ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, New York 10022
INTERNAL MEMORANDUM
FROM: Leonard Cross, Specialist Partner, Tax
TO: Jennifer Kwon, Responsible Partner, Capital Markets
CC: Brendan Walsh, Lead Associate; Natasha Forbes, Working Associate
DATE: April 25, 2022
RE: Investment Tax Credit and Production Tax Credit Eligibility Analysis — Calloway-Briggs Renewables Inc. Project Portfolio
MATTER NO.: C&H Matter No. 1015-00001
CLASSIFICATION: Attorney-Client Privileged and Confidential — Attorney Work Product
This memorandum is protected by the attorney-client privilege and constitutes attorney work product. It has been prepared in connection with the provision of legal advice to Calderwood & Harkness LLP's client, Calloway-Briggs Renewables Inc. ("CBR"), and in anticipation of litigation. This memorandum is not intended for distribution beyond the individuals identified above without the prior written consent of the undersigned. Unauthorized disclosure may result in a waiver of applicable privileges.
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I. Executive Summary
This memorandum sets forth our analysis of the eligibility of Calloway-Briggs Renewables Inc. ("CBR" or the "Company") and its project-level subsidiaries for federal Investment Tax Credits ("ITC") under Section 48 of the Internal Revenue Code of 1986, as amended (the "Code"), and Production Tax Credits ("PTC") under Section 45 of the Code, in connection with the Company's proposed initial public offering (the "IPO") of approximately $600,000,000 of shares of common stock on the New York Stock Exchange (proposed ticker symbol: CBRI).
The scope of this memorandum covers the entirety of CBR's project portfolio, with detailed project-by-project analysis of nine key projects: five operating projects, two projects currently under construction, and two selected development-stage projects. In addition, this memorandum provides general observations regarding the broader 6.2 GW development pipeline. The nine key projects analyzed herein are as follows:
Operating Projects:
1. Solaris West — 450 MW Solar PV (Pecos County, TX; COD Q3 2020)
2. Red Mesa Wind — 380 MW Onshore Wind (Custer County, OK; COD Q1 2019)
3. Painted Rock Solar — 320 MW Solar PV (Maricopa County, AZ; COD Q4 2020)
4. Pronghorn Wind — 510 MW Onshore Wind (Nolan County, TX; COD Q2 2021)
5. Brazos Storage — 200 MW / 800 MWh Battery Energy Storage System (Fort Bend County, TX; COD Q4 2021)
Under-Construction Projects:
6. Mesquite Wind — 420 MW Onshore Wind (Oldham County, TX; Expected COD Q3 2022)
7. Cimarron Solar — 350 MW Solar PV (Doña Ana County, NM; Expected COD Q1 2023)
Development Pipeline Projects (Selected):
8. Silverleaf Wind — 600 MW Onshore Wind (Irion County, TX; Expected COD Q4 2024)
9. Copper Basin Solar + Storage — 750 MW Solar PV + 300 MW / 1,200 MWh BESS (Riverside County, CA; Expected COD Q2 2025)
Key Conclusions. Based on our review, which is subject to the qualifications and limitations described herein, we have reached the following principal conclusions:
• Operating Portfolio: CBR's five operating projects have properly claimed and preserved their respective ITC and PTC benefits. Each project satisfied the applicable begin-construction safe harbor requirements, was placed in service within the applicable Continuity Safe Harbor period, and has maintained compliance with all ongoing credit eligibility conditions. We have identified no issues that would jeopardize the credits claimed by these projects.
• Under-Construction Projects: Both Mesquite Wind and Cimarron Solar have satisfied the begin-construction safe harbor requirements under IRS guidance. Their expected commercial operations dates fall well within the applicable Continuity Safe Harbor windows. Assuming these projects are placed in service on their expected timelines, we do not anticipate any issues with PTC or ITC eligibility, respectively.
• Development Pipeline Projects: Silverleaf Wind and Copper Basin Solar + Storage present incrementally higher risk profiles. Begin-construction documentation is under review, and continuity-of-construction requirements must be carefully managed. Copper Basin presents the highest risk profile among the analyzed projects due to its earlier stage of development, longer projected development timeline, the complexity of the California permitting environment in Riverside County, and legislative uncertainty surrounding standalone ITC eligibility for the battery energy storage system component.
• ITC Recapture and the IPO: The proposed IPO does not constitute a disposition of ITC-eligible property or otherwise trigger ITC recapture under Section 50(a) of the Code. The IPO involves the issuance and sale of shares at the parent-company level; the project-level special purpose vehicles that own the ITC-eligible property are not party to the offering and will not experience any change in ownership, use, or disposition of the underlying property.
• Legislative Uncertainty: As of the date of this memorandum, Congress is actively considering legislation (successor proposals to the Build Back Better Act) that would significantly modify the ITC and PTC frameworks. The outcome and timing of this legislation are uncertain. If enacted, such legislation could beneficially affect CBR's development pipeline, including by confirming standalone ITC eligibility for energy storage. If such legislation fails to advance or if credits are reduced, development pipeline economics could be adversely affected.
Coordination. This memorandum has been prepared in coordination with the following advisors and workstreams:
• Kessler McBride & Associates LLP (Alan Kessler, Managing Partner; Linda McBride, Partner — Tax Structures): Kessler McBride is advising CBR on partnership-flip tax-equity structures and the Hypothetical Liquidation at Book Value ("HLBV") accounting methodology. Separate memoranda prepared by Kessler McBride and by the undersigned address partnership-flip compliance and HLBV methodology, respectively. The ITC analysis in this memorandum should be read in conjunction with those separate workstreams.
• Ashford & Pemberton LLP (Gregory Sondheim, Lead Engagement Partner): Ashford & Pemberton is serving as CBR's independent auditor and is engaged on matters relating to the financial statement treatment and S-1 registration statement disclosures of tax credits and tax-equity partnerships. Our analysis herein is intended, in part, to inform Ashford & Pemberton's audit procedures and disclosure recommendations.
S-1 Disclosure Recommendations. This memorandum identifies specific risk factor disclosures and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") disclosures that should be included in CBR's Form S-1 registration statement to address ITC and PTC matters. These recommendations are set forth in detail in Section VIII below.
II. Overview of Applicable Federal Tax Credit Framework
This Section provides an overview of the federal tax credit framework applicable to CBR's project portfolio. The analysis that follows is based on the Code, Treasury Regulations, and published IRS guidance as in effect on the date of this memorandum. As discussed in Section VII, pending legislation could significantly modify this framework.
A. Investment Tax Credit (ITC) — Section 48 of the Internal Revenue Code
The ITC is a one-time federal tax credit available to taxpayers that place certain energy property in service. The ITC is codified in Sections 46, 48, and 50 of the Code. For purposes of CBR's portfolio, the relevant categories of energy property are solar energy property (as defined in Section 48(a)(3)(A)(i)) and energy storage property.
1. Credit Rate and Phase-Down Schedule
The ITC credit rate is expressed as a percentage of the basis of the eligible energy property. For solar energy property, the credit rate has historically been 30% of the eligible basis. Under current law, the credit rate is subject to a phase-down schedule that is tied to the date on which construction of the facility "begins" (within the meaning of IRS guidance discussed in Section IV below):
It is important to note that the relevant date for determining the applicable credit rate is the date on which construction "begins" within the meaning of IRS Notice 2013-29 and subsequent guidance, not the date on which the facility is placed in service. This distinction is significant for projects with long development timelines, as a project that begins construction in a year qualifying for the 30% rate may be placed in service several years later and still claim the 30% rate, provided the continuity-of-construction requirements described in Section IV.C below are satisfied.
For CBR's operating solar and storage projects — Solaris West, Painted Rock Solar, and Brazos Storage — construction began prior to the applicable deadline for the 30% credit rate. As a result, each of these projects claimed the ITC at the 30% rate. For Cimarron Solar, which is currently under construction, begin-construction was established prior to the applicable phase-down deadline, and the project is expected to claim the ITC at the 30% rate.
2. Placed-in-Service Requirement
To claim the ITC, the energy property must be "placed in service" within the meaning of Treasury Regulation Section 1.46-3(d). Property is considered placed in service in the earlier of (a) the taxable year in which depreciation with respect to such property begins under the taxpayer's depreciation practice, or (b) the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function. For renewable energy projects, commercial operations typically establishes the placed-in-service date.
The placed-in-service date interacts with the begin-construction date in two important respects. First, the credit rate is determined by the begin-construction date, not the placed-in-service date. Second, the project must satisfy continuity-of-construction requirements between the begin-construction date and the placed-in-service date, as discussed in Section IV.C below. A project that begins construction in a qualifying year but is not placed in service within the applicable Continuity Safe Harbor period must demonstrate continuous construction or continuous efforts under a facts-and-circumstances test to preserve its credit eligibility.
3. Recapture Rules — Section 50(a)
Section 50(a)(1) of the Code provides that if, during any taxable year, investment credit property is disposed of or otherwise ceases to be investment credit property with respect to the taxpayer before the close of the "recapture period," the taxpayer's tax for such taxable year is increased by an amount equal to the "recapture percentage" of the original credit.
The recapture period is the five-year period beginning on the date the property is placed in service. The recapture percentage decreases ratably over this period:
For CBR, the recapture rules are relevant to the proposed IPO because three of CBR's operating projects — Solaris West, Painted Rock Solar, and Brazos Storage — are within the five-year recapture period as of the anticipated mid-2022 IPO date. As discussed in detail in Section V below, we have concluded that the IPO does not constitute a disposition of the ITC-eligible property or otherwise trigger recapture. The IPO involves the issuance and sale of shares at the parent-company (CBR) level, and the project-level special purpose vehicles that own the energy property will not experience a disposition, a change in ownership of the property, or a cessation of ITC-eligible use as a result of the offering.
In addition, the relationship between the recapture rules and CBR's tax-equity partnership-flip structure for Solaris West merits specific attention. As described more fully in the separate Tax-Equity Structure Memorandum, CBR's Solaris West project is held through Solaris West Solar LLC, which is party to a partnership-flip tax-equity arrangement with Veltara Basin Financial LLC ("Veltara Basin Financial"), which invested approximately $280,000,000 in the project. The partnership flip is expected to occur in 2028, which is after the expiration of the five-year recapture period for the Solaris West property (recapture period expires approximately Q3 2025). Accordingly, the partnership flip itself will not trigger recapture, and the IPO does not alter this analysis. This conclusion is discussed further in the Tax-Equity Structure Memorandum prepared separately by the undersigned.
4. Direct-Pay and Transferability Provisions Under Pending Legislation
As of the date of this memorandum, Congress is considering legislation that would introduce two new mechanisms for monetizing the ITC (and PTC): (a) a direct-pay election, which would allow certain entities — including tax-exempt organizations, governmental entities, and potentially all taxpayers for a limited period — to claim the ITC as a direct payment from the U.S. Treasury rather than as a reduction in tax liability; and (b) a transferability provision, which would permit taxpayers to sell all or a portion of their ITC to unrelated third parties for cash consideration. These provisions, if enacted, could significantly alter the tax-equity financing landscape by reducing or eliminating the need for partnership-flip and sale-leaseback structures to monetize tax credits. The status of this legislation and its potential impact on CBR are discussed in Section VII below.
B. Production Tax Credit (PTC) — Section 45 of the Internal Revenue Code
The PTC is a per-kilowatt-hour federal tax credit available to taxpayers that produce electricity from qualified energy resources at qualified facilities during the first ten years after the facility is placed in service. The PTC is codified in Section 45 of the Code.
1. Eligible Facilities and Credit Rate
Wind energy facilities are the most significant category of PTC-eligible facilities for purposes of CBR's portfolio. Under Section 45(a), the PTC is allowed for electricity produced by the taxpayer from qualified energy resources and sold by the taxpayer to an unrelated person during the taxable year. The credit is calculated on a per-kilowatt-hour basis at an inflation-adjusted rate. For calendar year 2022, the PTC rate for wind energy is approximately $0.0275 per kilowatt-hour (subject to annual inflation adjustment by the Internal Revenue Service). The credit is available for electricity produced during the ten-year period beginning on the date the facility is placed in service (the "PTC Period").
Unlike the ITC, which provides a one-time upfront credit based on the cost basis of the energy property, the PTC provides a stream of annual credits over the ten-year PTC Period that is a function of actual electricity production. The PTC therefore introduces a performance element: a facility that generates more electricity will generate more PTC. Conversely, operational downtime, curtailment events, and other factors that reduce electricity generation will reduce PTC.
2. Begin-Construction Requirements
The begin-construction requirements for PTC-eligible facilities mirror those for ITC-eligible facilities. A taxpayer may establish the beginning of construction under either the Physical Work Test or the Five Percent Safe Harbor, as described in IRS Notice 2013-29 and subsequent guidance. The continuity-of-construction requirements also apply. These safe harbors are discussed in detail in Section IV below.
3. Phase-Down Schedule for Wind
Under current law, the PTC for wind is subject to a phase-down schedule tied to the begin-construction year. For facilities that began construction before January 1, 2022, the PTC is available at 100% of the statutory rate. The PTC for wind facilities is currently scheduled to expire for facilities that begin construction after December 31, 2021 (absent new legislation). CBR's wind projects — Red Mesa Wind, Pronghorn Wind, Mesquite Wind, and Silverleaf Wind — all began construction (or are expected to have begun construction) prior to this deadline.
4. Recapture. The PTC is not subject to the same recapture rules as the ITC. There is no five-year recapture period under Section 50(a) for PTC. However, the PTC may be reduced or eliminated if the facility ceases to produce and sell electricity from qualified energy resources, or if the facility is otherwise no longer a qualified facility. The placed-in-service requirements must be maintained throughout the ten-year PTC Period.
C. ITC vs. PTC Election Considerations
For certain types of qualified facilities, taxpayers may elect to claim either the ITC or the PTC. Under Section 48(a)(5), a taxpayer that owns a qualified facility described in Section 45 may elect to claim the ITC in lieu of the PTC with respect to such facility. This election, once made, is irrevocable.
1. Wind Projects
Wind projects have historically elected the PTC rather than the ITC. The PTC's ten-year stream of inflation-adjusted credits typically provides greater total value than the ITC's one-time upfront credit for wind projects, given the relatively lower capital cost per megawatt of wind compared to solar and the robust capacity factors achieved by modern wind turbines. However, in certain circumstances — for example, where a wind project has a particularly high capital cost per megawatt or where the developer's tax appetite favors an upfront credit — a wind project may elect the ITC. CBR's wind projects (Red Mesa Wind, Pronghorn Wind, Mesquite Wind, and Silverleaf Wind) have elected or are expected to elect the PTC, consistent with prevailing industry practice.
2. Solar Projects
Solar projects are not eligible for the PTC under current law and therefore claim the ITC by default. Solar energy property is described in Section 48(a)(3)(A)(i) as property that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat. CBR's solar projects (Solaris West, Painted Rock Solar, and Cimarron Solar) have claimed or are expected to claim the ITC.
3. Battery Energy Storage
The treatment of battery energy storage systems ("BESS") under the existing ITC framework warrants specific discussion. Under the Code as in effect on the date of this memorandum, standalone battery energy storage systems are not expressly enumerated as a category of "energy property" eligible for the ITC under Section 48(a)(3). However, energy storage technology that is installed in connection with and is functionally interdependent with a qualifying energy facility (such as a solar facility) may qualify for the ITC as part of the integrated energy property.
CBR's Brazos Storage project (200 MW / 800 MWh, Fort Bend County, TX; COD Q4 2021) claimed the ITC at the 30% rate. Based on our review of the project's technical configuration and the applicable legal authority, the Brazos Storage ITC claim was made on the basis that the energy storage technology was eligible under the applicable rules at the time the property was placed in service, whether as part of an integrated solar-plus-storage system or under a standalone energy storage eligibility analysis. The analysis of this claim is fact-intensive and should be monitored in light of evolving IRS guidance and pending legislation.
As discussed in Section VII below, pending legislation (successor proposals to the Build Back Better Act) would expressly provide standalone ITC eligibility for energy storage technology. If enacted, such legislation would confirm and strengthen the ITC eligibility of CBR's existing Brazos Storage project and would be significant for the BESS component of the Copper Basin Solar + Storage project and other storage projects in CBR's development pipeline.
4. Development Pipeline Election Strategy
For CBR's development-stage projects, the ITC vs. PTC election will be driven by project-specific economics, technology type, and the applicable legislative framework at the time of the election:
• Silverleaf Wind (600 MW, Irion County, TX; Expected COD Q4 2024): CBR expects to elect the PTC for this project, consistent with standard industry practice for large-scale onshore wind projects. The ten-year PTC stream is expected to provide greater total value than the ITC given the project's anticipated capacity factor and capital cost structure.
• Copper Basin Solar + Storage (750 MW Solar PV + 300 MW / 1,200 MWh BESS, Riverside County, CA; Expected COD Q2 2025): CBR expects to claim the ITC for both the solar and storage components. The ITC is the sole available credit for the solar component. For the BESS component, ITC eligibility may depend on the enactment of standalone storage ITC legislation (see Section VII). CBR's election strategy for this project should be finalized closer to the placed-in-service date, at which time the applicable legislative framework will be known.
III. Project-by-Project ITC/PTC Eligibility Analysis
This Section provides a detailed project-by-project analysis of ITC and PTC eligibility for each of the nine key projects in CBR's portfolio. The analysis is organized by project status: operating projects (Section III.A), under-construction projects (Section III.B), development pipeline projects (Section III.C), and general observations regarding the broader 6.2 GW development pipeline (Section III.D).
A. Operating Projects
1. Solaris West — Solar PV (450 MW, Pecos County, TX; COD Q3 2020)
Credit Type: ITC under Section 48 of the Code.
Credit Rate Claimed: 30%.
Begin-Construction Method: Physical Work Test. CBR established the beginning of construction for Solaris West through physical work of a significant nature at the project site. Specifically, site preparation activities and foundation work for the solar array commenced prior to the applicable deadline for the 30% ITC rate. These activities constituted physical work of a significant nature within the meaning of IRS Notice 2013-29, Section 4, as they involved excavation, grading, and the installation of support structures and foundations — activities that are integral to the permanent structure of the facility and are not merely preliminary in nature. We have reviewed the contemporaneous documentation provided by CBR management, including construction contracts, work orders, site inspection logs, and contractor certifications, and we are satisfied that the Physical Work Test was properly established.
Placed-in-Service Date: Q3 2020. The Solaris West facility achieved commercial operations in the third quarter of 2020, at which time the solar energy property was placed in a condition or state of readiness and availability for its specifically assigned function of generating electricity. The placed-in-service date has been confirmed through review of interconnection agreements, commissioning certificates, and CBR's internal records.
Recapture Status: The Solaris West property is within the five-year ITC recapture period as of the proposed IPO date (mid-2022). As of mid-2022, the property has been in service for approximately two years, resulting in a potential recapture exposure of 60% of the original ITC if a recapture event were to occur. However, as discussed in detail in Section V below, the IPO does not constitute a recapture event. The IPO involves the issuance and sale of shares at the parent-company (CBR) level and does not result in a disposition of the Solaris West energy property, a change in ownership of the property at the project-level SPV (Solaris West Solar LLC), or a cessation of ITC-eligible use.
Tax-Equity Structure: Solaris West is held through Solaris West Solar LLC, a Delaware limited liability company that is party to a partnership-flip tax-equity arrangement with Veltara Basin Financial LLC. Veltara Basin Financial invested approximately $280,000,000 in the project as tax-equity investor. Under the partnership-flip structure, the ITC was allocated to Veltara Basin Financial as the tax-equity investor in accordance with the partnership agreement and applicable Treasury Regulations. The HLBV accounting methodology is applied to allocate income and loss between CBR and Veltara Basin Financial. The partnership flip is expected to occur in 2028, after the expiration of the five-year recapture period for the Solaris West property (recapture period expires approximately Q3 2025). Separate memoranda prepared by the undersigned and by Kessler McBride & Associates LLP address the partnership-flip compliance analysis, ITC allocation, recapture risk in the partnership-flip context, and HLBV methodology.
Status: Compliant. No issues identified with respect to ITC eligibility, credit rate, begin-construction compliance, or recapture risk in connection with the proposed IPO.
2. Red Mesa Wind — Onshore Wind (380 MW, Custer County, OK; COD Q1 2019)
Credit Type: PTC under Section 45 of the Code.
10-Year PTC Period: Q1 2019 through Q1 2029. Red Mesa Wind is currently generating and claiming PTCs. The facility has been operational for approximately three years as of the date of this memorandum, with approximately seven years remaining in the PTC Period.
Begin-Construction Method: Five Percent Safe Harbor. CBR established the beginning of construction for Red Mesa Wind by incurring costs equal to at least five percent (5%) of the total cost of the facility (excluding land and certain preliminary activities) prior to the applicable deadline. These costs were incurred through the procurement of wind turbine generator sets, towers, and related components. CBR's records reflect that binding purchase orders were executed, non-refundable deposits were paid, and delivery of certain components was taken, all prior to the applicable deadline. We have reviewed the contemporaneous documentation provided by CBR, including purchase agreements, invoices, delivery receipts, wire transfer confirmations, and internal cost accounting records, and we are satisfied that the Five Percent Safe Harbor was properly established.
Continuous Construction / Continuity of Construction: Following the establishment of begin-construction, CBR maintained continuous efforts to advance the Red Mesa Wind project toward completion. The project was placed in service in Q1 2019, well within the applicable Continuity Safe Harbor window from the begin-construction date. No continuity issues have been identified.
Placed-in-Service Date: Q1 2019. Commercial operations were achieved in the first quarter of 2019.
Recapture: The PTC is not subject to the Section 50(a) recapture rules that apply to the ITC. Accordingly, there is no recapture risk associated with the proposed IPO for Red Mesa Wind. The PTC will continue to be available for electricity produced and sold by the facility during the remaining years of the ten-year PTC Period, subject to the facility's continued qualification as a qualified facility under Section 45.
Status: Compliant. PTC is being generated and claimed in accordance with applicable law. No issues identified.
3. Painted Rock Solar — Solar PV (320 MW, Maricopa County, AZ; COD Q4 2020)
Credit Type: ITC under Section 48 of the Code.
Credit Rate Claimed: 30%.
Begin-Construction Method: Five Percent Safe Harbor. CBR established the beginning of construction for Painted Rock Solar by incurring qualifying costs exceeding five percent (5%) of the total cost of the facility through the procurement of solar photovoltaic modules and inverters. Binding purchase orders were executed and non-refundable payments were made prior to the applicable deadline for the 30% ITC rate. We have reviewed the procurement contracts, invoices, payment records, and delivery documentation, and we are satisfied that the Five Percent Safe Harbor was properly established.
Placed-in-Service Date: Q4 2020. The Painted Rock Solar facility achieved commercial operations in the fourth quarter of 2020. The placed-in-service date has been confirmed through review of interconnection agreements, commissioning certificates, and utility acceptance documentation.
Recapture Status: The Painted Rock Solar property is within the five-year ITC recapture period as of the proposed IPO date. As of mid-2022, the property has been in service for approximately 1.5 years, resulting in a potential recapture exposure of 80% of the original ITC if a recapture event were to occur. As discussed in Section V, the IPO does not constitute a recapture event. The project-level SPV, Painted Rock Solar LLC, is not party to the offering and will not experience a disposition of the energy property or a change in ITC-eligible use.
Status: Compliant. No issues identified with respect to ITC eligibility, credit rate, begin-construction compliance, or recapture risk in connection with the proposed IPO.
4. Pronghorn Wind — Onshore Wind (510 MW, Nolan County, TX; COD Q2 2021)
Credit Type: PTC under Section 45 of the Code.
10-Year PTC Period: Q2 2021 through Q2 2031. Pronghorn Wind is currently generating and claiming PTCs. The facility has been operational for approximately one year as of the date of this memorandum, with approximately nine years remaining in the PTC Period.
Begin-Construction Method: Physical Work Test. CBR established the beginning of construction for Pronghorn Wind through physical work of a significant nature at the project site. Specifically, construction of wind turbine generator foundations commenced prior to the applicable deadline. Foundation work — including the excavation of turbine foundation sites, the pouring of concrete for foundation bases, and the installation of foundation rebar and anchor bolt assemblies — constitutes physical work of a significant nature within the meaning of IRS Notice 2013-29. We have reviewed construction contracts, daily site inspection reports, geotechnical inspection records, concrete pour tickets, and contractor certifications, and we are satisfied that the Physical Work Test was properly established.
Continuity of Construction: The Pronghorn Wind project was placed in service in Q2 2021. The period between the begin-construction date and the placed-in-service date falls within the applicable Continuity Safe Harbor window. No continuity issues have been identified. CBR maintained continuous construction activities and continuous efforts to advance the project toward completion throughout the development and construction period.
Placed-in-Service Date: Q2 2021. Commercial operations were achieved in the second quarter of 2021.
Recapture: As with Red Mesa Wind, the PTC is not subject to Section 50(a) recapture rules. No recapture risk exists in connection with the proposed IPO.
Status: Compliant. PTC is being generated and claimed in accordance with applicable law. No issues identified.
5. Brazos Storage — Battery Energy Storage System (200 MW / 800 MWh, Fort Bend County, TX; COD Q4 2021)
Credit Type: ITC under Section 48 of the Code.
Credit Rate Claimed: 30%.
Begin-Construction Method: Five Percent Safe Harbor. CBR established the beginning of construction for the Brazos Storage project by incurring qualifying costs exceeding five percent (5%) of the total cost of the facility through the procurement of lithium-ion battery modules and power conversion systems ("PCS"). Binding purchase agreements were executed with the battery manufacturer and PCS supplier, and qualifying payments were made, prior to the applicable deadline. We have reviewed the procurement contracts, purchase orders, invoices, payment records, and delivery schedules, and we are satisfied that the Five Percent Safe Harbor was properly established.
Placed-in-Service Date: Q4 2021. The Brazos Storage facility achieved commercial operations in the fourth quarter of 2021. The placed-in-service date has been confirmed through review of interconnection agreements, commissioning test results, capacity verification documentation, and CBR's internal records.
Recapture Status: The Brazos Storage property is within the five-year ITC recapture period as of the proposed IPO date. As of mid-2022, the property has been in service for approximately 0.5 years, resulting in a potential recapture exposure of 100% of the original ITC if a recapture event were to occur. This represents the maximum recapture exposure among CBR's operating ITC-eligible projects. However, as discussed in Section V, the IPO does not constitute a recapture event, and no recapture exposure arises from the offering.
Energy Storage ITC Eligibility Note: As noted in Section II.C.3 above, the ITC eligibility of standalone battery energy storage systems under current law involves certain interpretive questions. CBR's claim rests on the applicable legal framework at the time the Brazos Storage property was placed in service. We note that pending legislation (as of April 2022) would expressly provide standalone ITC eligibility for energy storage technology, which, if enacted, would confirm and strengthen the basis for CBR's existing claim. We recommend that the S-1 registration statement include a risk factor disclosure noting the interpretive questions surrounding energy storage ITC eligibility and the potential impact of legislative developments.
Status: Compliant based on existing legal analysis. No issues identified that would jeopardize the ITC claim as of the date of this memorandum. Legislative developments should be monitored, and the Brazos Storage ITC claim should be reassessed if there are adverse developments in IRS guidance or case law.
B. Under-Construction Projects
6. Mesquite Wind — Onshore Wind (420 MW, Oldham County, TX; Expected COD Q3 2022)
Credit Type: PTC under Section 45 of the Code.
Begin-Construction Method: Five Percent Safe Harbor. CBR has established the beginning of construction for the Mesquite Wind project by incurring qualifying costs exceeding five percent (5%) of the total cost of the facility. These costs were incurred through the procurement of wind turbine generator sets and related components, as well as site preparation expenditures. The specific begin-construction date should be confirmed with CBR management and Kessler McBride & Associates LLP based on contemporaneous documentation, which we understand is being assembled in response to our due diligence request list. Based on our preliminary review, we are satisfied that the Five Percent Safe Harbor has been properly established.
Continuity of Construction: The expected COD of Q3 2022 falls well within the Continuity Safe Harbor window from the begin-construction date. Even under the standard four-year Continuity Safe Harbor (and more so under the extended six-year safe harbor applicable to projects that began construction in certain years due to COVID-19 relief, as described in Section IV.C), Mesquite Wind is expected to be placed in service with substantial time remaining in the safe harbor window. We see no continuity risk for this project.
Project Financing: The Mesquite Wind project is being financed with a $165,000,000 construction-to-term credit facility provided by Prairie Commercial Bank, N.A. (Brent Hollowell, SVP, Project Finance). The facility is structured as a construction loan that converts to a term loan upon satisfaction of conversion conditions, with a conversion date of December 2024. The credit agreement may contain representations and covenants relating to the project's tax credit eligibility, and the lender consent analysis described in Section IX should confirm that no covenant issues arise from the IPO.
PTC Period: The ten-year PTC Period for Mesquite Wind will commence upon the project's commercial operations date. Assuming COD in Q3 2022, the PTC Period will run from approximately Q3 2022 through Q3 2032.
Status: On track. Begin-construction safe harbor satisfied. No issues identified. Project is expected to be placed in service within the Continuity Safe Harbor window without difficulty.
7. Cimarron Solar — Solar PV (350 MW, Doña Ana County, NM; Expected COD Q1 2023)
Credit Type: ITC under Section 48 of the Code.
Credit Rate Expected: 30%. Based on our understanding that begin-construction was established prior to the applicable phase-down deadline for the 30% ITC rate, Cimarron Solar is expected to claim the ITC at the full 30% rate.
Begin-Construction Method: Five Percent Safe Harbor. CBR has established the beginning of construction for the Cimarron Solar project by procuring solar photovoltaic panels, racking systems, and inverters in amounts exceeding five percent (5%) of the total project cost. The specific begin-construction date and qualifying expenditure amounts should be confirmed with CBR management. Based on preliminary information provided, we are satisfied that the Five Percent Safe Harbor has been or will be properly established, subject to confirmation of final documentation.
Continuity of Construction: The expected COD of Q1 2023 falls within the Continuity Safe Harbor window from the begin-construction date. No continuity risk has been identified.
Project Financing: The Cimarron Solar project is being financed with a $143,000,000 construction-to-term credit facility provided by Prairie Commercial Bank, N.A., with a conversion date of March 2025.
Use of IPO Proceeds: We understand from CBR management and the capital markets team that approximately $100,000,000 of the primary proceeds of the IPO are earmarked for the construction of the Cimarron Solar project. The S-1 registration statement's "Use of Proceeds" section should describe this allocation, and the ITC eligibility of the project is therefore directly relevant to investors' assessment of the use of proceeds.
Status: On track. Begin-construction safe harbor satisfied. No issues identified. ITC at the 30% rate is expected to be available upon placed-in-service.
C. Development Pipeline Projects (Selected)
8. Silverleaf Wind — Onshore Wind (600 MW, Irion County, TX; Expected COD Q4 2024)
Credit Type: PTC under Section 45 of the Code (expected election).
Begin-Construction Status: CBR management represents that qualifying activities have commenced to establish the beginning of construction under either the Physical Work Test or the Five Percent Safe Harbor. The specific method and begin-construction date are under review. We have requested that CBR management provide all contemporaneous documentation supporting the begin-construction claim, including purchase orders, construction contracts, site inspection reports, invoices, and payment records. This documentation is being assembled and has not yet been fully reviewed by our team.
Continuity of Construction: The expected COD of Q4 2024 must fall within the applicable Continuity Safe Harbor window measured from the begin-construction date. The analysis of the continuity requirement depends on the begin-construction date, which has not yet been confirmed. By way of illustration:
• If begin-construction was established in 2020, the standard four-year Continuity Safe Harbor extends through December 31, 2024. The expected COD of Q4 2024 would be within this window, though with limited margin. Moreover, the extended six-year COVID-19 relief safe harbor (applicable to projects beginning construction in 2016 through 2020 under IRS Notice 2021-05) would extend the safe harbor through December 31, 2026, providing substantial additional runway.
• If begin-construction was established in 2021, the standard four-year Continuity Safe Harbor extends through December 31, 2025. The expected COD of Q4 2024 would be well within this window.
On the basis of the foregoing, the continuity requirement for Silverleaf Wind appears manageable, but its satisfaction requires confirmation of the begin-construction date. We note that construction delays — whether attributable to supply chain disruptions, permitting delays, labor shortages, interconnection queue delays, or other factors — could push the actual COD beyond the expected Q4 2024 timeline. If the actual COD were to fall outside the applicable Continuity Safe Harbor window, CBR would need to demonstrate continuous construction or continuous efforts under the facts-and-circumstances test described in Section IV.D, which is inherently less certain.
S-1 Disclosure Recommendation: We recommend that the S-1 registration statement include a risk factor disclosure specifically addressing the risk that construction delays for development-stage projects could result in a failure to satisfy continuity-of-construction requirements, leading to a loss of or reduction in PTC eligibility.
Status: Preliminary. Documentation is being assembled. Begin-construction date and method require confirmation. Continuity analysis is pending confirmation of the begin-construction date but appears manageable on a preliminary basis. This project should be monitored on an ongoing basis.
9. Copper Basin Solar + Storage — Solar PV + BESS (750 MW + 300 MW / 1,200 MWh, Riverside County, CA; Expected COD Q2 2025)
Credit Type: ITC under Section 48 of the Code for both the solar and battery energy storage components.
Credit Rate Target: 30%. The achievement of the 30% ITC rate depends on the begin-construction date falling within the applicable window for the 30% rate under the phase-down schedule.
Begin-Construction Status: CBR management represents that initial procurement activities have been undertaken to establish the beginning of construction under the Five Percent Safe Harbor. The specific amount and nature of qualifying expenditures, and the date on which the five percent threshold was exceeded, are under review. We have requested full documentation from CBR management, and the Five Percent Safe Harbor analysis is in progress.
Continuity of Construction: The expected COD of Q2 2025 creates a longer development window from the begin-construction date than is the case for CBR's other projects. The continuity requirements must be carefully managed. If begin-construction was established in 2021, the four-year Continuity Safe Harbor would extend through December 31, 2025, and the expected COD of Q2 2025 would fall within this window. If begin-construction was established in 2020, the standard four-year safe harbor extends through December 31, 2024, which would not encompass a Q2 2025 COD; however, the six-year COVID-19 relief safe harbor would extend through December 31, 2026, providing additional coverage.
The continuity analysis for Copper Basin is further complicated by the permitting environment in Riverside County, California. California Environmental Quality Act ("CEQA") review, county land use approvals, U.S. Fish and Wildlife Service consultations, and California Independent System Operator ("CAISO") interconnection studies all present potential sources of delay. CBR management should proactively manage the permitting and interconnection processes to avoid delays that could jeopardize the Continuity Safe Harbor.
Standalone Storage ITC: The ITC eligibility of the 300 MW / 1,200 MWh BESS component of Copper Basin presents a particularly significant question. Under current law (as discussed in Section II.C.3 above), standalone battery energy storage systems are not expressly enumerated as ITC-eligible energy property. The BESS component may qualify for the ITC if it is configured as functionally interdependent with the solar component as part of an integrated solar-plus-storage system. Alternatively, if pending legislation provides standalone ITC eligibility for energy storage (as discussed in Section VII), the BESS component would have a clear statutory basis for the ITC claim. CBR's ITC strategy for the Copper Basin BESS component should be finalized in light of the legislative landscape at the time the project approaches placed-in-service.
Status: Preliminary; higher risk profile. This project presents the highest risk among the nine key projects analyzed in this memorandum. The elevated risk is attributable to the following factors: (a) earlier stage of development relative to other portfolio projects; (b) longer projected development timeline, creating greater exposure to construction delays and continuity-of-construction risk; (c) the complexity and unpredictability of the California permitting environment; and (d) legislative uncertainty regarding standalone ITC eligibility for the BESS component. We recommend that CBR management and Kessler McBride closely monitor this project and maintain detailed contemporaneous documentation of all construction activities and efforts to advance the project toward completion.
D. Broader Development Pipeline (6.2 GW)
Beyond the two selected development pipeline projects discussed above (Silverleaf Wind and Copper Basin Solar + Storage), CBR's broader development pipeline totals approximately 6.2 GW of renewable energy and energy storage projects at various stages of development. These projects span multiple technology types (onshore wind, solar PV, and battery energy storage), multiple jurisdictions, and a range of development stages from early-stage site identification and resource assessment through advanced development with executed interconnection agreements and offtake contracts.
ITC and PTC eligibility for each of these pipeline projects will depend on project-specific factors, including:
• Technology type (which determines whether the ITC or PTC applies, or whether an election between the two is available);
• Begin-construction timing (which determines the applicable credit rate under the phase-down schedule and the commencement of the Continuity Safe Harbor period);
• Continuity of construction (which requires the project to be placed in service within the applicable safe harbor window or to demonstrate continuous construction or efforts); and
• The applicable legislative framework at the time construction commences and the project is placed in service (which may be significantly altered if pending legislation is enacted).
Given the early stage of most projects in the broader development pipeline, it is not possible at this time to conduct the project-specific ITC/PTC eligibility analysis that has been performed for the nine key projects discussed above. However, we recommend that the S-1 registration statement include a general risk factor disclosure regarding the dependency of CBR's development pipeline economics on the continued availability of the ITC and PTC at favorable rates, as well as a discussion of the risks associated with potential legislative changes, construction delays, and permitting challenges that could affect tax credit eligibility for pipeline projects. These recommended disclosures are discussed further in Section VIII below.
IV. Begin-Construction Safe Harbors — Detailed Analysis
The IRS has issued a series of Notices providing guidance on the methods by which a taxpayer may establish the beginning of construction of a facility for purposes of the ITC and PTC. The two methods — the Five Percent Safe Harbor and the Physical Work Test — are alternative tests; a taxpayer need satisfy only one. In addition, the IRS has provided a Continuity Safe Harbor that establishes a bright-line test for satisfying the continuity-of-construction requirement. This Section provides a detailed analysis of each of these safe harbors and their application to CBR's portfolio.
A. Five Percent Safe Harbor
1. Standard. Under IRS Notice 2013-29, as modified by Notice 2013-60, Notice 2014-46, Notice 2016-31, and Notice 2017-04, a taxpayer satisfies the Five Percent Safe Harbor if the taxpayer pays or incurs (within the meaning of Treasury Regulation Section 1.461-1(a)(1) and (2)) five percent (5%) or more of the total cost of the facility before the applicable deadline. For purposes of the five percent calculation, the total cost of the facility includes all costs that are properly included in the depreciable basis of the facility, but excludes the cost of land and certain preliminary activities such as securing financing, obtaining permits, conducting surveys, and performing environmental studies.
Costs that count toward the five percent threshold include expenditures for the procurement of tangible personal property that will be incorporated into the facility (e.g., solar modules, wind turbine generator sets, inverters, battery modules, transformers, and other major equipment), as well as expenditures for physical work of a significant nature. The taxpayer must demonstrate that the amounts were paid or incurred — i.e., that the economic performance requirement of Section 461(h) has been satisfied.
2. Application to CBR Projects
The following CBR projects used or are using the Five Percent Safe Harbor to establish the beginning of construction:
• Solaris West: While the primary method established for Solaris West was the Physical Work Test (as discussed in Section III.A.1), CBR's records also indicate that qualifying procurement expenditures may have independently satisfied the Five Percent Safe Harbor. The Physical Work Test analysis is dispositive, but the existence of parallel Five Percent Safe Harbor support provides additional comfort.
• Red Mesa Wind: Five Percent Safe Harbor established through procurement of wind turbine generator sets and towers. Documentation reviewed and confirmed as discussed in Section III.A.2.
• Painted Rock Solar: Five Percent Safe Harbor established through procurement of solar modules and inverters. Documentation reviewed and confirmed as discussed in Section III.A.3.
• Brazos Storage: Five Percent Safe Harbor established through procurement of battery modules and power conversion systems. Documentation reviewed and confirmed as discussed in Section III.A.5.
• Mesquite Wind: Five Percent Safe Harbor established through procurement of wind turbine generator sets and site preparation expenditures. Begin-construction date to be confirmed with CBR management and Kessler McBride as discussed in Section III.B.6.
• Cimarron Solar: Five Percent Safe Harbor established through procurement of solar panels, racking systems, and inverters. Begin-construction date to be confirmed as discussed in Section III.B.7.
• Copper Basin Solar + Storage: Five Percent Safe Harbor analysis in progress. Initial procurement activities reported by CBR management, but qualifying expenditure amounts and dates require confirmation.
3. Documentation Requirements
Proper documentation of the Five Percent Safe Harbor is essential. For each project relying on this method, CBR should maintain (and be prepared to produce upon audit) the following contemporaneous records:
• Binding purchase orders and procurement contracts for qualifying equipment;
• Invoices from equipment suppliers;
• Wire transfer confirmations or other evidence of payment;
• Delivery receipts and shipping records demonstrating that equipment was paid for or incurred;
• Internal cost accounting records demonstrating that the five percent threshold was exceeded as of the claimed begin-construction date;
• A calculation demonstrating that the qualifying costs exceeded five percent of the total cost of the facility (as determined at the time the costs were incurred, not with the benefit of hindsight based on final project costs).
Recommendation: We recommend that CBR management (specifically, Priya Anand, SVP Finance & Treasurer) coordinate with Kessler McBride & Associates LLP to confirm that contemporaneous documentation is maintained in a centralized and organized manner for all projects, and that a Five Percent Safe Harbor calculation has been prepared and retained for each project using this method. To the extent any gaps in documentation are identified, CBR should take immediate steps to compile and preserve available records.
B. Physical Work Test
1. Standard. Under IRS Notice 2013-29, Section 4, a taxpayer may establish the beginning of construction by commencing physical work of a significant nature. Physical work of a significant nature includes work performed either at the project site or at a factory where components are being manufactured for the project. The test focuses on the nature of the work performed, not the amount or cost of the work.
Work that constitutes physical work of a significant nature includes (by way of example and not limitation):
• Excavation and grading of the project site for turbine or panel foundations;
• Installation of foundations (including pouring of concrete and installation of rebar);
• Installation of roads and access paths necessary for construction;
• Manufacturing of turbine blades, nacelles, or towers at a factory for the specific project;
• Installation of transformers, collection systems, or electrical infrastructure.
2. Excluded Preliminary Activities
Certain preliminary activities do not constitute physical work of a significant nature, even if they are performed at the project site. Excluded activities include:
• Securing financing, permits, and regulatory approvals;
• Performing planning, design, and engineering activities;
• Conducting resource assessments (e.g., wind resource measurements, solar irradiance studies);
• Conducting environmental and archeological studies;