Indigenous equity ownership also assists organizations' ESG goals, say lawyers
First Nations are increasingly pursuing an equity interest in projects that impact their territories or Indigenous rights, say two lawyers at Fasken.
“What I have seen is a growing trend that the question of equity is one of the first questions asked anytime that you're engaging with a First Nation on a project – no matter what kind of project it is, no matter where it is throughout the country,” says Kevin O’Callaghan, leader of the firm’s Indigenous law group.
In Canada, a series of legal structures, some constitutional, require governments to consult and accommodate a First Nation before approving industrial project development, if that development will potentially affect their rights or title, says O’Callaghan. In some cases, environmental assessment legislation places an obligation to consult onto the project’s proponents as well.
“There are these multi-layered obligations to consult, engage, and address the interests of a nation with respect to the potential impacts,” he says.
One way to achieve that and meet both the Nation’s interests in relation to the impact, as well as their broader interests concerning their activities on their traditional land base, is to make an agreement, says O’Callaghan. Because the agreement seeks to align the interests of all parties, the equity discussion is often part of it.
While there is no obligation to strike a deal on equity, “from a reconciliation perspective,” Indigenous groups increasingly see it as a way to “level the playing field,” says Ron Ezekiel, co-leader of Fasken’s global energy and climate group.
Historically, impact benefit agreements have involved a royalty, or some kind of fixed payment, but First Nations cannot be sure whether those payments represent a “reasonable accommodation or reasonable compensation, given the profitability of the project,” says Ezekiel.
“Finding a way to provide an equity interest that is equivalent to all the other investors in the project reduces the risk that the deal that's on offer is different, or less valuable, than what other stakeholders on the project might receive.”
In 2019, Ezekiel led a team advising Quanta Services Inc., on the sale of its 20-percent interest in Alberta PowerLine, while at the same time, Canadian Utilities Limited sold the remaining 80 percent. Alberta PowerLine runs from Edmonton and the oil sands, and seven First Nations bought 40 percent of it.
“The two project owners decided to divest and the transaction was structured so that Indigenous groups along the transmission route were given an offer to participate and take up a portion of the equity in that project,” says Ezekiel. “That was an interesting transaction and dealt with a variety of issues around structuring, around timing of the investment, and closing of the deal.”
Financing is one of the main considerations at play when striking a deal for equity.
“You're really looking at how to de-risk the revenue stream on the project because access to financing and rates on financing are proportional to risk,” says Ezekiel. “If you've got a project that's going to generate a steady revenue stream, it's much easier to finance and easier for Indigenous groups to go out and seek market financing.”
Without market financing, the Indigenous party will either need to get the project sponsor to finance their contribution or seek financing from government, the Alberta Indigenous Opportunities Corporation being one potential source.
Financing on assets such as utilities, which have a reliable revenue stream, is easier than with riskier projects such as mines. But utilities will have a regulatory regime layered on top, which can require “bespoke solutions,” he says.
The deal will take an asset traditionally held by a utility and subject to regulation by a utility commission and put it into a “flow-through vehicle” such as a limited partnership, which, for tax reasons, are where Indigenous groups tend to own their assets.
“You're extracting that regulated asset out of a utility, putting it somewhere else, but still telling ratepayers that they need to provide a rate of return on the equity investment in it,” says Ezekiel. “So, there's some creative structuring required to make Indigenous equity work in a regulated context like that and the commissions are still working through how to do that. There is no one-size-fits-all solution to that. Or, at least, not yet.”
Another significant issue is the timing of the Indigenous investment.
In its early stages, before its clear whether the project will proceed, an investment carries more risk. “For the most part, if you want to align interests for the long term, most Indigenous groups would prefer to invest and put real money in real project when it's largely de-risked,” says Ezekiel.
But when investments are made through flow-through vehicles such as limited partnerships, the money must come into the project early enough that it can be spent on construction and development activities, otherwise it will be a taxable disposition, rather than a joint venture.
“The tax treatment on those things is very different,” he says.
Another method is an agreement up front for an option to take advantage of an equity opportunity.
“You can come to an agreement about that earlier in the phase,” says O’Callaghan. “A nation can see how things are progressing, see whether all the permits come in, see how the initial construction might be going. Then they can exercise an option to come in.”
“That way, the option itself is part of the consideration at the beginning. In the context of a broader agreement about a lot of other things, that option has significant value to the Nation, knowing that they can, in the future, take advantage of it.”
With Environmental, Social, and Governance (ESG) factors increasingly relevant in demand, Indigenous equity ownership can also make a project more attractive for investors.
“People are looking for ESG opportunities to invest their money in and this is a way of demonstrating that,” says Ezekiel. “In addition, there are a lot of institutions where those issues are a mandatory part of due diligence. It may look like a market issue from here, but from their perspective, it's something they have to deliver on. So that’s part of the win-win analysis in getting Indigenous people involved in a project.”
“The market, investors, financing – all of that is pushing companies to take these issues more seriously,” adds O’Callaghan. “This is definitely one option of meeting some of those goals.”
