On December 28, 2013, the new Electricity Sector Act (Act 24/2013, of December 26) or “LSE” came into force.
The LSE maintains the essence of the rules established under Royal Decree- Law 9/2013, of July 12. Existing renewable energy plants will receive the market price and will be entitled to additional remuneration that, based on investment costs and standard operations costs, will enable them to achieve certain profitability.
This profitability, calculated for “efficient and well-managed” companies, will be reviewed every six years, and the remuneration parameters will be modified every three or six years (depending on the case).
The remuneration regime for renewable energy plants depends on (i) a new royal decree expected to be approved shortly, which will establish the framework for these plants; and (ii) the approval of ministerial orders establishing the standard value applicable to each technology and the new system for settling payments with the renewable energy plants, which are expected to be approved in March (although it is possible that these could be approved at a later date, given the processing status). However, the market’s participants have obtained the provisional text of the royal decree and the ministerial orders.
It must be highlighted that the definitive remuneration for 2013 has not yet been established. Royal Decree-Law 9/2013, of July 12, kept the system based on Royal Decree 661/2007, already abrogated, as a “payment-on-account-regime,” stating that income corresponding to the second half of 2013 would be reviewed once the remuneration under the new system was approved.
The uncertainty of this situation directly affects all renewable energy plants, particularly projects that used project finance structures for their financing, as those structures were created based on their capacity to repay the debt from the income earned by applying the special tariff regime.
This situation leads to corporate, financial and insolvency issues that companies owning renewable energy projects must consider until approval of the implementing regulations establishing how to calculate the remuneration these companies will receive, or once the implementing regulations come into force.
Thus, given the introduction of this new regulatory regime, each company’s situation must be studied in detail, including the following issues:
- OBLIGATION TO DRAW UP FINANCIAL STATEMENTS
Company directors must draw up their financial statements within the deadline established by law, i.e., within the first three months from the closure of the financial year (the deadline is March 31 for most public and limited companies). The difficulty of preparing financial statements arising from regulatory uncertainty does not exempt directors from the obligation to draw up financial statements within the deadline, although it may be advisable to hold off preparing them as long as possible in the hope that this uncertainty will be resolved. In any case, the future approval of the ministerial orders could require the financial statements to be restated again and affect the schedule for their approval by boards of directors.
- CONTENT OF FINANCIAL STATEMENTS
In these circumstances, to meet their duty of care, directors must consider the best way to handle matters when drawing up financial statements for 2013 and decide how to reflect the effects—concerning income earned in 2013, and the value of assets and their possible impairment—of the new regulations in their financial statements.
The following particularly relevant accounting principles and criteria should be observed: (i) the accrual and prudent valuation principles in article 38 of the Commercial Code; and (ii) the 23rd valuation rule of the General Accounting Plan, which, for drawing up financial statements, requires that later incidents showing conditions in existence at year-end closing be considered, leading to adjustments, addition of information in the notes to the financial statements, or both.
Thus, each company’s situation must be analyzed on a case-by-case basis when reflecting in the financial statements the potential effects of the regulations not yet approved. Factors to consider are the reliability or certainty of the provisional texts, the effects of a potential adjustment on companies’ financial statements, and the corporate or contractual effects deriving from all of this.
Attention must be paid to a potential equity imbalance, which could be mitigated depending on whether the special regime for calculating loss based on impairment in cases of capital reduction and mandatory dissolution, established under the Sole Additional Provision of Royal Decree-Law 10/2008, is extended.
- OBLIGATIONS DERIVED FROM FINANCING CONTRACTS
The financing contracts entered into for building and implementing the plants will have considered the generation of cash flow which, in line with the regulated tariff, corresponds to the projects, to predict the capacity to repay the debt. This would be reflected in the debtor companies’ financial obligations, mainly in the financial ratios agreed.
It will also be necessary to analyze the potential effects of the variations in the financing contracts’ remuneration system and possible future actions if the financial covenants agreed in those contracts are breached.
Although it could be advisable to carry out this analysis now, it would not be possible to specify the effects until the new remuneration is published and the ministerial orders come into force.
- INSOLVENCY ISSUES
The situation should be analyzed from an insolvency perspective, and appropriate measures must be applied to comply with the regulations and avoid the potential liability of directors in these circumstances.
Directors must request a declaration of insolvency within two months of the date on which the company became aware of or should have become aware of its state of insolvency, i.e., its inability to meet debts as they become due. However, within this two-month deadline for requesting the declaration of insolvency, companies can inform the court that they have started negotiations to reach a refinancing agreement or to obtain adherence to an advanced composition proposal according to article 5 bis of the Insolvency Act. This enables directors to extend the negotiation process in which they were engaged with their creditors for a maximum of six months from the time they became aware of or should have become aware of their companies’ actual insolvency, and it protects against possible requests for mandatory insolvency by dissident creditors or creditors not involved in the negotiations (also protecting directors from the liability that could arise from a late request for insolvency).
As with financing contracts, it is advisable to analyze the effects of the new regulations, although until these come into force and remuneration is officially established, no insolvency situation per se could be considered to arise requiring the above measures to be taken.