G POOLING


Final authority developer

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


Payment issues damages options leases production

Q & A

THANKS!

[email protected]

www.pilgrimland.com

405-604-8000


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