PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
DUE DILIGENCE MEMORANDUM — LITIGATION AND PROCEEDINGS
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, New York 10022
This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP in connection with its representation of Calloway-Briggs Renewables Inc. in the proposed initial public offering of its common stock. This memorandum is intended solely for the use of the Calderwood & Harkness LLP IPO Working Group members identified above and should not be disclosed to any third party without the prior written consent of the Responsible Partner.
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I. Executive Summary
This memorandum summarizes the results of the litigation and proceedings due diligence conducted by Calderwood & Harkness LLP ("C&H" or the "Firm") in connection with the proposed initial public offering (the "Offering" or "IPO") of approximately $600,000,000 of common stock of Calloway-Briggs Renewables Inc. ("CBR" or the "Company") on the New York Stock Exchange under the proposed ticker symbol "CBRI." The Offering is expected to be conducted pursuant to a registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission (the "SEC").
Scope of Review. This memorandum addresses all pending, threatened, and recently settled litigation, arbitration proceedings, regulatory investigations, government enforcement actions, and material claims involving CBR and its subsidiaries (collectively, the "Company" or the "CBR Group"). Our review encompasses the full corporate family, including the parent entity, Calloway-Briggs Renewables Inc., as well as CBR Holdings LLC, Calloway-Briggs Operating Company LLC, and all project-level special purpose vehicles ("SPVs"), including Solaris West Solar LLC, Red Mesa Wind Energy LLC, Painted Rock Solar LLC, Pronghorn Wind LLC, Brazos Energy Storage LLC, Mesquite Wind Holdings LLC, Cimarron Solar Development LLC, and CBR Development Co. LLC. CBR was founded in 2014 by Garrett Calloway and Elaine Briggs and currently employs approximately 1,240 individuals across its corporate offices and project sites in Texas, New Mexico, Arizona, Oklahoma, and California.
Information Sources. Our review was based upon the following principal sources of information: (i) responses to the Due Diligence Request List — Litigation (Document 17 of the data room index) provided by CBR management; (ii) multiple in-person and telephonic interviews with Sandra Haverford (General Counsel and Corporate Secretary), Dale Renfroe (Chief Operating Officer), and Tomás Quintero (Senior Vice President, Project Development); (iii) a comprehensive review of CBR's internal litigation tracking database and legal hold records; (iv) insurance claim files and loss-run reports provided by Dravello Place Insurance Advisors LLC ("Fenwick Place") through Nina Radcliffe, Vice President; (v) public record searches across all relevant federal and state court jurisdictions, as well as regulatory agency dockets; and (vi) reviews of the FERC docket, OSHA inspection records, and state environmental agency enforcement records. We also reviewed the directors' and officers' insurance policy file, including the primary policy issued by Meridian National Assurance Company and excess layers provided by Stonebridge Indemnity Corp. and Commonwealth Omnivrel Insurance Ltd.
Overall Assessment. Based upon our review of all available information as of the date of this memorandum, no single matter identified constitutes, or would reasonably be expected to constitute, a material adverse effect on the business, assets, properties, financial condition, or results of operations of CBR and its subsidiaries, taken as a whole. The aggregate estimated net exposure for all pending and threatened matters (after insurance recoveries and contractual indemnification) falls in the range of approximately $13.75 million to $21 million. This exposure is not material in the context of the Company's fiscal year 2021 total assets of approximately $3.94 billion, fiscal year 2021 total revenue of approximately $487.3 million, or fiscal year 2021 Adjusted EBITDA of approximately $218.6 million.
Notwithstanding this overall assessment, several individual matters warrant disclosure in the registration statement on Form S-1, either in the "Legal Proceedings" section, in the "Risk Factors" section, or both. Additionally, certain matters require coordination with the Company's independent auditors at Ashford & Pemberton LLP and its tax advisors at Kessler McBride & Associates LLP regarding contingent liability accruals under ASC 450 and uncertain tax position analyses under ASC 740. Our specific disclosure recommendations are set forth in Section IX below.
Cross-References. This memorandum should be read in conjunction with the following related due diligence memoranda prepared by the C&H IPO Working Group:
• Due Diligence Memorandum — Regulatory and Permitting (Document 21)
• Due Diligence Memorandum — Environmental (Document 29)
• Due Diligence Memorandum — Real Property and Land Rights (Document 22)
• Due Diligence Memorandum — Employment and Benefit Plans (Document 24)
• Due Diligence Memorandum — Tax Structure and Tax-Equity (Document 25)
• Tax-Equity Structure Memorandum — Partnership-Flip Compliance (Document 102)
II. Methodology and Scope of Review
A. Information Sources
The following information sources were reviewed and relied upon in the preparation of this memorandum:
Due Diligence Request List — Litigation. On March 14, 2022, C&H issued a comprehensive Due Diligence Request List — Litigation (Document 17) to CBR management. The request list sought, among other things, copies of all pleadings, complaints, petitions, and related filings in pending litigation; all demand letters, pre-suit correspondence, and notices of claims received or sent within the preceding five years; descriptions of all pending arbitration proceedings; copies of all government subpoenas, civil investigative demands, and regulatory inquiry letters; copies of all OSHA citations, environmental enforcement notices, and cease-and-desist orders; a complete litigation history for the preceding five years; all legal hold notices; and descriptions of all matters for which legal reserves have been established. CBR's responses were provided through the virtual data room (Thackeray Solutions) between March 28, 2022 and April 18, 2022 under the supervision of Sandra Haverford, General Counsel and Corporate Secretary.
Management Interviews. C&H conducted multiple interview sessions with CBR management personnel possessing knowledge of litigation and regulatory matters, as follows:
• Sandra Haverford, General Counsel and Corporate Secretary: In-person interview on March 21, 2022 at CBR's corporate offices in Austin, Texas; telephonic follow-up sessions on March 30, April 5, April 11, April 14, and April 20, 2022. Ms. Haverford has served as General Counsel since 2017 and has direct supervisory responsibility for all litigation, regulatory, and compliance matters across the CBR Group.
• Dale Renfroe, Chief Operating Officer: Telephonic interview on April 4, 2022. Mr. Renfroe provided operational context regarding construction-related disputes, equipment performance issues, and project-level regulatory matters.
• Tomás Quintero, Senior Vice President, Project Development: Telephonic interview on April 7, 2022. Mr. Quintero provided information regarding development-stage projects, interconnection disputes, and permitting matters, including the potential claim relating to the Silverleaf Wind development project.
Internal Records. C&H reviewed CBR's internal litigation tracking database, which is maintained by Sandra Haverford's office and tracks all pending and recently resolved matters across the CBR entity family. We also reviewed legal hold records to confirm that document preservation protocols are in place for all pending and threatened matters.
Correspondence Files. We reviewed the correspondence files maintained by Sandra Haverford's office, including demand letters received from third parties, pre-suit communications, regulatory inquiry letters, and response correspondence.
Insurance Files. Insurance claim files and loss-run reports were provided by Dravello Place Insurance Advisors LLC through Nina Radcliffe, Vice President. We reviewed coverage information for all pending litigation matters, the D&O policy file, and the Company's general liability, builder's risk, property, and umbrella/excess liability programs. The D&O insurance tower consists of a primary policy issued by Meridian National Assurance Company (policy no. DNO-22-048871), with an excess Layer 1 provided by Stonebridge Indemnity Corp. and an excess Layer 2 provided by Commonwealth Omnivrel Insurance Ltd., for an aggregate D&O tower of $50 million. The annual premium for the D&O tower is approximately $1.87 million.
B. Public Record Searches
C&H conducted public record searches across the following jurisdictions and databases:
Federal Courts. We conducted searches through the Public Access to Court Electronic Records ("PACER") system for all federal district courts in the states of Texas, New Mexico, Arizona, California, and Oklahoma, covering the United States District Courts for the Western District of Texas, the Northern District of Texas, the Southern District of Texas, the Eastern District of Texas, the District of New Mexico, the District of Arizona, the Central District of California, the Southern District of California, the Eastern District of California, the Northern District of California, the Western District of Oklahoma, the Eastern District of Oklahoma, and the Northern District of Oklahoma.
State Courts. We conducted state court record searches in the following specific jurisdictions, which correspond to the locations of CBR's corporate offices, operating projects, and development-stage projects:
• Texas: Travis County (corporate headquarters), Pecos County (Solaris West project), Nolan County (Pronghorn Wind project), Fort Bend County (Brazos Storage facility), Oldham County (Mesquite Wind project), and Irion County (Silverleaf Wind development project)
• Oklahoma: Custer County (Red Mesa Wind project)
• Arizona: Maricopa County (Painted Rock Solar project)
• New Mexico: Doña Ana County (Cimarron Solar project)
• California: Riverside County (potential future development sites identified by CBR management)
Regulatory and Agency Dockets. We conducted searches of the following regulatory and agency databases and docket systems:
• Federal Energy Regulatory Commission (FERC) docket and complaint filings
• Electric Reliability Council of Texas (ERCOT) dispute filings
• North American Electric Reliability Corporation (NERC) enforcement action database
• State environmental enforcement actions: Texas Commission on Environmental Quality (TCEQ), New Mexico Environment Department (NMED), Arizona Department of Environmental Quality (ADEQ), California Environmental Protection Agency (CalEPA), and Oklahoma Department of Environmental Quality (ODEQ)
• Occupational Safety and Health Administration (OSHA) inspection and citation records
• State public utility commission dockets: Public Utility Commission of Texas (PUCT), New Mexico Public Regulation Commission (NMPRC), Arizona Corporation Commission (ACC), California Public Utilities Commission (CPUC), and Oklahoma Corporation Commission (OCC)
A complete summary of all public record searches, including dates of searches and results (positive and negative) for each CBR entity, is set forth in Exhibit C to this memorandum.
C. Temporal Scope
The scope of our review encompasses the following temporal parameters:
1. Pending Matters: All matters pending as of the date of this memorandum (April 25, 2022), regardless of when initiated.
2. Settled or Resolved Matters: All matters settled or resolved within the preceding three years (i.e., since April 2019), consistent with Item 103 of Regulation S-K and standard S-1 disclosure practice for IPO registrants.
3. Threatened Matters: All matters identified as threatened based upon demand letters, pre-suit correspondence, government inquiry letters, or the assessment of CBR management as communicated during the interview process.
4. Governmental and Regulatory Proceedings: All governmental and regulatory proceedings, whether ongoing or concluded within the preceding three years, regardless of dollar amount.
D. Materiality Threshold
For purposes of this memorandum and the related S-1 disclosure analysis, we have applied the following materiality thresholds:
• Individual matters with potential exposure exceeding $500,000 are treated as potentially material for purposes of S-1 disclosure.
• Matters within a given category (e.g., employment, environmental, construction) are treated as potentially material in the aggregate if the combined potential exposure within that category exceeds $2,000,000.
• All matters involving officers, directors, or key management personnel of CBR are treated as potentially material regardless of dollar threshold, consistent with Item 401(f) of Regulation S-K and the requirements of the management questionnaires.
• All regulatory and governmental proceedings are treated as potentially material for disclosure purposes regardless of dollar threshold, consistent with Item 103(c)(3) of Regulation S-K as it pertains to environmental and governmental proceedings.
These thresholds were established in consultation with Jennifer Kwon and are consistent with the approach taken in comparable renewable energy IPOs reviewed by the C&H IPO Working Group.
III. Pending Litigation
A. Commercial Disputes
The CBR Group is currently party to three pending commercial disputes, each of which is described in detail below.
1. Solaris West Solar LLC v. Crestline Electrical Contractors Inc. — Construction Defect Claim. Court / Forum: 143rd Judicial District Court, Pecos County, Texas
Case No.: 22-CV-01487-PCT
Date Filed: September 14, 2021
Parties: Solaris West Solar LLC, a Texas limited liability company and wholly owned indirect subsidiary of CBR ("Solaris West"), as plaintiff, against Crestline Electrical Contractors Inc., an Oklahoma corporation ("Crestline"), as defendant.
Nature of Claim: This matter arises out of an alleged breach of the electrical subcontract entered into between Solaris West and Crestline in connection with the engineering, procurement, and construction ("EPC") of the Solaris West 450 MW solar photovoltaic ("PV") project located in Pecos County, Texas (the "Solaris West Project"). The Solaris West Project achieved commercial operation in Q3 2020. Solaris West alleges that Crestline performed defective electrical interconnection work during the construction phase, including improperly installed underground medium-voltage collection cables, faulty terminations at combiner boxes, and non-conforming switchgear installations. The defective work was identified during post-COD testing and operational performance monitoring and has resulted in unplanned outages and reduced power output at certain sections of the facility.
Solaris West's complaint asserts claims for breach of contract, breach of express and implied warranties, and negligent construction. The complaint seeks damages in the amount of approximately $4.2 million, consisting of (i) approximately $2.8 million in remediation costs (cable replacement, re-termination, and switchgear repair), (ii) approximately $900,000 in lost revenue attributable to project downtime during the affected periods, and (iii) approximately $500,000 in engineering and testing costs incurred to diagnose the defective work.
Counterclaim: Crestline filed an answer and counterclaim on November 22, 2021, denying the allegations and asserting a counterclaim for approximately $1.8 million in allegedly unpaid change orders. Crestline contends that certain scope changes directed by Solaris West's project management team during construction expanded the electrical subcontract scope without corresponding formal change-order approval, and that Crestline performed additional work in good faith reliance on verbal authorizations from Solaris West's on-site representatives.
Current Status: The matter is currently in the discovery phase. Written discovery requests have been exchanged, and document production is ongoing. Depositions of Solaris West's project manager and Crestline's site superintendent are currently scheduled for June 2022. A mediation has not yet been scheduled, although the court's scheduling order contemplates mediation prior to trial. Trial is tentatively set for Q1 2023.
Insurance Coverage: Solaris West has submitted a claim under the builder's risk and general liability insurance policies maintained during the construction phase of the Solaris West Project. A coverage determination from the relevant carriers remains pending as of the date of this memorandum. Sandra Haverford has indicated that she expects a coverage determination within the next 30 to 60 days. Nina Radcliffe at Fenwick Place confirmed that the claim has been acknowledged by the relevant carriers and is under review.
Risk Assessment: Low-to-moderate. CBR's outside local counsel (Thompson, Garza & Wilkins LLP, Midland, Texas) advises that Solaris West has a strong position on the affirmative claim, supported by detailed engineering reports, photographic and video documentation of the defective work, and contemporaneous project inspection records. With respect to the counterclaim, CBR's local counsel characterizes the exposure as manageable, noting that Solaris West maintained detailed change-order logs and that the alleged verbal authorizations are not well-documented by Crestline. The likely range of outcomes, in our assessment, is a net recovery to Solaris West of between $1.5 million and $3.0 million (after accounting for a potential partial allowance of the counterclaim), depending on the forum's assessment of the evidence and any negotiated resolution.
Disclosure Recommendation: We recommend disclosure of this matter in the "Legal Proceedings" section of the S-1 registration statement. The affirmative claim amount ($4.2 million) and the counterclaim amount ($1.8 million) each exceed the individual $500,000 materiality threshold. Additionally, we recommend referencing this matter in the risk factors as an example of construction-related disputes that may arise in the ordinary course of the Company's business.
2. Painted Rock Solar LLC — Landowner Lease Dispute. Court / Forum: Maricopa County Superior Court, State of Arizona
Case No.: CV2022-001673
Date Filed: January 11, 2022
Parties: Harmon Family Trust, dated March 15, 2009 (Theodore L. Harmon, Trustee), Joanne R. Pratt, and Pratt Cattle Company LLC (collectively, "Plaintiffs"), as plaintiffs, against Painted Rock Solar LLC, a Delaware limited liability company and wholly owned indirect subsidiary of CBR ("Painted Rock"), as defendant.
Nature of Claim: Plaintiffs are owners of three adjacent parcels of agricultural land located to the south and east of the Painted Rock 320 MW solar PV facility in Maricopa County, Arizona (the "Painted Rock Project"). The Painted Rock Project achieved commercial operation in Q4 2020. Plaintiffs allege that Painted Rock's facility operations exceed the scope of the land lease easements granted by the predecessor owners of the facility site, and that the facility operations constitute a nuisance and trespass upon the adjacent properties. Specifically, Plaintiffs allege: (i) that solar panel arrays generate excessive glare that interferes with the use and enjoyment of their properties and creates a safety hazard for equipment operators on the adjacent agricultural parcels; (ii) that grading and construction activities associated with the facility have altered natural drainage patterns, resulting in increased stormwater runoff onto Plaintiffs' properties; and (iii) that heavy vehicle traffic on access roads serving the facility exceeds the scope of the road-use easements and has caused degradation of shared unpaved road surfaces.
Plaintiffs seek injunctive relief requiring Painted Rock to implement anti-glare measures, restore pre-construction drainage patterns, and restrict vehicle use of the shared access roads. Plaintiffs also seek unspecified compensatory damages for diminished property value and interference with agricultural operations.
Current Status: The matter is at an early pleading stage. Painted Rock filed a motion to dismiss on February 28, 2022, arguing that the complaint fails to state a claim upon which relief can be granted because the land lease easements expressly authorize the construction and operation of the solar PV facility in the manner at issue, and that Plaintiffs lack standing to challenge the drainage alterations because the relevant grading work was performed within the boundaries of the facility site and in accordance with all applicable county permits. Plaintiffs' response brief was filed on April 4, 2022. The motion to dismiss is fully briefed and awaiting a ruling from the court. No discovery has been conducted to date.
CBR's internal assessment, as communicated by Sandra Haverford, estimates the maximum potential exposure at approximately $1.5 million, which represents a conservative estimate of the cost of potential remedial measures (anti-glare screening, drainage improvements, and road resurfacing) if the court were to deny the motion to dismiss and the case proceeded to an unfavorable judgment or settlement. However, Sandra Haverford characterizes the claims as without merit and believes the motion to dismiss will likely be granted, at least in part.
Risk Assessment: Low. The land lease easements between Painted Rock and the facility site landowners contain broad grant provisions that clearly authorize the construction, installation, operation, and maintenance of a solar energy generation facility, including associated grading, road construction, and infrastructure. The relevant easement language was reviewed by C&H and appears to support Painted Rock's position. Additionally, an award of injunctive relief requiring modification of an operating energy facility is generally disfavored by courts absent a showing of irreparable harm, and we believe such a showing would be difficult for Plaintiffs to establish on the record as currently understood. The drainage-alteration claims are further undercut by the fact that the relevant grading was performed in accordance with Maricopa County grading permits, which were issued following a review of drainage impact studies.
Disclosure Recommendation: We recommend disclosure of this matter in the "Legal Proceedings" section of the S-1, even though the estimated monetary exposure is at the lower end of the materiality range, because the claim involves injunctive relief against an operating project. We further recommend referencing this matter in the risk factors as an example of the types of land-use and real property disputes that may arise in connection with the Company's operations. Cross-reference to Due Diligence Memorandum — Real Property and Land Rights (Document 22) for discussion of the underlying easement terms.
3. Red Mesa Wind Energy LLC — Turbine Equipment Warranty Claim. Court / Forum: Arbitration proceeding under the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), administered by the AAA Oklahoma City regional office.
Case No.: AAA No. 01-22-0004-2187
Date Filed: March 3, 2022
Parties: Red Mesa Wind Energy LLC, a Delaware limited liability company and wholly owned indirect subsidiary of CBR ("Red Mesa"), as claimant, against Northfield Wind Systems GmbH, a German limited liability company ("Northfield"), as respondent.
Nature of Claim: This arbitration arises under the Turbine Supply Agreement ("TSA") dated June 15, 2017, between Red Mesa and Northfield, pursuant to which Northfield supplied and installed 95 wind turbine generators (Model NWS-4.0, each rated at 4.0 MW) for the Red Mesa Wind project, a 380 MW onshore wind energy generation facility located in Custer County, Oklahoma (the "Red Mesa Project"). The Red Mesa Project achieved commercial operation in Q1 2019.
Red Mesa's statement of claim alleges that 12 of the 95 wind turbines have experienced premature gearbox failures within the first three years of commercial operation. Under the terms of the TSA, Northfield provided a 10-year warranty on all major components, including gearboxes, which warranty extends through Q1 2029. Red Mesa contends that the gearbox failures are attributable to a design defect in the NWS-4.0 gearbox assembly, specifically an under-specified bearing in the planetary gear stage, and that the failures are covered by the manufacturer's warranty. Red Mesa's claims include breach of the warranty provisions of the TSA, breach of the implied warranty of merchantability, and breach of the implied warranty of fitness for a particular purpose.
Red Mesa seeks damages in the amount of approximately $8.5 million, consisting of: (i) approximately $5.2 million for the cost of 12 replacement gearbox assemblies; (ii) approximately $1.8 million for crane mobilization, demobilization, and on-site installation costs associated with the gearbox replacements; and (iii) approximately $1.5 million in lost revenue attributable to turbine downtime during the period from initial failure identification through anticipated completion of the replacements.
Respondent's Position: Northfield filed a preliminary response contending that the gearbox failures are attributable to improper maintenance practices by Red Mesa's operations and maintenance ("O&M") contractor, rather than a design or manufacturing defect. Specifically, Northfield alleges that Red Mesa failed to adhere to the manufacturer's prescribed gearbox oil change intervals and that the O&M contractor used a non-approved lubricant grade during a maintenance cycle in Q2 2020. Northfield further contends that certain of the warranty claims are barred by the TSA's notice provisions, which require written notice of a warranty claim within 30 days of the identification of a defect.
Current Status: A preliminary hearing before the arbitral tribunal is scheduled for May 2022. The tribunal has been constituted with a three-member panel. Discovery is expected to commence following the preliminary hearing, with an evidentiary hearing tentatively anticipated in Q4 2022 or Q1 2023.
Risk Assessment: Moderate. Red Mesa's position is supported by independent engineering reports prepared by CBR's third-party engineering consultant, which conclude that the gearbox failures are consistent with a systemic bearing design deficiency and are not attributable to maintenance practices. The engineering reports document that Red Mesa's O&M contractor adhered to the manufacturer's prescribed maintenance schedule, including oil change intervals, and that the lubricant grade used was within the range approved by Northfield in its O&M manual addendum issued in 2018. However, arbitration outcomes are inherently uncertain, and Northfield's maintenance-related defense introduces an element of factual dispute that will require resolution through expert testimony and documentary evidence. Our assessment is that Red Mesa is likely to recover a substantial portion of the claimed damages, but a partial recovery (reflecting, for example, a finding of contributory fault or a reduction for certain notice-related defenses) is a reasonably possible outcome. We estimate the likely recovery range at approximately $4 million to $7 million.
Disclosure Recommendation: We recommend disclosure of this matter in the "Legal Proceedings" section of the S-1 registration statement. The amount in controversy ($8.5 million) significantly exceeds the individual $500,000 materiality threshold. We further recommend referencing this matter in the risk factors under a heading addressing equipment and technology risks, including the Company's reliance on manufacturer warranties for major components and the risks associated with equipment performance failures.
B. Employment-Related Litigation
4. Former Employee Wrongful Termination Claim. Court / Forum: 126th Judicial District Court, Travis County, Texas
Case No.: D-1-GN-21-008742
Date Filed: November 9, 2021
Parties: David Engstrom ("Engstrom"), as plaintiff, against Calloway-Briggs Operating Company LLC, a Texas limited liability company and wholly owned indirect subsidiary of CBR ("CBOC"), as defendant.
Nature of Claim: Engstrom is a former project manager employed by CBOC who was assigned to the Pronghorn Wind project, a 510 MW onshore wind energy generation facility located in Nolan County, Texas (the "Pronghorn Wind Project"). The Pronghorn Wind Project achieved commercial operation in Q2 2021. Engstrom was terminated from his employment with CBOC on August 16, 2021.
Engstrom's petition alleges that his termination constituted wrongful termination in violation of Texas public policy and retaliation in violation of applicable occupational safety statutes. Specifically, Engstrom alleges that he raised internal safety complaints regarding fall-protection practices at the Pronghorn Wind Project construction site during the period from March through June 2021, and that his termination approximately two months later was motivated, in whole or in part, by his internal safety complaints. Engstrom seeks back pay, compensatory damages for emotional distress, and attorney fees, in an aggregate amount of approximately $750,000.
Current Status: CBOC filed an answer denying all material allegations on December 20, 2021. Written discovery is underway. Pursuant to the court's standing order, the parties have been referred to mediation, which is scheduled for Q3 2022. Sandra Haverford and Rachel Whitmore (Chief People Officer) report that preliminary settlement discussions have occurred between counsel for the parties, and CBOC's outside employment counsel (Hargrove & Denton LLP, Austin, Texas) has assessed the likely settlement range at approximately $150,000 to $300,000.
Risk Assessment: Low. Sandra Haverford and Rachel Whitmore have confirmed that Engstrom's termination was based upon well-documented performance deficiencies, including repeated failures to submit required project status reports, documented instances of insubordination toward the project director, and a pattern of unauthorized absences from the project site. CBOC's human resources files contain a detailed progressive-discipline record, including a written warning issued on June 4, 2021 (prior to the alleged retaliatory termination date) and a performance improvement plan initiated on July 12, 2021. While the temporal proximity between Engstrom's internal safety complaints and his termination creates a factual issue that a plaintiff's counsel could attempt to exploit in litigation, the well-documented performance basis for the termination provides a strong defense. Settlement within the estimated range of $150,000 to $300,000 is considered the most likely outcome.
Disclosure Recommendation: This matter falls below the individual $500,000 materiality threshold for separate disclosure in the "Legal Proceedings" section of the S-1. We recommend aggregating this matter with other employment-related risks in the risk factors section, including a general statement regarding the types of employment-related claims that may arise in the ordinary course of the Company's business.
5. OSHA Citation — Mesquite Wind Construction Site. Forum: United States Department of Labor, Occupational Safety and Health Administration ("OSHA"), Dallas Area Office
Citation Date: February 8, 2022
Citation No.: OSHA-22-0187-DAL
Site: Mesquite Wind construction site, Oldham County, Texas. The Mesquite Wind project is a 420 MW onshore wind energy generation facility currently under construction by Mesquite Wind Holdings LLC, a Delaware limited liability company and wholly owned indirect subsidiary of CBR (the "Mesquite Wind Project"). The Mesquite Wind Project has an expected commercial operation date of Q3 2022.
Nature of Citation: Following an unannounced OSHA compliance inspection of the Mesquite Wind construction site conducted on January 19, 2022, OSHA issued a citation alleging two "serious" violations of the fall-protection standards set forth in 29 C.F.R. Part 1926, Subpart M. Specifically, the citation alleged: (i) a violation of 29 C.F.R. § 1926.501(b)(1) for failure to provide adequate guardrail systems, safety net systems, or personal fall arrest systems for employees working at elevations exceeding six feet on unprotected sides or edges of a turbine-tower foundation platform; and (ii) a violation of 29 C.F.R. § 1926.502(d)(15) for failure to properly secure a personal fall arrest system anchorage point to a structural member capable of supporting the required loads during a turbine-tower erection sequence.
The proposed penalty for the two violations is $28,000 in the aggregate ($14,000 per violation).
Current Status: Mesquite Wind Holdings LLC, through outside counsel, filed a timely notice of contest on March 1, 2022, contesting the characterization and penalty amount. An informal settlement conference with the OSHA Area Director's office is currently pending and is expected to be scheduled within the next 30 to 60 days. Sandra Haverford has indicated that CBR's objective in the contest process is to negotiate a reduction in the penalty amount and to ensure that the citation characterization (if affirmed) is consistent with the remedial measures already implemented at the construction site. No work-stoppage orders, willful-violation allegations, or repeat-violation designations were issued in connection with this citation.
Risk Assessment: Low. This is a routine construction-site citation that is typical of the type encountered in the construction of large-scale wind energy facilities. The proposed penalty of $28,000 is well below the individual materiality threshold. OSHA citations of this nature are commonly resolved through informal settlement conferences at or near the proposed penalty amount, often with agreed-upon abatement measures. Sandra Haverford has confirmed that the conditions cited by OSHA were promptly corrected following the inspection, and that additional safety training was conducted for all workers at the Mesquite Wind construction site.
Disclosure Recommendation: This matter falls below the individual $500,000 materiality threshold for separate disclosure in the "Legal Proceedings" section. We recommend including a reference to this type of matter in the risk factors as a general construction-safety risk, and cross-referencing this citation in the regulatory and environmental overview section of the S-1 as an example of the types of OSHA oversight to which the Company's construction activities are subject.
C. Regulatory and Governmental Proceedings
6. FERC Compliance Inquiry — NERC Reliability Standards. Forum: Federal Energy Regulatory Commission ("FERC") / North American Electric Reliability Corporation ("NERC")
Date Initiated: October 2021
Entity: Calloway-Briggs Operating Company LLC ("CBOC")
Nature of Inquiry: In October 2021, NERC's Texas Reliability Entity ("Texas RE"), acting as the regional compliance monitoring and enforcement program administrator, initiated a compliance inquiry regarding a potential violation of NERC Reliability Standard FAC-001 (Facility Interconnection Requirements) at the Pronghorn Wind Project. The inquiry relates to documentation of the reactive power capability of the Pronghorn Wind facility during the commissioning phase, specifically whether the facility's reactive power capability was properly documented and reported to the relevant transmission operator in accordance with FAC-001 requirements.
The inquiry was triggered by a routine compliance audit conducted by the Texas RE during Q3 2021, during which the Texas RE auditors identified what they characterized as a documentation gap in the reactive power capability data submitted by CBOC to the transmission operator at the time of interconnection. The Texas RE's preliminary assessment indicated that the facility's actual reactive power capability was consistent with the interconnection agreement requirements, but that the documentation submitted during commissioning did not fully reflect the as-built reactive power performance curve.
Current Status: CBOC submitted a self-report to the Texas RE in November 2021, acknowledging the documentation gap and providing supplemental reactive power data that demonstrates the Pronghorn Wind facility's compliance with the applicable interconnection agreement requirements. NERC staff is currently reviewing the self-report and supplemental data. No formal notice of penalty or sanction has been issued. Sandra Haverford has been in regular communication with the Texas RE enforcement staff and reports that the inquiry is proceeding on a cooperative basis, with no indication of an intent to pursue a formal enforcement action.
Potential Exposure: Based on the nature of the inquiry (a documentation issue rather than an operational compliance failure), Sandra Haverford and CBR's NERC compliance counsel (Predding & Montrose LLP, Houston, Texas) expect that the matter will be resolved through a "Find, Fix, Track, and Report" ("FFT") disposition, which is a streamlined enforcement mechanism used by NERC for lower-risk, self-reported violations. An FFT disposition typically involves no financial penalty. In the event that NERC staff determines that a minimal penalty is warranted, the estimated penalty exposure is under $50,000 based on comparable FFT dispositions in the NERC enforcement database.
Risk Assessment: Low. This matter is characterized by Sandra Haverford and CBR's NERC compliance counsel as a documentation issue that does not reflect an operational compliance failure. The Pronghorn Wind facility has been operating in full compliance with all applicable NERC reliability standards since its commercial operation date in Q2 2021. The facility's actual reactive power capability meets or exceeds the requirements of its interconnection agreement. The documentation gap has been corrected through the self-report and supplemental data submission.
Disclosure Recommendation: We recommend referencing this type of matter in the risk factors as an example of the regulatory compliance risks to which the Company's operations are subject, including the potential for FERC/NERC compliance inquiries and enforcement actions. We do not recommend separate disclosure in the "Legal Proceedings" section unless the matter is escalated beyond the FFT process, which we consider unlikely based on current information. This matter should be monitored for any change in status through the IPO closing process.
7. Texas Commission on Environmental Quality (TCEQ) — Stormwater Permit Compliance. Forum: Texas Commission on Environmental Quality ("TCEQ")
Date Initiated: December 6, 2021
Entity: Mesquite Wind Holdings LLC
Reference No.: TCEQ NOV-2021-1847-OLH
Nature of Violation: In December 2021, TCEQ issued a Notice of Violation ("NOV") to Mesquite Wind Holdings LLC in connection with stormwater discharge permit compliance at the Mesquite Wind construction site in Oldham County, Texas. The NOV was issued following a TCEQ field inspection conducted on November 15, 2021, during which TCEQ inspectors observed conditions indicating inadequacy of the erosion and sediment control best management practices ("BMPs") required under the facility's Texas Pollutant Discharge Elimination System ("TPDES") Construction General Permit (TXR150000). Specifically, the inspectors noted: (i) silt fencing in a degraded condition along the southwestern boundary of the construction site, with evidence of sediment discharge beyond the permitted construction limits; (ii) insufficient stabilization of a temporary access road crossing an intermittent drainage channel; and (iii) incomplete implementation of a stormwater pollution prevention plan ("SWP3") amendment that had been submitted to TCEQ in October 2021.
Current Status: Mesquite Wind Holdings LLC submitted a corrective action plan to TCEQ on January 15, 2022, detailing the remedial measures taken to address the conditions identified in the NOV, including replacement of damaged silt fencing, installation of additional erosion-control blankets and check dams, stabilization of the temporary access road crossing, and full implementation of the SWP3 amendment. TCEQ acknowledged receipt of the corrective action plan and is conducting a follow-up inspection, which was anticipated to occur in April or May 2022 but has not yet been scheduled as of the date of this memorandum.
Potential Exposure: The estimated administrative penalty for the violations cited in the NOV is in the range of $10,000 to $50,000, based on TCEQ's penalty policy and comparable enforcement actions for construction-phase stormwater violations. No remediation order or project-stoppage order is anticipated.
Risk Assessment: Low. This is a construction-phase environmental compliance matter that is typical of large-scale construction projects in Texas. The corrective measures have been implemented, and Sandra Haverford reports that TCEQ enforcement staff have indicated informally that they are satisfied with the corrective action plan. The matter is not expected to result in any material financial exposure or project delay.
Disclosure Recommendation: We recommend referencing this type of matter in the risk factors regarding environmental compliance and permitting risks. Cross-reference to the Due Diligence Memorandum — Environmental (Document 29) for a broader discussion of environmental compliance matters, including the Phase I/II assessment discussion prepared in consultation with Greenridge Environmental Sciences LLC (Dr. Nadine Torres, Principal Scientist). We do not recommend separate disclosure in the "Legal Proceedings" section given the low exposure amount.
8. New Mexico Environment Department — Air Quality Permit Review. Forum: New Mexico Environment Department ("NMED"), Air Quality Bureau
Date: Ongoing (since Q4 2021)
Entity: Cimarron Solar Development LLC, a Delaware limited liability company and wholly owned indirect subsidiary of CBR ("Cimarron Solar")
Nature: This matter relates to the pre-construction air quality permit review for the Cimarron Solar project, a 350 MW solar PV facility planned for development in Doña Ana County, New Mexico (the "Cimarron Solar Project"), with an expected commercial operation date of Q1 2023. In Q4 2021, NMED's Air Quality Bureau requested additional fugitive dust modeling data for the construction phase of the Cimarron Solar Project in connection with Cimarron Solar's application for a construction air quality permit under 20 NMAC 2.72 (Construction Permits). NMED's request relates to the modeling assumptions used in Cimarron Solar's original permit application regarding the extent of soil disturbance during the grading and foundation-installation phases of construction, and the adequacy of the proposed dust-mitigation measures (water application, chemical stabilization, and wind-break fencing) to achieve compliance with the New Mexico ambient air quality standards for particulate matter (PM-10 and PM-2.5).
Current Status: Cimarron Solar submitted supplemental fugitive dust modeling data to NMED on March 15, 2022, prepared by the Company's environmental engineering consultant. NMED is currently reviewing the supplemental data. Sandra Haverford and Tomás Quintero report that they have had informal communications with NMED staff indicating that the supplemental data appears responsive to NMED's concerns, but that a formal determination has not yet been issued.
Risk Assessment: Low. This matter is a standard permitting process issue and does not constitute a violation, enforcement action, or claim. Sandra Haverford and Tomás Quintero do not anticipate that the NMED review will result in a denial of the construction air quality permit or a material delay to the Cimarron Solar Project construction schedule.
Disclosure Recommendation: This matter is not a litigation or claim item per se, and we do not recommend disclosure in the "Legal Proceedings" section. We recommend cross-referencing this matter to the Due Diligence Memorandum — Regulatory and Permitting (Document 21) for discussion in the context of the Company's development-stage project permitting status.
D. Tax-Related Proceedings
9. IRS Audit — ITC Eligibility for Solaris West. Forum: Internal Revenue Service ("IRS"), Large Business and International Division
Date Initiated: August 2021
Entity: Solaris West Solar LLC, and by extension the tax-equity partnership between Solaris West Solar LLC and Veltara Basin Financial LLC ("Veltara Basin"), a financial institution that invested approximately $280 million in tax equity in the Solaris West Project through a partnership-flip structure, with the tax-equity flip expected to occur in 2028.
Nature of Examination: In August 2021, the IRS initiated an examination of the Investment Tax Credit ("ITC") claimed by the Solaris West tax-equity partnership in connection with the Solaris West 450 MW solar PV project. The ITC, claimed under Section 48 of the Internal Revenue Code, was based on the project's placed-in-service date and eligible cost basis. The IRS examination agent has requested documentation supporting: (i) the project's placed-in-service date determination and the basis for the conclusion that the project was placed in service during the taxable year in which the ITC was claimed; (ii) the project's cost basis for ITC purposes, including the allocation of costs between ITC-eligible and non-eligible components; and (iii) the project's compliance with the "begin construction" safe harbor under IRS Notice 2018-59 (as subsequently modified), including documentation of the continuous efforts or five-percent safe harbor tests.
The examination was initiated following a broader IRS initiative to review ITC and Production Tax Credit ("PTC") claims by renewable energy projects, particularly with respect to placed-in-service date determinations and begin-construction safe harbor compliance. Sandra Haverford reports that CBR is aware of similar examinations affecting other participants in the renewable energy industry.
Current Status: CBR, through its outside tax counsel and advisors at Kessler McBride & Associates LLP (Alan Kessler, Managing Partner, and Linda McBride, Partner), has responded to multiple Information Document Requests ("IDRs") issued by the IRS examination agent. The IDR responses were submitted between October 2021 and March 2022 and include, among other things, copies of the EPC contract, notice to proceed, COD certificate, independent engineer's completion report, cost segregation study, begin-construction memorandum, and contemporaneous project development timeline documentation. The IRS examination agent is currently reviewing the submitted materials. No notice of deficiency, proposed adjustment, or Revenue Agent's Report has been issued as of the date of this memorandum.
Potential Exposure: The potential exposure associated with this examination varies significantly depending on the nature and scope of any adjustment that might be proposed by the IRS.
• Full ITC Disallowance (Remote Scenario): In the unlikely event that the IRS were to fully disallow the ITC claimed in connection with the Solaris West Project, the recapture exposure could be material to the Solaris West SPV. A full disallowance would also trigger obligations under the tax protection and indemnification provisions of the tax-equity partnership agreement with Veltara Basin Financial LLC. However, CBR's outside tax counsel and advisors at Kessler McBride & Associates LLP, as well as C&H's tax group (Leonard Cross), believe that a full disallowance is remote given the strength of the project's placed-in-service date documentation and begin-construction safe harbor compliance evidence.
• Partial Adjustment (Reasonably Possible Scenario): A partial adjustment — for example, a reduction in the eligible cost basis for ITC purposes based on a disagreement over the allocation of certain costs between ITC-eligible and non-eligible categories — is a reasonably possible outcome, although CBR's advisors believe even a partial adjustment is unlikely. If a partial adjustment were to be proposed, the estimated exposure is less than $5 million, based on Kessler McBride & Associates' analysis of the cost categories most susceptible to challenge.
• No Adjustment (Most Likely Scenario): The most likely outcome, in the assessment of CBR's tax counsel and advisors, is that the examination will conclude without any adjustment.
Risk Assessment: Low-to-moderate. CBR has strong documentation supporting the Solaris West Project's ITC eligibility, including a detailed begin-construction memorandum prepared at the time of the initial physical work test, a comprehensive cost segregation study, and an independent engineer's placed-in-service certification. Alan Kessler at Kessler McBride & Associates has expressed confidence in the defensibility of the ITC position. However, any adverse finding by the IRS, even a partial adjustment, could have implications for the Veltara Basin tax-equity partnership, including potential indemnification obligations and reputational effects with the tax-equity investor community. Additionally, an adverse finding with respect to the Solaris West Project could invite heightened scrutiny of ITC claims associated with other CBR projects. For these reasons, we assign a low-to-moderate risk rating notwithstanding the strong substantive position.
Disclosure Recommendation: We recommend disclosure of this matter in the "Legal Proceedings" section of the S-1, describing the nature of the IRS examination without quantifying the specific exposure amount, consistent with the guidance under ASC 740 and FIN 48 regarding disclosure of uncertain tax positions. We further recommend referencing this matter in the risk factors under a heading addressing ITC and PTC policy risks, tax-equity partnership risks, and the potential impact of IRS examinations on the Company's tax-equity financing structures. Cross-reference to Due Diligence Memorandum — Tax Structure and Tax-Equity (Document 25) and Tax-Equity Structure Memorandum — Partnership-Flip Compliance (Document 102) for a detailed discussion of the tax-equity structure and the relevant indemnification provisions.
IV. Threatened Litigation and Pre-Suit Matters
Based upon our review of CBR's correspondence files, demand letters, and management interviews, we have identified two threatened or pre-suit matters that warrant discussion in this memorandum. Neither matter has resulted in the filing of a lawsuit or arbitration demand as of the date of this memorandum.
A. Demand Letter — Adjacent Property Owner, Brazos Storage Facility
Date of Demand: February 14, 2022
Parties: Harlan Properties LP ("Harlan Properties"), through counsel (Garcia & Mendoza PLLC, Houston, Texas), has sent a written demand letter to Brazos Energy Storage LLC, a Delaware limited liability company and wholly owned indirect subsidiary of CBR ("Brazos Energy Storage").
Nature of Demand: Harlan Properties is the owner of a 340-acre agricultural property adjacent to the Brazos Storage battery energy storage facility, a 200 MW / 800 MWh lithium-ion battery energy storage system located in Fort Bend County, Texas (the "Brazos Storage Facility"). The Brazos Storage Facility achieved commercial operation in Q4 2021. In its demand letter, Harlan Properties alleges that the Brazos Storage Facility generates excessive noise during operation, particularly during periods of peak charging and discharging activity when the facility's thermal management systems (HVAC units and fans serving the battery enclosures) operate at maximum capacity. Harlan Properties alleges that the noise levels constitute a nuisance under Texas common law and a violation of the Fort Bend County noise ordinance. Harlan Properties demands that Brazos Energy Storage: (i) implement noise abatement measures, including installation of sound barriers and replacement of HVAC equipment with quieter alternatives; and (ii) pay $500,000 in damages for interference with the use and enjoyment of the Harlan Properties parcel.
CBR's Response: Sandra Haverford responded to the demand letter on March 7, 2022, providing the results of an independent engineering noise study conducted by Apex Acoustics Engineering LLC at the Brazos Storage Facility in December 2021. The noise study measured sound levels at the property boundary under various operating conditions and concluded that the Brazos Storage Facility operates within the noise limits established by the Fort Bend County noise ordinance at all measurement points. Sandra Haverford's response letter invited Harlan Properties to arrange a meeting to discuss the noise study results and any concerns, but Harlan Properties has not responded to the invitation as of the date of this memorandum.
Current Status: No lawsuit has been filed. Sandra Haverford reports that she has not received any further correspondence from Harlan Properties or its counsel since the March 7, 2022 response letter. Sandra Haverford considers it possible that the matter may be resolved without litigation, particularly given the engineering data demonstrating compliance with applicable noise standards.
Risk Assessment: Low. The engineering noise study data provides strong support for Brazos Energy Storage's position. Fort Bend County noise ordinance compliance is a complete defense to the ordinance-violation component of the claim, and the common-law nuisance claim would face significant evidentiary challenges given the documented noise levels. Even if a lawsuit were filed, the estimated maximum exposure (including the cost of potential noise-mitigation measures and compensatory damages) would be in the range of $250,000 to $500,000.
Disclosure Recommendation: This matter falls below the individual $500,000 materiality threshold for separate disclosure in the "Legal Proceedings" section. We recommend monitoring this matter for any further developments. We further recommend including battery-energy-storage-specific nuisance risks (including noise and thermal-event risks) as a general risk category in the risk factors section of the S-1, without specific reference to this demand letter.
B. Potential Claim — Interconnection Delay, Silverleaf Wind
Entity: CBR Development Co. LLC, a Texas limited liability company and wholly owned subsidiary of CBR ("CBR Development")
Nature of Potential Claim: Tomás Quintero, SVP of Project Development, has identified a potential claim by CBR Development against the relevant transmission utility for interconnection study delays affecting the Silverleaf Wind development project, a proposed 600 MW onshore wind energy generation facility planned for development in Irion County, Texas (the "Silverleaf Wind Project"), with an expected commercial operation date of Q4 2024.
The Silverleaf Wind Project is currently in the development stage and has submitted an interconnection request to the relevant transmission service provider under the ERCOT standard interconnection procedures. Tomás Quintero reports that the transmission utility has experienced significant delays in completing the required interconnection studies (system impact study and facilities study), which delays are attributable, according to Quintero, to the utility's resource constraints in processing the high volume of interconnection requests currently in the ERCOT queue. The Silverleaf Wind Project's interconnection queue position may be jeopardized if the study delays continue beyond the applicable milestone deadlines.
Current Status: No demand letter has been sent and no formal claim has been asserted. CBR Development's internal team and outside regulatory counsel are monitoring the situation and engaging in informal communications with the transmission utility to expedite the study process. Tomás Quintero reports that CBR Development is also exploring alternative interconnection configurations that might allow the project to proceed through a different queue position or interconnection point if the current path proves unworkable.
Potential Exposure: The potential exposure is difficult to quantify at this early stage. Tomás Quintero estimates that if the Silverleaf Wind Project's queue position is lost and the project must re-enter the interconnection queue, the associated development-cost impact (including sunk interconnection study fees, engineering costs, and delay-related carrying costs) could be in the range of $2 million to $5 million. However, the probability of a complete loss of queue position is uncertain, and the matter may be resolved through the ongoing informal discussions with the transmission utility.
Risk Assessment: Low. This is a development-stage project matter, and interconnection study delays are common in the renewable energy industry, particularly in the ERCOT market, which has experienced a significant increase in interconnection requests in recent years. The potential claim is speculative at this stage and may never materialize into a formal dispute.
Disclosure Recommendation: We recommend referencing interconnection and transmission risks in the risk factors section of the S-1, including a discussion of the risks associated with delays in the interconnection study and approval process. We do not recommend disclosure of this specific potential claim in the "Legal Proceedings" section at this stage, as no formal claim has been asserted and the matter remains at a preliminary, pre-dispute stage.
V. Recently Settled or Resolved Matters (Past Three Years)
The following matters were settled or resolved within the three-year period preceding the date of this memorandum (i.e., since April 2019). All three matters have been fully resolved, and there is no ongoing exposure to the Company. We include them in this memorandum for completeness and because certain of these matters are relevant to the risk factor disclosures in the S-1.
A. Property Tax Valuation Dispute — Solaris West
Forum: Pecos County Appraisal Review Board, Texas
Date Resolved: June 22, 2021
Parties: Solaris West Solar LLC v. Pecos County Appraisal District
Nature of Dispute: Following the initial property tax assessment for the Solaris West 450 MW solar PV project, the Pecos County Appraisal District assigned an initial assessed valuation of approximately $180 million to the facility for the 2021 tax year. Solaris West challenged the valuation, contending that the appropriate assessed valuation was approximately $140 million based on: (i) the limitations on assessed value established under the Company's Chapter 313 (Texas Tax Code) value limitation agreement with the Pecos-Barstow-Toyah Independent School District; and (ii) an income-approach valuation methodology that, in Solaris West's view, more accurately reflected the fair market value of the facility given the contracted power purchase agreement terms and the facility's projected revenue stream over its useful life.
Resolution: The matter was resolved through negotiation with the Pecos County Appraisal District, resulting in an agreed-upon assessed valuation of approximately $150 million. The settlement resulted in annual property tax savings of approximately $400,000 relative to the Appraisal District's initial assessment. The settlement was reached without a formal hearing before