MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TO: Jennifer Kwon, Responsible Partner, Capital Markets, Calderwood & Harkness LLP
FROM: Leonard Cross, Specialist Partner, Tax, Calderwood & Harkness LLP
CC: Brendan Walsh, Lead Associate; Natasha Forbes, Working Associate; Theodore Langston, Billing Partner
DATE: March 28, 2022
RE: Calloway-Briggs Renewables Inc. — Analysis of C-Corp vs. Up-C Structure for Proposed Initial Public Offering
MATTER NO.: 1015-00001
Right-click to update Table of Contents
I. Executive Summary
Calderwood & Harkness LLP has been engaged to represent Calloway-Briggs Renewables Inc. ("CBR" or the "Company") in connection with its proposed initial public offering of approximately $600,000,000 of common stock on the New York Stock Exchange (proposed ticker: CBRI). The purpose of this memorandum is to analyze whether CBR should proceed to IPO as a traditional C-corporation or restructure into an "Up-C" (umbrella partnership–C-corporation) structure, and to set forth our recommendation on the optimal tax structure for the offering.
This analysis was prepared in coordination with Kessler McBride & Associates LLP (Alan Kessler, Managing Partner; Linda McBride, Partner — Tax Structures), CBR's external tax advisor, and takes into account conversations with CBR management, Pinnacle Vista Capital Partners III, LP ("Pinnacle Vista" or "PVCP III"), and the lead underwriter, Hargrove Keating & Co. The memorandum reflects a comprehensive review of the relevant provisions of the Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations, and prevailing market practice for renewables-sector IPOs.
Recommendation: CBR should proceed to IPO as a C-corporation (its current form) rather than converting to an Up-C structure. This recommendation is driven by four primary considerations:
(a) CBR's existing corporate structure as a Delaware C-corporation holding its operating subsidiaries through CBR Holdings LLC and Calloway-Briggs Operating Company LLC, which obviates any need for restructuring and permits an efficient path to a public offering without entity-level reorganization;
(b) the substantial complexity and cost of restructuring into an Up-C, including estimated incremental legal, tax advisory, and accounting costs of $1.5 million to $3.0 million, and an estimated timeline delay of four to six weeks that would jeopardize the current target for a confidential submission of the draft registration statement;
(c) Pinnacle Vista Capital Partners III, LP's expected exit horizon — PVCP III is a 2016-vintage fund with a typical five-to-seven-year exit timeline, and its investment thesis contemplates a relatively near-term to medium-term monetization of its CBR position, which is best facilitated by a clean C-corp structure that permits straightforward public-market sales without an exchange mechanism; and
(d) the conclusion that a tax receivable agreement ("TRA") is unnecessary and inapplicable in a C-corp structure, as no basis step-up inures to the benefit of the issuer when pre-IPO holders sell C-corp shares in the public market.
The analysis also addresses the interplay between the proposed IPO structure and CBR's existing tax-equity partnership involving Solaris West Solar LLC and Veltara Basin Financial LLC, including the treatment of Investment Tax Credits ("ITCs") and Production Tax Credits ("PTCs") under the applicable framework, and confirms that a C-corp structure preserves the integrity of the existing tax-equity arrangements without introducing unnecessary complexity or consent-related risks.
II. Background and Current Corporate Structure
A. Overview of CBR
Calloway-Briggs Renewables Inc. is a Delaware corporation organized as a C-corporation for federal income tax purposes, with Employer Identification Number 83-4027615. The Company is headquartered at 4200 Ridgeline Parkway, Suite 1100, Austin, Texas 78746. CBR's registered agent in Delaware is Capitol Statutory Services, Inc., located at 1209 Orange Street, Wilmington, Delaware 19801.
The Company was founded in 2014 by Garrett Calloway (Co-Founder, Chairman & Chief Executive Officer) and Elaine Briggs (Co-Founder & President, Development). Since its founding, CBR has grown into one of the leading independent power producers in the southwestern United States, with a focus on utility-scale solar photovoltaic generation, onshore wind energy, and battery energy storage systems.
As of December 31, 2021, CBR maintains an operating portfolio of approximately 3.8 gigawatts ("GW") across 22 projects located in Texas, New Mexico, Arizona, California, and Oklahoma. The Company has an additional 1.4 GW of capacity currently under construction and a development pipeline of approximately 6.2 GW, reflecting significant growth potential over the next three to five years.
The Company's financial performance for fiscal year 2021 is summarized as follows:
• Revenue: $487.3 million
• Adjusted EBITDA: $218.6 million
• Net Income: $41.7 million
• Total Assets (as of December 31, 2021): $3.94 billion
• Total Debt: $1.71 billion
• Total Employees: approximately 1,240
These figures are drawn from CBR's audited financial statements for the fiscal year ended December 31, 2021, as prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and audited by Ashford & Pemberton LLP.
B. Current Ownership
The current capitalization of CBR reflects the following approximate ownership percentages on a fully diluted basis (taking into account all outstanding common stock, options, restricted stock units, and other equity-linked instruments on a post-conversion and reclassification basis):
• Pinnacle Vista Capital Partners III, LP ("PVCP III"): Approximately 62% of fully diluted pre-IPO common stock. PVCP III is a 2016-vintage private equity fund with a total fund size of $4.8 billion. Pinnacle Vista made an initial equity investment of $385 million in CBR in 2017 and a follow-on equity investment of $120 million in 2019, for total invested capital of $505 million. PVCP III is managed by Pinnacle Vista Capital Management LLC, a Delaware limited liability company with offices in New York, New York and Dallas, Texas.
• Co-Founders and Management: Approximately 24% of fully diluted pre-IPO common stock, held primarily by Garrett Calloway and Elaine Briggs, with the remainder allocated among other members of the senior management team pursuant to equity incentive plans and direct stock purchases.
• Earlier-Stage Investors and Employees: Approximately 14% of fully diluted pre-IPO common stock, including shares held by earlier institutional investors, angel investors, and current and former employees who received equity compensation.
As of the date of this memorandum, total pre-IPO shares outstanding (on a fully diluted basis, post-conversion and reclassification) are 100,000,000 shares of common stock, par value $0.001 per share.
C. Current Entity Structure
The current entity structure of CBR is as follows. We describe the structure here in narrative form; a diagram is included in Appendix A for reference.
Calloway-Briggs Renewables Inc. (Delaware C-corporation) is the top-level entity and the proposed issuer in the IPO. It wholly owns the following subsidiary:
CBR Holdings LLC (Delaware limited liability company), an intermediate holding company that is treated as a disregarded entity for federal income tax purposes. CBR Holdings LLC, in turn, wholly owns:
Calloway-Briggs Operating Company LLC ("CB Operating") (Texas limited liability company), the principal operating entity of the CBR group, which is also treated as a disregarded entity for federal income tax purposes. CB Operating directly or indirectly owns the following project-level special purpose vehicles:
• Solaris West Solar LLC (Texas) — 450 MW solar photovoltaic project, Pecos County, Texas
• Red Mesa Wind Energy LLC (Oklahoma) — onshore wind project
• Painted Rock Solar LLC (Arizona) — solar photovoltaic project
• Pronghorn Wind LLC (Texas) — onshore wind project
• Brazos Energy Storage LLC (Texas) — battery energy storage project
• Mesquite Wind Holdings LLC (Texas) — onshore wind project
• Cimarron Solar Development LLC (New Mexico) — solar photovoltaic project (under development)
• CBR Development Co. LLC (Texas) — development-stage project holding entity
Of particular relevance to this analysis, the tax-equity partnership in Solaris West Solar LLC involves Veltara Basin Financial LLC, which invested $280 million in a partnership-flip structure with a projected flip date of 2028. The partnership-flip allocates ITCs and accelerated depreciation deductions to Veltara Basin Financial during the pre-flip period, after which the allocation ratios revert to CBR (through CB Operating).
Key Structural Observation: CBR is already organized as a C-corporation at the top level of the entity structure. The subsidiaries — CBR Holdings LLC and CB Operating LLC — are single-member limited liability companies that are treated as disregarded entities for federal income tax purposes pursuant to Treasury Regulation § 301.7701-3. There are no outside partners in any entity in the chain between CBR and the project SPVs (with the exception of the Veltara Basin tax-equity interest in Solaris West Solar LLC). This foundational structural fact — that CBR is already a C-corp and has been since its formation — is the starting point for our analysis and is the primary reason why an Up-C restructuring is not warranted.
D. Proposed Offering Structure
Based on discussions with the Company, Pinnacle Vista, and Hargrove Keating & Co. (the lead underwriter), the proposed offering structure is as follows:
• Proposed aggregate offering size: $600,000,000 (including the 15% overallotment option)
• Base offering size: Approximately $521.7 million
• Overallotment option: Approximately $78.3 million
• Assumed midpoint IPO price per share: $22.00
• Base shares offered: 23,713,636 shares
• Overallotment shares: 3,559,091 shares
• Total shares offered (assuming full exercise of the overallotment option): 27,272,727 shares
• Post-IPO shares outstanding (base, no overallotment): 123,713,636 shares
• Post-IPO shares outstanding (full exercise of overallotment): 127,272,727 shares
The offering will consist of both primary and secondary components:
• Primary shares (sold by the Company): $371.7 million (16,895,455 shares at the midpoint IPO price)
• Secondary shares (sold by Pinnacle Vista): $150.0 million (6,818,182 shares at the midpoint IPO price)
The proposed use of proceeds from the primary offering is as follows:
• Approximately $200 million to repay the outstanding balance under CBR's Term Loan B facility with Veltrano National Bank, N.A.;
• Approximately $100 million to fund construction costs of the Cimarron Solar Development project in New Mexico; and
• Approximately $71.7 million for general corporate purposes, including working capital, potential acquisitions, and development-stage capital expenditures.
Based on the assumed midpoint IPO price of $22.00 per share and 100,000,000 pre-IPO shares outstanding, the pre-money equity valuation of CBR is approximately $2.2 billion. The post-money equity valuation (on a base offering basis) is approximately $2.72 billion. The enterprise value of CBR (based on fiscal year 2021 financials) is approximately $4.25 billion, implying an EV/EBITDA multiple of approximately 19.4x, which is within the range of comparable recent renewables-sector IPOs.
Following the sale of 6,818,182 secondary shares, Pinnacle Vista will hold approximately 55,181,818 shares, representing approximately 44.6% of the post-IPO shares outstanding on a base offering basis (or approximately 43.4% on a full-exercise basis). The Company and Pinnacle Vista will enter into a customary 180-day lock-up agreement with the underwriters, and the Registration Rights Agreement will provide Pinnacle Vista with demand registration rights and piggyback registration rights following the expiration of the lock-up period to facilitate orderly sell-downs of its remaining position.
III. Overview of Structural Alternatives
This section provides an overview of the three structural alternatives considered for the IPO: a traditional C-corporation structure, an Up-C (umbrella partnership–C-corporation) structure, and a Down-C variant. Each structure is described in terms of its general mechanics, tax characteristics, and applicability to the CBR transaction.
A. Traditional C-Corporation Structure
In a traditional C-corporation IPO, the issuer is a corporation subject to federal income tax under Subchapter C of the Code. Public investors purchase common stock of the C-corporation. The corporation is a separate taxable entity from its shareholders, and all income earned by the corporation is subject to corporate-level federal income tax at the rate prescribed by Section 11 of the Code, which is currently 21% following the enactment of the Tax Cuts and Jobs Act of 2017.
Distributions to shareholders are taxed as qualified dividends under Section 1(h)(11) of the Code, subject to a maximum federal rate of 20% for individual shareholders, plus the 3.8% net investment income tax ("NIIT") under Section 1411 of the Code, for a combined maximum rate on qualified dividends of 23.8%. Upon the disposition of shares, shareholders recognize capital gain or loss, which (if long-term) is taxed at the same maximum rate of 20% plus 3.8% NIIT, or 23.8% in the aggregate.
The effective combined tax rate on fully distributed corporate earnings — often referred to as the "double taxation" burden — is calculated as follows:
• Corporate-level tax: 21% of pre-tax income
• Shareholder-level tax on distributed after-tax income: 23.8% × (100% – 21%) = 23.8% × 79% = 18.8%
• Combined effective rate: 21% + 18.8% = approximately 39.8%
It is important to note, however, that this combined rate is fully realized only to the extent that earnings are actually distributed as dividends. To the extent that earnings are retained and reinvested at the corporate level — as CBR currently intends — the shareholder-level tax is deferred until the shareholder sells its stock, at which point the shareholder recognizes capital gain reflecting the retained earnings.
The structural simplicity of a C-corporation IPO is significant. There is no need for a TRA, no exchange mechanism for converting partnership units into C-corp shares, and no dual-class equity at the operating-company level. The governance structure is straightforward — one class of common stock with one vote per share (subject to any dual-class voting arrangements at the C-corp level, which CBR does not intend to implement). Financial reporting is accomplished through single-entity consolidated financial statements under GAAP, without the need for complex HLBV allocations at the parent or intermediate holding-company level (though HLBV methodology will continue to apply at the project-level tax-equity partnerships, as discussed below).
As applied to CBR, the C-corporation structure is the current state of affairs. CBR is already organized as a Delaware C-corporation, and all entities below CBR Holdings LLC are limited liability companies that are either disregarded entities or partnership-taxed for federal income tax purposes. The C-corporation "Blocker" — the entity that absorbs the corporate-level tax obligation — is already in place at the top of the structure. No restructuring is required to proceed with a C-corp IPO.
B. Up-C (Umbrella Partnership–C-Corporation) Structure
In an Up-C structure, the publicly traded issuer is a newly formed C-corporation ("PubCo") that serves as the managing member (or general partner) of an operating partnership or operating limited liability company ("OpCo"). At the time of the IPO, PubCo sells shares of common stock to public investors and uses the net proceeds to acquire units in OpCo, thereby becoming a member of OpCo alongside the pre-IPO holders (such as the private equity sponsor and the founders).
The pre-IPO holders retain their direct interests in OpCo in the form of OpCo units and typically receive a corresponding number of shares of a non-economic voting stock (such as Class B common stock) of PubCo, entitling them to vote at the PubCo shareholder level while maintaining their economic interest at the OpCo level. Over time, the pre-IPO holders have the right to exchange their OpCo units (together with the corresponding Class B shares) for shares of PubCo common stock (or, in some structures, cash) on a one-for-one basis. This exchange right is governed by an exchange agreement entered into at the time of the IPO.
The primary tax advantage of the Up-C structure inures to the benefit of the pre-IPO holders. Because the pre-IPO holders hold their economic interest at the partnership level (OpCo), they are not subject to corporate-level tax on their share of OpCo's income until they exchange their OpCo units for PubCo shares. At the time of exchange, PubCo is treated as acquiring the exchanging holder's share of OpCo's assets, and — if a Section 754 election is in effect at the OpCo level — PubCo receives a step-up in the tax basis of OpCo's assets under Section 743(b) of the Code. This basis step-up generates additional depreciation and amortization deductions for PubCo, which reduces PubCo's corporate income tax liability in future periods.
The TRA that typically accompanies an Up-C structure requires PubCo to pay the exchanging holder a percentage — typically 85% — of the cash tax savings actually realized (or, in some formulations, deemed to be realized) by PubCo from the basis step-up attributable to that holder's exchange. PubCo retains the remaining 15% of the tax benefit. The TRA creates a long-term contractual payment obligation, often extending over a period of 15 to 20 years (corresponding to the depreciable or amortizable life of the stepped-up assets), that is recorded as a liability on PubCo's balance sheet.
The complexity of an Up-C structure is substantial. It requires the creation of a multi-layered entity structure with dual-class equity (PubCo shares and OpCo units), the negotiation and documentation of an exchange agreement and a TRA, and ongoing accounting for multiple classes of equity, TRA obligations, and the allocation of income and loss among OpCo's members using the HLBV methodology. The registration statement for an Up-C IPO is significantly more complex than for a C-corp IPO, typically requiring an additional 20 to 30 pages of prospectus disclosure to describe the Up-C structure, the exchange mechanism, the TRA, and the related tax consequences. The SEC Staff routinely issues detailed comment letters on Up-C registration statements, focusing on TRA accounting treatment under ASC 450 (Contingencies) and ASC 740 (Income Taxes), the dilutive effects of OpCo unit exchanges, and governance matters related to dual-class equity.
Up-C structures have been common in certain sectors, including midstream energy (particularly master limited partnerships transitioning to C-corp structures), real estate, and other asset-heavy businesses where the basis step-up has significant economic value. More recently, Up-C structures have been used in technology and other growth-sector IPOs, though with mixed investor reception.
C. Down-C Structure (Variant)
For completeness, we also considered the "Down-C" structure, a less common variant in which the C-corporation is the direct public issuer, but the operating assets are held through a partnership subsidiary. The Down-C achieves some of the tax benefits of an Up-C structure (particularly the basis step-up upon exchange of partnership units) but with fewer structural layers and a more streamlined governance framework.
We evaluated the Down-C variant and dismissed it for CBR for the following reasons: CBR's existing structure already functions as a de facto Down-C — it is a C-corporation parent that holds its operating assets through LLC subsidiaries. However, the LLCs in the current CBR structure are disregarded entities (single-member LLCs) rather than true partnerships with outside partners. Because there are no outside partners holding interests in CBR Holdings LLC or CB Operating LLC, there is no opportunity for a basis step-up under Section 743(b) upon the exchange of partnership units — the units do not exist. Converting the disregarded LLCs into partnerships with outside partners would require the same type of restructuring as an Up-C conversion, with comparable costs and complexity. Accordingly, the Down-C variant offers no practical advantage over either the traditional C-corp or the full Up-C structure in CBR's circumstances.
IV. Detailed Analysis: C-Corp vs. Up-C for CBR
This section sets forth the detailed analysis supporting our recommendation that CBR proceed as a C-corporation. We examine the structural conversion costs, tax efficiency implications, Pinnacle Vista's exit horizon and liquidity considerations, market and investor perceptions, and accounting and financial reporting factors.
A. Structural Conversion Costs and Complexity
1. Current Structure Requires No Conversion
As described in Section II above, CBR is already organized as a Delaware C-corporation. The entity structure — CBR at the top, with CBR Holdings LLC and CB Operating LLC below, and project-level SPVs at the bottom — is fully compatible with a C-corp IPO. No restructuring, recapitalization, or formation of new entities is required. The S-1 registration statement currently being drafted by the working group reflects this C-corp structure, and the confidential submission to the SEC is targeted for April 11, 2022.
Proceeding as a C-corp avoids the need to restructure the entity chain, create a new holding partnership or operating company with outside partners, negotiate exchange rights or voting arrangements between PubCo and OpCo holders, or draft, negotiate, and finalize a TRA. The structural simplicity of the C-corp approach also reduces the risk of post-IPO disputes among stakeholders regarding exchange mechanics, TRA payment calculations, and governance rights.
2. Up-C Conversion Requirements
If CBR were to adopt an Up-C structure, the following steps would be required:
(a) Formation or Recapitalization of an Operating Partnership. Either a new operating partnership would need to be formed, or one of the existing LLC subsidiaries (most likely CBR Holdings LLC or CB Operating LLC) would need to be recapitalized as a partnership with multiple members. This would require converting the single-member LLC into a multi-member LLC, with the resulting entity treated as a partnership for federal income tax purposes under the default classification rules of Treasury Regulation § 301.7701-3(b)(1).
(b) Contribution of Pre-IPO Holders' Equity. Pinnacle Vista and the Founders would contribute their equity in CBR (currently held as shares of C-corp common stock) to the new operating partnership in exchange for OpCo units. This contribution would need to be structured as a tax-free exchange under Section 721 of the Code, which generally provides that no gain or loss is recognized on the contribution of property to a partnership in exchange for a partnership interest. However, careful planning would be required to ensure that the contribution qualifies under Section 721 and that the anti-abuse rules of Section 721(b) and the disguised-sale rules of Section 707(a)(2)(B) are not implicated.
(c) Negotiation and Documentation of Exchange Agreement. An exchange agreement would need to be negotiated and finalized, setting forth the terms and conditions under which OpCo unitholders may exchange their units for PubCo common stock (or, at PubCo's election, cash). The exchange agreement typically includes provisions regarding exchange mechanics, exchange timing and frequency, minimum exchange amounts, conditions to exchange (including compliance with securities laws), and the tax treatment of exchanges.
(d) Negotiation and Documentation of Tax Receivable Agreement. A TRA would need to be negotiated and finalized, as described more fully in Section V below. The TRA is typically one of the most heavily negotiated documents in an Up-C transaction, with extensive provisions regarding the calculation of tax savings, payment timing, dispute resolution, early termination, change-of-control provisions, and the treatment of tax attributes in the event of an audit or adjustment. Based on our experience, the TRA alone typically requires four to six weeks of negotiation among the Company, the sponsor, and their respective counsel and tax advisors.
(e) Amended and Restated Operating Agreement. The operating agreement of OpCo would need to be amended and restated to reflect the multi-member structure, including provisions for governance, capital accounts, allocations of income and loss (including the HLBV methodology), distributions, transfer restrictions, and the rights and obligations of PubCo as managing member.
(f) Revised S-1 Registration Statement. The S-1 registration statement would require extensive revisions to disclose the Up-C structure, including:
• A description of the Up-C structure and the relationships among PubCo, OpCo, and the pre-IPO holders;
• A description of the exchange agreement and exchange mechanics;
• A description of the TRA and the estimated TRA liability;
• Pro forma financial statements reflecting the Up-C structure;
• Risk factors related to the Up-C structure, the TRA obligation, and potential conflicts of interest;
• A revised "Material U.S. Federal Income Tax Consequences" section addressing the tax treatment of PubCo shares and OpCo units; and
• A revised "Organizational Structure" section with structural diagrams.
Based on our experience with comparable Up-C IPOs, these revisions would add approximately 20 to 30 pages of prospectus content and would likely generate five to ten additional SEC Staff comments in the first round of the comment process.
(g) Additional SEC Scrutiny. The SEC Staff has historically issued detailed comments on Up-C structures, focusing on the accounting treatment of TRA liabilities under ASC 450 (Contingencies) and ASC 740 (Income Taxes), the dilutive effects of potential OpCo unit exchanges on reported earnings per share, the presentation of non-controlling interests, and governance-related disclosures. Resolving these comments typically adds two to four additional weeks to the SEC review process.
(h) Incremental Professional Fees. The additional legal, tax advisory, and accounting costs associated with an Up-C restructuring are estimated at $1.5 million to $3.0 million, incremental to the costs of a C-corp IPO. This estimate includes additional legal fees for Calderwood & Harkness LLP, additional tax advisory fees for Kessler McBride & Associates LLP, additional audit and accounting fees for Ashford & Pemberton LLP, and additional financial advisory fees for Hargrove Keating & Co.
(i) Timeline Delay. The restructuring documentation, revised S-1 drafting, and additional SEC review would collectively delay the transaction timeline by an estimated four to six weeks. This delay would push the confidential filing date well past the current target of April 11, 2022, potentially into late May or early June, which could adversely affect the Company's ability to complete the IPO during the current favorable market window for renewables-sector offerings.
3. Conclusion on Conversion Costs
The restructuring costs (estimated at $1.5 million to $3.0 million), timeline delays (estimated at four to six weeks), and incremental complexity of an Up-C conversion are significant. These costs and delays must be weighed against the incremental tax benefits of an Up-C structure, which are analyzed in Section IV.B below. On their own terms, the conversion costs and timeline impact weigh heavily against the Up-C alternative, particularly given CBR's desire to access the public markets in the near term while the renewables-sector valuation environment remains favorable.
B. Tax Efficiency Analysis
1. Double Taxation Under C-Corp Structure
As described in Section III.A, CBR, as a C-corporation, pays corporate income tax at the current statutory rate of 21% under Section 11 of the Code. Shareholders are subject to a second level of tax on dividends or upon the disposition of their shares.
However, two important mitigating factors significantly reduce the practical impact of double taxation for CBR:
First, CBR does not currently pay dividends and does not anticipate doing so following the IPO. The Company's board of directors has adopted a reinvestment strategy pursuant to which substantially all net income will be retained and reinvested in the business, including in the construction of new solar, wind, and storage projects. In addition, the Company's credit facilities with Veltrano National Bank, N.A. contain restrictive covenants that limit the Company's ability to declare and pay dividends during the term of the facilities. As a result, the second level of tax on dividends is effectively deferred for the foreseeable future.
Second, the primary tax cost to shareholders will be the capital gains tax incurred upon the eventual disposition of their shares. For shareholders who hold their shares for more than one year, the applicable rate is the long-term capital gains rate (currently a maximum of 20%, plus the 3.8% NIIT). This tax is payable only at the time of sale and is not duplicated at the corporate level — the corporate-level tax reduces the value of the shares, but the shareholder's capital gain is computed based on the sale price less the shareholder's adjusted basis (i.e., the purchase price), not on the corporation's pre-tax income.
In practical terms, the "double taxation" burden of a C-corporation is most significant for companies that regularly distribute a substantial portion of their earnings as dividends. For a growth-oriented, capital-intensive renewables company like CBR that retains and reinvests its earnings, the incremental cost of double taxation is substantially mitigated.
2. Single Layer of Tax Under Up-C (for Pre-IPO Holders)
In an Up-C structure, Pinnacle Vista and the Founders would hold their economic interests at the OpCo level in the form of partnership units. Their share of OpCo's income would be subject to only a single level of tax — at the individual partner level (or, in the case of Pinnacle Vista, at the fund level and then through to the fund's limited partners). No corporate-level tax would be imposed on the income allocable to the pre-IPO holders' OpCo units.
Upon the exchange of OpCo units for PubCo shares, PubCo would be treated as acquiring the exchanging holder's proportionate share of OpCo's assets, and — if a Section 754 election were in effect — PubCo would receive a step-up in the tax basis of those assets under Section 743(b) of the Code. This basis step-up would generate additional depreciation and amortization deductions for PubCo in future years, reducing PubCo's corporate income tax liability.
The net present value of the basis step-up benefit depends on several variables:
(a) The fair market value of OpCo's assets at the time of exchange;
(b) The percentage of OpCo's assets that are depreciable or amortizable (as opposed to land, cash, and other non-depreciable assets);
(c) The remaining useful life of the depreciable assets at the time of exchange;
(d) The applicable corporate income tax rate; and
(e) The discount rate applied to future tax savings.
We have prepared the following approximate calculation to estimate the NPV of the basis step-up benefit, assuming Pinnacle Vista were to exchange its full position:
• Pinnacle Vista's pre-IPO interest: 62%
• Pre-money equity valuation: $2.2 billion
• Pinnacle Vista's share of equity value: approximately $1.364 billion
• Estimated percentage of value attributable to depreciable/amortizable assets: approximately 50% (reflecting the significant proportion of CBR's asset base that consists of solar panels, wind turbines, battery storage systems, and related equipment, offset by land, cash, and goodwill)
• Estimated basis step-up: approximately $682 million
• Tax savings at 21% rate: approximately $143 million (undiscounted, over the remaining depreciable life of the assets, estimated at 15–20 years)
• NPV of tax savings (at an 8% discount rate, over a weighted-average life of 17.5 years): approximately $80 million to $120 million
• TRA payments to Pinnacle Vista (85% of realized savings): approximately $68 million to $102 million (NPV)
• C-corp retained benefit (15%): approximately $12 million to $18 million (NPV)
These estimates are inherently speculative. The actual benefit would depend on Pinnacle Vista's exchange timeline (earlier exchanges produce higher NPV; later exchanges produce lower NPV due to the declining depreciable base of the assets), the asset mix at the time of exchange, changes in the corporate tax rate, and the discount rate. We note that if the corporate tax rate were to increase (as proposed in various legislative proposals currently pending before Congress), the NPV of the step-up benefit would increase, potentially making the Up-C structure more attractive. Conversely, if the corporate tax rate were to decrease, the NPV would decline.
3. Impact of Renewables-Specific Tax Attributes
CBR's projects generate significant ITCs and PTCs that are currently utilized to reduce CBR's corporate income tax liability at the C-corp level. The treatment of these credits in the two structural alternatives merits specific attention.
C-Corp Structure: In the current C-corp structure, ITCs generated by CBR's solar and battery storage projects and PTCs generated by CBR's wind projects flow through the disregarded LLCs (CB Operating and the project-level SPVs) and are reported on CBR's consolidated corporate income tax return (Form 1120). The credits directly reduce CBR's federal income tax liability, dollar for dollar, subject to applicable limitations. This treatment is straightforward and well-understood.
Up-C Structure: In an Up-C structure, these credits would originate at the project SPV level, flow through CB Operating and CBR Holdings (which would be owned by OpCo), and be allocated among OpCo's members — including PubCo (as managing member) and the pre-IPO holders (as limited partners) — in accordance with the OpCo operating agreement. The allocation of tax credits among partners in a multi-member LLC is governed by Sections 704(b) and 704(c) of the Code and the regulations thereunder, and requires careful drafting to ensure that the allocations have substantial economic effect. The interaction between project-level partnership-flip allocations (as in the Solaris West / Veltara Basin tax-equity arrangement) and an OpCo-level partnership would add a layer of complexity to credit allocation, HLBV accounting, and tax reporting.
Moreover, the interaction between the TRA calculations and the ITC/PTC credits could create additional complexity. The TRA is typically based on the tax savings from the basis step-up, but if PubCo's tax liability is already substantially reduced by ITCs and PTCs, the incremental tax savings from the basis step-up may be limited in any given year by the absence of sufficient taxable income against which to apply the additional depreciation deductions. This could delay the realization of TRA-eligible tax savings and reduce the NPV of the TRA to the pre-IPO holders.
4. Conclusion on Tax Efficiency
The Up-C structure provides a meaningful but uncertain tax benefit to the pre-IPO holders, with an estimated NPV of $80 million to $120 million over 15 to 20 years (of which 85% would be paid to Pinnacle Vista under a standard TRA, and 15% would be retained by the C-corp). The C-corp's retained benefit is estimated at only $12 million to $18 million (NPV), a modest amount relative to the Company's post-money equity valuation of $2.72 billion.
This benefit must be weighed against the significant costs and complexities of restructuring, the interaction with CBR's existing ITC/PTC utilization (which may limit the practical realization of the basis step-up benefit), CBR's no-dividend policy (which defers the practical impact of double taxation), and Pinnacle Vista's anticipated relatively near-term exit timeline (which compresses the period over which TRA benefits would be realized and reduces the NPV accordingly).
On balance, the incremental tax benefit of an Up-C structure does not justify the restructuring cost, complexity, and timeline impact. We recommend proceeding as a C-corporation.
C. Pinnacle Vista Exit Horizon and Liquidity Considerations
1. Fund Vintage and Exit Timeline
PVCP III is a 2016-vintage fund with a total fund size of $4.8 billion. Private equity funds of this vintage typically have a fund life of ten years, with potential extensions of one to two years upon approval of the fund's limited partners. This implies a target full-liquidation date of 2026 to 2028 for PVCP III, with the bulk of monetization activity expected to occur within the five-to-seven-year period following each investment.
Pinnacle Vista's initial investment in CBR was made in 2017 ($385 million), with a follow-on investment in 2019 ($120 million), for total invested capital of $505 million. At the assumed midpoint IPO price of $22.00 per share, Pinnacle Vista's 62% pre-IPO interest (62,000,000 shares) has an implied market value of approximately $1.364 billion, representing a return on invested capital of approximately 2.7x (before transaction costs and carried interest).
At the IPO, Pinnacle Vista will sell $150 million in secondary shares (6,818,182 shares), reducing its holdings to approximately 55.2 million shares. Following the 180-day lock-up period, Pinnacle Vista is expected to pursue additional sell-downs through registered secondary offerings, block trades, and/or open-market sales, utilizing the demand registration rights and piggyback registration rights set forth in the Registration Rights Agreement. Based on typical PE fund exit patterns for a 2016-vintage fund, we anticipate that Pinnacle Vista will seek to exit a substantial majority — if not all — of its remaining position within two to four years following the IPO (i.e., by 2024–2026), consistent with the fund's liquidation timeline.
2. Implications for Up-C
If CBR were organized as an Up-C, Pinnacle Vista would hold OpCo units rather than PubCo common stock. In order to sell shares in the public market, Pinnacle Vista would first need to exchange its OpCo units for PubCo common stock pursuant to the exchange agreement. This exchange process introduces several complications for Pinnacle Vista's exit strategy:
(a) Exchange Mechanics. The exchange agreement typically provides for periodic exchange windows (e.g., quarterly), minimum exchange amounts, and advance notice requirements. These requirements could constrain Pinnacle Vista's ability to sell shares in the public market at times and in amounts of its choosing.
(b) Tax Consequences of Exchange. Each exchange of OpCo units for PubCo common stock is a taxable event for the exchanging holder, requiring careful planning around the timing and sequencing of exchanges.
(c) TRA Payment Triggers. Each exchange triggers a TRA payment obligation from PubCo to the exchanging holder. The calculation of the TRA payment requires determination of the fair market value of OpCo's assets at the time of exchange, the resulting basis step-up, and the projected tax savings over the depreciable life of the stepped-up assets. This calculation is complex and can give rise to disputes between PubCo and the exchanging holder.
(d) Compressed TRA Benefits. If Pinnacle Vista exchanges its OpCo units relatively quickly (within two to four years post-IPO), the TRA payments would be triggered early but paid out over 15 to 20 years. The NPV benefit to PubCo (which retains 15% of the savings) would be reduced because the tax savings would be spread over a longer period while the obligation to pay 85% to Pinnacle Vista would be crystallized early.
(e) Liquidity Friction. The exchange requirement introduces an additional step between Pinnacle Vista's decision to sell and the actual sale of shares in the public market. This friction could impair Pinnacle Vista's ability to execute timely and efficient monetization, particularly in volatile market conditions where speed of execution is critical.
Given Pinnacle Vista's expected near-term to medium-term exit timeline, the Up-C structure creates unnecessary friction for the primary sponsor's liquidity objectives. The C-corp structure, by contrast, permits Pinnacle Vista to sell shares directly in the public market (subject only to lock-up and registration requirements) without the intermediate step of exchanging OpCo units.
3. Founder Considerations
Garrett Calloway and Elaine Briggs (together holding approximately 24% of pre-IPO equity, or approximately 24,000,000 shares) are expected to remain with the Company as long-term holders. Unlike Pinnacle Vista, the Founders do not have a near-term exit imperative, and an Up-C structure could theoretically benefit them more than Pinnacle Vista due to their longer expected holding period, which would allow the TRA benefits to accrue over a greater period.
However, the Founders' combined stake is significantly smaller than Pinnacle Vista's (24% vs. 62%), and the incremental TRA benefit attributable to the Founders' position alone is substantially less than the total TRA benefit calculated above. Moreover, the Founders have not expressed a preference for an Up-C structure. In conversations with Garrett Calloway and the Company's general counsel, the Founders have indicated that structural simplicity, investor confidence, and near-term execution are their primary objectives for the IPO.
4. Conclusion on Exit Horizon
Pinnacle Vista's expected exit timeline and the Founders' preference for structural simplicity strongly favor the C-corp structure. The Up-C's exchange mechanism would introduce unnecessary friction and complexity into the sponsor's exit strategy, with limited offsetting benefit given the compressed timeline. The C-corp structure facilitates straightforward public-market sales without an exchange mechanism and is the preferred approach for all stakeholders.
D. Market and Investor Considerations
1. Investor Perception of Up-C Structures
Up-C structures have faced increasing scrutiny from public-market investors in recent years. While the Up-C was once viewed as an innovative tax-efficient structure, investor sentiment has shifted in several important respects:
TRA Liability as a Negative Signal. The TRA liability is viewed by many institutional investors as a contingent obligation that reduces the enterprise value attributable to public shareholders and creates complexity in financial modeling. The TRA effectively transfers a substantial portion of the tax benefit generated by the basis step-up from the public company (and its public shareholders) to the pre-IPO holders. This "value leakage" is perceived as unfavorable to public shareholders and can depress the IPO valuation.
Dual-Class Economics. The dual-class economics of an Up-C structure — where pre-IPO holders hold OpCo units and public shareholders hold PubCo shares, with the two classes having different economic characteristics and tax attributes — create complexity in financial modeling and can lead to confusion among retail investors and some institutional investors.
Index Fund and ESG Considerations. Certain major index fund providers and ESG-focused investors disfavor dual-class structures (including Up-C structures with dual-class voting stock) and may exclude or underweight companies with such structures from their indices or investment universes. While this concern relates primarily to dual-class voting arrangements (which are not inherent in all Up-C structures), the complexity and governance implications of Up-C structures can contribute to exclusion decisions.
2. Underwriter Input
In conversations with Hargrove Keating & Co. (Oliver Marchetti, Managing Director, Equity Capital Markets; Sonia Tran, Director, Power & Renewables Investment Banking), the lead underwriter has indicated the following:
• The renewables-sector investor base currently has no strong preference for an Up-C structure, and a clean C-corp structure is viewed as more investor-friendly for a $600 million IPO of this profile;
• Recent feedback from the investor community suggests that a straightforward C-corp structure enhances the clarity of the investment thesis and facilitates broader participation by generalist institutional investors who may not be familiar with the mechanics of Up-C structures and TRAs;
• The underwriter's preliminary valuation analysis does not indicate that an Up-C structure would result in a materially higher IPO valuation for CBR, and there is a risk that the TRA liability could serve as a modest valuation discount; and
• The underwriter recommends proceeding as a C-corp to maximize investor participation and pricing outcomes.
3. Comparables Analysis
A review of recent renewables-sector IPOs indicates that both C-corp and Up-C structures have been used, but the trend for utility-scale developers and independent power producers is toward the C-corp structure. Up-C structures remain more common in the midstream energy sector (particularly for companies transitioning from MLP structures) and in certain real estate contexts (REIT-related IPOs). The C-corp structure is consistent with CBR's peer group positioning and with investor expectations for a company of CBR's size and profile.
4. S-1 Disclosure Simplicity
A C-corp IPO registration statement is significantly simpler than an Up-C registration statement. As noted above, an Up-C S-1 requires extensive additional disclosure regarding the Up-C structure, the exchange agreement, the TRA, and the related tax consequences. This additional disclosure adds 20 to 30 pages to the prospectus, increases the time required for SEC review, and raises the likelihood of additional SEC Staff comments. The SEC Staff routinely issues five to ten additional comments on Up-C registration statements, focusing on the topics described in Section IV.A.2(f) and (g) above.
A C-corp S-1, by contrast, requires standard disclosures regarding the Company's corporate structure, capitalization, tax status, and the tax consequences of purchasing, holding, and disposing of common stock. These disclosures are well-understood by the SEC Staff and are unlikely to generate significant additional comments.
E. Accounting and Financial Reporting
1. C-Corp Reporting
Under the C-corp structure, CBR will file consolidated financial statements prepared in accordance with GAAP, reflecting the financial position, results of operations, and cash flows of CBR and its consolidated subsidiaries. The financial statements are audited by Ashford & Pemberton LLP (Gregory Sondheim, lead engagement partner; Irene Valdez, audit manager).
HLBV methodology is currently used only at the project-level tax-equity partnership — specifically, the Solaris West Solar LLC / Veltara Basin Financial LLC partnership. HLBV is required in this context to allocate the investment returns between CBR (as the sponsor/developer) and Veltara Basin Financial (as the tax-equity investor) in a manner that reflects the economic substance of the partnership-flip structure. This HLBV methodology is adequately disclosed in CBR's audited financial statements and has been reviewed by the SEC Staff in connection with the confidential submission process (the SEC's first-round and second-round comment letters included questions regarding the HLBV methodology at the Solaris West level, which have been addressed in the responses prepared by the working group).
No additional HLBV complexity exists at the parent or intermediate holding-company level under the C-corp structure, because CBR Holdings LLC and CB Operating LLC are single-member LLCs treated as disregarded entities.
2. Up-C Reporting Complications
An Up-C structure would introduce significant additional accounting complexity:
(a) OpCo-Level HLBV. If OpCo were a multi-member LLC with PubCo as managing member and the pre-IPO holders as limited partners, HLBV accounting would be required at the OpCo level to allocate income and loss among the members. This would add a second layer of HLBV on top of the existing project-level HLBV at Solaris West, creating a multi-layered allocation structure that is difficult to model, audit, and explain to investors.