CALDERWOOD & HARKNESS LLP
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Jennifer Kwon, Responsible Partner, Capital Markets
FROM: Natasha Forbes, Working Associate, Capital Markets
CC: Brendan Walsh, Lead Associate, Capital Markets; Leonard Cross, Specialist Partner, Tax
DATE: June 12, 2022
RE: Review of Draft Initial Comfort Letter from Ashford & Pemberton LLP in Connection with the Proposed Initial Public Offering of Calloway-Briggs Renewables Inc.
MATTER NO.: 1015-00001
CONFIDENTIALITY NOTICE: This memorandum is a privileged and confidential attorney work product prepared in connection with the proposed initial public offering of Calloway-Briggs Renewables Inc. and is not intended for distribution outside the Calderwood & Harkness working group without prior approval. This memorandum is protected by the attorney-client privilege and the work product doctrine. Any unauthorized review, use, disclosure, or distribution is strictly prohibited.
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I. Executive Summary
The purpose of this memorandum is to set forth the results of our review and analysis of the draft initial comfort letter dated June 8, 2022 (the "Draft Comfort Letter"), prepared by Ashford & Pemberton LLP ("A&P"), the independent registered public accounting firm for Calloway-Briggs Renewables Inc. ("CBR" or the "Company"), addressed to the underwriters in connection with the Company's proposed initial public offering (the "IPO" or the "Offering") of shares of common stock, par value $0.01 per share, on the New York Stock Exchange. The aggregate offering size, inclusive of the underwriters' 15% overallotment option, is expected to be approximately $600,000,000.
The Draft Comfort Letter was prepared by A&P under the direction of lead engagement partner Gregory Sondheim, CPA, and audit manager Irene Valdez, CPA, each of whom are members of A&P's Capital Markets and Transaction Advisory Services group. The Draft Comfort Letter was issued pursuant to the procedures described in AU-C Section 920, Letters for Underwriters and Certain Other Requesting Parties (formerly Statement on Auditing Standards No. 72), as adopted by the Auditing Standards Board of the American Institute of Certified Public Accountants. The Draft Comfort Letter is the first of three planned circle-ups in connection with the Offering, consisting of: (i) the initial comfort letter (addressed herein), (ii) a bring-down comfort letter to be delivered at pricing, and (iii) a bring-down comfort letter to be delivered at closing. This three circle-up schedule was agreed upon at the organizational meeting held during the week of March 14–18, 2022, and is consistent with market practice for IPOs of this size.
The Draft Comfort Letter was requested by the underwriters — Hargrove Keating & Co., as lead-left book-running manager and representative of the several underwriters ("Hargrove Keating"), together with Linden Pratt Securities LLC ("Linden Pratt"), Graymont Brothers Inc. ("Graymont Brothers"), Barfield Stuart & Co. ("Barfield Stuart"), and Crane Whitley Capital LLC ("Crane Whitley," and together with Hargrove Keating, Linden Pratt, Graymont Brothers, and Barfield Stuart, the "Underwriters") — through the comfort letter request letter previously transmitted by Hargrove Keating, acting as representative, to A&P and previously reviewed and commented on by this firm. As discussed in greater detail in Section VII below, the Draft Comfort Letter has been compared against the comfort letter request letter and is fully responsive to all requested procedures.
Overall Assessment. Based on the review and analysis set forth in this memorandum, the Draft Comfort Letter is substantially in order and covers the expected scope of procedures for an initial comfort letter in connection with an IPO of this nature and magnitude. The tick-and-tie procedures performed by A&P reconcile in all material respects to the audited consolidated financial statements and unaudited interim financial data included in the Registration Statement. The change-period coverage is clean, with no material adverse findings reported and negative-assurance language in standard form. No substantive exceptions or qualifications have been noted by A&P. This memorandum identifies certain specific observations, minor open items, and procedural matters that should be addressed before the comfort letter is finalized, and recommends specific follow-up actions for the working group. Given the dormant status of the Offering as of June 17, 2022, certain of these items will be deferred until reactivation.
II. Background
A. The Offering
Calloway-Briggs Renewables Inc. is a Delaware corporation headquartered at 4200 Ridgeline Parkway, Suite 1100, Austin, Texas 78746. The Company is a developer, owner, and operator of utility-scale renewable energy generation facilities across the United States, with a current operating portfolio of approximately 3.8 gigawatts of capacity spanning wind, solar, and battery storage assets. CBR proposes an initial public offering of approximately $600,000,000 of shares of its common stock, par value $0.01 per share, on the New York Stock Exchange under the proposed ticker symbol "CBRI." The Offering is inclusive of the Underwriters' 15% overallotment option.
The key terms and economics of the Offering, based on the assumed midpoint offering price of $22.00 per share, are summarized as follows:
The Offering is a combined primary and secondary offering. The Company expects to sell approximately 16,895,455 shares of newly issued common stock in a primary offering to raise approximately $371,700,000 in gross proceeds for the Company's account. In addition, Pinnacle Vista Capital Partners III, LP ("Pinnacle Vista"), the Company's majority stockholder and an affiliate of Pinnacle Vista Capital Partners LLC, a private equity firm focused on energy infrastructure investments, expects to sell approximately 6,818,182 shares in a secondary offering to raise approximately $150,000,000 for Pinnacle Vista's account. The Company will not receive any proceeds from the secondary offering.
The draft Registration Statement on Form S-1 (the "Registration Statement") was initially confidentially submitted to the Securities and Exchange Commission (the "SEC") pursuant to the JOBS Act on April 11, 2022 (EDGAR Accession No. 0001948372-22-000001). Amendment No. 1 to the Registration Statement was filed with the SEC on May 20, 2022 (EDGAR Accession No. 0001948372-22-000002), in response to the SEC's first-round comment letter. Amendment No. 2 to the Registration Statement was filed with the SEC on June 10, 2022 (EDGAR Accession No. 0001948372-22-000003), in response to the SEC's second-round comment letter received June 3, 2022. SEC oral clearance of the Registration Statement is indicated for June 14, 2022, subject to the filing of a pricing amendment at the time of pricing.
B. The Auditor and Engagement
The independent registered public accounting firm for CBR is Ashford & Pemberton LLP, with offices at 30 Rockefeller Plaza, Suite 2800, New York, New York 10112. A&P is a nationally recognized accounting firm registered with the Public Company Accounting Oversight Board (the "PCAOB") and is experienced in the audit of companies in the renewable energy and power generation sectors. The lead engagement partner for the CBR audit and comfort letter engagement is Gregory Sondheim, CPA, a partner in A&P's Energy and Utilities Audit Practice. The audit manager is Irene Valdez, CPA.
A&P has served as the independent auditor for CBR since the Company's fiscal year ended December 31, 2019. A&P has audited the Company's consolidated financial statements for each of the three fiscal years ended December 31, 2019 (FY 2019), December 31, 2020 (FY 2020), and December 31, 2021 (FY 2021), and has issued unqualified audit reports with respect to each such fiscal year. In addition, A&P has reviewed the Company's unaudited interim consolidated financial data for the quarter ended March 31, 2022 (Q1 2022), in accordance with the standards of the PCAOB. The audited financial statements and unaudited interim financial data are included in the Registration Statement.
C. Procedural History
The comfort letter request letter was transmitted by the Underwriters, through Hargrove Keating, as representative, to A&P. Calderwood & Harkness, acting as counsel to the Company, reviewed and provided comments on the comfort letter request letter prior to its transmission to A&P, in coordination with Prescott, Danforth & Yee LLP ("PD&Y"), acting as counsel to the Underwriters. The Draft Comfort Letter was received from A&P on June 8, 2022. This review memorandum was prepared by Natasha Forbes, Working Associate, Capital Markets, and has been circulated to the working group on June 12, 2022. This memorandum has been reviewed by Brendan Walsh, Lead Associate, Capital Markets.
III. Scope and Structure of the Draft Comfort Letter
This section sets forth our review of the overall structure, addressees, and scope of the Draft Comfort Letter, including confirmation that the letter conforms to AU-C Section 920 requirements and market practice.
A. Addressees
The Draft Comfort Letter is addressed to the following five Underwriter entities:
1. Hargrove Keating & Co., as lead-left book-running manager and representative of the several underwriters;
2. Linden Pratt Securities LLC;
3. Graymont Brothers Inc.;
4. Barfield Stuart & Co.; and
5. Crane Whitley Capital LLC.
Under AU-C Section 920, comfort letters are issued for the benefit of the underwriters (or other parties with a due diligence defense under Section 11 of the Securities Act of 1933, as amended) and are not to be addressed to, or issued for the benefit of, the issuer or selling stockholders. Accordingly, we have confirmed that the Draft Comfort Letter is not addressed to CBR or to Pinnacle Vista Capital Partners III, LP in its capacity as selling stockholder. This is consistent with AU-C Section 920 requirements and with the agreed scope of the comfort letter engagement.
Observation: All five Underwriter entities are correctly identified by their full legal names, matching the names set forth in the draft underwriting agreement circulated on June 6, 2022. The addressee block is in proper form and no corrections are required.
B. Independence Confirmation
The Draft Comfort Letter includes A&P's confirmation that it is an independent registered public accounting firm with respect to CBR within the meaning of the Securities Act of 1933, as amended, and the applicable rules and regulations thereunder adopted by the SEC, and within the meaning of the applicable rules of the PCAOB. This independence confirmation is a required element of any comfort letter issued under AU-C Section 920 and is of fundamental importance to the Underwriters' due diligence process.
The independence statement in the Draft Comfort Letter covers the full audit period — that is, the three fiscal years ended December 31, 2019, December 31, 2020, and December 31, 2021 — as well as the period through the date of the Draft Comfort Letter (June 8, 2022). This temporal coverage is consistent with the independence requirements applicable to the audited financial statements included in the Registration Statement and ensures that A&P's independence is confirmed through the most recent practicable date.
Observation: The independence confirmation is in standard form and appears satisfactory in all respects. No qualifications, limitations, or caveats have been noted by A&P with respect to its independence. No further action is required at this time.
C. Financial Statements Covered
The Draft Comfort Letter identifies the financial statements and interim financial data of CBR that have been the subject of A&P's audit and review procedures, as follows:
Audited Consolidated Financial Statements:
For FY 2021, A&P additionally references an Adjusted EBITDA figure of $218.6 million (a non-GAAP measure, which is discussed further in Section IV.B below) and a cash and cash equivalents balance of approximately $185 million.
Unaudited Interim Consolidated Financial Data:
The audited consolidated financial statements for FY 2019, FY 2020, and FY 2021, together with A&P's audit reports thereon, and the unaudited interim consolidated financial data for Q1 2022, together with A&P's review report thereon, are included in the Registration Statement (Amendment No. 2, filed June 10, 2022).
Observation: The coverage period in the Draft Comfort Letter aligns with the financial statements and interim financial data included in Amendment No. 2 to the Registration Statement. We have confirmed that the Q1 2022 interim financial data references in the Draft Comfort Letter cross-reference correctly to the S-1 interim financial statements. The coverage is complete and no additional periods are required to be covered at this time. Upon reactivation, if additional audited or interim financial data becomes available, the comfort letter coverage will need to be updated accordingly (see Section VIII.B below).
D. Registration Statement Cross-Reference
The Draft Comfort Letter references the Registration Statement on Form S-1 as filed with the SEC, specifically identifying Amendment No. 2 to the Registration Statement, dated June 10, 2022 (EDGAR Accession No. 0001948372-22-000003). The comfort letter procedures are keyed to the prospectus included in Amendment No. 2, which is the most recently filed version of the Registration Statement as of the date of the Draft Comfort Letter.
It is important to note that if a further amendment to the Registration Statement is filed — including, but not limited to, the pricing amendment to be filed at the time of pricing — the bring-down comfort letter delivered at pricing and/or closing will need to reference the most recently filed amendment to the Registration Statement (including the pricing amendment and any subsequent post-effective amendments). This is a standard requirement and will be addressed in the ordinary course at the bring-down stage.
Observation: The cross-reference to Amendment No. 2 is correct and complete. A notation should be added to the closing checklist maintained by the working group to ensure that the bring-down comfort letters reference any subsequent amendments to the Registration Statement, including the pricing amendment. No further action is required at this time with respect to the initial comfort letter.
IV. Detailed Review of Comfort Letter Procedures and Coverage
This section provides a detailed review of the specific procedures performed by A&P in the Draft Comfort Letter, organized by category. For each category, we describe the scope of the procedures, the financial data covered, and our observations and recommendations.
A. Tick-and-Tie Procedures (Financial Data in the Prospectus)
The core of any comfort letter is the so-called "tick-and-tie" procedures, pursuant to which the independent auditor compares the financial data set forth in the prospectus to the corresponding amounts in the audited financial statements, unaudited interim financial data, and other financial records of the company. The Draft Comfort Letter contains tick-and-tie procedures covering each of the following sections of the prospectus.
1. Selected Financial Data
A&P confirms in the Draft Comfort Letter that it has compared the financial data set forth in the "Selected Financial Data" section of the prospectus to the corresponding amounts in the audited consolidated financial statements for FY 2019, FY 2020, and FY 2021 and the unaudited interim consolidated financial data for Q1 2022, and found such data to be in agreement. The specific figures verified include, among others:
Revenue:
• FY 2019: $312.8 million
• FY 2020: $401.5 million
• FY 2021: $487.3 million
• Q1 2022: $131.4 million
Net Income (Loss):
• FY 2019: ($22.4 million)
• FY 2020: $14.1 million
• FY 2021: $41.7 million
• Q1 2022: $8.3 million
Total Assets:
• FY 2019: $2.61 billion
• FY 2020: $3.18 billion
• FY 2021: $3.94 billion
• Q1 2022: $4.07 billion
Total Debt:
• FY 2019: $1.28 billion
• FY 2020: $1.52 billion
• FY 2021: $1.71 billion
• Q1 2022: $1.74 billion
In addition, A&P has verified the operating capacity figures set forth in the Selected Financial Data section, which reflect the Company's installed and operating renewable energy generation capacity measured in gigawatts. These figures — 2.1 GW (FY 2019), 2.9 GW (FY 2020), 3.8 GW (FY 2021), and 3.8 GW (Q1 2022) — were confirmed by A&P against management representations and the schedule of projects maintained by the Company.
Observation: No exceptions have been noted by A&P with respect to the Selected Financial Data tick-and-tie procedures. All figures reconcile to the underlying audited and reviewed financial statements. No corrections or follow-up are required.
2. Capitalization Table
A&P has compared the financial data set forth in the "Capitalization" section of the prospectus, including the pre-IPO shares of common stock outstanding (100,000,000 shares), total indebtedness ($1.71 billion as of December 31, 2021), and total stockholders' equity, to the corresponding amounts in the audited consolidated balance sheet as of December 31, 2021. A&P has confirmed the mathematical accuracy of these figures and found them to be in agreement with the audited financial statements.
The Capitalization section of the prospectus also includes pro forma post-IPO capitalization figures, reflecting the issuance of shares in the Offering and the application of net proceeds. The pro forma capitalization figures — including base-case post-IPO shares outstanding (123,713,636 shares, consisting of 100,000,000 pre-IPO shares plus 23,713,636 newly issued shares) and full-overallotment post-IPO shares outstanding (127,272,727 shares, consisting of 100,000,000 pre-IPO shares plus 27,272,727 newly issued shares, less 6,818,182 secondary shares sold by Pinnacle Vista, which are already outstanding) — are based on assumptions regarding pricing, share counts, and use of proceeds rather than on historical financial data that has been subject to audit or review. Accordingly, the Draft Comfort Letter appropriately notes that A&P has not audited or reviewed the pro forma capitalization figures and does not express any assurance with respect thereto. This treatment is standard and consistent with AU-C Section 920.
Observation: The treatment of the Capitalization section in the Draft Comfort Letter is satisfactory. The par value of the common stock ($0.01 per share) has been confirmed. The distinction between historical financial data (which is subject to tick-and-tie) and pro forma data (which is not) is properly drawn. No further action is required.
3. Use of Proceeds
A&P has confirmed the mathematical accuracy of the computation of estimated net proceeds from the primary offering set forth in the "Use of Proceeds" section of the prospectus. The primary gross proceeds of approximately $371,700,000 (based on the issuance and sale of 16,895,455 shares at an assumed offering price of $22.00 per share), less estimated underwriting discounts and commissions and estimated offering expenses, yields estimated net proceeds to the Company as described in the prospectus. A&P has verified the mathematical accuracy of the stated application of such net proceeds, which the Company intends to apply as follows:
• Approximately $200 million to repay a portion of the outstanding principal amount under the Company's Term Loan B credit facility with Veltrano National Bank, N.A.;
• Approximately $100 million to fund construction costs associated with the Cimarron Solar project; and
• Approximately $71.7 million for general corporate purposes, including potential future acquisitions and working capital.
A&P appropriately notes in the Draft Comfort Letter that the application of net proceeds is prospective in nature and that A&P cannot provide comfort as to whether such application will in fact occur. The comfort letter procedures with respect to the Use of Proceeds section are limited to verification of the mathematical accuracy of the stated amounts, which is the standard scope of coverage for this section.
Observation: The treatment of the Use of Proceeds section is standard and no exceptions have been noted. No further action is required.
4. Dilution. A&P has compared the financial data set forth in the "Dilution" section of the prospectus to the corresponding amounts in the audited consolidated financial statements and the unaudited interim financial data, and has verified the mathematical accuracy of the dilution calculations. The dilution table presents the net tangible book value per share of common stock on a historical basis and on a pro forma basis after giving effect to the Offering at the assumed midpoint offering price of $22.00 per share, together with the resulting dilution to new investors.
Observation: No exceptions have been noted by A&P. The dilution calculations are mathematically accurate and consistent with the underlying financial data. No further action is required.
5. MD&A Financial Data
A&P has compared the financial data appearing in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the prospectus to the corresponding amounts in the audited consolidated financial statements for FY 2019, FY 2020, and FY 2021 and the unaudited interim consolidated financial data for Q1 2022. The MD&A section is typically the most data-intensive section of the prospectus and contains numerous financial figures, including revenue, cost of revenue, gross margin, operating expenses, operating income, interest expense, net income, EBITDA, Adjusted EBITDA, capital expenditures, and various other operational and financial metrics. A&P has confirmed that all such financial data is in agreement with the underlying financial statements and records.
Of particular note, the Adjusted EBITDA figures set forth in the MD&A section — $138.7 million (FY 2019), $179.2 million (FY 2020), $218.6 million (FY 2021), and $59.8 million (Q1 2022) — have been verified by A&P against the Company's financial records. The reconciliation of Adjusted EBITDA to GAAP net income is discussed further in Section IV.B below.
Observation: No exceptions have been noted. All financial data in the MD&A section reconciles to the audited and reviewed financial statements and records. No further action is required.
6. Underwriting Section
A&P has verified the mathematical accuracy of the underwriting economics set forth in the "Underwriting" section of the prospectus. The key figures verified include:
• Gross spread: 5.50% of the public offering price.
• Total underwriting discount on the base offering: $521,700,000 × 5.50% = $28,693,500.
• Total underwriting discount on full exercise of the overallotment option: $600,000,000 × 5.50% = $33,000,000.
A&P has also verified the allocation of shares and dollar amounts among the individual Underwriters, as set forth in the underwriting table in the prospectus:
Observation: Mathematical accuracy has been confirmed by A&P and no exceptions have been noted. The share counts and dollar amounts sum correctly to the base offering totals. The allocation percentages are consistent with the syndicate economics agreed among the Underwriters. No further action is required.
7. Description of Indebtedness
A&P has confirmed the principal debt amounts and related financial data set forth in the "Description of Indebtedness" section of the prospectus against the Company's audited consolidated financial statements, debt schedules, and underlying credit agreements. The specific debt facilities and amounts verified include:
A&P has confirmed that the outstanding balances, commitment amounts, maturity dates, and other key terms of each facility as set forth in the prospectus are consistent with the underlying credit agreements and financial records of the Company.
Observation: No exceptions have been noted. All indebtedness figures reconcile to the audited financial statements and underlying documentation. No further action is required.
8. Principal and Selling Stockholders Table
A&P has verified the ownership percentages and share counts set forth in the "Principal and Selling Stockholders" table in the prospectus against the Company's stock ledger, capitalization table, and related records. The key ownership figures verified include:
• Pinnacle Vista Capital Partners III, LP: approximately 62,000,000 shares, representing approximately 62% of the pre-IPO shares outstanding.
• Founders and management stockholders: approximately 24,000,000 shares, representing approximately 24% of the pre-IPO shares outstanding.
• Other stockholders: approximately 14,000,000 shares, representing approximately 14% of the pre-IPO shares outstanding.
• Pinnacle Vista secondary offering: 6,818,182 shares ($150,000,000 at the assumed midpoint offering price of $22.00 per share).
A&P has confirmed the mathematical accuracy of the ownership percentages and share counts, both on a pre-IPO and post-IPO basis, and has confirmed that the aggregate shares outstanding (100,000,000) is consistent with the Company's stock ledger and the audited balance sheet.
Observation: No exceptions have been noted. Mathematical accuracy has been confirmed. No further action is required.
B. Non-GAAP Financial Measures
The prospectus includes a presentation of Adjusted EBITDA, which is a non-GAAP financial measure within the meaning of Regulation G and Item 10(e) of Regulation S-K. A&P has performed procedures with respect to the reconciliation of Adjusted EBITDA to GAAP net income as presented in the prospectus for each of the periods presented (FY 2019, FY 2020, FY 2021, and Q1 2022). Specifically, A&P has verified that the individual line items in the reconciliation — including, among others, interest expense, income tax expense (benefit), depreciation and amortization, stock-based compensation expense, acquisition and integration costs, and other non-recurring items — agree to the corresponding amounts in the Company's audited and reviewed financial statements and financial records, and has confirmed the mathematical accuracy of the reconciliation.
This is a particularly noteworthy area of review because the presentation and reconciliation of non-GAAP financial measures was the subject of SEC staff comments in both the first-round and second-round comment letters on the Registration Statement. The SEC staff requested enhanced reconciliation disclosure, including additional detail regarding the nature and amount of each reconciling item and additional explanation of why management believes Adjusted EBITDA is a useful measure for investors. The non-GAAP reconciliation was revised in Amendment No. 2 to the Registration Statement (filed June 10, 2022) in response to these comments, and the revised reconciliation was the subject of A&P's tick-and-tie procedures.
Observation: No exceptions have been noted by A&P. The reconciliation of Adjusted EBITDA to GAAP net income is mathematically accurate and consistent with the underlying financial records for each period presented. The revised reconciliation disclosure in Amendment No. 2 appropriately addresses the SEC staff's comments. No further action is required.
C. HLBV Methodology
A&P has confirmed in the Draft Comfort Letter that the Hypothetical-Liquidation-at-Book-Value (HLBV) methodology applied by the Company to the Solaris West tax-equity partnership with Veltara Basin Financial LLC is consistent with (i) the accounting policy description set forth in the notes to the financial statements included in the Registration Statement and (ii) the methodology as applied in the audited consolidated financial statements for FY 2019, FY 2020, and FY 2021. The HLBV methodology is the principal accounting methodology used by the Company to allocate earnings and losses, and to determine the carrying value of the noncontrolling interest, in connection with the Solaris West tax-equity partnership, which involves a total investment of $280,000,000 by Veltara Basin Financial LLC, with a tax-equity flip date in 2028.
The HLBV methodology was a specific area of focus in both rounds of SEC comment letters. In particular, the SEC staff's second-round comment letter (received June 3, 2022) requested additional disclosure regarding (i) the key assumptions underlying the HLBV methodology, including the hypothetical liquidation waterfall and the allocation of tax benefits and investment tax credits among the partners, and (ii) the sensitivity of the HLBV allocation to changes in key assumptions. The Company's responses to these comments were included in Amendment No. 2 to the Registration Statement.
A&P does not provide a separate opinion on the HLBV methodology in the Draft Comfort Letter, nor is such a separate opinion required. Rather, A&P confirms the consistency of the methodology as applied in the financial statements with the description of the methodology in the prospectus. This is the customary scope of comfort letter coverage for complex accounting methodologies such as HLBV.
Observation: The treatment of the HLBV methodology in the Draft Comfort Letter is adequate for comfort letter purposes and consistent with market practice. The HLBV methodology was separately analyzed in Calderwood & Harkness's HLBV Methodology Review Memorandum dated May 27, 2022, which was prepared in coordination with A&P and Kessler McBride & Associates LLP (tax-equity accounting specialists). Leonard Cross, Specialist Partner, Tax, led the firm's review of the HLBV methodology and has confirmed that no additional procedures are required from A&P at this stage. No further action is required.
V. Change-Period Coverage
A. Definition of Change Period
The Draft Comfort Letter includes change-period procedures covering the period from March 31, 2022 (the last day of the most recent interim period for which financial data was reviewed by A&P — i.e., the end of Q1 2022) through June 3, 2022 (the "cut-off date"). The cut-off date is five days prior to the date of the Draft Comfort Letter (June 8, 2022), which is consistent with the customary practice of establishing a cut-off date no more than five business days before the comfort letter date. The change-period procedures are designed to identify any material changes in specified financial items during the change period that may be relevant to the Underwriters' due diligence investigation.
The change-period coverage is a critical element of the comfort letter process because it provides the Underwriters with limited assurance regarding the Company's financial condition and results of operations during the period between the most recent financial data included in the Registration Statement and the date of the comfort letter — a period during which the Underwriters would not otherwise have the benefit of audited or reviewed financial data.
B. Procedures Performed
A&P describes in the Draft Comfort Letter the following procedures performed during the change period:
(a) A&P performed inquiries of, and obtained written representations from, certain officers and employees of CBR who are responsible for the Company's financial and accounting matters. The officers specifically identified in the Draft Comfort Letter as having provided representations are Marcus Yoon, Chief Financial Officer, and Priya Anand, Senior Vice President, Finance & Treasurer.
(b) A&P read the minutes of the meetings of the Board of Directors of CBR and the Audit Committee of the Board of Directors of CBR held during the change period (March 31, 2022 through June 3, 2022).
(c) A&P read the unaudited consolidated condensed financial data of CBR as of and for the two-month period ended May 31, 2022 (derived from the Company's internal management accounts), and compared such financial data with the corresponding financial data of the Company for the comparable period of the prior year (i.e., the two-month period ended May 31, 2021).
These procedures are consistent with the requirements of AU-C Section 920 and with the scope of change-period procedures customarily performed in connection with IPO comfort letters.
C. Items Covered in Change Period
The Draft Comfort Letter addresses the following specific financial items during the change period:
• Total revenue: A&P reports that, based on its limited procedures, no decrease in total revenue was identified that, individually or in the aggregate, would be considered material when compared to the corresponding period of the prior year.
• Total operating expenses: A&P reports that no material adverse changes in total operating expenses were identified during the change period.
• Net income: A&P reports that no material adverse change in net income was identified during the change period when compared to the corresponding period of the prior year.
• Total debt: A&P reports that no increase in total debt outside the ordinary course of business was identified during the change period. Increases in amounts outstanding under existing credit facilities were consistent with draws for construction activities on the Mesquite Wind and Cimarron Solar projects, which are ongoing capital projects disclosed in the Registration Statement.
• Total assets: A&P reports that total assets were consistent with expectations given ongoing construction activity on the Mesquite Wind and Cimarron Solar projects.
• Stockholders' equity: A&P reports that no material change in stockholders' equity was identified during the change period.
D. Change-Period Results
Based on its limited procedures, which do not constitute an audit conducted in accordance with PCAOB standards or a review conducted in accordance with the standards established by the PCAOB, A&P states in the Draft Comfort Letter that nothing has come to its attention that causes it to believe that, during the change period (March 31, 2022 through June 3, 2022):
(i) there was any decrease in revenue, net income, or total stockholders' equity, or any increase in total debt, from the amounts set forth in the Q1 2022 unaudited interim consolidated financial data, except in each case for decreases or increases that the Draft Comfort Letter describes as not being material; or
(ii) there was any change in the capital stock, increase in long-term debt, or decrease in net current assets or stockholders' equity of the Company and its consolidated subsidiaries, compared with the amounts shown in the Q1 2022 unaudited interim consolidated financial data.
Observation: The negative-assurance language in the Draft Comfort Letter is in standard form and is consistent with the formulation set forth in AU-C Section 920. No exceptions or qualifications have been noted by A&P for the change period. This is a clean result and no further action is required with respect to the change-period coverage at this time.
E. Adequacy of Cut-Off Date
As noted above, the cut-off date for the change-period procedures is June 3, 2022, which is five days prior to the date of the Draft Comfort Letter (June 8, 2022). This gap is consistent with the customary practice under AU-C Section 920, which permits a gap of up to five business days between the cut-off date and the comfort letter date.
It is important to note that if the Offering proceeds and a bring-down comfort letter is delivered at pricing and/or closing, the cut-off date will need to be refreshed to a date that is no more than five business days prior to the pricing date and/or closing date, as applicable. This is a standard requirement and will be coordinated with A&P at the appropriate time.
In addition, given the current dormant status of the Offering (which was placed in dormancy on June 17, 2022, as discussed further below), the current comfort letter's change-period coverage will become stale during the dormancy period. Upon reactivation of the Offering, A&P will need to issue a new initial comfort letter with an updated change period. The refreshed change period will run from the end of the most recent interim period for which financial data has been reviewed (which, depending on the timing of reactivation, may be Q2 2022, Q3 2022, or a subsequent period) through a new cut-off date no more than five business days prior to the date of the new initial comfort letter. If the Offering is relaunched after a significant period of dormancy, additional audited financial statements may be required to be included in the Registration Statement (see Section VIII.B below), and the comfort letter coverage will need to be expanded accordingly.
VI. Exceptions and Qualifications
A. Summary of Exceptions
The Draft Comfort Letter contains no substantive exceptions or qualifications to any of the procedures performed by A&P. Specifically:
• All tick-and-tie procedures with respect to the financial data in the prospectus (covering the Selected Financial Data, Capitalization, Use of Proceeds, Dilution, MD&A, Underwriting, Description of Indebtedness, and Principal and Selling Stockholders sections) have been completed without discrepancy. Each financial figure in the prospectus that was the subject of tick-and-tie procedures was found to be in agreement with the corresponding amounts in the audited consolidated financial statements, unaudited interim consolidated financial data, or other underlying financial records of the Company.
• The change-period inquiries and procedures yielded no material adverse findings. The negative-assurance language in the Draft Comfort Letter is clean and unqualified.
• The non-GAAP reconciliation procedures (Adjusted EBITDA to GAAP net income) were completed without exception.
• The HLBV methodology consistency confirmation was provided without qualification.
This is a favorable result and is consistent with what we would expect to see in a comfort letter in connection with an offering of this nature, where the Registration Statement has been through two rounds of SEC comment and response and the financial statements have been recently audited and reviewed by a capable accounting firm.
B. Standard Limitations
The Draft Comfort Letter includes the following customary limitations, each of which is standard and expected in comfort letters issued under AU-C Section 920. These limitations do not constitute exceptions or qualifications to the procedures performed, but rather define the inherent scope of a comfort letter engagement:
1. Scope of Procedures. The procedures performed by A&P in connection with the Draft Comfort Letter were not conducted in accordance with the standards of the PCAOB for the purpose of expressing an opinion on the financial statements taken as a whole. Accordingly, A&P does not express any such opinion. The comfort letter is limited to the specific procedures described therein and the results thereof.
2. No Duty to Update. A&P has no responsibility to update the Draft Comfort Letter for events or circumstances occurring after its date (June 8, 2022), except in connection with the bring-down comfort letters to be delivered at pricing and closing, at which time A&P will perform updated procedures as agreed with the Underwriters and their counsel.
3. Restricted Use. The Draft Comfort Letter is solely for the information of, and assistance to, the Underwriters in conducting and documenting their investigation of the affairs of CBR in connection with the Offering. The Draft Comfort Letter is not to be used, circulated, quoted, or otherwise referred to within or outside the underwriting group for any other purpose, including but not limited to the purchase or sale of securities, without A&P's prior written consent.
4. Pro Forma Financial Information. The Draft Comfort Letter does not cover the pro forma financial information included in the prospectus (including the pro forma capitalization and dilution calculations), which is based on assumptions regarding the Offering and the application of net proceeds rather than on historical financial data that has been subject to audit or review by A&P. This is a standard limitation and is consistent with AU-C Section 920.
Each of these limitations is in customary form and consistent with market practice. No issues are noted.
C. Observation on Tax-Equity Accounting
A&P includes a brief notation in the Draft Comfort Letter that its audit of the Company's consolidated financial statements for FY 2019, FY 2020, and FY 2021 included the audit of the HLBV-based accounting for the Solaris West tax-equity partnership with Veltara Basin Financial LLC, which involves total invested equity of $280,000,000. As noted in Section IV.C above, the Draft Comfort Letter does not separately express an opinion on the HLBV methodology but confirms that the methodology as applied in the financial statements is consistent with the description of the methodology in the prospectus.
Recommendation: No further action is required at this stage with respect to the tax-equity accounting treatment in the comfort letter. Leonard Cross, Specialist Partner, Tax, has separately reviewed the HLBV methodology in coordination with Kessler McBride & Associates LLP, and has confirmed that the methodology is being applied consistently and in accordance with applicable accounting guidance (ASC 970-323). The results of Leonard's review are set forth in the Calderwood & Harkness HLBV Methodology Review Memorandum dated May 27, 2022.
VII. Comparison to Comfort Letter Request
A critical step in our review of the Draft Comfort Letter is to compare its scope and content to the comfort letter request letter (the "Request Letter") transmitted by the Underwriters, through Hargrove Keating, as representative, to A&P. The Request Letter set forth the categories of procedures that the Underwriters requested A&P to perform and report on in the comfort letter. We have performed a detailed comparison of each requested procedure in the Request Letter to the corresponding coverage in the Draft Comfort Letter, and the results of that comparison are set forth in Appendix B hereto.
Based on our review, all categories of procedures requested in the Request Letter have been addressed in the Draft Comfort Letter. No requested procedures were declined by A&P or omitted from the Draft Comfort Letter. The specific items confirmed as covered include:
• Independence confirmation (A&P's independence as an independent registered public accounting firm with respect to CBR within the meaning of the Securities Act of 1933 and the applicable rules and regulations of the SEC and the PCAOB);
• Financial statement audit scope (audited consolidated financial statements for FY 2019, FY 2020, and FY 2021);
• Interim review scope (reviewed unaudited interim consolidated financial data for Q1 2022);
• Tick-and-tie of all financial data in the prospectus, organized by section (Selected Financial Data, Capitalization, Use of Proceeds, Dilution, Management's Discussion and Analysis, Underwriting, Description of Indebtedness, and Principal and Selling Stockholders);
• Non-GAAP reconciliation procedures (reconciliation of Adjusted EBITDA to GAAP net income for each period presented);
• Change-period negative assurance (negative assurance with respect to specified financial items during the change period from March 31, 2022 through June 3, 2022);
• Subsequent-events inquiry (inquiry of Company officers and reading of Board and Audit Committee minutes during the change period).
Observation: The Draft Comfort Letter is fully responsive to the Request Letter. No gaps have been identified between the requested procedures and the procedures performed and reported on by A&P. This is a satisfactory result and no further action is required at this time. A detailed side-by-side comparison matrix is attached as Appendix B.
VIII. Open Items and Recommended Follow-Up Actions
Based on our review of the Draft Comfort Letter, we have identified the following open items and recommended follow-up actions. These items are organized into three categories: (A) items requiring follow-up before the comfort letter is finalized, (B) items noted for the dormancy period, and (C) items relating to communication with underwriters' counsel.
A. Items Requiring Follow-Up Before Finalization
1. Final Amendment Cross-Reference. As noted in Section III.D above, the Draft Comfort Letter currently references Amendment No. 2 to the Registration Statement (EDGAR Accession No. 0001948372-22-000003, dated June 10, 2022). If a pricing amendment or any further amendment to the Registration Statement is filed before the comfort letter is finalized, the Registration Statement reference in the comfort letter must be updated to reflect the most recently filed amendment. SEC oral clearance is indicated for June 14, 2022, subject to the filing of a pricing amendment at the time of pricing. The working group should monitor for any further amendments and ensure that the comfort letter reference is current at the time of finalization.
Responsible party: Natasha Forbes / Brendan Walsh
Target date: Ongoing until comfort letter finalization
2. Cut-Off Date Refresh. As discussed in Section V.E above, the change-period cut-off date of June 3, 2022 will need to be refreshed at the bring-down stage to ensure that the gap between the cut-off date and the pricing/closing date is no more than five business days. This is a standard procedural requirement and will be coordinated with A&P (Gregory Sondheim / Irene Valdez) and the Underwriters' counsel (Prescott, Danforth & Yee LLP) at the appropriate time.
Responsible party: Natasha Forbes, in coordination with A&P
Target date: At bring-down stage (pricing and/or closing)
3. Confirmation of Final Financial Figures in Prospectus. Before the comfort letter is finalized, the working group should confirm that all financial figures in the most current version of the prospectus match the figures referenced in the comfort letter. This verification step is particularly important given that certain financial figures may have been revised in response to the SEC staff's second-round comment letter (received June 3, 2022) and in connection with Amendment No. 2 to the Registration Statement (filed June 10, 2022). While our review has not identified any discrepancies, a final cross-check should be performed against the printer's proof of the prospectus at the time of finalization.
Responsible party: Natasha Forbes / Brendan Walsh
Target date: At finalization (prior to execution of comfort letter)
4. Bring-Down Scheduling. The working group should coordinate with A&P (Gregory Sondheim / Irene Valdez) and the Underwriters (Oliver Marchetti, Managing Director, and Sonia Tran, Vice President, at Hargrove Keating & Co.) regarding the timing and logistics for the bring-down comfort letters to be delivered at pricing and closing. As noted above, the three circle-up process (initial comfort letter, bring-down comfort letter at pricing, and bring-down comfort letter at closing) was agreed at the organizational meeting held during the week of March 14–18, 2022. The bring-down comfort letters will be substantially similar in form and substance to the initial comfort letter, with updated change-period coverage and Registration Statement references.
Responsible party: Natasha Forbes, in coordination with A&P and Hargrove Keating
Target date: Upon determination of pricing date
B. Items Noted for Dormancy Period
5. Financial Statement Staleness. The Offering was placed in dormant status on June 17, 2022. During the dormancy period, the current comfort letter will become stale and will not be capable of being used in connection with the Offering without being refreshed. Upon reactivation of the Offering, A&P will need to issue a new initial comfort letter that covers:
(a) any updated audited financial statements that may be required to be included in the Registration Statement. Under Rule 8-08 of Regulation S-X, the Company's audited financial statements will become stale approximately 135 days after the fiscal year end. If reactivation occurs after approximately May 15, 2023, the Company will be required to include audited financial statements for FY 2022 (fiscal year ended December 31, 2022) in the Registration Statement, and A&P's comfort letter coverage will need to be expanded to include the FY 2022 audited financial statements;