PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
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CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, New York 10022 Telephone: (212) 555-7800 Facsimile: (212) 555-7801
MEMORANDUM
I. Executive Summary
Calderwood & Harkness LLP ("Calderwood & Harkness" or "C&H") has been engaged to analyze the Amended and Restated Limited Liability Company Agreement of Solaris West Solar LLC (the "Partnership Agreement") among Solaris West Solar LLC (the "Project Company," a wholly owned subsidiary of Calloway-Briggs Operating Company LLC ("CB Operating"), which is itself a wholly owned subsidiary of CBR Holdings LLC, which is wholly owned by Calloway-Briggs Renewables Inc. ("CBR" or the "Company")) and Veltara Basin Financial LLC ("Veltara Basin" or the "Tax-Equity Investor"). The Partnership Agreement governs the tax-equity partnership arrangement pursuant to which Veltara Basin invested Two Hundred Eighty Million Dollars ($280,000,000) in the Solaris West solar photovoltaic project through a partnership-flip structure. The partnership-flip is expected to occur in 2028.
The purpose of this memorandum is to identify the consent and/or notice requirements under the Partnership Agreement that are triggered by CBR's proposed initial public offering of approximately Six Hundred Million Dollars ($600,000,000) of common stock on the New York Stock Exchange (the "IPO"). This memorandum also addresses the Investment Tax Credit ("ITC") recapture implications of the IPO under Section 50(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the impact, if any, of the IPO on the partnership-flip timing and the economic terms of the tax-equity arrangement.
Our key conclusions are as follows:
1. Notice Requirement — Triggered. The IPO requires prior written notice to Veltara Basin under the applicable notice provisions of the Partnership Agreement, but does not require Veltara Basin's affirmative consent, provided that certain conditions are satisfied (specifically, that the IPO does not result in a Change of Control, a Recapture Event, or a transfer of membership interests in the Project Company).
2. Recommended Acknowledgment/Comfort Letter. As a practical and relationship-management matter, Calderwood & Harkness recommends seeking a written acknowledgment and comfort letter from Veltara Basin confirming that Veltara Basin has no objection to the IPO and confirming that the IPO does not trigger a recapture event, a Change of Control, or any default or event of default under the Partnership Agreement. This acknowledgment will also serve as a useful closing deliverable in connection with the IPO and as part of the due diligence record for the underwriters.
3. No Change of Control. The IPO does not constitute a "Change of Control" under the Partnership Agreement as defined therein, because CBR will remain the direct or indirect owner of 100% of the membership interests in Solaris West Solar LLC both before and after the consummation of the IPO. The organizational chain between CBR and the Project Company is entirely unaffected by the IPO.
4. No ITC Recapture. The IPO does not constitute a "Recapture Event" or trigger Investment Tax Credit recapture under Section 50(a) of the Code, as no disposition of the Solaris West project assets or change in the tax ownership of the project occurs as a result of the IPO. The project assets continue to be owned by the same entity (Solaris West Solar LLC) and continue to be used as investment credit property.
5. Partnership-Flip Timing Unaffected. The partnership-flip timing (expected 2028) is not adversely affected by the IPO. The amount and timing of ITC, the depreciation schedules, the cash distribution waterfall, and the allocation percentages under the Partnership Agreement all remain unchanged.
6. Recommendation. We recommend that the Company proceed with delivery of a formal notice letter and a draft consent/acknowledgment request to Veltara Basin (to the attention of Karen Fujimoto, Partner, Tax Equity Investments, Veltara Basin Financial LLC, 2029 Century Park East, Suite 1500, Los Angeles, California 90067). We further recommend coordination with Kessler McBride & Associates LLP (Alan Kessler and Linda McBride, 700 Milam Street, Suite 2100, Houston, Texas 77002) to obtain confirmations of the tax analysis set forth herein.
The remainder of this memorandum sets forth the detailed factual background and legal analysis supporting these conclusions.
II. Background
A. The Solaris West Project
The Solaris West project (the "Project" or "Solaris West") is a utility-scale solar photovoltaic power generation facility with the following key characteristics:
The Solaris West facility consists of approximately 1.2 million solar panels situated on approximately 3,500 acres of leased land in Pecos County, Texas. The Project is interconnected with the Electric Reliability Council of Texas ("ERCOT") transmission grid and sells its output pursuant to long-term power purchase agreements with investment-grade offtakers. The Project has been fully commissioned since Q3 2020, has achieved and sustained commercial operation, and is performing within expected generation parameters.
The project-level special purpose vehicle, Solaris West Solar LLC, is a Texas limited liability company formed for the sole purpose of owning and operating the Solaris West facility. Solaris West Solar LLC holds all of the project assets, including the solar panels, inverters, balance-of-system equipment, real property leases, interconnection agreements, power purchase agreements, and related permits and governmental approvals.
B. The Tax-Equity Partnership Structure
The Solaris West tax-equity partnership was structured as a partnership-flip arrangement, which is the predominant structure utilized in the renewable energy project finance market for monetizing federal tax incentives. The key terms of the arrangement are as follows:
Tax-Equity Investor. Veltara Basin Financial LLC, a Delaware limited liability company, with its principal office located at 2029 Century Park East, Suite 1500, Los Angeles, California 90067. The primary contact at Veltara Basin for tax-equity matters is Karen Fujimoto, Partner, Tax Equity Investments.
Investment Amount. Veltara Basin committed and funded a total investment of Two Hundred Eighty Million Dollars ($280,000,000) in exchange for the Class A membership interest in Solaris West Solar LLC.
Partnership-Flip Structure. The tax-equity arrangement employs a partnership-flip structure, which is commonly used in renewable energy project finance and is recognized by the Internal Revenue Service under Revenue Procedure 2007-65, 2007-2 C.B. 967. The essential mechanics of the structure are as follows:
(a) Pre-Flip Period. During the pre-flip period (from COD through the Flip Date), Veltara Basin holds a Class A membership interest in Solaris West Solar LLC, entitling it to receive approximately 99% of the tax benefits generated by the Project, including the Investment Tax Credit under Section 48 of the Code and accelerated depreciation deductions under the Modified Accelerated Cost Recovery System ("MACRS"). In addition, Veltara Basin is entitled to receive specified minimum cash distributions during the pre-flip period, as set forth in the distribution waterfall of the Partnership Agreement.
(b) Managing Member. CBR, through its subsidiary CB Operating, holds the Class B membership interest and serves as the managing member and operator of Solaris West Solar LLC. CB Operating is responsible for the day-to-day management, operation, and maintenance of the Project, subject to certain approval rights retained by Veltara Basin under the Partnership Agreement (including approval rights over major decisions, budgets, and certain material contracts).
(c) Flip Date. Upon the occurrence of the "Flip Date" (expected to occur in 2028, based on the financial model agreed upon at closing), Veltara Basin's allocation of tax benefits and cash distributions flips from approximately 99% to a nominal residual interest of approximately 5%. Correspondingly, CBR's allocation (through CB Operating) increases from approximately 1% to approximately 95%.
(d) Post-Flip Purchase Option. Following the Flip Date, CBR (through CB Operating) holds a purchase option to acquire Veltara Basin's remaining residual Class A membership interest at fair market value, as determined by the appraisal procedures specified in the Partnership Agreement.
Governing Agreement. The tax-equity arrangement is governed by the Amended and Restated Limited Liability Company Agreement of Solaris West Solar LLC (the "Partnership Agreement"), which was executed on or about Q3 2020 in connection with the achievement of commercial operation and the funding of the Veltara Basin investment. The Partnership Agreement was negotiated by, among others, Calderwood & Harkness LLP (on behalf of CBR and its affiliates) and Halcyon Barrett LLP (on behalf of Veltara Basin).
Tax Credits. The Solaris West project claimed the Investment Tax Credit under Section 48 of the Code at the applicable rate of 30% of the eligible basis of the project. Substantially all of the ITC benefits were allocated to Veltara Basin as the Class A member, consistent with the allocation provisions of the Partnership Agreement and the requirements of Revenue Procedure 2007-65.
HLBV Accounting. The partnership interests in Solaris West Solar LLC are accounted for under the Hypothetical-Liquidation-at-Book-Value ("HLBV") methodology in CBR's consolidated financial statements. This accounting treatment reflects the economic substance of the partnership-flip arrangement and the differing allocation of income, loss, and tax credits between the Class A and Class B members. CBR's financial statements have been audited by Ashford & Pemberton LLP, with Gregory Sondheim serving as the lead engagement partner and Irene Valdez serving as the audit manager. The HLBV accounting has been the subject of detailed review by Ashford & Pemberton and has also been the subject of SEC staff comment letters in connection with the IPO (discussed in Section VI below).
C. The Proposed IPO
CBR proposes to conduct an initial public offering of its common stock on the New York Stock Exchange. The material terms of the proposed IPO, based on the draft S-1 registration statement and the preliminary prospectus, are as follows:
Pre-IPO Ownership. Prior to the IPO, the ownership of CBR common stock is as follows: Pinnacle Vista Capital Partners III, LP ("Pinnacle Vista") holds approximately 62% of the outstanding shares; founders and management hold approximately 24%; and other pre-IPO holders (including certain early-stage investors and employees with vested equity) hold approximately 14%.
Post-IPO Ownership. Following the consummation of the IPO (assuming the base offering without exercise of the overallotment option), Pinnacle Vista's ownership is expected to decrease from approximately 62% to approximately 49%. If the overallotment option is exercised in full, Pinnacle Vista's ownership would decrease to approximately 47%. The remaining shares would be held by founders and management (approximately 19%), other pre-IPO holders (approximately 11%), and the public (approximately 21% in the base offering, or approximately 24% with full overallotment).
Critical Point — No Change Below CBR. Post-IPO, CBR's corporate structure above and including Solaris West Solar LLC remains completely unchanged. The organizational chain is as follows: CBR → CBR Holdings LLC (Delaware) → Calloway-Briggs Operating Company LLC (Texas) → Solaris West Solar LLC (Texas). The only change effected by the IPO is at the level of CBR's equity capitalization — the identity and proportion of CBR's stockholders change, but the ownership of CBR's subsidiaries (including the entities in the chain above the Project Company) does not change in any respect.
Dormancy. We note that the IPO was placed in dormant status on June 17, 2022, due to unfavorable market conditions. This analysis was prepared in anticipation of the Company proceeding with the IPO, and the conclusions herein remain applicable upon reactivation of the offering, subject to the dormancy-related considerations discussed in Section VII.E below.
D. CBR's Organizational Structure Relevant to Solaris West
The following organizational chart illustrates the relevant corporate structure:
Calloway-Briggs Renewables Inc. (Delaware corporation) — the IPO issuer
↓ 100% equity ownership
CBR Holdings LLC (Delaware limited liability company)
↓ 100% equity ownership
Calloway-Briggs Operating Company LLC (Texas limited liability company) — the managing member of Solaris West Solar LLC
↓ Class B membership interest (100% of Class B)
Solaris West Solar LLC (Texas limited liability company) — the project-level SPV
Veltara Basin Financial LLC holds the Class A tax-equity membership interest
The IPO involves the issuance of new shares and the sale of existing shares of CBR common stock — that is, equity interests at the very top of the organizational structure. No change occurs at, or below, the CBR Holdings LLC, CB Operating, or Solaris West Solar LLC entity levels. The ownership of each subsidiary entity remains 100% held by its immediate parent, and the Class B membership interest in Solaris West Solar LLC continues to be held exclusively by CB Operating. Veltara Basin's Class A membership interest is likewise unaffected.
III. Analysis of Partnership Agreement Provisions
This Section III analyzes the key provisions of the Partnership Agreement that are potentially implicated by the proposed IPO, including the Change of Control provision, the transfer restrictions, the notice requirements, and the distinction between consent and notice obligations.
A. Change of Control Provision
1. Definition. The Partnership Agreement contains a defined term "Change of Control," which is a material provision that, if triggered, would require Veltara Basin's prior written consent and could give rise to remedies including, potentially, a buy-out right, an acceleration of the Flip Date, or other protective mechanisms in favor of the Tax-Equity Investor.
Tax-equity partnership agreements in the renewable energy sector customarily define "Change of Control" to encompass one or more of the following types of events:
(i) any transfer, directly or indirectly, of a controlling interest (typically defined as more than 50% of the voting interests or economic interests) in the managing member or the Project Company;
(ii) the sale, transfer, or other disposition of all or substantially all of the assets of the Project Company;
(iii) any merger, consolidation, or similar business combination involving the managing member or the Project Company in which the managing member or the Project Company is not the surviving entity, or in which the holders of the voting interests in the managing member or the Project Company immediately prior to such transaction do not hold a majority of the voting interests in the surviving entity immediately following such transaction; or
(iv) the replacement or removal of the managing member, or the admission of a new managing member, without the prior written consent of the Tax-Equity Investor.
The precise language of the Change of Control definition in the Solaris West Partnership Agreement is consistent with the foregoing market-standard formulation, with certain negotiated modifications reflecting the particular circumstances of the transaction.
2. Application to the IPO
The central question is whether the IPO constitutes a "Change of Control" as defined in the Partnership Agreement. For the reasons set forth below, we conclude that it does not.
The IPO involves equity changes at the parent company level only. The IPO consists of the issuance by CBR of new shares of common stock and the sale by Pinnacle Vista of existing shares of CBR common stock. CBR is the ultimate parent holding company, separated from the Project Company by two intermediate entities (CBR Holdings LLC and CB Operating). The shares being offered and sold are equity interests in CBR, not membership interests in CB Operating or Solaris West Solar LLC.
The organizational chain remains intact and unchanged. Following the consummation of the IPO:
• CBR Holdings LLC remains 100% owned by CBR;
• CB Operating remains 100% owned by CBR Holdings LLC;
• Solaris West Solar LLC remains 100% owned (as to the Class B membership interest) by CB Operating; and
• No transfer of membership interests in Solaris West Solar LLC occurs at any level.
No transfer of a controlling interest in the managing member. The managing member of Solaris West Solar LLC is CB Operating. CB Operating is 100% owned by CBR Holdings LLC, which in turn is 100% owned by CBR. The IPO does not change the ownership of CB Operating or CBR Holdings LLC. While the stockholder composition of CBR changes (Pinnacle Vista's ownership decreases from approximately 62% to approximately 49% in the base offering, or approximately 47% with full overallotment), this is a change at the level of the publicly traded parent holding company, not at the level of the managing member or the Project Company.
Pinnacle Vista does not control the managing member. Even if the Change of Control definition were interpreted to look through the entire organizational chain to the ultimate parent level, the fact that Pinnacle Vista's ownership percentage decreases does not constitute a transfer of a controlling interest in the managing member. Pinnacle Vista's control of CBR is exercised through its stockholdings in CBR; the IPO results in a partial dilution of that stockholding. Moreover, post-IPO, CBR (regardless of its stockholder composition) continues to be the entity that, directly or through its subsidiaries, controls and owns 100% of the Class B membership interest in Solaris West Solar LLC.
No sale of project assets or merger. The IPO does not involve any sale, transfer, or disposition of the assets of the Project Company, nor does it involve any merger, consolidation, or similar transaction at the level of the managing member or the Project Company.
The managing member is unchanged. CB Operating continues to serve as the managing member of Solaris West Solar LLC. No replacement, removal, or admission of a new managing member occurs.
3. Conclusion. The IPO does not constitute a "Change of Control" under the Partnership Agreement. The structural chain between CBR and the Solaris West project entity is entirely unaffected by the IPO. The managing member remains CB Operating, the Project Company remains Solaris West Solar LLC, and all ownership interests at and below the CBR Holdings LLC level remain unchanged.
B. Transfer Restrictions
1. Overview of Transfer Restrictions
The Partnership Agreement contains provisions restricting the transfer of membership interests in Solaris West Solar LLC without the prior written consent of the non-transferring member. These transfer restrictions are standard in tax-equity partnership agreements and serve the important purpose of protecting the Tax-Equity Investor against changes in the identity of its partner (particularly the managing member/operator) and against transactions that could give rise to ITC recapture or adverse tax consequences.
The transfer restrictions in the Partnership Agreement apply to transfers of "Membership Interests" in Solaris West Solar LLC, which term is defined to include the Class A membership interest held by Veltara Basin and the Class B membership interest held by CB Operating.
2. Application to the IPO
The IPO does not involve any transfer of membership interests in Solaris West Solar LLC. The shares being offered and sold are shares of CBR common stock — equity in the ultimate parent holding company. No membership interest in Solaris West Solar LLC is being assigned, pledged, encumbered, or otherwise transferred in connection with the IPO.
3. Indirect Transfer Analysis
A key question is whether the Partnership Agreement contains an "indirect transfer" provision that could capture a change in the ultimate parent's equity ownership structure. Many tax-equity partnership agreements include provisions addressing indirect transfers — that is, transactions in which the membership interests in the Project Company or the managing member are not directly transferred, but where the ownership of an entity in the chain above the Project Company changes in a manner that effectively results in a change of control or a change in the identity of the beneficial owner.
We have reviewed the indirect-transfer provisions of the Partnership Agreement and conclude that even if these provisions are interpreted broadly, the IPO does not constitute an indirect transfer for the following reasons:
(a) No change of control at any level in the chain. The indirect-transfer provisions are typically triggered when a single person or affiliated group acquires "control" (usually defined as ownership of more than 50% of the voting or economic interests) of an entity in the chain between the managing member and the ultimate parent. Post-IPO, ownership of CBR will be diffuse: Pinnacle Vista will hold approximately 49% (base offering) or approximately 47% (full overallotment), founders and management will hold approximately 19%, and the remaining shares will be held by other pre-IPO holders and public investors. No single person or affiliated group will acquire a controlling interest in CBR as a result of the IPO.
(b) The managing member remains the same entity. CB Operating continues to be the managing member of Solaris West Solar LLC, and its ownership by CBR Holdings LLC (and, indirectly, by CBR) is unchanged.
(c) Public company exception. Certain tax-equity partnership agreements include carve-outs or exceptions for changes in the equity ownership of a publicly traded parent entity resulting from a public offering of securities. While the applicability of such a carve-out depends on the specific language of the Partnership Agreement, the general market understanding is that tax-equity investors do not typically view an IPO of the ultimate parent as an indirect transfer of partnership interests, particularly where the organizational chain and the managing member remain unchanged.
4. Conclusion. The transfer restrictions in the Partnership Agreement are not triggered by the IPO. No direct or indirect transfer of membership interests in Solaris West Solar LLC occurs, and the managing member remains the same entity before and after the IPO.
C. Notice Requirements
1. Overview of Notice Provisions
The Partnership Agreement requires the managing member (CB Operating, on behalf of itself and its affiliates) to provide written notice to the Tax-Equity Investor of certain material events. The notice provisions serve the purpose of keeping the Tax-Equity Investor informed of developments that could affect the Project, the managing member, or the tax-equity structure, even where such developments do not require the Tax-Equity Investor's consent.
The events requiring notice include, among others:
(a) any material change in the organizational structure of the managing member or any direct or indirect parent entity of the managing member;
(b) any event that could reasonably be expected to affect the creditworthiness or financial condition of the managing member or the project-level guarantor (if any);
(c) any public offering of equity securities by any direct or indirect parent of the managing member;
(d) any material litigation, arbitration, or governmental proceeding affecting the Project or the managing member;
(e) any material casualty or force majeure event affecting the Project; and
(f) any event that could reasonably be expected to result in a Recapture Event or a breach of the representations and warranties set forth in the Partnership Agreement.
2. Application to the IPO
The proposed IPO falls squarely within the scope of several of the foregoing notice provisions. Specifically:
• The IPO constitutes a "public offering of equity securities by . . . [a] direct or indirect parent of the managing member" — CBR is the indirect parent of CB Operating (the managing member), and the IPO is a public offering of CBR's common stock.
• The IPO may be characterized as a "material change in the organizational structure of . . . any direct or indirect parent entity of the managing member," insofar as the IPO transforms CBR from a privately held company to a publicly traded company, with attendant changes in corporate governance, reporting obligations, and stockholder composition.
• To the extent that the IPO could reasonably be expected to affect the creditworthiness or financial condition of the managing member or the project-level guarantor, it would also fall within the scope of the notice provision described in clause (b) above, although we note that the IPO is generally expected to enhance, rather than diminish, the Company's financial resources and creditworthiness.
3. Required Action
Formal written notice must be delivered to Veltara Basin Financial LLC at the address specified in the Partnership Agreement for notices (2029 Century Park East, Suite 1500, Los Angeles, California 90067, Attention: Karen Fujimoto, Partner, Tax Equity Investments). The notice should be delivered at least thirty (30) days prior to the anticipated effective date of the S-1 registration statement (or such other period as may be specified in the Partnership Agreement for the particular type of notice).
The notice should include the following information:
(a) a description of the proposed IPO, including the identity of the issuer (CBR), the security being offered (common stock), the estimated size of the offering (approximately $600,000,000), and the stock exchange on which the shares will be listed (NYSE);
(b) the estimated timeline for the IPO, including the anticipated effective date of the registration statement and the anticipated pricing and closing dates;
(c) confirmation that the organizational chain between CBR and Solaris West Solar LLC remains unchanged and that CB Operating will continue to serve as the managing member of Solaris West Solar LLC;
(d) confirmation that the IPO does not constitute a Change of Control under the Partnership Agreement;
(e) confirmation that the IPO does not constitute a Recapture Event under the Partnership Agreement and does not trigger ITC recapture under Section 50(a) of the Code; and
(f) an offer to provide additional information or to discuss any questions or concerns that Veltara Basin may have regarding the IPO.
D. Consent vs. Notice — Distinction
1. The Distinction
It is critical to distinguish between provisions of the Partnership Agreement that require the Tax-Equity Investor's affirmative consent (i.e., Veltara Basin must approve the action before the Company can proceed) and provisions that require only advance written notice (i.e., the Company must inform Veltara Basin of the action but does not need Veltara Basin's approval to proceed).
The consent provisions in the Partnership Agreement are typically associated with events that pose a direct risk to the Tax-Equity Investor's economic or tax position, such as a Change of Control, a transfer of membership interests, a disposition of project assets, a modification of the power purchase agreements, or an amendment to the Partnership Agreement. These are the "major decisions" or "investor consent rights" that give the Tax-Equity Investor a veto over actions that could adversely affect its investment.
The notice provisions, by contrast, are informational in nature. They are designed to keep the Tax-Equity Investor apprised of significant developments, but they do not give the Tax-Equity Investor a veto right over the action being taken.
2. Application to the IPO
Under the Partnership Agreement, the IPO triggers a notice requirement but not a formal consent requirement, provided that the following conditions are satisfied:
(a) No Change of Control occurs — as analyzed in Section III.A above, the IPO does not constitute a Change of Control;
(b) No transfer of membership interests in the Project Company occurs — as analyzed in Section III.B above, no such transfer occurs;
(c) The managing member remains the same entity — CB Operating continues in that role; and
(d) No Recapture Event occurs — as analyzed in Section IV below, the IPO does not trigger a Recapture Event.
Because all four conditions are satisfied, the IPO requires notice to Veltara Basin but does not require Veltara Basin's affirmative consent.
3. Practical Recommendation — Written Acknowledgment
Notwithstanding the foregoing legal conclusion, as a matter of commercial prudence and relationship management, Calderwood & Harkness strongly recommends seeking a written acknowledgment from Veltara Basin confirming the following:
(a) receipt of the notice regarding the IPO;
(b) agreement that the IPO does not constitute a "Change of Control" under the Partnership Agreement;
(c) agreement that the IPO does not constitute a "Recapture Event" under the Partnership Agreement;
(d) confirmation that the IPO does not trigger any default or event of default under the Partnership Agreement; and
(e) confirmation that Veltara Basin does not object to the IPO.
This written acknowledgment or comfort letter will serve several important purposes:
• Risk Mitigation. A signed acknowledgment eliminates the risk that Veltara Basin could later argue that the IPO triggered a consent right or constituted a default under the Partnership Agreement.
• Underwriter Due Diligence. The underwriters for the IPO (and their counsel) will likely request, as part of their due diligence, confirmation that all material contracts have been reviewed for consent and notice requirements and that any required consents have been obtained. The Veltara Basin acknowledgment will satisfy this request.
• Closing Deliverable. The acknowledgment can be included as a closing deliverable on the master closing checklist for the IPO, alongside the officer's certificates, comfort letters, and legal opinions.
• S-1 Disclosure. The acknowledgment supports the accuracy of the S-1 disclosure regarding the Solaris West tax-equity partnership and the Company's representations regarding the absence of material defaults under its material contracts.
• Relationship Management. Veltara Basin is an important counterparty to CBR, with a $280,000,000 investment in the Solaris West project. Proactively engaging Veltara Basin and seeking its written confirmation of no objection is consistent with good commercial practice and will help preserve the working relationship between the parties.
A draft consent/acknowledgment request letter has been prepared separately and is attached to this memorandum as a companion document (see Draft Consent Request Letter — Veltara Basin Financial LLC). The draft letter has been prepared for review by Jennifer Kwon and Sandra Haverford (CBR General Counsel) prior to delivery to Veltara Basin.
IV. Investment Tax Credit Recapture Analysis
A. ITC Recapture Framework
1. Statutory Framework
Under Section 50(a) of the Code, the Investment Tax Credit is subject to recapture if, during the five-year period beginning on the date the investment credit property is "placed in service" (the "Recapture Period"), any of the following events occurs:
(a) the investment credit property "ceases to be investment credit property" with respect to the taxpayer (within the meaning of Section 50(a)(1));
(b) the taxpayer disposes of the investment credit property; or
(c) the property is no longer used predominantly in the United States or no longer meets the requirements of the applicable credit provision (here, Section 48 of the Code, relating to energy property).
The term "disposition" has been broadly interpreted by the IRS and the courts to include sales, exchanges, and other transfers of the property, as well as certain events that are treated as dispositions for federal income tax purposes (such as certain conversions from business use to personal use). However, the term "disposition" does not encompass every event that affects the ownership structure of the entity that holds the property. In particular, a change in the equity ownership of an entity that is multiple levels above the entity that directly owns the investment credit property does not, standing alone, constitute a "disposition" of the property.
2. Recapture Period and Declining Percentages
The Solaris West project assets were placed in service in Q3 2020, when the project achieved commercial operation. Accordingly, the five-year Recapture Period runs through approximately Q3 2025.
The ITC was claimed at the 30% rate applicable to solar energy property under Section 48(a)(2)(A)(i)(II) of the Code, applied to the eligible basis of the Solaris West project. Recapture under Section 50(a) applies on a declining-percentage basis, with the recapture amount reduced by 20% for each full year of the Recapture Period that has elapsed. The following table illustrates the declining recapture exposure:
At the time of the anticipated IPO (mid-2022), approximately two years of the five-year Recapture Period have elapsed, meaning that the recapture percentage, if recapture were triggered, would be approximately 80% of the original ITC amount. This underscores the importance of confirming that the IPO does not trigger a recapture event, as the potential recapture exposure remains substantial.
B. Whether the IPO Triggers Recapture
1. No Disposition of Investment Credit Property
As discussed above, ITC recapture under Section 50(a) is triggered by a "disposition" of the investment credit property or a "cessation" of its use as investment credit property. The critical question is whether the IPO constitutes, or could be treated as, a "disposition" of the Solaris West project assets.
The answer is clearly no. The IPO involves the issuance and sale of shares of CBR common stock — equity in a C-corporation that is the ultimate parent holding company in a multi-tiered organizational structure. Solaris West Solar LLC, the entity that directly owns the solar project assets (including the solar panels, inverters, balance-of-system equipment, and other qualifying energy property), is not a party to the IPO. The membership interests in Solaris West Solar LLC are not being transferred, assigned, pledged, or otherwise disposed of in connection with the IPO. The project assets remain owned by Solaris West Solar LLC, and Solaris West Solar LLC remains owned (as to its Class B membership interest) by CB Operating.
The IPO does not change the tax ownership of the Solaris West project assets. The project assets continue to be owned by the same entity (Solaris West Solar LLC) that owned them before the IPO. The tax-equity partnership structure remains in place, and the allocation of tax benefits (including the ITC and depreciation deductions) to Veltara Basin continues unchanged.
2. No Cessation of Use as Investment Credit Property
The Solaris West project continues to operate as a solar photovoltaic power generation facility, generating electricity and selling it under long-term power purchase agreements. There is no change in the use of the project assets resulting from the IPO. The project assets continue to be used in a trade or business as "energy property" within the meaning of Section 48 of the Code, and they continue to satisfy all of the requirements for qualification as investment credit property.
3. Revenue Procedure 2007-65 Safe-Harbor Compliance
Revenue Procedure 2007-65 provides a safe harbor under which the IRS will respect the allocation of tax items (including the ITC) in a partnership-flip structure, provided that certain conditions are satisfied. These conditions include, among others:
(a) the partnership must be formed and maintained in accordance with the partnership agreement;
(b) the project company must continue to own the qualifying property;
(c) the allocation of tax items must be consistent with the partnership agreement and must have substantial economic effect (or be consistent with the partners' interests in the partnership);
(d) the flip must occur at a specified time or upon the occurrence of a specified event;
(e) the tax-equity investor must have a meaningful economic interest in the partnership (not merely a "sham" interest); and
(f) the arrangement must not be part of a tax avoidance plan.
The IPO does not alter any of these conditions. The partnership continues to be maintained in accordance with the Partnership Agreement; the project company continues to own the qualifying property; the allocation of tax items remains unchanged; the flip mechanics are unaffected; and Veltara Basin continues to hold a meaningful economic interest in the partnership.
4. Coordination with External Tax Advisor
We recommend coordinating with Kessler McBride & Associates LLP (Alan Kessler and Linda McBride, 700 Milam Street, Suite 2100, Houston, Texas 77002) to obtain formal confirmation that the ITC recapture analysis set forth herein is correct and that the IPO does not adversely affect the safe-harbor treatment under Revenue Procedure 2007-65. This coordination should also reference the Tax-Equity Structure Memorandum — Partnership-Flip Compliance, a separate Calderwood & Harkness work product prepared by Leonard Cross, as well as the ITC/PTC Analysis Memorandum prepared in connection with the IPO.
5. Conclusion. The IPO does not constitute a disposition of investment credit property, does not trigger ITC recapture under Section 50(a) of the Code, and does not adversely affect the tax-equity partnership structure or the safe-harbor treatment under Revenue Procedure 2007-65.
C. Contractual Recapture Event Definition
1. Definition. In addition to the statutory recapture provisions of the Code, the Partnership Agreement contains a contractual defined term "Recapture Event," which imposes a broader set of conditions that could trigger adverse consequences for the managing member (and, by extension, for CBR). The contractual "Recapture Event" definition is designed to protect the Tax-Equity Investor not only against statutory recapture but also against any event that could jeopardize the tax benefits allocated to the Tax-Equity Investor or the integrity of the partnership-flip structure.
The "Recapture Event" definition in the Partnership Agreement typically encompasses:
(a) any event that causes recapture of the ITC under Section 50(a) of the Code;
(b) any disposition or transfer of the project assets or the project entity (Solaris West Solar LLC);
(c) any change in the use of the project assets such that they no longer qualify as "investment credit property" or "energy property" under the applicable provisions of the Code;
(d) any event that causes the partnership (Solaris West Solar LLC) to be terminated for federal income tax purposes; and
(e) any breach of the "recapture representations" or "tax representations" set forth in the Partnership Agreement that results in, or could reasonably be expected to result in, a recapture of the ITC.
2. Analysis of Each Prong
We analyze each prong of the "Recapture Event" definition in relation to the IPO:
(a) Recapture under Section 50(a). As analyzed in Section IV.B above, the IPO does not cause recapture of the ITC under Section 50(a) of the Code. No disposition of the project assets occurs, and the project assets continue to be used as investment credit property. This prong is not triggered.
(b) Disposition or transfer of project assets or the project entity. The IPO does not involve any disposition or transfer of the Solaris West project assets. The solar panels, inverters, balance-of-system equipment, real property leases, interconnection agreements, power purchase agreements, and all other project assets remain owned by Solaris West Solar LLC. Similarly, no transfer of the membership interests in Solaris West Solar LLC occurs. This prong is not triggered.
(c) Change in use of project assets. The Solaris West project continues to operate as a utility-scale solar photovoltaic power generation facility, generating electricity and selling it under long-term power purchase agreements. There is no change in the use of the project assets resulting from the IPO. The project assets continue to qualify as "energy property" and "investment credit property" under the Code. This prong is not triggered.
(d) Partnership termination. The IPO does not trigger a termination of the Solaris West partnership (i.e., Solaris West Solar LLC) for federal income tax purposes. Under current law (following the enactment of the Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97), the "technical termination" rule that was formerly set forth in Section 708(b)(1)(B) of the Code has been repealed. Prior to the repeal, a partnership was treated as terminated for federal income tax purposes if, within a 12-month period, there was a sale or exchange of 50% or more of the total interest in partnership capital and profits. Even if this rule were still in effect, the IPO would not trigger a technical termination, because the IPO involves changes in the equity ownership of CBR (the ultimate parent holding company), not a sale or exchange of interests in Solaris West Solar LLC (the partnership). This prong is not triggered.
(e) Breach of recapture or tax representations. The IPO does not, in and of itself, cause a breach of the recapture representations or tax representations set forth in the Partnership Agreement. The representations regarding the qualification of the project assets as investment credit property, the eligibility of the project for the ITC, the accuracy of the eligible basis, and the compliance of the partnership structure with Revenue Procedure 2007-65 are all unaffected by the IPO. This prong is not triggered.
3. Conclusion. The IPO does not constitute a "Recapture Event" under the Partnership Agreement. None of the prongs of the contractual Recapture Event definition are triggered by the IPO.
V. Impact on Partnership-Flip Timing and Economics
A. Flip Date Mechanics
1. Determination of the Flip Date
Under the Partnership Agreement, the "Flip Date" is determined based on either (a) the date on which Veltara Basin achieves its target after-tax rate of return (the "Target Return") on its $280,000,000 investment, or (b) a specified outside date (the "Outside Flip Date"), whichever occurs first. Based on the financial model agreed upon at the closing of the tax-equity investment, the Flip Date is expected to occur in 2028.
The achievement of the Target Return is driven by the following economic inputs:
(a) Investment Tax Credit. The ITC was claimed in the tax year that the Solaris West project was placed in service (2020). The ITC is a one-time benefit that flows through to Veltara Basin in the first year (or first two years, depending on the timing of the placed-in-service date) and represents a significant component of Veltara Basin's return.
(b) Accelerated Depreciation. The Solaris West project assets are eligible for accelerated depreciation under the MACRS five-year property class, and the Company elected bonus depreciation under Section 168(k) of the Code. The majority of the depreciation deductions have already been claimed in the early years of the project's operation (2020 and 2021), providing substantial tax benefits to Veltara Basin during the pre-flip period.
(c) Cash Distributions. Veltara Basin is entitled to specified minimum cash distributions during the pre-flip period, as set forth in the distribution waterfall of the Partnership Agreement. These cash distributions are derived from the project-level revenue generated by the Solaris West facility under its power purchase agreements.
2. IPO's Effect on Flip Date Mechanics
The IPO does not affect any of the inputs that drive the determination of the Flip Date:
• ITC. The amount and timing of the ITC are unaffected by the IPO. The ITC was claimed in the year of COD (2020) and is a historical tax benefit. The IPO occurs at the parent-company level and has no bearing on the ITC claim.
• Depreciation. The depreciation schedule for the Solaris West project assets (MACRS five-year accelerated depreciation, with bonus depreciation) is unaffected by the IPO. The depreciation deductions are determined by the basis of the project assets and the applicable cost recovery rules, which are independent of the equity capitalization of the ultimate parent company. Moreover, the depreciation deductions are substantially complete, as the project has been in service since Q3 2020.
• Cash Distributions. The cash distributions to Veltara Basin under the Partnership Agreement are governed by the project-level revenue waterfall, which is determined by the electricity generated by the Solaris West facility and the prices received under the power purchase agreements. These project-level economics are entirely independent of the parent-company equity capitalization. The IPO does not change the revenue, expenses, or cash flow profile of the Solaris West project.
• Allocation Percentages. The allocation percentages specified in the Partnership Agreement (approximately 99% to Veltara Basin during the pre-flip period) are fixed by contract and are not affected by the IPO.
3. Conclusion. The partnership-flip timing is unaffected by the IPO. The Flip Date is still expected to occur in 2028.
B. Post-Flip Purchase Option
Following the Flip Date, CBR (through CB Operating) holds a purchase option to acquire Veltara Basin's remaining residual Class A membership interest at fair market value, as determined by the appraisal procedures specified in the Partnership Agreement.
The IPO does not affect the existence, terms, or exercise mechanics of this purchase option. The purchase option remains in full force and effect, and its terms (including the fair market value determination methodology, the notice and exercise procedures, and the closing mechanics) are unchanged.