CONFIDENTIAL TREATMENT REQUESTED BY CALLOWAY-BRIGGS RENEWABLES INC.
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, NY 10022 Tel: (212) 558-4000
Fax: (212) 558-3588
www.calderwoodharkness.com
Jennifer Kwon Direct Dial: (212) 558-4217
Email: jkwon@calderwoodharkness.com
May 20, 2022
Via EDGAR
Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549
Attention: Staff of the Division of Corporation Finance
Re: Calloway-Briggs Renewables Inc. Draft Registration Statement on Form S-1 Submitted Confidentially on April 11, 2022 CIK No. 0001948372 EDGAR Accession No. 0001948372-22-000001 Staff Comment Letter dated May 6, 2022 (18 comments)
Ladies and Gentlemen:
We submit this letter on behalf of our client, Calloway-Briggs Renewables Inc. ("CBR" or the "Company"), a Delaware corporation headquartered at 4200 Ridgeline Parkway, Suite 1100, Austin, Texas 78746, in response to the comments of the Staff (the "Staff") of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the "Commission") set forth in the Staff's comment letter dated May 6, 2022, relating to the Company's Draft Registration Statement on Form S-1 (the "DRS" or the "Registration Statement") confidentially submitted with the Commission via EDGAR on April 11, 2022 (EDGAR Accession No. 0001948372-22-000001).
Concurrently with this letter, the Company is filing Amendment No. 1 to the Draft Registration Statement ("Amendment No. 1") via EDGAR (EDGAR Accession No. 0001948372-22-000002), which reflects the Company's responses to the Staff's comments described below, as well as certain other updates, revisions, and clarifications. Amendment No. 1 has been marked to show changes from the DRS as originally submitted.
For the convenience of the Staff, the Company has reproduced each of the Staff's eighteen (18) comments below in bold italics, followed by the Company's response. Unless otherwise indicated, all page references in the Company's responses are to Amendment No. 1.
The Company respectfully requests that the Draft Registration Statement, Amendment No. 1, and this response letter continue to be treated confidentially pursuant to Section 6(e) of the Securities Act of 1933, as amended (the "Securities Act"), and Section 106 of the Jumpstart Our Business Startups Act (the "JOBS Act"). The Company qualifies as an "emerging growth company" within the meaning of the JOBS Act, as the Company's total annual gross revenues for the fiscal year ended December 31, 2021 were approximately $487.3 million, which is below the $1.235 billion threshold set forth in the JOBS Act. Accordingly, the Company is permitted to submit its Draft Registration Statement and amendments thereto for nonpublic review by the Staff prior to public filing.
The Company's responses to each of the Staff's comments are set forth below.
Comment 1 — Prospectus Summary / Business Overview
*The Staff notes that the Prospectus Summary discusses the Company's operating assets, assets under construction, and development pipeline in general terms. Please revise to enhance the disclosure regarding the Company's business model by distinguishing among operating assets (3.8 GW), assets under construction (1.4 GW), and the development pipeline (6.2 GW). In addition, please clarify the stage-gate criteria used by the Company to classify projects into each of these categories.*
Response:
The Company acknowledges the Staff's comment and has revised the Prospectus Summary on pages 1 through 8 of Amendment No. 1 to clearly delineate the three categories of the Company's project portfolio — operating assets, assets under construction, and the development pipeline — and to provide investors with enhanced visibility into the composition and status of the Company's renewable energy assets.
Specifically, the Company has added a detailed project table on pages 3 through 5 of Amendment No. 1 that presents each material project by name, technology type, nameplate capacity (in megawatts), location (county and state), current status, and commercial operation date ("COD") or expected COD, as applicable. The projects presented in the revised table include the following:
Operating Assets (3.8 GW):
Assets Under Construction (1.4 GW):
Development Pipeline (6.2 GW):
In addition, the Company has added disclosure on page 6 of Amendment No. 1 setting forth the stage-gate criteria used by the Company to classify projects into each category. The revised disclosure includes the following definitions:
• "Operating" means that the project has achieved mechanical completion, has been interconnected to the electric grid, has satisfied all conditions for commercial operation under the applicable power purchase agreement or interconnection agreement, and has delivered energy to the grid. Operating assets generate revenue for the Company.
• "Under Construction" means that the project has achieved financial close (i.e., all project-level financing commitments have been executed and all conditions precedent to initial funding have been satisfied or waived), a notice to proceed has been issued to the engineering, procurement, and construction ("EPC") contractor, and physical construction activities (including, without limitation, site preparation, foundation work, or equipment installation) are underway. Assets under construction do not yet generate revenue but have committed capital and defined construction timelines.
• "Development" means that the Company has secured site control (through land leases, options, or purchase agreements) and/or has obtained or is pursuing interconnection queue positions with the applicable regional transmission organization or independent system operator, but financial close has not yet occurred. Development-stage projects may also have completed certain permitting activities, environmental studies, or preliminary engineering, but there can be no assurance that any development-stage project will ultimately achieve financial close or be constructed. See "Risk Factors — Risks Related to Our Development Pipeline."
The Company believes that these revisions, taken together, provide investors with a clear and comprehensive understanding of the Company's portfolio and the criteria used to classify each project.
Comment 2 — Prospectus Summary / Offering Terms
*The Prospectus Summary discusses the aggregate offering size, the primary and secondary components, and the overallotment option. Please revise the presentation to clearly delineate these figures in a manner that is not potentially confusing to investors.*
Response:
The Company acknowledges the Staff's comment and has revised the summary offering table on pages 9 and 10 of Amendment No. 1 to present the key offering terms in a clear, tabular format that distinguishes between the primary and secondary components, the base offering and overallotment option, and the pre-offering and post-offering share counts. The revised disclosure is set forth below in summary form:
Aggregate Offering Size (including full exercise of overallotment option): Approximately $600,000,000
Base Offering: Approximately $521,700,000 (23,713,636 shares at an assumed initial public offering price of $22.00 per share, the midpoint of the estimated price range set forth on the cover page)
Overallotment Option (15% Greenshoe): Approximately $78,300,000 (3,559,091 additional shares)
Primary Offering (shares offered by the Company): Approximately $371,700,000 (16,895,455 shares)
Secondary Offering (shares offered by Pinnacle Vista Capital Partners III, LP): Approximately $150,000,000 (6,818,182 shares)
Base Shares Offered: 23,713,636 shares (16,895,455 primary shares + 6,818,182 secondary shares)
Overallotment Shares: 3,559,091 shares (all primary shares from the Company)
Total Shares Offered (full exercise): 27,272,727 shares
Pre-IPO Shares Outstanding: 100,000,000 shares (fully diluted, post-reclassification, giving effect to the conversion of all outstanding shares of the Company's Series A, Series B, and Series C preferred stock into shares of common stock)
Post-IPO Shares Outstanding (base offering, no exercise of overallotment): 116,895,455 shares
Post-IPO Shares Outstanding (full exercise of overallotment): 120,454,545 shares
Note: The foregoing share counts do not include (i) 12,727,273 shares reserved for issuance under the 2022 Omnibus Equity Incentive Plan or (ii) 2,545,455 shares reserved for issuance under the 2022 Employee Stock Purchase Plan. On a fully diluted basis (including all shares reserved for issuance under both plans and giving full effect to the overallotment option), there would be approximately 135,727,273 shares outstanding. The post-IPO shares outstanding on a post-plan, post-overallotment basis of 127,272,727 referenced elsewhere in the Registration Statement reflects the denominator used for purposes of calculating the equity plan reserves (i.e., the base of 120,454,545 shares plus the 6,818,182 secondary shares that are already outstanding, totaling 127,272,727).
The Company has also added cross-references in the revised summary table to the "Use of Proceeds" section (page 47 of Amendment No. 1), the "Principal and Selling Stockholders" section (page 138 of Amendment No. 1), and the "Underwriting" section (page 152 of Amendment No. 1), where additional detail regarding the offering structure is provided.
The Company notes that the final offering terms, including the initial public offering price and the exact number of shares, will be determined at the time of pricing and will be reflected in the final prospectus.
Comment 3 — Risk Factors (General)
*Several of the risk factors in the Registration Statement appear overly generic and do not appear to be tailored to the specific circumstances of the Company and its operations in the renewable-energy sector. Please revise the risk factors to make them specific to the Company's business, operations, and financial condition. In addition, please ensure that each risk factor heading concisely captures the specific risk described in the body of the risk factor, consistent with Item 105 of Regulation S-K.*
Response:
The Company acknowledges the Staff's comment and has substantially revised the Risk Factors section throughout Amendment No. 1, beginning at page 18, to ensure that each risk factor is specifically tailored to the Company's business, operations, financial condition, and the renewable-energy sector in which the Company operates. The Company has also revised the headings of its risk factors to be concise but descriptive of the specific risk, consistent with the requirements of Item 105 of Regulation S-K and prior Staff guidance.
By way of example, the Company has made the following illustrative revisions (among many others):
• The previously generic heading "We face risks related to our industry" has been replaced with the more specific heading: "Our revenues depend on power purchase agreements, the majority of which are long-term fixed-price contracts, and any default by our counterparties or expiration of such agreements without renewal could materially reduce our revenues." The body of this risk factor has been revised to discuss the Company's specific PPA portfolio, the creditworthiness of its counterparties, and the weighted average remaining term of its PPAs (approximately 14 years).
• The Company has added a new risk factor titled "A substantial majority of our operating capacity is located in Texas, and our business is disproportionately subject to the regulatory, market, weather, and grid-reliability risks associated with the ERCOT market and the policies of the Texas Public Utility Commission." This risk factor addresses the Company's geographic concentration in Texas, where approximately 65% of its operating nameplate capacity (approximately 2.5 GW of 3.8 GW) is located, and discusses the specific regulatory environment of ERCOT, including the energy-only market design, the absence of a capacity market, the risk of price volatility (including the extreme price events experienced during Winter Storm Uri in February 2021), and the ongoing regulatory changes being implemented by the Texas PUC.
• The Company has added a new risk factor titled "The Mesquite Wind and Cimarron Solar projects are currently under construction and may be subject to construction delays, cost overruns, equipment shortages, and other risks that could delay their commercial operation dates and increase our costs." This risk factor discusses the specific construction risks associated with these two projects, including supply-chain challenges, permitting requirements, and the potential impact of delays on the Company's projected revenue and cash flows.
• The Company has added a new risk factor titled "Curtailment of our wind and solar generation by grid operators, particularly in ERCOT, could reduce our revenues and the value of our operating assets." This risk factor discusses the specific curtailment risks facing the Company's Texas-based projects, including economic curtailment during periods of low or negative pricing, reliability curtailment ordered by ERCOT, and congestion-related curtailment resulting from transmission constraints in West Texas.
The Company has also reviewed and revised all other risk factor headings throughout the Registration Statement to ensure compliance with Item 105. The Company believes that the revised Risk Factors section, as presented in Amendment No. 1, provides investors with a comprehensive, tailored, and balanced discussion of the material risks facing the Company.
Comment 4 — Risk Factors (Tax-Equity / ITC / PTC)
*Please expand the risk factor discussion regarding the Company's reliance on federal tax credits, including the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). In particular, please address the risk of recapture of previously claimed tax credits, the potential impact of legislative changes affecting the availability or amount of such credits, and the impact of the Company's tax-equity partnership structures on its financial results.*
Response:
The Company acknowledges the Staff's comment and has substantially expanded the risk factor disclosure beginning on page 29 of Amendment No. 1 to address the specific risks associated with the Company's reliance on federal tax credits and the tax-equity partnership structures through which such credits are monetized. The enhanced disclosure includes the following:
Investment Tax Credit (ITC) and Production Tax Credit (PTC) Dependence. The Company has added enhanced disclosure explaining that its solar projects have historically relied upon the ITC under Section 48 of the Internal Revenue Code of 1986, as amended (the "Code"), and its wind projects have historically relied upon the PTC under Section 45 of the Code, to achieve target returns on invested capital. The Company has disclosed that the availability and amount of these credits has been, and may continue to be, subject to legislative action and regulatory interpretation, and that any reduction, elimination, or modification of the ITC or PTC could materially and adversely affect the economics of the Company's existing and future projects, as well as the Company's ability to attract tax-equity investment on favorable terms. The Company has also disclosed its reliance on safe-harbor and begin-construction requirements, including the continuous-construction and continuous-efforts tests under applicable IRS guidance (Notice 2013-29, Notice 2013-60, Notice 2016-31, Notice 2017-04, Notice 2018-59, and Notice 2021-5), and the risk that the IRS could challenge the Company's position that certain projects have satisfied these requirements.
ITC Recapture Risk. The Company has added a specific risk factor addressing the risk of ITC recapture under Section 50 of the Code. The disclosure specifically references the Solaris West tax-equity partnership with Veltara Basin Financial LLC, in which Veltara Basin Financial LLC has invested approximately $280 million and the partnership flip is expected to occur in 2028. The Company has disclosed that the ITC is subject to recapture if, during the five-year period following the date the relevant project is placed in service, the project undergoes certain changes, including a change in ownership, a reduction in the project's qualified basis, or a disposition of the project or a substantial portion thereof. The Company has further disclosed that the occurrence of any recapture event could result in a significant financial obligation for the Company (or the applicable project-level entity) and could adversely affect the Company's relationships with its tax-equity investors.
Legislative Risk. The Company has added disclosure noting that the ITC and PTC have historically been subject to periodic extension, modification, and phase-down by Congress, and that the availability and amount of such credits for future projects will depend on the legislative and regulatory environment in effect at the time such projects commence construction. The Company has noted the uncertainty surrounding pending federal tax legislation and the potential for material changes to the tax credit regime, including potential modifications to the ITC phase-down schedule, changes in the applicable credit rate, and the possible introduction of a direct-pay or transferability mechanism.
HLBV Methodology and Earnings Variability. The Company has added a risk factor specifically addressing the impact of the Hypothetical-Liquidation-at-Book-Value ("HLBV") methodology on the Company's reported financial results. The disclosure explains that the Company uses the HLBV methodology, in accordance with ASC 970-323, to allocate income and loss in its tax-equity partnership structures, and that this methodology can result in significant variability in the Company's reported net income from period to period, particularly in the early years of a tax-equity partnership when the majority of tax benefits are allocated to the tax-equity investor. The Company has cross-referenced the expanded HLBV discussion in the MD&A section (see the Company's response to Comment 12 below).
Comment 5 — Risk Factors (Controlled Company)
*Please disclose more prominently the risks associated with the Company's status as a "controlled company" under NYSE listing standards following the completion of the offering, including the potential impact of such status on corporate governance practices and the rights of minority stockholders.*
Response:
The Company acknowledges the Staff's comment and has revised and expanded the controlled-company risk factor beginning on page 37 of Amendment No. 1 to provide more prominent and detailed disclosure. The revised risk factor includes the following key points:
• Following the completion of the offering, Pinnacle Vista Capital Partners III, LP ("Pinnacle Vista") will beneficially own approximately 55,181,818 shares of the Company's common stock, representing approximately 47.2% of the outstanding shares of common stock assuming the base offering (no exercise of the overallotment option), or approximately 45.8% of the outstanding shares of common stock assuming the full exercise of the overallotment option. In combination with the shares held by the Company's co-founders, Garrett Calloway and Elaine Briggs (who collectively hold approximately 24,000,000 shares, or approximately 20.5% of the outstanding shares on a post-IPO base-offering basis), and the board designation rights and other governance rights granted to Pinnacle Vista under the Amended and Restated Stockholders' Agreement (described below), Pinnacle Vista may be deemed to effectively control the Company for purposes of the NYSE listing standards.
• The Company intends to avail itself of the "controlled company" exemption under Section 303A of the NYSE Listed Company Manual, which permits the Company to phase in compliance with the independent director requirements of the NYSE. Specifically, under the controlled company exemption, the Company would not be required to have (i) a majority of independent directors on its board of directors, (ii) an entirely independent nominating and corporate governance committee, or (iii) an entirely independent compensation committee. As a result, the Company's corporate governance practices may differ materially from those of companies that are not controlled companies, and the Company's minority stockholders may not have the same protections they would have if the Company were subject to all of the NYSE corporate governance requirements.
• The Amended and Restated Stockholders' Agreement provides Pinnacle Vista with the right to designate a specified number of nominees to the Company's board of directors, subject to a step-down schedule tied to Pinnacle Vista's beneficial ownership of the Company's outstanding common stock. At ownership levels above 40%, Pinnacle Vista has the right to designate four of nine directors; at ownership levels between 30% and 40%, three directors; at ownership levels between 20% and 30%, two directors; and at ownership levels between 10% and 20%, one director. Below 10%, Pinnacle Vista's designation rights terminate.
The Company has also added cross-references to the "Certain Relationships and Related-Party Transactions" section (page 130 of Amendment No. 1) and to the descriptions of the Amended and Restated Stockholders' Agreement and the Registration Rights Agreement contained therein.
Comment 6 — Use of Proceeds
*Please provide additional specificity regarding the Company's intended allocation of the net proceeds of the offering, including the amount and terms of debt to be repaid, the identity of the lender, and the interest rate on such debt. In addition, please clarify the scope and intended application of the "general corporate purposes" category.*
Response:
The Company acknowledges the Staff's comment and has revised the "Use of Proceeds" section on pages 47 through 49 of Amendment No. 1 to provide additional specificity regarding the allocation of the estimated net proceeds from the offering. The revised disclosure is as follows:
The Company estimates that it will receive net proceeds from the primary offering of approximately $351,356,500 (or approximately $421,556,500 if the underwriters exercise their overallotment option in full), after deducting the estimated underwriting discount of approximately $20,243,500 with respect to the primary component of the base offering (or approximately $26,143,500 with respect to the primary component of the full offering, inclusive of the overallotment) and estimated offering expenses of approximately $3.9 million payable by the Company. The Company will not receive any proceeds from the sale of shares by the selling stockholder, Pinnacle Vista Capital Partners III, LP.
The Company intends to use the net proceeds from the primary offering as follows:
Repayment of a Portion of the Corporate Term Loan B — Approximately $200 million. The Company intends to use approximately $200 million to repay a portion of the outstanding principal balance under its Corporate Term Loan B facility. The Term Loan B is provided by a syndicate of lenders for which Veltrano National Bank serves as administrative agent. The Term Loan B has an aggregate commitment of $650 million, of which approximately $612.5 million was outstanding as of March 31, 2022. The Term Loan B matures on January 15, 2029 and bears interest at a rate equal to LIBOR (with a 0.50% floor) plus an applicable margin of 2.75% per annum (which was approximately 3.25% as of March 31, 2022, based on one-month LIBOR of 0.46% plus the 2.75% applicable margin). The Corporate Term Loan B requires quarterly amortization payments of 0.25% of the original principal amount (approximately $1.625 million per quarter). The Company estimates that it will incur a prepayment premium of approximately 1.00% on the $200 million prepayment amount, or approximately $2.0 million, in connection with the voluntary prepayment of the Term Loan B. The proceeds of the Term Loan B were originally used to refinance the Company's prior credit facility, fund a portion of the Company's development activities, and for general corporate purposes.
Funding of Cimarron Solar Construction Costs — Approximately $100 million. The Company intends to use approximately $100 million to fund a portion of the construction costs for the Cimarron Solar project, a 350 MW solar PV project located in Doña Ana County, New Mexico, with an expected COD of Q1 2023. The total estimated construction cost for the Cimarron Solar project is approximately $385 million, of which approximately $143 million is being funded under a separate construction-to-term credit facility with Prairie Commercial Bank, N.A. as administrative agent and lender, and the remainder is being funded through a combination of the Company's cash on hand, tax-equity commitments (which are subject to satisfaction of conditions precedent), and the net proceeds of this offering.
General Corporate Purposes — Approximately $51.4 million (or approximately $121.6 million if the underwriters exercise their overallotment option in full). The Company intends to use the remaining net proceeds for general corporate purposes, which may include (i) working capital, (ii) funding early-stage development expenditures for the Company's 6.2 GW development pipeline, including interconnection deposits, land-option payments, permitting costs, and preliminary engineering, and (iii) potential acquisitions of complementary assets, projects, or businesses that the Company believes would enhance its portfolio or market position. The Company does not have any specific acquisition targets at this time, and no portion of the net proceeds has been specifically allocated to any particular acquisition. Pending the application of the net proceeds as described above, the Company intends to invest such proceeds in short-term, investment-grade, interest-bearing instruments.
The Company has also added a clarifying statement confirming that the Company will not receive any proceeds from the sale of 6,818,182 shares by the selling stockholder, Pinnacle Vista Capital Partners III, LP.
Comment 7 — Capitalization Table
*Please present the capitalization table on both an actual basis and a pro forma as adjusted basis reflecting the receipt of net proceeds from the offering and the application of those proceeds. In addition, please ensure that the capitalization table reconciles with the disclosure in the Use of Proceeds section.*
Response:
The Company acknowledges the Staff's comment and has revised the Capitalization Table on pages 50 through 52 of Amendment No. 1 to present three columns of data:
(i) Actual — reflecting the Company's capitalization as of March 31, 2022, derived from the Company's unaudited interim consolidated financial statements;
(ii) Pro Forma — reflecting the Company's capitalization on a pro forma basis as of March 31, 2022, giving effect to (a) the reclassification of all outstanding shares of the Company's Series A preferred stock, Series B preferred stock, and Series C preferred stock into shares of common stock in connection with the pre-IPO reorganization, (b) the filing and effectiveness of the Amended and Restated Certificate of Incorporation, (c) the adoption of the 2022 Omnibus Equity Incentive Plan and the 2022 Employee Stock Purchase Plan, and (d) the stock split and other reorganization steps described in "Organizational Structure — Pre-IPO Reorganization" (page 44 of Amendment No. 1); and
(iii) Pro Forma As Adjusted — reflecting the Company's capitalization on a pro forma as adjusted basis as of March 31, 2022, giving effect to all of the adjustments described in clause (ii) above, plus (a) the issuance and sale by the Company of 16,895,455 shares of common stock in the primary offering at an assumed initial public offering price of $22.00 per share (the midpoint of the estimated price range), after deducting estimated underwriting discounts and commissions of approximately $20,243,500 and estimated offering expenses of approximately $3.9 million, and (b) the application of the estimated net proceeds of approximately $351,356,500 as described in "Use of Proceeds."
The Company has confirmed that the Pro Forma As Adjusted column reconciles with the Use of Proceeds disclosure as follows:
The Company notes that the approximately $2.0 million prepayment premium, which was not separately identified in the Use of Proceeds section of the DRS, has now been disclosed in the revised Use of Proceeds section and is reflected in the Pro Forma As Adjusted column of the Capitalization Table. The slight difference between the $51.4 million referenced in the Use of Proceeds discussion and the $49.4 million shown above reflects the inclusion of the prepayment premium in the revised calculations. The Company has conformed the Use of Proceeds disclosure and Capitalization Table to ensure complete consistency.
Additionally, the Company has included footnotes to the Capitalization Table clarifying the components of total debt (Corporate Term Loan B, Corporate Revolving Credit Facility, project-level construction debt, and other indebtedness), the shares reserved under the equity incentive plans, and the impact of the overallotment option on the Pro Forma As Adjusted figures.
Comment 8 — Selected Financial Data / Non-GAAP Measures
*The Registration Statement presents "Adjusted EBITDA" as a non-GAAP financial measure. Please provide a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure (net income or net loss) for each period presented. In addition, please ensure that the presentation of Adjusted EBITDA complies with Item 10(e) of Regulation S-K and the Commission's Compliance & Disclosure Interpretations regarding non-GAAP financial measures, including with respect to the prominence given to the GAAP and non-GAAP measures.*
Response:
The Company acknowledges the Staff's comment and has added a detailed quantitative reconciliation table on pages 55 and 56 of Amendment No. 1 that reconciles Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, for each period presented. The reconciliation is as follows:
(1) Non-recurring items include certain legal and advisory fees related to the pre-IPO reorganization and other non-recurring expenses that the Company does not consider to be indicative of its ongoing operating performance.
In addition to the reconciliation table, the Company has made the following revisions to ensure compliance with Item 10(e) of Regulation S-K and the Commission's Compliance & Disclosure Interpretations regarding non-GAAP financial measures:
• Prominence. The Company has revised all instances in Amendment No. 1 where Adjusted EBITDA is presented to ensure that the corresponding GAAP measure (net income or net loss) is presented with equal or greater prominence. Specifically, in the Prospectus Summary, Selected Financial Data, and MD&A sections, the GAAP measure now appears before the non-GAAP measure, and the reconciliation table is presented immediately following the first presentation of Adjusted EBITDA.
• Management's Use and Limitations. The Company has added disclosure explaining why management believes Adjusted EBITDA is a useful supplemental measure for investors. Specifically, the Company has stated that management uses Adjusted EBITDA to evaluate the Company's core operating performance, to compare operating results across reporting periods, to prepare annual operating budgets and forecasts, and as a factor in determining compensation. The Company has also added the required disclosure regarding the limitations of Adjusted EBITDA as an analytical tool, including that it excludes certain significant cash and non-cash expenses such as depreciation and amortization, interest expense, income taxes, and stock-based compensation, and that it should not be considered as a substitute for, or in isolation from, the Company's GAAP financial results.
• Per Share Presentation. The Company has confirmed that Adjusted EBITDA is not presented on a per-share basis, consistent with Staff guidance.
Comment 9 — MD&A: Revenue Recognition
*Please expand the discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding the Company's revenue recognition policies. In particular, please discuss the nature and terms of the Company's power purchase agreements (PPAs), how revenue is recognized under ASC 606 (Revenue from Contracts with Customers) and, where applicable, ASC 842 (Leases) for PPAs that are classified as leases, and the relative contribution of contracted revenue versus merchant revenue.*
Response:
The Company acknowledges the Staff's comment and has substantially expanded the revenue recognition discussion in the MD&A section of Amendment No. 1, beginning on page 68, to provide investors with a comprehensive understanding of the Company's revenue recognition policies, the nature and terms of its PPAs, and the composition of its revenue. The key elements of the expanded disclosure are as follows:
Nature and Terms of PPAs. The Company has added disclosure explaining that the substantial majority of its revenue is derived from long-term PPAs with electric utilities, municipal utilities, rural electric cooperatives, and commercial and industrial ("C&I") offtakers. Approximately 85% of the Company's fiscal year 2021 revenue of $487.3 million (or approximately $414.2 million) was derived from long-term PPAs. These PPAs generally provide for the sale of all or a specified portion of the energy generated by the applicable project at a fixed price per megawatt-hour, subject in certain cases to annual escalation adjustments. The weighted average remaining contract term for the Company's PPA portfolio is approximately 14 years as of December 31, 2021, and the Company's offtakers include a diversified mix of investment-grade and other creditworthy counterparties.
Revenue Recognition Under ASC 842 and ASC 606. The Company has added disclosure explaining its evaluation of PPAs under the applicable accounting standards. Each PPA is evaluated at inception to determine whether it contains a lease within the scope of ASC 842. A PPA is classified as a lease if the offtaker has the right to control the use of an identified asset (i.e., the power generation facility) for a period of time in exchange for consideration, considering factors such as whether the offtaker has the right to obtain substantially all of the economic benefits from use of the asset and the right to direct the use of the asset. Approximately 60% of the Company's PPAs (by revenue) are classified as operating leases under ASC 842, with lease revenue recognized on a straight-line basis over the lease term. The remaining approximately 40% of PPAs are accounted for as contracts with customers under ASC 606, with revenue recognized as energy is delivered (i.e., over time, based on output delivered and the contractual price per megawatt-hour), which represents the satisfaction of the Company's performance obligation to generate and deliver electricity.
Merchant Revenue. The Company has added disclosure explaining that approximately 15% of its fiscal year 2021 revenue (or approximately $73.1 million) was derived from the sale of energy at prevailing spot-market prices, primarily through the ERCOT market in Texas. Merchant revenue is recognized as energy is delivered to the grid at the applicable nodal price. The Company has disclosed that merchant revenue is inherently more volatile than contracted revenue, as it is subject to fluctuations in energy prices driven by supply and demand conditions, weather, natural gas prices, and other factors.
Revenue by Technology Type. The Company has added a breakdown of fiscal year 2021 revenue by technology type, as follows:
The Company has also added a brief discussion of the nature of battery-storage revenue, which is primarily derived from energy arbitrage (charging during low-price periods and discharging during high-price periods) and ancillary services (including frequency regulation and responsive reserve services provided to ERCOT), and has noted that the relative contribution of battery-storage revenue is expected to increase as the Brazos Storage facility achieves a full year of operations and additional storage projects are completed.
Comment 10 — MD&A: Segment Reporting
*The Company appears to operate across multiple geographic markets and multiple technologies (solar, wind, storage). Please explain why the Company has determined that it has only one reportable segment under ASC 280 (Segment Reporting), including the analysis under ASC 280-10-50-1, and identify the chief operating decision maker.*
Response:
The Company acknowledges the Staff's comment and has added disclosure on pages 78 and 79 of Amendment No. 1 explaining the Company's determination that it operates as a single reportable segment under ASC 280, Segment Reporting. The disclosure includes the following analysis:
Identification of the CODM. The Company has identified its chief operating decision maker ("CODM") as its Chief Executive Officer, Garrett Calloway. Mr. Calloway is responsible for allocating resources and assessing the performance of the Company's operations.
Review of Discrete Financial Information. The Company has disclosed that the CODM reviews financial information on a consolidated basis for purposes of making decisions about resource allocation and performance assessment. Although the Company maintains internal financial records at the individual project level (which is customary in the renewable-energy industry and is required for project-level debt compliance and tax-equity reporting purposes), the CODM does not receive or regularly review discrete financial information organized by technology type (solar, wind, or storage), geographic region (Texas, New Mexico, Arizona, California, or Oklahoma), or any other operating dimension for purposes of allocating resources or evaluating performance at that level. Rather, the CODM evaluates the Company's operating and financial performance on a consolidated portfolio-wide basis, considering metrics such as total megawatt-hours generated, total revenue, Adjusted EBITDA, and consolidated cash available for distribution.
Similar Economic Characteristics. The Company has further disclosed that all of its renewable-energy projects share similar long-term economic characteristics, including (i) the nature of the products (electricity generated from renewable sources), (ii) the nature of the production processes (capital-intensive infrastructure assets that convert renewable resources into electricity), (iii) the type or class of customer (utilities, C&I offtakers, and grid operators), (iv) the methods used to distribute the products (delivery into the applicable regional transmission grid), and (v) the nature of the regulatory environment (FERC, state public utility commissions, and environmental regulations).
Conclusion. Based on the foregoing analysis, the Company has concluded that it operates as a single reportable segment under ASC 280-10-50-1, as the Company's operating components share similar economic characteristics and meet the aggregation criteria, and the CODM does not evaluate discrete financial information below the consolidated level for resource-allocation purposes.
Entity-Wide Disclosures. Notwithstanding its single-segment determination, the Company has added enhanced entity-wide disclosures in the notes to its consolidated financial statements and in the MD&A section, including revenue by geographic area (state) and revenue by technology type (solar, wind, and storage), as discussed in the Company's response to Comment 9 above. The Company believes these entity-wide disclosures provide investors with meaningful transparency into the composition of the Company's revenue.
Comment 11 — MD&A: Liquidity and Capital Resources
*Please provide additional disclosure regarding the Company's material debt covenants, the Company's compliance status with respect to those covenants, and the extent to which the Company's existing credit facilities restrict the Company's ability to pay dividends, incur additional indebtedness, or make acquisitions.*
Response:
The Company acknowledges the Staff's comment and has substantially revised the "Liquidity and Capital Resources" section of the MD&A in Amendment No. 1, beginning on page 83, to include enhanced disclosure regarding the Company's material indebtedness, debt covenants, compliance status, and restrictive covenants. The revised disclosure includes the following:
Corporate Revolving Credit Facility. The Company maintains a $400 million senior secured revolving credit facility (the "Revolving Credit Facility") with a syndicate of lenders for which Veltrano National Bank serves as administrative agent. The Revolving Credit Facility matures on January 15, 2027 and bears interest at a rate equal to LIBOR plus an applicable margin ranging from 2.00% to 2.50% per annum, depending on the Company's consolidated leverage ratio. As of March 31, 2022, the Company had $75 million in borrowings outstanding and approximately $42 million in letters of credit issued under the Revolving Credit Facility, leaving approximately $283 million in available borrowing capacity.
Corporate Term Loan B. The Company has an aggregate $650 million Corporate Term Loan B (the "Term Loan B") with a syndicate of lenders for which Veltrano National Bank serves as administrative agent. As of March 31, 2022, approximately $612.5 million was outstanding under the Term Loan B. The Term Loan B matures on January 15, 2029, bears interest at a rate equal to LIBOR (with a 0.50% floor) plus an applicable margin of 2.75% per annum, and requires quarterly amortization payments of 0.25% of the original principal amount (approximately $1.625 million per quarter), with the remaining balance due at maturity.
Key Financial Covenants. The Revolving Credit Facility and the Term Loan B (collectively, the "Corporate Credit Facilities") contain customary financial covenants, including:
(a) a maximum consolidated leverage ratio (defined as the ratio of consolidated total debt to consolidated Adjusted EBITDA, as defined in the applicable credit agreement) of not greater than 6.50:1.00 (stepping down to 6.00:1.00 on December 31, 2023 and 5.50:1.00 on December 31, 2024);
(b) a minimum consolidated interest coverage ratio (defined as the ratio of consolidated Adjusted EBITDA to consolidated interest expense, as defined in the applicable credit agreement) of not less than 2.00:1.00; and
(c) a minimum liquidity requirement of not less than $50 million, defined as the sum of unrestricted cash and cash equivalents plus available borrowing capacity under the Revolving Credit Facility.
Compliance Status. The Company has confirmed that it was in compliance with all financial covenants under the Corporate Credit Facilities as of December 31, 2021 and as of March 31, 2022.
Restrictive Covenants. The Company has added disclosure explaining that the Corporate Credit Facilities contain customary negative covenants that, among other things, restrict the Company's ability (subject to certain exceptions and baskets) to: (i) pay dividends or make other restricted payments (see cross-reference to the "Dividend Policy" section on page 46 of Amendment No. 1); (ii) incur additional indebtedness; (iii) create or permit liens on the Company's assets; (iv) make investments or acquisitions; (v) enter into transactions with affiliates; (vi) sell, transfer, or dispose of assets; and (vii) enter into mergers or consolidations. The Company has disclosed the material baskets and exceptions applicable to each of these restrictive covenants, including the general restricted-payment basket of $25 million per fiscal year and the additional restricted-payment basket permitting distributions from available excess cash flow.
Project-Level Financing. The Company has added a summary of its material project-level financing arrangements, including:
• Mesquite Wind: A $165 million construction-to-term credit facility with Prairie Commercial Bank, N.A. as administrative agent, which is expected to convert from a construction facility to a term facility upon achievement of commercial operation (conversion date expected December 2024). The facility bears interest at a rate equal to LIBOR plus 1.75% during the construction period and LIBOR plus 2.00% following conversion, and matures in December 2039.
• Cimarron Solar: A $143 million construction-to-term credit facility with Prairie Commercial Bank, N.A. as administrative agent, which is expected to convert from a construction facility to a term facility upon achievement of commercial operation (conversion date expected March 2025). The facility bears interest at a rate equal to LIBOR plus 1.85% during the construction period and LIBOR plus 2.10% following conversion, and matures in March 2043.
• Solaris West Tax-Equity Partnership: A tax-equity partnership with Veltara Basin Financial LLC, in which Veltara Basin Financial LLC has made a capital contribution of approximately $280 million. The partnership is structured as a "partnership flip," with the majority of tax benefits (including ITC) allocated to Veltara Basin Financial LLC during the pre-flip period, and the partnership flip expected to occur in 2028. Following the flip, the Company will hold substantially all of the economic interests in the partnership.
Total Indebtedness. As of December 31, 2021, the Company's total consolidated indebtedness (inclusive of corporate-level and project-level debt) was approximately $1.71 billion. As of March 31, 2022, the Company's total consolidated indebtedness was approximately $1.74 billion.
Comment 12 — MD&A: Tax-Equity Accounting / HLBV
*Please provide expanded disclosure regarding the Hypothetical-Liquidation-at-Book-Value (HLBV) methodology used by the Company to account for the allocation of income and loss in its tax-equity partnerships. In particular, please explain the significant assumptions and inputs used in the HLBV methodology, the sensitivity of the Company's reported results to changes in those assumptions, and the impact of the HLBV methodology on the Company's reported results for each period presented.*
Response:
The Company acknowledges the Staff's comment and has added a detailed critical accounting policy discussion in the MD&A section of Amendment No. 1, beginning on page 91, addressing the HLBV methodology. The expanded disclosure includes the following:
Description of the HLBV Methodology. The Company has explained that it uses the HLBV methodology, consistent with the guidance in ASC 970-323-25 (applicable to real estate and, by analogy, to tax-equity structures in the renewable-energy industry), to allocate income and loss among the members of its tax-equity partnerships. Under the HLBV methodology, income or loss is allocated to each partner based on the change during the reporting period in the amount that each partner would hypothetically receive if the partnership were to liquidate all of its assets at their carrying values (i.e., GAAP book values) and distribute the proceeds in accordance with the partnership agreement, after satisfaction of all liabilities. The methodology is applied at the end of each reporting period by constructing a hypothetical liquidation waterfall based on the distribution provisions of the applicable partnership agreement.
Key Assumptions and Inputs. The Company has identified the following as the significant assumptions and inputs used in the HLBV methodology:
(a) Tax Credit Allocations. The allocation of Investment Tax Credits (ITC) and Production Tax Credits (PTC) to the tax-equity investor and the Company in accordance with the terms of the partnership agreement. The timing and amount of tax credit allocations directly affect the hypothetical liquidation proceeds distributable to each partner.
(b) Depreciation Methods. The tax basis of the partnership's assets, which is determined based on the applicable depreciation methods (primarily the Modified Accelerated Cost Recovery System, or MACRS, using a five-year recovery period for renewable-energy equipment). Differences between the book basis and tax basis of the partnership's assets can result in significant differences between book income and taxable income, which in turn affects the allocation of income under the HLBV methodology.
(c) Projected Taxable Income. The partnership's projected taxable income over the partnership term, which is used in certain aspects of the allocation waterfall. Projected taxable income depends on assumptions regarding energy production, revenue, operating expenses, and other factors.
(d) Partnership Flip Timing. The date on which the partnership "flip" is expected to occur (i.e., the date on which the tax-equity investor's allocation of tax benefits and distributable cash changes, and the Company's allocation increases). For the Solaris West tax-equity partnership with Veltara Basin Financial LLC, the partnership flip is currently expected to occur in 2028. Changes in the expected flip date can have a material impact on the allocation of income and loss under the HLBV methodology.
Sensitivity Disclosure. The Company has added the following sensitivity analysis:
• A one-year acceleration or delay in the expected partnership flip date for the Solaris West partnership would result in an estimated change of approximately $12 million to $18 million in the Company's cumulative net income (loss) allocated from the partnership over the pre-flip period, with a corresponding offsetting adjustment in the post-flip period. A delay in the flip date would generally reduce the Company's reported net income during the pre-flip period, as a greater share of income would continue to be allocated to the tax-equity investor for a longer period.
• A 10% change in projected taxable income of the Solaris West partnership would result in an estimated change of approximately $4 million to $7 million in the Company's annual net income allocated from the partnership.
Impact on Reported Results. The Company has disclosed that the HLBV methodology resulted in the following allocations of net income (loss) from tax-equity partnerships to the Company:
The Company has explained that the negative allocations to the Company during these periods are primarily attributable to the early stages of the Solaris West tax-equity partnership, during which the majority of the tax benefits and a disproportionate share of the economic benefits are allocated to the tax-equity investor (Veltara Basin Financial LLC) under the terms of the partnership agreement. The Company expects that the allocations to the Company will become increasingly positive as the partnership approaches the expected flip date.
The Company has included a cross-reference to Note 8 to the consolidated financial statements for additional detail regarding the tax-equity partnership arrangements and the HLBV methodology. The Company also notes that the development of these disclosures was prepared in coordination with Ashford & Pemberton LLP (the Company's independent registered public accounting firm) and Kessler McBride & Associates LLP (the Company's tax advisor), to ensure accuracy and completeness of the HLBV-related disclosures.
Comment 13 — Business: Competitive Positioning
*Please revise the Business section to provide a balanced discussion of the Company's competitive position in the renewable-energy sector, including a discussion of the competitive landscape, barriers to entry, and the Company's competitive strengths and weaknesses relative to other participants.*
Response:
The Company acknowledges the Staff's comment and has revised the "Business — Competitive Landscape" discussion beginning on page 107 of Amendment No. 1 to provide a more balanced and comprehensive discussion of the Company's competitive position. The revisions include the following:
Competitive Landscape. The Company has identified the principal categories of competitors it faces in the renewable-energy sector, including: (i) other independent power producers ("IPPs") focused on renewable energy, ranging from large, publicly traded companies with diversified global portfolios to smaller, regional developers; (ii) utility-owned generation, as many regulated and unregulated utilities are investing directly in renewable energy assets to meet renewable portfolio standard requirements and corporate sustainability goals; and (iii) major oil and gas companies and other traditional energy companies that are diversifying their businesses into renewable energy. The Company has noted that the renewable-energy sector has experienced significant growth in recent years, attracting substantial new investment from both strategic and financial investors, which has increased competitive intensity. Consistent with past Staff guidance, the Company has not identified specific competitors by name but has described the competitive dynamics by reference to competitor type.
Barriers to Entry. The Company has discussed the principal barriers to entry in the renewable-energy sector, including:
• Capital Intensity. Renewable-energy projects require significant upfront capital investment, typically ranging from $800,000 to $1.3 million per megawatt of installed capacity (depending on technology, location, and other factors), creating a substantial capital barrier for new entrants.
• Permitting and Interconnection Timelines. The development of a renewable-energy project from initial site identification to commercial operation typically requires 3 to 5 years (and in some cases longer), including the time required to obtain land rights, environmental permits, local zoning and land-use approvals, and interconnection agreements with the applicable regional transmission organization or independent system operator. Interconnection queue backlogs have increased significantly in recent years, further extending development timelines.
• Access to Transmission. The availability of transmission capacity is a critical constraint in many markets, particularly in West Texas and other regions with high renewable-energy penetration. Securing transmission access often requires significant investment in network upgrades and long lead times.
• Tax-Equity Financing Relationships. The monetization of federal tax credits (ITC and PTC) through tax-equity partnerships requires established relationships with a limited number of institutional tax-equity investors, and the structuring and negotiation of these transactions requires specialized expertise.
Competitive Strengths. The Company has highlighted the following competitive strengths:
• A large and diversified operating portfolio of 3.8 GW across multiple technologies (solar, wind, and battery storage) and multiple states, providing scale, diversification, and a proven operational track record;
• A deep development pipeline of 6.2 GW, providing significant organic growth visibility;
• Established relationships with leading tax-equity investors, lenders, and offtakers, developed over the Company's approximately ten-year operating history;
• Integrated development-through-operations capabilities, with in-house expertise spanning site origination, permitting, engineering, procurement, construction management, and long-term asset management; and
• An experienced management team with deep domain expertise in the renewable-energy sector.
Competitive Challenges. The Company has added balanced disclosure of the challenges and competitive weaknesses it faces, including:
• Increasing competition for attractive development sites, interconnection queue positions, and PPA contracts, which may result in compression of PPA pricing and lower returns on future projects;
• Supply-chain constraints affecting the availability and cost of key equipment, including solar photovoltaic panels, wind turbines, and lithium-ion battery systems, which have been exacerbated by global trade disruptions, tariffs, and increased demand;
• Geographic concentration, with a substantial majority of the Company's operating capacity located in Texas, which exposes the Company to the regulatory, market, and weather-related risks of a single state; and
• The Company's smaller scale relative to certain of its larger competitors, including major utilities and diversified energy companies, which may have greater financial resources, broader geographic reach, and more diversified business models.
The Company believes that the revised disclosure provides a balanced and informative discussion of its competitive position.
Comment 14 — Related-Party Transactions
*Please provide additional detail regarding the management-services agreement between the Company and Pinnacle Vista Capital Partners, including the specific services provided, the fee amount and payment terms, the basis for the Company's determination that the fee reflects arm's-length terms, and the terms and timing of termination upon the completion of the IPO.*
Response:
The Company acknowledges the Staff's comment and has expanded the disclosure in the "Certain Relationships and Related-Party Transactions" section of Amendment No. 1, beginning on page 130, to include additional detail regarding the management-services agreement and related arrangements. The expanded disclosure includes the following:
Management-Services Agreement. The Company has disclosed that it is party to a Management-Services Agreement, dated as of March 15, 2017 (as amended, the "MSA"), with Pinnacle Vista Capital Management LLC ("Pinnacle Management"), the general partner of Pinnacle Vista Capital Partners III, LP. Under the MSA, Pinnacle Management provides the following services to the Company:
(a) strategic advisory services, including advice and assistance with respect to long-term business strategy, capital allocation, and portfolio optimization;
(b) capital-markets advisory services, including advice and assistance with respect to financing transactions (debt and equity), refinancing activities, and investor relations strategy;
(c) board-support services, including assistance with the identification and evaluation of potential board nominees and the preparation of materials for board and committee meetings; and
(d) such other advisory and support services as may be reasonably requested by the Company from time to time.
Fee and Payment Terms. In consideration for the services provided under the MSA, the Company pays Pinnacle Management an annual management fee of $2,400,000 (the "Management Fee"), payable in equal quarterly installments of $600,000 in arrears within 30 days following the end of each calendar quarter. The Management Fee is subject to annual adjustment by mutual agreement of the parties. The Company also reimburses Pinnacle Management for its reasonable, documented out-of-pocket expenses incurred in connection with the performance of its services under the MSA.
Arm's-Length Determination. The Company has disclosed that the Management Fee was established by negotiation between the Company's independent directors (Messrs. Howard Chen, Victoria Langford, and Reginald Okonkwo, who together comprised a majority of the Company's board of directors and were not affiliated with Pinnacle Vista) and Pinnacle Management. In connection with such negotiations, the independent directors engaged Clarendon Rowe Advisory Group LLC, an independent third-party advisory firm, to provide market benchmarks for management-services agreements between portfolio companies and their private equity sponsors. Based on its review of the mark