PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, New York 10022
MEMORANDUM
CONFIDENTIALITY NOTICE: This memorandum is protected by the attorney-client privilege and/or constitutes attorney work product. It is prepared solely for the internal use of Calderwood & Harkness LLP in connection with its representation of Calloway-Briggs Renewables Inc. and should not be disclosed to third parties without the prior written consent of the undersigned.
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I. Executive Summary and Purpose
This memorandum constitutes a comprehensive roll-up of all workstream-level due diligence memoranda prepared by Calderwood & Harkness LLP in connection with the proposed initial public offering (the "IPO") of the common stock of Calloway-Briggs Renewables Inc. ("CBR" or the "Company") on the New York Stock Exchange (the "NYSE") under the proposed ticker symbol "CBRI." The purpose of this memorandum is to consolidate and synthesize the findings from each individual workstream, identify gating issues that must be resolved prior to the offering, present disclosure recommendations for the Company's registration statement on Form S-1 (the "S-1"), and outline areas requiring ongoing attention as the offering process progresses.
Our engagement in connection with the proposed IPO commenced on March 10, 2022. An organizational meeting was held during the week of March 14–18, 2022, at CBR's corporate headquarters located at 4200 Ridgeline Parkway, Suite 1100, Austin, Texas 78746. The organizational meeting was attended by representatives of the Company, its management, the underwriters and their counsel, the Company's auditors, and outside regulatory counsel. Following the organizational meeting, we commenced our due diligence review and initial S-1 drafting activities during the period of March 21 through April 29, 2022. The confidential submission of the initial draft registration statement on Form S-1 (the "DRS-1") to the U.S. Securities and Exchange Commission (the "SEC") is targeted for May 11, 2022 (SEC CIK No. 0001948372; EDGAR Accession No. 0001948372-22-000001).
Company Overview. CBR is a Delaware-incorporated, Texas-headquartered developer and operator of utility-scale solar photovoltaic ("solar"), onshore wind, and battery energy storage system ("BESS") projects. The Company was founded in 2014 by Garrett Calloway and Elaine Briggs, who continue to serve as Chairman and Chief Executive Officer and President, respectively. As of the date of this memorandum, the Company employs approximately 1,240 full-time employees across its corporate headquarters in Austin, Texas, and various project offices throughout the southwestern United States.
The Company's current operating portfolio comprises approximately 3.8 gigawatts ("GW") of nameplate capacity across 22 projects located in Texas, New Mexico, Arizona, California, and Oklahoma. In addition, the Company has approximately 1.4 GW of capacity under active construction and a development pipeline of approximately 6.2 GW. These assets span the three principal utility-scale renewable energy technologies: solar, onshore wind, and battery energy storage.
Pre-IPO Ownership. The Company's pre-IPO capitalization reflects the following ownership structure: approximately 62% of the outstanding equity is held by Pinnacle Vista Capital Partners III, LP ("Pinnacle Vista" or the "Sponsor"), a growth equity fund managed by Pinnacle Vista Capital Advisors LLC; approximately 24% is held by the co-founders and members of the management team; and approximately 14% is held by earlier-stage investors and employees holding vested equity awards. Pinnacle Vista made its initial investment in CBR in 2017 through its Fund III vehicle, a 2016-vintage fund.
Proposed Offering. The proposed aggregate offering size is approximately $600,000,000, inclusive of a 15% overallotment option. Based on an assumed midpoint offering price of $22.00 per share, the base offering consists of 23,713,636 shares, with an additional 3,559,091 shares available under the overallotment option, for a total of 27,272,727 shares on a fully exercised basis. The offering is structured as a combined primary and secondary offering: the Company will sell approximately 16,895,455 shares in the primary offering, generating estimated net proceeds to the Company of approximately $371,700,000 (before deducting underwriting discounts and estimated offering expenses), and Pinnacle Vista will sell approximately 6,818,182 shares in the secondary offering, generating estimated net proceeds to the selling stockholder of approximately $150,000,000.
Scope and Organization. This memorandum identifies gating issues that must be resolved prior to the offering, presents disclosure recommendations for the S-1, and outlines areas requiring ongoing attention as the SEC review and offering process progress. It should be read in conjunction with the individual workstream memoranda referenced herein, which are designated as Documents 19 through 29 in the matter document index. In the interest of providing a comprehensive resource for the deal team, this memorandum also includes a financial overview and valuation context section, a summary of the underwriting and offering structure, and a detailed schedule of outstanding workstreams and next steps.
II. Workstream-by-Workstream Findings
The following sections summarize the key findings and recommendations from each of the individual due diligence workstreams. Each workstream section references the corresponding memorandum in the matter document index, and cross-references to other workstreams are provided where the issues overlap.
A. Corporate Organization and Authority
Reference: Due Diligence Memorandum — Corporate Organization and Authority (Document 19)
1. Entity Structure
Calloway-Briggs Renewables Inc. is a corporation organized under the laws of the State of Delaware, Employer Identification Number 83-4027615. The Company's registered agent in Delaware is Capitol Statutory Services, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. The Company is qualified to do business in the State of Texas as a foreign corporation, with its principal offices at 4200 Ridgeline Parkway, Suite 1100, Austin, Texas 78746.
The Company's corporate structure utilizes a standard holding-company architecture commonly employed by renewable energy developers to facilitate project-level financing, regulatory compliance, and asset protection. The immediate subsidiary of CBR is CBR Holdings LLC, a Delaware limited liability company that is wholly owned by CBR. CBR Holdings, in turn, wholly owns Calloway-Briggs Operating Company LLC ("CB Operating"), a Texas limited liability company that serves as the primary operating entity through which the Company conducts its business operations and holds its project-level assets.
Our review identified ten material subsidiaries, all of which are wholly owned through the CBR Holdings / CB Operating chain. These material subsidiaries are as follows:
(a) Solaris West Solar LLC (Texas) — 450 MW solar project in Pecos County, TX;
(b) Red Mesa Wind Energy LLC (Oklahoma) — 380 MW wind project in Custer County, OK;
(c) Painted Rock Solar LLC (Arizona) — 320 MW solar project in Maricopa County, AZ;
(d) Pronghorn Wind LLC (Texas) — 510 MW wind project in Nolan County, TX;
(e) Brazos Energy Storage LLC (Texas) — 200 MW / 800 MWh battery energy storage project in Fort Bend County, TX;
(f) Mesquite Wind Holdings LLC (Texas) — 420 MW wind project under construction in Oldham County, TX;
(g) Cimarron Solar Development LLC (New Mexico) — 350 MW solar project under construction in Doña Ana County, NM;
(h) CBR Development Co. LLC (Texas) — development-stage entity holding the Company's 6.2 GW development pipeline assets;
(i) and (j) two additional wholly owned entities serving as intermediate holding companies for certain project-level assets.
We reviewed the complete organizational chart provided by management and confirmed that the Company does not hold any minority interests in any subsidiary and does not participate in any joint ventures outside of the tax-equity partnership structure described in Section II.G below. Each subsidiary's limited liability company agreement or other organizational document was reviewed and confirmed to be in order.
2. Capitalization. The Company's pre-IPO capitalization, on a fully diluted basis after giving effect to the conversion of all outstanding shares of preferred stock and the reclassification of the Company's capital stock to be effected in connection with the IPO, consists of 100,000,000 shares of common stock, par value $0.01 per share. We reviewed the Company's stock ledger, including all transfers, issuances, and cancellations from the Company's inception through the date of this memorandum, and reconciled the ledger to the capitalization table prepared by the Company's management and counsel.
Post-IPO, the Company's shares outstanding will be as follows: on a base offering basis (excluding the overallotment option), 123,713,636 shares; and on a full-overallotment-exercise basis, 127,272,727 shares. We note that these figures do not include shares reserved for issuance under the Company's equity incentive plans to be adopted in connection with the IPO, as described in Section II.F below.
Our review confirmed that the Company has no outstanding warrants, convertible instruments, simple agreements for future equity ("SAFEs"), or other derivative securities, other than existing equity awards to be addressed in the employment and benefit plans workstream (Section II.F). All shares have been duly authorized and validly issued.
3. Board and Governance
The Company's board of directors (the "Board") currently consists of seven members, as follows:
(a) Garrett Calloway — Chairman of the Board and Chief Executive Officer (non-independent);
(b) Elaine Briggs — President and Director (non-independent);
(c) Hugh Pemberton — Director, designated by Pinnacle Vista Capital Partners III, LP (non-independent);
(d) Diane Kovac — Director, designated by Pinnacle Vista Capital Partners III, LP (non-independent);
(e) Warren Okoro — Director (independent);
(f) Catherine Liang — Director (independent); and
(g) Richard Estavez — Director (independent).
The three independent directors — Mr. Okoro, Ms. Liang, and Mr. Estavez — satisfy the minimum independence requirements for listing on the NYSE. We note that the Company may qualify for the "controlled company" exemption under NYSE Listed Company Manual Section 303A following the IPO, as discussed further in Section II.K and Section IV.H below. If the Company elects to rely on the controlled-company exemption, it would be exempt from certain NYSE requirements regarding the composition of the Board and its committees. We recommend that the Company carefully consider whether to rely on this exemption and disclose its decision in the S-1.
We reviewed the Board and stockholder minutes from the Company's inception through March 2022. The minutes reflect regular meetings, proper quorum and voting procedures, and no irregularities. Board resolutions authorizing the IPO, the engagement of underwriters, amendments to the Company's charter and bylaws to be effective upon the closing of the IPO, and the adoption of the Company's equity incentive plans are in the process of being finalized and will be adopted prior to the DRS-1 filing.
4. Charter and Bylaws
We reviewed the Company's existing Restated Certificate of Incorporation and existing Bylaws. In connection with the IPO, the Company will adopt an Amended and Restated Certificate of Incorporation (the "IPO Charter") and Amended and Restated Bylaws (the "IPO Bylaws"), each of which will become effective upon the closing of the IPO. Drafts of the IPO Charter and IPO Bylaws have been prepared and are currently under review by the Company's management and Board.
The IPO Charter and IPO Bylaws include the following anti-takeover and governance provisions, which are customary for newly public companies:
(a) Classified Board. The Board will be divided into three classes with staggered three-year terms, such that only approximately one-third of directors will be elected at each annual meeting.
(b) Delaware Section 203 Opt-In. The Company will be subject to the provisions of Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders.
(c) Advance-Notice Bylaws. Stockholders must comply with specified advance-notice and informational requirements in order to nominate directors or bring business before an annual meeting.
(d) Exclusive Forum. The IPO Charter designates the Court of Chancery of the State of Delaware as the exclusive forum for certain types of stockholder disputes, including derivative actions, breach of fiduciary duty claims, and actions under the Delaware General Corporation Law.
(e) Supermajority Provisions. Certain amendments to the IPO Charter and IPO Bylaws will require the affirmative vote of holders of at least 66⅔% of the outstanding shares of common stock.
(f) Dual-Class Sundown. The IPO Charter includes a dual-class sundown provision, the specific terms of which are being finalized in consultation with the underwriters.
5. Findings and Recommendations
No gating issues were identified in the corporate organization and authority workstream. Good-standing certificates are to be obtained for CBR (in both Delaware and Texas) and for all ten material subsidiaries in their respective jurisdictions of organization and qualification prior to the closing of the IPO. These certificates will be included on the closing checklist.
Disclosure Recommendation: The S-1 should include a complete organizational chart depicting the holding-company and special-purpose-vehicle architecture described above, together with a list of subsidiaries, in the Business section and as an exhibit to the registration statement. The anti-takeover provisions described above should be fully disclosed in the Description of Capital Stock section and referenced in the risk factors.
B. Material Contracts
Reference: Due Diligence Memorandum — Material Contracts (Document 20)
1. Power Purchase Agreements (PPAs)
We reviewed all power purchase agreements across the Company's 3.8 GW operating portfolio and 1.4 GW of projects under active construction. The Company's revenue model is centered on long-term, fixed-price PPAs with investment-grade utility and corporate offtakers. These agreements typically have original terms of 15 to 25 years, with the weighted average remaining term across the portfolio of approximately 14 years as of the date of this memorandum. This contracted revenue base provides significant revenue visibility and underpins the Company's financial projections and valuation.
Our review of the PPAs focused on, among other things, pricing provisions, term and termination provisions, change-of-control clauses, curtailment provisions, force majeure clauses, credit support requirements, assignment provisions, and default and remedy provisions. In general, the PPAs contain market-standard terms for utility-scale renewable energy offtake agreements and do not contain unusual or non-standard provisions.
With respect to change-of-control provisions, the majority of the Company's PPAs require notice but do not require consent for a change of control resulting from an initial public offering. This is consistent with market practice for utility-scale renewable energy PPAs, where the identity of the ultimate parent company is generally less significant to the offtaker than the creditworthiness and operational capability of the project-level entity. However, our review identified two PPAs that contain broad change-of-control definitions that may be triggered by the IPO:
(a) Painted Rock Solar PPA. The PPA for the Painted Rock Solar project in Maricopa County, Arizona, defines "change of control" as any event resulting in a change in the identity of the person or entity that "directly or indirectly controls" the project company. Because the IPO will result in a change in the ultimate ownership structure of the Company (from a privately held company controlled by Pinnacle Vista to a publicly traded company with dispersed ownership), there is a colorable argument that this provision may be triggered. Our analysis of this provision is ongoing, and we are working with the Company's general counsel, Sandra Haverford, to assess whether an IPO-specific carve-out or waiver should be sought from the offtaker.
(b) Pronghorn Wind PPA. The PPA for the Pronghorn Wind project in Nolan County, Texas, contains a similar broad change-of-control definition. Our analysis of this provision is also underway, and we anticipate that the same approach — seeking a waiver or carve-out — will be appropriate.
We believe that, in both cases, the Company will be able to obtain the necessary waivers or confirm that the IPO does not trigger the change-of-control provisions. However, until these waivers or confirmations are obtained, these provisions should be flagged as potential risk-factor disclosures and included on the action-item tracker.
Curtailment provisions across the portfolio are consistent with market standards and generally provide for payment adjustments or deemed-generation credits in the event of curtailment ordered by the applicable grid operator. Force majeure clauses were reviewed and do not include any non-standard or unusually broad provisions.
2. EPC Contracts
The Company has two active engineering, procurement, and construction ("EPC") contracts for projects currently under construction:
(a) Mesquite Wind (Oldham County, TX; 420 MW). The EPC contract provides for a fixed-price, turnkey construction arrangement with a guaranteed commercial operation date ("COD") of the third quarter of 2022. We reviewed the contractor's qualifications, performance guarantee provisions, liquidated damages for delay and performance shortfall, and warranty provisions. The project is currently on schedule and within budget. No material disputes have been identified.
(b) Cimarron Solar (Doña Ana County, NM; 350 MW). The EPC contract provides for a similar fixed-price, turnkey construction arrangement with an expected COD of the first quarter of 2023. We reviewed the same categories of provisions as for the Mesquite Wind contract. The project is progressing within budget and on a timeline consistent with the expected COD. No material disputes have been identified.
3. O&M Agreements
Operations and maintenance ("O&M") agreements are in place for all of the Company's operating projects. These agreements include both third-party O&M arrangements (with national and regional service providers) and affiliated-party arrangements (where certain maintenance functions are performed by Company employees under intercompany service agreements). We reviewed the terms of all material O&M agreements, including scope of services, performance benchmarks, fee structures, term and termination provisions, and liability limitations. The agreements generally have terms of 5 to 10 years with renewal options that are aligned with the PPA terms and project useful lives. All O&M agreements contain market-standard terms, and no unusual provisions were identified.
4. Interconnection Agreements
All operating projects have executed interconnection agreements with the applicable transmission service providers or independent system operators, as applicable. These agreements govern the terms of the projects' connections to the bulk electric system and establish the applicable transmission service arrangements.
For the two projects under construction, the interconnection agreements were also reviewed:
(a) Mesquite Wind. The interconnection agreement with the Electric Reliability Council of Texas ("ERCOT") has been executed. No material queue-position or upgrade-cost issues were identified.
(b) Cimarron Solar. The interconnection agreement with the applicable transmission provider has been executed. No material queue-position or upgrade-cost issues were identified.
5. Findings and Recommendations
The two PPA change-of-control provisions (Painted Rock Solar and Pronghorn Wind) have been flagged for disclosure in the risk factors section of the S-1 and for potential waiver letters to be obtained prior to pricing. We do not believe that these provisions constitute a gating issue for the IPO, as the Company expects to obtain the necessary waivers or confirmations, and the consequences of a change-of-control trigger under these PPAs (principally, the offtaker's right to terminate the PPA upon advance notice and subject to a cure period) can be adequately disclosed and mitigated.
Disclosure Recommendation: The S-1 should include detailed summaries of the Company's material PPAs, EPC contracts, O&M agreements, and interconnection agreements in the Business section and in the Material Contracts section. Risk factors should address the Company's reliance on long-term PPAs, the potential impact of PPA change-of-control provisions, and the risks associated with the construction of the Mesquite Wind and Cimarron Solar projects.
The waiver/notice process for the Painted Rock Solar and Pronghorn Wind PPAs should be completed prior to pricing of the offering.
C. Regulatory and Permitting
Reference: Due Diligence Memorandum — Regulatory and Permitting (Document 21)
1. Federal Regulatory (FERC / NERC)
The Company's operating subsidiaries hold Exempt Wholesale Generator ("EWG") status or qualifying facility ("QF") status under the Public Utility Regulatory Policies Act of 1978, as applicable, for each of the Company's operating projects. These designations exempt the projects from certain provisions of the Federal Power Act and the Public Utility Holding Company Act of 2005.
Market-based rate authorizations from the Federal Energy Regulatory Commission ("FERC") are in place for all projects that sell power at wholesale under FERC-jurisdictional tariffs. Our review confirmed that these authorizations are current and that the Company has filed all required triennial market-power updates and change-in-status reports on a timely basis.
With respect to compliance with the reliability standards of the North American Electric Reliability Corporation ("NERC") and applicable regional entities, the Company maintains comprehensive NERC compliance programs for each of its registered entities. Our review did not identify any outstanding compliance violations, self-reports, or enforcement actions.
We conducted an analysis under FERC Section 203 of the Federal Power Act to determine whether the IPO requires prior FERC approval. Because CBR is not a "public utility holding company" within the meaning of the Public Utility Holding Company Act of 2005, and because the IPO does not involve the disposition of any jurisdictional facility, we concluded that prior FERC approval under Section 203 is not required. However, a notice filing with FERC may be appropriate and is recommended as a matter of good regulatory practice.
2. State Regulatory (PUC Filings)
The Company's projects are located in five states with varying regulatory frameworks:
(a) Texas. The Company's Texas-based projects operate within the ERCOT market, which is largely deregulated. No material state Public Utility Commission of Texas approvals are required in connection with the IPO.
(b) Oklahoma. The Red Mesa Wind project operates within the Southwest Power Pool ("SPP"). All required state-level approvals from the Oklahoma Corporation Commission are in place.
(c) Arizona. The Painted Rock Solar project is subject to oversight by the Arizona Corporation Commission. All material approvals are in place.
(d) California. The Company's California-based assets operate within the California Independent System Operator ("CAISO") market and are subject to oversight by the California Public Utilities Commission ("CPUC"). All material approvals are in place.
(e) New Mexico. The Cimarron Solar project under construction is subject to oversight by the New Mexico Public Regulation Commission. All material approvals have been obtained or are expected to be obtained prior to COD.
No pending adverse regulatory proceedings were identified in any jurisdiction.
3. Environmental Permits
All operating projects hold the required environmental permits, including air quality permits, water use permits, and land use approvals. Phase I and Phase II environmental site assessments have been conducted by Greenridge Environmental Sciences LLC (Dr. Nadine Torres, Principal Scientist) for all operating and under-construction project sites. The detailed findings of these assessments are discussed in Section II.H below.
4. Findings and Recommendations
No gating regulatory issues were identified. The FERC notice filing should be made in connection with the IPO but is not a precondition to the closing of the offering.
Disclosure Recommendation: The S-1 should include a comprehensive regulatory and environmental overview section in the Business portion, describing the federal and state regulatory frameworks applicable to the Company's operations. Risk factors should address the impact of changes in regulatory frameworks, including potential changes to the Investment Tax Credit ("ITC") and Production Tax Credit ("PTC") policies, FERC and NERC regulatory developments, and state-level regulatory changes.
D. Real Property and Land Rights
Reference: Due Diligence Memorandum — Real Property and Land Rights (Document 22)
1. Land Leases and Surface-Use Agreements
We reviewed the land leases and surface-use agreements for all of the Company's operating and under-construction project sites. The Company does not own the land on which its projects are situated; instead, it secures long-term lease agreements with the underlying landowners. This is the standard approach in the utility-scale renewable energy industry, as it allows developers to control the necessary land rights without the capital outlay associated with fee-simple ownership.
The specific project sites and their respective locations are as follows:
(a) Solaris West Solar — Pecos County, Texas;
(b) Red Mesa Wind — Custer County, Oklahoma;
(c) Painted Rock Solar — Maricopa County, Arizona;
(d) Pronghorn Wind — Nolan County, Texas;
(e) Brazos Energy Storage — Fort Bend County, Texas;
(f) Mesquite Wind — Oldham County, Texas; and
(g) Cimarron Solar — Doña Ana County, New Mexico.
The lease terms generally range from 25 to 35 years, with multiple renewal options that are designed to be commensurate with the terms of the applicable PPAs and the expected useful life of the projects. All lease payments are current, and no defaults have been identified. The lease agreements contain customary provisions regarding rent escalation, access rights, restoration obligations, and assignment.
2. Easements and Rights-of-Way
Transmission interconnection easements and generation-tie ("gen-tie") line rights-of-way are in place for all operating projects. These easements provide the Company with the necessary rights to construct and maintain the electrical infrastructure connecting each project to the applicable point of interconnection with the transmission grid.
For the two projects under construction, easement acquisition is substantially complete:
(a) Mesquite Wind. All necessary easements have been obtained. No condemnation or eminent domain proceedings are pending.
(b) Cimarron Solar. Easement acquisitions are substantially complete. A small number of remaining easements are in final negotiation, and no condemnation proceedings are pending or anticipated.
3. Title. Title searches were completed for all operating project sites by a nationally recognized title company. Our review of the title reports did not identify any material encumbrances that are inconsistent with the Company's project operations. As expected, standard mortgage liens in favor of project-finance lenders (specifically, Prairie Commercial Bank, N.A., and Veltrano National Bank) were noted on the title reports for certain project sites. These liens are consistent with the Company's existing financing arrangements and are not unusual for utility-scale renewable energy project portfolios.
4. Findings and Recommendations
No gating issues were identified in the real property and land rights workstream. The Company's approach to land rights — utilizing long-term leases rather than fee-simple ownership — is standard for utility-scale renewable energy portfolios and does not present any unusual concerns.
Disclosure Recommendation: The S-1 should include a summary of the Company's land lease structure, key lease terms, and renewal options in the Business section. A risk factor should address the Company's reliance on leased real property, the potential impact of land-use restrictions or changes in local zoning regulations, and the risks associated with lease renewal negotiations.
E. Litigation and Proceedings
Reference: Due Diligence Memorandum — Litigation and Proceedings (Document 23)
1. Pending Litigation
Our review identified two pending litigation matters involving the Company or its subsidiaries:
(a) Landowner Boundary Dispute — Red Mesa Wind (Custer County, OK). A neighboring landowner has filed a claim asserting a boundary dispute adjacent to the Red Mesa Wind project site. The claim involves a relatively minor area of land along the project perimeter. The estimated exposure is approximately $175,000, reflecting potential survey adjustments and related costs. The matter is being managed by local outside counsel in Oklahoma, and we do not believe it will have a material adverse effect on the Company or the project.
(b) Employment Discrimination Claim — Pronghorn Wind. A former construction-site supervisor at the Pronghorn Wind project has filed an employment discrimination claim with the U.S. Equal Employment Opportunity Commission ("EEOC") and has subsequently filed suit in the U.S. District Court for the Northern District of Texas. The claim is currently in early discovery. The Company denies liability and intends to defend the matter vigorously. The potential exposure is estimated at less than $300,000, and the matter is covered by the Company's general liability insurance policy.
Both matters fall below the materiality thresholds that would warrant individual risk-factor disclosure in the S-1. Accordingly, we recommend that both matters be addressed in an aggregated litigation risk factor, consistent with the approach taken by comparable issuers in the renewable energy sector.
2. Regulatory Proceedings
Our review did not identify any pending adverse regulatory or enforcement actions against the Company or any of its subsidiaries. No outstanding subpoenas, civil investigative demands, or government investigation notices were identified.
3. Threatened Litigation
Management has represented to us that, as of the date of this memorandum, there are no material threatened claims or demands against the Company or any of its subsidiaries that have not been disclosed to us.
4. Findings and Recommendations
No gating issues were identified in the litigation and proceedings workstream. The Company's litigation profile is clean and consistent with a company of its size and industry.
Disclosure Recommendation: A standard aggregated litigation risk factor should be included in the S-1, disclosing that the Company is subject to various claims and legal proceedings in the ordinary course of business and that management does not believe any such claims or proceedings, individually or in the aggregate, will have a material adverse effect on the Company's business, financial condition, or results of operations. No individual matter warrants specific disclosure at this time based on current exposure levels.
We recommend that the litigation search and management representations be refreshed prior to the pricing of the offering to confirm that no new material developments have occurred.
F. Employment and Benefit Plans
Reference: Due Diligence Memorandum — Employment and Benefit Plans (Document 24)
1. Executive Employment Agreements
We reviewed the employment agreements for all of the Company's named executive officers ("NEOs"):
(a) Garrett Calloway — Chairman and Chief Executive Officer;
(b) Elaine Briggs — President;
(c) Marcus Yoon — Chief Financial Officer;
(d) Sandra Haverford — General Counsel;
(e) Dale Renfroe — Chief Operating Officer;
(f) Priya Anand — Senior Vice President, Finance;
(g) Tomás Quintero — Senior Vice President, Project Development; and
(h) Rachel Whitmore — Chief People Officer.
All employment agreements contain standard restrictive covenant provisions, including non-competition, non-solicitation of employees and customers, and confidentiality covenants. The terms of the employment agreements range from two to four years with automatic renewal provisions. The restrictive covenants are generally enforceable under the laws of the State of Texas, subject to reasonableness limitations that we have analyzed and concluded are satisfied.
With respect to change-of-control provisions, all employment agreements provide for "double-trigger" acceleration of equity awards — that is, accelerated vesting occurs only if the executive's employment is terminated without cause or the executive resigns for good reason within 12 months following a change of control. Cash severance benefits are also triggered upon a qualifying termination following a change of control. Importantly, the definition of "change of control" in the employment agreements requires the acquisition of more than 50% of the voting power of the Company by a person or group other than Pinnacle Vista. Because the IPO will not result in any person or group (other than Pinnacle Vista) acquiring more than 50% of the voting power, the IPO does not itself constitute a "change of control" under the employment agreements, and no acceleration or severance obligations will be triggered.
2. Benefit Plans
We reviewed the Company's employee benefit plans, including its 401(k) retirement plan, group health insurance plans (medical, dental, and vision), life insurance, short-term and long-term disability insurance, and wellness programs. All plans are in compliance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and applicable law. The Company does not maintain a defined-benefit pension plan or any post-retirement benefit obligations, which simplifies the disclosure requirements for the S-1 and eliminates the financial statement complexities associated with pension accounting.
3. Section 409A Compliance
Leonard Cross of our Tax group reviewed the Company's common stock valuation history in connection with the Section 409A analysis. All stock option grants made by the Company have been priced at or above the fair market value of the common stock as determined by contemporaneous third-party valuations prepared in compliance with Section 409A of the Internal Revenue Code and the applicable Treasury Regulations.
We conducted a "cheap-stock" analysis in light of the anticipated IPO. Our review focused on all stock option grants made within the 12 months prior to the anticipated DRS-1 filing date. During this period, the Company made stock option grants at exercise prices ranging from $15.50 to $17.00 per share, reflecting the fair market value determinations made by the third-party valuation firm at the time of each grant. The most recent Section 409A valuation, dated January 2022, established a fair market value of $17.00 per share. The proposed IPO midpoint price of $22.00 per share represents a premium of approximately 29.4% over the most recent 409A valuation.
We anticipate that the SEC Staff may comment on the gap between the most recent 409A valuation ($17.00) and the proposed IPO price ($22.00). This gap is attributable to a combination of factors, including the IPO premium (reflecting the value of public-market liquidity, access to the public capital markets, and increased marketability), the strong performance of the renewable energy sector during the first quarter of 2022, and certain business developments that occurred after the January 2022 valuation date. We have prepared a detailed reconciliation narrative that will be available for submission as part of the Company's response to any SEC comments on this topic. No material cheap-stock charges are expected as a result of this analysis.
4. Workforce Overview
As of the date of this memorandum, the Company employs approximately 1,240 full-time employees. The Company's workforce is not represented by any labor union, and the Company is not a party to any collective bargaining agreements. Our review did not identify any pending OSHA citations, material workplace safety proceedings, or other labor-related regulatory actions.
5. Proposed IPO Equity Grants
In connection with the IPO, the Company plans to adopt two new equity incentive plans:
(a) 2022 Omnibus Equity Incentive Plan. The plan will reserve 12,727,273 shares of common stock for issuance, representing approximately 10% of the post-IPO shares outstanding on a fully-exercised basis (based on 127,272,727 shares). The plan will authorize the grant of stock options (incentive and non-qualified), restricted stock units ("RSUs"), restricted stock awards, performance stock units, stock appreciation rights, and other equity-based awards.
(b) 2022 Employee Stock Purchase Plan. The plan will reserve 2,545,455 shares of common stock for issuance, representing approximately 2% of the post-IPO shares outstanding on a fully-exercised basis. The plan is intended to qualify under Section 423 of the Internal Revenue Code.
The proposed IPO equity grants to the Company's executive officers are as follows:
Benchmarking data for the proposed equity grants was provided by Clarendon Rowe Advisory Group LLC (Patricia Voss, Senior Managing Director), the Company's independent compensation consultant. The proposed grant levels are within the range of competitive practice for newly public companies in the renewable energy sector, as reflected in the peer group analysis prepared by Clarendon Rowe.
6. Findings and Recommendations
The potential SEC comment on the cheap-stock issue is the primary area of concern in this workstream. We have prepared a detailed reconciliation and response narrative that addresses the gap between the January 2022 Section 409A valuation ($17.00) and the proposed IPO midpoint price ($22.00). This response will be available for submission promptly upon receipt of any SEC comments.
Disclosure Recommendation: The S-1 should include complete executive compensation tables and a Compensation Discussion and Analysis ("CD&A") section describing the Company's compensation philosophy, the terms of the NEO employment agreements, and the proposed IPO equity grants. The equity incentive plan descriptions should be included as exhibits. A risk factor addressing the Company's reliance on key personnel, particularly the co-founders, should be included.
No gating issues were identified.
G. Tax Structure and Tax-Equity
Reference: Due Diligence Memorandum — Tax Structure and Tax-Equity (Document 25); prepared by Leonard Cross, Specialist Partner, Tax
1. C-Corp Structure
The Company will proceed with the IPO as a C-corporation. A comprehensive analysis of the trade-offs between a traditional C-corporation structure and an Up-C structure (using an umbrella partnership-C-corporation, or "Up-C," architecture) was completed by Leonard Cross and the tax workstream team. Following careful consideration of the factors relevant to CBR's specific circumstances — including the Company's existing corporate structure (which does not include a pre-existing partnership entity), Pinnacle Vista's exit horizon (the Pinnacle Vista Capital Partners III Fund is a 2016-vintage fund approaching the end of its typical investment period), and the simplification benefits of a C-corporation structure for public-market investors — the C-corporation structure was recommended and adopted.
A significant advantage of the C-corporation structure is that it does not require the establishment of a tax receivable agreement ("TRA"), which is a common feature of Up-C structures and can introduce substantial complexity to the Company's financial statements, tax obligations, and capital allocation decisions. The absence of a TRA simplifies the S-1 disclosure, the Company's ongoing tax accounting, and the investor narrative.
2. Tax-Equity Partnership — Solaris West
The Company's Solaris West Solar LLC subsidiary is subject to a partnership-flip tax-equity structure with Veltara Basin Financial LLC ("Veltara Basin"). Under this arrangement, Veltara Basin invested $280,000,000 in the Solaris West project, and the parties share allocations of taxable income, losses, and tax credits in accordance with a negotiated allocation schedule. The partnership is expected to "flip" — that is, the tax-equity investor's economic interest will be reduced to a nominal level — in 2028, at which point the Company will have the option to acquire Veltara Basin's remaining interest at fair market value.
The Investment Tax Credit ("ITC") was claimed on the Solaris West project at the time of its placed-in-service date in the third quarter of 2020. Under Section 50(a) of the Internal Revenue Code, the ITC is subject to a five-year recapture period, which extends through the third quarter of 2025 for the Solaris West project. If a "recapture event" occurs during this period, a portion of the ITC would be required to be repaid to the Internal Revenue Service.
Leonard Cross conducted a detailed analysis to determine whether the IPO constitutes a "recapture event" under Section 50(a). The analysis confirms that the IPO does not constitute a recapture event, because there will be no change of ownership at the project-company level: Solaris West Solar LLC will continue to be 100% owned by CB Operating both before and after the IPO. The change in the ultimate ownership of the Company at the publicly traded parent level does not, under applicable law and Treasury Regulations, constitute a disposition or change of ownership at the project level that would trigger recapture. Notwithstanding this conclusion, as a precautionary measure, we recommend that the Company obtain written consent or confirmation from Veltara Basin that the IPO does not trigger any adverse consequences under the partnership agreement.
The Company accounts for Veltara Basin's interest in Solaris West Solar LLC using the Hypothetical-Liquidation-at-Book-Value ("HLBV") methodology. Under the HLBV approach, the allocation of earnings and losses to the tax-equity investor is based on the change in the amount each partner would receive if the partnership were liquidated at book value at the end of each reporting period, compared to the beginning of such period. This methodology has been reviewed in consultation with the Company's auditors, Ashford & Pemberton LLP, and confirmed as appropriate under ASC 323 (Investments — Equity Method and Joint Ventures) and ASC 810 (Consolidation).
We note that the HLBV methodology is an area that the SEC Staff frequently comments on in the registration statements of renewable energy companies. The SEC's comments typically focus on the adequacy of the disclosure regarding the methodology, the sensitivity of the reported results to changes in assumptions, and the relationship between the HLBV allocations and the underlying economic arrangements in the partnership agreement. We recommend that the S-1 include a detailed and robust critical accounting policies disclosure regarding the HLBV methodology in the MD&A section, and that the Company be prepared to provide additional detail in response to SEC comments.
3. ITC / PTC Eligibility
The Company has claimed or intends to claim the following federal tax credits in connection with its project portfolio:
(a) Investment Tax Credit (ITC). Claimed on the Company's solar projects: Solaris West Solar (450 MW, in-service Q3 2020), Painted Rock Solar (320 MW), and Cimarron Solar (350 MW, under construction, expected COD Q1 2023).
(b) Production Tax Credit (PTC). Elected for the Company's wind projects: Red Mesa Wind (380 MW), Pronghorn Wind (510 MW), and Mesquite Wind (420 MW, under construction, expected COD Q3 2022).
For each project, we conducted a safe-harbor analysis to confirm that the project satisfies the applicable begin-construction requirements. Under the IRS safe-harbor rules, a project may satisfy the begin-construction requirement through either the "physical work" test or the "five-percent safe harbor" (under which at least 5% of the total project cost is incurred before the applicable deadline). All of the Company's projects satisfy the begin-construction requirements through one or both of these tests, and the Company has maintained documentation of continuous effort toward completion (the "continuity-of-construction" standard) for each project.
We note that, as of the date of this memorandum, there is ongoing legislative activity in Congress regarding potential changes to the ITC and PTC rates, eligibility requirements, and phase-down schedules. The Inflation Reduction Act (or similar legislation) has been the subject of extensive discussion, and the outcome of these legislative efforts may materially affect the federal tax incentive landscape for renewable energy projects. The S-1 should include a risk factor addressing this legislative uncertainty and its potential impact on the Company's development pipeline and financial results.
4. State and Local Tax
The Company has nexus in Texas, New Mexico, Arizona, California, and Oklahoma by reason of its project operations in those states. The state tax implications are as follows:
(a) Texas. Texas does not impose a state income tax. However, the Texas franchise tax (also known as the "margin tax") applies to entities doing business in Texas. The Company has filed all required franchise tax reports.
(b) California, New Mexico, Arizona, and Oklahoma. The Company and its subsidiaries file state income tax returns in each of these jurisdictions. Our review confirmed that all required returns have been filed on a timely basis, and we did not identify any outstanding state tax audits or disputes.
No material state or local tax exposure was identified.
5. Findings and Recommendations
The HLBV methodology and related tax-equity disclosures are identified as a likely area of SEC comment. We strongly recommend that the Company prepare a robust critical accounting policies disclosure in the MD&A section of the S-1, including a stand-alone description of the HLBV methodology, the key assumptions underlying the allocation of earnings to the tax-equity investor, and the sensitivity of reported results to changes in those assumptions. This disclosure should be coordinated with the Company's auditors, Ashford & Pemberton LLP, and with the Company's financial printer, Kessler McBride.
The ITC recapture risk for the Solaris West project should be disclosed in the risk factors section of the S-1, noting that the project is within the five-year recapture period through the third quarter of 2025 and that, while the IPO does not constitute a recapture event, certain future transactions involving the project could potentially trigger recapture.
The consent from Veltara Basin Financial should be obtained as a precautionary measure. While we do not believe that the consent is a legal requirement for the IPO, obtaining it will provide an additional layer of certainty and may be requested by the underwriters as a condition to pricing.
A risk factor addressing the potential impact of legislative changes to the ITC and PTC should be included in the S-1.
No gating issues were identified in the tax workstream.
H. Environmental