RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, together with all of the other information contained in this prospectus, including our consolidated financial statements and notes thereto and the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," before deciding whether to purchase shares of our common stock. If any of the following risks actually occur, our business, assets, properties, financial condition, or results of operations could be materially and adversely affected, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, assets, properties, financial condition, results of operations, or prospects.
As used in this prospectus, the term "material adverse effect" means any event, change, occurrence, or development that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on (a) the business, assets, properties, financial condition, or results of operations of the Company and its subsidiaries, taken as a whole, or (b) the ability of the Company to consummate the transactions contemplated by the underwriting agreement, subject to customary carve-outs for (i) changes in general economic or market conditions, (ii) changes in United States generally accepted accounting principles ("GAAP") or applicable law, (iii) changes affecting the renewable-energy or utility industries generally, (iv) natural disasters, pandemics, or acts of war, (v) changes resulting from the announcement or pendency of the initial public offering, and (vi) changes in the Company's stock price or credit rating, in each case to the extent such changes do not disproportionately affect the Company relative to other similarly situated companies operating in the renewable-energy industry.
I. RISKS RELATED TO OUR BUSINESS AND OPERATIONS
A. Our Operating History and Growth Strategy
We have a relatively limited operating history as an independent developer and operator of renewable-energy projects at scale, and our historical results may not be indicative of our future performance.
Calloway-Briggs Renewables Inc. ("CBR," the "Company," "we," "us," or "our") was founded in 2014 by Garrett Calloway and Elaine Briggs. While we have demonstrated meaningful growth since our inception, we have a relatively limited operating history as an independent developer, owner, and operator of utility-scale renewable-energy projects. Our current portfolio consists of approximately 3.8 gigawatts ("GW") of operating renewable-energy capacity across 22 projects located in Texas, New Mexico, Arizona, California, and Oklahoma, with an additional 1.4 GW of capacity currently under construction and a development pipeline of approximately 6.2 GW. Our operating history at this scale is limited, and there can be no assurance that we will be able to manage our current operations and planned growth effectively or that our historical results of operations will be indicative of our future performance.
Our rapid growth may not continue, and we may be unable to successfully execute our growth strategy.
Our revenue grew from $312.8 million in the fiscal year ended December 31, 2019 ("FY 2019") to $487.3 million in the fiscal year ended December 31, 2021 ("FY 2021"), representing a compound annual growth rate of approximately 24.8%. This rapid growth has been driven by our ability to develop, construct, and bring into commercial operation new renewable-energy projects, and by favorable market conditions for renewable energy in our core geographic markets. However, there can be no assurance that we will be able to sustain or replicate this growth rate in future periods. Our continued growth depends on, among other things, our ability to successfully execute on our 6.2 GW development pipeline, obtain the necessary permits, interconnection agreements, and offtake arrangements for projects in development, secure adequate financing on commercially acceptable terms, attract and retain qualified personnel, and manage the operational and financial complexities associated with a larger and more geographically diverse portfolio of projects.
Our development pipeline is subject to significant execution risk, and many projects in our development pipeline may not ultimately reach commercial operation due to range factors, including permitting delays, interconnection queue congestion, land-lease complications, failure to obtain power purchase agreements on acceptable terms, changes in the regulatory or policy environment, and inability to secure financing. The failure to successfully advance projects through our development pipeline and bring them into commercial operation on schedule and within budget could have a material adverse effect on our business, financial condition, and results of operations.
Our ability to attract and retain qualified personnel is critical to our success, and competition for renewable-energy talent is intense.
As of December 31, 2021, we employed approximately 1,240 full-time employees across our corporate offices, project development teams, and on-site operations and maintenance personnel. Our continued success depends in significant part on our ability to attract, hire, train, and retain highly qualified personnel, including project developers, engineers, construction managers, financial analysts, and senior executives with expertise in the renewable-energy sector. Competition for qualified employees in the renewable-energy industry has intensified in recent years as the industry has grown rapidly, and we compete for talent with other renewable-energy developers, utilities, independent power producers, and technology companies, many of which may offer more competitive compensation packages, greater opportunities for career advancement, or more established brand recognition. If we are unable to attract and retain qualified personnel, our ability to execute on our development pipeline, manage our existing operations, and pursue our growth strategy could be materially impaired.
In addition, the loss of one or more of our key executives, including Garrett Calloway, our Chief Executive Officer, and Elaine Briggs, our President, could disrupt our operations and materially adversely affect our business. We do not maintain key-person life insurance on any of our employees, and there can be no assurance that we would be able to find suitable replacements for our key personnel in a timely manner, or at all.
B. Project Development, Construction, and Operational Risks
Our projects under construction may experience delays, cost overruns, or performance shortfalls, which could adversely affect our financial condition and results of operations.
We currently have two significant projects under construction: the Mesquite Wind project, a 420 MW wind-energy facility located in Oldham County, Texas, with an expected commercial operation date ("COD") in the third quarter of 2022, and the Cimarron Solar project, a 350 MW solar photovoltaic facility located in Doña Ana County, New Mexico, with an expected COD in the first quarter of 2023. The construction of utility-scale renewable-energy projects is inherently subject to numerous risks, including delays in obtaining necessary permits and approvals, delays caused by adverse weather conditions, labor shortages and work stoppages, supply-chain disruptions affecting the timely delivery of critical equipment components, unforeseen site conditions including subsurface geological conditions, engineering and design changes during the construction process, disputes with contractors and subcontractors, cost overruns due to increases in the prices of raw materials, labor, and equipment, and the failure of contractors to perform in accordance with the terms of their construction contracts. Any of these risks could delay the commercial operation date of a project, increase the total construction cost, or result in a project that fails to achieve its expected performance levels, any of which could have a material adverse effect on our business, financial condition, and results of operations.
Delays in achieving COD for projects under construction may also result in adverse consequences under our power purchase agreements, interconnection agreements, and financing arrangements, including the potential for liquidated damages, termination rights, or events of default. For example, our construction-to-term financing facilities for the Mesquite Wind and Cimarron Solar projects contain milestone requirements and outside dates for the achievement of commercial operation, and the failure to satisfy these requirements could result in mandatory prepayments, increased interest rates, or events of default under those facilities.
Our 6.2 GW development pipeline is subject to significant execution risk, and many projects in our pipeline may never be constructed or achieve commercial operation.
Our development pipeline of approximately 6.2 GW represents projects at various stages of development, ranging from early-stage site identification and feasibility analysis to advanced development with executed land leases, filed interconnection applications, and ongoing permitting activities. The successful development of these projects depends on a number of factors, many of which are outside of our control, including the ability to secure long-term site control through land leases, surface-use agreements, easements, and rights-of-way; the ability to obtain all required federal, state, and local permits and approvals; the ability to secure interconnection agreements with the applicable transmission operators and to obtain positions in interconnection queues on a timely basis; the ability to negotiate and execute power purchase agreements or other offtake arrangements with creditworthy counterparties on acceptable terms; the ability to obtain project-level financing, including construction loans, term loans, and tax-equity investments; and the continued availability of federal and state tax incentives, including the investment tax credit ("ITC") and the production tax credit ("PTC"), at levels sufficient to make project economics attractive.
There can be no assurance that any particular project in our development pipeline will successfully advance through the development process and ultimately achieve commercial operation. The failure to successfully develop and construct a significant number of projects in our pipeline would have a material adverse effect on our ability to grow our business, generate revenue, and achieve our financial and operational objectives.
Our operating projects are subject to range risks that could reduce their performance or increase their operating costs.
Our portfolio of 22 operating renewable-energy projects, aggregating approximately 3.8 GW of capacity, is subject to a number of operational risks that could reduce the amount of electricity generated or increase the costs of operations. These risks include equipment failure, malfunction, or degradation, including failures of wind turbines, solar panels, inverters, transformers, and other balance-of-system equipment; extreme weather events, including hurricanes, tornadoes, hail, ice storms, flooding, and drought, that could cause physical damage to project assets or reduce the availability of solar irradiance and wind resources; curtailment of output by grid operators or transmission constraints that prevent the full delivery of generated electricity; performance of solar irradiance and wind resources below historical or forecasted levels; increased operations and maintenance costs due to aging equipment, regulatory changes, or unforeseen site conditions; and environmental compliance obligations, including wildlife mitigation measures and emissions monitoring.
Our key operating projects, including Solaris West (450 MW solar, Pecos County, Texas), Red Mesa Wind (380 MW, Custer County, Oklahoma), Painted Rock Solar (320 MW, Maricopa County, Arizona), and Pronghorn Wind (510 MW, Nolan County, Texas), are each subject to project-specific risks, including risks related to the geographic locations of the projects, the characteristics of the equipment deployed, the terms of the applicable power purchase agreements and interconnection agreements, and the regulatory environments in their respective states. The occurrence of any of these risks could reduce the revenue generated by our operating projects, increase our operating costs, and have a material adverse effect on our financial condition and results of operations.
Our Brazos Storage project involves emerging technology risks, including battery degradation, thermal runaway, and fire risk.
Our Brazos Storage project, a 200 MW / 800 MWh battery energy storage system ("BESS") located in Fort Bend County, Texas, which achieved commercial operation in the fourth quarter of 2021, involves the deployment of lithium-ion battery technology that is still relatively early in its commercial deployment at utility scale. BESS projects are subject to unique risks not present in traditional wind and solar generation projects, including battery capacity degradation over time, which may occur at rates faster than projected and could reduce the usable energy storage capacity of the system; thermal runaway events, in which individual battery cells or modules experience uncontrolled increases in temperature that can result in fires, explosions, or the release of toxic gases; fire risk associated with the storage and operation of large quantities of lithium-ion batteries, which may be difficult to suppress using conventional fire-suppression methods; the potential for software or control-system malfunctions that could result in improper charging or discharging cycles, damage to battery modules, or grid disturbances; and evolving regulatory requirements related to the siting, permitting, and operation of battery energy storage facilities.
The occurrence of a significant thermal runaway event, fire, or other safety incident at the Brazos Storage project could result in property damage, personal injury, business interruption, regulatory investigations, increased insurance costs, negative publicity, and potential litigation, any of which could have a material adverse effect on our business, financial condition, and results of operations. In addition, advances in battery technology or the development of alternative energy storage technologies could render our existing BESS assets less competitive or economically viable over time.
C. Reliance on Third-Party Contractors and Equipment Suppliers
We depend on third-party EPC contractors, operations and maintenance service providers, and equipment suppliers, and the failure of any of these third parties to perform their obligations could adversely affect our business.
We rely on third-party engineering, procurement, and construction ("EPC") contractors for the construction of our renewable-energy projects, third-party operations and maintenance ("O&M") service providers for the ongoing maintenance and repair of our operating assets, and a limited number of equipment manufacturers and suppliers for the procurement of solar photovoltaic panels, wind turbine generators, battery cells and modules, inverters, transformers, and other critical equipment components. Our dependence on these third parties exposes us to risks related to their financial condition, operational capabilities, workforce availability, and willingness and ability to perform their contractual obligations. If any of our key contractors, service providers, or suppliers experiences financial difficulties, fails to perform under their contracts, or is unable to deliver equipment on schedule and within specification, our projects could experience delays, cost overruns, performance shortfalls, or operational disruptions, any of which could have a material adverse effect on our business, financial condition, and results of operations.
Supply-chain disruptions, trade tariffs, and commodity price increases could increase our project costs and delay construction timelines.
The renewable-energy industry has experienced significant supply-chain disruptions in recent years, including disruptions caused by the COVID-19 pandemic, global shipping constraints, trade tariffs and other trade policy measures, and geopolitical tensions. We are particularly exposed to supply-chain risks related to the procurement of solar photovoltaic panels (including risks related to the availability and price of polysilicon and the impact of anti-dumping and countervailing duty orders on solar cells and modules imported from certain countries), wind turbine generators and components (including blades, nacelles, and towers, which require large quantities of steel and other commodities), and lithium-ion battery cells and modules (including risks related to the availability and price of lithium, cobalt, nickel, and other raw materials used in battery manufacturing). Increases in the prices of steel, polysilicon, lithium, and other commodities, as well as the imposition of new or increased trade tariffs or duties on imported equipment, could materially increase the capital costs of our projects under construction and in development, reduce the economic returns of those projects, and make certain projects in our development pipeline economically unviable.
Interconnection delays and grid-infrastructure constraints could impede our ability to develop and operate our projects.
The ability to interconnect our projects to the electric transmission grid is essential to their development and operation. The process of obtaining interconnection agreements from the applicable regional transmission organizations ("RTOs") and independent system operators ("ISOs"), including the Electric Reliability Council of Texas ("ERCOT"), the Southwest Power Pool ("SPP"), the California Independent System Operator ("CAISO"), and others, is complex, time-consuming, and subject to significant delays, particularly in regions where interconnection queue congestion is severe. In addition, the costs of network upgrades and transmission-system improvements required to accommodate new generation resources can be substantial and may not be fully known until late in the interconnection study process, creating uncertainty regarding the total cost of project development. If we are unable to obtain interconnection agreements on acceptable terms and timelines, or if the costs of required grid upgrades are higher than anticipated, our ability to develop projects in our pipeline could be materially adversely affected.
D. Revenue Concentration and PPA Risks
A significant portion of our revenue is derived from power purchase agreements with a limited number of counterparties, and the loss of one or more of these counterparties could materially adversely affect our results of operations.
Our revenue depends heavily on long-term power purchase agreements ("PPAs") with utility and commercial and industrial ("C&I") offtakers. For FY 2021, our top five PPA counterparties accounted for approximately 68% of our total revenue. The concentration of our revenue among a limited number of counterparties exposes us to credit risk in the event that one or more of these counterparties experiences financial difficulties, defaults on its payment obligations, or seeks to renegotiate the terms of its PPA. The creditworthiness of our PPA counterparties may be adversely affected by range factors outside of our control, including changes in the financial condition of the counterparty, changes in the wholesale electricity market that make the contracted price under the PPA above-market, regulatory changes affecting the counterparty's business, and general economic conditions.
The expiration or termination of our PPAs, or our inability to recontract at favorable rates, could reduce our revenue and increase our exposure to merchant electricity prices.
Our PPAs have finite terms, and upon expiration, we may be unable to enter into new PPAs or extend existing PPAs on terms that are as favorable as the original agreements. The ability to recontract our projects depends on a number of factors, including prevailing wholesale electricity prices, the regulatory and policy environment, the competitive landscape for renewable energy, the remaining useful life and condition of our project assets, and the availability and willingness of creditworthy counterparties to enter into long-term offtake arrangements. If we are unable to recontract our projects at favorable rates, we may be required to sell electricity into the wholesale spot market or enter into shorter-term contracts at lower prices, which would increase our exposure to the volatility of merchant electricity prices and could materially adversely affect our revenue, cash flow, and financial condition.
Any capacity in our portfolio that is not under long-term contract is exposed to merchant electricity price risk.
To the extent that any of our generating capacity is not covered by long-term PPAs, the revenue generated by that capacity is dependent on prevailing wholesale electricity prices, which can be highly volatile and subject to range factors, including natural gas prices, weather conditions, grid congestion, supply and demand dynamics, regulatory changes, and the addition of new generating capacity to the market. Significant declines in wholesale electricity prices could reduce the revenue generated by our merchant capacity and have a material adverse effect on our results of operations and financial condition.
E. Technology and Cybersecurity Risks
Our operations depend on supervisory control and data acquisition systems and proprietary monitoring software, and cyberattacks or other disruptions to these systems could adversely affect our business.
We rely on supervisory control and data acquisition ("SCADA") systems, proprietary monitoring and analytics software, and other information technology systems to monitor and control the operation of our renewable-energy projects, manage our development pipeline, and conduct our day-to-day business operations. These systems are potentially vulnerable to cyberattacks, including ransomware, malware, phishing, denial-of-service attacks, and other forms of unauthorized access or disruption. A successful cyberattack or other disruption to our SCADA systems could result in the loss of operational control over one or more of our projects, unplanned outages, equipment damage, safety incidents, environmental releases, or other adverse consequences. A cyberattack on our corporate IT systems could result in the theft or compromise of sensitive business information, personal data of our employees, or confidential information of our counterparties and business partners.
The frequency, sophistication, and severity of cyberattacks targeting the energy sector and critical infrastructure have increased significantly in recent years, and we may not be able to anticipate, detect, or prevent all such attacks. We have invested, and expect to continue to invest, significant resources in cybersecurity measures, including network monitoring and detection systems, employee training programs, and incident-response planning. However, there can be no assurance that our cybersecurity measures will be effective in preventing all cyberattacks or that a successful cyberattack would not have a material adverse effect on our business, financial condition, results of operations, or reputation.
Our intellectual property rights may not be adequately protected, and the unauthorized use of our intellectual property could harm our competitive position.
We rely on a combination of trademark registrations, trade secrets, confidentiality agreements, and other contractual provisions to protect our intellectual property, including the "Calloway-Briggs" and "CBR" trademarks and our proprietary monitoring and analytics technology. However, the measures we take to protect our intellectual property may not be sufficient to prevent unauthorized use, misappropriation, or infringement by third parties. In addition, we may face claims from third parties alleging that our technology or business practices infringe their intellectual property rights. Any such claims, regardless of their merit, could be time-consuming and expensive to defend and could divert the attention of our management and technical personnel.
Evolving technology in the renewable-energy sector could render our existing projects or our technology less competitive.
The renewable-energy industry is characterized by rapid technological change, including improvements in the efficiency and cost of solar photovoltaic panels, wind turbine generators, battery energy storage systems, and related equipment. Advances in technology could result in the development of new renewable-energy generating resources that produce electricity at lower costs or with higher efficiency than our existing projects, which could reduce the competitiveness and economic value of our operating assets. In addition, the emergence of new technologies, such as green hydrogen, advanced nuclear, or next-generation geothermal, could create competition for our projects in the broader energy market. Our failure to adopt or adapt to new technologies in a timely and cost-effective manner could have a material adverse effect on our competitive position and results of operations.
II. RISKS RELATED TO OUR SUBSTANTIAL INDEBTEDNESS AND FINANCIAL CONDITION
A. Significant Leverage
We have a substantial amount of indebtedness, which could adversely affect our financial flexibility, limit our ability to pursue our growth strategy, and increase our vulnerability to adverse economic conditions.
As of December 31, 2021, our total consolidated indebtedness was approximately $1.71 billion, compared to total assets of approximately $3.94 billion. Our indebtedness includes the following:
• Corporate Revolving Credit Facility: $400 million revolving credit commitment, with Veltrano National Bank acting as administrative agent, maturing in January 2027. As of December 31, 2021, we had $85 million of outstanding borrowings and approximately $47 million of outstanding letters of credit under this facility, leaving approximately $268 million of available borrowing capacity.
• Corporate Term Loan B: $650 million aggregate principal amount (of which $612.5 million was outstanding as of December 31, 2021), with Veltrano National Bank acting as administrative agent, maturing in January 2029. The Term Loan B bears interest at a variable rate based on LIBOR (or an applicable successor benchmark rate) plus an applicable margin.
• Mesquite Wind Construction-to-Term Facility: $165 million construction-to-term loan with Prairie Commercial Bank, N.A. as lender, with an expected conversion to a term loan upon achievement of commercial operation, and a final conversion date of December 2024.
• Cimarron Solar Construction-to-Term Facility: $143 million construction-to-term loan with Prairie Commercial Bank, N.A. as lender, with an expected conversion to a term loan upon achievement of commercial operation, and a final conversion date of March 2025.
Our substantial indebtedness could have important consequences for our business and for holders of our common stock, including: requiring a significant portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available for working capital, capital expenditures, acquisitions, and other general corporate purposes; limiting our ability to obtain additional financing for future development projects, working capital, capital expenditures, acquisitions, or other purposes on favorable terms, or at all; limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; placing us at a competitive disadvantage compared to competitors that may have less indebtedness or greater access to capital; and increasing our vulnerability to adverse economic conditions, industry downturns, or changes in interest rates.
The restrictive covenants in our debt agreements may limit our operational flexibility and our ability to pursue strategic opportunities.
Our Corporate Revolving Credit Facility, Corporate Term Loan B, and project-finance facilities contain a number of restrictive covenants that limit, among other things, our ability and the ability of our subsidiaries to incur additional indebtedness; create liens on our assets; make dividends, distributions, or other restricted payments; make investments, loans, or advances; sell, transfer, or otherwise dispose of assets; enter into transactions with affiliates; merge, consolidate, or sell all or substantially all of our assets; and change the nature of our business. In addition, our credit facilities require us to comply with certain financial maintenance covenants, including minimum interest coverage ratios and maximum leverage ratios. Our ability to comply with these covenants in future periods will depend on our financial and operating performance, which may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. A breach of any of these covenants could result in a default under the applicable credit agreement, which, if not cured or waived, could trigger the acceleration of all outstanding indebtedness under that facility and, through cross-default and cross-acceleration provisions, could potentially trigger the acceleration of indebtedness under our other credit facilities.
Change-of-control provisions in our credit agreements may be triggered by the initial public offering, and the failure to obtain the required lender consents could result in the acceleration of our outstanding indebtedness.
Certain of our credit agreements contain change-of-control provisions that may be triggered by the initial public offering or by changes in the ownership or control of the Company that result from the initial public offering. In particular, under the terms of our Corporate Revolving Credit Facility and Corporate Term Loan B, a change of control is deemed to occur if Pinnacle Vista Capital Partners III, LP and its affiliates cease to own, directly or indirectly, a specified minimum percentage of the voting equity interests of the Company. While we believe that the ownership structure following the initial public offering will not trigger these change-of-control provisions based on the expected post-offering ownership percentages, we have sought and are seeking lender consents from Veltrano National Bank and the lenders under our credit facilities to ensure that the initial public offering and related transactions do not constitute an event of default. The failure to obtain the required consents from Veltrano National Bank or any other lender could result in the acceleration of our outstanding indebtedness, the termination of our revolving credit commitments, and the requirement to repay all outstanding amounts, which would have a material adverse effect on our financial condition and could jeopardize our ability to consummate the initial public offering.
B. Project-Finance and Tax-Equity Structures
Our tax-equity partnership structures are complex and involve significant accounting judgments, and changes in GAAP or SEC interpretive guidance could require us to restate or reclassify our financial results.
We utilize tax-equity financing structures to monetize the federal tax benefits, including the investment tax credit and accelerated depreciation deductions, associated with certain of our renewable-energy projects. Our most significant tax-equity arrangement is the Solaris West tax-equity partnership with Veltara Basin Financial LLC, under which Veltara Basin Financial has invested approximately $280 million in exchange for an allocation of substantially all of the tax benefits generated by the Solaris West project (450 MW solar, Pecos County, Texas) during the initial allocation period, with a partnership flip expected to occur in 2028 based on the achievement of a specified after-tax internal rate of return by the tax-equity investor.
We use the Hypothetical-Liquidation-at-Book-Value ("HLBV") methodology to allocate income and loss among the partners in our tax-equity structures. The HLBV methodology is complex, requires significant management judgment, and involves the application of a hypothetical liquidation scenario at the end of each reporting period to determine each partner's share of the partnership's net income or loss. The application of the HLBV methodology can result in non-cash charges or credits that do not correspond to the economic performance of the underlying project and can create volatility in our reported earnings. The HLBV methodology has been the subject of ongoing scrutiny by the staff of the Securities and Exchange Commission ("SEC"), and changes in GAAP, SEC interpretive guidance, or the staff's views on the appropriate application of the HLBV methodology could require us to modify our accounting treatment, restate previously reported financial results, or reclassify amounts previously reported in our consolidated financial statements.
ITC recapture risk could result in material tax liabilities if our ITC-eligible projects fail to satisfy the five-year recapture period requirements.
Under Section 50 of the Internal Revenue Code of 1986, as amended (the "Code"), if property with respect to which an ITC has been claimed ceases to be investment credit property or is disposed of before the end of the five-year recapture period, a portion of the ITC previously claimed must be recaptured and repaid to the Internal Revenue Service ("IRS"). If the Solaris West project or any other ITC-eligible project in our portfolio fails to satisfy the five-year recapture period requirements, whether as a result of a change in ownership, a casualty event, a cessation of operations, a change in the use of the property, or any other event or circumstance, we or our tax-equity partners could be required to recapture all or a portion of the ITCs previously claimed, which could result in material tax liabilities, indemnification obligations, and adverse consequences under our tax-equity partnership agreements.
Failure to obtain the required consents from Veltara Basin Financial LLC in connection with the initial public offering could adversely affect our tax-equity partnership arrangement.
The Solaris West tax-equity partnership agreement with Veltara Basin Financial LLC contains provisions that restrict certain changes in the ownership or control of the managing member of the partnership and that may require the consent of the tax-equity investor in connection with the initial public offering or related transactions. While we are seeking the required consents from Veltara Basin Financial, there can be no assurance that such consents will be obtained on acceptable terms, or at all. The failure to obtain the required consents could result in a default under the partnership agreement, could give Veltara Basin Financial the right to exercise certain remedies, including the right to remove us as managing member, and could adversely affect the economics of the Solaris West project and our financial condition and results of operations.
C. Need for Additional Capital
Our development pipeline and construction projects require substantial capital expenditures, and we may be unable to obtain the financing needed to fund our growth on acceptable terms, or at all.
The development and construction of utility-scale renewable-energy projects are capital-intensive activities that require substantial upfront investment. Our 6.2 GW development pipeline and 1.4 GW of projects currently under construction will require significant additional capital expenditures to bring to commercial operation. We intend to use approximately $100 million of the net proceeds from this offering to fund a portion of the construction costs of the Cimarron Solar project, approximately $200 million to repay a portion of our outstanding Term Loan B, and approximately $71.7 million for general corporate purposes. However, the remainder of our development pipeline will require additional financing from range sources, including project-finance facilities, tax-equity partnerships, corporate credit facilities, and potentially additional equity offerings or corporate debt issuances.
Our ability to obtain the capital necessary to fund our development pipeline is subject to a number of risks and uncertainties, including general economic and capital market conditions, the availability and cost of project-finance debt, the willingness of tax-equity investors to commit capital to new projects, the terms of the ITC and PTC and their continued availability, our financial performance and credit profile, and the level of competition for renewable-energy financing. If we are unable to obtain the capital needed to fund our growth on acceptable terms, or at all, we may be required to delay, scale back, or abandon certain projects in our development pipeline, which could have a material adverse effect on our growth strategy and results of operations.
We may deviate from the planned use of proceeds from this offering, and such deviation could adversely affect our business.
We intend to use the net proceeds from this offering as described under "Use of Proceeds." However, our management will have broad discretion in the application of the net proceeds, and we may deviate from the planned allocation of proceeds depending on prevailing market conditions, the timing and progress of our construction projects, and other factors that we may deem relevant. If we do not allocate the net proceeds effectively, or if we apply the net proceeds in a manner that does not generate an adequate return, our financial condition and results of operations could be adversely affected.
D. Interest Rate and Refinancing Risks
We are exposed to interest rate risk on our floating-rate indebtedness, and increases in interest rates could increase our debt service costs and reduce our cash available for operations and growth.
A portion of our outstanding indebtedness bears interest at floating rates, including our Corporate Term Loan B and our project-finance construction facilities. Increases in interest rates, including as a result of central bank monetary policy actions, inflation, or other factors, would increase our debt service costs and reduce our cash available for other purposes, including capital expenditures, acquisitions, and general corporate purposes. While we have entered into certain interest rate hedging arrangements to mitigate a portion of our floating-rate exposure, these arrangements do not cover all of our floating-rate indebtedness and may not be effective in fully offsetting the impact of rising interest rates. In addition, the transition from LIBOR to alternative benchmark rates, such as the Secured Overnight Financing Rate ("SOFR"), could affect the cost of our floating-rate borrowings and the effectiveness of our hedging arrangements.
We face refinancing risk with respect to our outstanding indebtedness, and our inability to refinance or convert our credit facilities on acceptable terms could have a material adverse effect on our financial condition.
Our Corporate Term Loan B matures in January 2029, our Mesquite Wind construction-to-term facility has a final conversion date of December 2024, and our Cimarron Solar construction-to-term facility has a final conversion date of March 2025. If we are unable to refinance or convert these facilities on or before their respective maturity or conversion dates on terms that are commercially acceptable, or at all, we may be required to repay the outstanding balances from available cash, which could significantly reduce our liquidity, or to seek alternative financing on less favorable terms. Our ability to refinance or convert our indebtedness will depend on, among other things, prevailing capital market conditions, our financial performance and credit profile at the time of refinancing, and the willingness of lenders and investors to extend credit to us. There can be no assurance that favorable refinancing terms will be available to us, and the inability to refinance or convert our indebtedness on acceptable terms could have a material adverse effect on our financial condition and results of operations.
III. RISKS RELATED TO THE REGULATORY AND POLITICAL ENVIRONMENT
A. Federal and State Regulatory Risks
We are subject to extensive federal and state regulation, and changes in the regulatory framework applicable to our business could materially adversely affect our operations and financial condition.
Our business is subject to extensive regulation at the federal and state levels, including regulation by the Federal Energy Regulatory Commission ("FERC"), the North American Electric Reliability Corporation ("NERC"), and state public utility commissions and other regulatory authorities in Texas, New Mexico, Arizona, California, and Oklahoma. These regulatory bodies have broad authority over the generation, transmission, distribution, and sale of electricity, including the authority to establish and modify the rules governing wholesale electricity markets, transmission planning and interconnection policies, reliability standards, and renewable portfolio standards and other clean energy mandates.
Changes in the regulatory frameworks applicable to our business could have a material adverse effect on our operations, financial condition, and results of operations. For example, changes in wholesale electricity market rules, including changes to capacity markets, ancillary services markets, or energy price formation mechanisms, could affect the revenue we earn from our projects. Changes in transmission planning and interconnection policies could affect the costs and timelines associated with connecting our projects to the electric grid. Changes in renewable portfolio standards, clean energy mandates, or other state-level policies that currently incentivize the development and procurement of renewable energy could reduce demand for our projects' output and make it more difficult to obtain power purchase agreements on favorable terms.
Compliance with NERC reliability standards involves significant costs and exposes us to potential enforcement actions and penalties.
As a registered entity subject to NERC reliability standards, we are required to comply with a comprehensive set of standards governing the reliable planning and operation of the bulk power system. Compliance with these standards involves significant ongoing costs, including costs associated with monitoring and reporting requirements, personnel training, physical and cybersecurity measures, and the implementation of corrective action plans in response to identified violations. NERC and its regional entities have the authority to investigate potential violations of reliability standards, impose penalties for violations (which can be substantial), and require corrective action. A significant violation of NERC reliability standards, or a series of violations, could result in substantial financial penalties, increased regulatory scrutiny, and reputational harm, any of which could adversely affect our business and financial condition.
B. ITC / PTC Policy and Legislative Risks
The investment tax credit and production tax credit are material to our project economics and competitive position, and changes in these tax incentives could materially reduce the viability of our development pipeline.
The federal investment tax credit under Section 48 of the Code and the production tax credit under Section 45 of the Code are material to the economics of our renewable-energy projects and to our competitive position in the market. The ITC provides a tax credit equal to a specified percentage of the eligible cost basis of qualifying solar energy, battery energy storage, and other renewable-energy property, while the PTC provides a per-kilowatt-hour tax credit for electricity generated by qualifying wind, solar, and other renewable-energy facilities during the first ten years of operation. The availability of these tax credits significantly reduces the after-tax cost of developing renewable-energy projects and is a key driver of investment returns for both project developers and tax-equity investors.
Legislative changes, including phase-downs, modifications, or repeal of the ITC or PTC, could materially reduce the economic returns of our projects under development and in our pipeline, reduce the availability and increase the cost of tax-equity financing, and make it more difficult for renewable energy to compete with conventional power generation on a cost basis. In addition, changes to the safe-harbor and begin-construction rules applicable to the ITC and PTC could affect whether projects in our development pipeline qualify for the current credit rates. Projects that fail to satisfy the applicable continuity requirements under IRS guidance may be eligible only for reduced credit rates or may not qualify for the credits at all, which could materially adversely affect the economics of those projects.
The Inflation Reduction Act and other pending legislative initiatives create uncertainty regarding the final terms and implementation of renewable-energy tax incentives.
The U.S. Congress has been considering various legislative proposals related to climate, energy, and tax policy, including the Inflation Reduction Act and other reconciliation and infrastructure bills. While certain of these proposals, if enacted, could extend, expand, or otherwise modify the ITC and PTC in ways that would be beneficial to our business, the final terms of any enacted legislation, the implementing regulations and guidance to be issued by the IRS and the Department of the Treasury, and the timeline for enactment and implementation are uncertain. There can be no assurance that any pending legislation will be enacted in its current form, or at all, or that the final terms of any enacted legislation will be favorable to our business. The uncertainty surrounding these legislative initiatives could affect our investment decisions, the timing of our project development activities, and the willingness of tax-equity investors and lenders to commit capital to our projects.
C. Permitting and Land-Use Risks
Our ability to develop and operate our projects depends on obtaining and maintaining range permits, land-use rights, and interconnection agreements, and the failure to do so could delay or prevent the development of our projects.
The development, construction, and operation of utility-scale renewable-energy projects require range federal, state, and local permits, approvals, and authorizations, including but not limited to conditional-use permits, building permits, grading permits, environmental permits, air quality permits, water-use permits, biological opinions and incidental take permits under the Endangered Species Act, consultation findings under the National Historic Preservation Act, Federal Aviation Administration determinations of no hazard for wind projects, and various other approvals. The permitting process can be lengthy, complex, and unpredictable, and there can be no assurance that we will be able to obtain all of the permits required for our projects in development on a timely basis, on acceptable terms, or at all.
In addition, our projects depend on long-term site control through land leases, surface-use agreements, easements, and rights-of-way with private landowners, governmental entities, and other parties. These agreements are typically subject to renewal, termination, and other provisions that create risk, including the risk that landowners may decline to renew leases upon expiration, that leased land may be subject to condemnation or eminent domain proceedings, or that the terms of land agreements may be adversely modified. The loss of site control for any of our projects could delay or prevent the development of those projects or require us to relocate projects to alternative sites, which could result in significant additional costs and delays.
Community opposition and local zoning and siting challenges could delay or prevent the development of our projects.
The development of utility-scale renewable-energy projects can be subject to opposition from local communities, landowners, environmental groups, and other stakeholders, based on concerns related to visual impacts, noise, wildlife impacts, property values, construction traffic, and other issues. Community opposition can result in delays in obtaining required permits and approvals, the imposition of additional conditions or restrictions on project development and operation, and, in some cases, the denial of permits or the enactment of local zoning ordinances or moratoria that restrict or prohibit the development of renewable-energy projects. In addition, interconnection queue congestion and transmission-infrastructure constraints in certain regions have increased the time and cost required to connect new projects to the electric grid, and these constraints could worsen as additional renewable-energy capacity is developed.
IV. RISKS RELATED TO ENVIRONMENTAL AND CLIMATE MATTERS
A. Environmental Compliance
We are subject to extensive environmental laws and regulations, and compliance with these requirements involves significant costs and potential liabilities.
Our operations are subject to a broad range of federal, state, and local environmental laws and regulations, including the National Environmental Policy Act ("NEPA"), the Endangered Species Act ("ESA"), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and various state environmental statutes and regulations applicable in Texas, New Mexico, Arizona, California, and Oklahoma. These laws and regulations impose requirements and restrictions related to, among other things, environmental impact assessments, the protection of threatened and endangered species and their habitats, air quality and emissions, water quality and discharge, stormwater management, wetlands protection, waste management and disposal, and the remediation of contaminated properties.
Phase I and Phase II environmental site assessments have been conducted by Greenridge Environmental Sciences LLC under the supervision of Dr. Nadine Torres for our project sites in connection with our development activities and financing transactions. These assessments have identified certain pending remediation items and ongoing monitoring obligations at certain project sites, including monitoring of groundwater conditions at one of our Texas sites and soil remediation at a former agricultural site in New Mexico. While we believe that the costs associated with these remediation and monitoring activities are not material, there can be no assurance that additional environmental conditions will not be identified in the future, that the costs of remediation and monitoring will not exceed our current estimates, or that we will not incur material environmental liabilities in connection with our projects.
Our wind projects are subject to avian and bat mortality mitigation requirements that could increase operating costs or constrain operations.
Our wind-energy projects, including Red Mesa Wind (380 MW, Custer County, Oklahoma), Pronghorn Wind (510 MW, Nolan County, Texas), and Mesquite Wind (420 MW, Oldham County, Texas), are subject to avian and bat mortality mitigation plans developed in accordance with the U.S. Fish and Wildlife Service Land-Based Wind Energy Guidelines and applicable state regulations. These mitigation plans may require us to implement operational curtailment protocols (such as curtailing turbine operations during periods of high bat activity), install deterrent technology, conduct post-construction mortality monitoring, and contribute to habitat conservation or mitigation funds. Future changes in regulatory requirements, the listing of additional species under the ESA, or the discovery of higher-than-expected mortality rates at our wind project sites could require additional mitigation measures, increase our operating costs, reduce the energy output of our wind projects, and expose us to regulatory enforcement actions, civil penalties, or third-party litigation.
B. Climate and Weather Risks
Extreme weather events could damage our projects, reduce electricity generation, and increase our costs.
Our projects are located in geographic regions that are subject to extreme weather events, including hurricanes, tornadoes, hail, ice storms, high winds, flooding, drought, and extreme temperatures. The occurrence of such events could cause physical damage to our project infrastructure, including solar panels, wind turbines, battery storage systems, substations, and transmission interconnection facilities, and could result in unplanned outages, reduced electricity generation, increased operations and maintenance costs, and business interruption. For example, the February 2021 winter storm event in Texas resulted in significant disruptions to the Texas electric grid and caused physical damage to energy infrastructure across the state. While our projects were not materially damaged during that event, future extreme weather events of similar or greater severity could cause material damage to our assets and adversely affect our financial condition and results of operations.
Long-term shifts in weather patterns could affect solar irradiance and wind resources below forecasted levels, reducing the revenue generated by our projects.
The revenue generated by our solar and wind projects depends on the availability of solar irradiance and wind resources at our project sites. Our project development process includes detailed resource assessments based on historical meteorological data, satellite imagery, and on-site measurement campaigns. However, actual solar irradiance and wind resources may vary from forecasted levels due to natural variability, long-term changes in weather patterns, or other factors. If solar irradiance or wind resources at our project sites are below forecasted levels on a sustained basis, the electricity generation and revenue of our projects would be reduced, which could adversely affect our ability to service our project-level debt, meet our obligations under power purchase agreements, and achieve our projected financial returns.
While natural disasters, pandemics, and acts of war are among the customary carve-outs under the definition of material adverse effect set forth in the underwriting agreement, such events may nevertheless disproportionately affect CBR if our projects are concentrated in specific geographic regions that are particularly exposed to such events, in which case the carve-out would not apply.
C. ESG and Sustainability Expectations
Increasing investor, regulatory, and public focus on environmental, social, and governance matters could affect our reputation, access to capital, and compliance costs.
There has been increasing attention from investors, regulators, proxy advisory firms, and the general public on environmental, social, and governance ("ESG") matters, including corporate sustainability practices, climate risk disclosure, diversity and inclusion, and the environmental impacts of business operations. We may be subject to evolving ESG disclosure requirements at the federal and state levels, including the SEC's proposed rules on climate-related disclosures and similar state-level initiatives. Compliance with existing and new ESG-related regulatory requirements could require us to incur additional costs for data collection, reporting, assurance, and other activities, and the failure to meet evolving ESG standards or expectations could affect our reputation, our ability to attract and retain employees, our relationships with counterparties and business partners, and our access to capital from investors and financial institutions that apply ESG screening criteria to their investment decisions.
In addition, there is a risk that CBR could be subject to claims of "greenwashing" if our ESG disclosures or sustainability claims are perceived as misleading, inaccurate, or inconsistent with our actual practices and performance. Such claims, whether arising from regulatory enforcement actions, shareholder litigation, or public scrutiny, could damage our reputation and adversely affect our business and financial condition.
V. RISKS RELATED TO TAX MATTERS
A. Tax-Equity Partnership Accounting
The HLBV methodology we use to account for our tax-equity partnerships is complex and judgment-intensive, and the SEC staff has raised questions about the adequacy of our HLBV-related disclosures.
As described in the notes to our consolidated financial statements included elsewhere in this prospectus, we use the HLBV methodology to allocate net income and loss among the partners in our tax-equity partnership structures. The HLBV methodology involves a hypothetical liquidation analysis at the end of each reporting period, in which the net assets of the partnership are assumed to be liquidated at their carrying values and the proceeds of liquidation are distributed to the partners in accordance with their respective liquidation rights under the partnership agreement. The difference in each partner's claim on the net assets of the partnership at the beginning and end of the reporting period, adjusted for contributions and distributions, determines each partner's share of the partnership's net income or loss for the period.
The HLBV methodology is complex, requires significant management judgment and estimation, and is sensitive to the assumptions and inputs used in the hypothetical liquidation analysis, including the carrying values of partnership assets, the expected timing and amount of future tax benefits, the expected date of the partnership flip, and the interpretation of the contractual provisions of the partnership agreement governing the allocation of liquidation proceeds. The SEC staff has historically devoted significant attention to the application of the HLBV methodology by renewable-energy companies, and in connection with our initial registration statement, we received a total of 25 comments from the SEC staff in two rounds of comment letters dated May 6, 2022 (first round) and June 3, 2022 (second round), including specific inquiries regarding the adequacy of our HLBV-related disclosures, the significant assumptions and judgments underlying our HLBV calculations, and the sensitivity of our reported results to changes in those assumptions.
Changes in GAAP, SEC interpretive guidance, or the SEC staff's views on the appropriate application of the HLBV methodology could require us to modify our accounting treatment for our tax-equity partnership structures, which could result in the restatement or reclassification of previously reported financial results, additional disclosure obligations, and adverse effects on our reported financial performance and the trading price of our common stock.
B. ITC Recapture and Partnership-Flip Risks
The Solaris West partnership flip or the initial public offering transaction could trigger ITC recapture, resulting in material tax liabilities and indemnification obligations.
The Solaris West tax-equity partnership is st